American Axle & Manufacturing Holdings Inc (AXL) 2013 Q1 法說會逐字稿

Good morning.

My name is Kirk, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the American Axle & Manufacturing first-quarter 2013 earnings conference call.

(Operator Instructions).

As a reminder, today's call is being recorded.

I would now like to turn the call over to Ms. Liz Ventimiglia, Manager of Investor Relations.

Please go ahead, Ms. Ventimiglia.

Thank you, and good morning, everyone.

I would like to welcome everyone who is joining us on AAM's first quarter of 2013 earnings call.

Earlier this morning we released our first quarter of 2013 earnings announcement.

You can access this announcement on the aam.com website or through the PR newswire services.

To listen to a replay of this call, you can dial 1-855-859-2056, reservation number 32371382.

This replay will be available beginning at noon today through 5 PM Eastern Time, May 10.

Before we begin, I would like to remind everyone at 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 and from those discussed.

For additional information we ask that you to refer to our filings with the Securities and Exchange Commission.

Also, during this call we may refer to certain non-GAAP financial measures.

Information regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website.

During the quarter we will participate in the following conferences -- the Barclays 2013 High Yield and Syndicated Loan Conference in Chicago on May 21, the KeyBanc 2013 Automotive and Industrial Conference in Boston on May 29, and the Deutsche Bank Industrial Conference in Chicago on June 13.

In addition, we are always happy to host investors at any of our facilities.

Please feel free to contact myself or Chris Son to schedule a visit.

With that, let me turn things over to AAM's President and Chief Executive Officer, David Dauch.

Thank you, Liz, and good morning, everyone.

Thank you for joining us today to discuss AAM's financial results for the first quarter of 2013.

Joining me on the call today are Mike Simonte, our Executive Vice President and Chief Financial Officer; and John Bellanti, AAM's Executive Vice President of Worldwide Operations.

To begin my comments today, I will provide some highlights of AAM's first quarter of 2013 results.

I will also review the status of AAM's key business initiatives before turning things over to Mike.

After that, we will open up the call for any questions you may have.

Today AAM is reporting solid financial results in the first quarter of 2013, with continued sales growth and improved earnings performance.

Let me briefly cover a few key points from our first-quarter financial highlights.

First, for the first quarter 2013, AAM's sales were approximately $756 million.

This marks AAM's 13th consecutive quarter of year-over-year sales growth.

Second, non-GM sales were $188.1 million.

Including the impact of our [Jefe] joint venture, non-GM sales were approximately 30% of total sales for the first quarter of 2013.

Third, net income was $7.3 million and earnings per share was $0.10 per share in the first quarter of 2013.

AAM's quarterly results reflect the impact of $11.3 million or $0.13 per share of debt refinancing and redemption costs.

Fourth, AAM's profitability in the first quarter of 2013 improved significantly on a sequential basis.

Adjusted EBITDA increased 34% sequentially to $86.6 million in the first quarter of 2013, or 11.5% of sales.

And finally, in the first quarter of 2013 we took another major step in improving AAM's balance sheet strength.

The debt refinancing activities successfully completed in the quarter were highlighted by the issuance of $400 million of 6.25% of senior notes due in 2021.

This supports AAM's future operational and financial flexibility and improves our capital structure.

Mike will cover more details of our first-quarter 2013 financial results later in the call.

Let me shift gears and update you on AAM's continued progress on our Aligned Business Strategy, which is designed to build value for our key stakeholders.

This strategy emphasizes AAM's commitment to leadership in the areas of quality, operational excellence, and technology leadership.

First, AAM is delivering quality.

We are keenly focused on maintaining AAM's high quality standards.

This is a foundation of AAM's world-class delivery, warranty, durability, and reliability of performance.

Over the past 10 years, AAM has operated at an average of less than 10 discrepant parts per million.

This is an industry-leading quality performance.

In the first quarter of 2013 AAM was operating at Six Sigma levels, which is defined as operating below 3.4 discrepant parts per million.

At AAM we strive to produce quality products every day.

This is a foundational principle that drives our associates to provide exceptional service and value to our customers.

We stand for and consistently deliver industry-leading quality.

It is what helps AAM attract new business partners and keeps our existing customers coming back for more.

Second, AAM is delivering improved operational performance globally.

AAM's financial results in the first quarter of 2013 reflect our commitment to deliver improved profitability and launch performance globally.

The launch performance issues that impacted AAM's Guanajuato, Mexico, operations in the second half of 2012 were substantially resolved by year end in 2012, as we committed to.

Our operations in Brazil posted improved results sequentially, and we expect this trend to continue throughout this year in 2013.

While we continue to take actions to improve our operating and financial performance, we are focused on preparing for flawless and [anonymous] launches in 2013.

We are supporting several major product, process, and facility launches in 2013.

The most significant of these are as follows.

First, GM's next generation full-size pickup truck and SUV program, otherwise known as the K2XX.

Second, both the 2014 model year RAM Heavy Duty pickup trucks; and third, AAM's EcoTrac disconnecting all-wheel-drive system; and finally, a major capacity increase program for GM's global midsized truck program in Thailand.

