Dauch Corp Q2 FY2020 Earnings Call

Good morning. My name is Alisa, and I will be your conference facilitator today. At this time, I would like to welcome everyone to American Axle & Manufacturing’s Second Quarter 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. Operator instructions were provided to participants. As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Jason Parsons, Director of Investor Relations. Please go ahead, Mr. Parsons.

Thank you, Alisa, and good morning. I would like to welcome everyone who is joining us on AAM's second quarter earnings call. Earlier this morning, we released our second quarter 2020 earnings announcement. You can access this announcement on the Investor Relations page of our website, www.aam.com, and through the PR newswire services. You can also find supplemental slides for this conference call on the Investors page of our website as well. To listen to a replay of this call, you can dial 1-877-344-7529, replay access code 10144277. This replay will be available beginning at 1:00 PM today until 11:59 PM Eastern Time on August 7th. Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements which are subject to risks and uncertainties, which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed. For additional information, we ask you to refer to our filings with the Securities and Exchange Commission. Also, during this call, we may refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures, as well as the reconciliation of these non-GAAP measures to GAAP financial information, is available on our website. With that, let me turn things over to AAM's Chairman and Chief Executive Officer, David Dauch.

Thank you, Jason. And good morning everyone. Joining me on the call today are Mike Simonte, AAM's President; and Chris May, AAM's Vice President and Chief Financial Officer. To begin my comments today, I will provide remarks on AAM's second quarter financial results, which were adversely impacted by extended global production shutdowns resulting from the COVID-19 pandemic. AAM sales were $515 million for the second quarter of 2020 as compared to $1.7 billion in the second quarter of 2019. The decrease in our revenues on a year-over-year basis reflects primarily two factors. The first relates to the global production shutdowns and reduction in consumer demand due to the COVID-19 pandemic. We estimate that this had an unfavorable impact of approximately $947 million in the second quarter of 2020. In addition, our second quarter 2019 sales included $171 million related to our U.S. iron casting operations. This business was sold in December of 2019 and is therefore no longer part of our sales base in 2020. Adjusted EBITDA for the second quarter of 2020 was a loss of $52.1 million; this compared to adjusted EBITDA of $266 million in the second quarter of 2019. Our second quarter adjusted EBITDA was down significantly on a year-over-year basis primarily as a result of the unfavorable impacts associated with COVID-19, estimated at $299 million. In addition, our second quarter of 2019 adjusted EBITDA included $17 million related to our U.S. iron casting operations. On the upside, we realized the benefit of the cost reduction actions that we initiated in response to the much lower expected sales due to the pandemic, as well as lower launch costs. Adjusted loss per share for the second quarter of 2020 was $1.79 as compared to adjusted earnings per share of $0.55 in the second quarter of 2019. From a cash flow perspective, adjusted free cash flow was a use of $161.8 million. This was an expected result given the production shutdowns that occurred in the first half of 2020. While the second quarter financial results reflect some of the most difficult challenges we have faced at AAM, I believe our second quarter performance also highlighted the resiliency of our company, the flexibility of our operations and our ability to quickly adjust our cost structure. Despite all the challenges we faced in the second quarter of 2020, we also accomplished several important highlights in the quarter. AAM was named GM Supplier of the Year for the fourth year in a row, which is a great accomplishment and special recognition from our largest customer. During the quarter we also issued new unsecured debt at a favorable interest rate in order to refinance our most significant near-term maturity and strengthen our debt maturity profile. And finally, we launched our first e-drive program in China at the Liuzhou AAM joint venture supporting the new Baojun E300 Plus program. While this was an unprecedented quarter for the global economy, the industry and AAM, we took this as an opportunity to adjust our operations, structurally reduce our costs, and strengthen our financial profile. Most importantly, we have taken the necessary steps and actions to adjust our global operating procedures to further promote the health and safety of our 20,000 associates worldwide in the midst of the COVID-19 pandemic. With the stabilization of our China operations and a ramp up of our European and North American operations, we are optimistic about our ability to generate operating profits and positive free cash flow in this new market environment. While things are not back to normal, our global operating team has done an outstanding job of adjusting and adapting to change while staying focused and disciplined to deliver the core principles that guide AAM associates each and every day. While we have seen positive developments recently there is still a significant amount of uncertainty that exists as it relates to the COVID-19 pandemic and its continued impact on consumer demand and light vehicle production levels. As a result, we are refraining from updating our previously withdrawn 2020 financial outlook. As we continue to ramp up production and adjust our business to the new market demand in the second half of 2020, we are focused on the health and safety of our associates, supporting customer production schedules and launches, utilizing our operational excellence to generate positive financial performance and investing in our future. As we navigate through the numerous challenges this year has presented, we are also focused on positioning AAM for success beyond 2020. In a high delevered compression of our environment, we expect volumes to be lower than what we experienced in recent years. We are taking action to right-size and realign the business to be financially successful in a 14 million unit environment. As the benefits of our actions begin to take hold, we are confident in our earnings power and free cash flow generation potential. During these unprecedented times, we are also dealing with significant and disruptive change. At AAM, we are dedicated to not just getting back to normal, but to coming out of these challenging times as a stronger, leaner company positioned for possible growth and financial success. Before I hand it over to Chris, let me reiterate some key takeaways. First, despite the unanticipated severe drop in production volumes, AAM performed well in the first half of the year and made the necessary adjustments to the business to reduce costs and conserve cash. Second, we see the potential for a solid second half of the year and expect our operating performance to drive profit levels and free cash flow generation. Third, AAM is restructuring the business to drive our earnings power and free cash flow generation at a 14 million unit desired level and we are confident in our ability to achieve this. Fourth, our recent financial transactions have provided AAM with increased financial flexibility and lengthened our debt maturity profile, giving us an even longer financial runway to operate and work with. And lastly, despite all the near-term challenges, we continue to be focused on properly growing our business and addressing the key trends within the automotive industry, namely electrification. This concludes my prepared comments for this morning. I thank everyone for your time and attention today and for your continued interest in AAM. Now let me turn the call over to Chris May.

