Dauch Corp Q4 FY2021 Earnings Call

Good morning, everyone. My name is Rocco, and I will be your conference facilitator today. At this time, I would like to welcome everyone to AAM's Fourth Quarter 2021 Earnings Conference Call. As a reminder, today's conference call is being recorded. I would now 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 fourth quarter earnings call. Earlier this morning, we released our fourth quarter 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 7323464. This replay will be available beginning at 1:00 p.m. today through February 18. 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 fourth quarter and full year 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 fourth quarter and full year 2021 financial performance. Next, I'll cover how we are pivoting to electrification while securing our core business. Lastly, I'll discuss our 2022 financial outlook and our three-year new business backlog before turning things over to Chris. After Chris covers the details of our financial results, we will open up the call for any questions that you may have. So let's begin. AAM delivered solid operating results and cash flow performance in the fourth quarter and full year 2021. Despite market dynamics and continuing challenges with a global supply chain, our team did an outstanding job managing the areas under their control. AAM's fourth quarter 2021 sales were $1.24 billion, and for the full year 2021, AAM's sales were approximately $5.2 billion. In 2021, we experienced volume recovery from the impact of the 2020 global pandemic, but semiconductor supply chain shortages impacted AAM by over $600 million. From a profitability perspective, AAM's adjusted EBITDA in the fourth quarter of 2021 was $164.6 million or 13.3% of sales. For the full year of 2021, AAM's adjusted EBITDA was $833.3 million, or 16.2% of sales. In 2021, we were negatively impacted by supply chain disruptions, namely semiconductors, and we received very little forewarning to changes in production schedules, which disrupted our operations and cost structure. However, I'm proud to say the AAM team managed through these obstacles and delivered strong EBITDA margins and conversion for the full year. AAM's adjusted earnings per share in the fourth quarter 2021 was a loss of $0.09 per share. For the full year 2021 AAM's adjusted EPS was $0.93 per share compared to $0.14 per share in 2020. AAM continued to deliver strong free cash flow generation in 2021. AAM's adjusted free cash flow in the fourth quarter of 2021 was $43.6 million and for the full year 2021, AAM's adjusted free cash flow was $423 million. This is a record adjusted free cash flow performance for AAM, and I'm extremely proud of my team. Our goal has been to strengthen the balance sheet. Last year we delivered. We reduced our gross debt by approximately $350 million and reduced our leverage by about a turn. We will continue to work to improve our balance sheet strength going forward. Chris will provide additional information regarding the details of our financial results in just a few minutes. Let me talk about some key highlights for 2021 and the start of 2022, which you can see on Slide 4 and 5 of our slide deck. We secured an agreement with REE on electric drive units. We are named the sole supplier for front and rear pickup axles for GM's Oshawa truck plant. We won two new PACE awards for our partnership and innovation for our Electric Driveline Technology. We secured NIO differential business for their electric vehicles. We were selected to supply track-right differentials for the new GM Hummer EV program. We are supplying PTUs for the All-New Ford Bronco Sport and Maverick programs. We secured traditional core axle business while defining our electrification future. We were selected as a GM overdrive award winner and received multiple other customer awards for our performance. And we advanced our environmental sustainability and DEI initiatives and most recently here at the beginning of the year, AAM was recognized as one of America's best large employers, and top five in the automotive category. Now let's talk about the first pillar of our two-prong strategy which is securing the core, which is fundamental to our transformation to electrification. Earlier today, we announced AAM has secured multiple next-generation full-size truck axle programs with global OEM customers, with lifetime sales valued at greater than $10 billion. These replacement business awards are key developments as we leverage the cash flow generation to bring the future faster with our electrification technologies. On the electrification front, we continue to make significant progress with our 