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Operator
Good morning.
My name is Lindsay and I will be your conference facilitator today.
At this time I would like to welcome everyone to the American Axle & Manufacturing first-quarter 2014 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. Dani Landolt, Manager of Marketing and Communications.
These go ahead, Ms. Landolt.
Dani Landolt - Manager, Marketing & Communications
Thank you and good morning everyone.
I'd like to welcome everyone who is joining us on AAM's first-quarter of 2014 earnings call.
Earlier this morning we released our first quarter of 2014 earnings announcement.
You can access this announcement on the AAM.com website or through the PR Newswire service.
To listen to a replay of this call, you can dial 1-855-859-2056, reservation number 34605136.
This replay will be available beginning at 1 PM today through 5 PM Eastern time, May 9.
Before we begin I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed.
For additional information, we ask that you refer to our filings with the Securities and Exchange Commission.
Also, during this call we may refer to certain non-GAAP financial measures.
Information regarding these non-GAAP measures, as well as a reconciliation of these non-GAAP measures to GAAP financial information, is available on our website.
During the quarter, we will participate in the following conferences.
The Barclays 2014 High Yield and Syndicated Loan Conference in Phoenix on May 20, the KeyBanc 2014 Automotive and Industrial conference in Boston on May 28, and the Deutsche Bank Industrial Conference in Chicago on June 4. In addition, we are always happy to host investors at any of our facilities.
Please feel free to contact Chris Son to schedule a visit.
With that, let me turn things over to AAM's chairman, president, and Chief Executive Officer, David Dauch.
David Dauch - Chairman, CEO, and President
Good morning, everyone.
Thank you, Dani.
Thank you for joining us today to discuss AAM's financial results for the first quarter of 2014.
Joining me on the call today are Mike Simonte, our Executive Vice President and Chief Financial Officer, and Alberto Satine, AAM's Senior Vice President of Global Driveline Operations.
To begin my comments today, I will provide some highlights of AAM's first quarter 2014 results.
I will also review the status of AAM's business 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 2014 highlighted by strong sales growth that continues to outpace the industry.
Let me briefly cover a few first-quarter financial highlights.
First, for the first quarter of 2014 AAM sales are approximately $858.8 million.
This represents year-over-year sales growth of 14% and sequential sales growth of approximately 3%.
AAM's year-over-year sales growth of 14% in the quarter compares to US SAR growth of approximately 3% in the quarter and North American line vehicle growth of approximately 4%.
Second, AAM's non-GM sales in the first quarter of 2014 increased by more than 50% on a year-over-year basis to approximately $288 million.
Including the impact of our China joint venture located in Hefei, China, non-GM sales were approximately 37% of total sales in the quarter.
Third, AAM's net income in the first quarter of 2014 was $33.6 million or $0.44 per share.
This represents a $26.3 million increase as compared to the first quarter of 2013.
And fourth, AAM's operating profitability was much improved on a year-over-year basis.
EBITDA was $112.5 million in the first quarter of 2014, or 13.1% of sales and EBIT was $65.6 million in the first quarter of 2014, or 7.6% of sales.
Mike will cover more details of our first-quarter financial results later on the call.
Let me switch gears and update you on AAM's continued progress on our aligned business strategy which emphasizes AAM's commitment to leadership in the areas of quality, operational excellence, and technology leadership.
First, AAM continues to deliver world-class quality.
In the first quarter of 2014 AAM operate at Six Sigma levels, which is defined as operating below 3.4 parts per million, or world-class.
AAM's commitment to the highest quality standards in the industry is a critical differentiator for our Company in the marketplace.
Said quite simply, it has never been more important to emphasize quality, reliability, durability, and warranty performance in our business.
As our customers and potential customers adjust to more stringent market demands for quality, AAM is well-positioned to grow and prosper.
Second, AAM is delivering improved global operational performance.
Our top priority priorities for 2014 is to flawlessly launch 16 critical programs for our customers.
In the first quarter of 2014 AAM supported multiple major launches in North America, including the launch of the K2XX full-sized SUV and heavy-duty pickup trucks, the Chrysler heavy-duty pickup truck program, and the Chrysler Jeep Cherokee SUV as well as most recently the Chrysler 200 passenger cars -- both of which feature AAM's all-new EcoTrac Disconnecting All Wheel Drive program.
Later in the year, we support other several other major product program launches including the Ram Power Wagon, the Precision 4 transmission components for Honda, additional passenger car driveshaft business for Chrysler, and the expansion of our supplier relationship with Mercedes in China.
We will also begin production of both power takeoff units and rear drive modules for a major global crossover vehicle program this summer.
Unfortunately, we can't announce the customer or the program at this time.
AAM's solid financial results in the first quarter of 2014 reflect our commitment to deliver improved profitability and launch performance, globally.
Third, AAM is delivering technology leadership.
As global OEMs grace to meet tighter fuel efficiency emissions standards, the automotive industry is entering into new and advanced phases 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 with an aggressive plan to increase our investment in advanced products, processes, and systems technology.
In support of these efforts AAM's R&D spend in the first quarter of 2014 was $25.8 million.
AAM's R&D spending is focused on the development of innovative solutions to assist our customers to meet market demands for higher fuel efficiency, lower emissions, enhanced power density, and improve vehicle performance, which includes safety and ride and handling performance.
AAM's new and innovative products to meet these industry trends include our high efficiency and map to optimize our light weighted axles, which are featured on many of the premium light truck programs, passenger cars, and crossover vehicle programs today.
In addition, our EcoTrac Disconnecting All Wheel Drive program, which was the first to market and next our e-AAM hybrid and electric drive solutions which we have already conquested new business on.
And now, my last item is AAM is delivering diversification and profitability into our business.
The key driver in the growth of AAM's new business backlog and [courting] opportunities is our commitment to develop that innovative advanced technology and driveline products to meet the rapidly changing and global automotive marketplace needs.
Our new business backlog today is valued at $900 million for programs launched between the 2014 through 2016 period of time.
And as we covered earlier, the cadence of this revenue covering the 2014 through 2016 period of time is $400 million in 2014, $300 million in 2015, and $200 million in 2016.
The new business awards included in this backlog should help sustain AAM's three-year compounded annual growth rate, or CAGR above 10% through the 2016 calendar year period of time.
This is more than double the rate of the industry growth expected over this same period of time.
In addition to this book business, AAM is working on more than $1 billion of new and emerging business opportunities.
These opportunities relate principally to non-GM programs.
This should help drive further business diversification as we convert many of these program opportunities into book business and target parity between GM and non-GM sales by mid-decade.
