American Axle & Manufacturing Holdings Inc (AXL) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the American Axle and Manufacturing First-Quarter Earnings Conference Call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now like to turn the call over to Christopher Sun, Director of Investor Relations, Corporate Communications, and Marketing.

Please go ahead.

Thank you Victoria, and good morning to everyone on the call.

I would like to welcome everyone who is joining us on our first quarter 2015 earnings conference call.

Earlier this morning we released our first quarter of 2015 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 using the reservation number 34605208.

This replay will be available beginning at 2 p.m.

today through 5 p.m.

Eastern time on May 8.

Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements that are subject to risks and uncertainties which cannot be predicted or quantified, and which may cause future activity, 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 also available on our website.

During the quarter we expect to participate in the following conferences: The KeyBanc 2015 Automotive Industrial Conference in Boston on May 27; the Deutsche Bank Industrial Conference in Chicago on June 3, and the Barclays 2015 High-Yield and Syndicated Loan Conference in Colorado Springs on June 11.

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

Please feel free to contact Vitalie Stelea to schedule a visit.

With that, let me turn things over to AAM's Chairman, President, and CEO, David Dauch.

Thank you Chris, and good morning, everyone.

Thanks for joining us today as we cover our financial results for the first quarter of 2015.

Joining me on the call today is Mike Simonte, our Executive Vice President and Chief Financial Officer.

To begin my comments today, I will first provide some highlights of our first-quarter performance.

I'll also update you on some recent business developments before turning things over to Mike.

After that, as always, we'll open it up for Q&A session.

AAM is off to a great start here in 2015, with increased North American production volumes and improved operating efficiencies driving significant sales growth and margin expansion for AAM.

Let me briefly discuss some of the first-quarter financial highlights.

First, our sales continued to grow twice as fast as the industry in the first quarter of 2015.

For the quarter, AAM sales were approximately $969.1 million, up more than $110 million, as compared to the first quarter of 2014.

AAM's year-over-year sales growth of 13% compares to a US [ZAR] growth of approximately 6%, and a North American light vehicle production growth of approximately 2%.

Our leverage in the light truck segment in the US is a major sales growth driver for us right now.

AAM's growing exposure to the China market, as well as our new European business launching in our Swidnica, Poland, facility, is also powering AAM sales here in 2015.

Second, our non-GM sales increased $41 million, or more than 14% on a year-over-year basis, to a new quarterly record of approximately $329 million.

Including the impact of our Hefei China joint venture, AAM's non-GM sales were approximately 37% of our total sales in the quarter.

In 2015, AAM's non-GM sales will grow faster than AAM's total sales, as a result of new business launching with Ford, Jaguar Land Rover, Jeep, Mercedes, and Nissan, just to name a few.

We're very proud to be on these premium brands.

Third, all key financial measures of operating profitability, including gross margin, operating margin, EBIT margin and EBITDA margin, expanded by more than 100 basis points on the year-over-year basis.

Gross profit increased by approximately $31 million to $153 million in the first quarter of 2015.

Our gross margin was 15.8%.

Our operating income increased by approximately 30% to $84 million, and our operating margin was 8.7%.

Our EBITDA increased $25 million, or 22%, to $137.5 million in the first quarter of 2015.

Our EBITDA margin was 14.2% of sales.

EBITDA increased approximately $22 million to $87.5 million, and our EBIT margin was 9% of sales.

Fourth, AAM's net income in the first quarter of 2015 was $53.2 million, or $0.68 per share.

Our net income and our EPS were both improved by more than 50% on a year-over-year basis.

Finally, key performance measures in balance sheet strength and credit protection continued to improve in the first quarter of 2015.

On a trailing 12-month basis through March 31, 2015, AAM's positive free cash flow was over $180 million.

Our EBITDA leverage was 2.5 times at the end of the quarter, and our EBIT coverage improved to 3.4 times.

All in all, we are very pleased to report such a strong start to the year.

Mike will cover more details of our first quarter 2015 financial results later on this call.

Let me now shift gears and cover some business highlights for the quarter.

From an operational perspective, AAM is reaping the benefits of our focused improvement initiatives.

Our major North American drive-line assembly operations in Three Rivers, Michigan, and Guanajuato, Mexico, are running very well, achieving their daily production requirements on time every time, and doing it in a very stable, efficient, and high-quality manner.

These operations are benefiting greatly from investments we made in recent years to expand capacity to align with both our customer requirements, as well as the market requirements.

We have also placed additional emphasis on training and structured workshops to expand the reach of our AAM operating system, and to promote the lean principles in our manufacturing facilities and administrative functions, again to eliminate waste.

We're also starting to see the return on investments to upgrade our AAM Oracle enterprise resource planning systems, and implement some other information technology tools.

These investments, and a focus on continuous improvement, have made a big difference in AAM's daily operating performance and our financial results.

In 2015, AAM is focused on possibly an announced re-launching and supporting 18 major new product programs, including opportunities with Jaguar Land Rover, where we will be delivering both front and rear axles for our global passenger car program, which we're presently in launch on.

Our Rayong, Thailand, manufacturing facility will launch AAM's first-ever major drive-line program with Ford, in support of a global rear-wheel-drive SUV program.

