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Operator
Good morning.
My name is Jack, and I will be your conference facilitator today.
At this time, I would like to welcome everyone to the American Axle & Manufacturing Second Quarter 2017 Earnings Conference Call.
(Operator Instructions) As a reminder, today's call is being recorded.
I'd now like turn the call over to Mr. Jason Parsons, Director of Investor Relations.
Please go ahead, Mr. Parsons.
Jason P. Parsons - Director of IR
Thank you, and good morning.
I would like to welcome everyone who is joining us on AAM's Second Quarter of 2017 Earnings Call.
Earlier this morning, we released our second quarter of 2017 earnings announcement.
You can access this announcement on the Investor Relations page of our website, www.aam.com, and through the PR Newswire services.
You can find supplemental slides for this conference call on the Investor page of our website as well.
To listen to a replay of this call, you can dial 1 (855) 859-2056, reservation number 87956025.
This replay will be available beginning at 1:00 p.m.
today through 11:59 p.m.
Eastern time, August 4.
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 will 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.
Over the next few months, we will participate in the following conferences: the JPMorgan's Automotive Conference on August 8; the Guggenheim's Auto Assembly Conference on September 6; and the 2017 RBC Capital Markets Global Industrials Conference on September 13.
In addition, we are always happy to host investors at any of our facilities.
Please feel free to contact me to schedule a visit.
With that, let me turn things over to AAM's Chairman and Chief Executive Officer, David Dauch.
David C. Dauch - Chairman & CEO
Thank you, Jason, and good morning, everyone.
Joining me on the call today are Mike Simonte, AAM's President; and Chris May, our Vice President and Chief Financial Officer.
To begin my comments today, I'll provide some highlights of our second quarter activity.
The first major accomplishment of the second quarter of 2017 was the completion of AAM's acquisition of Metaldyne Performance Group back on April 6. Since then, we've been working very hard on integration activities while continuing to focus on flawless and anonymous support of customer program launches and daily operational performance.
I'd like to personally thank the 25,000-plus AAM associates across the globe for all their hard work, dedication and determination during this busy and exciting time for AAM.
Our second quarter financial results reflect the impact of the MPG acquisition.
And as a result, AAM sales for the quarter were $1.76 billion, easily a quarterly record and significantly higher compared to $1.03 billion in the second quarter of 2016.
A key element of the MPG acquisition was accelerated diverse -- customer diversification, and we began to realize this benefit in a meaningful way in the second quarter.
Our non-GM sales for the second quarter were over 55% of total sales and $969.7 million.
This marks the first quarter in AAM's history that the non-GM sales were over 50% of our total sales.
This compared to $333.9 million or 33% of our total sales in the second quarter of 2016.
We look forward to continuing this diversification through the launch of our new business backlog over the next couple of years.
The second quarter also represented another strong performance for AAM as it relates to profitability.
Adjusted EBITDA for the second quarter of 2017 was $325.7 million or 18.5% of sales, both quarterly records for AAM by a wide margin.
This compared to adjusted EBITDA of $164.8 million or 16.1% of sales in the second quarter of 2016.
Adjusted earnings per share for the second quarter of 2017 was $0.99 as compared to $0.89 in the second quarter of 2016.
AAM's profitability in the second quarter of 2017 shows the power of strong product mix, global operations that are delivering productivity, operational excellence worldwide and attainment of planned cost reduction synergies.
I'll provide you more progress and details as we go forward in the presentation on our cost reduction synergies.
From a cash flow perspective, AAM generated $141.6 million of adjusted free cash flow in the second quarter and over $200 million during the first half of 2017.
As a result of delivering strong EBITDA performance and free cash flow generation, AAM has reduced its net leverage ratio since closing the MPG acquisition to 3.1x as of June 30.
AAM's operational performance has put us in a great position to meet our objectives in the future.
As you can see, our financial results in the second quarter of 2017 demonstrate the favorable impact of AAM's recent strategic acquisition and our ability to deliver operational excellence, technology leadership and world-class quality in a larger and more diverse scale.
With the acquisition of MPG, we are now running the business under 4 separate operating segments: our driveline business, metal forming business, powertrain business and casting business.
As a result, we have reported our financial performance for the first of each of these segments in the second quarter, another first for AAM.
Let me run you through the sales and segment-adjusted EBITDA for each of the business units.
