Dauch Corporation (DCH) Earnings Call Transcript & Summary

Okay. Great. Good morning, everyone, and thank you for joining the Barclays Auto and Mobility Tech Conference. I'm Dan Levy. I lead autos research coverage at Barclays and very pleased to have with us American Axle. Chris May, the company's CFO; as well as David Lim, who leads the Investor Relations effort. We're going to do this fireside chat style. Chris is going to give just 1 or 2 minutes of opening remarks, and then we will have a series of prepared discussion topics. If you want to ask any questions, there should be a box in your screen. That allows you to submit a question that will go to me or you can e-mail me directly [email protected]. I'm glad to ask that question [ honestly ]. So Chris, David, thank you so much for joining.

Thank you, Dan. Certainly appreciate participating in the conference today. This is always a great conference each year in our participation. We always look forward to it very much. So -- and good morning to everyone listening and joining us here online here today. To begin, I would direct your attention to our forward-looking statements that we have on our website, www.aam.com, for any of the matters that we do speak about here today. And as Dan mentioned, I will kind of touch on just a few opening remarks, and then we'll kick it over to questions that may be on any of your minds, happy to take and kind of walk through those. So to begin, we come off the back of a decent third quarter. Strong cash flow generation, almost $50 million. We used that cash flow generation aligned with our capital allocation strategy, continue to pay down our gross debt, paid down some term loan B inside of the third quarter. We also issued revised guidance on November 4. And since that time frame, I would tell you, we continue to experience volatility that we articulated through our third quarter earnings call. Also talked about volatility expected into the fourth quarter. And I would tell you the volatility has continued and probably at the higher level of volatility than we were thinking coming into the quarter. But I think most importantly, through the earnings call that we had, we had some really exciting business updates we talked about. We talked about significant wins from the electrification front with new customers and new products, that being eco mobility, where we have an eBeam axle, we're launching here in the India market, but also supporting Volvo in Europe as they transform their platform into all electrification. Now we won a significant key component award for that business. And that continues to foster and grow our approach to the marketplace where we support components as well as driving us into the electrification space. And as you know, that's a growing business for us. And I'm sure you'll have a lot of questions on that topic. We continue to get recognized for our advanced technology through some PACE Award wins, a couple associated with our AMG Mercedes product, another associated with our next-gen platform for electrification drive mobility. That's a key product we're supporting with REE. But also in addition to the electrification conversation, our legacy business and more traditional as it continues to grow as well. We announced a new customer, new products in the China marketplace with a win with Chery that we'll launch here in a year or 2. And also most significantly, a significant conquest win for us as we will be the new axle supplier for the Colorado Canyon for General Motors starting early in 2023. And those are very critical for us as that continues to fill out and grow our cash flow generation capabilities and also solidify our backlog for the near term. That said, though, we'll continue to be focused on a couple of key items here inside of strengthening and generating strong free cash flow, strengthening the balance sheet of the company, continuing to secure our traditional book of business into their next generation of platforms. And if you think about our key driveline applications, we're almost substantially complete with that. So that's great news, taking us out a decade plus in terms of the core book of business. Advancing our electrification portfolio and, of course, at the end of the day, positioning us to continue to grow over time. So it's a exciting time for AAM. It's certainly a challenging time for the industry in total, but we'll continue to kind of work through that and continue to grow the business on a go-forward basis. So maybe with that, Dan, I'll stop there and turn it over to you for any questions you may have or anyone in the audience who they may have.

Great. Thank you so much, Chris. So why don't we just start with the current environment? And you just said that volatility is trending on the high side. So maybe you can elaborate that -- on that a little more. Are you seeing -- is it just more of what you had discussed in the past in terms of a stop-start production environment? Are you seeing certain shortages, whether it's from your customers on the chip side or Tier 2 or Tier 3 supplier challenge with the logistics? Maybe you could just elaborate a bit more on the volatility and where it's coming from, the specific reasons or specific regions, et cetera?

