American Axle & Manufacturing Holdings Inc (AXL) 2016 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the American Axle & Manufacturing first-quarter 2016 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).

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

I would now like to turn the call over to Mr. Jason Parsons, Director of Investor Relations.

Please go ahead, Mr. Parsons.

Thanks and good morning.

I would like to welcome everyone who is joining us on AAM's first quarter of 2016 earnings call.

Earlier this morning, we released our first quarter of 2016 earnings announcement.

You can access this announcement on our website, www.AAM.com, or through the PRNewswire services.

To listen to a replay of this call, you can dial 1-855-859-2056, reservation number 87956018.

This replay will be available beginning at 1 PM today through 11:59 PM Eastern time May 13.

Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed.

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

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

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

During the quarter, we will participate in the following conferences: the 2016 KeyBanc Capital Markets Industrial, Automotive, and Transportation Conference in Boston on June 2; the Deutsche Bank 2016 Global Industrials and Material Summit in Chicago on June 8; the Barclays 2016 High-Yield and Syndicated Loan Conference in Colorado Springs, also on June 8; the 2016 Susquehanna Energy and Industrials Conference in New York on June 9; and the Citi 2016 Industrials Conference in Boston on June 15.

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

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

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

Thank you, Jason, and good morning everyone.

Thank you for joining us today to discuss AAM's financial results for the first quarter of 2016.

Joining me on the call today is AAM's President, Mike Simonte, and Chris May, our Vice President and Chief Financial Officer.

To begin my comments today, I'll first provide some highlights of AAM's first quarter of 2016 financial performance.

I will also update you on recent business development before turning things over to Chris.

After Chris covers the details of our financial results, we will open up the call for any questions that you all may have.

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

First, our first-quarter sales were $969.2 million, approximately the same as the first quarter of 2015.

On a year-over-year basis, the revenue gains associated with higher production volumes on our North American light truck program and the launch of our new business backlog in the first quarter of 2016 were offset primarily by reductions in sales from lower middle-market pass-throughs and foreign currency translation, as well as the impact of exiting a North American commercial vehicle program.

AAM's non-GM sales in the first quarter of 2016 were $323.2 million as compared to $328.9 million in the first quarter of 2015.

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

Second, AAM delivered record quarterly gross profit and EBITDA performance in the first quarter of 2016.

Our gross profit increased by $21.2 million to $174 million in the first quarter of 2016, and our gross margin was 18% compared to 15.8% in the first quarter of 2015, a 220 basis point increase.

With respect to EBITDA, our EBITDA increased $12.3 million to $149.8 million in the first quarter of 2016 and our EBITDA margin was 15.5% of sales compared to 14.2% in the first quarter of 2015, a 130 basis point increase.

And third, AAM's net income in the first quarter of 2016 was $61.1 million, or $0.78 per share, and this compared to $53.2 million, or $0.68 per share, in the first quarter of 2015, a 15% increase.

And finally, key measures of balance sheet strength and credit protection continued to move in a positive direction in the first quarter of 2016.

On the trailing 12 month basis through March 31, 2016, AAM's positive free cash flow was over $200 million.

AAM's EBITDA leverage ratio was 1.9 as of March 31, 2016, and our coverage ratio was four times.

In addition, in March 2016, AAM's corporate family credit rating was upgraded one notch by Moody's to BA3 status, further validation of the continued improvement of AAM's balance sheet strength.

All in all, the first-quarter financial results reflect very strong North American light vehicle, full-size truck and SUV production, continued profitable growth in China on the strength of the crossover vehicle luxury passenger car segment, and outstanding operational performance by our team.

This is a very consistent message that we've had with recent quarterly performances.

Chris will cover more details of the first-quarter 2016 financial results later on the call.

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

From an operational excellence perspective, as we mentioned, we continue to take advantage of strong capacity utilization for our full-size truck and SUV programs that we support here in North America.

In addition, our teams across the globe have delivered productivity improvements and operational efficiencies that are directly contributing to our record profitability.

Meanwhile, we remain very focused on flaws and anonymous launches in the execution of 17 programs yet this year.

These programs include customers such as Nissan, Mercedes, Ford, Jaguar, Land Rover, Fiat Chrysler and, yes, Isuzu.

It's also important to note that, in the first quarter of 2016, we entered into a new agreement with the UAW Represented Associates at our Three Rivers, Michigan facility, which represents our largest facility here in the US.