3-in-1 electric drive technology. Recently, we displayed our electric drive technology at CES. The power intensity and compactness of our proprietary design were very well received. The technology platform can accommodate the electric propulsion needs across all light vehicle segments from small cars to light commercial applications. The flexibility and modularity provide legacy and start-up OEMs with many options from components, gearboxes, motors, power electronics, to full systems and e-axles. Our design was recently given the Altair Enlighten award, the automotive industry's only award dedicated to lightweighting and sustainability. Again, something we're very proud of. That said, 2022 is an exciting year with multiple expected launches on the horizon, including our high-performance e-drive system for a premium luxury European OEM. This system will be applied across multiple vehicle variants, proof that our technology is not only state-of-the-art but meets the high standards of this iconic manufacturer. We will also be launching multiple electric propulsion components with several global OEMs this year. In addition, we recently announced our investment in Autotech Ventures, which is an early stage venture capital firm. This firm invests globally in mobility startups and AAM is leveraging the relationship with Autotech to identify new opportunities with companies aimed at electrification and mobility. The pivot to electrification is well underway and we embrace this change to make the environment more sustainable. Our engineering teams continue to develop game-changing electric mobility solutions and AAM is well-positioned to support our customers with cutting-edge technology and a strong value proposition. On the ESG front, I'm also very happy to share that AAM was named to Newsweek's list of America's Most Responsible Companies. We look forward to building on that positive momentum in 2022 as we advance our environmental sustainability and DEI initiatives. Be on the lookout for our new sustainability report in April of this year. At AAM we believe a strong ESG foundation and commitment are critical to running the business for long-term success. Before I turn it over to Chris, let me cover AAM's three-year new business backlog and our 2022 financial full-year outlook, which we included in our press release earlier this morning. AAM expects our gross new business backlog covering the three-year period of 2022 through 2024 to be approximately $700 million. We expect the launch cadence for this backlog to be $175 million in 2022, $325 million in 2023 and $200 million in 2024. As usual, our backlog factors in the impact of updated customer launch timing and our latest customer volume expectations and does not include replacement business—only new and incremental business. You can also see the backlog breakdown on Slide 6, with about 55% of this new business backlog relating to global light trucks, including crossover vehicles, and most importantly, 35% stems from electrification; this is more than double the 15% last year that we had. Our approach to electrification, from selling components and subsystems to full electric drive units, is gaining traction in our book of business. Currently, AAM is quoting on approximately $1.5 billion in revenue, with two-thirds of the quotes coming from electrification-based programs. Now, let me turn to our financial outlook, which you can see on Slide 7. AAM is targeting sales in the range of $5.6 billion to $5.9 billion, adjusted EBITDA of approximately $800 million to $875 million, adjusted free cash flow of approximately $300 million to $375 million, and that assumes our capital spending in the range of 3.5% to 4% of sales. From a launch standpoint, we have 25 launches here in 2022, which should drive growth over the next several years. From an end-market perspective, we forecast production at approximately 14.8 to 15.2 million units for our primary North American market. This represents about a 14% to 17% increase over last year's performance. Going forward, an improving production environment stemming from strong demand and inventory replenishment will set up AAM nicely for the future. In summary, 2021 was an unprecedented year filled with numerous challenges, but AAM delivered solid financial results. In 2022 and beyond, we will continue to focus on securing our core business, generating strong free cash flow, strengthening our balance sheet, advancing our electrification portfolio and positioning AAM for profitable growth. I'm very excited about what lies ahead for AAM. That concludes my remarks. Let me now turn the call over to our Vice President and Chief Financial Officer, Chris May.

