Dauch Corporation (DCH) Earnings Call Transcript & Summary

Good afternoon. All of you could take your seats, that would be great. Sorry about the technical difficulties, but we figured it out, and we're ready to go. So hi, my name is David Lim. I'm the Head of Investor Relations here at AAM and happy new year to you all, and thank you for joining us online and in person. Fabulous Las Vegas Motor Speedway for AAM's Technology Day. So we're very excited that you are here, and we hope you will learn a lot about our award-winning electric technology, our pivot to electrification and our commitment to excellence in driving value. The day will begin with David Dauch, our CEO and Chairman, providing an overview of our company and our strategic vision. His formal remarks will be followed by Mark Barrett, Vice President of Engineering and Quality. He will talk about our electric vehicle technology. And finally, Chris May, our Chief Financial Officer, will talk about our financials. And the formal presentation will be followed by a quick Q&A session before breaking up into our respective groups for the Ride & Drive and static tour. But before we begin, I want to draw your attention to our forward-looking statements. And that said, let's begin with a video. [Presentation]

And introducing David Dauch, Chairman and CEO of AAM.

Thank you, David. Well, thank you, David, and thank you all for being here today in person as well as those that are joining us through the webcast here today. Let me first and foremost wish you all a happy new year. Hopefully, you all had a great holiday season, but I wish you a healthy and productive year here in 2023. Hopefully, 2023 will bring a better opportunity for all of us because the last several years have been very challenging in the automotive space. As David covered, I'm going to give an overview of the vision and the strategy and direction of the overall business. Mark Barrett will talk in regards to the technology and the scalable technology that we're developing with an eye on electrification and then Chris will tie it all together from a financial perspective standpoint. But the critical thing I want to make sure I address with you all right upfront, there's 6 key takeaways that I really want to make sure that you walk away from today's presentation as well as the Ride & Drive event that you're going to experience. And quite honestly, that's why you really here is for the Ride & Drive event to get into the vehicles and really see our technology in action. We were out there yesterday on the track, and it was just phenomenal just driving those vehicles and what they have to offer. But the first thing I want to make sure that you walk away with here today is the fact that we have award-winning technology. And we've always been known as an operating company, but we have tremendous technology leadership in our business. We're developing outstanding electrification portfolio. And it's also being recognized not only by the industry but also by our customers in regards to new business as well as awards with the recent automotive PACE awards that we have. That technology is also being developed, so it's scalable and modular. The key to the business with electrification, the pivot to electrification, is going to be economies of the scale. So we got to make it where it's transferable across multiple platforms so we can drive volume, drive cost management with respect to it. At the same time, we're going to leverage our heritage and operational excellence in quality and performance because that will carry over no matter what happens with the pivot to electrification. We're known as an industry leader when it comes to operational excellence and productivity and performance and our EBITDA margins show how we deliver that operational excellence each and every day. The other side is those that follow our company and have for years. You see that we continue to grow in size and scale. Again, that's an important part of our business and part of our strategy as we go forward. Again, part of it is to support the economy of scale, but also we need that size and that scale as the business consolidates moving forward. And the most important thing when it's all said and done is we AAM have to deliver value proposition to our customers. And I'm -- I don't care if it's just on the ICE side of the business and the hybrid side of the business which we do today. We also have to bring that compelling value proposition to the OEMs with electrification. And we're doing that today and we'll continue to do that as we go forward here. And when it's all said and done, you, our investors, want to see that we can provide adequate returns to you and generate a strong cash flow and strong EBITDA margin performance, which we have been historically doing on the traditional business, and we think we can also do that on the electrification business as we go forward. So with that, let me just get started with the presentation here. So as the slide shows for nearly 30 years, we've been delivering power to -- in the automotive space. Our business started, as you all know, March 1 in 1994 when my father and his partners acquired the Final Drive and Ford business unit from General Motors. At that time, we took over 5 facilities, 3 in Michigan, 2 in New York, all in the U.S. We had 2 customers. GM was 98.5% of the business and Ford was 1.5% of the business. And really what my father and the initial team did was really change the culture of the business, change the expectations of the business and change the performance requirements of the business. And that DNA or that culture still exists in our organization today. And we've just built on that solid foundation that my father and the original team put into place. And in the first 5 years of the business, we just focused on fixing the assets that we had taken over from General Motors before we started to look at business growing the business outside of General Motors really. And then -- so we properly grew in '99 to 2005 period of time. And then like many of the companies, we went through a restructuring, resized and recovery period during that 2008, 2009, 2010 period of time. And then we got back on the profitable growth in the global expansion side of the business in that 2011 to 2015. And then from the 2016 to 2020, we've done a lot of acquisitions. The biggest one being MPG, but a number of acquisitions. And most recent one that we did was in June of last year with Tech 4. But really where we're focused right now is trying to work hard to bring the future faster as the industry and the market is pivoting towards electrification. And the key word I want to leave with you today, in your mind, is AAM needs to be agnostic to the market. We want the market and the customers to be the boss and dictate what level of propulsion system that they need. Regardless, we're going to have an internal combustion engine portfolio, which we have in complete hybrid portfolio, which is complete, and we're developing that electrification portfolio today. You're going to hear a lot more from Mark Barrett with respect to that. So as we go forward here, just some quick facts on AAM. As all of you know, today, we've expanded our business that we're just short of $6 billion, will be about $5.8 billion. And clearly, semiconductors and supply chain challenges negatively impact some of our topline sales this year. So we're approximately a $6 billion company, but we're -- we've guided to the Street in that -- at the midpoint, it's $5.8 billion. We have 20,000 associates operating in 18 countries, and we've got 14 global technical centers that are part of that 85 facilities around the world. We're the industry leader when it comes to truck axles. We're also the pioneer of disconnecting all-wheel drive systems. But why you're here today is to talk about electrification. And our technology is definitely being recognized, as I mentioned earlier, is being rewarded with new business, and we expect to see more and more awards as we go forward in growing that backlog as we go forward in the future here. And then on the metal forming side, we're the largest automotive forger globally in the world. We've done that through a series of acquisitions over the last several years here. The Tech 4 acquisition only complements and adds to that, but it also helps us expand our portfolio from a component standpoint with rotor shafts, main shafts and other components that are very vital to support in electrification technology. So as I mentioned, technology and we really define technology as product processing systems. And we look at technology as being a differentiator in the marketplace. And our job is to make sure that we drive value and build value and deliver value to our customers and to our stakeholders and investors. And how we're doing that, as I mentioned, is going to be through that culture and that heritage that we have as an organization through the innovation that we have in that product process and systems technology. As I mentioned, we want to be agnostic to the market. But really, what we want to do is be the supplier of choice, be that premier electric driveline supplier to the industry is what we want