This new market competitive agreement ensures that we have the labor cost structure to be vital and competitive all the way through the 2021 period of time.

We are very pleased with this accomplishment.

Technology-wise, we had the opportunity to showcase our latest research and development achievement at the 2016 Winter Test Activities that took place in the Upper Peninsula here in Michigan and near the Arctic Circle in Sweden.

The 2016 events featured AAM's expanded fleet of 16 demonstration vehicles for customers to experience firsthand the performance of AAM's latest mechanical and electric drive technology in the most extreme conditions.

Our advanced technologies were put to the test in snow, ice and extreme cold, and yes, they delivered.

One of the key technologies featured as part of the Winter Test event is our EAM hybrid electric driveline system.

Customers were able to drive vehicles with these systems which delivered increased fuel efficiency, decreased tailpipe emissions, and vehicle performance improvements.

Recently, there has been a significant customer interest in our hybrid and electric drive products.

Increased quoting activity of this technology coupled with AAM's program launch already included in our backlog, makes for a very exciting time for both AAM and our EAM team.

In addition, AAM also showcased our latest mechanical driveline innovation, an all new completely redesigned family of lightweight axles and drive units that we refer to as Quantum.

This breakthrough technology demonstrates AAM's commitment once again to be an industry leader in technology innovation.

We took our traditional axle, which has not been materially redesigned for nearly 100 years, and utilized cutting-edge engineering tools and techniques to revolutionize and design and streamline the manufacturing process.

The result is an axle that achieves a significant mass reduction, increased fuel economy and efficiency, and is scalable across multiple applications, all with no loss of performance or power.

Quantum is at the forefront of the innovation curve and has the potential to provide AAM a significant competitive advantage for many years to come.

Customer responses from our Winter Test activity were extremely positive.

AAM's fleet of demonstration vehicles exhibits our commitment to technology leadership and the ability to provide innovative solutions for our customers' needs today and for the future.

As it relates to new business, we continue to make progress in offsetting the sales impact related to the transitions of the next generation full-size GM truck platform.

Back in October of 2015, we communicated to you that we had replaced about 35% to 40% of the sales impact associated with GM's sourcing decision, based on a win of a major new global program that we had received.

After adding a couple of recent program wins, we now estimate that we have covered 50% of the estimated sales impact of this transaction.

Keep in mind this transaction does not fully impact AAM until 2020, and these new wins fall nicely into that timeframe.

These recent developments continue to demonstrate our ability to earn new business and validate the confidence we have in filling the sales gap that was created with the full-size truck next-generation changeover.

We continue to work on well over $1 billion of new and incremental business opportunities, most of which falls in that 2018 to 2020 time frame, and we look forward to providing further updates as 2016 progresses here.

On a separate note, today I'm pleased to announce that we have established a share repurchase program.

Under the program, our Board of Directors has authorized AAM to purchase up to $100 million of common shares through December 31, 2018.

The share repurchase program demonstrates our confidence in AAM's long-term growth and free cash flow generation as well as our commitment to create and deliver value to our shareholders.

To be clear, we remain very focused on organic growth, reducing our leverage, and identifying strategic opportunities to accelerate our growth and diversification.

We consider this share repurchase program as part of AAM's overall capital allocation strategy, and we believe this balanced approach benefits all stakeholders.

Lastly, before I turn it over to Chris, let me wrap up by making a few closing remarks regarding our outlook for 2016.

I communicated in February that we expect 2016 to be another record year for AAM sales and profitability, and this quarter's performance was a great step.

We continue to target full-year sales of $4 billion.

This is based on the anticipated launch schedule of programs in our new and incremental backlog as well as the assumption of the US light vehicle desire being in the range of 17.5 million units to 18 million units here in 2016.

We are now targeting an EBITDA margin in a range of 14.5% to 15%.

This represents a 25 basis point increase on the top end of the EBITDA margin range from our previous disclosure.

We continue to target free cash flow in the range of $120 million to $140 million in 2016 and were targeting CapEx for capital spending of approximately 6% of sales.

To sum things up, our strong first-quarter financial results position AAM to achieve our full-year 2016 financial targets.

As we look forward to the remainder of 2016, we remain very focused on supporting the launch programs of our new business backlog and advancing AAM's product technology to drive long-term, profitable growth in shareholder value.

This concludes my prepared remarks for this morning.

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

Now, I'll turn the call over to Chris.

Chris?

Thank you, David, and good morning everyone.

Today, I will cover the financial details of our first quarter of 2016 results with you today.

