Good morning, everyone, my name is Jamie and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing Second Quarter 2021 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. As a reminder, today's call is being recorded. At this time, I'd like to turn the conference call over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.

Thank you, and good morning. I'd like to welcome everyone who is joining us on AAM's second quarter earnings call. Earlier this morning, we released our second quarter of 2021 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 Investor Relations page of our website as well. To listen to a replay of this call, you can dial 1-877-344-7529, replay access code 10156999. This replay will be available beginning at 1:00 PM today through 11:59 PM Eastern Time August 6. Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements 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 that you 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 a 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 CEO, David Dauch.

Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AAM's financial results for the second quarter of 2021. 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'll review the highlights of our second quarter 2021 financial results. Next, I'll touch on some exciting business development news in the quarter including announcements with the Chinese EV OEM deal and our recent communication about GM's Oshawa plant. And lastly, we will discuss the ongoing and unprecedented challenges within the supply chain and our financial outlook. After Chris covers the details of our financial results we will then open up the call for any questions that you may have. AAM delivered strong operating performance in the second quarter 2021 navigating industry production volatility stemming from the continuity of supply challenges. These challenges were greater than what we originally anticipated at the beginning of the quarter, but our team did an excellent job in managing these obstacles resulting in solid financial results.

Thank you, David. And good morning everyone. I will cover the financial details of our second quarter results with you today. I will also refer to the earnings slide deck as part of my prepared comments. So, let's go ahead and begin with sales. In the second quarter of 2021, AAM sales were $1.28 billion compared to $515 million in the second quarter of 2020. Slide 7 shows a walk of second quarter 2020 sales to second quarter 2021 sales. First, we add back the impact of COVID-19 from second quarter of 2020 of approximately $947 million. Then we account for the unfavorable impact of the semiconductor shortage which we estimate to be approximately $162 million in the second quarter of 2021. Other volume, mix and pricing was negative by $99 million. Metals and FX accounted for an increase in sales of $82 million. During the last several quarters, we have continued to see an increase in the primary index-related inputs to metal-based materials that we purchased. You may recall, we hedged this risk with our customers by passing through the majority of index-related changes. The metal portion in this column reflects those elevated pass-throughs on a year-over-year comparison. Now, let's move on to profitability. Gross profit was $190 million or 14.8% of sales in the second quarter of 2021, compared to a loss of $99 million in the second quarter of 2020. Adjusted EBITDA was $222.6 million in the second quarter of 2021 or 17.3% of sales; this compares to a loss of $52.1 million in the second quarter of 2020. You can see a year-over-year walk down of adjusted EBITDA on Slide 8. We benefited from the contribution margin on the increase in net sales from last year as we continue to experience positive per-unit performance. As a result of short-notice production schedule changes and receipt of long-lead inventory items such as steel, our raw WIP and finished goods inventories increased in this quarter. This drove a $16 million benefit from inventory absorption timing, which we should reverse out in the second half of the year as we anticipate reducing inventories during that timeframe. As we mentioned throughout the quarter, our schedules were more volatile than expected, but we were able to close the latter part of the quarter on a strong note. Now let me cover SG&A. SG&A expense including R&D in the second quarter of 2021 was $86 million or 6.7% of sales. This compares to 14.3% of sales in the second quarter of 2020 as revenues rapidly declined last year due to COVID-19 related shutdowns.

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

And our first question today comes from John Murphy from Bank of America. Please go ahead with your question.

Good morning, everyone. This is Aileen Smith on for John. First question, as your automaker customers have clearly been benefiting on the margin side from very favorable pricing in the tight inventory environment, have they in any way been more cooperative with recovery mechanisms for the stop-and-go production environment that you and others have experienced with the semiconductor shortage? We've heard from some suppliers that automakers have been receptive to cost recoveries where those suppliers have had to buy spot-buy semiconductors to avoid disruption. But just wondering if that's extended to automakers also helping out on cost overruns for logistics and manufacturing or other buckets for those suppliers that are just trying to meet their customers with very choppy schedules and releases?

