American Axle & Manufacturing - Q2 2024

Transcript

Operator (participant)

Good morning. My name is Gary, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press the star key, then the number one on your telephone keypad. If you would like to withdraw your question, press the star key, then the number two. As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.

David Lim (Head of Investor Relations)

Thank you, Gary, 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 2024 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 page of our website as well. To listen to a replay of this call, you can dial 1-877-344-7529, replay access code 273-3759. This replay will be available through August sixteenth.

Chris May (EVP and CFO)

Now, 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 reconciliation of these non-GAAP measures to GAAP financial information, is available on our website. And with that said, let me turn things over to AAM's Chairman and CEO, David Dauch.

David Dauch (Chairman and CEO)

Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AAM's financial results for the second quarter of 2024. Joining me on the call today is Chris May, AAM's Executive Vice President and Chief Financial Officer. To begin my comments, I'll review the highlights of our second quarter financial performance. Next, I'll touch on some business development news and commentary about the industry. After Chris covers the details of our financial results, we'll open up the call for any questions that you all may have. So let's begin with our financial highlights. AAM's second quarter of 2024 sales were $1.63 billion. Adjusted earnings per share was $0.19 per share. Adjusted EBITDA in the second quarter was $208 million, or 12.8% of sales, and our adjusted free cash flow was approximately $98 million.

Chris May (EVP and CFO)

These solid results reflect positive contributions from volume and mix and continued operational performance. Let me provide you some perspectives about our performance. Overall, volumes for the industry and for a number of our key platforms were higher sequentially and year-over-year, according to third-party forecasters. As you all know, production consistency is very important for EBITDA flow-through. Production stability that we experienced in the first quarter continued into the beginning of the second quarter. That stated, we did experience periods of higher than anticipated downtime near the second quarter end. We will closely monitor this trend in the second half of the year. On a positive note, in some cases, customers were providing more advanced shutdown notices, giving the AAM time to make necessary cost adjustments. From an operational standpoint, we are making good overall progress, as seen by our results.

The team continues to work diligently on driving positive operational performance and delivering AAM's high standards of operational excellence. I'm also happy to share that we have concluded most of our commercial discussions related to inflation for the year. We do have some minor open discussions remaining, but generally, this is in the rearview mirror for us here in 2024. So overall, a good, solid, and positive quarter for Team AAM. Let me talk about some business updates, which you can see on slide 4 of our presentation deck. We are very pleased to announce that AAM has been awarded business to supply components for a global European OEM's modular vehicle platform that will support a multitude of propulsion systems, including internal combustion, hybrid, and electric vehicle derivatives, highlighting certain of our products that are agnostic to powertrain applications.

Furthermore, AAM will supply a luxury European OEM with helical drive gears for electric drives for a future EV program. This is a nice incremental win for our components business and plays to our strategy of providing comprehensive approach in both components and full systems, and providing OEMs with strong optionality for their respective EV powertrain needs. We believe our strategy well positions AAM to be the supplier of choice. In addition, AAM was recently awarded business to provide traditional axles for a next-generation full-size van program. This is a great example illustrating an ICE-for-longer thesis. This program is scheduled to launch later in the decade. Finally, AAM was named one of Newsweek's Greatest Workplaces for Women in 2024. We're very pleased with this award, as it is AAM's goal to support and promote a diverse, inclusive, and safe work environment.

Now, let's talk about the industry. The wins that I just mentioned reinforces AAM view that ICE, hybrid, and EV powertrains will coexist for a long time... Although we believe electrification technology is compelling, the adoption and consumer acceptance will take time, driven by affordability, range performance, and charging infrastructure. Meanwhile, AAM will continue to manage factors under our control to facilitate this transition and drive profitable growth. This includes making selective investments and closely monitoring technology and policy shifts. In the near term, it appears to us that OEMs are still evaluating future product planning strategies, especially within the propulsion systems, which more clarity is likely to come. As such, the bidding pipeline reflects this current environment. What is clear is that the capacity being put into place for EVs has been rescoped, delayed, or in some cases, canceled.