We are prepared, excited, and focused to execute these launches successfully in 2013.

Third, AAM is delivering on our technology leadership.

AAM's continuing focus on technology innovation helps our business to be vibrant.

The addition of new products and ideals which respond to the rising requirements of the global automotive industry is the primary reason for our optimism for future growth.

As global OEMs race to meet tighter fuel emission standards, the automotive industry has entered into a new advanced phase of innovation and design.

This encompasses independent drive vehicles, hybrid, and electric vehicles; advanced powertrain applications; and other equally sophisticated technologies.

AAM is meeting these challenges head-on, with an aggressive plan to increase investment in new technology, including product, process, and systems, as we have always done.

This plan is designed to supply manufacturers with products that address these new and emerging market demands.

In support of these efforts, AAM's R&D spending in the first quarter of 2013 was $28.5 million.

AAM's R&D spending is increasingly focused on the development of innovative solutions to assist our customers to meet the market demands for higher fuel efficiency; lower emissions; enhanced power density; and improved vehicle performance, which includes safety, ride, and handling performance.

AAM continues to invest in many new and innovative products focused on the most important industry trends and design drivers.

Some of these investments include enhancing fuel efficiency and meeting market demands for lower emissions.

This includes many axle efficiency improvements and is especially evident in AAM's leading rear-drive module capability.

These new axles are delivering significant efficiency gains for our customers.

We are also improving our torque capacity through power density.

Torque capacity improvements are necessary to enable the OEMs to achieve improved fuel efficiency and reduce the emission requirements without sacrificing torque and towing capabilities.

We are also reducing noise, vibration, and harshness characteristics within a vehicle.

AAM's NVH performance is constantly improving.

As a full-service systems integrator, AAM has a full range of NVH capabilities on a global basis, including full vehicle validation capability for a complete range of drive lines to meet the market demands for reduced NVH.

AAM has unique and valuable capabilities in this critical engineering discipline.

We are also offering unique and industry-leading technologies in the industry through our EcoTrac disconnecting all-wheel drive system, which enables vehicle manufacturers to offer fuel-efficient, environmentally friendly options to provide safety, ride, and handling performance on all-wheel drive systems for passenger cars and crossover vehicles.

AAM's EcoTrac disconnecting all-wheel drive system is an industry first.

This is a great example of how AAM is using innovation to strengthen our position as a product, process, and systems technology leader.

AAM will be launching our EcoTrac disconnecting all-wheel drive system on a global passenger car program for a major global OEM later this year.

We are very, very excited about this new product and launch.

We are also advancing the development of electric drive applications.

In this area of product development, we continue to leverage our wholly-owned subsidiary, e-AAM Driveline Systems, in Trollhattan, Sweden.

This technology is designed to improve fuel efficiency and significantly reduce CO2 emissions.

This is done while enhancing vehicle stability through the use of proprietary torque factoring attributes.

As we have commented, we have been very close to commercializing this technology and recently have done such, and we are very proud of what we have accomplished here.

And now my last item.

AAM is delivering diversification and solid profitability.

A key driver in our growth is our new business backlog and quoting opportunities that continue to leverage our innovative and advanced technology across the driveline products to meet the rapidly-changing needs of the global automotive marketplace.

As we said before, our new business backlogs stand at $1.25 billion for the three-year period covering 2013 through 2015.

And that cadence is 400 million in 2013; 550 million in 2014; and 300 million in 2015, as we have communicated before.

The new business awards included in this backlog helped drive our CAGR, or Compounded Annual Growth Rate, to over 10% for the period 2013 through 2015.

This is more than double the rate of the industry growth expected over this period of time.

In addition to this booked business, AAM is working on new and emerging business opportunities that are principally for non-GM programs.

This should help drive further business diversification as we convert many of these opportunities into booked business and target parity between GM and non-GM sales by the 2015 period of time.

AAM's improved financial performance is a critical element of our plans to reduce leverage, strengthen our balance sheet, and increase stockholder value.

We are on track to achieve these objectives and improve our financial strength.

Before I turn it over to Mike, let me wrap it up by making a few closing remarks about AAM's 2013 and beyond outlook.

Our outlook is based on the assumption that the US light vehicle sales will be approximately 15 million units for the full year of 2013.

Based on this industry sales assumption and the anticipated launch timing of AAM's backlog of new business, we are targeting AAM's full-year 2013 sales to approximate $3.25 billion.

In the first half of 2013 AAM has targeted adjusted EBITDA as a percentage of sales in the range of 11% to 12%.

For the full year 2013, we are targeting adjusted EBITDA margin to range from 13% to 13.5% of sales.

As we look further, AAM is targeting full-year sales to exceed over $4 billion and EBITDA performance of over $500 million in the 2015 period of time.

This sales and EBITDA target are based on the anticipated launch schedule of programs in AAM's new and incremental business backlog.

Our first-quarter performance indicates that AAM is on track to achieving its outlook and goals.

That concludes my comments for this morning.

