Joining us again. Next up, we have American Axle, which is a leading supplier of driveline components and powertrain technology. I think, you know, despite somebody thinking despite the name, I think you should really think about them more broadly as a powertrain tech company. They're big on a lot of trucks here in North America, but also growing internationally on many vehicles outside of outside of the truck space. You know, they're bringing a lot of solutions to market that I think are also not well appreciated by a lot of investors outside of complicated, I wouldn't say simple, drivetrain components that you actually operate in right now, because they are pretty complex.
I think their pro-product portfolio is going to be expanding a lot more than most folks really appreciate or even understand at the moment. I think the customers themselves are being educated by David and his team about those products. Today, we're very happy to have David Dauch, American Axle's Chairman and CEO, as well as Chris May, Vice President and CFO. Thanks, guys, for joining us. We really look forward to the session. I guess maybe kind of start a little bit... We kind of start these sessions a little bit more mundane in thinking about sort of the near term and volumes.
I guess the first question is, you know, schedules have been volatile and all over the place for the course of the last two to three years. Maybe you could comment on sort of absolute levels and sort of the fulfillment rates or, you know, how these schedules and volatility are shaping up for you here in the near term.
Yeah, sure. If you just go back and look at the last three years of production in the industries, you know, you know, the first two years were roughly 13 million units. Last year was 14.3 million units. You know, this year we're projecting the u-production level to be in that 14.5 million-15.1 million units. We think it takes several years to get back to a 16 million units R. Remember, pre-COVID, we were running at a 17 million units R. You know, there's still some challenges that are out there. Obviously, we've been dealing with a lot of uncertainty in the marketplace, a lot of volatility in our schedules, limited amount of notification as it relates to downtime.
A lot of that, we thought the second half of the year last year was gonna be better than the first half. It turned out to be worse. Some of that has carried into the first half of this year or the first quarter of this year. We've already experienced, you know, 8-10 weeks of downtime at some of our key assembly plants or the key OEM assembly plants that have impacted some of our core business, especially during, you know, the scheduled downtime. The OEMs were really protecting a lot of that truck and SUV and even CUV volumes for the most part, especially the truck and SUV and running a heavier mix. We're seeing some adjustments and have felt that here.
We think that'll continue here in the first half, but we think that'll subside the second half of the year. Chris, I don't know if there's anything else you want to add.
Yeah. As you know, as we exited last year, I think at our first quarter or our year-end earnings call, we talked about volatility seeing similarities between the first quarter and the fourth quarter of last year. I would say since our earnings call, that volatility has continued, as David mentioned, probably a little higher from some of the truck plants we support than we would have expected a few during our earnings call a few months ago.
Yeah. Before it was heavily weighted on semiconductors. Semiconductors are still a problem, but subsiding. It's just really becoming just supply chain challenges across the board, you know, a lot of it driven by labor availability.
Is your OEM labor availability just tweaking their production, then it just comes down to just in time stoppages? Is that still happening?
to me, labor availability is a problem for everyone in the industry, from the OEMs all the way through the tiered ranks.
Yeah.
You know, the OEMs can only schedule their plants based on what they can receive. You're only as good as that weakest link in the supply chain.
Yep.
We're all spending a lot of time just trying to make sure our supply base has the proper capacity and capability and labor availability to support our production needs, so we can support our customer. At the same time, business has changed. It's not going to go back to the pre-COVID days. We got to recognize that labor inflation's here. It's going to be harder to get labor, attract labor. A lot of the people left the workforce. Baby boomers retired. A lot of the childcare, half of the childcare went away during COVID. The services went out of business. Therefore, a lot of the women took themselves out of the workforce as well. It's just a changed market, so we got to adjust and adapt to that.
We're putting a lot more robotics and automation into our factories to address some of those issues.
The smaller suppliers that support you, are you seeing problems in their network as well?
Absolutely.
Yeah.
Absolutely. Where we've had to manage down deep into our supply base.
Deep. Okay.
Yeah. That's the big thing our OEM customers are challenging us with, is making sure that we have supply chain resiliency and transparency. You know, listen, the whole industry got caught by surprise in regards to not understanding what, where, when it came to chips.
Yeah.
There's a lot more focus on where are components coming from all the way down to raw material sources through the value chain up to the OEMs.