Before I turn it over to Mike, let me wrap up by making if you closing remarks about AAM's 2014 and beyond outlook.
Our outlook is based on the assumption that US light vehicle sales will approximate 16 million units in the full year of 2014.
Based on this industry sales assumption and the anticipated launch timing of AAM's new business backlog, we are targeting AAM's full-year 2014 sales to approximate $3.75 billion to $3.8 billion.
This represents year-over-year sales growth of approximately 17% to 18%, versus an expected 3% growth rate for the US (inaudible).
So for the full year of 2014 we are targeting our EBITDA margin to range from 13.5% to 14% of sales and positive free cash flow of approximately $100 million.
AAM's improved financial performance is a critical element of our plans to reduce leverage, strengthen the balance sheet, and increase stockholder value.
We are on track to achieve these objectives and improve our financial strength going forward.
That concludes my comments for this morning.
I thank everyone for your attention today and for your vital interest and support of AAM.
Let me now turn the call over to Mike.
Mike?
Mike Simonte - EVP and CFO
Thank you, David, and good morning everybody.
My job today is to get into details of our first-quarter 2014 financial results starting with sales.
Led by higher sales in support of Chrysler's all new Jeep Cherokee and the heavy-duty Ram pickup trucks, AAM's net sales increased by more than $100 million in the first quarter of 2014, or 14% on a year-over-year basis.
Sales ended up at $859 million in the first quarter.
Non-GM sales hit a new quarterly record of $288 million.
Including the impact of our Hefei, China joint venture, AAM's non-GM sales were approximately 37% total sales.
The 14% growth rate for the first quarter of 2014 was a little lower than what the expect for the full year 2014.
This is true because we experienced significant customer down time in the first half of the first quarter, principally related to GM's launch of the K2XX heavy-duty pickup trucks and full-size SUVs.
To put this in context, daily production rates for our major North American light truck programs were almost 30% lower in the month of January as compared to the month of March.
AAM's content per vehicle is measured as the dollar value of product sales supporting our customers' North American light truck and SUV programs.
In the first quarter of 2014, AAM's content per vehicle was $1655, also a new quarterly record for AAM.
This represents a $150 year-over-year increase in content per vehicle as compared to the first quarter of 2013 and a $75 sequential increase as compared to the fourth quarter of 2013.
The primary driver of this increase is the additional content we are providing to GM and Chrysler on their next-generation full-size truck programs.
Of course, that is the K2XX and the Ram heavy duty series pickup trucks.
We expect our content per vehicle to stay above the $1600 level for the rest of the calendar year 2014.
Okay.
Let's move now to profitability.
All of our key operating profit metrics for the first quarter of 2014 reflect strong year-over-year improvement.
Gross profit was up nearly $18 million on a year-over-year basis -- so $122 million, or 14.2% sales.
Operating income for the first quarter of 2014 was up $20 million as compared to the first quarter last year, $64.8 million or 7.5% of sales.
Net income was $33.6 million.
EPS was $0.44 per share.
GAAP-derived EBITDA, or earnings before interest, taxes, depreciation, and amortization, was $112.5 million.
That's 13.1% of sales.
Now let me anticipate some questions about the details of our sequential profit performance.
In the first quarter of 2014 AAM's gross margin of 14.2% was 110 basis points lower than the previous two quarters and, to be clear, I am talking about the second half of 2013.
When we announced our full-year 2014 outlook, we said the first quarter profitability would be lower than the run rate for the full year.
This was expected due to the impact of the GM downtime related to the K2XX launch.
As I just mentioned, capacity utilization on this program was much lower in the first half of the first quarter.
We had our teams and our equipment in Three Rivers, Michigan and Guanajuato, Mexico fully mobilized to support the launch, but we had lower sales to cover our fixed costs in these operations due to the launch curve associated with the heavy-duty pickups and full-size SUVs.
Within the quarter, our operating profitability improved significantly in March, once GM and the extended K2XX supply chain achieve higher daily production levels on a consistent basis.
Overall, we are pleased with our cost performance in this period of transition.
We believe AAM is well-positioned to return to higher gross margin levels in the second quarter of 2014.
Now, offseting a significant portion of the decrease in our gross profit margin in the first quarter of 2014 was tight cost control on SG&A.
We expect SG&A expense for the full year 2014 to be as much as $25 million higher than as compared to the full year 2013.
Along with wage and benefit economics, higher R&D spending and higher IT costs are the major drivers of the expected increase for the full year 2014.
In the first quarter of 2014, however, SG&A was approximately $2.5 million lower as compared to the first quarter of 2013.
That's a year-over-year comparison.
Let me walk through some of the major puts and takes.
The first thing I want to address is R&D spending.
AAM's R&D spending in the first quarter of 2014 was $25.8 million.
Although this was close to $2 million higher on a sequential basis, R&D spending in the first quarter of 2014 was almost $3 million lower on a year-over-year basis as compared to the first quarter 2013.
We expect AAM's full year 2014 R&D spending to be approximately $8 million to $10 million higher than the full year 2013.
This implies a step-up of approximately $3 million per quarter for the remaining three quarters of this year as compared to the first quarter of 2014.
There are a number of reasons why R&D spending did not jump higher in the first quarter, mostly related to the timing of customer sourcing and validation requirements.
This was the major period of launch, not so much on these other matters.
We simply did not need to spend anymore to achieve our business objectives in the first quarter of 2014, so we did not.
Second, the second major driver of SG&A growth in 2014 -- this is the full year -- is increased IT spending.
This includes costs related to upgrading the Oracle and Plex ERP systems we use to manage our business.
For the full year 2014 we expect higher IT spending to drive as much as $10 million of additional expense on a year-over-year basis.
In the first quarter of 2014, costs relating to these activities were in line with this expectation.
The projects are on track and the spending mirrored what we planned to spend relative to our plans and budgets for the year.
The third and final factor I will comment on related to SG&A expense in the quarter is compensation expense.
In the first quarter of 2014, we booked lower incentive comp accruals as compared to the first quarter of 2013 and so that would be a year-over-year comparison.
Also lower as compared to the fourth quarter of 2013, and that would be a sequential comparison.
This was driven in part by a variance in the quarterly mark-to-market adjustment on our variable long-term incentive awards.
These awards are payable to eligible executives in part based on AAM's relative PSR performance or total stockholder return.
Reflecting our relative stock price activity on a year-to-date basis, we booked a favorable adjustment in the first quarter of 2014 to reduce the projected value of future payouts on these awards.
This was an expense driver in 2013 and depending on what happens the rest of the year we anticipate this to boomerang back a little bit and increase SG&A in future quarters.