Yes, absolutely. And when I refer to volatility in this context, I do refer to from our customer's standpoint, meaning our shipping and our production, shipping into different customers from a volatility standpoint. And to be frank, we continue to experience this on a global basis. So I would tell you sort of in the back half of the third quarter and clearly continuation at a high level here in the fourth quarter, it's in North America, especially on the full-size truck franchise, and it's really with multiple customers. We're seeing partial week shutdowns, overtime cancellations, things of that nature. Some of this we experienced in the third quarter that has continued at an elevated level here inside of the fourth quarter. In conversations with our customers, certainly, you can tell that they're still being impacted by a lack of semiconductors that does cause some of the downtime. And it's also very clear to us that they are experiencing potentially other supply chain challenges. They, of course, do not articulate those to us. They would be in a better position to articulate to you what some of those reasons are. But it's evident to us by the nature of the start and stop of their production. And of course, with that, it causes inefficiency inside of our facilities and really allows us -- the challenge is to sort of navigate through that the best we can through the course of the quarter.

Any line of sight to this being mitigated, I mean are you hearing any visibility from your customers on just timing on when things move out a bit more?

At this point, no. I mean, they've not really articulated when they think they can kind of clear through some of these challenges. We're probably hearing so many of the same things that you do and others in the audience do. Our view, from a semiconductor standpoint, that this will still remain with us deep into 2023. The supply chain challenges, in our view, at least some of the experiences that we have and incur in our own supply base as well as our own operations are, in many cases, tied with labor availability that causes inefficiencies, it causes [ them to reduce ] output. And then, of course, ultimately, that causes downtime through the entire value chain. So getting the labor fund -- labor availability sort of stabilized, that will be a key to sort of that element to some of these supply chain challenges. And as you know, that will take a little bit of time to do.

Great. Why don't we talk about another near-term issue, cost inflation, obviously very top of mind for investors. This year, I think you guided to a $60 million to $65 million headwind. Maybe you can just give us a sense of what's driving that? And maybe an early look into next year. If input costs stay where they are, what's the plan to maybe mitigate or reduce some of that?

Yes. So great question. And obviously, very tough, very challenging here inside of 2022 for ourselves as well as pretty much every other supplier inside of our space. As you mentioned, the impact -- when we talk about that $60 million to $65 million, that's really the net impact of inflation that we have experienced from price increases from our suppliers, utility cost increases and freight, net of any customer negotiated recoveries. And we've been in discussions with our customers for recoveries. You saw us make a -- call it a meaningful step in terms of recoveries in the second quarter, where you saw the year-over-year impact dropped down dramatically. That's what sort of got us to this run rate that we just articulated. So we'll be continuing to battle sort of through that, continuing to have dialogue with our customers. But as you think about going into 2023, and those 3 elements that I just mentioned, a couple of them are very, I would say, market dynamic, meaning prices can go up and down, such as utilities and freight to some degree. The purchase price increases that we've experienced from our supply base is really also a result of similar type of increases our supply base has experienced, haven't passed them on to us and ultimately passed on to the customer. So if utilities moderate in any form or fashion, in particular in Europe, which is really where the majority of our costs have come from that standpoint, you could see a benefit associated with that. We have experienced some utility inflation elsewhere outside of Europe as well. And if any of that moderates, obviously, that will be very positive in the company. And same with freight rates. We're starting to hear anecdotally that some freight rates have started to reduce. We've not experienced that reduction yet, but we obviously watch that very closely. And then as these costs have carryover from '22 into '23, we'll continue to have dialogue with our customers in terms of compensation associated with that. But also equally important, as a company, focusing on productivity initiatives to help mitigate many of these cost inflation factors. So if you think about these costs came on very rapidly through the course of 2022 in terms of increases in the slope of that increase. Productivity doesn't work at that level of speed. It takes time to gain traction on that. But when you start to over time, implement different initiatives from a productivity standpoint to mitigate some of these, you should start to see some of that benefit next year, some of the benefit will come in 2024 and beyond as well from a productivity standpoint in terms of energy reduction usage, various ways to modify freight and logistics and also to work with your supply base to reduce the costs.