For the refresh of the Nissan Titan light-duty truck program here in North America, we will be providing some of our latest state-of-the-art high-efficiency front and rear axles for the truck application.

For Mercedes, we're supporting both the next-generation C-class and E-class vehicles in China, and will expand our supplier relationship with Mercedes to now also include rear axles or RRDAs for multiple SUV variants for Mercedes in China.

Finally for FTA, we will provide PTUs and RDUs for our third EcoTrac derivative, this time for the China market.

These programs are indicative of our efforts to successfully achieve significant business diversification gains in terms of customer, product, and geography.

The most important business focus for AAM, however, is the continued advancement of our technology leadership position, which will continue to drive our global performance in the industry.

As all of you know, the global automotive industry is facing unprecedented challenges in response to market and regulatory demands for increased fuel efficiency, reduced emissions, and improved safety, ride, and handling performance.

Brutal competition is driving OEMs to focus on technology innovations to help differentiate their products in a crowded automotive landscape.

To respond to these challenges and changing market dynamics, we have been heavily invested in the areas of efficiency, light weighting, and performance, which should be no surprise to any of you.

We are very confident that our engineering initiatives, such as the development of our next generation AAM EcoTrac, our disconnecting all-wheel-drive system, and our EAM electrification strategies will further strengthen AAM's position as a drive-line technology leader on a global scale in the coming years.

Before turn it over to Mike, let me wrap up and make a few closing remarks regarding our outlook for 2015 and beyond.

With respect to AAM's 2015 outlook, let me simply say and state that our outlook is unchanged.

We are targeting full-year sales in 2015 in excess of $4 billion.

We continue to target full-year 2015 EBITDA margin in the range of 13.75% to 14% of sales.

As all of you know, calendar year 2014 marked an inflection point in AAM's free cash flow generation.

In 2015, we expect to build on that momentum and generate between $175 million to $200 million of positive free cash flow.

AAM's 2015 outlook is based on the anticipated launch schedule of the programs in our backlog, as well as the assumption of a US light vehicle bar of approximately 16.5 million to 17 million units.

As to our longer-term financial targets, for the period covering 2015 through 2017, we continue to target annual organic sales growth in excess of 5%, EBITDA margins in the range of 13% to 14% of sales, and free cash flow in the range of 4% to 5% of sales during this period.

As we look to the future, we remain very focused on leveraging our technology leadership to develop innovative new products, focused on fuel efficiency, emission reductions, and safety, ride, and handling performance that supports and addresses our customers' needs and vehicle program requirements, while also staying very laser focused on delivering on our sustainable financial business and performance plan.

We are focused on advancing AAM's sales growth and business diversification efforts through targeted organic growth initiatives.

We will continue to emphasize the important improvement to AAM's balance sheet by reducing leverage and operating the Company with investment-grade discipline like we have continued to do in the past.

We will also look for ways to accelerate AAM's sales growth going forward, and our diversification efforts through strategic growth initiatives, including M&A, joint venture arrangements, or other forms of collaboration and cooperation.

We will also continue to work to position the Company to consider other stockholder value creation strategies, including re-establishing a dividend policy when appropriate.

AAM is focused on building value for all of our stakeholders in our business.

All of our actions and strategies are aligned with this critical objective.

With this, I conclude my comments for this morning.

I thank each and every one of you for your time and attention today, and for your vital interest and continued support of AAM.

I will now turn the call over to Mike.

Mike?

Thank you, David, and good morning, everybody.

Let me build on what David has already told you about our first-quarter results.

I will start to sales.

On a year-over-year basis, sales increased approximately $110 million, or 13% in the first quarter of 2015, as compared to the first quarter of 2014.

Continuing strength in the North American light truck market was the largest factor powering our sales growth in the quarter.

Higher shipments in support of GM's full-size pickups and SUVs, and also the Ram heavy-duty series pickup trucks, accounted for approximately $65 million of the increase on a year-over-year basis.

The other major sales growth driver in the quarter was our support of a new global cross-over program for General Motors.

We launched RDMs, or rear-drive modules in PTUs, or power transfer units, for this program in the second half of 2014.

There is no similar activity in the first quarter of 2014.

AAM's content for 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 2015, AAM's content per vehicle was $1,676 per unit, as compared to $1,655 in the first quarter of 2014.

Most of this increase in content per vehicle is attributable to a higher four-wheel-drive penetration rate, which rose to 71.4% in the first quarter of 2015, as compared to 67.5% in the first quarter of 2014.

As you may recall, GM launched the K2XX SUVs and the heavy-duty pickups in the first quarter of 2014.

The unit volume growth in production, as well as the higher four-wheel-drive penetration rate, reflects a full quarter of activity in 2015, as compared to the launch period one year ago.

Non-GM sales were up 14% on a year-over-year basis to $329 million, which as David noted, is a new quarterly record for our Company.

For the full year 2015, we expect non-GM sales to grow faster than our total sales, due principally to the new business launching with FCA, Ford, Jaguar Land Rover, Mercedes-Benz, and Nissan.

As we launch these programs during the next several months, we expect non-GM sales to approach, and likely exceed a quarterly pace of $350 million in the second half of this year 2015.

Okay, let's move now to AAM's profitability.