Thank you, David and good morning everyone. I will cover the financial details of our fourth quarter and full year 2021 results with you today. I will also refer to the earnings slide deck as part of my prepared comments. Before I begin to discuss the specific details, let me provide a macro overview of our fourth quarter. On the surface, you will note our sales were down nearly $200 million on a year-over-year basis. However, understanding the factors driving this change is crucial. AAM's product sales were down more than $300 million on a year-over-year basis due to semiconductor shortages and overall market dynamics. Partially offsetting the drop in product sales was a $100 million increase in index-related metal market costs that we pass through to our customers at no margin. As we talk through the details today, keep in mind that metal market pass-through has a significant adverse impact on the calculation of our margins. However, results said and done, you'll take away three key points about our fourth quarter results. First, AAM sales and profits were impacted by lower industry volumes. Second, AAM's margins were impacted not just by lower sales, but also by rising metal market pass-through recoveries. And third, and most importantly, we continue to perform and optimize our business despite macro-level headwinds. So let's go ahead and get started with sales. Slide 10 shows a walk down from fourth quarter 2020 sales to fourth quarter 2021 sales. In the fourth quarter of 2021, AAM sales were $1.24 billion compared to $1.44 billion in the fourth quarter of 2020. We note that AAM was unfavorably impacted by the industry-wide semiconductor shortage by approximately $137 million in the fourth quarter of 2021. We note that high production volatility experienced in the third quarter continued well into October. Although volatility improved some in November and December on a month-over-month basis, we still experienced short lead-time production changes from our customers and reduced output. Other AAM mix and pricing were negative by $200 million. Overall, we experienced some lower global light-truck volumes and lower overall component sales in several markets as customer schedules fluctuated and they rebalanced inventories versus a very different environment than we experienced in the prior year. This brings us to the fourth quarter 2021 sales subtotal which excludes recoveries for index-related metal market costs and foreign currency impacts. We hedged this risk with our customers by passing through the majority but not all of these index-related changes. The metal portion of this column reflects these elevated pass-throughs on a year-over-year basis. Metal markets and foreign currency accounted for an increase of approximately $94 million to our total sales in the quarter. For the full year of 2021, AAM sales were $5.16 billion as compared to $4.71 billion for the full year of 2020. The primary drivers of the increase were a return of COVID-related volumes, an increase of over $300 million in index-related metal market pass-throughs and foreign currency, partially offset by volume losses due to semiconductor chip shortages that exceeded $600 million for 2021. Now, let's move on to profitability. Gross profit was $140 million, or 11.3% of sales in the fourth quarter of 2021 compared to $237 million or 16.4% of sales in the fourth quarter of 2020. Adjusted EBITDA was $165 million in the fourth quarter of 2021, or 13.3% of sales. This compares to $262 million in the fourth quarter of 2020, or 18.2% of sales. You can see a year-over-year walk down of adjusted EBITDA on Slide 11. During the quarter, semiconductor sales disruptions and other volume mix had a negative impact of $39 million and $59 million, respectively. This was partially offset by the benefits of AAM's continued productivity and restructuring programs and successful recoveries in some E&D costs. As I just mentioned earlier in our sales discussion, we are facing year-over-year increases in index-related metal market costs retained portion impacting this quarter plus FX of approximately $30 million. You can see in our EBITDA walk the dynamic this had on our EBITDA margin calculations. If you exclude this impact, our margins would have been meaningfully higher. For the full year of 2021, adjusted EBITDA was $833 million, adjusted EBITDA margin is 16.2% of sales. Now I will cover SG&A. SG&A expense, including R&D in the fourth quarter of 2021 was $78 million, or 6.3% of sales. This compares to $83 million in the fourth quarter of 2020, or 5.8% of sales. AAM's R&D spending in the fourth quarter of 2021 was approximately $20 million, compared to $31 million in the fourth quarter of 2020. The fourth quarter of 2021 includes higher E&D recoveries as we prepare to launch multiple key new programs. This activity drove a significant portion of the net year-over-year reduction in R&D. As we head into 2022, we will continue to focus on controlling our SG&A costs, while also capitalizing on the growing number of electrification opportunities that are before us. We would expect R&D to increase in 2022 by approximately $45 million to support these multiple new opportunities. This is in line with our previous R&D spend trajectory commentary. Let's move on to interest, taxes and pensions. Net interest expense was $42 million in the fourth quarter of 2021, compared to $50 million in the fourth quarter of 2020. We expect this favorable trend to continue in 2022 as we benefit from our debt reduction and refinancing actions. In the fourth quarter of 2021, we recorded an income tax benefit of $2.3 million compared to an expense of $13.9 million in the fourth quarter of 2020. As we head into 2022, we expect our adjusted effective tax rate to be approximately 15% to 20%. And lastly, during the fourth quarter AAM completed the transfer of nearly $100 million of pension obligations to an insurance company. This transaction was paid entirely through pension plan assets and continues our journey to strengthen AAM's balance sheet in this area. As a result of