So 2 different areas where you can mitigate just on the part of customer recoveries. Maybe you could give us a flavor of the tone and tenor of the discussions with your customers. I mean, obviously, no one ever wants to give price concessions, but you have to get your fair share of margin. So what has been the tone of that discussion? Do you think you've got a more fair share of recoveries?

Yes. No, that's a great question, Dan. And it's really, to be frank, it's been a journey. It's been a journey in the last 12 months because if you think about when some of these costs have started to enter into the supply base's cost structure, it was maybe a little less than a year ago and then approaching customers in terms of potential recoveries, the resistance early on in the early days was quite high. And through the early part then of 2022, the discussions became a little more wholesome and robust and then some recognition that, yes, there are real inflationary parts inside of the supply base that need to be addressed. And as I mentioned in the last question, we made a really good progress in the second quarter trying to negotiate for the impact here in 2022. And the recognition of price increases from our supply base, which were accommodated by, in many cases, through our customers. Some recognition and some compensation for utilities, probably to a lesser degree in North America, a little more so in Europe. In freight with some of the other inflationary factors, some level of cost sharing with the OEM. I would expect these dialogues to continue. It's obviously a key issue for the supply base for us as well. But at least in terms of recognition that these costs exist, recognition that at the end of the day, the OEM is really the only piece in the value chain where those costs can be compensated for is a key element of that. And I think having good productive discussions with the customers are ongoing and will continue to be ongoing. But it's been a journey over the last 9 to 12 months.

Great. Similarly, let's just discuss commodities. You've seen a $56 million revenue boost, but it's roughly $25 million of EBITDA loss year-to-date. Maybe you can just give us a sense about the recoveries if prices hold where they are, what the net impact into 2023 is and, again, just mitigation efforts around that?

Yes, absolutely. And maybe it'd be helpful to sort of level set. So we just talked about some core inflation in our cost structure on the previous question. The second element to this is commodity-based cost that we incur that we generally have back-to-back arrangements with our customer from a pass-through mechanism, meaning, so as these indexes such as scrap index, nickel, moly, aluminum that our supply base or our sales procure, they vary by price every 30, 60, 90 days. We compensate our supply base. We have a back-to-back arrangement with our customers and sort of pass either that cost increase or that cost decrease on to our customers. And as we stepped into 2022, our expectation is we would be closing in on between $400 million and $500 million over the last 2 years of these type of costs. We saw a really steep escalation in 2021. And then you saw the escalation again in the first half year of 2022. And to your point, they have started to mitigate somewhat here in the tail end of the third quarter for some of the key indexes, such as scrap, a little bit of hot roll has come down, but they've now plateaued here in the fourth quarter. Aluminum continues to remain elevated for us. Nickels remain elevated for us. Magnesium, which is another key piece that we buy, has remained elevated for us. But the nice thing about these mechanisms, first and foremost, they're designed to protect the company from these type of inflation factors and they're doing just that, though you do carry a little bit of a residual cost, as you pointed out. But if they do moderate, and they step into 2023 and moderate even more, once you sort of clear through the timing calibration, which usually takes about a quarter for all the price pass-throughs between your supply base and customers to align in your inventory to realign, that's generally a very positive thing for the company. So moderation of these costs are good for us. Obviously, escalation protects the company, and we do get a little residual against it. So we're keeping our fingers crossed. But again, these are items that are priced every 30 and 60 days in the open markets, and we're subject to those -- that volatility associated with that. Hopefully, that addresses that question. It can be a complex area. What it's doing exactly what it's designed to do. But big picture-wise if they do moderate over time once you put it through a quarter or 2, you'll see that benefit.

Great. And then let's just wrap up in terms of the current operations with maybe the market side of it. If we look at IHS, they're forecasting North America LVP up mid-single digits next year. To the extent that, that holds true, should we expect a typical or normal contribution margin for you on that front? What are you seeing on mix? How we think about the contribution margin?