One of the other, the other big concerns that the investors and folks in the industry have is that that mix may deteriorate from where it is right now or where it has been. I mean, it's hard to believe it could be much richer than it has been for the past couple of years. I mean, fortunately, if we saw lower volumes, actually mix may improve. We'll, you know, but let's table that for right now 'cause we're all expecting, you know, at least small increases in volumes. I mean, how do you think about mix, particularly for your products? I mean, you know, GM has been protecting, as you said, and so is Chrysler, Stellantis, their trucks and favoring them.
That's been a reasonably good guy for you guys. you know, I think there's some forecasting services that talk about the GMT being down year-over-year, which seems kinda unlikely, at least to us. But, you know, I mean, I'd like to hear your thoughts on that. But generally, mix and maybe even a commentary around the, on the truck volumes direction.
Well, I mean, it's clear that the OEMs ran a heavier mix focused towards trucks and SUVs and crossovers because that's their managing their profit pools. Obviously, anything that was positive in that area was positive for American Axle. When I say positive in that area, trucks, SUVs, and crossovers, right? I still think our market's heavily dominated on that side. 90% of the market is, you know, is suited in that area. Some of the passenger car volumes essentially were cut during the COVID days. Some of that may crawl back, but many of the passenger car programs are being canceled out, right?
Now, when it comes to the mix, as far as the different concentricity of the vehicles or the different trim levels of the vehicle, a lot of cases, our products are agnostic to that because we're undercarriage suppliers, right? What we like is a two-fer, a front axle and a rear axle. There's more content per vehicle for us. In some cases, they'll de-content a vehicle if they can't get a chip. But for the most part, we've been able to sustain, you know, that mix of front axles and rear axles, which has been positive for us and will continue to be positive for us. The biggest thing that we're seeing right now, again, was we saw adjustments because of semiconductor issues. That's starting to wane, as I mentioned to you.
We also are seeing OEMs that are managing their inventory levels, in order to keep transaction prices up and keep incentives down. We're just having to adjust to what the new norm is in regards to the OEM side. Chris, I don't know if anything else you want to add on-
Yeah. Oh, yeah.
...from a mix perspective.
From a mix perspective, John, you talked about, you know, bringing on additional vehicle applications. If you assume flat or increasing volumes over the near to mid-term, I mean, our expectation would be truck volumes continue to remain resilient. When they're adding on additional volume, whether it be additional crossover vehicles, we would accrete obviously additional revenues associated with that, and then our operating leverage will allow us to convert that into a nice contribution margin. We don't see full-sized trucks ceding backwards, right? That would hold, and if they add on some volume, and from their perspective, a different mix, that's actually incremental volume for us.
Mm.
You mentioned incrementals on volume, right? We haven't had a lot of upside in volume.
No, we don't.
...for the last few years. Can you remind us, if we get into this environment, we see maybe 5%, 10% volume increases, how we should think about incremental margins?
I mean, our incremental contribution margin, and we experience this, and you can see this in our year-over-year walks, for the past several years through a lot of different market dynamics, is anywhere from 25%-30% contribution margin. If it's more weighted towards the truck side, it's at the higher end of the range. If it's sort of more broadly focused, you'll see it sort of towards the lower end of that range. Either way, we have a nice operating leverage, and you see that certainly perform on an upside to volume. No question.
Another thing that's been swinging around on us is raw mats. You know, they were kind of up, I think kind of peaked, sort of mid-last year, and now have come, you know, come back in a bit. Can you just remind us, I mean, obviously, steel is a huge one for you.
Mm-hmm.
You know, how your exposures work on raws, particularly on steel.
Yeah. I mean, broadly speaking, we have exposure to, raw mats really from two different venues. One, which would be our sort of mechanical, pass-through elements, which we're under contract with the OEMs. We've seen really an uptick since 2020. We're passing through probably nearly over $300 million worth of increased costs from that perspective. We pass it through roughly 80%-90% of that residual piece. The extent that that seeds down or decreases, that accretes to us from a margin perspective because your sales will be lower and you get a little bit of the profit capture in reverse.
We've seen some of that seed down or come down a little bit in the back half of last year, but I will say the first quarter of this year, we've actually started to see a little bit plateau, but starting to creep back up here through the course of the first quarter. These are published indexes, and you can see a lot of different elements that we buy, whether it be aluminum, scrap, et cetera. The other piece would be just general inflation. From a raw mat perspective, you know, we go out and we procure steel and various different components. We saw some inflation on that last year. From a net perspective, we were impacted about $60 million net of customer recoveries for price increases on raw mats, utilities, and I would call it freight, and a few other different headwinds.