Let's get started with sales.

On a year-over-year basis, sales were $969.2 million in the first quarter of 2016 compared to $969.1 million in the first quarter of 2015.

Production volumes for the North American light truck and SUV programs we currently support were up over 9% in the first quarter of 2016 as compared to the first quarter of 2015.

This increase includes the new business launch of rear and front axles for the Nissan Titan.

Sales in the first quarter of 2016 also reflect the impact of lower middle-market pass-throughs to our customers as well as FX translation mainly related to that weakening of the Brazilian reais and Thai baht against the US dollar.

Middle-market and FX accounted for an estimated $25 million reduction in sales in the first quarter of 2016 as compared to the first quarter of 2015.

AAM's content per vehicle, which is measured as the dollar value of product sales supporting our customers' North American light truck and SUV programs, was $1,611 in the first quarter of 2016.

This compares to the $1,676 in the first quarter of 2015.

Most of this decrease in content per vehicle is related to lower middle-market pass-throughs and differences in product mix.

Now let's move on to profitability.

AAM has continued to deliver strong operating profit metrics.

Gross profit was $174 million, or 18% of sales, in the first quarter of 2016.

This compares to $152.8 million, or 15.8%, in the first quarter of 2015.

Operating income increased by $14.1 million to $98.4 million in the first quarter of 2016.

Operating margin was 10.2% compared to 8.7% in the first quarter of 2015.

EBITDA, or earnings before interest, income taxes, depreciation and amortization, was $149.8 million in the first quarter of 2016, or 15.5% of sales.

This compares to EBITDA of $137.5 million in the first quarter of 2015, or 14.2% of sales.

AAM continues to take advantage of our strong capacity utilization on our North American light truck and SUV production as well as increased growth and profitability in China.

We are also benefiting from lower net manufacturing costs resulting from productivity improvements in operational efficiencies as well as a favorable environment as it relates to certain commodity costs.

Now let me cover SG&A, interest, other income and taxes.

SG&A expense, including R&D in the first quarter of 2016, was $75.6 million, or 7.8% of sales.

This compares to $68.5 million, or 7.1% of sales, in the first quarter of 2015.

A significant driver of increased SG&A spending in the first quarter of 2016 was R&D spending.

R&D spending for the first quarter of 2016 was $30.9 million compared to $27.3 million in the first quarter of 2015.

The increase in R&D primarily related to investments in (technical difficulty) technologies such as our electrification driveline systems, Quantum, and our mechatronics and electric control system initiatives.

SG&A in the first quarter of 2016 also reflected higher staffing requirements related to our global growth and engineering initiatives as well as wage and benefit inflation.

Net interest expense in the first quarter of 2016 was $23 million, $1.3 million lower than the first quarter of 201, primarily reflecting the benefit of the voluntary prepayment we made on our term loan in December of last year.

Other income was $1 million in the first quarter of 2016.

Gains and losses related to RX re-measurements netted to nearly 0 for this quarter, and the other income we recorded in the first quarter of 2016 consisted primarily of earnings from our Hefei joint venture.

In the first quarter of 2015, other income was $2.4, million of which approximately $2 million represented gains related to the favorable impact of the remeasurement of peso denominated assets and liabilities.

Income tax expense was $15.3 million in the first quarter of 2016 as compared to $9.2 million in the first quarter of 2015.

The effective income tax rate was 20% in the first quarter of 2016 as compared to 14.8% in the first quarter of 2015.

There were no significant discrete events in the first quarter of 2016 that impacted of the effective income tax rate, and we continue to expect the full-year effective income tax rate to be between 15% and 20%.

Taking all these sales and cost drivers into account, GAAP net income was $61.1 million, or $0.78 per share, in the first quarter of 2016 compared to $53.2 million, or $0.68 per share, in the first quarter of 2015.

All in, this was a strong net profit result for the first quarter of 2016.

Now let's move on to cash flow and the balance sheet.

We define free cash flow to be net cash provided by operating activities less CapEx net of proceeds received from the sale of property, plant, and equipment.

Net cash generated by operating activities in the first quarter of 2016 was $26.2 million.

Capital spending net of proceeds from the sale property, plant, and equipment was $50 million in the first quarter of 2016.

Reflecting this operating activity and CapEx, AAM's free cash flow in the first quarter of 2016 was a use of $23.8 million.

This compares to a use of $37.1 million in the first quarter of 2015.