I thank everyone for your attention today and your vital interest and continued support in AAM.

Let me now turn the call over to our Executive Vice President and Chief Financial Officer, Mike Simonte.

Mike?

Thank you, David, and good morning, everybody.

David covered the highlights of our first-quarter 2013 financial results, so I will get right into the details and start that discussion with sales.

Net sales in the first quarter of 2013 were $755.6 million.

That is up slightly versus the $751.5 million in the first quarter of 2012.

When analyzing this year-over-year variance, keep in mind that the first quarter of 2012 benefited from an usually high GMT900 build.

In addition, sales for the RAM Heavy Duty program were lower in the first quarter of 2013 as compared to the prior year, primarily due to the launch timing of the new 2013.5 model year program -- of course, the precursor to the later launch this year of the 2014 model year RAM Heavy Duty series pickup trucks.

In total, sales for the major North American light truck programs we support for GM and Chrysler were off by almost $50 million on a year-over-year basis.

For the remaining three quarters of 2013, we expect strong sales gains from these programs as compared to the calendar year 2012 quarters.

In the first quarter of 2013, AAM's sales were adversely impacted by the labor strike occurring at General Motors Rayong, Thailand, assembly facility.

We estimate that lost sales in the quarter from this disruption were approximately $12.5 million.

We had previously disclosed this could be as much as $15 million.

However, sales in the last week of the quarter were stronger than we expected, as GM began the process of increasing production in that facility.

AAM's content per vehicle in the first quarter of 2013 was $1,504.

Similar to the trend in total sales, we expect this critical metric to increase during the rest of the year, primarily due to additional content we are providing to GM and Chrysler on their next-generation truck programs.

Okay, let's move now to our profitability.

Gross profit in the first quarter of 2013 was $104.3 million, or 13.8% of sales.

Operating income was $44.7 million, or 5.9% of sales.

Net income was $7.3 million.

Diluted EPS was $0.10 per share.

GAAP-derived EBITDA was $75.3 million or 10% of sales in the first quarter of 2013.

All these key profitability metrics, with the exception of operating income, were adversely impacted by debt refinancing and redemption costs of $11.3 million or $0.13 per share that we incurred in the quarter.

Excluding the impact of the debt refinancing and redemption costs, AAM's adjusted EBITDA in the first quarter of 2013 was $86.6 million or 11.5% of sales.

Adjusted net income, again, adjusting for the impact of the debt refinancing and redemption costs, was $17.2 million, or $0.23 per share.

Although our adjusted EBITDA margin was lower than our results in the first quarter of 2012, and also lower as compared to our full-year expectations for the calendar year 2013, the first quarter was 270 basis points better than the fourth quarter of 2012 and right in line with our guidance for the first half of 2013.

From our perspective, AAM is off to a good start in 2013.

Let me now anticipate some questions about the details of our sequential profit performance.

As we have previously discussed, there are three major puts and takes for our 2013 profit performance expectations as compared to the second half of 2012.

These are -- number one, sales mix, which we expect to improve in 2013; it certainly did in the first quarter.

Production performance, which is improving in 2013 -- that's our performance that we control.

And third, launch preparation costs, which we said and continue to indicate will increase early in the year but should be much lower as we end the year.

In the first quarter of 2013 sales mix improved as compared to the fourth quarter of 2012, driven primarily by a significant increase in GMT900 production volumes.

In the first quarter of 2013 our shipments supporting the GMT900 program were up approximately 35,000 vehicle units on a sequential basis.

Again, what I am specifically saying is as compared to the fourth quarter of 2012.

Although this was partially offset by lower RAM Heavy Duty program production, the improved sales mix accounted for more than half of the EBITDA margin improvement in the quarter.

We estimate approximately 175 basis points of positive margin impact.

One last comment on volume and mix.

We already mentioned that our profit performance in the quarter was adversely impacted by the lost sales resulting from the labor strike at GM's Rayong, Thailand, assembly facility.

We estimate the profit impact associated with this disruption to be approximately $3 million.

This partially offset the gain in sales mix.

As to AAM's production performance in the first quarter of 2013, we expected to make improvements, and we did.

Premium freight was cut by 75% on a sequential basis to approximately $2.5 million in the quarter.

While we did not achieve profitability in Brazil, we managed to significantly improve our results in this critical region.

In total, we estimate that improved production performance increased our EBITDA margin performance by approximately 250 basis points in the quarter.

The third and major final major category of cost drivers affecting AAM's sequential profit performance are launch preparation costs.

Now, on our year-end earnings teleconference, we said that we expect launch preparation costs to increase in the first half of 2013 before being significantly reduced in the second half of the year.

And to be clear, when we say launch preparation costs, we are commenting on the following types of costs -- project expense, which includes the non-capitalizable portion of constructing facilities and installing machinery and equipment.

Project expense also includes process validation expenses, runoff, PPAP, and related costs.

The second area of launch preparation costs are product validation costs, which is the work we do to make sure our product performs as designed.

These are typically included in R&D expense.