this transaction, AAM recorded a non-cash pre-tax pension settlement charge of $42 million. Taking all these aforementioned items into account, including the pension settlement charge, our GAAP net loss was $46 million, or $0.41 per share in fourth quarter 2021 compared to an income of $36 million or $0.30 per share in the fourth quarter of 2020. Adjusted earnings per share excludes the impact of the items noted in our earnings press release. Adjusted loss per share for the fourth quarter of 2021 was $0.09 compared to $0.51 earnings per share in the fourth quarter of 2020. For the full year of 2021, AAM earned adjusted earnings per share of $0.93 versus $0.14 in 2020. Let's now move on to cash flow and the balance sheet. Net cash provided by operating activities for the fourth quarter of 2021 was $102 million. Capital expenditures net proceeds from the sale of property, plant and equipment in the fourth quarter was $65 million and cash payments for restructuring and acquisition-related activity for the fourth quarter of 2021 were $9.8 million. Reflecting the impact of these activities AAM generated adjusted free cash flow of $44 million in the fourth quarter of 2021. For the full year of 2021, AAM generated adjusted free cash flow of $423 million compared to $311 million in the full year of 2020. As David mentioned, this is a record for AAM. As a team, we've been focused on free cash flow conversion, including tightly managing CapEx, and reducing restructuring charges. Our results demonstrate success in these areas. From a debt leverage perspective, we ended the year with net debt of $2.6 billion and LTM adjusted EBITDA of $833 million, calculating a net leverage ratio of 3.1 times to December 31. This is a reduction of nearly a full turn of leverage in 2021. In 2021, we prepaid over $350 million of gross debt. We utilized the free cash flow generating power of AAM to strengthen the balance sheet by reducing our debt and lowering our future interest payments. AAM ended 2021 with total available liquidity of approximately $1.5 billion consisting of available cash and borrowing capacity on AAM’s global credit facilities. We continue to maintain a strong liquidity position and debt maturity profile. Before we move into the Q&A, let me close my comments with some thoughts on our 2022 financial outlook. In our earnings slide deck, we have put a walk from 2021 actual results to our 2022 financial targets. You can see those starting on Slide 13. As for sales, we are targeting the range of $5.6 billion to $5.9 billion for 2022. The sales target is based upon North American production estimates of 14.8 million to 15.2 million units, new business backlog launches of $175 million and attrition of approximately $100 million. Given the market volatility, our sales guidance assumes a range of semiconductor recovery of approximately one-third at the low end and two-thirds at the high end versus what we experienced in 2021. We continue to experience this issue in January and February of this year. However, we do expect improvements throughout the year. In addition, on a year-over-year basis, we expect to continue to see increases in index-related metal market and foreign currency. As noted in our fourth quarter walks, the 2021 exit rate on a year-over-year basis was the highest for the year. Our guidance is based on current trends. From an EBITDA perspective, we're expecting adjusted EBITDA in a range of $800 million to $875 million. As you may ask questions in this area, let me provide some direct comments on the key elements of our year-over-year EBITDA walk. First, we expect to convert our year-over-year product sales increases at expected contribution margins of approximately 25% to 30% as shown on our year-over-year walk. Second, we intend to invest in our future through more in R&D as we continue to have growth opportunities with a variety of customers and products. Third, we are experiencing inflation. By way of perspective, this net amount reflected on our walk represents only slightly more than 1% of our annual purchased component buy. Lastly, we expect AAM to continue to deliver operational productivity to mitigate some of these costs, as well as offset cost pressures we're experiencing inside of our own operations. You can see continued year-over-year performance on our walk of nearly $35 million. From an adjusted free cash flow perspective, we are targeting approximately $300 million to $375 million in 2022. The main factors driving our cash flow change are as follows. We have slightly higher capital expenditures as we are coming upon a series of launches. However, our CapEx to sales ratio is still very low by our historical measures as we are targeting CapEx as a percentage of sales of approximately 3.5% to 4%. We also expect higher taxes and we would expect working capital outflows as our sales and related activity are increasing year-over-year. And lastly, we estimate our restructuring payments to be in the range of $20 million to $30 million for 2022. This is a year-over-year reduction by nearly half of our cash restructuring payments from the prior year. We expect the U.S. free cash flow generated in 2022 to continue to reduce leverage and further solidify our position in electrification and take advantage of select market opportunities to support growth. So in conclusion, the tenets of our business approach are already yielding results. As David mentioned, we've secured significant new awards with our legacy business with strong free cash flow potential. Our new one e-drive platform and components are driving global interest; as such our backlog electrification mix is now at 35%. We generated strong free cash flow, a company best in 2021, and we look to generate solid free cash flow in 2022, while ramping up new business launches to drive growth. We're looking forward to a great year for AAM and building value for all our stakeholders. Thank you for your time and participation on the call today. I'm going to stop here and turn the call back over to David so we can start the Q&A. David?