In many cases, that will continue here into this year and through our mechanisms of either negotiated recoveries with customers, whether we have to go back and get additional lump sum elements, or in some cases, we went under contract for one or two years in some of these price increases that we experienced last year. That will continue here with us into 2023.
Another piece of inflation is on the labor side. UAW's got a Master Agreement that's coming up here with GM and Ford and Chrysler, Stellantis. Well, been around for a while. Keep calling it Chrysler, sorry. I mean, as you think about your exposure on labor costs, you do have some UAW contracts that are outside of the Master Agreement here, you know, in the U.S. Can you talk about how those work here in the U.S. and how you're thinking about labor inflation, you know, generally?
When we started our business, we had a Master Agreement 'cause we took over the GM assets, we essentially inherited an OEM contract. We broke that agreement or separated that agreement back in the 2008 calendar period of time. Every one of our plants, we've got 85 facilities around the world, all have a standalone independent agreement. Each of our plants are backed up by another plant, we protect for continuity of supply that way. You know, we don't have any UAW negotiations this year. We purposely got off of the timetable that the OEMs were negotiating to. There's no doubt that labor inflation or wage inflation's here. It's sticky.
You know, part of it is how do you hold on to your existing workforce from a retention standpoint? How do you attract workers? Ultimately, you gotta be at market or above market in order to be able to do that. We're definitely gonna see some increasing costs as we go forward there. Typically, we've been able to offset that through productivity. We'll continue to do that, but we couldn't offset all the economic increases that we were dealing with in inflation plus the labor side of things with productivity, which is why we needed to go back to the customers. You know, clearly the UAW is gonna be looking for, you know, job security, program assignments, as well as wage and benefit increases for the OEMs.
That'll cascade down or trickle down. Yet we're not an OEM, and that's what we remind the UAW is we're a tier one automotive supplier. We have to be market competitive in everything that we do, and labor's one of those functions, just as raw materials and other things are as well. You know, clearly we're gonna have to amp up some of our productivity initiatives knowing that we, you know, labor's scarce and we need to attract more of that. We've got a very good working relationship. Not all of our plants are unionized. Many are to just two party agreements, us and our workforce. Just treat them with respect and give them the tools and resources and training to do their job.
They know how to do things and empower them to do their job. Where we do have, you know, UAW representative facilities or unionized facilities outside the U.S., we've had good working relationships with them. Quite honestly, we've had a good working relationship with the UAW since we went through our major issue in the 2008 period of time.
I mean, as far as tracking labor, you mentioned you had studied before. There were, you know, some shortages in the system. Are you guys running into anything directly at American Axle, or is this stuff that you're dealing with sort of?
We're dealing with some ourselves, directly to ourselves, especially on the west side of the state of Michigan. We're dealing with some issues there, but that whole corridor, it has got some challenges there, but we're offsetting that or we're taking necessary actions to reload different components so that we can protect, you know, keep the amount of business in that facility that we need based on labor force availability and then moving other components out that we can go to places where labor is more abundant.
Is there an opportunity or need to automate more over time?
Yeah. Absolutely. We're doing that now. We saw this coming several years ago, so we've already started that process, which I think we're ahead of the game, but we've still got a lot more work to do in the supply base, quite honestly, there's a lot of work to do there.
In all bases.
That's my biggest concern is just the supply base at tier levels. Are they going to make the necessary investments they need to in order to deal with the shortage of labor?
Yeah. Automation helps with the labor availability, but also drives some of the productivity we would expect.
Yeah
... be a beneficiary of over the next several years.
Is there any outreach in the schools, like trade schools or, you know, 18-year-olds that, you know, maybe would never have thought going to the industry? It just feels like qualified labor in the auto industry is getting thinner and thinner.
Yeah. No, I mean, we're having to develop our own programs a lot internally. Same time, we're partnering with the community colleges, to help both on the hourly side and on the salary side. The type of worker we need is a lot different than the worker we had in the past. The worker in the past was a lot of non-skilled labor in our factories.
Right.
Going forward, especially with the increase in automation, the increase in the technology that's going in, especially as we're transitioning to more software and control type things in our facilities, we need a different technical talent.
Right. Right.
Therefore, we need to develop that. We're doing things, like I said, on our own, but also partnering with local universities, whether they're four year or two year or even the community colleges.