Thank you, David, and good morning everyone. I will cover the financial details of our second quarter of 2020 results with you today. I will also refer to the earnings slide deck as part of my prepared comments. Let's start with sales. Sales in the second quarter of 2020 were $515 million compared to $1.7 billion in the second quarter of 2019. On Slide 5, there is a walk down of second quarter 2019 sales to second quarter 2020 sales. First, we stepped down our second quarter 2019 sales by $171 million to reflect the sale of the U.S. casting business unit that was completed in December of 2019. The impact of COVID-19 related production shutdowns and reductions across the globe in the second quarter of 2020 was $947 million. These reductions impacted us at nearly every manufacturing facility across our global footprint. Other volume mix was down $40 million year-over-year, and we also continue to see the trend of lower year-over-year metal market pricing and the effect of foreign currency in the second quarter of 2020, resulting in a decrease in sales of $31 million. Now let's move on to profitability. Adjusted EBITDA was a loss of $52 million in the second quarter of 2020. This compares to earnings of $266 million in the second quarter of 2019. You can see a year-over-year walk down of adjusted EBITDA on Slide 6. First, we backed out second quarter 2019 U.S. casting EBITDA which provides a comparable figure after the sale of the U.S. casting business. The estimated impact of COVID-19 related production shutdowns on adjusted EBITDA was $299 million, representing detrimental margins of approximately 32%. As we discussed on our last earnings call, we expected the detrimental margins related to COVID-19 should be slightly higher in the second quarter versus the first quarter. There was a greater impact on North American operations, especially in the full-size truck programs we support. Excluding the impact of COVID-19, we were unfavorably impacted by volume mix by $19 million and we had $7 million of year-over-year pricing unfavorable. We spent $6 million on COVID-19 inefficiency and service costs, which represent costs for PPE, additional cleaning and disinfecting, and other costs related to operating adjustments we made in response to COVID-19 shutdowns and ramp-ups. As David mentioned, the team has been very focused on cost reductions. You can see the impact of these actions in $22 million year-over-year savings. This includes actions such as temporary wage reductions, permanent headcount adjustments and reduced discretionary spending. This puts us in line to meet our $60 million cost reduction savings target expected to be achieved this year. We also saw continued improvement in lower launch costs and performance of about $6 million in the second quarter of 2020 compared to 2019. All things considered, the AAM team did a good job flexing our variable cost structure, reducing discretionary spending and running operations effectively in a very uncertain and volatile production environment. Let's take a look at our SG&A expense. SG&A including R&D in the second quarter of 2020 was $73.8 million; this compares to $91.3 million in the second quarter of 2019. R&D spending for the second quarter of 2020 was $32 million, compared to $33 million in the second quarter of 2019. The reduction in SG&A reflects a portion of our cost reduction activities and excluding R&D reflects a reduction of nearly 28%. R&D was essentially flat as we continue to invest in key advanced technology initiatives and our upcoming electrification launches. Now, let me cover interest and taxes. Net interest expense in the second quarter of 2020 was approximately $52 million compared to $56 million in the second quarter of 2019. Income tax was a benefit of $43.9 million in the second quarter of 2020, as compared to an expense of $6 million in the second quarter of 2019. During the quarter we began to recognize an evaluation allowance against our deferred tax assets related to U.S. interest expense carryforwards. As a result, we experienced a lower tax benefit in the second quarter. Going forward, we expect our effective income tax rate for book purposes to be closer to 25%. We would not expect to see a significant impact on projected cash tax payments in the foreseeable future. Taking all of these sales and cost drivers into account, GAAP net loss was $213.2 million, or $1.18 per share in the second quarter of 2020 compared to net income of $52.5 million, or $0.45 per share in the second quarter of 2019. Adjusted loss per share was $1.79 per share in the second quarter of 2020 compared to adjusted earnings of $0.55 per share in the second