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Operator
Good morning.
My name is Mike, I will be your conference facilitator today.
At this time, I would like welcome everyone to AAM's third quarter 2015 earnings conference call.
(Operator Instructions)
As a reminder, today's call is being recorded.
I'd now like to turn the call over to Mr. Jason Parson, Director of Investor Relations, please go ahead Mr. Parsons.
- DIrector of IR
Thank you and good morning.
I would like to welcome everyone who's joining us today on AAM's third quarter of 2015 earnings call.
Earlier this morning, we released our third quarter of 2015 earnings announcement.
You can access this announcement on our website AAM.com or through the PR user wire services.
To listen to a replay of this call, you can dial 1-855-859-2056, reservation number 34605624.
This replay will be available beginning at 1 PM today through 5 PM Eastern time, November 6, 2016.
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 asked 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 the reconciliation of these non-GAAP measures to GAAP financial information, is available on our website.
Over the next several months, we will participate in the following conferences: the Barclays Global Automotive Conference in New York on November 19, the Credit Suisse Industrial Conference in Florida on December 2, the Bank of America 2015 Leveraged Finance Conference in Florida on December 3 and the Deutsche Bank Global Auto Industry Conference in Detroit, Michigan on January 13.
Finally, we are also happy to host investors at any of our facilities.
Please feel free to contact either me or Vitalie Stelea to schedule a visit.
With that, let me turn things over to AAM's Chairman and CEO, David Dauch.
- Chairman & CEO
Thank you, Jason.
Good morning, everyone.
Thank you for joining us today to discuss AAM's financial results for the third quarter of 2015.
Joining me on the call today are Mike Simonte, our President; and Chris May, our Vice President and Chief Financial Officer.
To begin our discussions today, let me provide you a few highlights from the third quarter of 2015.
I'll then review some of the quarterly developments before turning things over to Chris.
After Chris covers the details of our quarterly results, we will then open it up to Q&A as we normally do.
Let me first state that our financial results in the third quarter of 2015 were highlighted by strong cash-flow generation and profitability, driven by solid production volumes and continued operational excellence.
Something that AAM has been known for.
Our third quarter financial results include the following: First, our sales in the third quarter of 2015 were $971.6 million, up 2.2% on a year-over-year basis.
On a year-to-date basis, AAM sales for the first nine months of 2015 were up $2.94 billion compared to $2.76 billion in the first nine months of 2014.
This year-to-date sales growth grew approximately 7%, compared to growth rates of 4.5% on the US dollar and 3% for the North American light-vehicle production.
Second, in the third quarter of 2015, our non-GM sales increased by 8.4% on a year-over-year basis, to $321.6 million.
The key drivers that continue to support our non-GM sales growth in 2015 were strong production volumes on the Jeep Cherokee, increased revenue related to Mercedes in China and the FCA drive shaft program here in North America.
In addition, we launched programs for Ford in Thailand, as well as Jaguar and Land Rover in Europe.
Third, our net income increased over 38%, on a year-over-year basis, to $60.9 million, or, $0.78 per share in the third quarter of 2015.
Fourth, we continue to achieve significant year-over-year performance gains in key operating metrics.
Our gross profit increased $17.6 million to $158.3 million in the third quarter of 2015, as compared to the third quarter of 2014.
Our gross margin was 16.3% in the third quarter of 2015, as compared to 14.8% in the third quarter 2014.
And, our EBITDA increased to $149.2 million in the third quarter of 2015, which represents a new quarterly record for American Axle.
This compares to $127.7 million in the third quarter 2014.
Our EBITDA margin was 15.4% in the third quarter of 2015, compared to 13.4% on a year-over-year basis.
And fifth, AAM generated over $73 million of positive free-cash flow in the third quarter of 2015.
On a trailing 12-month basis, we've generated $175 million of positive free-cash flow, and are on track to deliver approximately that same amount for the full year 2015.
As a result of the free-cash flow generated in the third quarter of 2015, we've been able to lower our adjusted EBITDA leverage ratio to 2 times.
Which is meeting our long-term objective that we had for this year, which was targeted to be done by the end of the year, here.
We actually completed it one quarter ahead of time.
This has been a long-standing goal for AAM and we're very pleased to have accomplished this one quarter early.
Chris will cover additional details on our third quarter financial results in just a few minutes here.
But, before I turn over to him, let me share with you some highlights from the quarter in areas of quality, operational excellence and technology leadership.
First in the area of quality.
In today's fast-paced automotive business world, quality is on everyone's mind.
For AAM, quality is a key differentiator in the marketplace.