And third, start-up expenses incurred by our manufacturing facilities.

To make a long sorry short, the primary driver here are the people that we hire weeks ahead of actual start of production, so that they can be properly trained and we can hit the ground running at the start of regular production.

In the first quarter of 2013, AAM incurred higher project expense as compared to the fourth quarter of 2012.

We also incurred higher start-up expenses, and these expenses were significantly centered at our Three Rivers manufacturing facility, which is preparing to launch AAM's industry-first EcoTrac disconnecting all-wheel drive system.

These costs were partially offset by lower product validation costs, which in some cases were deferred to the second and third quarters due to changes in customer timing.

We had an opportunity to reduce spending for a time, and we took it.

In total, the headwinds associated with launch preparation costs in the first quarter of 2013 affected AAM's profit performance by almost $10 million.

This translates to about 115 basis points of EBITDA margin.

So this helps to explain the improvement in our EBITDA margin performance -- stronger mix, better performance, higher launch preparation costs.

Okay, before reviewing our cash flow results, let me quickly cover SG&A, interest, and taxes.

I will start with SG&A.

In the first quarter of 2013, SG&A -- of course, including R&D -- was approximately $59.6 million or 7.9% of sales.

This compares to 8.2% of sales in the first quarter of 2012 and 8.9% in the fourth quarter of 2012.

AAM's R&D spending in the first quarter of 2013 decreased approximately $1.6 million on a year-over-year basis to $28.5 million.

This was the primary driver of our lower SG&A spending versus the prior year.

On a sequential basis, R&D spending was down approximately $4.6 million in the first quarter of 2013.

And again, the timing of certain customer validation and prototype requirements drove our R&D spending down slightly in the quarter as compared to the fourth quarter of 2012.

Net interest expense in the first quarter of 2013 was $29 million.

This was up approximately $5.3 million versus the first quarter of 2012.

Higher outstanding borrowings is the primary reason why interest expense is up on a year-over-year basis.

And recall that a significant portion of this increase in our higher outstanding borrowings is due to the elective pension funding that we made in calendar year 2012.

Interest expense is up; pension expense is down.

And finally, taxes.

In the first quarter of 2013 our tax provision was a benefit of approximately $2.4 million.

This benefit provision resulted from two discrete tax adjustments we were required to record in the quarter under GAAP.

Both of these adjustments were favorable.

The first adjustment related to the expiration of the statute of limitations on a potential tax liability in a foreign jurisdiction.

The second tax adjustment related to an election we made on a foreign tax return associated with exchange gains and losses -- foreign exchange gains and losses.

Here is the bottom line on taxes.

We expect our effective tax rate for the full year of 2013 to be in the range of 15% to 20%.

That is absolutely consistent with the expectations that we have laid out for you previously.

If you were to adjust our first-quarter results to normalize our rate for the quarter to be equal to the projected tax rate for the full year 2013, our tax provision for the quarter would be approximately $700,000.

This would reduce our first-quarter net income by approximately $3.1 million or $0.04 per share.

So you can make that adjustment to really look at what we did on more of a run-rate basis in terms of our P&L performance for the first quarter of 2013.

That's all I have to say about taxes right now.

If you have further questions, please ask in the Q&A period.

We'd be happy to address those.

Let's move on to cash flow.

We define free cash flow to be net cash provided by or used in operating activities, less capital expenditures, net of the proceeds received from the sale of equipment and the sale and leaseback of equipment newly purchased.

Net cash used in operating activities in the first quarter of 2013 was $26.8 million.

Capital spending, net of the proceeds from the sale of equipment and the sale leaseback of equipment, was approximately $43.9 million in the first quarter of 2013.

Reflecting this operating activity and capital spending, AAM's free cash flow in the first quarter of 2013 was a use of approximately $70.7 million.

$70.7 million.

It is not unusual for our Company or other automotive suppliers to use cash in the first quarter.

Seasonal working capital trends often drive this type of result.

Sales in March are much higher than they are in November and December; receivables are up; payables partly offsets that, but our inventory is up as well, as we are dealing with much higher levels of business activity at the end of the first quarter as compared to the end of the fourth quarter.

Our cash flow results in the first quarter of 2013 were also adversely impacted by debt refinancing activity we have already discussed.

This was approximately $8.7 million of cash outlay in the first quarter for tender premiums and other costs related to the redemption of the 7.875% notes that we refinanced in the quarter.

Okay?

So let me now cover a couple of quick hitters on the balance sheet.

EBITDA leverage -- this is the ratio of net debt to EBITDA, of course, EBITDA on a last 12 months basis, was approximately 4.5 times at the end of the first quarter of 2013.

And this was on an adjusted basis.

AAM's EBIT coverage, or the ratio of adjusted EBIT to interest expense, again on a last 12 months basis, was approximately 1.6 times at the end of the first quarter.

Both of these credit metrics, again, are calculated on an LTM basis.

As to liquidity, AAM ended the first quarter of 2013 with total available liquidity of approximately $457 million.

This consists of available cash and borrowing capacity on our global credit facilities.