This is David Dauch speaking. First and foremost, we've been able to work with our suppliers and our OEMs with respect to protecting semiconductor supply to our business. So there's been no need to have to go to the customer to ask for relief there; as they're prioritizing and allocating chips accordingly, we're adjusting and following their lead with respect to that. With respect to any premium costs being incurred because of some of the supply and other shortages in the marketplace, we deal with that on a case-by-case basis with each of the respective customers. I don't really want to go any further from a detailed standpoint on that. But the customers have been very understanding of the situation that's out there; at the same time they're asking for some paint sharing in the process, which we've been supportive of. We're all just trying to protect continuity of supply and keep the industry rolling.

Okay that's helpful. And then, second I wanted to ask a question around the EBITDA margins. Obviously, we've seen a bit of a return to normal, but it's still incredibly strong margin performance from some pretty elevated quarters over the past year. But can you help us bridge how you landed, what I think will probably be a 16 or sub-16 margin in the second half of the year to get to your full year outlook versus where you stood in the second quarter? We've got the volume environment that will probably be sequentially better. But what offsetting factors are there to that? Is it commodities, mix or just cost lingering through the value chain?

Good morning Aileen. If you think about our second quarter performance or first half, very similar in terms of strong performance. Bridging that to the second half, a couple points I would emphasize. I would expect some benefit as some of the semiconductor sales return off of an obviously second quarter trough, so we'll have a benefit there. We'll have a benefit of some continued performance. Offsetting some of that are a couple of different items, one of which you see in our year-over-year EBITDA walk bridge where we had some benefit of a build of inventory in the second quarter that will actually bleed out through the back half of this year; neutral to the whole year, it's just a timing difference. Also, as we're advancing some of our electrification initiatives and new business opportunities, we're going to step up some of our product engineering spend associated with that. This is something we've been dialoguing with you and others over the past six months; it was a little light in the first half of the year and it's going to be a little heavier in the back half of the year in terms of product engineering spend. Mechanically, some of the timing of our price decreases year-over-year are a little bit more weighted to the second half of the year which will impact us a little bit. And as you know, metal markets and others continue to rise here throughout this quarter and we expect it to rise a little bit into the second half of the year, so you'll have a bit of impact associated with margin related to that as well. Those are the primary elements and again we'll pick up some sales and benefit from performance as well to mitigate some of that.

Great that's very helpful color. And one last question on the balance sheet if I may. Clearly you continue to make good progress in generating cash and delevering. Can you remind us what your timeframe is to get to a sub-two times net leverage target? Is that something that could be theoretically achieved in the next 12 months? And then as you get to that target that you've talked about in the past, how might the capital allocation framework change in any way?

In terms of a two times leverage target, as you know we're at 2.5 times here in the second quarter making meaningful progress already year-to-date. You've heard us articulate our objective to get to two times and the goal there — we haven't laid out specific timing, but sooner rather than later is our objective. And then when you get into that level of framework from a leverage perspective that certainly opens up the capital allocation playbook. At that point, I think that's when we would start to have some further dialogue on that topic.

Okay. Thanks for taking the questions.

Thank you.

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

Thanks, everybody. Really nice to see these incrementals in the quarter and frankly I'm a bit surprised just given the short-notice production volatility. But just to Aileen's question it does look like those decrementals in the back half are very high or at least that's what's implied by your guidance. I'm just wondering, I understand the timing of pricing. But I'm wondering if you are sensing that there is any change in production schedules that would also be contributing to that or are you actually not gaining or still having limited confidence in production in the short run?

Yes Rod, this is David. I'll make a couple of comments and then I'll turn to Chris. Obviously OEMs have been protecting their major core platforms to manage their profit pools. AAM has benefited greatly, as many other suppliers have, with respect to that. Obviously, we took our first downtime this week with respect to some of GM's full-size truck platform at select plants; that's all coming back online starting next week so that's positive. We do still continue to see extended downtime with respect to some of our crossover vehicle business and clearly the uncertainty that we're managing in the marketplace is a challenge for the balance of this year and, as I indicated, will carry into 2022. But we think our major core platforms will be protected going forward, but we also need to be prepared because we didn't expect the GM stuff to go down this week. We have to adjust with our customer base and we've done that. We just utilize that time efficiently to give our people a break, do maintenance in our facility and catch up on some service part and aftermarket-type work. So we actually turned a negative into a positive. Chris, any comments you want to make to Rod's question?