AAM's view is to maintain and develop a deep and diverse product portfolio to support current and emerging powertrain trends and be agnostic to the market. We believe EV adoption by region and by segment will differ materially. On to our guidance. With two quarters now completed, we're raising our full-year sales and EBITDA guidance. AAM is now targeting sales in the range of $6.1 billion-$6.3 billion, versus our previously guided sales direction of $6.05 billion-$6.35 billion. Our Adjusted EBITDA will be approximately $705 million-$755 million, which is higher than the previously communicated $685 million-$750 million. And our adjusted free cash flow will remain unchanged at approximately $200 million-$240 million.

Our second half of the year includes multiple significant launches, including the next generation Ram heavy-duty program. In addition, we continue to monitor industry inventories, transaction prices, incentive spending, and overall interest rates. To conclude my remarks, and as I have communicated previously, our aim is on the future, and we will continue to drive our efforts towards securing our primary legacy business, which in all honesty, is substantially complete, generating strong free cash flow, strengthening our balance sheet, and we continue to pay down debt every quarter, and advancing our electrification portfolio, and positioning AM for profitable growth. So let me now turn the call over to our Executive Vice President, Chief Financial Officer, Chris May. Chris?

Thank you, David, and good morning, everyone. I will cover the financial details of our second quarter of 2024 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 2024, AAM sales were $1.63 billion, compared to $1.57 billion in the second quarter of 2023. Slide 7 shows a walk of second quarter 2023 sales to second quarter 2024 sales. Positive volume, mix, and other was $94 million, driven by a number of our key programs and backlog in the quarter, including the GM mid-size truck platform in North America and a Chery SUV platform in China. Metal market pass-throughs and FX decreased sales by approximately $20 million, and both were lower in the quarter.

Now, let's move on to profitability. Gross profit was $217.3 million in the second quarter of 2024, as compared to $178.2 million in the second quarter of 2023. Adjusted EBITDA was $208.4 million in the second quarter of 2024, versus $191.6 million in the second quarter of last year. You can see a year-over-year walkdown of adjusted EBITDA on Slide 8. In the quarter, volume, mix, and other added a net $22 million of adjusted EBITDA versus the prior year, resulting in a conversion rate of approximately 23%.

R&D was higher year-over-year, as timing of R&D spend can be lumpy from quarter to quarter, and net inflation, performance, and other was favorable by $16 million, driven by a combination of operational improvements, benefits of less production volatility, and inflation offsets. Let me now cover SG&A. SG&A expense, including R&D, in the second quarter of 2024, was $105.2 million, or 6.4% of sales. This compares to $91.1 million or 5.8% of sales in the second quarter of 2023. AAM's R&D spending in the second quarter of 2024 was approximately $44.5 million. The year-over-year R&D expense increase of $7 million was driven by timing of our engineering spend and programs that we are currently supporting.

We expect our R&D spend to be in line with our initial estimates for the year, but it can vary from quarter to quarter. We will continue to support the needs of our business with the appropriate R&D spending levels. That said, we anticipate R&D spend should moderate in the coming years as we finish developing our electric platform technologies and mitigate spending in this area to match current industry powertrain trends. So let's move on to interest and taxes. Net interest expense was $41.8 million in the second quarter of 2024, compared to $44.3 million in the second quarter of 2023, due in part to lower debt balances.

In addition, we paid down over $30 million of senior notes in the second quarter, and we continued to lower our debt balances with yet another $50 million pay down of senior notes here in August. In the second quarter of 2024, we recorded income tax expense of $17.2 million, compared to $5.3 million of income tax expense in the second quarter of 2023. This increase in our elevated effective tax rate was driven by higher profitability and an expense for valuation allowances, primarily related to interest expense deduction limitations in the U.S.... We expect our adjusted effective tax rate to be approximately 45%-50%. This elevated book tax rate is a function of the valuation allowance I just described. We also expect cash taxes of approximately $60 million this year.

Taking all these sales and cost drivers into account, our GAAP net income was $18.2 million, or $0.15 per share in the second quarter of 2024, compared to $8 million or $0.07 per share in the second quarter of 2023. Adjusted earnings per share, which excludes the impact of items noted in our earnings press release, was $0.19 per share in the second quarter of 2024, compared to $0.12 per share for the second quarter of 2023. Let's now move on to cash flow and the balance sheet. Net cash provided by operating activities for the second quarter of 2024 was $142.8 million. Capital expenditures, net of proceeds from the sale of property, plant, and equipment, and government grants for the second quarter of 2024 were $46.6 million.

