Dauch Corporation (DCH) Earnings Call Transcript & Summary

Next up we have American Axle which is a lean supplier of driveline components and powertrain technology. I think despite somebody thinking -- despite the name, I think you should really think about them more broadly as a powertrain tech company. They're big on a lot of trucks here in North America but also growing internationally on many vehicles outside of the truck space. They're bringing a lot of solutions to market that I think are also not well appreciated by a lot of investors outside of complicated, I wouldn't say simple, drivetrain components that you actually operate in right now, because they are pretty complex. But I think the product portfolio is going to be expanding a lot, more than most folks really appreciate or even understand at the moment. And I think the customers themselves are being educated by David and his team about those products. So today, we're very happy to have David Dauch, American Axle's Chairman and CEO as well as Chris May, Vice President and CFO. So thanks, guys, for joining us. We really look forward to the session.

I guess maybe to kind of start a little bit -- we kind of start these sessions a little bit more mundane in thinking about sort of the near term and volumes. I guess -- so the first question is, schedules have been volatile and all over the place for the course of the last 2 to 3 years. Maybe you could comment on sort of absolute levels and sort of the fulfillment rates or how these schedules and volatility are shaping up for you here in the near term.

Yes, sure. If you just go back and look at the last 3 years of production in the industries, the first 2 years were roughly 13 million units. Last year, it was 14.3 million units. This year, we're projecting the production level to be in that 14.5 million to 15.1 million units. We think it takes several years to get back to a 16 million units [indiscernible]. I remember, pre-Covid, we are running at 17 million units [indiscernible], so there's still some challenges that are out there. Obviously, we've been dealing with a lot of uncertainty in the marketplace, a lot of volatility in our schedules. A lot of -- a limited amount of notification as it relates to downtime. A lot of that -- we thought the second half of the year last year was going to be better than the first half, it turned out to be worse. Some of that has carried into the first half of this year or the first quarter of this year. We've already experienced 8 to 10 weeks of downtime at some of our key assembly plants or the key OEM assembly plants that have impacted some of our core business, especially during the scheduled downtime, the OEMs are really protecting a lot of that truck and SUV and even CUV volumes for the most part, but especially the truck and SUV and running a heavier mix, but we're seeing some adjustments and have felt that here. And we think that will continue here in the first half. We think that will subside in the second half of the year. Chris, I don't know if there's anything else you want to add.

Yes. As we exited last year, I think in our first quarter or year-end earnings call, we talked about volatility seeing similarities between the first quarter, the fourth quarter last year. And I would say, since our earnings call that volatility has continued. And as David mentioned, probably a little higher from some of the truck plants we support than we would have expected a few -- during our earnings call a few months ago.

Yes. I mean before it was heavily weighted on semiconductors. Semiconductors are still a problem but subsiding. It's just really becoming just supply chain challenges across the board. A lot of it driven by labor availability.

So is the OEM labor availability just tweaking their production, then it just comes down to -- just-in-time stoppages? Is that still happening?

I mean labor availability is a problem for everyone in the industry from the OEMs all the way through the tiered ranks. The OEMs can only schedule their plants based on what they can receive. So you're only as good as that weakest link in the supply chain. So we're all spending a lot of time just trying to make sure our supply base has the proper capacity and capability and labor availability to support our production needs, so we can support our customer. At the same time, business has changed. It's not going to go back to the pre-Covid days. We got to recognize that labor inflation is here. It's going to be harder to get labor, attract labor. A lot of the people left the workforce. Baby boomers retired a lot of the childcare, half of the child care went away during COVID, the services went out of business. So therefore, a lot of the women took themselves out of the workforce as well. So it's just a changed market. So we've got to adjust and adapt to that. So we're putting a lot more robotics and automation to our factories to address some of those issues.

Smaller suppliers that support you, are you seeing problems in their network as well?

Absolutely, yes. Absolutely. Where we've had to manage down deep into our supplier base. And that's the big thing. Our OEM customers are challenging us with is making sure that we have supply chain resiliency and transparency because listen, the whole industry got caught by surprise in regards to not understanding what, where, when it came to chips. And so there's a lot more focus on where our component is coming from all the way down to the raw material sources through the value chain up to the OEMs.