And, for the third quarter of 2015, we had seven AAM facilities with a perfect quality performance, or 0 ppm.
This is a great accomplishment for these location.
And, on an overall basis, AAM has and continues to operate at levels less than 5 discrepant parts per million across the board.
Our focus on quality S&N in just achieving world-class ppm models.
As we strive to stay ahead of the customer's changing expectations, we are taking our best-of-the-best techniques that's developed, where we're referred to internally, as AAM's [kewder] for quality assurance system, and are reaching it across our entire global enterprise.
We continue to meet and exceed astringent quality standards and warranty metrics that are demanded by our customers, year over year, while providing the highest level of quality performance in industry.
We believe our quality performance is, and will continue to be, a competitive advantage for AAM.
Now moving on to my second item, operational excellence.
AAM's third quarter 2015 gross profit EBITDA and cash-flow performance reflect high-capacity utilization rates in our North American facilities, combined with continued operational stability and the implementation of significant productivity initiatives at our Three Rivers, Michigan plant and our Guanajuato manufacturing complex in Mexico.
We've also been able to reduce our inventories in 2015, while at the same time, implementing our new business backlog and growing our topline sales.
Most importantly, we continue to demonstrate the ability to profitably grow while operating and generating positive cash flow.
In the third quarter of 2015, we continued a philosophy [in the anonymously] launch programs in our new business backlog, with important customers that include Ford, Jaguar, Land Rover, Mercedes, Fiat Chrysler and Nissan.
Again, continuing to support our diversification initiatives.
The last thing I would like to cover today is our technology leadership.
The most important business focus for AAM is continued advancement in the area of technology leadership, as we position ourselves to continue to lead in a global driveline industry.
We are confident that our engineering initiatives, such as the development of AAM's next-generation EcoTrack Disconnecting axle technology and our EAL electrification strategies, will continue to drive AAM's sales growth and diversification.
AAM's courted and emerging new business opportunities currently exceeds $1 billion of opportunity.
And, a significant portion of these new business opportunities relates to these innovative driveline solutions.
In the third quarter 2015, we began the initial move-in phase to our Advanced Technology and Development Center, what we are referring to as the ATDC.
The ATDC will be the center of our acceleration of innovation, collaboration and development of advanced product, process and systems technologies.
It will enable us to expand our benchmarking capabilities and accelerate the development of many of our critical competencies needed to successfully address the dominant industry trends that are changing forever quickly, and are affecting the future of driveline systems.
These systems include improved efficiency, light weighting or mass reduction, and also enhanced vehicle performance.
We expect to complete the initial phases of the new technology center by the end of 2015.
And, we look forward to showcasing our latest commitment to technology leadership to you, in the near future.
In addition to this key investment in the heart of the North American automotive industry right here in Motown, we are also planning to increase our investment in technical resources abroad over the next few years.
As we continue to solidify our global manufacturing footprint and diversified portfolio, we look to enhance and expand our capabilities in order to provide more approved and stronger capabilities in the area of technology solutions, to our customers in those regional areas.
With respect to AAM's 2015 Outlook, we are now' estimating our full-year sales for 2015 at $3.9 billion.
We're raising our full year 2015 EBITDA margin target by 25 basis points, to a range of 14.5% to 14.75% of sales.
We're also confirming our full year 2015 free-cash flow target to be approximately $175 million.
Before I turn it over to Chris, let me address one last update the I know you are all interested in.
On our last call, our earnings call in July, we referenced one specific program that was in the final stages of the courting process.
Recently, we were notified that we have been selected as a supplier for this program.
We are currently in the process of finalizing the documentation of this new business award.
And, we expect to include it in our AAM's new business backlog.
We will communicate to you in early 2016.
This new program supports our key business diversification goals, and has the potential to offset approximately 35% to 40% of the impact of the GM's next-generation full-size truck program sourcing decision, as we communicated to you earlier in the last earnings call.
This is fantastic news and great news for AAM, and further demonstrates our ability to competitively win new business.
And, we're extremely confident that over time, we can continue to close the remaining sales gap resulting from the GM sourcing decision.
But again, a great victory and great news for AAM.
In summary, we are pleased with AAM's operation and financial performance in the first nine months of 2015.
We are confident in our ability to finish the year strong while delivering on our 2015 key performance objectives.
As we look towards 2016, we will sustain our focus on organically growing our business and reducing our debt through positive free-cash flow generation, just like we've done in the past.
We will also continue to assess strategic opportunities that will complement our core strengths, supplement our diversification strategies and be accretive while providing future, profitable growth prospects.