Cash payments for restructuring and acquisition-related activity for the second quarter of 2024 were $1.7 million. Reflecting the impacts of these activities, AAM's adjusted free cash flow was $97.9 million in the second quarter of 2024. From a debt leverage perspective, we ended the quarter with net debt of $2.2 billion and LTM adjusted EBITDA of $740 million, calculating a net leverage ratio of 3.0x at June 30. Our focus is to continue to strengthen the balance sheet by reducing debt. AAM ended the quarter with total available liquidity of approximately $1.5 billion, consisting of available cash and borrowing capacity on AAM's global credit facilities. As for the full-year outlook on Slide 5, we are adjusting our revenue and EBITDA outlook.

For sales, our target range is at the $6.1 billion-$6.3 billion for 2024. This sales target is based upon a North American production of approximately 15.8 million units. As you all know, our sales results are more sensitive to the performance of certain key programs versus just macro changes to the overall industry production. From an EBITDA perspective, our new range is $705 million-$755 million. Our adjusted free cash flow target remains at $200 million-$240 million, and we anticipate CapEx at approximately 4% of sales. Our adjustments to our guidance are based on what we currently see in future production builds.

According to third-party estimates, the GM T1XX platform is forecasted at approximately 1.4 million units for the full year, with production weighted towards the first half of the year. The 1.4 million units continues to represent the midpoint of our guidance range. Equally important, in addition to normal seasonality, we are in the process of launching some of AAM's largest next-generation programs in the second half of this year. These launches include driveline systems for the next-generation GM Delta Crossover vehicle program and the next-generation Ram medium and heavy-duty trucks. As you know, with any launch, there are ramp-up costs and volume volatility, some of which can be unpredictable. Of course, these important launches will serve as part of the key foundational sales pillars for many, many years to come, and this is a very good position to be in.

Furthermore, we are making good progress with our performance initiatives that we have shared with you and have closed most of our commercial discussions for the year. Putting all this together, from a full-year 2024 perspective, we are tracking to deliver year-over-year margin improvement, have reduced our outstanding debt, continue to win new business, and by the end of the year, we'll have completed significant next-generation product launches. And this is all really good stuff. So 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?

David Lim (Head of Investor Relations)

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. At this time, please feel free to proceed with any questions you may have.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. The first question today is from Joe Spak with UBS. Please go ahead.

Joe Spak (Managing Director)

Hey, team.

Chris May (EVP and CFO)

Morning.

Joe Spak (Managing Director)

Chris, I just wanna sort of just talk a little bit about second half here. You know, net inflation performance, I think $24 million year to date. But in thinking about the second half, how should we think about that driving the EBITDA? 'Cause, you know, you mentioned recovery negotiations are underway. I don't know if you could give us some indications for what we could expect there, but then also on a year-over-year basis, I think you had some warranty issues last year that shouldn't repeat, and also the inefficiencies, which have seemingly gotten better. But on the other hand, you just sort of indicated that it's a pretty heavy launch schedule, which might, you know, weigh on performance a little bit. So what are you guys embedding, I guess, for performance in the back half?

Chris May (EVP and CFO)

Yeah, Joe, as you think about what we're stepping into here in the back half, you know, it really, you know, talk about the midpoint, obviously, starting with a nice, strong first half of the year. But from a production standpoint, just normal production, right? First half, second half, clearly, overweighted into the little bit into the first half, whether it's on the full-size truck platforms. Europe. Our European operations, a little bit weighted towards the first half as well. And then you have what's called normal seasonality in the back half of the year, right? Just from a production landscape perspective. But some of the key items we're talking about that will weigh on the back half of the year, of course, are these large transitions we're having for our next generation programs.

And these are some, as you know, some key products that support not only revenue generation, but profit generation in the back half, and they can be a little bit volatile as we sort of work through that. So that's a key piece of the second half that obviously will work through the course of the year, and then as we exit in 2025, those will be behind us. But from a performance standpoint, you know, we would expect to continue to show continued improvement in our metal forming operations, in particular. You can see that trend continuing through their segment disclosures and their margin performance, so I would expect that to continue. From a recovery standpoint, our negotiations are substantially complete, so that's already embedded in our first half and second half run rates.