The driveline business unit recorded sales of just over $1 billion in the second quarter of 2017.
It was translated to $178.9 million of segment-adjusted EBITDA.
AAM's driveline business unit benefited from strong global full-size truck production and the impact of new product launches supporting multiple crossover vehicle platforms.
The metal forming business unit recorded sales of $369.3 million in the second quarter and $69.4 million of segment-adjusted EBITDA.
The results of AAM's metal forming business unit shows the operating earnings power of our vertical integration as well as significant external sales growth as a result of the MPG acquisition.
AAM's powertrain business unit recorded $283.6 million in sales and segment-adjusted EBITDA of $59.1 million.
These results reflect continued growth in Europe and Asia and a business unit that is operating and performing very well across the globe.
AAM's casting business unit recorded $225.6 million of sales and segment-adjusted EBITDA of $25.5 million.
The casting business unit experienced increased volumes in commercial vehicle in the industrial markets in the first half of 2017 and contributed very nicely to AAM's diversification strategy.
We look forward to updating you on our progress of each of these business units in quarters to come as we go forward.
Let me switch gears and provide a brief update on our synergy attainment progress, which you can see on Slide 7 of the earnings call presentation.
As you may recall, we are targeting an annual cost reduction synergy run rate of $100 million to $120 million by the end the second full year of the acquisition after the completion of our integration activities.
We are also targeting to achieve 70% of this and a run rate by the end of the first full year of the acquisition.
So let's call that by the end of the first quarter of 2018.
As we close out the month of July, we have currently attained synergies that on an annualized run rate basis amount to approximately $38 million.
Many of these initial synergies relate to the reduction of redundant public company costs, overhead spending and the optimization of our operating structure.
AAM has also identified considerable purchasing and manufacturing initiatives that are currently underway in order to achieve further cost reductions.
We are driving hard and very focused on the organization to achieve our synergy goals.
There is still plenty of work to do, but we are very pleased with our progress for the first couple of months of the integration and believe we are well on our way of achieving our previously communicated synergy attainment targets.
Stay tuned for further updates along the way.
Let me now review our 2017 financial outlook.
The first thing that I'd like to note is that we revised our full year 2017 U.S. dollar assumption from 17.5 million units to approximately 17 million of light vehicle units based on the most recent sales data from the last couple of months.
The good news is, despite the reduced macro assumption, we are confirming our full year financial outlook for 2017, which includes consolidated sales of approximately $6.1 billion, adjusted EBITDA margin in a range of 17% to 18% and adjusted free cash flow of approximately 5% of sales.
The fact that we are able to maintain our 2017 financial outlook while reduce our macro level U.S. dollar assumption highlights a few important factors driving AAM's current and future sales and profitability, including a product portfolio that is concentrated in light trucks, SUVs and crossovers; vehicles that continue to experience high levels of consumer demand despite recent weaknesses in overall U.S. dollar levels; continued growth in markets outside the United States that are not impacted by the U.S. dollar; and macro level improvements in non-automotive industries that we support, such as commercial vehicles, industrial and agricultural markets.
Sales in these markets make up about 10% of our current sales.
AAM is well-positioned to deliver sales growth and superior profit performance in 2017.
Before I turn it over to Chris, let me touch base on our new business backlog.
Back in the last earnings call, we disclosed our updated gross new and incremental business backlog for the 3 year period of 2017 to 2019 to be approximately $1.5 billion.
This new business backlog includes key business wins throughout each of our business units and represents many of our advanced technologies, including our e-AAM hybrid and electric driveline solutions and our EcoTrac disconnecting all-wheel drive system.
On Slide 10, you can see that we will continue to diversify our business through the realization of this backlog over the next few years.
Approximately half of the new business relates to all important and growing crossover vehicle segments, and approximately 35% of this new business is outside of North America.
We will also continue to reduce our customer concentricity over the next few years as we expect sales of GM to become about 1/3 of our total revenue by 2020.
And with approximately $1.5 billion of quoted and emerging new business opportunities, organic growth and diversification continues to be a priority for AAM.
To sum things up, AAM had an outstanding and transformational second quarter, and we're off to a great start on our integration activities and look forward to driving further value through the achievement of our synergy and debt reduction targets.