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

Also, the first quarter of 2016 free cash flow includes approximately $26 million in tax payments related to our Mexican transfer pricing issues that we have previously disclosed.

In total, as we have shared with you previously, we expect to pay between $30 million to $40 million in 2016 for these transfer pricing items.

Now let me address key credit metrics and our liquidity position at the end of the quarter.

At March 31, 2016, AAM's EBITDA leverage, or the ratio of EBITDA to net debt, was 1.9 times.

AAM's EBIT coverage, or the ratio of EBIT to net interest expense, improved to four times at the end of the first quarter.

Both of these credit metrics are calculated on an LTM basis and are adjusted to exclude the impact of the debt repayment costs we incurred in the fourth quarter of 2015.

One final note on the balance sheet.

AAM ended the first quarter of 2016 with total available liquidity of approximately $851 million, consisting of available cash and borrowing capacity of AAM's global credit facilities.

This represents an appropriate level of liquidity for the Company.

Before we start the Q&A, let me add this quick comment to AAM's 2016 outlook.

As David mentioned, we have reaffirmed our guidance for 2016 and increased the top end of our EBITDA range to 15%.

The first-quarter results are a great start for AAM and reinforce our confidence in meeting our financial targets for 2016.

We are excited for the opportunity to continue our strong operating performance and high cash flow yield throughout the rest of the year.

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

I'm going to turn the call back over to Jason so we can get started with Q&A.

Thank you Chris and David.

We have reserved some time to take questions.

I would ask 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 Instructions).

Itay Michaeli, Citigroup.

Thanks guys.

This is actually Justin on behalf of Itay.

Congrats on the quarter.

So a quick question.

On the 18% gross margin that you guys put up, can you give some color as to what drove the margin improvement really and how we should think about the cadence for the rest of the year?

Certainly a very strong quarter for us as it relates to the gross profit margin as well as our EBITDA margin.

What I would tell you, Justin, if you look inside, embedded in the quarter, we had a very strong, healthy full-size truck makes in particular as it relates to the K2.

A slight blend to our overall revenue concentration was a little bit higher there.

And that obviously drives significant capital or capacity utilization performance in our factories, and they are running very well.

So we are able to convert that into contribution margins, strong productivity initiatives.

We had a little bit of favorability on metal and FX.

And if you do the math on that from a margin perspective, it's around 25 to 50 basis points just on the math on that dynamic alone.

And of course, as we mentioned in some of our prepared comments, our China operations also are delivering strong profitability for the quarter.

Perfect.

That's extremely helpful.

And then I guess my second question is around the new business quoting activity, if you can give some maybe visibility on the trajectory that you guys have for 2018 and 2019 as we kind of progress through these years.

And maybe any only further traction with the EcoTrac product and the estimates that you guys have previously put out I believe was $600 million for 2018, and how that's progressing and moving forward.

As you said, in our backlog already we've got, between current production and the backlog, we are well over $600 million of EcoTrac business recorded on a significant amount of the EcoTrac or disconnecting all-wheel-drive business along with our latest technology as far as the electric and hybrid electric driveline systems as part of the over $1 billion that we are quoting at this point in time.

So we see tremendous opportunity for us in our latest technologies of both EcoTrac and EAM.

So we are very pleased with what's taking place there.

Clearly, we are very excited about the new wins that we had in this past quarter here that offsets now 50% instead of 35% to 40% of the losses of the GM Q1 SX sourcing decision on the full-size truck.

So again, continued progress and we will keep you guys posted as the year progresses.

And as we've said before, we are very confident that we can offset that business going forward.

Perfect.

Again, thanks so much for the questions and congrats on the quarter.

John Murphy, Bank of America Merrill Lynch.

Good morning guys.

Just a first question here about the broader industry, and it's kind of on quoting.

But there's a lot of discussion coming from companies like Fiat Chrysler specifically but also the broader industry about changing over car capacity to cross-over capacity and potentially even trucks over time.

I'm just curious if you are seeing any positive impact here in the short run given your sort of exposure to the Cherokee and potential growth at Fiat Chrysler.

Because it just seems there's a real opportunity to open up here.

As I've said to you and said to everyone else, we are right in the sweet spot as far as our business right now with trucks and SUVs being strong, with crossover vehicles picking up momentum and being very strong, and the luxury passenger car business that we enjoy as well.

But getting to your question with regards to FCA and their focus on trucks and SUVs, specifically the Jeep side of things and cross-overs, again, that complements our product portfolio.