You're not gonna get any additional lift per se in the back half of the year versus the first half there. So that's sort of, I would call, level from period to period. And then again, a little bit of normal seasonality in the back half. You do have an overweight to some of your fixed costs with the holiday schedules, et cetera, as part of the industry trends. That's how I would think about it, but as we sit here today, stepping into these launches, you know, we're trying to be measured here with the back half, but we expect the underlying performance of the bench business to continue.

Joe Spak (Managing Director)

That's helpful. One quick follow up there. I think before you indicated your, like, the midpoint of your guide assumes, you know, roughly 1.4 million on the T1. Is that still sort of the going assumption, or is that, has that changed at all?

Chris May (EVP and CFO)

No, that is still the going assumption.

Joe Spak (Managing Director)

Okay. Just one more quick one. The e-Beam contract that was canceled, any update there? I know you were trying to get some recoveries. How are negotiations for that going?

David Dauch (Chairman and CEO)

No, Joe, this is David. As we indicated to you before, that contract's been, you know, canceled or terminated, and we've turned in cancellation costs to our customers, and we're still in negotiations with them at this time. So nothing further to announce right now.

Joe Spak (Managing Director)

Okay. Thank you.

David Dauch (Chairman and CEO)

Thank you.

Operator (participant)

The next question is from Tom Narayan with RBC. Please go ahead.

Tom Narayan (Lead Equity Analyst)

Hey, thanks for taking the questions. The first one is on the 2024 guidance. So if my math is right, you're raising, I think, the EBITDA by $12.5 million at the midpoint, but the cash from operations is going down by $16 million. Just curious, what's driving that? My sense is probably working capital. You've talked about those new launches in H2, but I would think some of those launches maybe were already known about. Just trying to understand what has changed since the last time, I guess, you gave the guidance in this regard on potentially working cap, and then I have a follow-up. Thanks.

Chris May (EVP and CFO)

Yeah. No, it's really two elements. Our cash tax is up slightly, so that's a piece of it in terms of where our previous guide was, and also it's gonna simply fall down to working capital timing in terms of the balance. We had a favorable adjustment a little bit on our CapEx. Cash tax is up a little bit, and then the balance is working capital timing.

Tom Narayan (Lead Equity Analyst)

Got it. And then my second one, you know, one thing we've noticed this earnings season is that some tier one suppliers and OEMs, for that matter, have talked about something similar to what you're saying, you know, the R&D coming down, et cetera. And they've decided to increase capital return to shareholders in the form of share buybacks, given the depressed market values of their equity. In some cases, we've even seen companies lever up to do buybacks. I know you have that slide that shows a 3x leverage and $1.5 billion of liquidity in your priorities to reduce debt. But just curious, as you look at where your stock is trading, and you know, potentially pushing investments out, what is your appetite to potentially doing more on the share buyback? Thanks.

David Dauch (Chairman and CEO)

This is David. You know, listen, our capital allocation priorities are to continue to be disciplined and support our organic growth and our backlog of new business, continue to pay down debt. We're obviously more highly leveraged than some of our competitors and some of the other industry peers. At the same time, we're continuing to look at inorganic growth opportunities. So I don't really see a near-term future where we're looking at major stock buybacks or shareholder-friendly activities. But at the same time, you know, those are the four allocations of capital, and we always look at those, but we try to do what we think is right for the business.

Chris May (EVP and CFO)

But right now, I don't see it deviating from the discipline that we've had, you know, in the previous, you know, quarters and previous years. Chris, I don't know if there's anything else you want to say.

Yeah. No, Tom, also, you know, we've paid some debt down as a priority capital allocation in the second quarter, and I don't know if you caught in my prepared remarks, we paid yet another $50 million of debt down inside here in the third quarter, so that should be very positive and accretive to our investors as well.

Tom Narayan (Lead Equity Analyst)

Got it. Thank you.

Operator (participant)

The next question is from Dan Levy with Barclays. Please go ahead.

Dan Levy (Senior Equity Research Analyst)

Hi, good morning. Thank you for taking the questions. Wanted to just follow up on that last question from Tom, and more specifically on the leverage ratio. So I believe you're right now, you know, at 3x. Maybe you can give us a sense of, you know, just given the current business dynamics and how you're thinking of free cash and the current EBITDA profile, what is a reasonable timeframe to expect to get down to 2x leverage, which then unlocks a greater set of capital allocation opportunities?