We are laser-focused on our near-term goals of profitable sales growth, superior profit margins, synergy attainments, strong free cash flow generation and deleveraging the business.
I strongly believe the best yet to come and that AAM and our stakeholders have a bright future in front of us.
This concludes my prepared comments for this morning.
I thank everyone for your attention today and your interest in AAM, and I'll now turn it over to Chris.
Thank you.
Christopher John May - CFO and VP
Okay.
Thank you, David, and good morning, everyone.
I will cover the financial details of our second quarter of 2017 results with you today.
I will also refer to the earnings slide deck as part of my prepared comments.
So let's go ahead and start with sales.
As David mentioned, sales increased over $732 million on a year-over-year basis, primarily as a result of the MPG acquisition.
Excluding the impact of MPG, AAM sales also benefited from higher global light truck volumes and new business backlog launches related primarily to products supporting crossover vehicle platforms.
Slide 13 shows a walk down of pro forma second quarter 2016 sales to the second quarter of 2017 sales.
As you can see, we need to adjust for MPG exiting the KBI business and eliminate the 5 days from April 1 through April 5 before MPG was acquired by AAM to represent comparable quarter-over-quarter results.
After those adjustments, the most significant factors in our sales growth related to launching our backlog of new business and volume and mix on our core products.
Also, as metal prices have increased since last year, metal market pass-throughs added $40 million of revenue on a year-over-year basis.
Compared to the pro forma sales in the second quarter of 2016, AAM realized approximately 3.5% of organic net growth.
AAM's content per vehicle, which is measured by the dollar value of our driveline business segment, product sales supporting our customers in North American light truck and SUV programs, was $1,660 in the second quarter of 2017.
This compares to the $1,609 in the second quarter of 2016.
This increase relates primarily to increased metal market customer pass-throughs and stronger mix, including higher estimated four-wheel drive penetration from 70% up to 73%.
So now let's move on to profitability.
AAM continued to deliver strong operating profit metrics.
Gross profit was $316.4 million or 18% of sales in the second quarter of 2017.
This compares to $191.4 million or 18.7% in the second quarter of 2016.
However, gross profit in the second quarter of 2017 was impacted by 2 acquisition-related adjustments during the quarter.
The largest is specifically related to the nuance of purchase accounting.
It was an adjustment related to an increase in the recorded value of acquired inventory from MPG to its fair value by $24.9 million.
That was quickly recorded as an expense through cost of goods sold during the second quarter as the inventory was sold.
There was also a onetime gain of $3.7 million for a change of accounting related to indirect inventory.
Both of these items have been excluded as adjustments to our reported results.
Excluding the net impact of these items, gross margin in the second quarter of 2017 would have been 19.2%.
Adjusted EBITDA, or earnings before interest expense, income taxes, depreciation and amortization, excluding the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs, was $325.7 million in the second quarter of 2017 or 18.5% of sales.
This compares to $164.8 million in the second quarter of 2016 or 16.1% of sales.
You can see a year-over-year walk down of adjusted EBITDA on our Slide 14, which again begins with a pro forma adjusted EBITDA and adjusts for the impact of pre-acquisition sales and exiting of the KBI business.
Key drivers of EBITDA growth include not only the margin earned on our backlog and other favorable volume and mix factors, but we are delivering results on our acquisition activities.
You can see the benefit of our recent acquisition of USM's Mexico operations, which allow us to capture value and margin by the vertical integration of several key components.
Also note, the initial impact of the synergies of our MPG acquisition has started to reflect in our results.
And lastly, but just as important, our core productivity initiatives continue to drive performance and have more than offset the price downs we incurred this quarter.
In the second quarter of 2017, in addition to the previously mentioned purchase accounting adjustments in cost of goods sold, we also incurred $51.7 million of restructuring and acquisition-related costs, which are shown in detail on Slide 15.
This included restructuring costs of $1.7 million associated with our global restructuring efforts that we communicated to you in the fourth quarter of 2016; costs related to the closing of our acquisitions, such as professional fees and expenses related to the severance and accelerated vesting of stock compensation to MPG associates due to the acquisition, all totaling $40.6 million; and costs related to the integration and synergy attainment activities of $9.4 million.
Ultimately, we expect to incur between $45 million and $60 million of restructuring and acquisition-related costs over the last 6 months of 2017.