quarter of 2019. Let's now move on to cash flow and the balance sheet. We define free cash flow to be net cash provided by operating activities less capital expenditures, net proceeds received from the sale of property, plant and equipment. AAM defines adjusted free cash flow to be free cash flow excluding the impact of cash payments for restructuring and acquisition related costs. Net cash used in operating activities in the second quarter of 2020 was $142.5 million. Capital spending net of proceeds from the sale of property, plant and equipment was $35 million in the second quarter of 2020. This is a year-over-year reduction of nearly 70%. Cash payments for restructuring and acquisition related costs for the second quarter of 2020 were $15.7 million. Reflecting these activities, AAM's adjusted free cash flow in the second quarter of 2020 was a use of $162 million. This cash flow use reflects the impact of our operations being shut down for the better part of the quarter. The net working capital impact for the quarter was relatively neutral as the working capital benefits in the first half of the quarter were used during the ramp up of our operations in the back half of the quarter. As with our operating and SG&A cost controls, we moved quickly on targeted capital spending reductions to help mitigate the impact in the second quarter. We also took action in the second quarter to strengthen our financial profile. At the beginning of the quarter, we amended our existing credit facility to revise financial maintenance covenants to provide additional flexibility for AAM, as we adjust our business for the estimated impact of COVID-19 on current and future global light vehicle production. Later in the quarter, we took advantage of favorable market conditions to issue eight-year unsecured notes at 6.75% and 7.125%. We used these proceeds to refinance our senior notes due in 2022. After payment on the 2022 notes in mid-July, we do not have any significant debt maturities until 2024. We also paid down a portion of the revolver that we drew on during the quarter. Liquidity at the end of June was over $1.6 billion consisting of available cash and unused capacity on AAM's global facilities. After reflecting the payment we made in July to redeem the 2022 notes, we would still have nearly $1.3 billion of liquidity as of June 30th. While we are not providing formal guidance today, we thought it was important to show some trends we are seeing. As a reference, we included our breakeven scenario from our maintenance call in the slide deck appendix. That scenario is based on an assumed reduction of AAM sales by 25% to 30% as compared to what we expected for the full-year at the beginning of this year. In relation to the sales midpoint of our breakeven scenario, we are seeing trends based on third-party estimates, customer schedules and other inputs. We see production volumes in North America as better, Europe very similar, China better, and India and Brazil well below that estimate. In addition we are confident in our ability to deliver both the $60 million cost reduction savings and the previously disclosed cash figure of $250 million for the full-year of 2020. Lastly, we initially estimated approximately $40 million of COVID-19 start-up inefficiency and supplier costs; we are now estimating those expenses in the $30 million to $40 million range. Uncertainty in demand, production schedules and the supply chain remain, and can impact any of these assumptions and trends. Despite all the uncertainty that exists, we are cautiously optimistic on the second half of 2020. Based on the demand indicators I just covered for the key product sets we support, we see our customers prioritizing full-size truck, SUV and crossover vehicle production. Low dealer inventory levels continue to suggest pent-up demand and support current production levels, and we take that as a positive as well. Ultimately, end consumers continue to demand the vehicles on which we supply systems and components, and that is a good thing for AAM. As we manage the business for today, we are also setting up well for future profitable growth. For example, we continue to invest in our electrification initiatives and we launched our first China e-drive program during the quarter. Investing in areas tied to profitable growth for AAM is a strategy that we will continue to pursue. We are taking actions to set up AAM for an even stronger future. We are excited for the potential of our future earnings capability and free cash flow generation. I thank you for your time and participation on the call today. I'm going to turn it back over to Jason so we can start the Q&A.