Yes, I mean just to reiterate, I've listed out the key drivers on the previous question. If you think about, for example, that inventory absorption, that's a 50-basis-point margin impact on us in the second half and that's truly just a timing within the year; it's neutral in total. And if you think about the other elements as well, a lot of them are timing driven. You see we didn't change, for example, the top end of our margin or our EBITDA guide, which would imply a lot of this stuff was previously known to be timed at different points throughout the year.

Okay. And then just secondly, it looks like you're going to get to that two turns of net leverage over the next year or so. And it sounds like that should provide you with a lot more flexibility for acquisitions or other things. Can you just talk a little bit about the opportunities that you're seeing, particularly assets that would be complementary to you on electrification? And also organically, if you could just provide any color on the magnitude of bidding opportunities that you see at this point?

Yes Rod. I'll start with the latter question first. We're quoted about $1.5 billion worth of new and incremental opportunity for our business, which is consistent with how we have been quoting in the past. The biggest difference is that the mix of that quoting now has shifted dramatically to hybrid and electric vehicles, where about 80% of what we're quoting today is in that category, which is positive because that's where the industry is shifting. We're seeing quotation opportunities especially based on the technology days that we've had with our various customers and the excitement we've garnered with the products our engineers have developed. Now it's a matter of converting some of those RFQs or RFIs into booked business going forward. So we're very excited about what that holds going forward. On the acquisition side, as I noted in my prepared remarks, we did a small bolt-on acquisition in the core powder metal business. We want to be smart about that; where it's appropriate to consolidate the traditional business so that we can leverage our size and scale and get synergies and a financial benefit to the overall business, we'll act on those types of opportunities, especially as our capital structure and balance sheet becomes even stronger. We see more opportunities both on the metal forming side of our business as well as on the driveline side. We also want to keep in front of us certain things to strengthen our vertical integration capabilities or partnership capabilities with respect to electrification. That will remain a priority as we look at acquisitions.

Great. Thank you.

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

Hi. Thanks for taking my question. I wanted to check in with regard to the still relatively new venture with Inovance in China, so a couple of questions around that. Firstly, I realize Magna also operates its integrated electric drive unit business via a joint venture in their case with LG Electronics, although I think BorgWarner has claimed some benefits to having all capabilities within one company. So wanted to get your thoughts on that, what advantages or disadvantages either approach may have if any. On a related note, with regards to the new NIO win, I'm curious if you think the venture with Inovance helps with go-to-market strategy or customer introductions in China, given where they're based, and if these customer introductions might also confer some benefits on the component side, such as with differentials or for complete electric drive units?

Ryan, this is David. As it relates to the NIO business, the NIO business is a sub-assembly work that we won directly from AAM; we did not have or need any involvement from our partner Inovance with respect to that. That's just a bonding and building relationship that we've established with NIO as they continue to grow their market share in China and they have greater demands and needs for their product performance. They really turned to us based on our overall capabilities, especially in the area of NVH. So that's been a big positive for us in regards to building that relationship. On the Inovance question, Inovance has been a good partner for us in China. They've helped introduce us to many startup OEMs, as well as other OEMs within the China market. We are clearly growing our business in China with Inovance's support and leadership in some cases. That's been positive and we expect further growth opportunities. We're jointly developing some next-generation products today that will strengthen our capability as far as product offerings to the marketplace, whether in China or globally, and our relationship is going very positively. As we've said before, when it comes to the market, we don't necessarily have to be completely vertically integrated in order to win business. We're bringing the value proposition to the table with the partners we have today and have been successful in winning our fair share of the business. Clearly, as we go forward we'd like to strengthen our knowledge and capability there, but it doesn't mean we have to do everything ourselves. The partnership with Inovance is going very well right now.