Right. So one of the other big concerns that investors and folks in the industry have is that mix may deteriorate from where it is right now or where it has been. I mean it's hard to believe it could be much richer than it has been for the past couple of years. I mean, fortunately, if we saw lower volumes, actually mix may improve, but we'll -- let's table that for right now because we're all expecting at least small increases in volumes. I mean how do you think about mix, particularly for your product. I mean, you've -- I mean, GM has been protecting, as you said, and so is Chrysler [indiscernible], their trucks and favoring them. So that's been a reasonably good guy for you guys. I think there's some forecasting services that talk about the GMT being down year-over-year, which seems kind of unlikely at least to us. But I mean, I'd like to hear your thoughts on that, but generally, mix and maybe even a commentary around on the truck volumes, your expectations.

I mean, it's clear that the OEMs ran a heavier mix focused towards trucks and SUVs and crossovers because that's -- they're managing their profit pools. And obviously, anything that was positive in that area was positive for American Axle. When I say positive in that area, trucks, SUVs and crossovers, right? I still think our markets heavily dominated in that side, 90% of the market is suited in that area. Some of the passenger car volumes essentially were cut during the COVID dates. Some of that may crawl back, but many of the passenger car programs are being canceled out, right? Now when it comes to the mix, as far as the different concentricity of the vehicles at the different trim levels of the vehicle. In a lot of cases, our products are agnostic to that because we're under carriage suppliers, right? What we like is a 2 for -- front axle, a rear axle, there's more content per vehicle for us. In some cases, they'll decontent a vehicle if they can't get a chip. But for the most part, we've been able to sustain that mix of front axles and rear axles, which has been positive for us and will continue to be positive for us. The biggest thing that we're seeing right now, again, was we saw adjustments because of semiconductor issues, that's starting to wane, as I mentioned to you. But we also are seeing OEMs that are managing their inventory levels in order to keep transaction prices up and keep incentives down. So we're just having to adjust to what the new norm is in regards to the OEM side. Chris, I don't know anything else you can add on...

Yes. From a mix perspective, John, you talked about bringing on additional vehicle applications. If you assume flat or increasing volumes over the near to midterm, I mean our expectation would be truck volumes continue to remain resilient. And when they're adding on additional volume, whether it be additional crossover vehicles, we would accrete obviously additional revenues associated with that. And then our operating leverage will allow us to convert that into a nice contribution margin. But we don't see full-sized trucks seeding backwards, right? So that would hold. And if they add on some volume, and from their perspective, a different mix, that's actually incremental volume for us.

So you mentioned incrementals on volume, right? We haven't had a lot of upside in the last few years. So can you remind us, if we get into this environment where you see maybe 5%, 10% volume increases, how we should think about incremental margins?

Yes, I mean our incremental contribution margin, and we experienced this, and you can see this in our year-over-year walks for the past several years through a lot of different market dynamics is anywhere from 25% to 30% contribution margin. If it's more weighted towards the truck side at the higher end of the range, if it's sort of more broadly focused, you'll see it sort of towards the lower end of the range. But either way, we have a nice operating leverage, and you see that certainly perform on an upside to volume. No question.

Another thing that's been swinging around on us is raw mats. They were kind of up, I think, kind of peaked sort of mid last year and now have come back in a bit. Can you just remind us, I mean, obviously, steel is a huge 1 for you, how your exposures work on rods, particularly on steel?

Yes. I mean, broadly speaking, we have exposure to raw mats, really from 2 different venues. One, which would be our sort of mechanical pass-through elements, which were under contract with the OEMs. And we've seen really an uptick since 2020, we're passing through probably nearly over $300 million worth of increased costs from that perspective. And we pass it through roughly 80% to 90% of that residual piece. So to the extent that, that seeds down or decreases, that accretes to us from a margin perspective because your sales will be lower and you get a little bit of profit capture in reverse. We've seen some of that seed down or come down a little bit in the back half of last year. But I will say the first quarter of this year, we've actually started to see a little bit plateau but starting to creep back up here through the course of the first quarter. And these are published indexes and you can see a lot of different elements that we buy, whether it be aluminum, scrap, et cetera. The other piece would be just general inflation. So from a raw mat perspective, we go out and we procure steel into various different components. We saw some inflation on that last year from a net perspective. We were impacted about $60 million net of customer recoveries for price increases on raw mats, utilities, and I would call it freight and a few other different headwinds. And in many cases, that will continue here into this year and through our mechanisms of either negotiated recoveries with customers, whether we have to go back and get additional lump sum elements or in some cases, we went under contract for 1 or 2 years and some of these price increases that we experienced last year that will continue here with us into 2023.