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 that you may have.

Your first question today comes from John Murphy of Bank of America.

First question on your North American volume assumptions of 14% to 17% is a little bit higher than we were at and I think some folks are at. So I'm just curious, your comfort in that, but also, does that actually really matter that much when you're doing sort of a bottom-up forecast on your specific programs? I’m just trying to gauge how a 14% to 17% assumption seems kind of aggressive. But if you drop into your programs, when the mix has been pretty strong, and probably will continue to be, that might not be that aggressive. So just trying to gauge your thoughts there and how you're building that up?

Yes, John. This is Chris. You're exactly right in your comment. When we build our forecasts, we do a bottoms-up approach, clearly very focused on select key platforms that drive our business, such as the General Motors full-size truck, the Ram heavy duty, and a few other key crossover platforms. That production element we use, 14.8 to 15.2, does drive some of our component business, which we look to do. What we're trying to signal here as well is that we see market estimates out there by third parties calling 15.2. We certainly see some of the challenges in the early part of the year associated with semiconductor delivery and otherwise. We wouldn't expect that to happen at the high end of our ranges. So we do build some conservatism into our macro market assumptions. But at the end of the day, it's a bottoms-up build by the specific platforms we support and the unique volumes associated with them.

Okay, that's helpful. And then, just a second question on Slide 6 on the backlog. I appreciate electrification is going up from 15% to 35% year-over-year in the backlog, so that's great. But if we think about sort of the cadence of that mix changing over time, I don't know if you have this breakdown for us right now. But how much would electrification be of your '23 and '24 backlog versus what it is in 2022? How much is this growing sequentially?

John, we don't disclose the specific by-year element. But what I would tell you is as you see the market transitioning more to electrification, our backlog is experiencing that same trend and dynamic; it increases year-over-year.

Yes, clearly by the last year meaning 2024, some of these programs are starting to come online. We do have some significant launches in 2023 that are a balance between electrification and also some of our traditional businesses as well. That mix will be more oriented toward 2024.

Our next question today comes from Ryan Brinkman at JPMorgan.

Hi, thanks for taking my question. I guess, it's surprising to me that your 2021 free cash flow yield is as high as 46% of today's market cap and your guidance for '22 suggests another year of I think, like 37% free cash flow yield at the midpoint. It's interesting that you can generate the amount of cash that you do with the free cash conversion that you do. Consistently positive cash flow in years with vastly different macro and industry backdrops with debt repayments, mandatory payments, and other items and you can do all this without more of an impact on the share price. I think it suggests that investors suppose that the amount of cash flow you're generating is not sustainable. What do you think are the primary contributing factors to this almost distressed level of free cash flow yield? Is it the transition to electrification, which you've highlighted as a positive? Or maybe the financial leverage, which I know you're focused on lowering? And I'm curious how you think about capital allocation in the context of this free cash flow yield. On the one hand, if leverage is the investor concern weighing on the multiple, allocation of free cash flow toward debt paydown does seem appropriate. On the other hand, if the valuation is so disconnected, or if it's driven by doubts about electrification or something else that maybe suggest that share repurchase or a more balanced approach is warranted relative to being as focused on debt paydown as has happened.