Listen, the bottom line on SG&A is this: we tightly controlled our SG&A spending in the quarter.
We knew we had a tough quarter from an operating perspective and took prudent action to manage what we could control.
Where we needed to spend more than we did in the fourth quarter such as R&D and IT, we did.
Wherever we could reduce, defer, or eliminate costs, we did that.
And we will continue to do that.
In total, we were able to manage through a complicated launch transition and still achieve reasonable profit margins for the quarter.
Okay.
Before reviewing our cash flow results let me quickly cover interest and taxes, starting with interest.
Net interest expense in the first quarter 2014 was $24.7 million, down approximately $4.3 million versus the first quarter of 2013.
As a result of the debt refinance refinancing actions we completed in 2013, the weighted average interest rate of our debt capital structure at the end of the first quarter was approximately 6.3%.
This was approximately 120 basis points lower than at March 31, 2013, the end of the first quarter last year.
Substantially all of the reduction in our first-quarter interest expense was attributable to lower interest rates.
And finally taxes -- in the first quarter of 2014 AAM's tax provision was $7 million.
The effective income tax rate was 17.3%.
This is right in line with our guidance range of approximately 15% to 20% for AAM's underlying effective tax rate in calendar year 2014.
There are no unusual tax accounting developments to discuss this quarter.
If you have any further questions about tax, please ask in the Q&A period.
Let's move on to cash flow.
We define free cash flow to be net cash provided by -- or in the case of the first quarter, used in -- operating activities less CapEx, net of proceeds received from the sale of equipment and sale leaseback of equipment to the extent applicable.
[Net] cash used in operating activities in the first quarter of 2014 was $55.5 million.
Capital spending, net of proceeds from the sale of PP&E was approximately $40 million in the first quarter of 2014.
Reflecting this operating activity and CapEx, AAM's free cash flow in the first quarter of 2014 was a use of approximately $95.5 million.
Now, you know it's not unusual for an automotive supplier to use cash in the first quarter due to seasonal working capital trends.
In fact, our free cash flow results in the first quarter of the past two years were a use of $71 million and a use of $115 million, respectively.
It's important to note that a calendar anomaly exacerbated the impact of our working capital trends in the first quarter 2014.
At year end 2013, December 31 fell on a Tuesday.
Our largest customer makes weekly payments on Tuesday.
At quarter end -- this would be for the first quarter -- March 31, 2014, fell on a Monday, one day before we collected our weekly payment from General Motors.
We estimate that this timing issue accounted for approximately $45 million of AAM's total use cash in the first quarter of 2014.
Let me conclude on cash flow by saying this -- when we built our 2014 budget and established our $100 million target for positive free cash flow, we anticipated a significant use of cash in the first quarter.
In fact, our actual research results were a little better than our budget.
There is nothing that happened in the first quarter that dissuades us from our confidence in achieving our free cash flow target for the full year 2014.
Okay.
Let me cover a few couple quick hitters on the balance sheet.
First, accounts receivable, and obviously this is linked to the use of cash in the first quarter.
In the first quarter of 2014, accounts receivable increased approximately $196 million as compared to year end 2013; that's a big increase in just 90 days.
There are three major drivers of this increase.
First and most importantly, sales in the month of March 2014 were $322 million, and that was approximately $100 million then the month of December 2013 -- obviously impacted by holidays at the end of the year.
Sales in the back half February were approximately $20 million higher than the second half of November 2013.
This timing issue alone accounted for more than half of the increase in accounts receivable.
The second issue affecting accounts receivable is the weekly payment timing that I just described -- and by that I mean the fact that March 31 fell on a Monday, one day before we collected our regular weekly payment from General Motors.
This accounted for another $45 million of the increase.
So, these two items account for about $165 million of increase, together.
The third issue is the fact that in the first quarter of 2013 AAM reached two important commercial agreements with GM.
Under the first of these two agreements, AAM will receive $34.4 million in this calendar year, 2014, to increase installed capacity and adjust product mix for the K2XX program.
Under the second agreement, AAM will receive $9.3 million to recover certain costs related to the delay of a major product program.
AAM received $19.5 million in the first quarter of 2014 relating to these two agreements.
The balance owed to AAM pursuant to these agreements in 2014 are $24.2 million we booked as a receivable at quarter end.
So, these three items account for virtually all of the increase in accounts receivables.
At March 31, 2014, AAM's net debt was just shy of $1.5 billion.
AAM's EBITDA leverage or the ratio of net debt to EBITDA was approximately 3.35 times at quarter end.
AAM's EBIT coverage or the ratio of EBIT to interest expense was approximately 2.4 times at quarter end.
Now, both of these credit metrics are calculated on an LTM basis -- last 12 months basis -- and both are adjusted to exclude the impact of special items in the last three quarters of 2013; and you can find that in our Reg.
G disclosures online or the back of our press release.
We expect both of these critical credit metrics to improve in 2014.
As to the leverage ratio, we expect to improve at least another half turn by year end 2014.
As to the coverage ratio, we expect to approach three times by year end 2014.
So by the end of this calendar year we are going to have those investment grade credit metrics in sight.
As to liquiddity, AAM entered the first quarter of 2014 with total available liquidity of approximately $600 million.
This consists of available cash and borrowing capacity on AAM's global credit facility.
This is about $50 million higher than our target liquidity position of approximately two months sales -- and we calculate that on an LTM, or last 12 months basis.
Before we start the Q&A, let me close my comments this morning by discussing our outlook for 2014.
David already covered the basics, so let me just say this.
We are targeting AAM's sales to grow as much as 18% on a year-over-year basis to a range of approximately $3.75 billion to $3.8 billion.
For the full year 2014 we are targeting an EBITDA margin in the range of 13.5% to 14%.
We are also targeting approximately $100 million of positive free cash flow this year, in 2014.
With respect to the cash flow guidance keep in mind that as a result of the agreement to we have reached with GM to adjust installed capacity and product mix for the K2XX program, CapEx will be higher than what we had originally planned.
This is mostly a cash flow geography issue with no debt impact on our cash flow results expected this year.
We expect CapEx to be approximately 6.5% of sales this year -- that's our current estimate we are changing today and we made that disclosure in our Form 8-K this morning -- as compared to our previous guidance estimate of approximately 6%.
However, operating cash flows will also be higher to offset this increased spending.
Of course, that's because we are receiving the money from General Motors.
This is why there is no change to our free cash flow target for 2014, despite having taken on additional near-term spending requirements in raising our CapEx guidance.
We are pleased with our first-quarter 2014 financial results.