Okay. Another piece of inflation is on the labor side. UAW has got a master agreement that's coming up here with GM and Ford and Chrysler Stellantis [indiscernible], been around for a while, [indiscernible] Chrysler, sorry. But I mean, as you think about your exposure on labor costs, you do have some UAW contracts [ are ] outside of master agreement here in the U.S. Can you talk about how those work here in the U.S. and how you're thinking about labor inflation generally?

Yes. When we started our business, we had a master agreement because we took over the GM assets, we essentially inherited an OEM contract. We broke that agreement or separated that agreement back in the 2008 calendar period of time. Now every 1 of our plants, we've got 85 facilities around the world, all have a stand-alone independent agreement. Each of our plants are backed up by another plant. So we protect for continuity to supply that way. We don't have any UAW negotiations this year. We purposely got off of the timetable that the OEMs renegotiating to. There's no doubt that labor inflation or wage inflation is here, it's sticky. So part of it is how do you hold on to your work with your existing workforce from a retention standpoint, how do you attract workers? And then ultimately you got to be at market or above market in order to be able to do that. So we definitely are going to see some increasing costs as we go forward there. Typically, we've been able to offset that through productivity. We'll continue to do that, but we couldn't offset all the economic increases that we were dealing with an inflation plus the labor side of things with productivity, which is why we needed to go back to the customers. Clearly, the UAW is going to be looking for job security, program assignments as well as wage and benefit increases for the OEMs that will cascade down or trickle down, but yet, we're not an OEM. So that's why we remind the UAW is we're a Tier 1 automotive supplier, we have to be market competitive in everything that we do, and labor is one of those functions, just as raw materials and other things are as well. But clearly, we're going to have to ramp up some of our productivity initiatives, knowing that we -- labor is scarce, and we need to attract more of that. But we've got a very good working relationship. Not all of our plants are unionized. Many are 2 -- just 2-party agreements, us and our workforce, just treat them with respect and given them the tools and resources and training to do their job, they know how to do things and empower them to do their job. But where we do have UAW represented facilities or unionized facilities outside of the U.S., we've had good working relationships with them. And quite as we've had a good working relationship with the UAW since we went through our major issue in the 2008 period of time.

I mean as far as attracting labor, you mentioned [indiscernible], there were some shortages in the system. Are you guys running into anything directly at American Axle? Is this stuff that you're dealing with...

No, we're dealing with some ourselves -- directly to ourselves, especially on the west side of the state of Michigan. We're dealing with some issues there, but that whole corridor has got some challenges there, but we're offsetting that or we're taking necessary actions to reload different components, so that we can keep them out of business and that facility that we need based on labor force availability and then moving other components out that we can go to places where labor is more abundant.

And is there an opportunity or a need to automate more over time?

We're doing that now. We saw this coming several years ago. So we've already started that process, which I think we're ahead of the game, but we still got a lot more work to do in the supply base. Quite honestly, there's a lot of work to do there. That's my biggest concern is just the supply base at tier levels, are they going to make the necessary investments they need to in order to deal with the shortage of labor?

And then automation helps with the labor availability, but also drives some of the productivity we expect to be a beneficiary over the next several years.

Is there any outreach in the schools like trade schools or 18-year-olds that maybe would never have thought going to the industry, because it just feels like you -- qualified labor in the auto industry is getting thinner and thinner?

Yes. No, it's -- I mean we're having to develop our own programs a lot internally. At the same time, we're partnering with the community colleges to help both, on the hourly side and on the salary side. The type of worker we need is a lot different than the work that we had in the past. And the work in the past, there was a lot of non-skilled labor in our factories. Going forward, especially with the increase in automation, the increase in the technology that's going in, especially as we transition to more software and control type things in our facilities, we need a different technical talent. And therefore, we needed to develop that. So we're doing things like I said, on our own, but also partnering with local universities, whether they're 4-year or 2-year or even the community colleges.