So Ryan, there was a lot there, but let me try to comment on what I think I've heard and let Chris add. We're very proud of what we've been able to do consistently year-over-year in regards to our free cash flow generation. We've only gotten stronger as a company over the last several years. We've used this crisis to really optimize our business and focus on the things we need to do to generate sustainable cash flow. Yes, we do feel we're going to continue to generate strong cash flow as we go forward. As you mentioned, it's a significant percentage of overall market cap; clearly the investors aren't recognizing the full potential performance of AAM when it comes to our EBITDA and our cash flow performance. The two things that are really impacting us that we hear in the marketplace are our balance sheet and the pivot to electrification. Yes, we knew we were levered. At the same time, we took almost a full turn off of our leverage this past year, and we've demonstrated our commitment to strengthen that balance sheet. We're going to continue to focus on improving that balance sheet going forward. We don't see it being a problem in the future because of our strong resolve and our strong performance, not only what we've delivered, but what we will deliver going forward. Only the investors can make those decisions. On the pivot to electrification, if people want to see our backlog of new business grow, which they're now seeing, we expect that to continue to grow. As I indicated, we're quoting $1.5 billion and two-thirds of that is electrification. We've already increased our backlog year-over-year with greater penetration on the electrification side from 15% to 35%. So we're delivering on what we said we would deliver and the things that we can control. When we did the MPG acquisition, we said we were going to generate significant free cash flow in our business, and we're doing just that. At the same time, it's allowing us to fund paying down the debt, fund the advancement of our electrification portfolio, fund our launches, and keep CapEx as a percentage of sales down over the past several years. Yes, CapEx will be up a bit because we have 25 launches this year, but we expect to convert a lot of our equipment over to electrification. I think that's my initial response to your question. Chris, do you want to add anything?

Ryan, your observation on our cash flow generating power is spot on. If you look back over the last five years, our conversion of EBITDA to cash flow was about 20% five years ago and is now in the 40% to 50% range. That's a concentrated effort by this team, as David mentioned, to manage our CapEx, maximize the use of our assets, reduce interest cost, and strengthen our balance sheet. We're seeing that play out. As it relates to capital allocation and electrification, we will continue to drive our backlog of electrification, maintain a balanced capital allocation, stay focused on de-risking our balance sheet, and also look to grow where we can.

That's helpful. Thanks. Just lastly, specifically curious what you've planned for GM production in North America. I think they gave like a 25% to 30% global growth. I don't think they broke that down by region, but obviously they're optimistic. Not all suppliers have slowed, so I'm just curious what your revenue guidance assumes there. Thanks.

Yes. Our revenue guidance shows what we assume at the macro level. We typically don't articulate our specific views on GM by platform. The largest GM platform we supply would be the full-size truck platform. In terms of industry estimates, we're close to consensus at the higher end of ranges. We're probably a little more conservative than the most bullish third-party estimates, but we're close to IHS in how we think about their large platform.

Our next question today comes from Joseph Spak with RBC Capital Markets.

Maybe just to follow up on that and going back to John's question as well on production. I mean, your revenue growth that you're calling for, especially if you back out the metals market, seems to be below not only what people are looking for in North America broadly, but even if we look at T1XX or just broadly North American truck production. So is there some other element where we're missing there, or are you just taking a fairly conservative stance here? It didn't sound like that specifically because you just mentioned you're more in line with IHS in some of those programs.

Joe, good morning. Let me take that. I think there's a couple things to think about. I'm assuming when you're making that comment in terms of growth, you're talking from 2021 production levels stepping up. If you step back and look at 2020 to 2021, some of the platforms we support, like full-size trucks, had an outsized growth in 2021 versus 2020. So some of the year-over-year growth in absolute volumes is really over a two-year span. As we step into 2022, some of the full-size platforms that we supply are not experiencing that same level of year-over-year growth because they already captured that in 2021. We're seeing growth now more on crossover platforms and passenger component elements, which track differently. The balance of our business in China and Europe is probably similar to North America. So you have to look at the trajectory over the last two years and the sub-platforms we support.

Yes, that's helpful. Maybe we can follow up offline. One last question: have you thus far seen any impact from the issue at the Canadian border?

Joe, our operations have not been impacted directly because of the Canadian border issue. Clearly, some OEM plants are adjusting shipments or changing their line rates because of some of the bumps taking place right now. Hopefully level heads will prevail and that will subside. But to answer your direct question, no, we have not been impacted directly by the border constraint.

Our next question today comes from Dan Levy with Credit Suisse.