Thank you Chris and David. We have preserved some time to take questions. I would ask you to please limit your questions to no more than two. At this time please feel free to proceed with any questions you may have.

The first question today comes from John Murphy of Bank of America. Please go ahead.

Good morning guys. This is Annie Smith on for John. Good morning. First question on the balance sheet: almost $900 million in cash appears pretty sufficient to weather through the current crisis as we think about the back half of the year and cash burn reversing as volume comes back and then looking forward into next year presuming things continue to recover and cash flow improves. Can you remind us what you feel comfortable with in terms of a minimum cash level above which you would look to direct capital towards delivering?

Sure. Good morning, this is Chris May. First, I would remind you that balances as of June also contained the proceeds from the note issuance that we had in the back half of June, and $350 million of that was deployed in July to redeem those notes. Obviously, in a break-even scenario, the back half would imply positive free cash flow generation, and we would clear up the remaining items in terms of priority remaining open items in terms of our revolver. As we have previously communicated, funding our organic growth and our R&D initiatives is a top priority for us and reducing and continuing to reduce our gross debt leverage on the company is also a priority.

Okay. That is helpful. And then a bit more of a longer term strategic question. There has been a lot of hype more recently around electrification, particularly for light and commercial trucks. However, amongst some of the incumbent automakers, there also appears to be a push strategically to emphasize or actually even introduce new ICE body-on-frame trucks in their product portfolios. Do you see any burgeoning opportunity for the industry and for AAM from expansion of this high margin segment, and any discussion or bidding on future programs that you may be involved in?

This is David Dauch speaking. First of all, electrification is only going to grow in terms of penetration in the market. You mentioned specific segments, particularly the pickup truck side. There are obviously a number of new entrants that are coming into that market with lifestyle and leisure-type vehicles. I also expect the Detroit Three will do what is required to protect their market share on the truck side of things, whether it is ICE engine-based or electrification-based. As we are a leading provider of driveline systems for the ICE engine base, we have also been investing heavily in electrification since the 2010 period. We have won three contracts now; we just launched one in China recently, and we continue to position ourselves to provide product offerings for all the vehicle segments across different regions of the world. We are actively working on truck electrification activities. We are working on crossover vehicle electrification activities as well as e-drive for passenger cars. We have been successful in the market today and expect more opportunities to present themselves where we will win our fair share. At the same time, OEMs will have to decide how much work they do internally, but we feel very comfortable competing in the marketplace to win our fair share of the business. I am still a strong believer that the ICE engine will be around. We continue to grow our business on ICE-engine vehicles today. I think COVID will force both OEMs and consumers to assess the value proposition associated with the different technologies, but I still expect continued investments by the OEMs especially in the areas of autonomous, connected, electric and shared vehicles; it may be a little bit delayed in some cases by select OEMs, while others are moving forward and protecting their plans. I hope this addresses your question.

Yes. That is helpful commentary. Thanks for the question.

Our next question comes from Rod Lache of Wolfe Research. Please go ahead.

Good morning everyone. There is a lot of puts and takes as you look out to Q3 and Q4 between the strengths and troughs that you are seeing and some weakness in certain passenger cars and crossovers, the Thailand business getting locked down — a lot of variables. I was hoping you might talk a little bit more about the outlook and specifically how that affects the incremental margins that we will see, which is like a blend of all these things moving around, maybe relative to the 32% that you saw in the quarter. Do you think it gets better? And then how do we think about the incrementals as business recovers, hopefully next year?