to be able to accomplish. As I mentioned earlier, when we started the business, GM represented -- we had 2 customers. GM was 98.5%, and Ford was the other 1.5%. You can see, today, we have well over 400 customers. And we couldn't put them all on the slide here, but we continue to grow. GM is still our largest customer. We have an outstanding relationship with General Motors. We've been their supplier of the year or Overdrive Award winner in the last 6 years in a row. We see continued growth with General Motors as we go forward. We're launching the 31xx program here right now in January, which is a program that we conquested. At the same time, we're talking deep discussions with them in regards to a number of electrification opportunities in the future also. So the pillars that have supported American Axle since our founding is really that technology leadership, that operational excellence and quality. So it's the 3 pillars that are definitely transferable over into the electrification side as the industry pivots. When I talk about technology leadership, I want to talk about efficiency, which is never more important than with electrification because of the cost of batteries and the cost of raw materials that are associated with those batteries today. At the same time, we're going to leverage our NVH experience, our gear experience, which is not something to be taken for granted, and we're also going to leverage the driveline knowledge and experience that we have because we are one of the industry leaders with respect to that. On the operational excellence side, as I mentioned, we're going to continue to drive standardization, drive productivity, drive throughput in our performance and get the most out of our business and optimize our core business today while generating that cash to really fund the future and also continue to support paying down debt. And everything that we do from a quality standpoint, it's going to be focused on the edge of perfection. We're obviously striving to be the best in the industry and our customers are recognizing that and rewarding us with that. We won countless performance quality awards, excellence awards, diversity awards. And most recently, some of the PACE awards, both in the 2020 calendar year period of time where we won 2 PACE awards associated with the Jaguar, I-PACE. And then we just won 3 PACE awards here in 2022 that I'll let Mark Barrett and others talk more about it as we go forward. And this -- all the technology really originates in our advanced technology development center, which is an adjacent facility to our headquarters [indiscernible] campus. And again, that whole thing is focused on the advancement of product process and systems technology. We're a big believer in that. We continue to invest in that. We never cut our budgets that way. We need to continue to differentiate ourselves, which is exactly what the team is doing here. We've also set up a very extensive competitive analysis center there. We tear down every product that's out there in the marketplace today on traditional product, but especially in electrification. There isn't a product that we haven't torn down on the electrification side. I've challenged my team to be 1 to 2 generations ahead of our competition so that we can bring that value proposition and differentiate ourselves in the marketplace. And again, we're going to continue to do -- we're going to have issues in the marketplace, and we have to deal with those from a quality and warranty standpoint. We obviously want to minimize that as much as we possibly can. So as part of that advanced technology center, we have a dedicated facility within that, focused on quality and warranty. And then we're making a lot of our own prototypes that are actually doing low-volume production in this development center as well. So we can prove out all of our capabilities, process capabilities in this center and then send those packages to the plants. So when we do have launches, we have very efficient and productive launches as we go forward. From a geographic standpoint, again, we're represented in all the major regions of the world here. The critical thing, our headquarters is in Detroit, Michigan. Our innovation hubs in Detroit, Michigan. At the same time, the ATDC, Advanced Technology Development Centers, all in Detroit. So the hub of American Axle is in Detroit. The spokes in all the major regions of the world. But we've set up each of those regions with many technical centers or engineering centers and also manufacturing capabilities. But the standards that we set from our North American production and our headquarters permeate out to all of our operations globally around the world. So let me talk briefly on electrification. And a lot of people think electrification just picked up in the last couple of years here. We actually started electrification activity back in 2010 when we partnered with working on some electric activity in the beginning. But we also had a focus on battery electric vehicles going forward. We didn't think it was going to take us this long for the market to really adopt electrification. So we've been patient, but we've also been funding that growth and that technology there. We outright acquired that joint venture 2 years later when [indiscernible] financially got themselves in trouble. But our big focus at the time was really to focus on Europe and also the focus on China because China was following a lot of the European standards. And as you all know, Europe was really leading from an emission standpoint and CO2 standpoint in regards to what the expectations that they were driving for the industry. And so that helped develop a lot of technology for us there. We won our first contract with Jaguar Land Rover in 2015. We launched that in 2017. Subsequent to that, we ultimately signed a joint venture with that led to additional business in China. We also won a new program with Mercedes-AMG in the 2019 calendar year period of time. That program just launched last year in 2022, and there are 7 variants coming off of that. And then as I mentioned earlier, we received PACE awards in 2020 and also incremental PACE awards here in 2022. When you fast forward, when you look at 2021, so for the last 10 years, we really -- we saw some activity, but not nearly the activity that we're experiencing realizing today in the area of electrification. In 2021, it really picked up because the market picked up, especially in Europe. They're moving very, very fast there. North America, as you all know, was clearly behind But with the Biden administration and there has changed the game and things have accelerated considerably there. And we're working to keep up with the marketplace with respect to what's taking place there. But you can see the activity here that what we've accomplished. I mean we -- our team has done a tremendous job developing a scalable platform, getting that ultimately turned into production POs. We've got business with Neo now. We've got business with RE now. We launched, like I said, the Mercedes-AMG, which is just an outstanding vehicle. We acquired the Tech 4, a business to help support our portfolio. And that's really what we're trying to do right now is develop a complete product portfolio that will serve the electrification market, much like we have on our ICE and our hybrid business today. And then we most recently announced in the December period of time, a recent Beam award that we have with an Indian supplier -- or Indian customer, I should say [indiscernible] Motors. So we're very proud of that award. But really what's happening in the marketplace right now is a tremendous amount of investment focused on electrification globally around the world. So we're all working to -- we've been operating in a recession in the last several years in the automotive space. Inventory is going to have to get rebuilt. It will never get rebuilt to the original levels that it was at because OEMs want to maintain those higher transaction prices and the profitability that goes with that. But they definitely are going to have to build some of that back. But now with all the governments either setting policy, changing policy or increasing regulatory requirements and emission requirements, a lot of that new buying that's going to come back is going to be in the form of electrification. And therefore, we need to make sure that we're positioned to properly capture and capitalize on that. Now OEMs are all investing in electrification today. Some had various higher levels than others, but every OEM is investing in electrification right now. They're all demonstrating capabilities -- or a lot of them are developing the capabilities similar to what we do. But guys, that's no different today on electrification than what's done on ICE engines, okay? If you really understand, there's a lot of work that's still done in-house by the OEMs, but there's a considerable amount that's on the outside. The most important thing is to understand is what is that addressable market, and I'll talk to you about that here in a little bit here. But the critical thing that's no different for the OEMs than it is for us, it's just at a different scale is capital allocation. They've