That concludes my comments for this morning.
I thank everyone for your attention today, and for your support of AAM.
Let me now turn the call over to our Vice President and Chief Financial Officer, Chris May.
Chris?
- VP & CFO
Thank you, David.
Good morning to everyone.
I will cover the financial details of our third quarter 2015 results with you today.
Let's start with sales.
Net sales in the third quarter of 2015 increased to $20.8 million, or 2.2% on a year-over-year basis, and $971.6 million.
Growth in non-GM sales was the primary driver of our sales growth for the quarter.
In total, non-GM sales increased 8.4% to $321.6 million in the quarter, compared to $296.8 million in the third quarter of 2014.
This continues our strong growth trend of our non-GM sales.
We expect non-GM sales growth for the full year of 2015 to be up over 10%.
As it relates to content-per-vehicle, AAM's content-per-vehicle is measured by the dollar value of our product sales supporting our customer's North American light truck and SUV programs.
AAM's content-per-vehicle was $1,642 in the third quarter of 2015, down from $1,676 in the third quarter of 2014.
This reduction is largely due to the impact of lower metal market pass-throughs to our customers.
Now, let's discuss AAM's profitability for the quarter.
All of AAM's key profitability metrics in the third quarter of 2015 were significantly improved on a year-over-year basis.
This was led by solid performance in our North American operations and increased profitability in our China operations.
Gross profit was $158.3 million, or 16.3% of sales, in the third quarter of 2015.
On a year-over-year basis, gross margin was up approximately 150 basis points.
Operating income was $92.8 million, or 9.5% of sales.
On a year-over-year basis, operating margin was improved by 140 basis points.
AAM's GAAP derived EBITDA; or earnings before interest expense, taxes and depreciation and amortization; was $149.2 million, or 15.4% of sales, which improved by 200 basis points as compared to the third quarter 2014.
And as David mentioned, this represents a new quarterly record for AAM.
Net income in the quarter was $60.9 million, or $0.78 per share.
This is an increase of over 38% on a year-over-year basis.
The favorable profit contribution from higher sales and production volumes, as well as continued operational efficiency and productivity in our driveline assembly and no-foam products operations, were the primary drivers of AAM's improved gross and operating margin performance for the third quarter of 2015, when compared to the prior year.
Before we talk about our cash flow results, I will cover SG&A, interest, other income and taxes, starting with SG&A.
In the third quarter of 2015 SG&A, which includes R&D, was $65.5 million, as compared to $64 million in the third quarter of 2014.
Both SG&A figures were at 6.7% of sales.
On a year-to-date basis, SG&A was $204.6 million, or 6.9% of sales.
AAM's R&D spending in the third quarter of 2015 was $25.8 million, as compared to $26.4 million in the third quarter of 2014.
However, on a year-to-date basis, R&D spending increased by $6 million to $82.6 million.
This year to date increase supports many of the technology leadership initiatives that David mentioned earlier.
Net interest expense in the third quarter of 2015 was $24.2 million, about the same as it was in the first two quarters of 2015, and slightly less than the $24.4 million in the third quarter of 2014.
Other income in the third quarter of 2015 was $6.7 million, as compared to a loss of $0.8 million in the third quarter 2014.
As a reminder, the two primary components of other income for our company are: One, foreign-exchange gains and losses; and two, funds from our Hefei joint venture.
In the third quarter of 2015, AAM benefited from the net favorable impact of foreign exchange gains, primarily related to the re-measurement of peso's denominated assets and liabilities at September 30, 2015.
Since we have a significant net peso-liability position in Mexico, we benefited from a continued strengthening of the US dollar versus the Mexican peso in the third quarter 2015.
These re-measurement gains and losses are non-cash in nature, but can increase or decrease under income every period, based on that quarter end exchange rate.
AAM's effective tax rate was 19.3% in the third quarter of 2015, and 17.5%, year to date, through nine months of 2015, which is right in line with our guidance range of 15% to 20% for the full year of 2015.
Taking all of these sales and cost drivers into account, GAAP net income was $60.9 million, or $0.78 per share, in the third quarter of 2015.
Now, onto one of my favorite topics, cash flow.
We define free-cash flow to be net cash provided by operating activities, less capital expenditures, net of proceeds received from the sale PP&E.
GAAP cash provided by operating activities in third quarter of 2015 was $113.8.
Net capital spending in the third quarter of 2015 was approximately $40.6 million.
Reflecting this operating activity and CapEx, AAM's positive free-cash flow in the third quarter of 2015 was a solid $73.2 million.