Electrification is a big topic these days. What does it mean for American Axle? Some will think it's a net negative. Some will think it's -- from an optimist, you think it's a net-net positive and provides jobs opportunities for you over time. But what is it really -- as you think about this and the shift in your change in your strategy, what does it mean for you? What products do you bring to the table? What's the potential? I mean if we kind of think about it in numbers, content per vehicle that you have on an EV versus an ICE. I mean how do you kind of think about this holistically?

We're super excited about the future, and we want to bring the future faster as it relates to electrification. I mean a lot of people don't realize, but we've been in the electrification business since the 2010 period of time. We did that when we partnered with Saab. We acquired Saab out right as far as that portion of the business in 2012. We've had bookshelf technology since that 2010 period of time. The market quite honestly, on a global basis, just wasn't really ready for electrification. Now it is. So we landed our first production contract in '15. We launched it in '17. That being the Jaguar Land Rover I-PACE where we make the front and rear axles. There's roughly $2,500 plus of content in that vehicle. So much higher than what we typically enjoy. Today, our average content per vehicle on a full-size truck is around $1,600 to $1,700. On a crossover vehicle, let's say it's $1,000 to $1,200. So really, we saw the growth taking place in Europe. It's still going to take place in Europe. And you can see, even with the IHS or S&P reports today, the penetration of EVs is forecasted to grow at a much accelerated rate in Europe than it is around the world. China following closely behind Europe and the North America trailing, but moving in the right direction. Our market, our -- specifically on the trucks and the SUVs weren't really impact until the last couple of years in regards to that. We've been developing a whole host of different products. We do not have a complete portfolio yet. We're working on that. That's part of why our R&D expenses have gone up to $35 million, $40 million a quarter right now with respect to where we are. But we've got over 20 programs or customers that we're supporting in the EV space. We're one of the few companies that can support the EV space. We can do it in a component state, so think shafts and gears that go into a vehicle. We can do it into a subassembly state. So we think like differential assemblies that go into EDUs or eBeams. We can do that independently, whether we make it or the customer makes it. We can do it in gearboxes. If they wanted to buy a gearbox from us and made it with a motor and inverter, we can do that. We can also do the full integrated system. And we can do it both, in the EDU state, the electric drive unit or we can do it in a beam axle state, which is typically what you see in the truck application. So we're very excited. I mean, our backlog in new business has grown to $725 million, of which 40% of that's electrification based. We're quoting $1.5 billion of new and incremental business, of which 75% is electrification based. So we really positioned ourselves to be a player in electrification going forward. A lot of people think our business is going away with electrification. What I can tell you guys is the engine will go away, the transmission will go away, but you need -- you still need a medium to deliver the power to the wheels, that medium that delivers the power to the wheels is the axle. And today, in an ICE environment, it gets the power from the engine. In an EV environment, it gets the power from the battery. But the axle content, the axle knowledge, the axle experience that we have weighs heavily on the OEM's mind and just highlights our capabilities in this area. You put that with an advanced product portfolio as we round out our portfolio going forward, we're going to be a player. We already are a player in ICE. We're going to be a big player in EV going forward as well. It's just that we'll let time play out.

I think it offers us 2 really compelling areas of growth for our company. One, that David mentioned was on the content per vehicle side on a like-for-like driveline ICE, driveline EV, significantly higher in an EV scenario. And two, I think it's probably -- I would call it an underappreciated element of our growth with electrification. If you think about American Axle today, 80% to 90% of our business is full-size truck crossover vehicle applications and all-wheel-drive on the crossover vehicle application. When we move into electrification space and we're an EDU provider or an eBeam provider, you're on the full-size truck, you're in the all-wheel drive applications, but now you're into front-wheel drive space, different vehicle applications, hybrid performance. These are applications we do not have a lot of content on today at all. And that's where you're starting to see us make significant wins in that space. You've heard a lot of our announcements last year. So growth at a CPV basis, but also significant growth with segment expansion to where our products will end up in, which we don't play in today. So that's actually, I think, 1 of the more even compelling areas of growth for us.