Okay. Thanks. And then the last question is about how you have been named the 100% sole supplier up front and rear for pickup truck axles for production at GM's Oshawa, Ontario facility. How should we be thinking about this in the context of your earlier having gone from I think 100% to more like 65% of the content on GM full-size pickups as that program transitioned from the K2XX to T1 architecture? Does this potentially signify any kind of shift in how GM thinks about producing these components in-house versus outsourced? Or is GM maybe already at capacity in terms of what driveline components they can produce out of Arlington and they didn't want to make an additional investment, whereas you already had some excess capacity, maybe more nearby? And then on this topic, as GM insources driveline capabilities for its Ultium drive program, do you think as they reallocate resources that they might in the future reassess how much of the non-Ultium pickup driveline work they want to do in-house and maybe benefit American Axle?

Let me talk to the traditional side of the business before I talk about electrification. Clearly, GM made a decision, which we understood, to take a portion of the light-duty pickup truck program in-house into their Grand Rapids facility. That business is running; we helped them get it started and they are running that business essentially to the capacity they've installed. So that's positive for them and it did impact us, but we've managed through it financially over the last several years. I'll remind everyone on the heavy-duty and SUV segments, GM did not in-source that work and we're the supplier of that business directly. All the incremental capacity programs that GM has had have come towards American Axle; the latest being the Oshawa program and we're very grateful for their confidence in us. We've earned it based on our performance and the value propositions we brought to them for decades and recently. Our relationship with GM is very strong. They need us; we need them on traditional products today. At the same time, we've had very good involvement with their senior leadership regarding our technology and electrification. We recognize and understand what they're doing on the Ultium platform, both from a battery and EDU standpoint. That will apply to many segments within their vehicle models. But they have said if there is a good value proposition from the supply base and it benefits General Motors, then they will entertain that. We're highly confident they recognize that we have value propositions to offer in electrification. More to come, nothing more to say at this point in time, but we're very confident about where our relationship is with General Motors.

Great. Thank you.

Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.

Hey. Good morning, thank you for taking the question. I'm sorry if I missed this earlier, but in the second quarter, how much did mix play a role in the strong margin? And maybe you could just comment on what you're expecting for mix into the second half?

Dan, clearly with the semiconductor impact inside the second quarter the focus of our end customers, whether Stellantis or General Motors and others, was building full-size truck applications to the detriment of some of their crossover vehicles. So you do get a small benefit associated with mix in terms of our overall revenue profile. We would expect that to continue a bit into the third quarter, but as they bring those facilities back online that will mitigate more towards our previous normal mix through the course of the back half of this year. Note in the third quarter they've taken some downtime in the full-size trucks that we're experiencing this week, which we discussed earlier, so that dynamic plays into the third quarter.

Great. And then the premium freight in the quarter: any color on the magnitude of premium freight as a drag?

We had a little bit — think of it in the concept framework — a couple of million dollars’ worth of premium freight inside the quarter due to challenges inside the supply chain to make sure we had adequate supply. It wasn't material.

Got it. Thank you. And then as a follow-up, I think in the past, you talked about this award in Europe with a luxury OEM for an eDrive, and I think that program is supposed to launch in the back half of this year like a P3 eDrive unit. Maybe you could give an update on that program, and on top of that, how is that program created an entry point for discussions with that customer on higher-content EV programs? Any progress on advanced hybrid giving you an entry into higher-content discussions on EV?

You're right; we are going to be launching a new electrified program, a P3 application for our luxury European OEM at the end of this year. There will be seven variants to that program that will launch over multiple years. Anytime you work closely with an OEM and advance a new technology you're going to build and strengthen the relationship — strengthen their confidence in us for development and our ability to launch successfully. We expect other opportunities to present themselves because of the technology we've developed. We're also seeing other opportunities that could use that P3-type application in other vehicles and that supports sharing that capability with other customers. We feel very good about the opportunity with them and other opportunities that will present themselves with respect to whether it's P3 or P4 applications in the future. We're working on a lot of other advanced technology in the electrification space that will demonstrate to customers; they will determine based on long-range product plans what their technology needs are and what they want to do in-house versus what they want the supply base to provide. All we can do is provide a competitive offering and solution that offers that value proposition.