Yes, good morning Rod, this is Chris. In terms of thinking about the back half of the year, a couple of perspectives: first, on sales, then on profitability associated with these movements. From a sales perspective, as you mentioned, our Thailand operations did see at the end of the second quarter approximately a $20 million per quarter sales headwind. Another large piece is conversion on the new General Motors SUV and full-size truck platforms which, as we disclosed previously, has a different architecture impacting our content. From a planning perspective, holistically we are seeing detrimental margins in the plus-or-minus right around that 30% range. We saw slightly lower in the first quarter, around 28%, and the second quarter was higher around 32% when you include all COVID impacts. We will continue restructuring activities in the back half of the year where you saw about $22 million of year-over-year savings in the second quarter; that puts us on pace to reach the $60 million run-rate target. I would expect continued progress on that pace into the back half of the year. I do expect to have some ongoing costs associated with COVID-19, and we talked about that being in the $30 million to $40 million range for the full-year. You saw $6 million of COVID-related costs in the second quarter as our operations came online in the back half of that quarter. Balancing R&D and SG&A along with all cost structure activities will continue. Hopefully that provides context and color to your question.

Yes, that is very helpful. And just secondly, it looks like you are not really significantly pulling back on R&D, but you are on the SG&A side. Are there any long-term consequences you anticipate from the posture that you are taking just relative to spending?

Rod, this is David. We do not expect long-term negative consequences from some of the restructuring actions we are taking now. We are fully dedicated and committed to supporting continued growth in the electrification space and investing in that product portfolio. At the same time, for our conventional products we have a complete portfolio already. We feel very good about where we are. We are reprioritizing and redirecting spend while cutting costs where appropriate. I don't think it will have lasting adverse effects on us going forward.

Okay, alright. Thank you.

The next question comes from Ryan Brinkman with JPMorgan. Please go ahead.

Great. Thanks for taking my question. Firstly, how should we think about detrimental margin trends for the remainder of the year relative to the 32% in Q2? Should it continue to moderate given the outlook for less severe industry production declines and restructuring actions more fully filtering through? How should we think about that?

Yes Ryan, this is Chris. Our core movement is broadly in that plus-or-minus right around the 30% range. We will continue to drive restructuring activity in the back half of the year which should help improve the margin profile a bit, offset by some COVID-related costs we articulated in my prepared remarks. So we expect some improvement, but it will depend on sales mix and production levels.

Great, thanks. And then I saw the announcement relative to the electric drive unit for Baojun. Are you able to provide an update with regard to your conversations with OEMs around electrification? Generally, do you think that Coronavirus speeds up, slows down, or has no impact on electrification? There are thoughts that disruption from the virus speeds up transformational trends, but I am curious how you are balancing that against automakers potentially delaying launches to conserve capital or lower oil prices, etc.?

Ryan, this is David. Clearly there is consumer interest in alternate propulsion systems, mainly electrification and hybrids. It varies by OEM. Some are cutting back on electrification spending while others are maintaining or increasing investments. It will vary by region and be dependent on government regulations, incentives and infrastructure. Regardless, our strategy is to be agnostic to the market and ensure we have product offerings for ICE, hybrid and electrified vehicles. We want to make sure we can support the market shift toward electrification as it progresses.

Okay, that is helpful. Thank you.

The next question is from Brian Johnson of Barclays. Please go ahead.

Hi team. This is an analyst on for Brian. I really just had one question. If we could revisit the downside protection playbook that you introduced last quarter, trying to address a 14 million unit scenario, which I know is a long way down but it sounds like North America OEMs are also calibrating inventories at this point. I wanted to try to understand the level of confidence in being able to get the organization not only profitable enough versus historical metrics at that level but also profitable enough to generate enough cash flow to support the debt load. And would there need to be a debt restructuring or recapitalization at a 14 million unit level?