These amounts are in line with what we have previously disclosed to you and directly support a successful implementation of our synergies from our recent acquisition.
SG&A expense, including R&D, in the second quarter of 2017 was $105.6 million or 6% of sales.
This compares to $78.7 million or 7.7% of sales in the second quarter of 2016.
R&D spending for the second quarter of 2017 was $41 million compared to $35 million in the second quarter of 2016.
SG&A as a percent of sales declined due to the benefits of blending the AAM and MPG SG&A expenses for the combined companies but also reflects the favorable impacts from AAM's global restructuring that was initiated in the fourth quarter of 2016 as well as in synergies realized as part of the integration activities of the MPG acquisition.
Amortization of intangible assets for the second quarter of 2017 was $24.8 million as compared to $1.2 million in the second quarter of 2016.
This increase related to the amortization of intangible assets recorded during 2017 as part of the purchase accounting for our acquisitions, and I would expect this to run at approximately $25 million per quarter for the next few years.
Now let me cover other income and expense and interest.
Other income and expense was expense for the second quarter of 2017 of $9.5 million compared to income of $2.1 million in the second quarter of 2016.
$2.7 million of the expense in the second quarter of 2017 related to onetime debt refinancing costs attributable to the premiums we paid on the extinguishment of MPG's existing debt upon acquisition.
The remaining net expense in the second quarter of 2017 primarily relates to foreign exchange, balance sheet remeasurement losses as a result of the dollar weakening against the Mexican peso and euro.
In the second quarter of 2016, we recorded a foreign exchange remeasurement gain from this account, mainly related to the strengthening of the U.S. dollar against the peso.
Net interest expense in the second quarter of 2017 was $56.1 million as compared to $21.9 million in the second quarter of 2016.
This increase in interest expense reflects the impact of the additional debt required to fund the MPG acquisition.
The weighted average interest rate for the second quarter of 2017 was 5.6%.
Now I know one of everybody's favorite topics these days, taxes.
Income tax expense was $2.4 million in the second quarter of 2017 as compared to $20.7 million in the second quarter of 2016.
The effective income tax rate was 3.6% in the second quarter of 2017 as compared to 22.6% in the first quarter of 2016.
The lower income tax expense and effective tax rate is explained by 2 factors.
First, significant restructuring and acquisition-related costs in the U.S. causing lower-than-normal income in the United States, a higher rate jurisdiction in 2017 and a net discrete favorable tax adjustment in the quarter of 2017 of $4.2 million, resulting from the tax benefits of the MPG acquisition.
The effective income tax rate when adjusted for these items would've been approximately 23%, quite in line with the guidance of 20% to 25% that we have provided previously.
Taking all of these sales and cost drivers into account, GAAP net income was $66.3 million or $0.59 per share in the second quarter of 2017 compared to $71 million or $0.90 per share in the second quarter of 2016.
Adjusted earnings per share, which excludes the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs and nonrecurring items, including the tax effect, was $0.99 per share in the second quarter of 2017 compared to $0.89 per share in the second quarter of 2016.
Let's now move on to cash flow and the balance sheet.
We define free cash flow to be net cash provided by operating activities less capital expenditures, net of the proceeds received from the sale of property, plant, equipment and government grants.
AAM defines adjusted free cash flow to be free cash flow excluding the impact of cash payments for restructuring and acquisition-related costs and settlements of pre-existing accounts payable balances and interest expense payable for acquired entities.
Net cash generated by operating activities in the second quarter of 2017 was $150.9 million.
Capital spending, net of proceeds from the sale of property, plant and equipment, was $103 million in the second quarter of 2017.
Cash payments for restructuring and acquisition-related costs for the second quarter of 2017 was $56.7 million.
The cash payment for the settlement of pre-existing accounts payable balances for the acquired entities was $12.4 million.
This relates to a purchase price accounting adjustment that required AAM to treat a portion of the price we paid for MPG to be classified as a reduction of cash flow from operations, resulting from the settlement of pre-existing balances we had with MPG immediately before the acquisition.
We also paid $24.6 million in the second quarter of 2017 for interest payments due upon the redemption of MPG's outstanding legacy debt on the acquisition date.
Reflecting these activities, AAM's adjusted free cash flow in the second quarter of 2017 was $141.6 million as compared to $105 million in the second quarter of 2016.