Okay. And that P3 eDrive unit, how much does that differ technically from a BEV eDrive unit?

It's a different architecture completely from a full BEV-type application. It's more technical than I really want to get into here, but it's a high-performance passenger car application with derivatives over multiple years. We are spending most of our time on P4-type solutions for full battery-electric vehicles as well.

Our next question comes from Joseph Spak from RBC Capital. Please go ahead with your question.

Thanks. This is Garrett on for Joe. Maybe going back to the margins, but taking a step back, you put up almost 18% margin in the first half. I think even if you normalize for some timing differences associated with the inventory and more normalized R&D, I think you're still high 16% right around 17%. What can we extrapolate about the underlying performance of the business in the first half as we think about a more normalized operating environment where scheduled volatility comes down, the semi situation improves and commodity supply chains should improve? I realize pricing may normalize and mix may be a slight headwind. But what is the underlying performance in the first half telling us about what this business can do as things normalize?

I don't want to oversimplify, but our underlying business excluding the items you talked about such as semiconductor impacts and metals has been very strong in the first half. I would expect it to be very strong in the second half and going forward beyond that.

Okay. And then maybe just switching gears to the NIO win, I think in the past you said components in a CTV can be as high as $500. Maybe give a sense of where the NIO win lies in that? And of the EV sourcing activities, the 80% of the $1.5 billion that you're quoting, what percentage of those are customers looking for full eDrive solutions versus just components?

We're approaching the market in four different ways as it relates to our electrification strategy: components such as gears and shafts; sub-assemblies like differential assemblies; gearboxes; and fully integrated units. We're clearly seeing opportunities in every one of those categories right now. We're capitalizing on that and the latest award is a sub-assembly application. The pricing is in line with things we've guided in the past and we see more opportunities presenting themselves going forward. On fully integrated electric drive units, because our technology has been demonstrated, understood and well received by the customer base, and because content per vehicle will swing disproportionately in that direction, that area is significant. However, there are plenty of opportunities in the other three categories as well.

Okay. Thank you very much.

Thank you.

Our next question comes from Brian Johnson from Barclays. Please go ahead with your question.

Yes. Just have a question around OEMs particularly by protecting their full-size truck platforms, building vehicles that don't have chips and stored on lots around their factories. As we kind of get out the sharp pencils for this quarter and next quarter, do you have any sense of the magnitude of that deal because that may not show up in IHS or its production numbers because they're not finished trucks, but from your perspective, you would have delivered an axle set to those factories?

Brian, I don't know a specific number and everyone at the OEMs is building full units with chips; they are building or changing the configuration in some trucks to take out chips so they can still sell those directly to the marketplace with less capability and performance. There are clearly other vehicles being built short of chips right now. I can't tell you the exact number off the top of my head. It's impacting all three truck manufacturers and they're going to have to, as soon as they get steady supply of chips, put those back into the system. It's probably better to ask the OEM that specific question.

Okay, and a second question, just following up on the NIO win — congratulations. Did that start as a component discussion or did you pitch the drive e-motors and drive modules and then wind up with a sub-assembly? In fact, some of your knowledge of the capabilities and then wound up with a subcomponent?

They have existing suppliers today and they've had some issues with some of those existing suppliers related to capability and performance, especially NVH. We bring a strong skill set there. First we solved an issue they had, second we identified opportunities to compete going forward, and third there is extended dialogue taking place. We're hopeful there will be other opportunities that could include some of our advanced technologies in the future.

Okay. Thank you.

Our next question comes from Adam Jonas from Morgan Stanley. Please go ahead with your question.

Hey, everybody. First a clarification: that 80% of the quoting activity that was electrification you mentioned was hybrids and other forms of electrification. Can you tell us a split of hybrid versus BEV, for example, of the 80% quoting?