Electrification is a big topic these days. What does it mean, you know, for American Axle? Some people think it's a net negative. Some people think it's a, you know, for an optimist, you think it's a net positive and provides huge opportunities for you over time. What is it really as you think about this and the shift in your change in your strategy, you know, what does it mean for you? What products do you bring to the table? What's the potential, I mean, if we kinda think about it, numbers, content per vehicle that you have on an EV versus an ICE. I mean, you know, how do you kinda think about this holistically?
Yeah. We're super excited about the future, we wanna bring the future faster as it relates to electrification. I mean, a lot of people don't realize, we've been in the electrification business since the 2010 period of time. We did that when we partnered with Saab. We acquired Saab outright as far as that portion of the business in 2012. We've had bookshelf technology since that 2010 period of time. The market, quite honestly, on a global basis, just wasn't really ready for electrification. Now it is. We landed our first production contract in 2015. We launched it in 2017, that being the Jaguar Land Rover I-PACE, where we make the front and the rear axles.
There's roughly $2,500+ of content in that vehicle, so much higher than what we typically enjoy today. Our average content per vehicle on a full-size truck's around, what, $1,600-$1,700. On a crossover vehicle, let's say it's $1,000-$1,200. you know, really, we saw the growth taking place in Europe. It's still gonna take place in Europe. You can see even with all the IHS or S&P reports today, the penetration of EVs is forecast to grow at a much accelerated rate in Europe than it is around the world. China following, you know, closely behind Europe and North America trailing, but moving in the right direction. Our market, our specifically on the trucks and the SUVs weren't really impacted until the last couple of years in regards to that.
We've been developing a whole host of different products. We do not have a complete portfolio yet. We're working on that. That's part of why our R&D expenses have gone up to $35 million-$40 million a quarter right now, with respect to where we are. You know, we've got over 20 programs or customers that we're supporting in the EV space. We're one of the few companies that can support the EV space. We can do it in a component state, so think shafts and gears that go into a vehicle. We can do it into a sub-assembly state, so think like differential assemblies that go into EDUs or e-Beams. We can do that independently, whether we make it or the customer makes it. We can do it in gearboxes.
If they wanted to buy a gearbox from us and mate it with a motor and inverter, we can do that. We can also do the full integrated system, and we can do it both in the EDU state, the electric drive unit, or we can do it in an e-Beam axle state, which is typically what you see in a truck application. We're very excited. I mean, our backlog in new business has grown to $725 million, of which 40% of that's electrification-based. We're quoting $1.5 billion of new and incremental business, of which 75% is electrification-based. We've really positioned ourselves to be a player in electrification going forward. A lot of people think our business is going away with electrification.
What I can tell you guys is the engine will go away, the transmission will go away, you still need a medium to deliver the power to the wheels. That medium that delivers the power to the wheels is the axle. Today, in an ICE environment, it gets the power from the engine. In an EV environment, it gets the power from the battery. The axle content, the axle knowledge, the axle experience that we have weighs heavily on the OEM's mind and just highlights our capabilities in this area. You put that with an advanced product portfolio as we round out our portfolio going forward, we're gonna be a player. We already are a player in ICE. We're gonna be a big player in EV going forward as well. It's just we gotta let time play out.
Yeah, I think it offers us two really compelling areas of growth for our company. One, that David mentioned, was on the content per vehicle side. On a like for like driveline ICE, driveline EV, significantly higher in an EV scenario. Two, I think is probably, I would call it an underappreciated element of our growth with electrification.
If you think about American Axle today, 80%-90% of our business is full size truck crossover vehicle applications and all-wheel drive on the crossover vehicle application. When we move into electrification space, and we're an EDU provider or an e-Beam provider, you're on the full size truck, you're in the all-wheel drive applications, but now you're into front wheel drive space, different vehicle applications, hybrid performance. These are applications we do not have a lot of content on today at all, and that's where you're starting to see us make significant wins in that space. You've heard a lot of our announcements last year. Growth on a CPV basis, but also significant growth with segment expansion to where our products will end up in, which we don't play in today. That's actually, I think, one of the more even compelling areas of growth for us.
That's an important point Chris is bringing up because there's a whole another market, the front wheel drive passenger car market that we don't participate in, which is the majority of the market on a global basis. The OEMs are making a lot of that today in a nice environment with what they call transaxles, which is essentially another form of a transmission to deliver powers. The OEMs are gonna do work in the electrification space, but they're not gonna do all of the work. They don't have the resource to do all the work, and in some cases, they don't have all the experience. That's where we're confident in our partnerships and our relationships with the OEMs, that we'll earn our fair share of the work while at the same time they're gonna do some of this work in-house. We know that.