Rather than repeating what David has already covered, let me focus on providing both a year-over-year EBITDA walk-down analysis, and a sequential EBITDA walk-down analysis, of our first quarter of 2015 results.

GAAP to EBITDA -- and we define EBITDA as earnings before interest, taxes, depreciation, and amortization -- GAAP to EBITDA increased by $25 million in the first quarter of 2015 to $137.5 million.

That's 14.2% of sales, and that compares to $112.5 million in the first quarter of 2014, and that was 13.1% of sales.

The contribution margin we earned on higher sales -- recall I mentioned that sales increased $110 million on a year-over-year basis -- this was the primary reason why EBITDA grew by $25 million in the quarter

Other significant comparison points on a year-over-year basis include the following: Launch preparation costs, including project expansion research and development, were not materially different in the first quarter of 2015 as compared to the first quarter of 2014 on a collective basis.

Operating efficiency was much better in 2015, as our drive-line assembly operations benefited from higher capacity utilization and post-launch stability.

Productivity gains related to these improvements were partially offset by higher SG&A spending, and this included IT-related costs, including those related to our ERP system upgrade, and also the cost of higher staffing levels and compensation.

One last point affecting the year-over-year comparison of our first quarter of 2015 results is that in the first quarter last year, we recognized a $4.1-million gain on the sale of our Detroit manufacturing complex.

There was no similar gain in 2015.

Let's turn to the sequential analysis.

On a sequential basis, GAAP-derived EBITDA increased by $37.9 million to $137.5 million in the first quarter of 2015.

That compares to $99.6 million in the fourth quarter of 2014.

Now the fourth quarter had a special charge.

For our 2014 pension payout offer, we exclude the impact of that special charge, which increased operating expenses by $35.5 million in the fourth quarter of 2014.

Our first-quarter EBITDA rose by about $2.4 million as compared to the prior quarter.

Now this is the profit progression I will explain in the sequential EBITDA walk-down analysis.

As compared to the fourth quarter of 2014, AAM sales grew by approximately $30 million.

Again, that was $969.1 million in the first quarter of 2015.

We estimate the contribution margin on this sequential increase in sales to be approximately $8 million.

The favorable impact of sequentially higher production volumes in the first quarter was offset by two issues.

The first was a reduction in the amount of marked to market foreign exchange re-measurement gains we recorded in the first quarter of 2015, as compared to the fourth quarter of 2014.

The second item was higher warranty expense accruals in the first quarter of 2015.

Now let me explain the foreign exchange issue in a little further detail.

In Mexico, our operations are US dollar functional for accounting purposes, but have a significant net peso liability position on the balance sheet.

In the fourth quarter of 2014, we recorded foreign exchange re-measurement gains of $6.7 million related to this position, and the peso-US-dollar exchange rate grew to 14.72 at year end.

As you recall, foreign exchange re-measurement gains and losses are non-cash transactions, but they do increase or decrease other income in every period based on changes in the exchange rate at quarter end, and the last few quarters have been somewhat volatile.

In the first quarter of 2015, the US dollar continued to strengthen relative to the peso, not at the same pace as the fourth quarter, but still strengthen.

In accordance with GAAP, we recorded approximately $2 million of foreign exchange re-measurement gains in the first quarter of 2015.

These gains are classified as other income on the income statement.

The balance of the other income is the joint venture profit contributions we received from the Hefei China joint venture.

While still favorable, the foreign exchange re-measurement gains were almost $5 million less than that which we recorded in the previous quarter.

That's really the significant offset to the contribution margin gains that we picked up in the first quarter of 2015, as compared to the fourth quarter of 2014.

All right.

Before reviewing our cash-flow results, let me quickly cover interest and taxes, starting with interest.

Net interest expense in the first quarter of 2015 was $24.3 million, approximately $400,000 lower than the first quarter of 2014.

The weighted average interest rate of our debt capital structure at the end of the first quarter of 2015 was substantially unchanged from year-ago levels.

Really, it's going to be our net debt levels and our gross debt levels that drive interest expense going forward, and we would expect interest expense to trend lower as we move forward.

Finally, taxes.

Income tax expense was $9.2 million in the first quarter of 2015, as compared to $7 million in the first quarter of 2014.

The effective income tax rate was 14.8% in the first quarter of 2015, down from 17.3% in the first quarter of last year.

In the first quarter this year, our tax provision included a $1-million discrete item benefit related to audit settlements closed in the quarter.

If we exclude the impact of the audit settlements which were favorable to the Company, AAM's adjusted first-quarter effective tax rate was approximately 16.3%.

Really, both the 15% rate and the 16% rate were right in line with our full-year 2015 guidance range of approximately 15% to 20%.

Let's move on to cash flow.

We define free cash flow to be net cash provided by our used in operating activities, less CapEx, net of proceeds received from the sale of equipment.

GAAP cash generated by operating activities in the first quarter of 2015 was $6.4 million.

Capital spending, net of proceeds from the sale of property, plant, and equipment, was approximately $43.5 million in the first quarter of 2015.

Reflecting this operating activity in CapEx, our cash flow in the first quarter of 2015 was a use of approximately $37.1 million.

It is not unusual for an auto supplier to use cash in the first quarter due to seasonal working capital trends.

That's clearly been our experience.

In fact, over the past three years, AAM has averaged a first-quarter free cash flow use in excess of $90 million.