On a year-to-date basis, we have generated $136.2 million of free-cash flow.
On a trailing 12-month basis, we have generated $175 million free-cash flow.
Our free-cash flow results, year to date in 2015, positions us in a good spot to deliver on our target for of approximately $175 million of free-cash flow for the full year of 2015.
Next, I will cover a few items on the balance sheet.
AAM's EBITDA leverage, or ratio of net debt to EBITDA, was down to approximately 2 times at September 30, 2015, on an adjusted basis.
This represents achieving our targeted ratio for the end of 2015 a full quarter ahead of schedule.
AAM's EBIT coverage, or the ratio of EBIT to interest expense, was approximately 3.8 times at September 30, 2015, also on an adjusted basis.
Both of these credit metrics were calculated on a trailing 12-month basis.
Final note on the balance sheet.
AAM ended up the third quarter of 2015 with total available liquidity of approximately $924 million, consisting of available cash and borrowing capacity on AAM's global credit facilities.
We view this as a healthy level of liquidity for the Company, in order to meet all our objectives.
Before we start Q&A, I will close my remarks this morning by commenting on AAM's 2015 Outlook.
First, as David mentioned, we are estimating our full year 2015 sales guidance to be approximately $3.9 billion.
This tracks to the lower end of the range that was provided to you in the previous earnings call, and further reflects our estimate of impact of lower metal market pass-throughs and foreign currency translation for the balance of 2015.
Today, we also raised our full year 2015 EBITDA margin targets to be in the range of 14.5% to 14.75% of sales.
And lastly, we confirmed our full-year 2015 free-cash flow target of approximately $175 million, which would represent a robust 11% free-cash flow yield compared to our market capitalization.
In summary, we're pleased to have delivered another solid performing quarter, and look forward to closing the year out strong.
That wraps up our prepared comments for our third quarter of 2015.
Jason, back to you.
- DIrector of IR
Thank you, Chris and David.
We have reserved some time to take questions.
I would ask that you please limit your questions to no more than two.
So, at this time, please feel free to proceed with any questions you may have.
Operator
(Operator Instructions)
Itay Michaeli, Citigroup.
- Analyst
Thanks.
Good morning and congratulations, everyone.
I know that you're not disclosing the update in the backlog, today.
But I'm hoping, just given your prior target of going topline about 5% to year, through 2017.
Could you give us a rough update of how you're feeling about that target, as you look at the world today?
- Chairman & CEO
We're not changing those targets going forward, Itay.
We're reaffirming those targets.
The good news for us is the fact that they have a program that we've identified as an opportunity to offset some the loss from the K2XX business that we've been successful, in regards to earning that business.
We wanted to communicate that to you guys, effectively here today.
- Analyst
Great.
Can you need described when that program would begin?
- Chairman & CEO
Right now, the sharing of the details, timing-wise, of the overall program.
At the appropriate time, we will do that.
We're just not at liberty to do it at this time.
- Analyst
Second question, on the free-cash flow progress.
First thing, could you talk about what's driving the CapEx a little bit lower than the prior Outlook?
And then maybe, David, as you're generating all this free-cash flow, if you could perhaps update us on what you're seeing in terms of cash deployment opportunities for the Company over the next year or so.
- Chairman & CEO
Just from a cash availability standpoint, clearly we are going to continue to balance our priorities, which is the organic growth.
Which we've consistently been doing year over year.
We been strengthening the balance sheet.
And, obviously, we achieved an important goal for us, as far as getting to that 2.2 times leverage position by end of the third quarter instead of the end of the fourth quarter.
So, we are one quarter ahead of schedule.
That doesn't mean that we're going to stop there.
We will continue to look at how we continue to pay down debt and do the appropriate thing there, to strengthen and solidify the balance sheet.
And, as we've said all along, we're also going to start looking more at some of the inorganic, or strategic, growth opportunities.
And, we're assessing some capabilities and opportunities at this point in time.
So, we feel very good about where we stand from a liquidity standpoint, right now.
We're at a healthy position.
We're strengthening our balancing sheet.
At the same time, we continue to grow our new business backlog.
- VP & CFO
Itay, just to reemphasize our strong liquidity position at the end of the quarter.
Subsequent to the end of the quarter, we had started some pay-down activity on our term loan, albeit small.
We've taken off, essentially, the next five quarters of amortization payments.
And that, of course, is top of our mind here, as well.
In line with some of these other priorities.
- Analyst
Great.
Terrific.
Thanks for that, that's very helpful.
Thank you.