At the same time, we're already supplying them, those that are making the electric axles today, we're supplying them either components or sub-assemblies or gearboxes to support those electric electrification units.
Maybe just real quickly, I mean, we'll talk of the potential in a second, but maybe we talk about the here and the now. You know, do you sell anything in the Tesla? Maybe you could talk about the AMG GT 63, right? I mean, what you have on the axle there or the e-Beam or however you want it.
Tesla, we've got a future program with Tesla that's, you know, a differential assembly. They make their axles internally.
For now.
For now. As they scale, they've got to decide how much do they wanna do internally versus what do they wanna do on the outside. Again, what we'll do is we'll just, you know, we benchmark the industry. We know what the competitive sources are, we know where our technology is, and we know the benefits that we bring with the technology that we've advanced. When you look at, you know, I talked to you about the Jaguar Land Rover, what we did in Europe initially. Another big program that we just launched last year, and there's multiple variants coming off of that, is this Mercedes-AMG program. It's probably the most complicated product we've ever made. It's probably the most dynamic electric axle or EDU system that's out there.
This isn't a pure BEV, this is a hybrid vehicle, so it still has an engine and transmission, which generates 650 horsepower, but we put another 200 horsepower kilowatts of power behind it. It's an 850 horsepower type vehicle. It's a rocket ship. We integrated all that with them and, you know, brought a lot of the software and controls capability that an OEM has. We brought that capability to them and worked with them on that. It's our design of our axles that ultimately won them over and that we've ultimately integrated into this one vehicle, and now we're integrated into others.
Okay. On the potential side, right? We think about e-Beam. I mean, you've got the axle, right? You've got the electric motor, you've got the inverter, and you've got power electronics largely, right? The main components of that. What would the content potential be on that? Maybe if we think about sort of full size truck or large SUV, versus what you're doing right now. I mean, you said $2,500 on the I-PACE, but I would imagine if you're doing an e-Beam, you know, it might be a lot higher than $2,500.
Significantly higher.
Significantly higher. All right. The content is $1,600-$1,700 right now. How much of that is done in-house? How much of this is you being sort of a great packager and integrator of this, and how should we think about sort of, you know, margins and returns on that kind of a product versus your existing core axle technology?
Yeah. From a content per vehicle, as I mentioned, significantly higher, right? From a margin profile, look, our goal is to continue to drive and win new business replicating or continuing to be a top-tier margin performer in our space as we pivot into electrification. We see a lot of value add through the stream, especially on an e-Beam axle space. If you think about it today from an internal combustion engine, you know, we do significant amount of content vertically integrated into an e-Beam axle or a traditional beam axle. As we move into the e-Beam space, a lot of that content remains the beaming structure of the axle, a lot of the gear sets, a lot of the h-housings and integration that we'll do.
Obviously, we'll coordinate motor and inverter or power electronics with the OEM and their requirements, but there's certainly some different opportunities we can do to fulfill that need inside of the e-Beam axle as well. It's a great opportunity for the company.
Yeah. I mean, historically, we have not made motors and inverters, but we're developing a competency and capability in that area. We have partners that we work with today in the motor and inverter space that allow us to be competitive. In some cases, the OEMs wanna designate who that motor or that inverter supplier is gonna be. In some cases, it's them themselves. We've designed our systems to be flexible and interchangeable between what a customer may wanna do themselves with us, what they may want through us through a directed buy or a line partner they want us to work with. At the same time, we wanna control as much of the vertical integration as we can, but it's gonna take us time to grow into that capability.
We've developed a tremendous competency in motors and inverters. In the interim, as we grow into that competency, as far as making the full assembly, there's a number of components that we can make that go into a motor or go into an inverter, but especially a motor. We're looking at how we can participate in part of that value chain as well.
I had a question strategically. Many of these EV companies are brand-new, and they have a white sheet of paper, and they could choose if they wanna design an axle in-house or go externally. What's your value proposition when you reach out to a new company that's, you know, developing a car for the first time and making a decision, do we wanna be internal or external? 'Cause I think that the investors
Feel that your content will be very high on EV axle, but they worry about that decision for these new companies to take it in-house. How do you sell your idea as service?