got to figure out where they're going to place their money and where they're going to place their bets. And clearly, they're spending a lot of that money on electrification. But they've also got to spend it on what you see in the chart here, software, connectivity, autonomous vehicles, battery management and also some of the shared mobility going forward. They can't afford to do all this independently on their own. And all the discussions that I've had with the OEMs, they're not planning on doing all of it on their own. It's just a matter of how it rolls out and when it rolls out to the supply base. But they clearly want to understand what the technology is for electrification, how it impacts their vehicles, how it impacts the designs of their skateboards as they're going forward with and how they're going to drop to different chassis or the top hits on those skateboards and platforms of the future. What we just need to do is make sure that we win our fair share of the business that's going to go to the outside. And we have that capital allocation where we're spending money as well to support our ICE and our hybrid business but also to position ourselves to profitably grow our electrification business going forward. So when you look at the addressable market, we've defined the addressable market by 2030 to be approximately a $20 billion to $30 billion market for our core products. When I talk about our products, I'm talking about components, subassemblies like differentials, gearboxes and final assemblies. And those final assemblies could be like electric drive units or could be e-beam axles. So you can see here what we define it by 2030, we think that market will be about a $20 billion to $30 billion market. So take the midpoint of that. At the same time, as part of that market, the e-beam makes up -- you can see a fraction of the total market. Our biggest business is in the beam space today and the crossover vehicle space today. But it also shows you on this chart that we actually with our portfolio that we're developing have the opportunity to penetrate and get into additional served markets, which is the blue area, not the gray area of the chart here. We're not going to win all of what's in the gray area, but we're going to win our fair share of it. But our job and our opportunity is to penetrate that blue area, which a lot of the OEMs are doing today as far as ICE vehicles, but they're going to convert that to electrification. And some of our competitors are doing some of that work there today as well. So we're very excited about what the opportunity has for us. And quite hasty, we expect the electrification market only to grow beyond the 2030 period of time. It's just a matter at what rate is it going to grow at. And none of us really understand what that is. When you look at our book business today and you look at revenue that we're generating from 2022 through the life of their programs going forward here, we've got about $1.8 billion of lifetime revenues that are already booked and either in production or will be going into production over the next several years here. So we're very proud of the fact that our technology -- our award-winning technology is being recognized, is being rewarded, and it's been in production. So we're not just talking about winning programs. we've actually won them. We've been in production, like I said, since 2017, with our first electric program with JLR, and you'll have the opportunity to drive that vehicle today. At the same time, our last program that went into production was a Mercedes-AMG, which you will have the opportunity to drive that vehicle today. I'll tell you right now, there isn't a more sophisticated product in the marketplace than what you're going to drive in that Mercedes-AMG when it comes to the hybrid electric vehicle that exists there and the horsepower and torque that goes with that vehicle. It's a rocket ship and you're going to have a great time riding in that vehicle. But the other critical thing here, as you can see, again, this represents with us partnering with SAB in 2010, our business started first in Europe because of the emission requirements. We then migrated over to China. And then obviously, with the U.S., we've picked up a lot of work here in the U.S. or in North America in the last several years. Next slide, please. There we go. What we're trying to do right now, we enjoy about a 10% market share of the total driveline business. And that's really what we're targeting going forward. So when you look at that $20 billion to $30 billion by 2030, the addressable market, -- and if we can achieve and accomplish what our target market share it is, by 2030, we should be in that $2 billion to $3 billion range of sales should be targeted towards electrification. And that's the goal that we're working towards. We've never said that before. We're putting that out there here today because we're very confident in regards to our ability to win that business going forward, especially when you see the technology that Mark is going to cover here with you going forward here. But our portfolio is definitely expanding. We're the industry leader, as I said, in beam axles today. We're developing that technology to be scalable, modular and allow us to expand into the other segments beyond the truck business. Next slide. So this just kind of gives you a little bit of idea of the programs. The Jaguar Land Rover, as I mentioned, is a 2-in-1 system that's been in production since the 2017 period of time. The Mercedes-AMG is the 850-horsepower vehicle that you're riding today. We picked up a lot of work with Volvo with respect to gears as they're expanding their electrification portfolio. We've got the [indiscernible] corner modules, where there's either 2 or 4 of our axles in each of the wheels depending on the configuration. We got our first beam axle with Motors that's been now publicly released. And then we've got 3 other programs that we have booked 2 of them are component-based programs. The other is a differential program. We can't tell you right now who they are or what they are, from a detailed standpoint and all because the OEMs have not given us that authorization. But again, this will go into our -- it's in our backlog and new business going forward into that in that $1.8 billion that I mentioned to you. And we only expect the red dresses or the red covers to grow as we go forward. So when you look at our backlog of new business, 2 years ago, our backlog of new business was sitting at $600 million, covering a 3-year period of time, 2020 through 2023. Last year, that grew to $700 million. And I should have said it in the $600 million, only 15% of our backlog was electrification based. Last year, we grew that backlog to $700 million and 35% of that. Right now for the period of 2023 through 2025, that's grown at $25 million from the $700 million to $725 million, but our electrification content is also going up from the 35% to the 40%. And we're -- right now, we're quoting on $1.5 billion of new and incremental business, and 75% of that is electrification based. So this backlog of new business is only going to grow. It's all going to grow predominantly in the electrification space. But you can also see with the backlog by geography, the distribution is pretty balanced with respect to where we're winning new business going forward as well. So we're very, very proud and very happy that we're trending in the right direction. And our job is to grow at or faster than the market, especially with the adoption of electrification. But we'll take growth wherever we can get it. And my final slide before I turn it over to Mark is when it's all said and done, it's all about how do we build value for our customers, right? And what we're really focused on is driving that diversification in our business, expanding our portfolio, like I said, on the electrification side, being agnostic from a propulsion offering standpoint, growing at a pace faster than the market from a sales standpoint, offering our customers that value proposition that I mentioned earlier, while also being disciplined from a financial standpoint because we still have to address the balance sheet. At the same time, we have other needs. And the keyword I always like to use is balance. We're going to balance our strategic priorities and our capital allocation based on the needs of the business and the opportunities that present themselves, knowing that we're never going to do anything that's going to put the company in harm's way or in jeopardy and try to balance all the needs of our stakeholders. And then the long-term focus is, obviously, we want to be a leader in the premier choice for the OEMs when it comes to electrification technology. We want that increased size and scale, as I mentioned to you earlier, and we're going to be very disciplined and effective with respect to how we deploy that capital going forward. So with that, I'm going to turn it over to Mark Barrett, our Vice President of Product Engineering and Quality. And so he'll get overview of the whole scalable and modular technology that I just was referring to earlier. So thank you, all. I'll be back up for a little bit. Thank you.