Chris May (EVP and CFO)

Yeah, Dan, this is Chris. Look, if we continue to perform and increase our EBITDA, of course, this would be on a decent macro backdrop, meaning production volumes continue to remain strong, right? We continue to improve our operational performance. We can deliver, you know, good, good EBITDA performance over the next couple of years, strong cash flow generation. You know, you're gonna start to enter that zip code. You can just, I mean, do the math, right, over the next couple of years.

Dan Levy (Senior Equity Research Analyst)

And is any of this, is there additional opportunities to flex CapEx down or, you know, opportunities on the working capital side?

Chris May (EVP and CFO)

Look, if you look at our CapEx spend, it's been at some of the lowest levels in our company's history over the past couple of years. You know, we're very cognizant to continue to support the appropriate maintenance capital inside the business, which we will not thrift, because that's critical to our ongoing operational success, and then it will ebb and flow with the new programs that we launch. From a working capital perspective, you know, we're pretty tight on receivables and payables. I think we've been one of the best benchmarks from an inventory perspective, though I do think there's continued cash flow opportunity there, which we'll, you know, squeeze out of the business over the next year or two. But that continues to fund a good, solid delivery of cash flow over the next couple of years.

Dan Levy (Senior Equity Research Analyst)

Great. Thank you. And then maybe a follow-up. David, more of a strategic question. You know, understandably, you know, there was a large bidding pipeline, and you were trying to expand your portfolio of opportunities. And, you know, obviously, that's changed, as you noted in your remarks, and the bidding pipeline has certainly shifted. The question is: what is the forward opportunity on bidding, and what are the aspirations for AAM to diversify beyond the core North America truck exposure, which has consistently been your core exposure? Or is the strategy shifting a bit to say, "Okay, like, you know, given where we are right now, this is an exposure we're very happy with, and we're happy to flex down some of the spend and just stay where we are right now?

David Dauch (Chairman and CEO)

Yeah. So, so Dan, I mean, clearly, our, our responsibility is to protect the overall health of the company. We're gonna continue to focus on driving operational performance and strengthen the balance sheet. But to your point, I mean, we don't, we don't control the market, and the consumer is not readily accepting electrification, which was the path that the whole industry was going, and everyone's had to, to throttle back. And as I commented, all the OEMs are evaluating their long-range product plans right now, and we're hopeful to get some more clarity on that as we go forward here. But meanwhile, there's, you know, kind of like an air pocket going through the industry, and it's impacting us and other suppliers in regards to quoting opportunities, both on the ICE side and, and especially on the EV side.

Chris May (EVP and CFO)

What we're doing is as I said, we're substantially complete in securing our next generation ICE and hybrid business. We're in discussions with a number of customers in regards to looking at contract extensions to some of that business as well, you know, beyond the years that we were originally being contemplated. A lot of the EV business, as we said, has been re-scoped, re-timed, delayed, or even canceled. So that's impacting not only AAM, but the industry and our peers. And we're just trying to understand where it is, but meanwhile, we're being selective in regards to where we're placing those investments between the different, you know, powertrain propulsion systems. Now, truck has been a strong point for us.

It's gonna continue to be a strong point for us, we think, for decades. We're in a solid position with respect to that, so we'll have strong cash generation there. But we also recognize that we need to get more diversification with customers as well as, you know, geographically in our business. It's part why we're doing tactical acquisitions like Tekfor, that allows us to grow with other customers. So, you know, that's why I also indicated that the electrification strategies are gonna vary by region. You know, obviously in Asia, especially in China, they're going all in on hybrid and full battery electric vehicles. Europe feels strongly about it as well, but maybe lagging a little bit behind China.

North America, I think everyone's gonna be in a holding pattern until we see where the election comes out in the November period of time and consumer acceptance. You know what the consumer issues are, and it's all about affordability right now. It's about range anxiety, and it's about charging infrastructure. Until those issues get fixed, I think it's gonna lag in the US for a period of time, which is gonna impact all of us, which just means we're gonna be making more ICE and EV for a longer period of time, or ICE and hybrid, excuse me, for longer periods of time. So, as I said, I mean, you either grow organically or you grow inorganically, right? We're trying to manage both.