First, I want to go into the contribution margin that you're assuming for 2022. You typically get 25% to 30%, but there are some moving parts. I'm hoping you can disaggregate those if possible. You're talking about more growth from crossovers, which is generally lower contribution margin, but then I'm wondering what the offset is. Is it just that you had some inefficiencies in the system in 2021 that are reversing in 2022? So maybe you could just unpack that contribution margin assumption?

At the product level of our contribution margin for volume changes, typically it can range anywhere from 25% up to 35%. Of course, 35% would be more heavily weighted on our full-size truck applications. The absolute volume and mix net it all together, and at the midpoints we have around 29%. What you have happening is our new business backlog and attrition is rolling in at a slightly lower part of that range, our semiconductor sales recovery is roughly in line with the sales mix that was lost in 2021, and there is some full-size truck element associated with it. It's predominantly a little more weighted towards crossovers, which is why you see it below the 30% range in terms of contribution margin. All in all, the mix has a balance of some full-size truck and some crossover vehicles, which drives that contribution margin near just below the midpoint of our typical contribution margins.

Okay. And then just as far as inefficiencies or trapped labor beyond just, I see your guiding to cost inflation of $40 million. What did you have in aggregate in 2021 for inefficiencies, trapped labor, premium freight? And what are you assuming for 2022?

I think David mentioned our ability to navigate these challenges operationally; the team has done a fantastic job. For example, premium freight, which many companies faced in 2021, was maybe a couple million dollars a quarter for us. We'll still have some of that in 2022, but some of it may go away as we refine operations and as disruptions subside. In terms of labor and other inflationary pressures, our focus has been on optimizing factories, automation, throughput optimization, and similar initiatives to contain some of the inflation impacts, such as entry-level wages and indirect costs like tooling and utilities. That focus is critical to keeping inflation at bay.

Okay, and then the second question is on the backlog. Usually this is a gross backlog; can you give us an indication of what it is on a net basis? And any color on that 35% electric mix—what's the composition between drive units, sub-assemblies, et cetera?

On the new business backlog, it's gross $700 million over three years with a $175 million launch cadence in 2022. We also disclose our attrition is $100 million. So you should think of those combined, so net it's roughly +$75 million going from 2021 into 2022. Typically, each year, we have attrition somewhere between $100 million to $200 million; for 2022 it's at the lower end of that range. Regarding the electrification backlog mix, think about the announcements we have made in the past 18 months—wins with NIO and General Motors/Hummer on the component side. We are launching drive units with companies such as REE and some other European customers. We have drive unit activities in China as well. So it's a healthy mix across our entire product suite and across many different customers.

Our next question comes from Brian Johnson of Barclays.

Just a follow-up on that. To get more specific on that 35% electric slice of the pie, when I think about legacy metal-die businesses producing parts for transmissions and combustion engines, to what extent is some of this backlog coming in not necessarily to the e-drive but into e-motor or other e-gearing components that can utilize your metal die footprints?

Brian, clearly a lot of our equipment can be converted from making traditional forged elements for ICE applications to components used in electrified applications. We're seeing wins and opportunities on the gear side and shaft side of the business. We're also, as Chris commented earlier, getting differential awards that play into our metal forming business and overall machining and assembly capability. So we're seeing growth within our traditional metal forming products, especially as the market consolidates, and we're also realizing growth on the electrification side of the metal forming business.

I want to pick up on the consolidation comment. Over in the truck engine space, some companies are benefiting from consolidation of engine platforms and outsourcing. Are you seeing a similar dynamic in internal combustion driveline components, where competitors are dropping out or moving to other segments and leaving more business for you?

Yes, the answer is yes. Some of our peers in the auto space have indicated they want to reduce their involvement in some powertrain or driveline technologies. We don't have a problem being a consolidator in that space. We started that effort with the MPG acquisition and it benefited us greatly. We know how to realize integration synergies. Our buying power continues to get stronger, especially for steel in a volatile market. So we do see opportunities for further consolidation in that space. We will balance that with strengthening our balance sheet and making the necessary investments in R&D to support the pivot to electrification.

Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Lim for any closing remarks.

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

Ladies and gentlemen, this concludes today's conference call. We thank you all for participating in today's conference. You may now disconnect your lines and have a wonderful day.