A lot of the new companies, new startup companies, can't afford to bring all the.
Right
-systems in-house. They're fighting for their own survival today. With money not being free anymore, they're really fighting for their survival. As those have gone from the R&D stage to the launch stage, they're burning through cash a whole lot quicker, okay?
Oh, yeah.
Companies like us can help relieve them of some of that cash burn by bringing advanced technology to the table that's proven with tremendous experience and knowledge for well over 100 years when you date back to the amount of time we spent at GM plus our own almost 30 years.
Yeah
as an independent company. Our value proposition is the fact that we really focus on doing more with less, what we call power density, okay? What's the biggest cost of an electric vehicle going forward? The batteries.
Batteries.
What do you need to do to drive the battery cost down? You got to drive efficiency. What do you got to do to drive efficiency? You got to lower mass and content in the vehicle.
Weight.
Which our systems we've designed where we have two-in-one systems where you put the gearbox and the motor together that are integrated. Several people can do that, but we really know how to do that. The other stage is, you know, right now, a lot of the systems, the inverter is bolted onto the axle or bolted in the vehicle but connected to the axle through cables. We've designed a system that integrates all three of those in the same packaging space, essentially as a two-in-one type system. Think of all the mass we can take out. Think of all the mating component parts that we can take out, and the, and the cost benefit that goes with that. The other part is we're very strong on gearing, and we're very strong on what they call Noise, Vibration, and Harshness or NVH or sound management.
Those are our strengths. When you take an engine and transmission out of a vehicle which generate a lot of noise, the noise is gonna, you know, most likely transfer to the axle or to the tires.
Right.
With our gearing experience, I mean, We've picked up a lot of business because of our ability to solve OEM problems or other supplier problems in the, in that gear and NVH area. And because of that's led to other EDU and e-Beam opportunities.
Makes sense.
We've made a lot of announcements over the last year.
Yeah.
We've picked up on the, what you call the startups, if you will. In India, we picked up two big e-Beam application wins, neon components, Volvo, you know, our work with REE.
Yeah.
I mean, They're seeing traction in that area.
That's great. Thank you.
One of the things that we've seen as new programs launch around, you know, EVs and AVs in the industry is that as they're launching, there's sometimes surprise CapEx and R&D dollars as you're kinda going through the launches. You guys haven't seemed to hit those yet. You know, how do you manage that? I mean, and how do you think about sort of leveraging your existing assets, so you're not all of a sudden putting new capacity into place and running into these issues of, oh, my god, we're launching a new contract, and it's actually not working exactly how we thought 'cause we're building on you know, new machines and new tooling.
You know, how do you, how do you prep for this and get ready so we don't see some of these surprises?
You wanna go first or you want...
You can go first.
Okay. All right. Well, listen, that's one of the core competencies of us is our operational excellence and our ability to manage, you know, CapEx. You guys have seen the last several years our CapEx has come down dramatically. You know, when we were rebuilding this company, when my father first took it over, we were spending 8%-12% in CapEx. Historically, we settled in in that 4%-6% range. When we bought MPG, we bumped up to that 6%-8% range, but with a commitment to get down to under 5%. The last several years, we've operated, you know, in that 3.5%-4% range. That's where we think we'll be again this year. We did say that going forward that our CapEx may crawl up to approximately 5%.
There may be some years that it may be above that, but that's a good thing. That means we've got book business that we need to support. What we're gonna do, though, is we're gonna leverage as much of our e-existing infrastructure, design products that can leverage that e-existing infrastructure. But there's no doubt there's certain areas that we're gonna have to invest new just because of the technology difference. But we'll do our best to manage that and then spread that load over a period of time. We've been launching electrification programs the last several years within that 3.5%-4%. We've got a proven capability and a proven model how to launch electric vehicles. Now, you know, You know, the volumes are much lower.
If you get into a big full-size truck program and the volumes are much higher, then that CapEx could be, you know, a little bit more than what we've experienced here recently. Again, remember what Chris said is all the parts that, you know, essentially make up a beam axle, everything from the center section, what we call an EDU or like a pumpkin, everything out is carryover from an ICE vehicle, you know, to an EV. The tubes, the shafts, all, you know, all those types of things. It's really the center section that's changing. The carriers get bigger because you're putting more horsepower and torque through it. The case has got to get bigger because you're putting more horsepower and torque through it. The biggest issue is integrating the motor and the inverter into the product.