Yes, we are seeing opportunities there.

As you know, we've got a very strong working relationship with FCA not only here in the US but now on a global basis with the expansion of some of the EcoTrac disconnecting all-wheel-drive into China.

And they're globalizing that whole platform we expect it to benefit further, and also on some of the truck to SUV opportunities that may present themselves.

Okay.

That's helpful.

And a second question just on Quantum.

I apologize for the ignorance here, but David, as you are talking about this, you're talking purely about axles or you are talking about sort of a set of sort of -- a drivetrain set.

I'm just trying to understand if this is something that, as you said, could be scalable across applications.

I would assume this would be more on the cross-over and car side, but just curious if there could potentially ever be any crossover between trucks.

I'm just trying to understand how broad that spectrum across applications really means.

It's very broad.

It's predominantly centered initially on the truck and SUV side of the business, but at the same time can support front axle applications, rear axle applications, and RDF applications for cross-overs.

So it's a whole platform that we are putting together that's scalable across the different vehicle architectures between truck SUV and cross-over vehicle and luxury passenger car.

So we are very, very excited about this technology, and, again, it's heavily focused on mass reduction fuel efficiency, and again making it scalable so we can realize the economies of scale associated with it.

That's very impressive.

Thank you very much.

Rod Lache, Deutsche Bank.

Thanks.

Good morning everybody.

I had a couple of things.

One is I just wanted to understand a little bit better this gross margin improvement.

So, your revenue was flat year-over-year.

Your gross margin improved by a little bit over $20 million.

Even if I add back the $25 million from the commodity pass-through and say that, on a flat commodity basis, it would have been up by $25 million, a $20 million gross profit improvement would be a pretty huge conversion.

So on a dollar basis, can you give us a sense of how that ridge looks on a year-over-year basis?

Certainly.

If you think about -- Rod, this is Chris -- a couple of those pieces put together, China, as you know, is going through significant launch mode in the past couple of years and that's converted to significant profitability here for the Company.

In addition, we do have some favorability as it relates to FX.

Associated in that, if you look at the key inputs that we use, especially as it relates to the peso, we've benefited from that pretty substantially.

Our operations are running, quite frankly, very, very strongly.

They are now out of launch mode over the past couple of years, on very steady, strong volumes, and they get significant conversion on that.

So I would tell you it's volume and mix associated with the underlying volumes, it's those other items that I spoke about, and they're delivering results.

Okay.

I guess maybe just thinking about this looking forward, your EBITDA this quarter was up -- your margin was up by 130 basis points.

But if my math is correct on your margin guidance, it looks like the margins will be kind of flat from Q2 to Q4.

So wouldn't some of these benefits be ongoing that would help the year-over-year margin comparison as we look at Q2 to Q4?

Clearly.

We increased our guidance contemplating those exact circumstances.

But a couple things as you think going forward through the year -- you saw metal indices for example sort of trough out in January and February and they're on their way back up.

So you'll have a little bit of dynamic associated with the margin on that element alone.

Some of the cadence of our annual price-downs, in particular as it relates to the K2, start to impact us in the second and third quarter.

Those are sort of annual lapping type of items.

And then we do pick up a little bit of project expense in the second half of the year getting ready for our big launches in 2017.

So we do have a few items kind of working against that trend, but we believe very strongly we're going to continue to perform.

That's why we took our guidance up today.

Okay, great.

Thanks.

Just the last question, does the -- how should we be thinking about this share repurchase announcement?

It seemed like, up until recently, the Company was just extremely focused on external M&A opportunities and having achieved kind of the leverage target that you guys wanted to see.

It would seem that would still be a big focus for the Company and may be inconsistent with starting to deploy cash towards share repurchases.

This is David.

I think the way you need to look at this is what we've communicated all along, is that we are going to do everything in balance as it relates to our capital uses.

In the past, we predominantly have focused on the organic growth and also the debt management of our balance sheet strengthening.

At the same time, as you highlighted, we clearly are very focused on M&A activity but we are also looking at the other avenue that's available to us in regards to shareholder activity.

So we'll keep everything in balance as it relates to those capital uses, and we'll evaluate where we think we get the best return based on the capital and the placement of that capital going forward.

But in the past, we were limited in regards to what we could do with the focus on organic and balance sheet strengthening, and then we started opening up the playbook into the strategic side.

We are still very focused on the strategic side, especially as we are looking to transform this organization.