Before we start the Q&A, I will close my comments by discussing briefly here our 2013 outlook.

David already covered some of the basics, so let me just say this regarding our 2013 outlook.

We are targeting AAM sales to grow more than 11% on a year-over-year basis to approximately $3.25 billion.

As compared to the second half of 2012, we are targeting to significantly improve our profit performance.

For the full-year 2013, we are targeting an adjusted EBITDA margin in the range of 13% to 13.5%.

In the first half of the year, as we have indicated, we expect our adjusted EBITDA margin performance to be approximately 11% to 12%.

This is true primarily because we are incurring high launch preparation costs, as we've already said, in the first half of the year; and these costs include more capacity utilization, or unabsorbed fixed costs, on a number of launch programs, including the all-new EcoTrac all-wheel-drive program in Three Rivers.

These costs also include the product and process validation startup, training, quality containment, and other related activities that we have been discussing and describing to you over the past several quarters in terms of what to expect in our business in calendar year 2013.

As we work our way through the major launches we have in front of us in the next 90 days, principally, we will shed these extra costs and benefit from higher capacity utilization; better operating leverage; and ultimately, higher sales and profits.

We hope and expect that the first quarter of 2013 was a good down payment on these expectations.

That is the end of my comments this morning.

Thank you for your time and participation on the call today.

We are going to stop here now and turn the call back over to Liz and start the Q&A.

Thank you, Mike and David.

We have reserved some time to take questions.

I would ask that you please limit your questions to no more than two.

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

Kirk, please go ahead.

(Operator Instructions).

Rod Lache, Deutsche Bank.

A couple of things.

One is, could you just talk a little bit about how much your Brazil operations improved sequentially?

How far away are you from breakeven, your expectations for when you would get there.

Rod, I will make a couple of comments, and David may want to elaborate a little bit.

From a purely financial perspective, we had roughly $15 million of P&L hit from our Brazilian subsidiary in the second half of 2012.

We were close to breakeven in the first quarter of 2013, but we were a little shy.

Probably right around $1 million gross profit and loss in the first quarter of 2013.

Now, the improvements that we are making in the business and the ones that we could tangibly access immediately are around the premium freight activity, getting our operations in line, meeting our daily production requirements.

And that is going very well.

The other area is the area of pricing.

And we commented on the fact that we needed to make some improvements to address the economic inflationary trends in that market, and that the pricing improvements that we have in that business would show up in the first half of the year.

And that is exactly what happened, Rod.

Okay.

And then just another question on the trajectory of margins -- first of all, in the short term from Q1 to Q2.

If you could just describe some of the pluses and minuses, and how you expect that to flow.

And then assuming that you exit the year this year with 14% margins, can you help us understand, just broadly, what happens next year.

You have said before that you give back some pricing on the new truck 12 months after the launch.

Could that be offset by the productivity, the nonrecurrence of the launch costs and volume -- do you believe that this exit rate is something that can be sustainable a little bit through next year?

Or do some new things come in that bring it back down?

Okay, we will talk about 2014.

As you might imagine, we are much more focused on 2013 right now.

In the cadence of our 2013 margins, there's not a whole lot going on first quarter versus second quarter in terms of major changes to the factors that will affect our profit performance.

We expect the sales mix to be roughly flat.

In fact, we would expect sales mix to be about flat or roughly the same now for the rest of the year.

So we've made the improvement we expect to make in that area.

Of course, as it relates to our Thailand facility, as it stands right now, customer is recovering nicely, and we would expect to regain the margin lost on the strike impact in the second quarter.

That is roughly about 40 basis points, Rod.

In terms of production performance, we do see some opportunities to make some gains in the second quarter.

I wouldn't characterize those as major opportunities.

I think we see some better opportunities in the back half of the year as we really, really strive to get Brazil to profitability, for example.

But the one thing that we are facing in the second quarter is, again, the continuation of launch preparation costs.

We don't expect any material increases in R&D quarter to quarter, but project expense will probably tick up a little bit.

The EcoTrac all-wheel drive system requires a lot of attention in the second quarter as we get ready to launch that product.

And so I think big picture, as we said right from the beginning of the year, around 11% to 12% is the expectation we have for calendar year 2013 first half.

We are going to do everything in our power to access the higher end of that range, and if we can exceed it, we will certainly try.

But basically, we see the same factors that affected our first quarter affecting the second quarter.

As we get to the second half of the year, Rod, we do see some significant daylight.

And as we look at what happens in the second half of the year, the biggest opportunity for us is to reduce these launch preparation costs.

Maybe 150 to 200 basis points of margin improvement on that issue alone.

Project expense should be much lower.

R&D in terms of product validation expense should be a little lower.

We will have our launch of the EcoTrac system underway -- it's going to allow us to absorb fixed costs in Three Rivers and stop the cost driver there associated with people getting ready to launch.

And of course, the process validation expenses that we are incurring right now.

And we do expect our sales to be higher on a quarterly run rate basis.

And again, that will help us with capacity utilization.

So many of these factors, Rod, will carry into calendar year 2014.