Okay. Good afternoon, everyone. Thanks for joining us today. As David mentioned, AAM has been in the business for over 12 years on electrification. So we have a tremendous amount of experience, a tremendous amount of knowledge, and we've been able to be successful in applying that into the market. We've been chosen as the lead supplier for EDUs, electric drive units and electrified beam axle products as well as components. We have a solid global footprint to support our customers around the globe. And also, as David mentioned, which we're very proud of, we've been recognized most recently with 3 automotive PACE awards. for our product technology and our OEM collaboration, and I'll share some more detail with you in a little bit on that. And if you look at the summary as a whole kind of level set where we are today, we have 12 plus years of electrification experience, well over 28 years of traditional driveline experience and that positions, AAM, I believe, very well as a unique and very capable supplier that differentiates us from the rest of the market. If you look at the electrification awards, I'll just touch on these briefly. We've already been awarded over 20 electrification vehicle programs globally. They're shown here on the chart. These programs include 2-in-1 electric drive units, 3-in-1 electric drive units, including AAM's next-generation technology. And then we also have 3-in-1 electrified axles and a variety of components from forgings to gear sets and differentials. And I'll get into more detail and more specifics on these products here in a little bit. If you look at trends in electric propulsion, as part of a normal business process, AAM does very extensive industry and product benchmarking. Where do we need to spend our money, where do we need to innovate and push the envelope and technology for the market? This chart shows 2 very clear trends when we look at what's out there in the last several years and what's moving forward into the market. Those 2 main areas are increase motor speed. And fundamentally, as you can increase the speed of the motor, you can physically shrink the motor, which gives you benefits in packaging costs and all the things that go with that. And then also taking other components that used to be remotely located in the vehicle, but now integrated into the unit, so you have 1 compact unit to be able to deliver to the customer. We've developed our own next-generation electric drive units. You'll see some slides coming up. We call those our Gen 5 and then our Gen 6, and I'll show you some detail on that in a little bit. And those, clearly, when you look at the attributes and you see where they are on the chart here, they leapfrog the competition in all these attributes. A couple of things here, just to point out to level set from a terminology standpoint, there's really units when you say a 3-in-1 electric drive units. There's the power electronics, the software that goes with that, there's an electric motor and there's also a gearbox. Our Gen 5 technology provides a full system solution with the most integrated, efficient and power dense design that will -- that is soon to be on the market, but when you get a chance to see all the other products here, you'll get to experience why that is so industry-leading compared to the benchmarks. These 3 major subassemblies, the power electronics and the software, the electric mode and the gearbox are all optimized. Each one individually engineered, but then combine the entire system to be able to give the absolute best performance as a single integrated unit, and they provide the best efficiency and performance. And again, we've been recognized from the Automotive News PACE Award for innovation and product technology on this. And we'll launch our first production program early in 2024. Continuing on the benchmarking and the market attribute side of it. Our electric drive Gen 5 units, the next-generation units, outperformed the widely recognized industry and competitive benchmarks. As you can see the numbers there on the slide. And as you can see, the improvements are substantial. When you look at the numbers in key areas like mass, power density, power loss and overall packaging. And you can also see from the sliding view in the upper right-hand corner of the slide, that's -- the goal is the, I would call it, the high-volume market leader in electric vehicles. You can guess the name of that company. Compared to our unit there, showing the difference in packaging and the advantages of being able to integrate that system. The value proposition that we bring, every OEM right now as they're trying to expand and accelerate into the electrification space, they're all faced with a lot of the same challenges. They're all striving to solve issues of -- from a propulsion system and/or vehicle performance level, how can I reduce mass, how can I improve the efficiency of the unit, how can I get greater power density, the things I covered with making the units as small as possible? How can I get better range out of the vehicle and then probably the most important, how can I get cost -- be more cost effective? and the propulsion units obviously play a role in that. And we have the proven performance, the technical capabilities, the product and the footprint to deliver on these needs, and I'll share some more detail on that here in a minute. Without going too deep into the engineering world, I wanted to at least put together a slide and just describe on the left-hand side, the subsystems, These are all the individual major components of an electric drive unit. And on the right-hand side are all the engineering tools and analysis tools that you have to be able to effectively design and develop that product. You can see it's a very long list. It's a very complicated list. But to be a leading supplier, which we are, you have to be a master in all of these areas. And we have the capabilities to -- for all those subsystems, our in-house capabilities, the analytical tools to be a credible full surface -- full-service leading supplier. And with our long-standing heritage in the mechanical space, we've developed, again, through those 12 years, extensive experience in electronics, motors, softwares, functional safety, capabilities, all critical to make us a one-stop shop supplier to be able to deliver those products. When you look at engineering capabilities, the extension of it was really kind of the right side of that chart. We've developed our own analytical tools to design and develop mechanical components, electric motors and power electronics. And these are proprietary computer simulation tools that we've developed in-house to -- not only to speed the design process but also to have the most accurate results in the first phase of the development process. And the whole intent of this not only is to go fast to the market but also eliminate physical hardware in the early development phases to be able to get there quicker. As an example, the JLR program that you saw earlier, we were sourced, we designed, we developed and we launched that product in 2 years. So that's a benchmark in terms of fast launch performance in the industry. In the area of that also that David mentioned from a scalable and modular platform, we've developed these products to satisfy multiple vehicle architectures using that scalable and modular architecture. And this allows us, as David mentioned, again, not only to take care of the market we're traditionally in, but also expand into other markets to serve and grow. This includes wheel and drive units, single motor, dual-motor drive units, light-duty and heavy-duty beam axles. Also wanted to mention, Dave kind of gave you some