This is David Dauch speaking. We are highly confident in our ability to restructure our business to operate at a 14 million unit volume level. We are taking necessary actions to realign our business to new market demand. We have exercised the elements in our downside protection playbook, including significant reductions in headcount for both salaried and hourly employees. We have also worked on plant loading and plant consolidation where appropriate. We will continue to assess those matters as the market settles. Global volumes have dropped from roughly 90 million to approximately 70 million in total; year-to-date levels were lower, and for the second half of the year we expect volumes near 14 million in the U.S. which is why we aligned ourselves to a 14 million unit scenario. If we need to make further adjustments to our cost structure, we will do that. Our focus is on generating profitable growth and operating financial performance that will allow us to service the debt going forward. Historically, we have been a large positive free cash flow generator, and we continue to use cash flow to reduce debt and strengthen our balance sheet. I do not see any need for recapitalization at this point in time in our plans. Chris, do you want to add any comments?

No, as David phrased it, aligning a profitable organization at that level of sales and production will generate meaningful cash flow and allow us to service our debt as well as support the needs of the organization.

Fair. It is helpful color. Is there any sort of minimum EBITDA or free cash flow target that investors could think about in a 14 million unit scenario?

No, we are not providing a specific target at this time. But I would expect us to continue to perform at a top-tier EBITDA margin profile relative to peers, and to continue to generate meaningful cash flow.

The next question is from Dan Levy of Credit Suisse. Please go ahead.

Good morning. Thank you for taking the question. I wanted to start by asking on GM T1: what volumes are you saving for the year and could you give a sense of what type of contribution margin we might expect on the GM business given they are prioritizing every unit they can? Should we expect similar contribution margin to what you have done in the high 20% or low 30% region? Specifically for Q4 when you might see a very large year-on-year increase?

Yes, Dan. As I articulated in previous responses, corporate planning around the detrimental impacts is in the approximately 30% range. You may see some higher contribution margins on full-size truck platforms specifically, as they tend to have higher content and margins. But when you look at the entirety of the business and blend all platforms, you should think of it around that 30% detrimental range. You may see some quarter-to-quarter variation, particularly with truck-heavy production schedules and conversions, but the broad planning range is around 30%.

Okay, and in the fourth quarter with an outsized amount of truck production, that is aligned with what you are saying?

Yes, that is correct.

Okay. Second, on electrification and the Baojun E300: could you give a sense of exactly what content you are providing on that program? What might you be outsourcing, such as motors or power electronics? More broadly, what are OEMs asking of you in e-drives — full e-drive systems or components? How might this be shifting?

This is David Dauch speaking. Our strategy for electrification is to address customer needs across a range from components — gears and shafts — to sub-assemblies such as differentials or gearboxes, to fully integrated three-in-one solutions that include motors and inverters. From a product portfolio standpoint, we have all the mechanical capabilities — gears, shafts, differentials, gearboxes — and we have controls, software and integration capabilities. We do not currently make motors and inverters internally, but we have partnerships to support that requirement and are evaluating how much more capability we may want to vertically integrate over time. We are leveraging relationships either guided by the OEMs or developed independently, and we continue internal innovation initiatives to optimize three-in-one solutions. OEM preferences vary by region: Chinese OEMs tend to ask for more complete solutions including integration, while Western OEMs often handle the integration themselves. There is variance by OEM in how much they want to do internally versus outsource. We have the depth and breadth of capability from components to final assembly and the engineering and software aptitude to support electrification, and we are well positioned operationally to compete in the marketplace.

Okay, that is helpful color. As a follow-up, has the shift toward insourcing versus outsourcing changed because of COVID? Are OEMs more likely to insource or outsource now compared to before?

We have not seen a material change in OEM behavior due to COVID. It remains a mixed bag where some OEMs outsource and some insource. There has not been a trend shift attributable to COVID at this time.

The next question comes from Armintas Sinkevicius of Morgan Stanley. Please go ahead.

Good morning. Just trying to think through Q2: production was shut down for several months, but as production started to pick up OEMs have emphasized trucks, which is beneficial. Can you just describe what lift you got in Q2 as production restarted, and how we should think about that normalizing into Q3 as production expands into other product sets?

This is David. First, we focused on health and safety as our associates returned to work. Our powering-up safety protocols were well received and we have not had major disruptions in our facilities. We have been working closely with OEMs on production schedules and launches. They prioritized trucks, SUVs and crossovers, which sits well with our positioning. They are focused on their profit pools which helps drive our profitability going forward. The balance of the business — crossovers and passenger vehicles — remain lower than before and we will see how that recovers. Overall, we feel very good about customer schedules and we see pent-up demand given the rising average age of vehicles. GM is still rebuilding inventory following their strike last year, which positions us well to benefit.