The improvement in our first-quarter cash flow results is consistent with the higher overall free cash flow expectations we have for our business in 2015, and also reflects favorable working capital trends in this first quarter of 2015.

Okay, let me touch on a couple balance-sheet issues.

At March 31, 2015, EBITDA leverage, or the ratio of EBITDA to net debt, improved to slightly less than 2.5 times.

EBIT coverage, or the ratio of EBIT to net interest expense, improved to 3.4 times at the end of the first quarter.

Both of these credit metrics are calculated on a trailing 12-month basis, and are adjusted to exclude the impact of that pension pay-out offer special item in the fourth quarter of 2014.

You can expect to see steady improvement in our leverage profile as we work our way through this calendar year 2015, and track to an EBITDA leverage ratio of approximately 2 times by the end of the year.

All right, before we start the Q&A, let me add this quick comment on our 2015 outlook.

David has told you already today that we reaffirmed our 2015 earnings and cash-flow guidance today.

I have nothing significant to add on that matter except to reiterate that we are confident in our ability to deliver those results.

Our confidence stems from the fact that we're already performing at the levels implied by our guidance.

On a trailing 12-month basis through the end of the first quarter of 2015, our sales have increased by 15% to $3.8 billion, and we're on track to achieve $4 billion for the full calendar year 2015.

Now over the same trailing 12 months time period, AAM has generated adjusted EBITDA of $537 million, or 14.1% of sales, and positive free cash flow has been $181.4 million over the last 12 months.

By the way, the only adjustment to EBITDA in the trailing 12 months time period was the add-back for the $35.5-million charge in the fourth quarter related to the pension pay-out offer.

Are we confident that we can deliver our 2015 guidance?

Yes, we are.

That will end my prepared comments this morning.

Thank you for your time and participation on the call.

We do have some time for Q&A this morning, so I'm going to turn back over to Chris, and we'll take your questions.

Great.

Thank you Mike, and thank you David.

We reserved some time for some questions, as Mike said.

At this time, we're going to turn it over to Victoria for her to compile the Q&A roster, so we can start the Q&A period.

(Operator instructions)

Itay Michaeli, Citi.

Great, thanks.

Good morning, everyone, and congrats.

Good morning, Itay.

A question first, Mike, on the outlook.

I think if we look at your Q1 revenue historically, I think it tends to roughly be around 23%, 24% for the full year, which would imply maybe you're running at the high end, maybe even a little above the high end of the range.

I know it's early in the year.

Can you comment about that?

Should we think about the high end as more likely at this point?

Are there some timing, seasonality, maybe Brazil issues that might be out there that would make that premature?

Yes, Itay, relative to the full-year sales outlook, I think our first quarter tracked very close, in fact within $2 million, of our budget for this time period.

Things are on track the way we look at it to achieve our outlook.

The one issue that we're facing, lesser issue for our Company but still out there, is the foreign exchange translation, that we see Brazil being the largest head wind from that standpoint.

But there are some other locations where the US dollar exchange rate has strengthened.

We do face in the area of a $40-million to $50-million head wind associated with that.

The strength of the North American light truck market, in particular the K2XX program and the Ram program, is going to dictate where we end up in that range of $4 billion to $4.1 billion.

I think at this point, Itay, I would say it's relatively balanced in terms of where we expect to end up in that range.

We might be a little bit more bullish if it were not for the strength in the dollar.

That's very helpful, Mike.

Speaking of the strength in North America, during the quarter we saw some headlines around GM potentially looking to increase capacity to Arlington.

If that were to happen, can you remind us of what your capability, your max capacity is for K2XX -- how much more you would be able to absorb?

Do you see any potential bottlenecks around the supply chain, away from American Axle.

I'd like to get your thoughts on that.

Itay, this is David.

As we've told you before, we've got installed capacity of about 1.2 million units on a straight-time basis.

When you factor in incremental capacity above and beyond that of roughly 15%, we can cover any changes or additions that GM may put into the schedule.

That was what I was alluding to earlier is that over the past couple years, we've worked very closely with all of our customers, in this case GM, to make sure we've got our capacity aligned not only with them on a total program basis and mix basis, but also with respect to what the current market demand is.

We feel very confident that if they put the additional requirements in the schedule that we'll be able to support them without issue.

With that being said, I can't speak to the rest of the supply base regarding that, but I know that American Axle will be ready.

Great.

That's good to hear.

Lastly, maybe for Mike.

I think CapEx as a percentage of sales was really 4.5% this quarter, a little bit light versus the full year.

Does that ramp up, or is there potential that you might be coming a little bit below the CapEx guide for the year?

Yes, Itay, thanks for raising this question related to CapEx.

I was thinking about adding something to my script, and just forgot.

I do expect that CapEx in this first quarter will be lighter than we see as a run rate for the rest of the year.

We had some normal timing issues relating to the period of launch.

There's nothing out of the ordinary other than that.

We still stand by our CapEx estimates for the year around 5% of sales.

Yes, I expect our CapEx run rate to trend up as we work our way through the year.

Great.

Thanks so much everyone.

John Murphy, Bank of America Merrill Lynch.

Good morning, guys.

Good morning, John.

If we think about the EBITDA margin in the quarter, obviously it was very strong at 14.2%.