And that's an important point, Chris, is bringing up because there's a whole another market, the front-wheel drive passenger car market that we don't participate in, which is the majority of the market on a global basis. The OEMs are making a lot of that today in a nice environment with what they call transaxles, which is essentially another form of a transmission to deliver powers. The OEMs are going to do work in the electrification space, but they're not going to do all of the work. They don't have the resources to do all the work. And in some cases, they only have all the experience. That's where we're confident in our partnerships and our relationships with the OEMs that will earn our fair share of the work while at the same time, they're going to do some of this work in-house, we know that. But at the same time, we're already supplying them, those that are making the electric axles today. We're supplying them either components or subassemblies or gearboxes to support those electrification units.

So maybe just real quickly, I mean, we'll talk the potential in a second, but maybe we talk about the here and the now. Do you sell anything in the Tesla and maybe you could talk about the AMG GT 63, right? I mean what you have on the actual air or the eBeam or however you want to...

Yes. So Tesla, we've got a future program with Tesla that's a differential assembly that will be supplying to support them, but they make their axles internally.

For now.

For now. As they scale, they've got to decide how much do they want to do internally versus what do they want to do on the outside. But again, what we'll do is we'll this, we benchmarked the industry. We know what the competitive sources are. We know where our technology is, and we know the benefits that we bring with the technology that we've advanced. When you look at -- I talked to you about the Jaguar Land Rover, what we did in Europe initially. Another big program that we just launched last year, and there's multiple variants coming off of that is this Mercedes AMG program. It's probably the most complicated product we've ever made. It's probably the most dynamic electric axle or EDU system that's out there. This is in a pure bev. This is a hybrid vehicle. So it still has an engine and transmission, which generates 650 horsepower, but we put another 200-horsepower kilowatts of power behind it. So it's an 850 horsepower type vehicle, it's a rocket ship. But we integrated all of that with them and brought a lot of the software and controls capability that an OEM has, we brought that capability to them and worked with them on that, but it's our design of our axles that ultimately won them over and that we've ultimately integrated into this 1 vehicle and now we're integrating into others.

Okay. So then on the potential side, right, when we're thinking about eBeam, I mean you've got the axle, right? You've got the electric motor, you got the inverter and you've got power electronics, largely main components of that. What would the content potential be on that? Maybe if we think about sort of full-size truck or large SUV versus what you're doing right now? I mean, you said $2,500 are on the I-PACE, but I would imagine if you're doing an eBeam, it might be a lot higher than...

Significantly higher.

Significantly higher? All right. And the content of $1,600 to $1,700 right now, how much of that is done in-house? How much of this is you being sort of a great packager and integrator of this? And how should we think about sort of margins and returns on that kind of a product versus your existing core axle technology?

Yes. So from a content per vehicle, as I mentioned, significantly higher, right? From a margin profile, look, our goal is to continue to drive and win new business, replicating or being -- continuing to be a top-tier margin performer in our space as we pivot into electrification. And we see a lot of value add through the stream, especially on the eBeam axle space. So if you think about it today from an internal combustion engine, we do significant amount of content vertically integrated into an eBeam or a traditional beam axle. As we move into the eBeam space, a lot of that content remains, a lot of the beaming structure of the axle, a lot of the gear sets, a lot of the housings and integration that we'll do. Obviously, we will coordinate motor and inverter or power electronics with the OEM and their requirements. But there's some -- certainly some different opportunities we can do to fulfill that need inside of the eBeam axle as well. So it's a great opportunity for the company.

Yes. I mean, historically, we have not made motors and inverters, but we're developing a compensating capability in that area. We have partners that we work with today in the motor and inverter space that allow us to be competitive. In some cases, the OEMs want to designate who that motor or that inverter supplier is going to be. In some cases, it's them themselves. So we've designed our systems to be flexible and interchangeable between what a customer may want to do themselves with us, what they may want through us to a directed buyer or a line partner they want us to work with. At the same time, we want to control as much of the vertical integration as we can, but it's going to take us time to grow into that capability. But we've developed a tremendous competency in motors and inverters. In the interim, as we grow into that competency as far as making the full assembly, there's a number of components that we can make that go into a motor or go into an inverter, but especially a motor. So we're looking at how we can participate in part of that value chain as well.

I had a question strategically. Many of these EV companies are brand new, and they have a white sheet of paper and they could choose if they want to design an axle in-house or go externally. What's your value proposition when you reach out to a new company that's developing a car for the first time and making a decision? Do we want to be internal or external? Because I think that investors feel that your content will be very high on an EV axle, but they worry about that decision for these new companies to take it in-house. So what -- how do you sell your ideas?