- Chairman & CEO
Thanks, Itay.
Operator
Ryan Brinkman, JPMorgan.
- Analyst
Thanks for taking my question.
Good morning.
Congratulations on the new award win.
The ink is not dry yet.
But, I know you're not in a position to identify the customer or the product.
But, now that we are closer, I was curious if there's anything you can say about the general nature of the program?
Whether by geography, vehicle type or the product or component that you're going to supply.
I'm ask because, obviously, this helps you with your customer diversification goals.
But, I'm curious if it helps with any of your other goals like geographic diversification, et cetera.
- Chairman & CEO
Yes, Ryan.
Great question.
It is global in nature.
It supports our EcoTrac Disconnecting All Wheel Drive type systems.
So, it is right in our core business that we do today.
As we mentioned, it's a non-GM customer.
And, I just can't get into the specifics of the pockets of, or the programs.
But, at the same time, it should give you enough indication that it's going to support all of our diversification issues, support our global initiatives, at the same time, leverage our latest and greatest technology.
So, we are very, very excited and happy about the program.
- Analyst
Thanks, and my last question.
When one of your competitors reported -- I'll just say it, it was Dana.
They had some execution issues, went through some supply chain issues basically, they lost market share to some of their competitors on the commercial vehicle side.
I was just curious, because you mentioned that your execution has recently been very strong, if there has been any sort of opportunity, if you've been picking up market share?
- Chairman & CEO
Well, we continue to not only hold but grow our business going forward, here.
And, what we effectively communicated to you today is the fact that we have got solid operating execution in our facility.
We're achieving the productivity commitments.
And, we're leveraging the strength that American Axle has always had when it comes to operational excellence.
In addition to that, we continue to invest in our technology leadership with that ATDC that we put into place.
And, we're continuing to elevate and enhance our quality and warranty systems and programs going forward.
That's really the three legged stool that we are really competing on, on a global basis.
And with that, we've been able to protect and support our Business.
At the same time, profitably grow our Business going forward, not only today but also our backlog especially with this new big award that we just received.
- Analyst
Okay.
Thanks, and congrats again on that award.
Operator
Rod Lache, Deutsche Bank.
- Analyst
Good morning, everybody.
Couple questions.
One is, you made a comment on this new program offsetting 35% to 40% of the GM change.
Are you kind of referring to the earnings impact or the revenue impact of that?
- Chairman & CEO
The revenue side, Rod.
- Analyst
Okay.
I thought the GM change was around $500 million.
Maybe that was incorrect?
- Chairman & CEO
No, it's not outlined in regards to what we had talked to you about before.
Again, we are still working with both GM and this new customer in regards to the final program definition.
So, based on what we know at this point in time, we are just updating things appropriately.
- Analyst
Okay.
and --
- Chairman & CEO
What I will say is, as things progress going forward on both customer fronts, as well as on some of our other new business opportunities that we are working on, we'll obviously update you appropriately.
- Analyst
It looks like you're raising the low end of your EBITDA guidance for the year, just based on the margins and the revenue.
The free-cash flow is coming in at the lower end.
Is there any change that is occurring working capital-wise, that has any longer-term implications?
- Chairman & CEO
No, Rod.
In terms of the free-cash flow guidance that's consistent with what we shared with you a quarter ago, we're expecting a good solid fourth quarter as well.
On a positive note, as it relates to working capital to your question, demand for our crossover vehicle that we support from the China market, which we export here from North America, has been very strong, which has sort of a temporary longer working capital draw for us.
But, that's part of the support of the total package, to get to $175 million.
- Analyst
That is one of the reasons why it's at the lower end, I suppose?
Obviously, there has been quite a bit of talk in the market about increasing truck production.
As we look out to 2016 and beyond, GM has been making some changes at Arlington.
Chrysler, just this week, suggested that they would like to grow their body-on-frame truck business.
Do you have any insights into the magnitude of what the growth opportunity is?
And, any color on timing or magnitude of acquisitions?
- Chairman & CEO
With respect to the activity in regards to truck-type production and all that, it's again in that range of 1.235 type area.
That's in line with [ISHF] is at this point in time.
And, we're seeing strong schedules from our customers in that respect, not only just GM but also, the RAM program that we're working on.
So, we feel very good about where we are with truck buy-ins in production.
We think those buy-ins are going to remain strong going forward.
And, if anything, potentially it'll go up.
So, we are pleased that.
The Outlook for the truck industry and crossover market, it continues to be very strong.
Especially when you see the earnings that just came out form the OEM's, and what they are emphasizing in those earnings class and their profits.