For both EBITDA and free cash flow, our results were a little better than what we budgeted to start the year.
This positions us well to achieve our goals for the full year.
That's the end of my comments this morning.
Thanks for your time and participation on the call today.
I am going to stop here and turn the call back over to Dani so we can start the Q&A.
Dani Landolt - Manager, Marketing & Communications
Okay.
Thank you, Mike and David.
We've reserve some time to take questions.
I ask you please limit your questions to no more than two.
So at this time, please feel free to proceed with any questions that you may have.
Operator
(Operator Instructions)
Itay Michaeli, Citigroup.
Itay Michaeli - Analyst
Thanks.
Good morning, everyone.
So just hoping we can start off, Mike, in discussing the cadence of EBITDA margins the rest of the year.
Maybe particularly around the second quarter, what are some of the big buckets?
We know K2XX production should be up sequentially.
What are some of the other buckets we should be thinking about in Q2 and for the rest of the year?
Mike Simonte - EVP and CFO
Okay.
Relatively straightforward, Itay.
You hit on the most critical issue first, which is the fact that we do expect significantly higher production activity relative to the K2XX program.
We see relative stability on the Ram heavy-duty program and most of the other major revenue contributors for our Company.
But the K2XX should be up in the range of 40,000 units, quarter to quarter.
So that's going to drive much higher revenue for our Company.
And, of course, you know, that will come with premium property margin impact because we've got all the fixed costs in place.
So, those incrementals should be pretty good.
Now we need that to offset some increase in SG&A spending, for sure.
But the combination of good operating leverage and increased sales and excellent productivity improvements we're anticipating in the second quarter and for that matter the rest of the year associated with pretty much through the toughest part of the launch of this program, that's going to drive better profit performance in the second and third quarter.
The fourth quarter should be pretty good, too.
It may be a little shy of the second and third quarter.
We will have to see.
It all depends on production volumes.
As you know, there are fewer production days due to holidays in the fourth quarter.
So, I think our best profit margin opportunities will likely the in the second and third quarter, but we expect all three quarters to be better than what we experienced in the first quarter.
Itay Michaeli - Analyst
Great.
That mentions my second question, as we track the Company going forward, what are some of the factors that could lead you towards the low end or high-end of the full-year EBITDA margin range?
There may be more company specific.
Maybe update us on the situation in Brazil and how that recovery is coming along, other launches you may have.
What are some of the key specific things that could kind of sway that margin number on a full-year basis?
David Dauch - Chairman, CEO, and President
Just to address the different sections of your question, starting in Brazil, as we mentioned to you all before, we have addressed all of our operating issues that we had in Brazil associated with the [GM I7XX] launch.
So that cost control is there.
The performance is there.
The only issue that we are dealing with in Brazil at this point in time is that we are seeing a softening in the marketplace as a result of the GM I7XX, or the light-duty pickup truck program.
Not only there, in Brazil, but a little bit in Thailand, as well, which explains a little bit of why maybe the GM sales [consensus] for the quarter was off a little bit.
But from an operating standpoint we're doing the things that we need to do.
We are restructuring our business to adjust to the market demand, so no issue there.
As Mike and I both covered, we had a good first quarter with respect to our launch performance.
We only expect to get stronger as the year progresses, based on the strength of the K2XX volumes, strength in the Ram volumes, strength in the Cherokee program, and really getting those launch inefficiencies out of the way and getting the dual product strategy out of the way that we've been running for quite some time.
So, we feel very good about where we are from a launch standpoint.
Very good about where we are from an operational standpoint.
Very good about where we are from a cost control standpoint.
But we also think that we can get better.
And that's our commitment, that's what we are going to deliver.
Mike Simonte - EVP and CFO
Itay, I'd just add one thing to that.
When you talk about the high-end versus the low end of our earnings guidance range, the most critical issue -- and this would be true for just about any discussion of profitability -- is capacity utilization.
So to the extent that volumes meet or even exceed the expectations we have -- the base expectations we have currently K2XX program I would say that better-than-expected performance of the K2XX is the largest single driver that pushes us up the food chain in terms of the higher end of that range.
Itay Michaeli - Analyst
That's very helpful.
If I can sneak one last one in, any thoughts on CapEx beyond 2014, now with this new arrangement with GM?
Does that affect the trajectory of the next couple of years?
David Dauch - Chairman, CEO, and President
It's in line with what we guided in the past.
4% to 6% was what we had guided.
Obviously, we are raising it up to 6.5% this year because of the agreement with General Motors on the K2XX capacity and mix program.
Other than that, it will trend in the direction that we communicated to you all earlier.
Mike Simonte - EVP and CFO
Just to be clear, this issue, the agreement that David just referenced -- that's expected to be handled within calendar year 2014.
Itay Michaeli - Analyst
Great.
Thanks for that clarification.
Thanks, guys.
Operator
John Murphy, Bank of America.
John Murphy - Analyst
First question on, David, on the quoting activity.
You mentioned $1 billion.
You've been talking about that number for a while.
I'm just curious how you see the pace of quoting activity and your win rates there.
And in particular, potentially the upside with Chrysler because you seem to be making a lot of progress there, and if you can remind us of maybe some upcoming recent launches, or upcoming launches I should say that you might have coming up with Chrysler.
David Dauch - Chairman, CEO, and President
Just starting on the launched side of things, obviously, we are still accelerating the launch of the Cherokee platform, the [QSW] platform.
As that product continues to be received very favorably in the marketplace, our volumes continue to rise in line with what we've worked out with Chrysler.
Now that they are launching the US platform, which is the Chrysler 200 program that incremental business that we had planned with Chrysler.
We are launching that as we move forward.
We also have the L-series driveshaft passenger car program that will be launched later this year.
Obviously the Ram program, the success of the Ram and the high volumes that we are experiencing on heavy-duty at this point in time.
Those are all positives for us, as it relates to non-GM sales growth or specifically growth with another critical customer of ours -- that being Chrysler.
We would think that there are more opportunities that are out there based on the strong relationship that we built with them.
We are quoting, like I said, over $1 billion of opportunity.
We expect some decisions to be made here, really in the third and the fourth quarter are where the bigger decisions will be made with respect to the opportunities that are out there.
But we think we are also well-positioned to capitalize on our normal hit rate of 25% to 30% with respect to that, and we are really working on a number of program opportunities globally around the world with multiple OEMs.
The majority of what we've quoted is non-GM business, which is only going to help further our diversification as we move forward.
So nothing really more, John, to add with respect to that.
Mike, unless you have anything else.
Mike Simonte - EVP and CFO
No.