Thinking about it in the absolute terms and forget about sequentials or year over year, if we look back over the last two years, the first quarter's been the lowest quarter for EBITDA margin.

If we think about what's going on seasonally through the course of the year, there's no reason to believe that it should necessarily be the strongest quarter of the year.

As we think about the future three quarters this year, what's the reason that you think there might be a deterioration in EBITDA margin?

Is the new non-GM programs coming on that are running a little bit lighter, or just trying to understand?

It seems like you're being pretty conservative on that margin now?

Yes, John, a couple things I would comment on.

First is we did have a really solid operating performance in the first quarter of 2014.

I mentioned that our budget for sales was right in line with our actuals, but our performance from an operating perspective was well ahead of our budget.

We do see the opportunity for some up side as we work our way through the year.

But let me point out a couple things that need to be considered in balance with that issue.

The first is that we did have, while lower than the fourth quarter, we did have a couple million dollars of this balance sheet marked to market running through our EBITDA in the first quarter of 2015.

That would normalize 14.2% to approximately 14%, which is right in line with our guidance for the year.

As it relates to seasonality, I think you touched on a couple critical points.

We do expect that as we bring on new programs, our launches this year are a little bit more weighted, at least in terms of the starting of the launches, to the back half of the year.

We will have the lower capacity utilization rates on the capacity we're putting in place for those programs.

We will experience higher launch costs in the early days of launch as it relates to excess staffing levels and quality checks, that type of thing.

We do see our SG&A spending ticking up little bit over the course of the next couple quarters, probably not so much in the fourth quarter.

But we have some R&D expenses, particularly product validation, that will increase a little bit over the next couple quarters.

Some of those issues might result in the first quarter looking favorable.

As you pointed out, if we can keep our operating performance at the same levels we had the first quarter, we think that this year shapes up very well for us.

That's great.

Maybe then a second question, and Itay touched on this a bit.

We think about the rumors around the Arlington plant expansion, $1.3 billion.

It sounds like there's something going on down there, whether it's confirmed or not yet.

If GM were to theoretically expand capacity on the K2XX, whether it be on the pickup or the SUV side, and they came to you and asked for increased capacity, and you would have to put capital to work, how does that agreement work right now?

Would they be sharing in that capacity expansion, or the cost of that capacity expansion for you?

I'm trying to understand what your commitment is currently with GM, and how that would work if that came to pass.

Yes, John, as I mentioned, we've got an installed capacity on straight time of about 1.2 million units, with the ability to flex up based on an MCR-type level of about 15% incremental to that.

We just have to understand what GM's vehicle assembly capacity capability is.

If they're increasing that going forward we'll have to balance that against our installed capacity today.

If there's incremental investment required to support those changes, then we'll have those negotiations with GM with respect to their responsibility for some of that capital, and the timing associated with that.

That's a great problem, or a great opportunity.

That's how we're going to look at it.

We're not knowledgeable of any of the changes, other than some of the things we've all read in the press in regards to future expansion and announcement of Arlington, but without any details associated with it at this time.

We'll work closely with our customer, in this case GM, to address that matter when it becomes public, and when they share that with us.

John, the other thing I would add -- this is Mike -- as David pointed out, 1.2 million is our straight-time capacity.

We do have flex capacity up to about 15% higher.

Not all of that is mix-aligned with GM's desire to build more SUVs, but much of our capacity would be relatively easily transferable.

This issue is clearly more up side than risk to our Company.

Got you.

Lastly, you alluded to higher accruals for warranty in the first quarter.

I'm wondering what was going on there, and if that's something we should expect going forward, and how much higher those warranty accruals were?

Yes.

John, we did plan and budget and build into our guidance for this year higher warranty accruals.

This is nothing more than the application of existing agreements to our business.

In certain of our warranty arrangements with our customers, we have a period of time at the beginning of the program, in the first year to two years of launch, where we have lesser warranty obligations then as the program matures.

As we step into significant launch activity 2013, 2014, and 2015, our warranty obligations increase.

Keep in mind that back in 2009, with respect to General Motors anyway, we did normalize warranty terms and conditions back at that point in time.

We were not responsible for warranty in the same manner as other suppliers, due to the way that the Company was bought and sold in 1994.

That's since been changed.

We will expect to see higher warranty expense going forward.

There was no specific concerns or material issues related to a particular program.

These are sort of the accruals that you set aside, hope you never have to pay, but based on estimates of what the industry bears based on our own experience with our customers, it's appropriate under GAAP to make those accruals.

Thank you very much.

Great quarter, guys.

Thanks, John.

Rod Lache, Deutsche Bank.

Good morning, everybody.

I have a couple questions.

First, could you give us some magnitude of the launch -- the launches second half versus the first half?

You said it was a little bit more back-half weighted?

Yes, right.

I think you'll see, beginning in the second quarter, and certainly more in the third and fourth quarter, that our sales will pick up as it relates to launch.

We're probably in the neighborhood of 2/3 new business activity in the back half of the year, somewhere between 60% -- call it 60%, maybe, back half of the year.

But it's really the fact that the new business contributions we have in the first quarter relate to programs that launched last year.

The launch activity that we have in the second half of the year will be early days of launch, as opposed to second, third, fourth, quarter of launch.