Armintas, to add, we saw prioritization of truck production in the second quarter, with more emphasis mid-quarter, and starts coming on in the back half of June and into July that helped our ramp.

Okay. And then my other question on Mexico: plants opened earlier than expected. How are operations there today and how is the supply chain functioning?

Mexico is running about eight to ten weeks behind the U.S. in terms of managing COVID activity. We are watching the situation closely as the industry is only as strong as the value chain. There are suppliers that ship product within Mexico or from Mexico back to the U.S. Currently we have very few supplier issues, a couple we are managing, but nothing jeopardizing production. Certain regions in Mexico have outbreaks and we are monitoring closely. For the areas we operate in, we are able to function and operate, but the situation could change quickly. We are preparing alternative plans if any locations need to shut down. Our priority remains protecting the health and safety of associates and supporting customer schedules and launches, with contingency from our supply base if required.

Great. Appreciate it, thank you for taking the question.

The next question comes from James Picariello of KeyBanc. Please go ahead.

Can you quantify or put any parameters on what that change in GM architecture impacted relative to your original expectations as we think about the second half?

Yes. Converting from a rear axle to an independent rear suspension on that platform results in lost component content such as tubes and brakes. Pre-COVID, our guidance stepping into the year had the GM truck transition and we expected revenues on that T1 platform to be down roughly $10 million to $25 million on a full-year basis due to that architecture change. That was the main effect from a sales perspective.

Was your Thailand business profitable when factoring the $20 million per quarter revenue loss that was captured in the quarter?

Yes, our Thailand business was profitable prior to the shutdown. When you think about it, it is roughly around our corporate average and comprises two platforms in Southeast Asia.

Got it. As we think about actual liquidity — about $1.7 billion this quarter — would you expect to finish Q3 at a similar level? I believe you indicated you expect positive second-half free cash flow, so I'm trying to get a sense for Q3 versus Q4 cadence.

The June 30 liquidity number included proceeds from the June bond issuance. We used $350 million of that to redeem the 2022 notes in mid-July, so that will reduce the liquidity shown at quarter end when the redemption posts in Q3. After that, the balance of liquidity will change based on our free cash flow profile. If we are at breakeven or better in the back half, yes, we would expect positive free cash flow for the second half.

Thanks guys.

Your last question comes from Joseph Spak with RBC Capital Markets. Please go ahead.

Thanks, good morning everyone. David, the Baojun E300: I know you have been talking about three-in-one e-drive programs for a while, so maybe you could talk a little bit more about what you see in the pipeline, if there are more programs on the horizon. Also, Baojun is a different vehicle than historically the vehicles you have been on. How does the content per vehicle of that Baojun program compare to other e-drive offerings you have done, like the Jaguar Land Rover IPS program?

Joe, this is David. Baojun is a value-brand opportunity, so the content per vehicle on this product is much lower than the higher-content programs like Jaguar Land Rover IPS where content can be over $2,000 per vehicle. This Baojun program is much lower content — more component and gearbox-related — but it is an important entry into that value-driven market and may lead to incremental opportunities as a result of this presence.

And Joe, this is Mike. In that market segment, AAM historically had limited play in front-wheel drive passenger car vehicles, so even though the content is relatively small compared to trucks and crossovers, this is valuable growth for us because it addresses a portion of the market where we didn't previously play much.

Okay fair enough. Maybe a second question: we have seen some axle competitors make software-related hires to gain more engineering competency for electrification systems. Is this something AAM needs to do? Are you comfortable with your organic engineering and engineering spend?

We are comfortable with the engineering resources we have today, especially given our investments over recent years in software and controls engineers that support electrification. We have partnerships to supplement areas where we are not vertically integrated, and we have been able to offer OEMs a compelling value proposition for new business and launches. Over time, we may choose to control more capabilities internally, but we have no problem working in technical partnerships, joint ventures, or supplier relationships as long as we can deliver value to customers. We have launched a second electrification program next year which is a high-performance passenger car with multiple variants, and we have a pipeline of opportunities across the product spectrum we support.

Okay, thank you very much.

Thank you.

Thanks Joe.

Thanks, Joe. We thank all who have participated on this call and appreciate your interest in AAM. We do look forward to talking with you in the future.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.