But at the same time, we want to make sure we are getting return to our shareholders as well.

Does this mean that maybe some of the M&A opportunities that you've been looking at might not be that near-term or that large?

No.

It still gives us the opportunity to bolt-on different M&A type activities.

At the same time, if there is a more significant transformational M&A opportunity that may arise, that may require us to review our overall capital allocation strategies.

So we are not limiting -- at this point in time, all we're trying to do is keep our options open and make sure we have balance across how we want to utilize that capital going forward.

But if the right transformation opportunity presents itself, then obviously we'll have to reevaluate our capital allocation strategy.

But right now, we feel it is the right thing for us to be doing.

Great.

Okay.

Thank you.

Emmanuel Rosner, CLSA.

Good morning everybody.

So, you mentioned a few times China is one of these positive factors, and in particular in the context of the margin improvement.

Can you maybe give us a little more detail on what's going on there?

What are you doing business wise?

And any way to quantify sort of like this benefit either in terms of industrial growth or to your margin and profitability in general?

I don't think we're going to get into all the margins that have to do with China specifically.

We did simply talk more on the macro level.

But as far as what's going on in China, we have tremendous growth taking place in China right now.

Our joint venture is doing exceptionally well, although not consolidated in our financials here, but, again, we have a great partner there, and we are growing.

Most importantly, in our wholly-owned subsidiary over there, we are right in the sweet spot as it relates to luxury passenger car where you know we're supplying a lot of product into Daimler as that product is doing exceptionally well in that market.

We've launched a disconnecting all-wheel-drive program.

We're launching another disconnected all-wheel-drive program.

We have significant additional launches planned this year and through our backlog.

So we see tremendous growth, especially as the China market is now receiving very favorably the cross-over vehicle, and we are right in the -- we are positioned properly to benefit in those future gains going forward.

So again, North America has been very strong for us in truck and SUVs.

China is especially strong for us on luxury passenger cars as well as cross-over vehicle.

That's good to hear.

And then just on the revenue growth, so obviously as a result of some of the factors you disclosed, the revenue was essentially -- the reported revenue was essentially flat year-over-year.

Obviously you are still maintaining your full-year guidance.

Can you just give us a sense of how you expect sort of this metal pass-through to sort of like -- the cadence of that for the rest of the year, and how you will fade?

Certainly.

The first quarter, as we mentioned, was impacted pretty significantly by that, and we do try -- we track to a variety of different indexes associated with that.

But it looks like they sort of troughed out in the January-February time frame and have started to come back up.

But we do still expect to have some impact on a year-over-year basis associated with that, but it will tail off or it should tail off throughout the year, especially as it starts to compare back to previous years' quarters.

You saw low points in the third and fourth quarter of last year as well.

Great.

Thank you.

Ryan Brinkman, JPMorgan.

Thanks for taking my question.

Congrats on the quarter.

I'm just trying to determine if there's any conservatism in raising the full-year or the high end of the full-year implied EBITDA guidance by just $10 million after having beaten consensus by $7 million in 1Q.

Because you don't guide quarterly, it's obviously hard to do that math.

Was consensus wrong about the cadence of earnings throughout the year?

I'm assuming obviously you did better than your own expectations because you are raising the full-year guidance up.

But just any sort of color you can give us in terms of some of the tailwinds in 1Q that allowed you to do better, slow a little bit, or have you all along anticipated a little bit different cadence of earnings versus consensus?

If you go back to what I stated earlier, we do have some things coming at us here in the next couple of quarters associated with project expense with some of our key launches for the 2017 time frame, some annual cadence of some price downs.

The first quarter was a fantastic quarter for us.

We performed.

So you've got a little bit of some reversion back on metal, but we expect it to continue to be strong the balance of the year and that's why we raised our guidance.

Okay, great.

And then can you give us any update on your operations in Brazil and Thailand?

I think Brazil continues to deteriorate as strongly as it did before when it was a bigger deal because it's just kind of a smaller portion of your business now I presume after the macros soften there.

But obviously a lot of moving pieces down there.

Maybe you can shed some light on how they are impacting you.

As you know and everyone else understands, Brazil is in a deep recession right now much like we were back in the 2009 period of time.

So just like we put a restructure, resize, recovery program together in North America, we've had to do that same thing in Brazil.

And we continue to implement that and adjust our business to the new market demand.

So much like other companies, we are having to go through a massive restructuring in that market, and hopefully it will turn around in the near future, but quite honestly, I don't see it happening anytime soon.