There's gonna be some investment that we'll do, but there'll also be investment that we're gonna ask our supplier partners to do as well to be able to support that business to balance our CapEx needs going forward.
Yeah, look, discipline on CapEx is key. Optimizing the existing fixed assets we have inside the company are key. You know, as David mentioned, as we begin and continue to launch new programs, our goal is to continue to be very disciplined in this area. If you get a compressed year or two, as David mentioned, where you have an elevated CapEx, it's because we're launching a lot of new programs, which is great. From an R&D perspective, you know, we've been spending over the last couple of years more higher elevated levels.
We talked about when we step into 2023, we'll continue to be at the higher end of from an R&D perspective as we're building out our product portfolio, as we have a lot of interest in some of these next, call it next generation of our product, as well as some of the customer, long-range plans as well to support those. I would expect that to continue this year and in the next.
One thing I wanna highlight is.
We've secured a lot of our next generation ICE business. A lot of that CapEx is gonna be a more of a maintenance CapEx versus a growth CapEx for ICE. That growth CapEx will be coming in the form of EV side. On the R&D side, our portfolio is in place for ICE and hybrid vehicles. We're adding to our portfolio for electrification. We're gonna spend that for a period of time. Once we get our portfolio and our platform developed, we can start seeing some of that R&D expense come down. The only reason it might stay elevated would be if we booked enough program that now we're in a launch mode that we need a certain amount of engineering support in order to bring it up to production.
When we looked at your tech day back at CES, and we saw the integrated inverter and electric motor, the way you guys package it, I haven't seen anything nearly that tight at all. Seems very, very impressive. If you think about that, you know, the inverter and the electric motor is something that you're sourcing at the moment.
Correct.
If you think about, you know, going forward on becoming bigger in e-Beam axles, is the inverter or the electric motor or power electronics or other technical capabilities, the kinda thing that you might look at acquiring or developing in-house? I mean, could, you know, the make versus buy decision here, I mean, how is that developing as you're bringing this new technology to market?
I mean, clearly one of the strengths of our company today on the ICE side of the business is our vertical integration capabilities. We'd like to have a similar vertical integration capability on EV. We're also realists that we're not experts in motors and inverters today, but we've hired a lot of people and gained a lot of knowledge, and we're developing a lot of knowledge with respect to the prototypes and the other products we've developed. We clearly wanna expand into motors inverters, and we formed a partnership with Inovance out of China to help us support the China market and better understand that. We've grown with them with multiple customers in China, as we're supporting what I wanna call the value brand.
In Europe, we've partnered with, you know, different companies there that's more technology-based, that was directed more by the customer. That's why I said it's really gonna be based on what the customer needs are, but we wanna make sure that we can offer a portfolio that's complete, including motors and inverters in the future. With our unique and innovative and award-winning inverter technology, there's no doubt that we can make that. No one's making anything like that today. It's, it's leapfrog technology what's in the marketplace today.
So-
To be competitive in those areas, you need a certain amount of scale from a buying power standpoint. That's why it's gonna be important that we have partners for a period of time, or be willing to acquire those partners or form some sort of strategic relationship or partnership that we tie them up where we're collectively together, we can mutually benefit in a relationship.
Got it. I've got a couple more questions, but do we have any questions in the, in the audience? Okay, there's one over here. Sorry, the mic's over there.
Yep.
Thanks for the presentation. Axle's done a pretty good job of consistently deleveraging, both by growing EBITDA and then, more importantly, just by paying down total debt. With the kind of production environment we've been in, lots of stop/start, lots of cost inflation, in terms of deleveraging, where it sits in the capital allocation priority, if you could remind us. Is there a pathway, given that, as you said, money is no longer free towards higher ratings? If you could elaborate on that'd be great. Thanks.
From a capital allocation perspective, I think, you know, we've articulated this now over the last probably three to five years and been quite consistent with our messaging on this. I don't see that changing anywhere in the near term. We're gonna continue to focus on funding our organic growth, which is CapEx and R&D. After that, our primary use of our cash flow generation has been to pay down gross debt. We've been paying down gross debt every year since 2017. That includes, you know, during the years of COVID, during last year's volatility, during semiconductor's volatility. I would expect that to continue into this year. We'll continue to pay down gross debt from our cash flow generation.