A lot of the new companies, new start-up companies can't afford to bring all the [indiscernible] in-house. They're fighting for their own survival today. And with money not being free anymore, they're really fighting for their survival. And as those have gone from the R&D stage to the launch stage, they're burning through cash a whole lot thicker, okay? So companies like us can help relieve them of some of that cash burn by bringing advanced technology to the table as proven with tremendous experience and knowledge for well over 100 years. When you date back to the amount of time we spend the GM plus our own almost 30 years as an independent company. But our value proposition is the fact that we really focus on doing more with less, what we call power density, okay? What's the biggest cost of an electric vehicle going forward? The batteries. What do you need to do to drive the battery cost down? You got to drive efficiency. What are you going to do to drive efficiency? You got to lower mass and content in the vehicle, which are systems we've designed where we have 2-in-1 systems where you put the gearbox and the motor together that are integrated. Several people can do that, but we really know how to do that. The other stages is -- right now, a lot of the systems, the inverter is bolted on to the axle or bolted in the vehicle, but connected to the [ axle 2 cables ]. We designed a system that integrates all 3 of those in the same packaging space, essentially is a 2-in-1 type system. So think of all the mass, we can take out -- think of all the [indiscernible] component parts that we can take out and the cost benefit that goes with that. The other part is we're very strong on gearing, and we're very strong on what they call noise, vibration, harshness; NHV, sound management. Those are our strengths. So when you take an engine and transmission out of a vehicle, which generated a lot of noise, the noise is going to most likely transfer to the axle or to the tires. So with our gearing experience, I mean that we've picked up a lot of business because of our ability to solve OEM problems or other supplier problems in that gear and NVH area. And because of that, that's led to other EDU and eBeam opportunities.

And we've made a lot of announcements over the last year. We picked up on the -- what you call them the start-ups, if you will. But in India, we picked up 2 big EV application wins, [indiscernible] components, Volvo, our work with [indiscernible]. So I mean, they're seeing traction in that area.

One of the things that we've seen as new programs launch around EVs and AVs in the industry is that as they're launching there's sometimes a surprise CapEx and R&D dollars going -- as you're kind of going through the launch -- the launches. You guys haven't seemed to hit those yet. But how do you manage that? I mean -- and how do you think about sort of leveraging your existing assets, so you're not all of a sudden putting new capacity in place and running into these issues of, oh my God, we're launching a new contract, and it's actually not working exactly how we thought [indiscernible] new machines and new tooling. How do you prep for this and get ready, so we don't see some of the surprises?

You want to go first or you want?

You can go first.

Okay. All right. Well, listen, that's 1 of the core competencies of us is our operational excellence and our ability to manage CapEx and you guys have seen in the last several years. Our CapEx has come down dramatically. When we are rebuilding this company when my father first took it over, we were spending 8% to 12% CapEx. Historically, we settled in, in that 4% to 6% range. When we bought MPG, we bumped up to that 6% to 8% range, but with a commitment to get down under 5%. The last several years, we've operated in that 3.5% to 4% range, that's where we think we'll be again this year. We did say that going forward that our CapEx may crawl up to approximately 5%. There may be some years that may be above that, but that's a good thing. That means we've got booked business that we need to support. What we're going to do, though, is we're going to leverage as much of our existing infrastructure, design products that can leverage that existing infrastructure. But there's no doubt there are certain support areas that we're going to have to invest new just because of the technology difference, but we'll do our best to manage that and then spread that over a period of time. And we've been launching electrification programs the last several years within that 3.5% to 4%. So we've got a proven capability and a proven model, how to launch electric vehicles. Now if you -- the volumes are much lower, if you get into a big full-size truck program and the volumes are much higher, then that CapEx could be a little bit more than what we've experienced here recently. But again, remember what Chris said is all the parts that essentially make up a beam axle, everything from the center section, what we call an EDU or like a pumpkin, everything out is carryover from an ICE vehicle to an EV; the tubes, the shafts, all those types of things. It's really the center section that's changing. The carriers get bigger because you're putting more horsepower and torque through it. The case has got to get bigger because you put more horsepower and torque through it. The biggest issue is integrating the motor and the inverter into the product. There's going to be some investment that we'll do, but there will also be investments that we're going to ask our supplier partners to do as well to be able to support that business to balance our CapEx needs going forward.