initial highlights, but our most recent market introduction, and there'll be several more models beyond this. is a very advanced hybrid electric propulsion system for the Daimler AMG GT 63. You'll have an opportunity to drive in this vehicle. And not only what Dave said in terms of power and performance of that, but you'll be amazed at how seamless this very complicated system functions and performs in the overall vehicle. The drive unit is the most complex in the market. It can propel the vehicle in a pure electric mode, a pure mechanical mode or a combination of both depending on the performance and the driving characteristics. To add a little bit more detail, it has a 2-speed gearbox. It has an electronic limited slip differential. And it's all AAM software and controls developed to make all this happen seamlessly. And when you're in that vehicle and you see how that performs, you'll get an appreciation for that. And again, we were recognized with 2 Automotive News PACE awards for this innovative product technology and customer collaboration, and we're very proud to be part of that vehicle and that launch. The next area, a growing area in the market today is the electrified beam axle space. We're -- again, if you look back at our long heritage in the mechanical and the beam axle space, along with our 12-plus years in the electrification space, we're very well positioned to be able to be a premium supplier for this based on our motor, power electronics and supplier capabilities. And I'll show you, there are some architectures on the side showing a variety of different single motor, dual motor applications, again, depending on what the OEMs and the customers are asking for. The picture there are 3 development vehicles. And I've got a short video I'll play here to show that being put through the. [Presentation]

Again, all part of that scalable and modular product portfolio used to develop those same products. Then the next question becomes, okay, we're industry leading with the technology we have that we're going to launch in the early 2024 time frame. So where do we go from here? That's where our Gen 6 technology comes in. Again, same basic features that are there. But the next steps are really pushing the innovation even further. We have other things up our sleeve to be able to focus on getting greater gains in efficiency, power density, continuous power of the unit and overall cost. So in summary, you can see that AAM is already well positioned to support the electrification pivot from a component standpoint, subsystems or full electric drive units. We have proven product technology, engineering capability and customer support anywhere in the world. And just to give you a snapshot, these are the vehicles you'll have a chance to drive in today. These are the courses that you'll be -- it will be broken up into 3 different courses that you'll have a chance to experience and specific to those individual applications. So I hope you have fun you enjoy it. A lot of us will be with you so we can answer any other questions you have during that event. And with that, I'll turn it over to Chris May.

All right. Thank you, Mark. Good afternoon, everyone. Good afternoon, everyone, online. You heard David today, shared a little bit about our vision of where we want to take our business from an electrification space, talked about served markets. talked -- you heard Mark talk a lot about the intricacies of our technology. So now is the time we're going to sort of bring in some of the financial analysis associated with that. So let's go ahead and get started. So my agenda here for today. We'll talk about our financial goals that align with the vision of the company going forward from here, give you some considerations for pathways to achieve those goals. I'll give you a brief snippet of where we stand for 2022 in terms of our financial outlook that we provided in early November, talk about capital allocation, and then I'm going to cover a section. entitled, No Honey For the Bears Here. So I know there's some prevailing counter themes I'm going to try to kind of give you our view of life as it relates to some of those. So let's go ahead and get started. So in terms of our vision from a financial perspective, you can see these here laid out with where we want to take the company going forward over the next 10, 15 years. We want to continue to drive to be a top-tier EBITDA margin performing company. We want to continue to drive to be a top-tier cash flow conversion company. I'm talking EBITDA down to free cash flow, have a strong balance sheet and of course, a nice, healthy, balanced capital allocation. So let's kind of break down into some of the details associated with that. But it starts in terms of driving cash flow, in terms of driving margin, it starts with delivering growth, delivering sales. So if you look at the areas of focus on the left-hand side of this chart, you can see the first top 3 are really associated with the electrification that we just spoke about, building that business with legacy OEMs, building that biggest business with start-up OEMs, increasing our content per vehicle opportunity set and also leveraging our core skill sets, our technology base, protect those segments that we're in today and expand into new segments. You saw Mark showed that serve segment chart. So what are the trends and results that we've been experiencing so far? Well, as David mentioned, we continue to increase our backlog on an absolute dollar basis over the last couple of years, continue to increase the share of that backlog as it relates to electrification. Our expectation is that will continue. Our expectation is we'll continue to add new customers. You saw a lot of new nameplates over the last couple of years through our announcements that you didn't see with our company 10 years ago. We'll cover CPV on the next slide, so I won't talk about it here. But again, that e-beam axle space and expertise that we have in that niche, very compelling as we go forward as well as expanding into the other EDU space. The other two areas of focus that we have for terms of sales and growth, I know we're not allowed to talk about our ICE business, no one wants to hear about it. But it's a core fundamental piece of this company. We're in great served markets that have long tails that generate great profits and great cash flow, and we'll continue to secure and defend that as it continues to wind down over the next decade plus. And then we'll continue to have high-value acquisitions. We've had small tuck-in acquisitions inside of our capital structure each year over the last couple of years, most recently, Tech 4, which brought on $300 million of revenue and some great synergy opportunities associated with that. So let's talk a little bit about the CPV as it relates to electrification. So our approach to the market, full EDU systems, beam axles, e-beam axles as well as the component side. If you look on the right-hand side, if we are a primary supplier of components, for example, if the OEM is building the EDU in-house, our content per vehicle can be up to $500 per vehicle as a component supplier. That's very consistent with what we experienced if we are a component supplier today on our internal combustion engine business. On the left-hand side of this chart, if we are the primary drive unit supplier, our content per vehicle can be up to [$25 to $100] plus, and I accentuate the plus in many cases. And this is what we're experiencing today in real time and product that's in the field as well as things that we're quoting on for future business opportunities. So how does that compare to our internal combustion engine business today? Well, if