You are right to point out some of the pricing issues, but from our perspective, we are going to have opportunities to improve our operating efficiency as we get through these major launches.

And we are running, for example, in Mexico with one major program for GM instead of this year having to support two.

Chris Ceraso, Credit Suisse.

You just covered a lot of what I was thinking about, as well, so -- not much change from Q1 to Q2; maybe the expense is up a little bit, but Brazil gets better; Thailand gets better.

Is that a decent summary?

Yes, and certainly we are going to try to do better than that -- kind of a put and take watch.

But yes, that's exactly right.

Okay.

And then I noticed in the quarter, if I isolate your business to just the GM revenue and what we believe to be the GM products that you're on, it looked like the content per vehicle was up pretty nicely.

Was there anything that changed from, let's say, the back half of last year to the early part of this year on your content on GM products, specifically?

Well, Chris, it's really just mix math.

What I mean by that is the GMT900 was significantly higher on a run rate basis.

Recall, last year there was significant downtime in the back half of the year.

In the first quarter of 2013, we were up about 35,000 units on that program.

And the content contribution in that program is very nice.

No, there wasn't any material change in the nature of the content we are providing, although we did launch the new truck on the RAM Heavy Duty.

But mostly, it's just the fact that GMT900 volume was up, and that has a positive impact on that calculation.

Brett Hoselton, KeyBanc.

Back to Rod's question, outside of pricedowns, outside of operating efficiencies, do you see any major puts and takes?

Obviously, production could be up or down.

You got some new business launches; you want to factor that in.

But do you see maybe any other puts and takes that might impact your margins in 2014 in a significant way?

And then again, I am kind of comparing it to your exit rate versus the second half of 2013.

Yes.

We think we are going to head into 2014 with some tailwind, certainly, from a production standpoint.

The estimates for production on the K2XX program are very bullish at this point in time.

And certainly, we would expect opportunity for those to be higher than the production rates that we are seeing in calendar year 2013.

If that's true, that's likely also going to be true for the RAM Heavy Duty program, and quite possibly the [610 Vin] program.

So that could give us an opportunity to have excellent operating leverage and really a darn near perfect environment for us to have a very solid year, both from a profitability and cash flow standpoint, Brett.

But as you pointed out, volumes could be up; they could be down.

Our perspective this year is to focus on getting our launches made effectively, and if we do that, we are going to exit 2013 in a good spot.

We are going to set ourselves up for a very good performance in 2014.

And then secondly, we've seen steel pricing drift a little bit here down.

Can you talk a little bit about whether or not you see that as a tailwind, or is it even significant?

I know you've changed your arrangements with GM, so some of that is going to be passed through and so forth, but would you just generally consider that to be, maybe, a little gravy?

Or is there actually a potential significant benefit there?

Brett, this is David Dauch.

As you know, we've got some long-term strategic relationships put into place at a number of the different steel mills.

We feel that we are buying at a very market-competitive level, especially based on the fact that we are vertically integrated with our forging business, and because of the volume level that we put through and utilize.

Therefore, we get the benefit of some of the economies of scale.

Clearly we have the proper material agreements with all of our customers, GM just being one of them -- but with all of them, to make sure that we can pass through the appropriate increases where it applies and where it has been negotiated.

But we don't see any substantial change going forward with our business right now.

Brett, if I could just add briefly -- the market data that you're tracking, that really reflects the economic risk that is passed through to the customers.

The actual base price itself is not following that same trend, necessarily.

And that is what really what drives our economics.

So that factor that you are looking at, that would have a much larger impact on GM, Ford, Chrysler, and the OEMs that actually take that risk in the supply relationships.

John Murphy, Bank of America.

It is John Lovallo on for John Murphy.

First question for you would be on R&D.

It did trail off a little bit in the quarter.

You guys gave some good color on this, but I guess what we're trying to think about here -- it appears to be more efficient use of R&D spend versus any kind of program push outs or delays.

Is that a fair way to think about it?

Absolutely.

We've put a lot of money into our product and process and systems technology over the years.

We are continuing to do that.

Not only have we closed some gaps where we had them, but more importantly, we have been focused on putting industry-leading technology out there.

And now we are bringing -- we're commercializing it.

We're bringing it to market with the EcoTrac disconnecting all-wheel drive system, which we said launches later this year.

We have also commercialized some of our e-all-wheel-drive technology through our subsidiary there.

We've also commercialized and put into production our efficient axles for some of the luxury passenger car work that we are doing.

Clearly, with how we are changing over the product portfolio with both the RAM and the K2XX, we've got a very modern product portfolio that is out there.

It's a matter of how we continue to advance and stay on the cutting edge ahead of our competition.

Great.

That's very helpful.

John, one other quick one I would add to that -- this will be particularly relevant as we work through the year.

But the nature of the work we are doing this year, there's a much higher ED&D recovery from our customer base that's going to be factored into the calendar year 2013 activity that really is different from, certainly, 2011 and 2012.