Yes. Look, disciplined on CapEx is key optimizing the existing fixed assets we have inside the company are key. As David mentioned, as we begin and continue to launch new programs, our goal is to continue to be very disciplined in this area. If you get a compressed year or two, as David mentioned, where you have an elevated CapEx, it's because we're launching a lot of new programs, which is great. From an R&D perspective, we've been spending over the last couple of years, more higher elevated levels we talked about when we step into 2023, we'll continue to be at the higher end of -- from an R&D perspective as we're building out our product portfolio as we have a lot of interest in some of these next -- call it, next generation of our product as well as some of the customer long-range plans as well to support those. And I would expect that to continue this year and into next.

But one thing I want to highlight is we've secured a lot of our next-generation ICE business. So a lot of that CapEx is going to be more of a maintenance CapEx versus a growth CapEx for ICE. That growth CapEx will be coming in the form of EV side. On the R&D side, our portfolio is in place for ICE and hybrid vehicles. We're adding to our portfolio for electrification. We're going to spend that for a period of time. Once we get our portfolio and our platform developed, then we could start seeing some of that R&D expense come down. The only reason it might stay elevated would be if we booked enough program that now we're in a launch mode that we need a certain amount of engineering support in order to bring it up to production.

When we looked at your tech day back at CES, and we saw the integrated inverter and electric motor, the way you guys package it, I haven't seen anything nearly that tight at all. Seems very, very impressive. If you think about that, the inverter and the electric motor something that you're sourcing at the moment. But if you think about going forward, becoming bigger in eBeam axles or -- is the inverter or the electric motor or power electronics or other technical capabilities, the kind of thing that you might look at acquiring or developing in-house? I mean, could the make-versus-buy decision here, I mean, how is that developing as you're bringing this new technology to market?

Yes. I mean clearly, one of the strengths of our company today on the ICE side of the business is our vertical integration capability. So we'd like to have a similar vertical integration capability on EV. We're also realist that we're not experts in motors and inverters today, but we've hired a lot of content over -- or a lot of people and gained a lot of knowledge, and we're developing a lot of knowledge with respect to the prototypes and the other products that we've developed. We clearly want to expand into motors, inverters, and we formed a partnership with Innovance out of China to help us support the China market and better understand that. We've grown with them with multiple customers in China as we're supporting what I want to call the value brand. In Europe, we've partnered with different companies there. That's more technology-based that was directed more by the customer. So that's why I said it's really going to be based on what the customer needs are, but we want to make sure that we can offer a portfolio that's complete, including motors and inverters in the future. With our unique and innovative, an award-winning inverter technology, there's no doubt that we can make that. No one is making anything like that today. And it's leapfrog technology, what's in the marketplace today. But to be competitive in those areas, you need a certain amount of scale from a buying power standpoint. So that's why it's going to be important that we have partners for a period of time or be willing to acquire those partners or form some sort of strategic relationship or partnership that we tie them up, where we're collectively together, we can mutually benefit in the relationship.

Got it. I've got a couple of more questions, but do we have any questions in the audience? The mic's over there.

Thanks for the presentation. Axle has done a pretty good job of consistently deleveraging both by growing EBITDA and then more importantly, just by paying down total debt. With the kind of production environment we've been in lots of stop start, lots of cost inflation. In terms of deleveraging, where it sits in the capital allocation priority, if you could remind us? And then is there a pathway given that, as you said, money is no longer free towards higher ratings. And if you could elaborate on that, that would be great.

Yes. From a capital allocation perspective, I think we've articulated this now over the last probably 3 to 5 years and been quite consistent with our messaging on this. I don't see that changing anywhere in the near term. We're going to continue to focus on funding our organic growth, which is CapEx and R&D. And after that, our primary use of our cash flow generation has been to pay down gross debt. And we've been paying down gross debt every year since 2017. And it includes: during the years of COVID, during last year's volatility, during semiconductors volatility. I would expect that to continue into this year. We'll continue to pay down gross debt from our cash flow generation. After that, obviously, we've looked at some smaller tactical M&A activity over the past couple of years, and we've taken action where it made sense to do that. From our perspective, that's still obviously a very viable option for us. But those first 2 of organic growth in R&D investments and then continue to pay down gross debt. You asked about the rating perspective. Look, obviously, that's up to the agencies to assess their ratings of us, but we've been very consistent with them in the same [ messaging ] that we're consistent with you, and I think that carries some weight with them in terms of our commitment to paying that down and they see that. So it's up to them on the rating piece. We'll continue to drive to strengthen our balance sheet. That's our primary goal.