I would just comment, again, we are not at a stage where we can talk about specific customers and specific programs.
But in the first quarter -- or through I should say the first four months of the year we've had a couple of key wins.
One in the country of India and one in Brazil, which are crucial to helping those entities cover their fixed costs and improve their profit margins.
So we're making progress, as David pointed out, and we do expect to have some good news to report near the end of this year relative to the backlog growth overall.
John Murphy - Analyst
Okay.
And then just the second question, I was wondering if you could give us a little bit more detail around the discussions with GM for this CapEx reimbursement.
It does appear to be a little bit unusual.
I'm just trying to understand if there's other opportunities for you to maybe recover more CapEx from customers.
Or is this really just a one time issue with mix be very different than what was expected at the initial launch of the project?
David Dauch - Chairman, CEO, and President
John, I think it's more of the lather than the former in the fact that as we communicated to you before and even GM had communicated there was a mismatch when it came to the powertrain configuration of what was planned versus what the reality was.
That drove different engine sizes which led to different actual types for us and created some mix issues within that.
We needed to work those issues out with General Motors.
That's now completed.
Mike and I have both reflected what that impact is.
But now it's going to allow us to put the capacity and the mix in place to support the demand there.
And as you all know, we've got 1.15 million units built into our model for our planning from a K2XX standpoint.
We are confident that we can deliver on that, and based on the schedule, we see them being very strong and hopefully getting stronger as we move forward.
John Murphy - Analyst
Great.
And then just one last quick point of clarification, the parity of GM versus non-GM sales by mid-decade, does that include the JV, the Hefei JV, as well?
David Dauch - Chairman, CEO, and President
It does.
Yes.
John Murphy - Analyst
Okay, great.
Thank you very much.
Operator
Rod Lache, Deutche Bank.
Rod Lache - Analyst
Good morning, everybody.
I think I need to insert and if/then formula into our model on whether your quarter ends on Tuesdays are not.
Mike Simonte - EVP and CFO
Pay attention to that in the third quarter.
Rod Lache - Analyst
We will.
Mike Simonte - EVP and CFO
That's when it's going to flip, Rod.
Rod Lache - Analyst
Okay.
First, just housekeeping.
Was there a gain or anything in the P&L this quarter for that my $9.3 million settlement on the contract delay?
Mike Simonte - EVP and CFO
The answer is no.
No portion of that was in our P&L.
We received some cash, we deferred the revenue, and we will recognize that over a period of time that we operate that program.
Rod Lache - Analyst
Okay.
And also just to follow up on Itay's question, the high end versus low end of your margin guidance, clearly just mathematically it would take more than a $50 million variance in revenue, which is the high end of the low end of your revenue swinging from 13.5% to 14% EBITDA margin.
So from a utilization perspective, that part of it, the swing in revenue and the effect on operating leverage -- it seems like there's more there.
Is there something else in terms of execution that you are watching that would swing it one way or the other?
Mike Simonte - EVP and CFO
Rod, the critical issue, as you know, in our profit driving is always the capacity utilization.
But as David pointed out -- and I'm sitting next to the man making it happen, Alberto Satine, but we are working hard to normalize our operations to achieve productivity.
Last year, we had all kinds of different things going on in our facility, particularly in Mexico related to supporting both the GMT900 and K2XX program.
This year, as most of our launch activity is now behind us, the team is really focused on the actions and activities that can drive cost reduction.
And so the combination of that with better capacity utilization, higher sales throughput has really given us an opportunity to increase our profits.
Rod Lache - Analyst
Okay.
And just mathematically it would seem like you are tracking towards the upper end of it.
I just wanted to get your opinion on this -- your revenue in the quarter annualized at $3.43 billion just taking your revenue times four.
So you're $318 million lower than the low end of your revenue guidance range.
Your EBITDA annualized at $450 million.
Maybe it's $440 million with hires SG&A.
If you just applied that 30% margin -- the incremental margin to that gap to the low end of your range, you'd be coming up north of a 14% margin, something like 14.2% margins.
Is there something that comes in, aside from that increment in SG&A?
Or is there something in the incremental margins or something that we should be aware of, or are you, in fact, tracking a little bit better than would be implied in your guidance?
Mike Simonte - EVP and CFO
Okay.
So a couple of things I would comment on, Rod.
First of all, that SG&A increase is pretty substantial.
We would expect -- what we are telling you if we are saying SG&A is up $25 million that means that runs around $260 million to $265 million this year.
First quarter was $57 million.
Average of the next three quarters should be north of $65 million, probably closer to $70 million.
So that's a big factor in limiting the amount of upside relative to our earnings guidance this year.
The second issue is while we are really confident and feeling good about what's happening in North America and specifically with the two major truck programs we support for GM and Chrysler, we are seeing some weakness in other parts of the world, particularly in Brazil and Thailand.
The midsize truck programs we support there are weaker than what we had expected.
So that is probably a bit of a drag as well, relative to the expectations we had for the year.
So we feel like we are solidly placed to achieve our guidance for this year.
I think would be a little premature for us to be talking about exceeding it, which is why we are sticking with the guidance that we laid out at the beginning of the year.
Rod Lache - Analyst
Okay.
Just lastly, the non-GM revenue growth on a year-over-year basis -- can you give us in color on that?
Is your backlog kind of evenly split over the course of the year?
What are you seeing in terms of ramp production year-over-year for the next couple of quarters?
Mike Simonte - EVP and CFO
You know, Rod, we see ramp production being relatively stable quarter to quarter.
The first quarter was a very strong quarter, but I don't expect any of the other quarters this year to be materially different from that.
The content that we have in that program is driving a lot of growth for us in that non-GM sales.
So expect that to continue.
Relative to the Jeep Cherokee program, that's a program that as you know we lost in the August timeframe of 2013, ramping up in the fourth quarter and here again in the first quarter.
I expect that to have a significant impact on our year-over-year comparisons in the second quarter and third quarter, little bit lesser impact in the fourth quarter simply because we had quite a lot of volume in the fourth quarter last year.
The other item I will mention of substance -- David already mentioned it -- that's the driveshaft growth we will have with Chrysler -- the L-series program that launches later this year.
These three programs are the significant drivers of non-GM sales growth this year, so we are close to run rate based on the cadence of activity we've got now.
Operator
Joe Spak, RBC Capital Markets.
Joe Spak - Analyst
Mike did a good job anticipating some free cash flow questions.
I did have one question maybe as it relates to the 2015 free cash flow guidance.
I recognize you guys are focused on getting through 2014 first.
But obviously volume is a big driver for the range you provide for 2015.