we are the primary driveline supplier on an all-wheel drive system in the market, our content per vehicle is somewhere around the $1,000 to $1,200 range. If we are the primary driveline supplier on one of the North America full-size truck applications. our content per vehicle is in that $1,500 to $1,600 range. So you can see meaningful increase in content per vehicle if we're the primary driveline supplier in terms of electrification space. So we talked about sales, we talked about growth. Let's talk a little bit about some considerations as it relates to margins and how we continue to drive very strong margins. Our average EBITDA margin over the last 5 years is a little over 15%. And if you think about the years I'm talking about, a lot of crazy things have been going on in those years. And we've still been able to maintain very strong healthy margins during that time period. So what are the core today that we believe gives us an advantage? You can see them listed on the left-hand side, obviously, scale and product mix, product mix being full-size truck and crossover vehicles. Vertical integration adds us almost 100 basis points of margin opportunity set for us as we do a lot of the products that we build for our internal combustion engine, driveline units in-house, variable cost structure, regional sourcing, which has helped us in terms of protecting us from tariff issues that you've seen over the merger over the last couple of years, long supply chains, et cetera, where we build and supply in the area that we ultimately provide to our customer. We believe that is a core element of one of our cost advantages of the company. Is it 100%? No. Of course, we're a global auto industry. We do source outside of the regions from time to time where we need to, but our focus has been building by local, if you will. Lean SG&A and an AAM operating system, which is fully integrated across the company, which amongst many different things it does, it's a key productivity driver, and we believe this is also a differentiator for our margin performance. So that said, as we convert over the next 5 to 10 years, how are we going to continue to maintain these margin profiles? Well, if you look on the left-hand side, these things are going to continue to retain and stay with us. But as we go forward, some of these new integrated product designs that Mark shared with you, smaller, easier to assemble, less cost, these will drive margin opportunities, sourcing strategies with partners that can meet end customer OEM needs gives us margin opportunities. From our core operating system, continued fixed cost reductions, further doubling down on automation to drive productivity that sells not only margin challenges but also labor availability challenges. As you know, the industry deals with synergies from our acquisitions. And we do see benefits with ESG going forward as it relates to margin opportunities. Twofold in particular, as we're focused on reduction of energy consumption that saves obviously costs associated with that, but it's also -- it tracks the best talent. If you have a great ESG profile, people are interested in working for it. You get the best and the brightest engineers, you get great productivity thoughts, et cetera. So we see differentiators in that space in an area we're very focused on. So with that, let's flip over to cash flow. So I'm going to talk in the next couple of slides on cash flow. But I'm going to start with cash flow as it relates to capital intensity as we pivot into electrification. I know there seems to be a prevailing theme that maybe we're going to have to pour an excessive amount of dollars to make this pivot. I'm going to present to you here in terms of our capital intensity, you're going to find it's very similar to our internal combustion engine business. And in many cases, we can leverage what we already have to make that pivot. So on this slide, you see different areas that we spend our capital dollars in terms of launching new business as we continue to move into the electrification space. So for example, on the upper left-hand side, this is the components that we share with you that we're supplying now in the electrification world. Very similar in many cases, to our internal combustion engine products that we supply, gears, shafts, differential assemblies. We can leverage our installed equipment base to produce a lot of this. Yes, in some cases, we will have select investments we'll need to make, but we can leverage an installed base that already exists. Driveline assembly, they're generally very unique for our internal combustion engine driveline units. That will be the same in an electrified world. Capital intensity, very similar electric versus ICE. Facilities, so David showed our global footprint. We're in great shape from a footprint perspective to serve our customers. And some of our facilities today are building both internal combustion engines as well as electrified product right next to each other. So we have a great facility base to launch from. We don't need to put in new brick-and-mortar. If we win a very large program or their specific requirements for a regional sourcing from an OEM, yes, it would be a great business case, we'd certainly take a look at it. But we've got a great global installed facility base that we can leverage as we make this pivot. The Inflation Reductions Act, there are some benefits associated with that in terms of manufacturing credits and investments that we can certainly leverage to minimize any of these costs as we pivot into electrification -- On the right-hand side, maintenance productivity, same as we experienced in ICE. No additional amounts required information technology, we have great installed systems. We have one of the best factory information systems in the world, which will be the same. We'll continue to leverage what we already have through this pivot. And then in R&D, as we have shared with you many times, of course, that will come with some upfront funding. But hopefully, the message here to you is our installed capital base as well as the capital intensity associated with this pivot very similar to what we had for an internal combustion engines. So I think that is a key piece. A key message I wanted to share with you from a cash flow perspective. Second piece as it relates to cash flow. If you think about cash flow, it starts with EBITDA, CapEx, we'll have a similar intensity on the capital conversion for -- going from internal combustion engine to electrified vehicle. Our investments and our capital intensity and our base internal combustion engine business, obviously, will decline even as we're renewing successive programs Interest costs will continue to decline, which is a key contributor to our cash flow profile, and that's driven by the slide that you can see right here, and this is our debt reduction. So since the second quarter of 2017, which was our MPG acquisition, we've paid down $1.3 billion of debt. We paid an additional $50 million, which is included in the $1.3 billion, but an additional $50 million of debt down inside of the fourth quarter here in 2022. So this puts us in great footing to continue to drive and reduce our cash call from an interest perspective, and we expect this trend to continue, and it obviously will continue to strengthen our balance sheet along the way. As it relates to our balance sheet, this is our debt profile or debt maturity profile as of 12/31/2022. In the December time frame, we just refinanced our Term Loan B for maturity out in 2029. So thank you for those of you who have participated in that transaction. We certainly appreciate your support. But the message here, you can see very clearly, we're