But the organic growth side of things is slowing down, not just for AAM, but just for the industry in general. And so that's why we're also trying to figure out, are there other means for us to grow, both within our current space, meaning auto, or there are adjacent markets that we need to leverage our competencies to exercise. Hopefully, that addresses your question.

Dan Levy (Senior Equity Research Analyst)

Yeah. That's very helpful. Thank you.

David Dauch (Chairman and CEO)

Yep.

Operator (participant)

The next question is from Itay Michaeli with Citi. Please go ahead.

Itay Michaeli (Equity Research Analyst)

Great. Thanks. Good morning, everyone. Just like a couple follow-ups. Could you maybe just quantify the top-line impact from the second half launches you talked about?

Chris May (EVP and CFO)

Yeah, we haven't quantified those specifically, Itay, but you can clearly see that embedded inside of... You know, if you follow, for example, the midpoint of our guidance, if you have a reasonable conversion rate on our sales, if you're comparing first rate or first run rate, half run rate compared to second half, obviously, we'll probably click the step down a little bit to higher contribution margin due to the products that, in terms of weighted from trucks first half versus second half. The balance of that will squeeze out as sort of some of the launch impact that you'll feel in both the third and fourth quarters.

Itay Michaeli (Equity Research Analyst)

That's helpful. Thank you. And then just maybe thinking beyond 2024, how should we think about the effective cash tax rate for the company? And then also, if you just maybe give us a bit of a help on the second half kind of outlook for SG&A.

Chris May (EVP and CFO)

Yeah. SG&A, well, we'll reverse SG&A. We're sort of targeting that 6%-6.5% range. I would expect that to continue in the back half.

I would expect R&D to be, you know, relatively flattish near that $40 million a quarter, which is a key piece of that SG&A as well, that doesn't necessarily flex with sales, so you got to contemplate that. We've not given tax-specific guidance for forward-looking years, but you can see our recent cash tax rates would probably be very similar going forward. Of course, as you become more profitable, you will pay more cash tax. Effective rate in the U.S. is 21%. We've been higher than that, closer to that 45%-50% due to some of our interest deduction limitations. So it's gonna be probably somewhere between that U.S. effective tax rate and sort of the higher rate we're experiencing currently right now, meaning as you get more profitable, those limitations start to roll off.

So it's gonna be somewhere between the two.

Itay Michaeli (Equity Research Analyst)

That's all very helpful. Thank you.

David Dauch (Chairman and CEO)

Thank you, Itay.

Operator (participant)

The next question is from Jake Scholl with BNP. Please go ahead.

Jake Scholl (Equity Research Associate)

Hey, guys, I just wanted to dig in a little bit on profitability. So obviously, the first half has performed pretty well at that 12.8% level, and there's a pretty big falloff in the second half. And I know that in the second half, you know, you're dealing with a combination of lower industry volumes and the Ram and Delta changeovers. So as we look beyond this year, are there any structural reasons why the business can't operate in that 12.5%-13% range? Thank you.

Chris May (EVP and CFO)

Yeah, no, it's a great question, and, you know, it's always difficult to extrapolate a forward-looking full year based on a single quarter, right? Because there's a lot of different dynamics that go inside the quarter, inside our business, whether it's launches or normal seasonality. But I guess what I would encourage you is take a look at our full year guidance that we provide today holistically over 12 months. Obviously, our performance trend continues to be positive. That's with a decent, also volume macro backdrop. And then I would expect performance to continue to drive forward into the years past 2024, and some of these, I'll call it premium costs associated with launches in the back half start to subside.

I think full year, stepping into next year is a good way to think about it, making a couple of those adjustments from what I just described.

Jake Scholl (Equity Research Associate)

Thank you. And then, as the EV, you know, as the overall EV market slows down a little bit, how should we think about the profitability of your EV business? I know you have also the Mercedes-AMG, in addition to the EV programs, but how should we think about that?