On these questions, the thoughts on GM's ability to flex production higher, these investments that we're seeing GM announcing, at least to our knowledge, they don't seem to be associated with near-term capacity.

They're more related to the T1 project.

Does that sound right to you?

Rod, all I would say is I think GM's doing everything possible to maximize their output out of their existing infrastructure today in regards to the K2XX.

Clearly the market's receive their product extremely well, not only the pickup trucks, the light duty and heavy duty, but especially the SUV.

As Mike indicated earlier, Arlington is the sole SUV facility.

Therefore there is a major backlog or a demand for that product right now.

How quickly they can get that on board is something that's still TBD.

But as I indicated, they're going to do everything they can to flex the capacity, and we'll be prepared to support that.

Okay.

When do you get some insight into the bidding activity on the next-generation truck?

Is that something you have this point?

We're in discussions with GM with respect to that program.

They will be making some decisions and going through the whole quotation process this year.

It'll probably be the latter half of the year before we get any final direction on that program.

Okay.

Lastly, if you could maybe touch on, reminding us how raw materials affect your numbers?

Also, now that leverage is coming down, it sounds like you have a lot of comfort with the free cash flow.

Any update on acquisitions, and just the general expectation that you have about identifying and closing in on something external?

Just from a capital standpoint, as we've said to you before, we're going to continue to focus on organic growth, but we're going to be much more selective in regards to the target organic growth opportunities we're going to go after.

Clearly we're focusing on strength in the balance sheet and lowering our debt levels.

That's been the focus the last several years, those two items I just mentioned.

Then as you indicated, we are looking at inorganic or strategic growth opportunities.

Nothing to announce today, but we're actively looking -- not only in the core businesses that we operate in today, but other things that could be complementary or vertically integrate and support our business.

Last but not least, as we said, we will evaluate those things for our shareholder, whether we introduce a dividend at the appropriate time.

That's something that we'll contemplate

From a strategic standpoint again, as we said to you guys, we're going to be shifting some of our focus, which was heavily concentrated on the organic side, to more of a balance between the organic and the strategic side.

And the raw materials?

Hi, Rod.

I'll address that.

Raw materials this year for us we expect to be relatively flat, maybe modest levels of inflation versus year-ago levels.

Keep in mind that the volatility of this issue is mitigated significantly by the fact that the metal-market-based inputs to our cost structure are passed through to our customer, primarily.

The good news is that the capacity constraints that we saw in certain commodities, certain types of components we need to deliver our products to our customers, they seem to be receding.

Because there's not a lot of pressure -- in fact in some cases there's input cost reductions right now, our supply base seems to be pretty healthy, all in all.

There's not a significant amount of cost increases that are affecting the business.

In markets such as Brazil, that's really a different case, where there is significant inflationary pressure right now.

But in terms of the markets that really matter for our business, the markets have really moved the needle.

There's no significant cost pressures that we see for 2015.

Okay, great.

Thank you.

Thanks, Rod.

Brian Johnson, Barclays.

Yes, good morning.

I just want to follow up.

You've talked about the excess capacity that's fungible, that can support an expansion of your primary customers' product line and hence demand for axles.

A couple clarifications on that.

Are you saying when you measure that, there's actually tooling and machinery that is in the system that could be put to use, or would be additional CapEx for PP&E that you would require?

Brian, the answer to that is both.

Clearly we're going to leverage and exercise the capacity and the tooling and the machines that we have installed to date first and foremost.

If GM decides to change their schedule requirements going forward and increase that capacity beyond that, and if incremental capacity is required, then we would look to bring that capacity online.

Clearly there's a timing associated with doing that.

We would also need to make sure that our supply base is capable of supporting that moving forward.

They critical thing to note is we've established standardized and common designs and processes.

We would make sure that our operations are flexible and will adjust with the mix and will adjust the changing requirements in the total program if required.

Any way to bound what that could potentially means for 2016 CapEx?

Right now we're operating to the releases that are there.

If GM decides to go beyond that, then we'll have to decide what that means.

Right now we don't have enough clarity to give you any feedback.

Related, I assume when you say excess capacity you mean excess machine capacity.

You don't have staff capacity in excess, so you would need to modestly step up, or could you vary shift?

How would that work down in what I would presume would be (inaudible)?

As I mentioned to you, we'll leverage our existing infrastructure including the manpower side of things -- not only the machinery but the manpower.

But if there is incremental requirements for both the manpower and the machinery, then we'll look at adjusting that accordingly, but we'll do it in line with the buy-in requirements and making sure there's consistency to those buying requirements.

But we do this every day, adjust our schedules accordingly to our customers' requirements, in this case GM.

We just need to get a little bit more clarity in regards to what their future requirements may need to be.

Great.

Second question, thinking about the -- in particular, the sequential quarterly incremental margin.

How is it tracking between sequential on K2XX, just one big program, and sequential on the variety of programs that make up the 37% non-GM -- and then if you include non-K2XX GM, the large part of your business that isn't K2XX, where I assume the operating challenges are more diverse?

Yes, Brian.

I would say this.

The major offsets to the contribution margin we earned on higher sales in the first quarter were not related to the K2XX program, other than to the extent we had some higher warranty accruals.

Big picture, K2XX program ran very well.