Yes. No, great question. And we're not providing any 2023 guidance. I would expect us to provide that guidance in the early part of next year as we customarily would do. But as we think about 2023, I would tell you, we're cautious, maybe cautiously optimistic, but probably cautious in terms of where volumes will ultimately settle in from the broader market, but also for our respective platforms. And as you know, we have high exposure on full-size trucks, and we continue to be a big believer in that product set as well. But from a contribution margin standpoint, on pure volume, I would expect both incrementally or decrementally to have 25% to 30% incremental or decremental margins associated with product and revenue moves over the course of a period, whether from this year into next. If there's some additional inflation factors and things like that, that would be on top of that, but pure volume changes, we should, given our high operating leverage, highly variable cost structure, our strong operating system, we should realize the benefit on the upside. Obviously, you've seen what the downside does as sales come down as well through some of our past year bridges -- past quarter-over-quarter bridges as well. But I would expect that contribution margin to be robust if our sales click up.

Great. And from a mix standpoint, I assume that, that's -- you'll maybe see some more mix normalization?

Yes. Look, if we look over the last, call it, a couple of years being '21 and '22, '21 was very much overweight on full-size truck applications. There's a lot of -- when semiconductors were, I would say, raging impacts inside of our OEM customers. They took a lot of downtime with whatever passenger car vehicles they have left, but also a lot of crossover vehicles that we're supplying to. We saw the crossover vehicle volumes really increase meaningfully here in 2022 and truck demand continued to remain robust. Going into 2023, I would expect that to continue as well, a nice mix for the company, good all-wheel drive penetration, 4-wheel drive penetration, which is a very positive mix for us on those platforms as well. So that should continue to remain a positive for the company.

Good. Okay. Let me pivot to capital allocation. And let's just start with your leverage. You're just over 3x at the end of 3Q, 3.3x on a trailing 12-month basis. Maybe you could just remind us of your leverage target? And what are your views on that if we go into more of a [ decline ]? What are you planning for here?

Yes. Look, I would tell you our near to midterm leverage target is to get towards that 2x net debt leverage. Obviously, as you mentioned, we closed the third quarter at 3.3x leverage. But we're really attacking this from 2 ways. #1, very focused on cash flow conversion from EBITDA to cash flow and deploying that cash flow through our capital allocation with a heavy concentration on a continued reduction of our gross debt. And you've seen us now do that over the past couple of years. We've continued this year to continue to pay gross debt down. Every quarter to continue to strengthen our balance sheet. The leverage equation, as you know, is a math equation. It's your net debt divided by EBITDA, and our focus is to continue growth on EBITDA and performance will help drive that leverage down even further in the near and midterm. But that's -- so that's how I would tell you is our goal, and that's our approach. By continuing to strengthen the balance sheet through continued gross debt paydowns is clearly a priority for the company. And at the end of the day, that will strengthen your balance sheet. And as -- you asked the question, is it really -- we're heading to a downturn. But holistically, lower leverage is always better when you get into that type of activity or that type of economic environment. So that's why we continue to be very focused on paying our gross debt down. It strengthens the balance sheet. It reduces interest costs, and we believe this is the right application of our cash flow generation today.

Great. You have done some M&A. How are you thinking about M&A currently within your capital allocation framework?

Yes. So our capital allocation framework is really centered on deploying our internal free cash flow generation. We'll continue to support the organic growth of the company. We'll continue to support R&D initiatives. You've seen us uptick a little bit in R&D, especially as it's associated with electrification as continued interest has grown in our product set, continued opportunities from our customers in terms of new business opportunities from that space. So we'll continue to invest in both of those that sort of Priority 1. Priority 2 would be continue to reduce our gross debt, as I just mentioned. But Priority 3, you've seen us now take action over the last couple of years, is to take advantage of, I would say, market opportunities that present themselves, distressed assets, assets where we see very high synergy value, such as the Tekfor acquisition that we can tuck in inside of our current cash flow generation capability. The Tekfor one this year is a great example of that. It was EUR 125 million, which the ultimate purchase price. We paid less than that in terms of cash, high synergy deal, added us electrification exposure, added European exposures for some really key customers that we've been building relationships with really since the MPG acquisition. So very nice fit inside of our product set, and our view of our longer-term product portfolio. The year prior to that, we did some consolidation in terms of the powder metal space, very small acquisition. So these type of things, joint ventures, smaller joint ventures that we've also invested in, I would continue to expect inside of our capital allocation along with the debt pay down. We see real value through this.