So while the first quarter is really not impacted by that significantly, as we work our way through the year, that will be another factor that reduces our net R&D spending, because we have some situations where the customer is actually bearing that cost.

That is very helpful.

The second question would be -- is there any carryover from Rayong in the second quarter that we should think about?

It should not be significant, John, no.

No.

John, GM is pretty well approaching where the volumes used to be prior to the strike.

At the same time, we've got to just continue to watch what's going on with their workforce over there.

They've replaced a lot of their existing workers with replacement workers.

But they are building a good quality product over there.

And we expect volumes not only to stabilize but hopefully improve going forward, or increase.

Itay Michaeli, Citi.

Just wanted to clarify.

Are you still assuming 1 million units of T900 K2XX production this year?

And in your answers to the earlier questions around the 2014 perspective outlook and your formal 2015 targets, is the assumption still about 1 million units of production there?

Okay, Itay, let me peel that off one at a time.

For 2013, $3.25 billion is tracking right around 1.025 million units of production.

As we've said before, the customer is communicating to the supply chain to expect to build more.

We are probably now also expecting that.

But in terms of the math, $3.25 billion, which is our current guidance, is based on around 1.025 million units of production in 2013.

Going forward, 2014, and I can be very specific about 2015, our 2015 target is $4 billion of sales.

That is still based on 1 million units of production.

There's nothing different about that.

And so there's certainly some upside, Itay, that's possible on either of these couple of analyses, whether you're looking at 2013 or 2015.

That is great.

Two quick follow-up questions on cash flow.

One, it looks like CapEx is trending closer to 6% of sales in Q1.

Are you maybe tracking a little bit below the full-year guide?

And Mike, does the positive free cash flow outlook for the year include, I believe, the $8.7 million of cash flow impact from the debt redemption?

Yes, right.

The $8.7 million -- we didn't have full visibility to that when we provided our guidance at the beginning of the year, but we certainly hope to be able to absorb that and accomplish positive free cash flow.

With respect to the timing of CapEx, it's just -- that's timing.

We, quite frankly, budgeted and expected our CapEx in the first quarter to be a little higher, and just based on the timing of customer activities.

I commented, I think David commented also, that we had some timing changes in some cases; minor delays, I guess you'd say, of certain launch activity.

Not anything to be concerned about, but they did move out the timing of certain activities.

So that allowed us to defer some of the CapEx into periods later this year.

Brian Johnson, Barclays.

A couple of questions about operations in Latin America, including Mexico.

First, GM produced seven K2XXs in Silao.

Can you maybe give us color on the ramp up in Guanajuato?

And also, are a lot of the validation and quality control costs that you talked about -- given that your factory is going to supply, as I understand it, the American factories as well for that product -- going to be out of the way?

And the second, I want to talk about your Brazilian supply chain.

Okay, Brian, this is David.

As far as the K2XX start in Mexico, GM is clearly on track.

They launched the vehicle on April 29 in Silao.

They will have a later launch at their other light duty pickup truck facility later this year.

Everything is clearly on schedule, both for General Motors as well as American Axle at this time.

We see no issues at this time.

We are prepared for the launch; GM is prepared for the launch.

And we will follow their ramp-up schedule as we move forward.

As it relates to some of the heavy-duty product that you're talking about coming out of our Three Rivers facility in the future, that is a later year launch, early next year launch.

That change isn't as large to the Heavy Duty platform as it is the Light Duty platform.

So most of the changes are already put into place or pulled ahead into the 900 vehicles.

So we don't expect as big of a change at the Three Rivers facility as we are experiencing in Mexico right now.

So hopefully that addresses your question regarding K2XX.

And then with respect to Brazil, as Mike touched on earlier, we've spent a lot of time in regards to stabilizing the operations there, making sure that we are meeting all of our daily production requirements, building in the quality that I mentioned earlier.

We've got the pricing issues being worked on.

And as we had indicated, it was going to take us into the second quarter of this year and even into the second half to localize some of our material suppliers to the South American market, specifically Brazil.

That is clearly on track to our plan at this point in time.

We still have some validation that we need to work through internally as well as with our customers in certain cases, so that will take a little bit more time as we go forward.

But some of the things that we wanted to get done are already done, and on track or ahead of schedule with what we had committed to.

So we expect it to support the sequential improvement in our financials every quarter moving forward here.

Ryan Brinkman, JPMorgan.

Just another question on the GM full-size pickup trucks.

There's been a few.

But you mentioned in response to the last question that I think you are looking for 1.025 million units.

I guess that of the combined K2XX and GMT900 pickups and SUVs.

And that looks to be unchanged.

But I'm curious how you think about that number, given that we learned during the quarter that GM's 5.3-liter V8 in the Silverado and the Sierra will be surprisingly more fuel-efficient than the turbocharged V-6 in the F series.

Maybe you had a better idea than Wall Street that the fuel efficiency would track as well as it did, just because you are close to the program.

But if not, does that provide some upward pressure on your outlook?

And then just second to that, I think you had felt for a long time that IHS was too conservative on their outlook for the program.