Of course, you ended the year with, I think net leverage was 3.2, where do you think the sweet spot is for your leverage?

Look, I mean, ideally, we'd like to get it a little more towards industry average, so that's another full turn down or so. That's going to take some time. And it's really going to be an EBITDA perspective. Once volumes lift back up here, whenever you pick the year that, that happens and your EBITDA growth at leverage turn very quick. But we continue to want to chip away at that gross debt, and we continue to do that even inside of the movements of our EBITDA and leverage cycle.

I got one last one I want to sneak in here. As EVs grow, people think ICE shrinks. But in your product portfolio, your EV seems like it will be largely additive and we won't see a shrinkage in your core product. As you think out to 2025 plus, and you're looking at the schedules or sort of the projections you're getting from your customers as you're bidding on sort of next-gen truck products as well as this growing EV portfolio over time. I mean how do you think about sort of that core? Do you think it shrinks or it is maintained as sort of these new products grow on top of it? Or are these new products cannibalizing some of the core products? I mean, something like you could use an example like the Silverado, Sera EV versus the ICE version or something like that? Or however you want to talk about it.

Yes, just step back and look at where the EV market is penetrated first. I mean they first went to the luxury market, right, because there's an affluent buyer that can afford differentiation and can afford the prices there. The average price of electric vehicle today is $66,000. Most consumers can't afford to buy a $66,000 vehicle. Some of them are well over $100,000, a little bit below $50,000, but not in that $20,000 or $30,000 to $50,000 range, which is where the mass market is. Then think where are they because of battery technology, they're in the passenger car side of the business because a range -- they can support that level as to what needs to be done there. What's funding all this movement to electrification is the current ICE business heavily weighted on trucks and CUVs. So GM has already come out and said they're going to have an EV offering for every vehicle model that they're going to put out there and they'll have it both, for ICE and EV. Now that they're going to let the market decide which way they're going to go. But what's paying for all that? All their full-size trucks pay with the majority of the bills as well as their crossover vehicles. So the 1 thing you got to keep in mind, too, is the OEMs have to be able to make the same type of returns that they're making on the ICE vehicles on the EVs, otherwise, is it really a good business decision to move in that direction? Yes, it's environmentally friendly to do that. But ultimately, they get paid to make a profit and provide a return to their shareholders, no different than we do as a public company. So I think that on the EV side, you've got the front-end issues of the challenges of grid capability, charging station capability, raw material availability, raw materials were coming down cost per kilowatt. Now they're going back up because of economic issues. Those raw materials are coming from challenged areas; China, Russia and the Congo. We've got to understand that. I do think battery technology will continue to improve. I do think battery costs will get in line with fuel. The big concern I still have is on the back end is the affordability with the consumer. Can they afford to buy an electric vehicle, and is it compatible for them to live their life? Meaning that there's regular charge in stations or a grid that's available to support them. But the other part, like I said, is the OEMs got to be able to make money at it, okay? I personally think, and our company thinks that the EVs are here. We're very supportive of the technology, but we're also realists in regards of what we think the adoption rate is going to be especially here in North America. In Europe, it's going very fast, because the governments are mandating that it's going to go very fast. If the government's mandated to go fast here, we're going to be prepared. We have a scenario that says it goes faster, stays the same as what IHS is projecting and something slower than that. We have to -- our job is to be agnostic to the market and provide a portfolio that allows the consumer to decide what vehicles they want or the OEMs decide what do they want to build. The market and the customer are the boss to us, and we have to respond to accordingly as any other supplier. If they tell you differently, they're kidding you. They're kidding themselves.

Great. With that, thank you very much for joining us, guys. We really appreciate the time.

Thank you. Thank you, everybody. Thank you, John. Thanks so much. Thank you.

Thank you.