But in the meantime, we will look at how we reallocate our capital at the same time we are adjusting variable costs where we can in order to keep it where it's not a drag on our overall business.

With respect to Thailand, you know, we went through a massive launch with regards to the Ford U-375 program that we launched their last year.

That's accelerating up to rate, so that's been a positive for us.

At the same time, the GM midsize truck program was down from what the original expectations were.

However, there is some redesign activity refreshing that's taking place and we are hopeful that that will improve the sales of that product and our schedules going forward.

But overall we have both markets under control.

We are managing the business appropriately, and it's part of our overall financial performance and the operational success that we've realized.

Okay, great.

And then just lastly, on the 4Q call, you were talking about you felt pretty strongly we could track around 17.5% SAAR in the US in 2016, similar to last year.

The year is off to a start just slightly below that.

I'm curious if you had any updated thoughts on sales in the United States.

Our guidance range for the US dollar is still at 17.5 million to 18 million units.

Right now, the industry is tracking in that direction there.

It aligns with what I just had out there in regards to their thoughts as well.

And as we said to you, we are running high utilization from a capacity standpoint here in North America.

We've got the ability to flex with some of the incremental capacity that's been put into place.

And so we feel really good about where we are and if they've got more volume and they want to bring it, bring it.

Okay, thanks.

Congrats again.

Joe Spak, RBC Capital Markets.

The first question, just you mentioned the exit of the North American commercial vehicle program.

Can you just help quantify that and I guess further remind us how much longer that will persist?

When do you start anniversarying that?

This is Chris.

That impact in the first quarter was approximately $20 million of revenue.

You'll see that for the first couple quarters of the year and then it dissipates in the third and fourth quarter on a year-over-year basis.

Okay.

And then the second question, a little bit more of a housekeeping.

I think when you talked about content per vehicle, you mentioned the metal market but you also mentioned product mix.

Is that -- do you mean between the programs or is that sort of a change in four-wheel-drive penetration, or is there any update you could give us on four-wheel-drive?

Yes, that's -- four-wheel-drive continues to remain strong as we increase similar kind of quarter-over-quarter.

It's typically a mix between the different vehicle platforms in North America.

So for example full-size van versus full-size truck type of mix.

Okay.

Thanks a lot guys.

Congrats.

Paresh Jain, Morgan Stanley.

Good morning everyone.

The first question, on the free cash flow guide here, it's unchanged despite your very strong quarter.

And if I heard you right, a lot of the Mexican audit related payments are behind you.

So is this just a case of too early to do that in the year, or are there any offsets to think about?

Yes, certainly the -- first, to the Mexican tax payments, that will continue throughout the year, as we indicated.

It's right in line with where we estimated previously from that $30 million to $40 million.

The free cash flow guidance we've given you is $120 million to $140 million.

It's a little bit wider band than our EBITDA margin was.

We took our performance up obviously from an operation standpoint.

It's a little early yet but we think it's still a good range for us to deliver in this year.

Got you.

And thinking about R&D in a little longer term here, as the growth bucket shifts from GM to non-GM sales, would it be a case of higher R&D spend per dollar of revenue generated since a lot of this business would be new programs as opposed to platform refreshes?

No.

Really what it comes down to is we are designing products not just for General Motors but for the industry.

And whether it's non-GM customers or GM customers, we are designing and developing products to satisfy the truck and SUV market, the cross-over vehicle market, the rearwheel drive passenger car, both luxury and performance, and then also now with respect to the electric and hybrid electric technology.

So that's applicable to any of the customers that are out there.

It's just we obviously will personalize it based on individual customer preferences, but we try to build standard architecture so that we get can the economies of scale and manage the costs in our business.

So clearly you are seeing some increases in R&D because of our commitment to technology advancement in the area of product, process and systems.

You are also seeing that being translated to commercialization and into our backlog.

So it's positive all around from an AAM standpoint in regards to we're putting money out there as far strategic bets on our R&D and our technology and we are seeing it come home in regards to new business and profitability and performance, not to mention the customer concentricity reduction.

That's good color.

And lastly, you mentioned a lot of interest for your hybrid vehicle products a couple of times.

What kind of timeline are we looking at for these programs to come online?

And if you could remind us of what content per vehicle could look like for these programs?

Thank you.

Yes.

We have one in our backlog at this point in time that launches in the 2018, 2019 period of time.