But it looks like they have recently upgraded their full-year outlook to 1.081 million from 1.054 million last month, which was itself upgraded.

So I'm surprised to see that your outlook now below theirs.

Might that be another reason to think that your outlook could be likely to improve as the year progresses?

Thanks.

Listen, first of all, I think I had mentioned to Itay, I will be very clear with you.

We do see upside potential to the 1.025 million.

Itay's question I interpreted to be very specifically around what was the assumption built into the models that drive the guidance.

Of course, we have many other programs in our business, so we have not at this point in time made an adjustment to our full-year sales outlook.

But with respect to this program, we do see some upside.

IHS has been very conservative now for two or three years.

I think we've noticed the same increase in their outlook for production as you have, and we see that being much more in line with what the customer has been communicating to the supply chain, and probably represents a reasonable upward bound from what is going to happen here in calendar year 2013.

So we do see some upside on that program, Ryan.

And we're very pleased about it.

We are very pleased about the expected performance of these vehicles with respect to fuel efficiency, and we do expect it to be a very competitive product.

Given the recent upswing in the overall market conditions, we would see this as a major tailwind for our Company.

Not just the fact that the GMT900 K2XX transition will be good, but we see the strength in this market helping the RAM Heavy Duty program, the large vans that we support for General Motors, and many other programs that we are a part of.

We see the current market conditions setting up very nicely for our Company for the next couple of years.

Great.

That's all very good color.

Just another one.

You've guided to 7% CapEx as a percentage of sales for the full year.

And while we've only just begun the year, it looks like the trend thus far is that your sales are coming in a little better than expected, and your CapEx may be coming in a little bit lower than expected.

It looks like about 5.8% of sales in the quarter.

So did Q1 maybe track lower than your expectation?

You didn't really provide the cadence earlier, I don't think.

Or did you always just assume more spending as the year progresses, whether that is to support the K2XX launch, or something else that you have anticipated?

Ryan, you and the others should still plan 7% of sales for CapEx for the year.

It's just a timing issue, as Mike communicated earlier.

Joe Spak, RBC Capital Markets.

Thanks as always for the great color.

Just -- if we could go back to R&D real quick, I think last quarter you said it would be about $3 million to $5 million higher in the first half but still down for the year.

Now it sounds like there's been a little bit of change in the timing, but also some greater efficiencies.

So how should we think about -- is that $3 million to $5 million higher still accurate, but maybe pushed out?

Or are there actually more savings than you thought a quarter of go?

Joe, this is Mike.

I do think the R&D spend is not likely to be a lot higher than what it was in the back half of last year.

That is a change in the last 90 days or so as we have managed the timing of the various launches that we have to support.

And we have been able to find some efficiencies in our R&D activities.

We've managed to get something done at a lower validation cost than what we had anticipated.

I guess that is maybe the best way to say it.

So that is an opportunity that we have taken to improve our 2013 cost structure with respect to R&D.

Okay, great.

And then if I back of the envelope do all the puts and takes you said on this sales in the quarter, it looks like maybe about -- call it $50 million to $60 million of backlog or new business came in this quarter.

I was just wondering if you think that is directionally right.

And also, that still obviously implies the greater ramp in the back half.

Is that how you are thinking about that business coming on this year?

Joe, we said we were going to launch $400 million of business this year across the full-year.

A third in the front half of the year; two-thirds in the back half of the year.

So we are still on schedule for that.

And, Joe, the major -- just to add a little bit more color to that, the major programs that drive the sales gain this year on launch are the EcoTrac all-wheel drive system; the K2XX, of course, the additional content; and the RAM Heavy Duty series pickup truck program.

And with the exception of the RAM, those launches are yet to come in terms of financial impact.

So that's the reason behind what David just said being right on.

Thanks, Joe.

We have time for one last question.

Ravi Shanker, Morgan Stanley.

Your non-GM business was down year on year.

Can you let us know what exactly drove that?

And also remind us how much of the backlog comes from non-GM this year, and what the cadence of that is going to be?

On a year-over-year basis, we noted that the RAM Heavy Duty series pickup truck program was down.

And from a dollars and cents standpoint, that is the significant reduction.

We did see some additional weakness in some commercial vehicle business, but that was relatively small as compared to the RAM program activity being lower.

In terms of launch, we have talked about the EcoTrac program being a significant non-GM program this year.

Of course, the RAM Heavy Duty series pickup truck programs and other things that we are involved in and China and India.

So we have a higher percentage of non-GM versus GM.

I'll have to get back to you after the call; I don't have the detail with me right now, but it's certainly much more than 50% non-GM business this year.

Last year, as you recall, we had a much more GM-centric launch cadence for backlog.

This year it flips, and it's much more non-GM.

I think it's in the neighborhood of two-thirds/one-third, roughly, but I can confirm that detail for you later.

Got it.

And just as a follow-up, the EcoTrac launch, I think that is on the Cherokee.

How much of that is in the US versus China?

It is a US program right now.

Great.

Thanks very much.

Thank you, Ravi.

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.

This concludes today's conference call.

You may now disconnect.