I think embedded in that you are looking for fairly flattish K2XX volume.
So, we can do the math to a sensivity, to our volume projections, but is there anything else we should be thinking about in terms of impacting the 2015 free cash flow range?
For instance, what would a working capital impact be from higher or lower volume?
Mike Simonte - EVP and CFO
Joe, the walk from 2014 to 2015 on cash flow is not really that complicated.
We do expect relatively flat -- at least in our base guidance expectations -- relatively flat K2XX production.
We do see some growth in other programs, and that is going to push us up closer or potentially above that $4 billion level.
The working capital hit this year should be much greater.
Our sales growth this year is going to be probably close to double or at least much higher than what is going to be next year.
So we would expect to have a smaller working capital requirement in 2015.
And the other issue aside from just profit conversion on higher sales is CapEx.
As David pointed out, we expect our CapEx requirements to moderate as a percentage of sales, and in 2015 we'll clearly have lower CapEx as compared to this calendar year.
Even as compared to our original guidance of approximately 6%.
So lower CapEx, lower working capital usage, good performance from an operating perspective and incremental sales perspective -- those are the issues that drive us up in 2015.
Joe Spak - Analyst
But if we wanted to sensitize the volumes for the working capital impact -- it looks like it's historically maybe 12%, 13% of the change in sales.
Is that roughly a good number?
Mike Simonte - EVP and CFO
Yes.
12% is right on it.
If we are managing our receivables and payables to about 60 days -- and on a global basis there's nothing that we would expect to see different there.
It's a little bit lower on both terms in the US.
But if you use that and then manage your inventories between 12 and 15 turns you are going to be right around 12%; that's exactly how we model it, Joe, and how we hold ourselves accountable from an operating perspective.
Joe Spak - Analyst
Okay.
And maybe one quick one -- is there any sensitivity you can provide to the incentive comps?
So, if we for instance monitor your stock price and there's maybe a $50 million change in market cap for instance, what the dollar impacts to the accrual change you have to make is?
Mike Simonte - EVP and CFO
Yes, it would probably be -- it cost us between $1 million in $2 million in the first quarter.
We expect to pay that back.
If we marked today, our stock price is up relative to where we were at the end of the first quarter.
So we are headed in that direction.
It's not a huge issue.
What's interesting about this issue, Joe, is that it was an expense driver in 2013, and it was -- it flipped in the first quarter.
So it had a significant sequential impact, if you're looking at SG&A performance from one quarter to the next.
Going forward, it's probably in the range of a $1 million to $2 million issue, if the stock price recovers and if a relative standing among our peer recovers, as well.
Operator
Brian Johnson, Barclays.
Brian Johnson - Analyst
Good morning, folks at American Axle, and, of course, congratulations to Chris, who is not on the call.
David Dauch - Chairman, CEO, and President
Good morning, Brian.
He better not be.
Brian Johnson - Analyst
Yes, he might be.
David Dauch - Chairman, CEO, and President
Yes.
Brian Johnson - Analyst
And if he is, he won't forget it for the next 20 or 30 years.
David Dauch - Chairman, CEO, and President
That's for sure.
Brian Johnson - Analyst
Wanted to do two things -- one a little bit of [T] account housekeeping from Mike, and then secondly kind of a semi-strategic question for both of you.
The T accounting is, can you take us through the revenue and the cost walk through of the customer payments to support the shift in mix to production?
What's revenue?
What's deferred revenue and what are the costs against that?
Mike Simonte - EVP and CFO
Okay.
So the big picture is it's all deferred revenue to start.
We collect the cash or in the case of the portion we didn't collect, we book the receivable to recognize the fact that over the life of the respective programs we will amortize the amounts of consideration received from General Motors through revenue.
So, we've had these kinds of agreements in the past.
It's pretty common and straightforward for suppliers to recognize these types of payments as part of the underlying economics of the sale relationship with the customer.
So the K2XX program we would expect to run that $34 million off over roughly 5 years, and all this is disclosed in the 10-Q.
You will see it tonight.
In the case of the other major program, that runs off a little bit longer, so we'll run that off over a period of roughly seven years but as I said it's specifically disclosed in the 10-Q.
Brian Johnson - Analyst
And on the cost side -- go ahead --.
Mike Simonte - EVP and CFO
What I was going to say is relative to the K2XX program, there are some pricing considerations that we have provided to General Motors, and what I mean by that is they will have a lower price on certain components.
And we will have a higher price on other components, but the net impact of the P&L impact of the K2XX agreement is positive -- expected to be positive, but more like $1 million or $2 million a year, not $34 million divided five.
And the program, if I'm running off $9 million -- there's no other cost simplification on the other issue, but if I'm running $9 million off over six, seven, eight years, you can do the math; it's not a material impact, as well.
Brian Johnson - Analyst
Okay.
So the cost been booked and CapEx then will be brought in in depreciation as you recognize the revenue?
Mike Simonte - EVP and CFO
Correct.
Brian Johnson - Analyst
Okay.
Second question -- get out of the weeds -- the K2XX last month recovered some share but it's still below 38%.
The shares ranged anywhere from 32% to 35%, 36% as they try to get back in the low end of the market.
Where do you see that share going this year?
What are the puts and takes there?
We certainly understand how you get a sequential increase from Flint and Fort Wayne coming back and Arlington coming back online.
But then next year we've got one prominent competitor launching an aluminum truck and gaining a lot of attention.
How do you see that share rolling out through the next couple of years?
David Dauch - Chairman, CEO, and President
Brian, this is David.
First of all I think GM is going to continue to fight for their market share.
Typically, as you know, when new vehicles come out they usually gain market share.
GM went down a little bit, but their full complement of the product wasn't out yet.
It's now starting to completely be out, but with the latest SUVs and heavy duties starting to hit the marketplace we've also seen GM take a different tactic with regard to transactional prices and incentives.
They still been able to defend a lot of their transactional price, but they've also started to offer some incentives.
And you've seen the results of what's happened here, just even from March to April in regards to their performance there.
So GM's got a great truck in the marketplace.
It's the latest truck that's out there.
There was a lot of concern in regards to the success of that program and the launch effectiveness of that program.
GM, along with American Axle, have proven that we've been able to launch that effectively.
The biggest issue we had to work our way through is just the capacity and mix issue which as we've covered with you, we've got that resolved now with them.
As you've indicated, their largest competitor has a new product offering coming out here.
That's going to be a great product offering.
At same time, there's even bigger risk associated with launching that program than it was the K2XX.
But there's also some major benefits that can be realized based on the whole fuel efficiency side of things.