Vertical integration, maybe, I mean you can talk about that, especially from the -- we will look at the EV shortly, but vertical integration from an EV perspective, motors or software or power electronics. Is any of that viewed to be critical and something that you're considering within M&A?

Yes. Vertical integration at its core, as you know, is core to AAM. The company was founded with -- as a driveline and metal form business, which was highly vertically integrated. We believe that has allowed us to strengthen our product development over time, has strengthened our margins. It allows us to control key elements of the value chain. As we step into electrification, there's already certain key elements, especially on the mechanical side of the electrification product that we have vertically integrated inside of our metal form and driveline operations. The 2 other key elements most associated with vertical integration for our drive units -- our electric drive units that is would be, of course, the motor and the converter, if you're in a full 3-in-1 system. We see strength in vertical integration. But at the same time, we also see a very strong and capable supply base in some of these components. And we've been able to leverage that supply base or leverage partnership arrangements such as our relationship with Inovance in China to secure these and then still win business and have a good capital allocation into program wins allows us to be competitive and nimble. But where it made sense to do vertical integration, such as our next generation of electric drive units, for example, that we're supporting with REE. We're starting to do low volume production of motors inside of our operations to support that, allows us to gain that technology, but also gives us some flexibility with the supply base as well. So I think as this evolves over time, as the volumes ramp up over time and our electrification platform develops even greater over time, where it makes sense to vertically integrate, I think we would be hoping to and interested in that because of the strength of vertical integration. But at the same time, we're very comfortable also doing a supplier relationship with others who we feel we can be competitive. In addition to that, our view, from a motor and inverter perspective as well, is that also has, I will call it, an element of dialogue with your end customer because there are certain OEM customers that are going to direct buy you into specific motors or specific inverters they're going to want you to use as part of the product and you supply into them. So being able to be flexible and nimble on our product design and development and integration of either vertically integrated components or service components or OEM-directed source components, we believe gives us a competitive edge in that marketplace. And that's sort of our view as we sit here today. And to be frank, we think it's been successful.

So again something to chime in on now is, if you take a look at our engineering prowess, right? We didn't have to go out and buy an inverter company or a motor company really is a testament to how deep our engineering resources are in that area.

Yes. No, no. I think it's generally well recognized in terms of what you've done on the engineering front. Two more on capital allocation before we pivot fully to EVs.

Sure.

Maybe you could just talk about CapEx. You've actually seen a significant step-down in CapEx. Obviously, some of that is probably some pushout of spend. But maybe you can give us a sense of the broader CapEx trends. When we look now, you're, call it, the high 100s. In the past, you were at something much higher than that. What's been going on in CapEx? Is there some future spend that you have?

Yes, this is a great story, Dan. As you know, call it 5, 10 years ago, we spent a very high level of CapEx to support program launches, to support productivity, to support maintenance, et cetera. And as we sort of pivoted through some of those large launches, a lot of lessons learned through that on capital efficiency and really doubled down our focus, our drive and our initiatives to reduce our capital intensity inside of the business. So what does that mean? What does it -- that means in terms of optimizing capital spend, so it is deployable across multiple sources. So some of our machining and forging operations team can support electrification and can also support similar products and internal combustion. So it's flexible. So you can reduce future spend. Also optimizing maintenance cycles and things like that in terms of what you have to spend on maintenance capital and still maintaining your equipment ahead of where it needs to be to run and be very optimal. But this has been an intense focus of the company over the last 3 to 5 years. I know our capital spend is down this year, but if you look over the last couple of years, I think you'll see a similar trend. Now I know there was a lot going on inside of the industry and macro at the same time. But these initiatives that I just spoke about, purchasing bundle buys and gaining an actual price you pay for equipment have benefited us. Productivity initiatives, those are taking hold. And we -- and our expectation is, on a go-forward basis, this level of intensity of capital management will continue. We haven't really deferred much from this year into next year because of current situations. What we've been doing is trying to optimize our spend. Where you might see spikes in capital, of course, will tie in with program launches. Those can drive capital spikes from time to time. And the next wave of spikes could potentially be, if you're launching multiple large electrification programs all in a very concentrated time period. And if that happens, that will certainly be fantastic as well, by the way. But in terms of our focus on capital intensity, our focus has been to reduce that. Our incentive compensation has been aligned with that as well, which has really driven this management team to stay very tight on our capital spend, and we think it's been a great outcome for the last couple of years, and I expect that to continue.