At the same time, we're reporting a significant amount of opportunity that is going to be post-that, so more like the probably 2019 to 2022 period of time.

But there are some significant opportunities with a plethora of different customers that are there.

Content per vehicle is really going to range anywhere between $500 to $2,500 depending on the customer and what type of technology they are looking for based on it is scalable, and it's all feature-based based on the customers' specifications.

Thank you.

Matt Stover, Susquehanna.

I think you've gotten most of the walk, but just to finish it off, so reported revenues were about flat.

If we add back F&X and material recovery, you're up 4%.

Add back commercial vehicle, sort of up to 6%.

But I think you had mentioned that mix was favorable and underlying SUV and pick-up production was plus 9% in the quarter.

So I'm wondering if you could kind of give us an idea if there were any other sort of major platform variances that were unfavorable as we sort of think through the year-to-year walk.

From a platform perspective, no.

They were still strong and in our favor for that mix.

We do have annual pricing also from first quarter of last year to this year would be other element of that.

But principally you hit the main points.

So we would be up 6%, 7% or so based on those elements you just added back.

And then David, you mentioned that you'd increased sort of the replacement business from kind of a run rate of about 35% to a run rate of about 50%.

And I'm wondering if you could give us some color on what programs or types of programs were filled in there.

And then any color as to whether or not you expect to see any meaningful change in that as we progress through this model year, or this calendar year.

Starting with your last question, yes, we expect to see change in a positive direction going forward through the balance of this year.

And as we said, we are still quoting on activity that's really production source or SRPs in the 2018-2020 period of time, but those decisions are being let now.

So that is positive in that respect.

The first part of your question is we picked up some non-GM business on a brand-new platform that we don't participate in today.

It covers more of our driveshaft technology.

It is where it is, which is positive for us.

At the same time, we picked up some other driveline business.

So those are the favorable benefits that contribute to the move from 35% to 50%.

Okay.

Thanks guys, appreciate it.

We have time for one last question.

Brian Johnson, Barclays.

This is Dan Levy on for Brian.

Thanks for taking the question.

Obviously, today, your mix is skewed toward pickups and SUVs, large trucks, and with less exposure to cars.

But could you just give us a sense of what your car or cross-over truck mix looks like, roughly looks like, in a couple years?

And as more flex capacity comes online in North America, which can service both cars and cross-overs, is there any benefit to you vis-a-vis commonality of components or commonality of lines as opposed to capacity that's really just specifically dedicated to just sedans or just cross-overs?

We're going to see more increase in regards to our pass car and cross-over vehicle as we've mentioned to you in the past.

We will see more balance in the mix of our product portfolio between truck and SUV and pass car and cross-over vehicle.

Our backlog alone has got well over 70% of the backlog is passenger car and cross-over vehicle, and a lot of what we are holding today is passenger car and cross-over vehicle.

Again, as I mentioned earlier to you in regards to our R&D activity, we're trying to design things that are scalable across truck, SUV and pass car, where they can be, so we can try to drive economies of scale and performance while keeping our R&D costs down in certain areas.

So, overall, I think our engineering organization is doing an outstanding job providing products that meet the market needs and the different vehicle segments and it's clearly a growth opportunity for us in regards to the cross-over vehicle.

And then you factor in what we're doing now in the electrification space, I see that as all positives for the Company.

This is Mike.

There's one other real significant issue that's pertinent to your question.

That's our manufacturing processes.

Many of our manufacturing processes are highly flexible and transportable between passenger car applications and truck applications.

In fact, we've rebalanced gear processing equipment, featuring equipment, forging cruxes for that matter, any number of different activities.

The one area where we have dedicated processing is on the assembly line.

But even within our assembly lines, we've designed common stations that can be and have been in fact recently moved from truck to car applications.

So we've got a substantial amount of process similarity that we can leverage in our operations as well.

So it sounds like flex capacity, flex capacity wouldn't really impact your utilization as opposed to capacity that's just dedicated toward cars or cross-overs, correct?

We've built flexibility into our operations.

No longer do we have transfer lines and all of that.

We've got flexible component machining, flexible gear operations, and then we've designed our assembly systems as best we can to be flexible based on the stations that Mike had indicated earlier.

So we've got flexibility built into our operations while also trying to drive standardization into the product.

Understood.

Thank you.

Thank you Dan.

And we thank all of you who have participated on this call, and appreciate your interest in AAM.

We certainly look forward to talking with you in the future.

This concludes today's conference call.

You may now disconnect.