So, I think Ford is going to do a great job in regards launching that product.
GM is going to continue to do what they need to do.
I think they will both protect their market share.
The big issue is going to come down to cost of ownership, when it's all said and done, because, yes, there is a fuel efficiency benefit associated with a lighter vehicle but there's also some other incremental costs associated with that as well.
And those are things that are going to have to be ferreted out over time.
I can't sit here and tell you what those are exactly right now, but I think both are going to continue to be dominant players in the truck marketplace and protect their shares.
Brian Johnson - Analyst
And is there aluminum, say, driveshafts you could be offering, say, for a midcycle refresh of your key platform (multiple speakers)?
David Dauch - Chairman, CEO, and President
We are already (multiple speakers) aluminum driveshaft today, and in the past we've supplied aluminum axles to select customers.
So we've got plenty of things in our portfolio.
We are working on some -- what I call evolutionary -- designs to continue the efficiency I talked about and the map optimization.
But we're also working on some revolutionary type designs to really address the more demanding stringent requirements as we move forward so we can bring competitive solutions that meet our customers' needs and, ultimately, we will meet the government and the consumer needs of the future as well.
Operator
Brett Hoselton, KeyBanc.
Brett Hoselton - Analyst
I wanted to start off just on the free cash flow side.
You've identified three different components for the improvement in free cash flow, the $75 million to $100 million improvement into 2015.
Can you maybe put a little bit finer tip on that, finer point on that -- quantify some ranges for the CapEx, working capital, and higher profit?
What portion is attributable to each of those, in your view?
Mike Simonte - EVP and CFO
Brett, I think someone else mentioned that we're much more focused on 2014.
I'm not going to say too much more, but I'll give you a couple of pointers here.
You know, the sales growth -- you know where our sales are going to be and you get a pretty good indication of our incremental profit margin expectations throughout this time period, so if you address that issue you can get a pretty good understanding of our expectations around higher profitability that is going to drive some additional cash flow.
The working capital is clear.
It's the growth in sales times 12%.
And the CapEx, we said many times before we expect to moderate around the midpoint of the range, maybe 4% to 6% -- so don't hold me to that quite yet.
We just finished the first quarter of 2014.
I haven't spent time thinking about 2015 budget details.
But if you are around 5% of $4 billion, maybe even a little bit less, you are going to see a net absolute reduction in CapEx next year from that current level.
So, those are the analysis points that are going to drive the discussion.
Brett Hoselton - Analyst
And then, switching gears, the GM full-size pickup truck sport-utility, can you remind us where do you see production levels at currently?
And do you have any particular bias, upwards or downwards?
Mike Simonte - EVP and CFO
The K2XX SUVs, Brett, you know are produced in Arlington.
That's the one facility that's dedicated to building those vehicles.
Their capacity level at that facility is a little bit higher than 1000 units a day.
That's straight time and they can flex higher with overtime.
I just took delivery of one a couple of weeks ago.
It is a fantastic vehicle.
A major upgrade over the previous iteration of that truck.
I think it's going to be a very successful program.
I don't know what else to say.
Our view is -- and certainly GM has got confidence in that portion of the program, looking at their production plans for Arlington.
We would expect that to be very strong production for the next 6 to 12 months, at least.
And then from there it's a matter of marketplace demand.
Brett Hoselton - Analyst
I apologize, Mike, I guess I was referring to the overall programs.
In my mind I'm thinking you're kind of thinking around 1.15 million units this year, give or take.
It sounds like next year you're kind of thinking in around that same range.
Obviously that's a bit higher than IHS at this point in time.
I was wondering is that kind of still what you're thinking at this point?
Is that what General Motors is communicating to you at that point in time in terms of volume levels?
Mike Simonte - EVP and CFO
Brett, listen, absolutely.
We have a baseline expectation of roughly 1.15 million units of production on this program for 2014 and 2015.
That lines up with a US SAR assumption around 16 million units.
Both size trucks mix -- by that, I mean the percentage of the overall market dedicated to full-size truck sales and full-size SUV sales of around 14% to 14.5%; that's consistent with where we were and have been now for the last 15 months or so.
And of, course, GM market share is slightly improved from where they were at the tail in of the GMT 900 program.
There's nothing in our view at this point in time that dissuades us from that point of view, and I would point out that, certainly, General Motors is spending a lot of time and, in the case of American Axle, a lot of money focused on increasing capacity and adjusting mix so that they can hit the marketplace with full force on this program.
We're very confident in this program.
We've seen the products -- they're great products.
We feel pretty confident -- despite what anybody else says about this program, we feel pretty confident about these production levels for at least the next three years.
Operator
Emmanuel Rosner, CLSA.
Emmanuel Rosner - Analyst
I wanted to ask you a question about how do you think about your long-term growth rate.
Obviously, you have an incredibly strong backlog, and there's obviously no assumption that in the long run you can grow revenues at 18% a year or so, like this year.
But at the same time we look at the backlog, it seems to be sort of slowly decreasing, while staying very strong.
So 400 million and then 300 million and then 200 million.
When you think about the long-term, obviously, you are quoting a lot of activity, and I'm sure 2016 still has some upside.
But what do you view as sort of sustainable amount of backlog or I guess growth from your business on a sustainable basis?
David Dauch - Chairman, CEO, and President
Emmanuel, this is David.
As we said, or I said in my earlier comments -- from 2014 to 2015 we are going to grow over 10% CAGR rates.
Obviously, you see this year with the backlog of $400 million, we are at a growth rate of 18% for this year year-over-year.
As you indicated, there is still an opportunity based on some things we are working on that with favor the impact of favorably impact the 2016 period of time.
Beyond that, we see a lot of things impacting us in the 2017 period of time.
When you look at from an organic side of things we looked at probably in the range of 5% to 7%, from a gross standpoint consistent with what we talked about from a CapEx standpoint as well.
And then ultimately as we had communicated to you as well, that's not assuming any strategic activity that we may take also as we strengthen our organization as we move forward.
Emmanuel Rosner - Analyst
Okay.
So you don't view the next three years or so of very strong backlog as a one-time opportunity because you were -- you've been very successful at diversifying your mix of business.
And then that trailing off, you think there is (multiple speakers) --.
David Dauch - Chairman, CEO, and President
Not the all, Emmanuel.
As I said to you before, we continue to invest heavily into our technology leadership.
That technology leadership as far as passenger car, crossover vehicle, and truck is was driving our backlog and new business.
We are being very selective in regards to the target opportunities that we are going after.
So, no, I don't see it as being a one-time type thing or a benefit that we enjoyed after the downturn.