EVs, let's just start briefly with the backlog. If we look at the pie chart of your backlog, EVs this year or back in February was 35%, I guess, you'll give us an update next February. It was 15% in 2021. So what is driving the rise of EV mix in your backlog? And maybe you can give us a flavor of what had been the core pieces of that? Is it full drive units? Is it some of the subcomponents, the housing, et cetera. Maybe you can give us a sense of what's driving that increase in the backlog for EVs?

Yes. In terms of mix, over 50% of that is associated with drive units in terms of the backlog we released earlier this year. But what's driving that? Go back to a little bit of the comment I made earlier in terms of how we are facing off to the market. Our view of the marketplace is, it's very similar to traditional type of driveline systems, meaning there are going to be OEMs that are going to want to build some of these drive units in-house; all of them, in some cases, partially in some cases. And then some OEMs want to have it all done at the supply base. So recognizing that fact -- and that same dynamic exists on our traditional business, by the way. Knowing that the OEMs are going to source this profile for this product, we wanted to make sure we're in a position to support components to OEMs that choose to build in-house, so from just gears and shafts all the way to fully assembled gearboxes and differential assemblies, which have nice content per vehicle applications. At the same time, also provide full drive units, which are comparable to our axles on an ICE system. So having this product set that can meet really any of the OEM sourcing decisions, in our view, gives us a nice capability to support revenue growth in this space. So that is what's driving this backlog in terms of electrification, in addition to holistically, the market has pivoted to electrification. But having this broad set, this face out to the market from a competitive product set of components up to full drive units, it really allows us to have discussions with [indiscernible] and win awards with them to supply their internally built EDUs, or Volvo that we announced this year or the Hummer, and at the same time, expand with Mercedes and Jaguar and others on the full drive unit applications. And then as the market continues to grow, we have a broad product set that supports [ us at this time ] and should allow us to continue to grow our backlog in the space.

A follow-up on that. I think -- and this is a question I've asked you in the past. We tend to think of some suppliers as having a signature program, a signature product that really defines them. I think, in the case of American Axle on the ICE side, it's the driveline offering you have for the GMT1XX platform for Ram HD, very high content where you really pull a lot of that share. When we move into an EV world, do you expect to have a signature product or program? Or it sounds like it's going to be a bit more diverse in terms of what you're offering, no signature program or product per se.

Yes. I mean, look, everyone would love to have large signature products on many of the things they supply. And I think it will really depend on how the OEMs build out their platforms and their products, whether they're going to have size and scale on single platforms such as they do on some of their ICE platforms that you mentioned. Look, we have designed and developed our eDrive technology to be scalable in various different power levels, and to accommodate a wide production platform such as a T1, for example, or a Ram to meet the needs of these customers. And should a signature program come up for bid, I think we'll be certainly in the mix and dialogue to have that. but at the same time, positioning ourselves to be nimble and cost-effective to support smaller platforms across the globe, whether it be Mercedes and JLR and [ Baojun ], for example, where we can be profitable in some of these nice volume levels. Signature massive volume levels of some of the programs that you just mentioned, but very strong program levels and remain competitive and profitable in that space, we also think is a key to our success over time as well. So diversity brings -- some of that, good operating systems, good cost structure, good global footprint that we have will support all of what we just spoke about.