in great shape from a balance sheet strength perspective. We have no significant maturities until 2026. And we have a great callable feature profile amongst many of these done instruments. We can continue to chip away at our outstanding debt on a go-forward basis. So we're in a great spot here, continued financial flexibility, continued balance sheet strength. So let me take a step back here and put some of this in terms of different perspective versus our peers, and this is adjusted EBITDA and free cash flow, true cash flow, not adjusted free cash flow, but true free cash flow as part of our market capitalization. And we've performed very well in this metric over the last 8 years versus our peers. Our goal is to continue strong performance in our EBITDA performance, strong performance in our free cash flow performance and really leverage the technology that you heard, Mark talk about today, you'll see and experience today to hopefully drive on a go-forward basis, growing value inside of our market cap. That is our goal, that is our mission, and we'll continue to see this play out. We talked a lot about the financial piece. We talked about some of our goals. These are some of the key. I mentioned there's benefits we see to margin enhancements and margin maintenance with ESG elements. You can see here, these are our sustainability initiatives. We announced new goals earlier in the year 2022 with our sustainability report. You could see those, of course, in our sustainability report online. I would encourage you to go read that. You'll see our new one come out here in a couple of months. But we see long-term benefits with this. I mentioned energy reduction usage, I mentioned talent attraction, but also key and critical here is alignment with our customers. We can be considered, obviously, sourceable, maybe preferred sourcing if we continue to meet these metrics from our customers. So it's very important for us to continue to stay on the front end of this curve to grow the company, and I think we're doing just that. All right. So let me move off of that and into the tactical a little bit up what you see on your slide here is our outlook update that we provided at the beginning of November at our earnings call for sales, EBITDA and adjusted free cash flow. It's very early in the close process for only a couple of days into January. I'll tell you where we're seeing the trends for the fourth quarter come in. Production volatility continued to remain very elevated inside of the fourth quarter, inside of November, inside of December, very volatile for us, continue to work through that, probably not surprising to many, but it was a high level of volatility. So impacting us, obviously, from a sales perspective, also from an adjusted EBITDA perspective, it will impact us from that volatility, not only through sales, but also volatility in efficiencies. And our cash flow target, we told you we'd be approximately $300 million, and we are on track to deliver that target of cash flow. Okay. Capital allocation. I think you've seen this slide from us before. There's probably not a lot of new news on this perspective. We will continue to invest in this company's organic growth through R&D. We'll continue to invest in our growth and through appropriate returns. We'll continue to focus on leverage reduction and then, obviously, the strategic element. I mentioned we've done several bolt-on acquisitions over the last couple of years. I would expect if something was appropriate from a portfolio perspective, we would certainly take a look at that. That's good for the long-term interest of the company. And then currently, there's no active shareholder activity, whether it's a dividend or buyback, and that would be considered at the appropriate time. But the priority, of course, is the top 2 And the third one, as we meaning strategic as opportunities present themselves. Okay. Let me move here to, like I said, no honey for the barriers here. So these are kind of, I would say, 4 very direct points we hear from time to time maybe the bare thesis on American Axle. And here is our counterview or I'll call it reality, what we believe reality to these points. So let's start with them. On the upper left, and you've heard me talk about many of these through the course of the presentation or Mark or David had mentioned these earlier, -- So it's sort of an encapsulation some of this. But the concept of, hey, American Axle is going to lose content per vehicle as we transition into electrification. Well, I think the data we showed you, the experience that we have and our current product that were launched in the electrification space as well as our active quotation activity is certainly giving us indication that the opposite is occurring. Our content per vehicle opportunities are increasing. We are realizing this on a go-forward basis. And our served segments that we're in are expanding, okay? Upper right-hand side, all electric drive units are going to be in-sourced by the OEMs. There's going to be none out for the marketplace. Well, I think we just shared with you, number one, you'll drive cars and vehicles that have our electric drive units and that are in the marketplace today. So it's clearly not true. There are specialty areas, niche areas that we will accelerate such as the e-beam space. There's EDU space, also that would be put to this outside to the supply base. And as volumes expand, it's our belief the OEMs, as David mentioned, as part of the -- their investments in the space, they will reach out to the supply base to continue to fund that growth in terms of that. So this is what we're experiencing today. We're seeing this in our quotation activity today. So no, we do not believe all EDUs will be in-sourced by the OEMs, and that's also reflective in our served market opportunities that David had in his presentation. Lower left, capital intensity is going to be much higher for the electrification pivot. I think we cover that in great detail. We don't believe that to be true. It's going to be very similar to our internal combustion engine business. And then lastly, the one we constantly hear, hey, AAM, your terminal value is 0. Well, I don't think that's true. I think we have a very comprehensive product portfolio that allows us to be very agnostic to the market, whichever the end customer pulls, we're in production on. We have contracts on, we'll continue to generate very strong returns on our internal combustion engine business for a very long time. We'll continue to generate very strong returns on the new books of business as it relates to electrification that we win and launch over the next 5 to 10 years. And you'll see us position ourselves with strong free cash flow, strong margins, which will ultimately translate into shareholder activity and shareholder returns and value. Okay. So let's bring it all together before David comes back up here for some closing remarks. Hopefully, you got a nice appreciation of where we stand today in terms of our product portfolio, a clear vision, a heritage of operational excellence that we can leverage to drive the future forward in terms of our performance as a company financially. Great proprietary technology, and you'll really see, feel and touch some of that here today, highly engineered products. These aren't easy to replicate in the marketplace. Good strong financial attributes to take us forward for good margins and cash flow And then ultimately brings us an opportunity to create significant value for all our investors and stakeholders around the globe. So with that, I'm going to bring David back up here to give some couple of closing remarks, and then we're going to have some Q&A.