On the strategic fronts, we're not in a position right now to identify or communicate anything to you.
All I will say is the fact that, and we've said it earlier, that we are actively looking at appropriate things from a strategic standpoint.
And, when the time is right for us to do something, we will clearly do that and we'll communicate that effectively.
Again, the main thing we want to emphasize, the last several years we've been very focused on organic growth and strengthening the balance sheet.
We've been able to successfully do that.
We will continue to do that.
We're now just being much more aggressive in regards to looking at strategic opportunities, based on the health of the Company.
- Analyst
Great, thank you.
- Chairman & CEO
Thank you, Ron.
Operator
John Murphy, Bank of America Merrill Lynch.
- Analyst
Good morning, guys.
Just a first question, in particularly on the quarter but also year to date.
You're looking at non-GM revenue outstripping GM revenue pretty significantly, and certainly in the third quarter.
Yet, you're getting pretty big grosses.
And, I think the general perception outside the Company is that non-GM business is going to be a whole lot less profitable.
But, we're seeing big growth in non-GM business and we're also seeing margin expense.
So, I'm just curious if you can help up understand why you're getting this margin expansion, even though you're getting what looks like to be a lower mix of business?
And how we should think about that going forward, because the results so far are pretty good with this non-GM growth?
- Chairman & CEO
Yes, we continue to demonstrate strong results as you indicated, John.
What I would tell you as it relates to the non-GM business, we will continue to expect that to grow, very consistent with what we have shared with you in the past.
However, as it relates to the GM business, volumes have been strong in North America.
Especially in the full-size truck program.
And especially in some of the products, as I mentioned earlier, that we ship over to Asia under crossover vehicles.
Some of the dynamic you're seeing from a revenue perspective is the softening of our metal market reimbursement.
And, if you look through the course of the year, we are now reaching some of the lowest points for some of those various metal indices, to which we pass on through to the customers.
Our revenue in excess of $100 million is down, just related to the issue, as well as some FX, in particular out of Brazil.
So, you are seeing that dynamic as it relates to our margin.
Most of that falls into the GM programs, due to their size.
- VP & CFO
Chris, even if we adjust for that, you are still looking at out growth in a non-GM business.
And, you are still seeing margin expansion.
A lot of this purely execution on both the GM and non-GM business.
Because, especially, even when you adjust for that, your grosses are pretty strong.
- Chairman & CEO
John, that's what I was going to say.
Let's give credit to the our operating guys, in regards to the operational efficiency and stability that we're getting.
The productivity initiatives that we're getting.
We have a better profit conversion, in regards to some of the program opportunity that we have out there.
So, again, I really think the operating guys have done a hell of a job here this past quarter, and frankly, throughout the year.
Once we get through getting all the capacity and mix aligned with where the customers need it to be and where the market demand was at.
- Analyst
Okay.
That's helpful.
A second question is, when you think about capital allocation, you are going to have a real high-class problem of being below this 2 times net-debt to EBITDA at the end the year.
I'm just curious, as your thinking about being freed up here on allocating capital a little bit more easily outside of the core business in debt pay down, how do you think about that?
It looks like maybe you could institute a dividend.
Or, maybe you could to buybacks or, you will have room to do acquisitions.
And also, just curious as we think about this new program rolling on, that's going to replace the GM falloff here, will you need to ramp up capacity in any way?
Or could you potentially, I know it's going to sound like a different product, reuse some of the tooling and capacity that you have in place right now?
- Chairman & CEO
Clearly, where we can try to reuse some capacity that's coming available because of the GM sourcing decision, we will do that.
We will have to spend some CapEx in advance.
Not only just to support this new business award but to support the backlog in new business that we have.
As you remember, our current backlog sits at $875 million.
Not next year, but the year after that, we have got $375 million in that given year.
So, there's some CapEx that's going to have be spent to support that, prior to some of the other CapEx coming available for us from the GM K2XX sourcing type of mission.
Again, from a CapEx standpoint and from a capital management standpoint, again you touched on it.
The core areas -- we're going to continue to focus on organic growth.
There's a lot of opportunities.
When you look at the $1 billion that we always, essentially, have in our market basket and the conversion rate that we're having on that right now has been very successful.
The debt situation, Chris and Mike will continue to assess what we need to look at the debt side of things.
Again, historically, this Company lies right around the 1.5 times leverage-type position.
So, we will evaluate with that looks means to us.
But, we're not locked into that.
But, all we want to do is shore up our balance sheet so that we can, one, be in a position that we can do strategic activities, two, deal with any business-cycle turn that may or may not happen in the near future.