You just mentioned Mercedes. I think this is one of the larger wins you had flagged in the past. You're doing a drive unit for a P3 hybrid application. Maybe you could just give us a sense of -- I believe that launched somewhat recently. Some of the early takings, learnings and what is the potential to leverage that into something larger with Mercedes or the European OEM base where, historically, you have had less of a presence?

Yes, certainly. Look, it just launched here in 2022 and, hands down, it is the most complex driveline system that we make inside the company. So what were some of the lessons and learnings here. What we have learned is and it's built and assembled in our operations in Poland, alongside with internal combustion engine applications as well. So what have we we've learned? We learned to leverage our existing global footprint to provide capital efficiency, leveraging our global technology centers and design and development of very complex products for a very unique customer in terms of high requirements, high demand, high product acceptability. And then translating down a lot of that technology into our core eDrive platforms. But what does it ultimately translate into? Good profitable product, but also now this product is on the road. People see it. Customers recognize it. It's earned PACE Awards. We get inbound questions about this product, but also demonstrates our capability to design and develop this level of sophisticated product for customers such as AMG. Think of the things we can do for a broad set of customers here. And that really ultimately speaks volumes for our capabilities inside of our eDrive units. And customers have taken notice, and we get a lot of inbounds now, and it's driven quotation activity inside of our ongoing discussions with a variety of customers, Mercedes included.

Great. A couple of more because I know we're running up on time here. You mentioned profitability. One of the questions that has come up in the past is what the margin profile looks like on drive units or some of the EV components versus ICE. Maybe you can give us a sense, thus far, how margins are shaking out for some of the EV content you have?

Yes. every new business that we pursue, whether it's electrification or internal combustion engine has to go through a business case analysis and has to meet certain financial hurdles. So I would tell you the discipline in maintaining that continues into the electrification side. At the end of the day, we need to make money. We need to have a nice margin profile. We need a good DCF/ROIC model to support that investment in that book of business. And to meet those hurdle rates, the new electrification programs do that as well. So our goal over time, and this time will take a decade plus, is to continue to be a top-tier margin performer in our ICE products as well as our electrification products. Early days. From a component standpoint, the components are very similar in many cases, components for internal combustion engines. So you see that profile and cost structure to be very similar. On the electrification side, the journey is similar to a large internal combustion engine program where you have upfront R&D costs. You see us spending that now in a lot of our electrification. It goes through a low ramp curve where you're not as profitable, and then you really start to realize that profitability when you're volume is at scale. Many of the programs we're just getting into [indiscernible] our electrification plan are starting now to work out sort of the lower volume into scale. And they'll be [ refined ] over time once they hit those volume elements. So -- but again, it starts with they have to meet the financial goals of the company even before we step into that book of business.

Okay. So we got a ramp ahead, and we'll see that pay off. But one...

[indiscernible]

Right, yes. Final one, and I know you're not in the business of commenting on media articles, so I won't go there, but you did issue a press release maybe in response to some media articles about strategic options. I want to ask just broadly rather than addressing that, maybe you can give us a sense of how AAM goes about the process of weighing potential strategic options, whether it's consolidating assets or staying the course. I mean what is the broader strategic process or approach that you're going for?

Yes, certainly, it starts with your own internal plans for our organic growth of the company, which has really been our focus, the organic growth and balance sheet management of the company. But broadly speaking, I think if you go back to our third quarter earnings call, this question was asked or something very similar was asked of our Chairman and CEO, David Dauch. And at the end of the day, he said, "Look, I'm focused on growing this company organically. I'm focus on strengthening this balance sheet. I want to be a consolidator inside of the industry," and left it at that. We see benefits over time in consolidation of the industry. But right now, our focus is on our core game of organic growth and balance sheet management. But we look at different options. We think about our product portfolio, we think about how the industry is transforming and pivoting and the time frame associated with that. And all these factors weight in on discussion and debate over the question you just asked. But we're focused today on our organic growth and balance sheet management, the rest will come.

Great. Okay. Well, we're out of time. Chris, David, thank you so much. Appreciate the [ time ].

Thank you. Thank you very much, and appreciate everyone's time today. Thank you.

Thanks.

Operator, we can now disconnect.