It's more of us managing the different priorities across our business, knowing that we still have some significant debt that we need to pay down but you can see that we are coming into some very strong years from a cash flow generation standpoint, and we will balance that with both organic and strategic growth opportunities and CapEx as we move forward.
So, we are operating the plan, and we are being disciplined in the plan, and we are delivering on the plan.
And we expect to continue and strengthen delivery on that plan as we move forward.
Emmanuel Rosner - Analyst
That's very helpful.
And then Mike, you've provided an unprecedented level of detail on 2015, and we are very appreciative of that.
I guess one other angle I wanted to ask you about was when you look at -- so you spoke about the revenues, you spoke about free cash flow.
How do you think about the margin progression?
Obviously, you have strong solid revenue growth, which is positive for the operating leverage, but at the same time you sort of assume flat K2XX, which typically has pretty solid margins.
So any high-level thoughts on margin progression through 2015, or is it just too early?
Mike Simonte - EVP and CFO
Emmanuel, I guess one or two other things that we've been discussing relative to margin progression -- we do expect relative stability in the K2XX program.
We've commented that we do have some pricing productivity commitments or breakdowns that we expect to pass along to GM on that program.
Over the course of 2014 and 2015, we feel pretty good about our chance to offset the economic impact of those pricedowns with productivity, recovering, if you will, some of the inefficiencies from our launch.
So, we don't see any major detrimental impact associated with the productivity commitments on the K2XX program.
Relative to margin performance, as I said before, it's all about capacity utilization.
And we do expect some new programs in our backlog to be launched in this time period that should improve the capacity utilization.
But as we work through this calendar year, we will have a lot more information on the competitiveness and the production plans for other major programs that we're supporting, and we'll have more to say about the details of that as we go.
Make no mistake, though, we do expect 2014 and 2015 to be a time period where we can generate very attractive profit margins in our business.
We expect the K2XX and Ram heavy-duty program in particular to be very strong and successful this time period.
So this gives us confidence that we can do a real good job in this time period.
Emmanuel Rosner - Analyst
Great.
Thank you very much.
Operator
Ryan Brinkman, JPMorgan Securities.
Ryan Brinkman
There's already been some backlog questions.
I guess what I would do is try to focus on the 2014 number -- the $400 million number.
Since you last briefed us on this in January I think auto sales first tracked a little softer and then a little stronger.
So I would guess may be expectations for industry volumes as a whole are roughly unchanged.
However, some of the vehicles that are in that backlog, I wonder if it could track better this year.
Just if you look at the Jeep Cherokee, right, which I think has been a pretty big hit.
And then also the Ram heavy-duty which has been gaining some market share, helped by some good pricing support there.
So have you tried to be cut that number at all since January?
And if you have, did you find that maybe there's some upward pressure on it?
Mike Simonte - EVP and CFO
Ryan, I don't think there's any material upward pressure on that estimate.
The production estimate that we expect for this calendar year are very consistent with the estimates we made in building our budget and determining our plan for this year.
I will say that -- and, certainly, I have had a chance to say something like this already today, and so did David.
We feel great about the success of these programs and what our customers doing, but that's not different than what we felt six, 12, 18 months ago.
So we baked that thought process into our plan, and at least at this stage we don't see any significant upside associated with that dynamic.
Ryan Brinkman
Okay.
Great.
And just last question, you talk about how much business you are bidding on and everything.
I'm just curious about within that, if you are gaining, you think, any incremental traction with some of the more securely leveraged technologies you have, like disconnecting all-wheel-drive, for example, or some of your high-efficiency axles.
What's the latest you are seeing on that front as your conversations with customers?
David Dauch - Chairman, CEO, and President
Yes.
Now that we have the disconnecting all-wheel-drive or the EcoTrac in the marketplace with the Cherokee, it's gotten a lot of favorable feedback from the consumer and not to mention other customers.
So there's a strong interest from other customers in regard to our technology.
So, we are having some discussions with them and having some discussions with respect to some future program applications.
Ultimately, that will show up in regards to some emerging opportunities but right now it's not in any of our quoted activity.
So we see even more opportunity for the disconnecting as we go forward, which is what our expectation was going to be.
As you know, we have already conquested some business with our next generation technology in that area, that being the electric all-wheel-drive.
We continue to work on the full hybrid and hybrid electric type applications with a number of different customers.
Again, a lot of it is still in regards to early stages of the development cycle and planning for future vehicle applications.
But obviously that is going to accelerate going forward because of CAFE legislative requirements that are going to take place.
Again, we continue to focus on how to we lightweight and get maps out of our products especially on the truck side, and also bring the efficiency from a fuel economy standpoint.
So as we said, our whole technology leadership is really focused on the fuel efficiency and lightweighting, while still providing small packages that provide the power density that the consumers and our customers are looking for and moving as we move forward.
So I'm very pleased with where our product portfolio is.
I'm very pleased with the opportunities that we have in front of us with the diverse customer base that will help our overall [concentricity] reduction with GM, without losing GM business.
At the same time, more importantly, leverage our global footprint and our sourcing composition that we have around the world now that we didn't have before.
Dani Landolt - Manager, Marketing & Communications
Thank you, Ryan.
At this time we have time for just one more question.
Operator
Ravi Shanker, Morgan Stanley.
Ravi Shanker - Analyst
Just one clarification.
If IHS is to be believed, and I don't know if they are to be believed, but if they are, they are looking for K2XX production of over 300 K in 2Q and 3Q which I think is quite a bit above a level that GM has produced out for a long time.
Are you confident that both GM and you will be able to meet that level of production without any operating issues?
Mike Simonte - EVP and CFO
As you know, IHS doesn't schedule GM's plants.
GM has set up production plan that they have in mind for second and third quarter, I know they have confidence in.
We certainly have confidence in.
And it's very close, very similar to the level of production -- if you look over the two quarters, very similar to the assumption that you commented on, roughly 300,000 units a quarter.
So, we certainly have already operated at that level in the much of March and April, for that matter.
We don't see anything standing in our way if GM should follow through on those plans -- and we expect they will -- we don't see anything standing in our way of being able to help them achieve that.
David Dauch - Chairman, CEO, and President
Especially now that we have this capacity issue addressed with them and are in the process of implementing those changes.
Ravi Shanker - Analyst
Great.
Thank you.
Dani Landolt - Manager, Marketing & Communications
Okay.
Thank you, Ravi, and we thank all of you who have you participated on this call and appreciate your interest in AAM.
We certainly look forward to talking with all of you in the future.
Operator
This concludes today's conference call.
You may now disconnect.