And then, as far as the shareholder side of things, obviously we always look at the shareholder side of things from an activity, whether it be a dividend or a stock buyback.
But right now our priorities lie more with the first three.
That being organic growth, strengthen the balance sheet, or paying down the debt.
And then, now, we'll start to look heavily into the strategic side.
- Analyst
That's very helpful, thank you.
Operator
Brian Johnson, Barclays.
- Analyst
Hi, good morning.
Team, this is actually Steven Hempel on for Brian Johnson.
I just wanted to drill down on your Brazil operations.
Clearly some weakness down there, overall, in the markets.
I know it's less than 5% of your business over all right now, but just want to get a better understanding on that.
I believe you mentioned in the past you might be in a position to restructure or move some of capacity elsewhere.
Potentially exporting the capacity to other regions.
And then, how are you thinking about VW's decisions to delay it's redesign of it's truck platform for that market?
And then, any impact you're seeing on production schedules from the truck recall related Volkswagens Amarok truck.
- Chairman & CEO
A lot of questions in there.
Let me start with Brazil and South America.
Obviously, a very extremely difficult market to be marketing to be operating in.
Not only for AAM, but all OEM's as well as the supply base.
With respect to AAM, clearly, we've restructured our business to the point that we're continuing to stay healthy in that market.
But, not at the level that we would expect it to be there.
We've got an economic recovery from several of our customers.
But not all of our customers, we continue to work on that right now.
We're evaluating what we need to do with regards to the fixed asset, or fixed cost investment, that's there from a capacity standpoint.
Dependent on where volumes go in the future, we'll have to make some decisions as to, do we produce product out of that market, and export it based on where exchange rates are right now?
Or, do we look to redefine capital outside of that market to other markets, to minimize some future CapEx in other areas?
The most important thing, with respect to us right now is, getting the proper capacity utilization in the market and understand where the buy-ins are.
We don't see Brazil turning around anytime soon, or the South American market turning around anytime soon.
Shifting over to your questions on VW.
VW is a very small part of our overall business.
We haven't seen any adjustments in our schedule, as it relates to the Amarok truck, to your question earlier.
The fact that they are delaying that program only supports our continued production of that product today.
Which, as I said, we haven't seen in those volumes adjust.
So, we feel fine about where we are with VW.
And, we're not feeling the impact that, maybe, many other suppliers are as a result of the VW decisions.
- Analyst
That's helpful.
Turning to your EAM business.
Clearly, in light of the diesel emissions issue here right now, any update on new business quoting activity?
How that's been trending?
Have you seen any colorations in the trend overall?
Remind us if any of that is from the backlog right now, or the potential timing of some business flow into the backlog?
- VP & CFO
We see a stronger interest, in regards to hybridization of electrification initiatives across multiple customers right now.
Yes, we do have a program in our backlog.
A new business in the outer years, that has backlog at this point in time.
Yes, we are seeing a significant increase in regards to interests from a new business opportunity.
Some are still in the emerging stages.
Others are in the quoting stages, right now.
But we feel that we are very well positioned with multiple OEM's, to be able to capitalize and capture some of that business going forward.
That will hopefully continue to profitably grow our backlog as we move forward.
- Analyst
Great.
Thanks for taking my questions.
Operator
Joe Spak, RBC Capital Markets.
- Analyst
Good morning, everyone.
First question, I just want to get a better sense if you are able to, how much of the higher margin for the year is really just a result of the lower metal market pass-through?
Maybe, how much the commodity's helped you in the quarter?
And I guess, if we see those commodities remain at these levels, does that change your view for that margin opportunity to next year?
Or that 13% to 14% you guided to the 2015 to 2017 timeframe?
- VP & CFO
Hi, Joe.
This is Chris.
As it relates to margin impact on the dynamic of the metal market reduction, we've typically seen about a 25 to 40 basis points, just on the math associated with that margin as the sales have declined.
However, our price structure remains essentially the same, excluding that metal cost.
That's the benefit that we would typically see today.
- Analyst
Okay.
So, the raise in the guidance for this year, that sounds like a decent amount to distribute, attributable to what happened.
- VP & CFO
All of it's included.
Certainly, it's a piece of that, from a margin perspective.
From a dollar perspective, as you know, it didn't change.
- Analyst
Okay.
And just for the fourth quarter, specifically.
Typically, I guess the way I think about you guys, and the way I think you have portrayed the Company, is that some of the margin swings are most related to volume.