After that, obviously, we've looked at some smaller tactical M&A activity over the past couple of years, and we've taken action where it made sense to do that from our perspective. That's still obviously a very viable option for us. Those first two of organic growth and R&D investments and then continuing to pay down gross debt. You ask about the rating perspective. Look, obviously, that's up to the agencies to assess their ratings of us, but we've been very consistent with them in the same messaging that we're consistent with you. I think that carries some weight with them in terms of our commitment to paying debt down, and they see that. It's up to them on the rating piece. We'll continue to drive to strengthen our balance sheet. That's our primary goal.
Chris, you ended the year with, I think, net leverage was 3.2.
Mm-hmm.
Where do you think the sweet spot is for your leverage?
Look, I mean, ideally, we'd like to get it so, you know, a little more towards industry average, so that's another full turn down or so. That's gonna take some time, and it's really gonna be an EBITDA perspective. Once volumes lift back up here, whenever you pick the year that that happens and your EBITDA grows, that leverage will turn very quick. We continue to wanna chip away at that gross debt, and we continue to do that even inside of the movements of our EBITDA leverage cycle.
Great. Thank you.
I got one last one I want to sneak in here. You know, as EVs grow, people think ICE shrinks. But in your product portfolio, your, you know, your EV seems like it'll be largely additive, and we won't see a shrinkage in your, in your core product. You know, as you think out to 2025+, and you're looking at the schedules, or sort of the projections you're getting from your customers as you're bidding on sort of next gen, you know, truck products as well as this growing EV portfolio over time, I mean, how do you think about sort of that core? Do you think it shrinks or it is maintained as sort of these new products grow on top of it?
These new products, cannibalizing some of the core products. I mean, something that, you know, you could use an example like the Silverado and Sierra EV versus the ICE version or something like that or, you know, however you wanna talk about it.
Yeah, I mean, just step back and look at where the EV market has penetrated first. I mean, they first went to the luxury market, right? Because there's an affluent buyer there can afford differentiation, can afford the prices there. The average price of an electric vehicle today is $66,000. Most consumers can't afford to buy a $66,000 vehicle. Some of them are well over $100,000, a little bit below $50,000, but not in that $30,000-$50,000 range, which is where the mass market is. Then think, where are they because of battery technology? They're in the, in the passenger car side of the business because of range, they can support that level as to what needs to be done there.
What's funding all this movement to electrification is the current ICE business, heavily weighted on trucks and CUVs. You know, GM's already come out and said they're gonna have an EV offering for every vehicle model that they're gonna put out there. They'll have it both for ICE and EV. Now they're gonna let the market decide which way they're gonna go. What's paying for all that? All their full-size trucks pays the majority of the bills as well as their crossover vehicles. You know, the one thing you gotta keep in mind too is the OEMs have to be able to make the same type of returns that they're making on the ICE vehicles on the EVs. Otherwise, is it really a good business decision to move in that direction? Yes, it's environmentally friendly to do that.
Ultimately, they, you know, they get paid to make a profit and provide a return to their shareholders, no different than we do as a public company. I think that, you know, on the EV side, you got the front end issues of the challenges of grid capability, charging station capability, raw material availability. Raw materials were coming down, cost per kilowatt. Now they're going back up because of economic issues. Those raw materials are coming from, you know, challenged areas, China, you know, Russia and the Congo. We understand that. I do think battery technology will continue to improve. I do think battery costs will get in line with fuel. The big concern I still have is on the back end, is the affordability with the consumer. Can they afford to buy an electric vehicle?
Is it compatible for them to live their life, meaning that there's regular charging stations or a grid that's available to support them. The other part, like I said, is the OEM's gotta be able to make money at it, okay. I personally think, and our company thinks that EVs are here. We're very supportive of the technology, but we're also realistic in regards to what we think the adoption rate is gonna be, especially here in North America. In Europe, it's going very fast because the governments are mandating that it's gonna go very fast. If the government's mandate it to go fast here, we're gonna be prepared. We have a scenario that says it goes faster, stays the same as what IHS is projecting and something slower than that. We have to...
Our job is to be agnostic to the market and provide a portfolio that allows the consumer to decide what vehicles they want or the OEMs decide whether they wanna build. The market and the customer are the boss to us, and we have to respond accordingly, as does any other supplier. If they tell you differently, they're kidding you and kidding themselves.
Great. With that, thank you very much for joining us, guys. We really, really appreciate the time.
Thank you, John.
That was great.
Thank you.
Thank you, everybody.
Really enjoyed it. Thanks, John.
Thanks so much.
Thank you.
Thank you.