Chris May (EVP and CFO)

Yeah, our current EV business is only a couple% of our current revenues today. But as we go and source and secure new business, especially as it relates to electrification, you know, we have certain financial hurdles that we have instituted and are very focused on as we're looking to win that business and secure that for the future. So our goal and our objective is to continue to strive to have a top-performing profile business with our ICE, with our hybrid, and with our EV business.

Operator (participant)

Thank you, gentlemen. Your last question comes from John Murphy with Bank of America. Please go ahead.

John Murphy (Managing Director)

Good morning, guys.

David Dauch (Chairman and CEO)

Good morning, John.

John Murphy (Managing Director)

Good morning. Through your commentary, you know, I mean, you have the GMC EV program. You mentioned the van program later in the decade, and there were some other comments. It just indicates it's kind of an indication that the bidding is going, you know, fairly well to grow the backlog over time. But we're also seeing this extension of ICE programs, right? When I think, you know, when you look at your backlog, you'll net out or roll off, you know, programs that you're exiting or being wound down over time, but some of those may be actually extended. So it just seems like the backlog from a growth basis is getting better and potentially from a net roll-off will get better as some of these ICE programs get extended.

Chris May (EVP and CFO)

How do you think about the backlog potential as we grind into the end of the year and into next year, that it could potentially be significantly higher than it was, you know, at the start of the year?

David Dauch (Chairman and CEO)

You know, John, I mean, you know our normal attrition rate is about $100 million-$200 million on a given year. This year, it's a little bit higher. You know, going forward, I mean, what you're gonna see is our core ICE and hybrid programs are gonna extend further. We don't include that in our backlog. That's part of our base business. So we only, in our backlog, show new and incremental business to the base business that we have. Because of this air pocket going through the industry, I think it's gonna challenge not only us, but other suppliers going forward in regards to that backlog. But we still have a, you know, healthy backlog at $600 million today, and obviously, we'll update that appropriately, at the right time next year.

Chris May (EVP and CFO)

But we're just trying to manage our way through, you know, those issues right now. But if you want to factor in, you know, extensions on core business today, then certainly our backlog would be going up. But it—that's not how we have historically done it. You know, as I said, we only include new and incremental business, you know, to our backlog. I don't know, Chris, if there's anything you want to say, so...

Yeah, no, John, you would see our attrition, you know, as we thought about it before, obviously would, quote, unquote, "slow down," right? Because our programs, as David indicated, will be extended, or also being replaced with additional equivalents going into their next generation of products as well. So that, that's a critical factor to keep in mind.

David Dauch (Chairman and CEO)

Yeah.

John Murphy (Managing Director)

But are you getting actual clarity on that at this point, or is that kind of a little bit of a guessing game, you know, in conjunction with your partners? Are you actually seeing that directly, you know, in current schedules and program changeovers?

David Dauch (Chairman and CEO)

So our schedules on our core business today, John, are very strong and holding there. I mean, obviously, we're going through some launches, so it's impacting a little bit of the volume, especially on the Ram and on the D2, too, as we highlighted earlier, but the balance of our core business is still very strong. It's just a matter of how long, you know, ICE and hybrid are gonna continue to run, which we think will be for long periods of time. And listen, the OEMs are essentially adopting and protecting their ICE business while at the same time making the necessary investments in EV and hedging their bets.

Chris May (EVP and CFO)

And we've said, "Listen, we don't have the deep pocketbook that an OEM has, but, you know, we need to be more selective on where we're placing our investments in EV," and that's exactly what we're doing on certain customers, on certain programs, and investing in certain technology development. And, you know, again, we want to be agnostic to the market, we want to be relevant to the market, and we want to give the OEMs a choice of the propulsion systems that... You know, whatever they need, we want to have something on the shelf to support them.

Yeah, and John, if you look at some of the recent announcements from some of the OEMs, they were not EV-related, which of course certainly supports and grows some of our base internal combustion engine and hybrid business.

John Murphy (Managing Director)

Okay, great. Yeah, just one comment on the cap allocation stuff. I think paying down debt can be very accretive to the equity over time, so, you know, keep that up. Thanks, guys.

David Dauch (Chairman and CEO)

Thanks, John. Appreciate it.

Operator (participant)

That was our final question. This concludes our question-and-answer session. I would like to turn the conference back over to David Lim for any closing remarks.

David Lim (Head of Investor Relations)

Thank you, 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.

Operator (participant)

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