Adam, the majority of that electrification quoting is for full BEV electrification. When I say majority, it's almost all BEV.

Thank you. And David or team, any comment on the profit profile of these wins versus what may be rolling off? Can you provide color on whether it's lagging, how much or if it's approaching breakeven at EBITDA and any color so we can think as these programs ramp when we might narrow the gap between gas margins and EV margins?

Adam, as we think about new business that we source and price, we maintain a very tight financial discipline. Margins are one element and return on invested capital is another. Big picture, our objective is to continue to be a high-margin performing supplier both in our traditional business and in our future business.

Appreciate it. Thanks.

Our next question comes from Itay Michaeli from Citi. Please go ahead with your question.

Great, thanks, good morning, everyone.

Good morning.

So just a quick housekeeping to start, if I look at the D&A and CapEx outlook for the year and compare it to the first half, I think that implies your CapEx is up significantly in H2 and D&A down quite a bit. Maybe just color on those flows?

CapEx is clearly weighted to the back half of the year and in particular more so in the fourth quarter, as we're launching some of the programs that we've previously announced and beginning that process. As it relates to D&A, it's a little bit weighted to the first three quarters of the year. You may notice we had some accelerated depreciation associated with one of our customers that exited a region in Brazil, and that acceleration ceases at the end of the third quarter. So that's the dynamic you're seeing from a depreciation standpoint.

Great, that's helpful Chris. Then going back to a bigger-picture incremental margin question — I know it's early to talk about 2022 — but if we do have a smoother production cadence next year and also considering some investments you're making in electrification, are there any updated thoughts on how to broadly think about a range of incremental margins beyond 2021 given the choppiness this year?

If you think about going into next year, as the semiconductor issue passes you'll pick up volume and our contribution margin on that volume is generally attractive. Some of our customers are adding full-size truck capacity and that will be attractive to our overall revenue into next year. On the cost side, we'll continue to invest in R&D. So I would expect R&D to continue to increase slightly over time. Those are two major items thinking about next year, along with the usual items of pricing partially offset with productivity and a few other items.

Great. Quick follow-up: did you share what R&D is expected to come in this year?

In the first half of the year we're averaging a little over $30 million a quarter. We said that would step up in the back half of the year and that step-up will probably be similar into next year. Historically we've talked of a $35 million to $40 million range; we've been trailing under that recently but we're going to start to move into that range over the next three to twelve months.

Perfect, that's all very helpful. Thank you.

And our final question today comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.

Yes hi, good morning everybody.

Good morning, Emmanuel.

Just wanted to come back to the 80% of quoting activity being electrified solutions, which is a very big number. I was comparing that to your roughly 15% of three-year backlog which is EV solutions. Would you expect over the next three years or more that your backlog shifts to overwhelmingly electrified solutions, or how should we think about it?

Absolutely yes. We're seeing less and less traditional opportunities from the OEMs and more and more electrification, which is clearly indicative of the 80% of our quoted opportunities being in the electrification space.

Okay. Do you have any initial data on win rates on some of this quoting activity and maybe in comparison with the traditional business? I'm curious if you have the opportunity over the next few years to get your annual backlog contribution above the $200 million average that it is right now and back toward higher levels from a few years back?

We're comfortable with our ability to win business going forward. Historically we've been in the 25% to 30% win rate on our traditional business. As long as we can continue to support that and more, we'll have plenty of opportunity to offset any business that is trading out in the $100 million to $200 million range. Our backlog is lower than it has been at times, but we fully expect that we'll be growing that backlog in years to come.

And some of your initial experience on electrification wins: is the 25% to 30% win rate potentially applicable for those opportunities as well?

We're winning our fair share in the business and that's the most I can say about that.

Thank you, Emmanuel, and we thank all of you who have participated on this call and appreciate your interest in AAM. We certainly look forward to talking with you in the future. Thanks.

Ladies and gentlemen, with that we'll conclude today's conference call and presentation. You may now disconnect your lines.