The big houses at Guanajuato and Three Rivers were run exceptionally well, in many regards.

I would tell you that those facilities are not only running the K2XX, they run many other programs.

They did well.

We had pretty much an across-the-board beat.

Our forging operations beat their budget.

Many of our other foreign operations, while they may have suffered some sales declines or foreign exchange translation head winds, their labor and overhead performance was pretty solid.

I would tell you there was no significant differences across the portfolio, but obviously the one that -- the couple that matter the most, the big truck programs, they ran well, and so did our total business.

Should we be thinking about roughly the same kind of incremental margins on K2XX versus non-K2XX business?

No.

As we've said many times before, the contribution margins on the large truck programs are higher.

than the contribution margins on the other business.

We're north of 25% on the major North American light truck programs, and we're closer to 20% on many of the other passenger car programs we run, where the material margins are higher.

The material margins are lower, but the material input costs are higher, is what I meant.

Maybe it's more compared to some, when you're more in the learning stage on those programs where there's some volatility around operating results.

You're feeling fairly comfortable that your passenger car programs are running very smoothly?

I think you just hit on the key issue.

Both David in his comments and my comments we hit on the fact of post-launch stability.

There's been a lot of volatility in operating requirements over the last couple years, a lot of mix changes, and things that we've had to do to adapt on the run.

General Motors has done a good job of clarifying those requirements.

We've done a good job, and so have other elements of the supply chain adapting to those market demands.

We had an excellent quarter of stability and performance across the entire supply chain -- not just our Company, but all the other companies that are key to making that program work.

Okay.

Some points we've been making, there's worse things in life than having a plateau of around $17 million that doesn't go up or down very dramatically?

Brian, in our case that is a bullish scenario, because we can harvest cash, we can pay down debt, we can reward our shareholders.

That's going to generate the cash we need to accelerate our growth and diversification.

I would describe that in a much different manner than not so bad.

Okay.

Great, thanks.

Thanks, Brian.

Joseph Spak, RBC Capital Markets.

Hi, this is [Reta Paray] on for Joseph Spak.

I was wondering how does China fit into your overall strategic plans, and how are you forecasting for those in the region over the next few years?

Secondly, what are the puts and takes we should be thinking about in cash flow for the rest of the year?

Let me address your first question in regards to China.

China's an integral part of our business today, and a growing part of our business in the future.

It's very important to us with respect to the opportunities that are in front of us.

We're going to see nothing but growth for American Axle within the Asian corridor, especially China.

That's not only on our truck activity, but more importantly on our passenger car activity, and through our joint venture with JEC.

We're very favorable and positive towards China.

Even though the overall market's slowing down a little bit, our products are being received very favorably there.

Like I said, we only see positive growth going forward.

On the cash flow side of things, as we said to you, we've guided at $175 million to $200 million for the year.

We're consistent in regards to maintaining that guidance.

We expect to deliver that range this year.

Again, last year was an inflection point for us in that respect.

As we continue to improve our operations, hopefully we can continue to strengthen the overall margins and cash flow generation.

Thank you so much.

Ryan Brinkman, JPMorgan

Hi, thanks for taking my call.

I'm just looking at your incremental EBITDA margin in the quarter.

It looks like about 23%.

You gave John Murphy some of the reasons why impacting the year-ago results, like the balance sheet marked to market.

I understand just can't just take this incremental and apply it to the full-year revenue rise.

That would be about $590 million of EBITDA at the mid-point -- too high.

Can you talk about the 23% in the quarter, that was fairly clean, right?

Maybe talk about how that compared to your expectations, and whether it at a minimum at least, suggests that you're on track to maybe end up in the higher end of the EBITDA range for the year?

Yes, Ryan, from our perspective, we would describe that contribution margin or profit conversion as relatively clean.

The only two major factors that really enter into the walk from a year ago level is the contribution margin earned on the higher sales, which came in a little better than 25%.

Then when you look at the fact that the quarter a year ago had a one-time gain of some magnitude, $4 million on the sale of the DMC.

The other costs were relatively in balance.

Launch preparation costs, as I mention, were relatively consistent, meaning that the cost of project expanse and R&D, and other launch costs were relatively similar.

Our production performance, we've commented now on a few questions.

Our operating efficiencies were better, and fairly significantly better.

But we did have some higher warranty expense obligations, and our SG&A went up.

SG&A went up in line with our expectations.

We were actually short of our budget by a couple million dollars in the quarter, but we were higher than year-ago levels.

We've increased staffing levels where we think we can take advantage of opportunities to grow our business.

We do incur wage inflation, and that alone accounts for $5 million to $7 million of increase year over year, if you account also health care inflation.

We continue to work on our Oracle ERP upgrade.

The cost increase relative to that is relatively modest, just a little bit more than $1 million.

All these relatively small items add up, and do offset that profit conversion a little bit.

What I would tell you is all that is consistent with the guidance and the planning that we had for this year.

There were no significant variances in the quarter that persuade us from being confident in our ability to deliver what we've said.

Okay, that's great color.

My last question is about Brazil and the latest you're seeing down there.

How are your customers, your key ones, VW and GM I think, are performing relative to the industry?

Then just your general thoughts on the market and the currency?

I guess one benefit, if you want to call it that, from the lower -- from the industry down-turn, is that your revenue exposure there will be less going forward.