But, it looks like the volume at this point is pretty much set for the fourth quarter, or close to it, given where we are.
So, what are some of the other puts and takes that could cause that little bit of a swing in how EBITDA comes in for the fourth quarter.
- Chairman & CEO
Yes, we have a couple items that will work for us, in terms of the fourth quarter.
Certainly, our production days are down.
So, our fixed costs are spread over a narrower sales space.
You do have some impact on that.
As it compares to the third quarter, as I stated earlier in some of the prepared remarks, we had a sizable FX gains in other income, to the tune of about $6 million.
We also have some additional project expense with some of our launches coming in next year.
Just a little bit around edges, in terms of that.
And then, just from a timing perspective, SG&A up slightly versus this quarter.
We've had some positive arrangements with some of our customers for PP&E recoveries that worked overall for us in the third quarter.
That will blend in for probably a full-year SG&A run rate or around 7%.
- Analyst
Okay.
Thanks.
- Chairman & CEO
Thanks, Joe.
Operator
Matt Stover, Guggenheim.
- Analyst
Thank you very much for taking my question.
Two things.
If I look at the new program, is there a time frame which we should think about that layering into the revenue expectations?
- Chairman & CEO
Yes, Matt.
This is David.
Look in the 18 to 20 period of time.
- Analyst
And then two, when I look at the quarter -- did I hear you correctly when you'd said that the FX revaluation gain in the other line was $6 million?
- VP & CFO
Correct, is about 90% to 95% of our other income for the quarter.
- Analyst
Okay.
So, when we look guidance, should we include that in the first three quarters EBITDA, when we back into what the fourth-quarter guidance is?
Because, if I do that math, it looks like the margin range in the fourth quarter is 12.5% to 14.5%.
I'm just trying to understand if I'm doing something wrong?
Or, what would be the things that would imply the lower end of that range?
- VP & CFO
That is a little bit lower than I would've calculated here.
I would have calculated the lower end of the range is more around 13.7%.
However, that is not something that we are anticipating repeating at this point, as it relates to other income in the FX gain or loss.
- Analyst
Okay.
Thank you very much.
- Chairman & CEO
Thanks, Matt.
We have time for one last question.
Operator
Emmanuel Rosner, Credit Agricole Securities.
- Analyst
Good morning, everybody.
First of all, congrats on the new award.
And, also David, very good hearing you're stronger information, obviously, of your quality performance.
That is very good to hear.
My question is on the key to K2XX replacement.
I guess, do you have any new color you could share with us in terms of what the CPV may look like for you guys?
Or, maybe the margin profile?
And then I guess more in terms of the mechanics of that replacement.
Can you share whether you will be supplying one plant and someone else the other ones?
Or, will it be based on trim levels, how will the sharing of the revenue work?
- Chairman & CEO
Yes, Emmanuel, we're not in a position to share that information at this point in time.
All I can say is that, we are going to be significantly involved in the K2XX as we've communicated to you in the past.
We have a very strong relationship in partnership with General Motors that we've had for 20 plus years.
We're going to continue to have that relationship and partnership going forward.
They are a valued customer of ours.
You all understand the fact that we are not being awarded 100% of the next-generation product, that a portion of that product will be resourced elsewhere, separately.
Really, GM needs to answer those questions as to what their plans are.
But all I will say is that, we will play a significant role, like we continue to do today.
- Analyst
Okay.
And then secondly, on China.
Obviously, it's a meaningful portion of your backlog and it seems like you're executing very well there.
Can you maybe give us an update in terms of, have you seen any sort of pressure on the backlog, may be in the coming years there?
Either from volume coming in lower than previously expected?
Or, are customers pushing back any programs?
- Chairman & CEO
No, Emmanuel, we are quite the opposite.
We are seeing increases in the products that we're supporting for the China market.
We are seeing expansion in our backlog, in new business.
We are seeing expansion in our current production schedule, as well as future production schedules.
As we indicated to you guys before, we have some additional investments going into China, to support localization and growth in the market.
We feel very good about where we are and what our strategy is for China.
And quite honestly, all of Asia at this time.
- Analyst
That is impressive.
Is that a function of your focus on SUV, which is, obviously a hot segment there?
- Chairman & CEO
Especially in that SUV/CUV type market.
Absolutely.
- Analyst
Okay.
Great, thank you.
- Chairman & CEO
Thank you.
- DIrector of IR
Thank you, Emanuel.
We thank all of you who have participated on this call and appreciate your interest in AAM.
We certainly look forward to talking with you in the future.
Operator
This concludes today's conference call, you may now disconnect.