Well, hopefully, you're taking away that we have an outstanding core business. That core business of ICE and hybrid is going to be around much longer than people think. At the same time, we're investing and have been investing for well over 10-plus years in electrification and have accelerated considerably that investment to what you're seeing in the back of the room here and what you're going to experience driving today in regards to the technology. We fully expect no different than we are today to be an innovator and a leader in the driveline space in the metal forming space as we go forward here. The OEMs cannot do all this themselves. They don't have plans to do all this themselves. We're going to win our fair share of the business, as I mentioned to you. And as I mentioned in the very onset of the presentation here today, we're developing that award-winning technology that you just heard Mark covered in much more detail. We're designing it where it's scalable and modular so we can enter into new segments, and we can drive that economy of scale in our overall business. We're leveraging that heritage of our business, that operational excellence that I talked about and the others talked about that differentiates us in the marketplace today on the traditional and ICE business, will also differentiate us in the future. But technology, technology, technology is the differentiator when it comes to electrification. That product side, the process side and the systems side, as I mentioned to you. We also -- you've seen from when we started this business back in 1994, approximately $1.4 billion in sales for that year. We're now almost a $6 billion company. $5.8 billion is the midpoint of our guidance for this year. But we've always brought a compelling value proposition to our customers. That's why we're the industry leader in what we do because we listen to what the market says, we listen to what our customers say and we bring those innovative solutions to them. That's what differentiates AAM. And you just heard Chris say, we got a strong business from a financial standpoint, right? We don't have any major debt maturities due until that 2026 period of time. And again, we'll chip away at that long before that ever gets to that point in time. We'll refinance some of the other things that are there. We've always tried to maintain that financial discipline while driving the proper balance in the capital allocation, but being very diligent and very disciplined in regards to organic growth and servicing that balance sheet or strengthening that balance sheet. But you've also seen us do tactical acquisitions and major strategic acquisitions if the right opportunities present themselves and as good for us as a company and good for our shareholders, -- we're clearly going to look at further strategic activity in order to grow this business and also to expand our portfolio and diversify our business as we go forward. But I couldn't be more proud of my team right now in regards to what they've accomplished over the last 3 years, which has been a very difficult period of time to manage and operate through. While we're managing through a recession in the auto space, our team is growing our backlog in new business we're coming out with award-winning technology when it comes to electrification. We're winning business in electrification. We've got the attention and the of customers all over the world. You see our backlog growing in all 3 regions of the world, North America, Europe as well as in Asia. So again, it's the innovation and the creativity that the team has here, but also the discipline, the foresight and the strategy. And as you always have known us for years, we're very disciplined. we're very structured. What we say we're going to do, we deliver on. And that's what I fully expect us to do as we go forward here to achieve that 10% of that market -- of that addressable market by that 2030 period of time. And again, a lot of features, a lot of things can change in that next 10 years and beyond. And what we have to do, just like anybody else has to do, is we have to adapt to the market and adapt to our customers. So as they're adjusting and they're entrusting, they're adjusting every day their platform strategies, their long-range product plans and the cost structure, especially as you got the increase in costs associated with raw materials. where are those raw materials coming from, how is it impacting their platform strategies going forward, what's the penetration rate is going to be? So there's a lot of uncertainty out there as we're trying to plan the business. And that's why we try to share as much of the strategy as we could with you today. So you understood that we've got the fundamentals in place. We've secured a lot of our next-generation ICE and hybrid business that's going to fund the future, as Chris indicated. But we also have an award-winning technology that we're going to round out the portfolio on electrification. And then we're just hopefully going to continue to grow that backlog equal to or greater than the market is pivoting from ICE to electrification. So with that, I'll wrap things up here, and then we're going to do a short Q&A because we really want to -- while it's still light up, we want to get you out into the vehicles and drive this technology. So again, thank you very much for your attention today and your time, and we'll turn it over to David Lim and the team to start going on the Q&A side.

Great. If we can get the management team up to the podium and get these chairs up, that would be great. And John Murphy I not surprised.

Thanks for information actually. Incredibly helpful. Just David, 2 quick questions. I mean, first, as you look at all the investment that's going on in the industry, a lot of it not going into ICE anymore, but you bring a lot to the table on a technology and helping improve the efficiency of the traditional ICE powertrain. There is a case to be made that margins and cash flow on ICE products for the next 5, 10, 20 years actually might be far greater or better than they have been historically because the automakers are needed more than ever before. What kind of -- what do you think about that thought process and the opportunity there and sort of the core business that exists right now? That's the first question. And then the second question is we think about the transition to EVs. It sounds like there's sort of a little bit of in-sourcing that's going on right now, maybe more than it has on the ICE side, but then it's going to get pushed back to you guys in sort of outsourcing How long do you think that process -- do you agree with that? And how long do you think that process will take?

Yes. Let me start with the last question first. Yes, the OEMs are designing and developing electric vehicles and driveline systems that support those electric vehicles today. Most of those systems are being designed and developed are EDU-based-type vehicles. We -- our specialty has always been in the beam axle side of the business, but we also make EDU. So we can play in that space. I don't see a lot of the OEMs making big investments in the beam space. So that's why I said earlier, if we can win our fair share of the beam space like we enjoy today, that's going to bode well for our organization going forward. But we also think that we can win in the EDU space as well, especially in that blue part of the chart that I was saying to you in markets that we don't serve today. And I do think it will -- we're already working on things that will take us in that 2026 and beyond the 2030 period of time axle. So I think the OEMs are trying to understand what does electrification mean to them, what's their cost structure, what's their profitability because they're not making money today on electric vehicles. Their goal is to get that modularity and that scalability, no different than what we're trying to do ourselves with our portfolio so that they can make profits on that. And to your first question in regards to ICE and profitability there, I'm a huge believer in the ICE and the consolidation of the ICE and a lot of profits to be made over the next decades, right? And we think that we can be an industry leader with respect to being part of that consolidation while also making strategic bets in our future with electrification.

Do you think that could create better margins and returns in the...

I think in the short term for sure because the infrastructure is in place, the cost structure is in place. I mean, obviously, we're managing through and uncertainty and economic changes in the marketplace today, but absolutely because the fixed cost is sunk. So there's not a lot of -- more capital that's going there. The product is in place. So we're shifting that to electrification. If you just want to forego the future because I do believe that electrification will become a greater level of the marketplace going forward, I don't think it's going to be in the short term like a lot of analysts and others are projecting. A lot of -- I've been to several conferences where they say, well, you're going to be out of business in 5 years. There's no way. We won't be out of business 20 years even if ICE sticks around that long. And even if electrification accelerates, we want to be agnostic to it and be prepared so that if we need to pivot with the market, we can pivot quickly to the market to start making more electrification product.

And John, you're doubling down on productivity initiatives inside of synergy opportunities will drive margin opportunities, Less capital is required for next generation of programs, and we've already secured in our business next generation of programs to 2030 and beyond for the bulk of our key platforms that we are on. So there's a great window of opportunity to make a lot of money.