I was hoping you could I was hoping maybe update us, too, on what the current exposure is to Brazil and LATAM?

First and foremost, everyone understands Brazil market is way down right now.

At the same time, there's significant foreign-exchange issues going on in Brazil.

We're addressing all those matters with our customers.

We've gotten relief with many customers, but not all customers at this point in time.

We've had to adjust our market to the new market demand, or I should say our business to the new market demand.

We've done that through some manpower adjustments, and just scheduling -- adjusting our operations to meet the customer schedule requirements.

I don't see any relief in the near sight.

But at the same time, we've got a solid Management team that's in place that's addressing the issues, to make sure that we can have a viable and sustainable business there.

You guys understand some of the challenges we had in Brazil a couple years ago.

As we've already communicated to you, we've overcome those challenges.

Now we got the new economic challenges that we as a Management team are having to work our way through.

We're managing those quite well, I think.

Mike, I don't know if you want to comment anything else?

The only thing I'll add, maybe Ryan, is to the second half of your question.

You recall a couple years ago this was a $200-million business.

It weakened a little bit last year based on some lower volumes.

As we look now with the adjustment for foreign exchange translation, we are in $150-million area.

It could be a little lighter than that this year, depending on where volumes end up.

But generally speaking, we went from a $200-million business to $150-million exposure to this market.

Okay, very helpful.

Thank you.

Thank you.

Matt Stover, Susquehanna.

Question's been answered.

Thank you.

Thanks, Matt.

Dan Galves, Credit Suisse.

Hi, good morning, thanks.

Most of my questions have been answered, too.

I thought maybe you could give us a quick update on the Thailand business.

I was curious if Europe is a region that you guys would potentially look to get bigger in at this point, and whether that could be done through new business, or would need to be through acquisitions?

I will start with the second question first in regards to Europe.

Europe only represents about 3% of our overall sales today.

We're clearly growing right now from an organic standpoint in Europe.

We'll continue to grow based on opportunities that are presenting themselves there across various product lines that we offer.

But also, we'll look at inorganic or strategic growth in Europe to grow our overall business and our presence there.

Again, all in the effort of diversifying our customer, our products, and our geographic footprint.

With respect to Thailand, clearly you understand the Thailand market's been down.

We've again adjusted our business accordingly to what we need to do.

More importantly for us, what's exciting for us is launching this new Ford program, our first-ever drive-live contract with them.

That launches this year.

Our team is absolutely ready for that launch.

Got it.

Is that new program, is that within the existing footprint of your business, and from that perspective, could it lead to pretty strong contribution margins initially?

The answer is yes.

It operates within the existing footprint and structure.

We've had to make a few capital investments to support the requirements, but minimal.

We should see decent returns on that investment.

Great.

Thanks, guys.

Your final question comes from the line of Ravi Shanker with Morgan Stanley.

Thanks.

Good morning, everyone.

Thanks for squeezing me in.

A few follow-ups here.

First, I'm sorry if I missed this, but did you quantify the FX transaction benefit that you got on the quarter from Mexico?

Ravi, the foreign-exchange benefit that we quantified is the marked to market re-measurement gain on the balance sheet.

That was about $2 million in the first quarter 2015, down from $6.7 million a year-ago level, or sequentially last quarter.

Right, but rather than the balance sheet, there should been a gross-margin bump from that, as well, right?

Well, that's right.

The other way that the currency benefits the Company is currency move relative to the US peso is that to the extent we're being paid in dollars and have some portions of our expenses in pesos that benefits us.

I'm not sure, are you talking annual or sequential?

Just in the quarter.

I know, but --

In the quarter year on year.

Yes, year on year.

Year over year?

Yes.

We're probably in the neighborhood of $4 million benefit.

Got it, very helpful.

Second question is on the disconnecting all-wheel-drive system.

Forgive me if I missed this, but did you -- do you have any customers other than Chrysler signed up?

Right now all the derivatives or programs are through Chrysler at this time, but we do have other ones in our backlog that will be launching going forward here.

Any you can identify?

No.

Okay, got it.

Third, on the CPV you guys are settled in to a pretty high level right now, but the CPV year-on-year increase of 1% was the smallest of the K2XX era.

Do you think we're flat at all these levels, are do you think there's still room for that to go up?

Yes Ravi, absolutely we think it's going to flatten out around these levels.

The program is fully launched.

Really, the last quarter where we had any substantial increase in activity is this quarter, as the SUVs and heavy duty pickup trucks launched a year ago.

Relative to that, we don't expect any significant changes.

Seasonal changes in four-wheel-drive penetration, that type of thing, could have some impacts, but they should be relatively modest.

Understood.

Lastly, there was mention of the K3XX program on this call.

To the extent that you know a reasonable amount about that program so far, do you expect the SUV portion of the program to be the same size as the K2XX?

Ravi, we're not in a position to comment on that at this time.

You need to have any discussions with GM regarding that matter.

We're not at liberty to speak on that.

Sure, no problem.

Thanks for taking my questions.

Great.

Thanks, Ravi, and we thank all of you participating on the call, and appreciate your interest in AAM.

We look forward to talking with you in the future.

Again, thank you for your participation.

This concludes today's call.

You may now disconnect.