For the first half of 2017, AAM generated over $200 million in adjusted free cash flow as compared to $81.2 million in the first half of 2016.
Note that our capital spending would be second half heavy due to the timing of our launches and upcoming replacement programs, such as the jet full-size truck programs for General Motors and for FCA.
Lastly, as David mentioned, we expect adjusted free cash flow for 2017 to be approximately 5% of sales, which represents a free cash flow yield of approximately 17%.
From a debt leverage perspective, we ended the quarter with a net debt to LTM pro forma adjusted EBITDA or net leverage ratio of 3.1x at June 30.
This calculation takes our total debt, net minus our available cash balances divided by our pro forma adjusted EBITDA, which includes a pre-acquisition adjusted EBITDA, recognized in the last 12 months by our acquired entities.
Liquidity at the end of June was $1.45 billion, in line with our target of over $1 billion post-acquisition.
So big picture, we're a little ahead of where we thought we would be as it relates to our net leverage ratio and reducing our net debt leverage continues to be a priority for AAM.
In fact, we prepaid over $20 million of our scheduled term loan amortization payments for the next 12 months in the second quarter of 2017.
David confirmed our 2017 full year financial outlook that was communicated on last quarter's conference call, so I won't repeat our target again.
But I will say that we are very confident on our ability to reach these targets.
Before we open up for Q&A, let me quickly summarize the key observations from the quarter.
First, outstanding operational performance from our global team, at the same time, we have significant integration activities and product launches worldwide, resulting in record quarterly sales, adjusted EBITDA, adjusted EBITDA margin and strong adjusted free cash flow generation.
Second, maintaining our current 2017 full year outlook across the board despite lower U.S. SAAR levels, a testament to our strong product mix and end market diversification, supplemented by the MPG acquisition.
And lastly, our synergy attainment is on track, business diversification is being achieved and deleveraging of the business has begun.
It has only been a few months since our acquisition of MPG has been completed, but we are off and running to see significant opportunities ahead of us, continuing to build on a foundation of profitable growth, superior profit margins and a robust free cash flow generation.
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 start on our Q&A.
Jason P. Parsons - Director of IR
Thank you, Chris and David.
We have reserved some time to take questions.
(Operator Instructions)
Operator
(Operator Instructions) Your first question comes from the line of Rod Lache with Deutsche Bank.
Rod Avraham Lache - MD and Senior Analyst
I'll try to limit it to 2. Just first of all, pretty impressive level of SG&A as a percentage of revenue in the quarter.
Can you just give us a sense of how you're thinking about that going forward?
Christopher John May - CFO and VP
Yes, Rod.
This is Chris.
Yes, you saw a 6% level here in the second quarter.
Obviously, a little higher than the first quarter as we blend these 2 companies together.
I would think about that sort of in the mid-6% range for the full year as we level out for the sales in the third and fourth quarter.
Rod Avraham Lache - MD and Senior Analyst
Okay.
And then I'd like to ask about how we should be thinking about the EBITDA going forward, just in light of some of these production cuts that we're seeing from General Motors.
Q3 might be somewhat instructive since it's a quarter of pretty low run rate of K2 production.
And then for next year, GM is talking about something like a 100,000-unit decline year-over-year for that platform.
Any high-level thoughts there?
Is that somewhat weaker than you've been expecting?
The number, obviously, this quarter is quite strong, and there are some speculation out there that, basically, the upside from this quarter was -- is offsetting some modest downside maybe for the back half.
Christopher John May - CFO and VP
Yes, Rod.
This is Chris again.
First of all, no, nothing different than from what we were expecting.
I guess from a macro level, I would think about it from that perspective.
Our full year guide for the year, an EBITDA margin of 17% to 18%.
On a year-to-date basis, we're right at that high end of the range.
We continue be focused on performing as a company in the second half, and we expect to fall in that range and are, quite frankly, driving towards the higher end of that range.
We see continued strong performance in the second half of the year.
In addition, our synergies continuing to grow and take hold through the third and fourth quarter are also key considerations in that factor.
Rod Avraham Lache - MD and Senior Analyst
So Q3, in light of where they -- the production for General Motors is coming in, I presume would be below that range, though?
Christopher John May - CFO and VP
Well, in terms of -- it will fall in our overall guide, but we do see some lower K2 production in the third and fourth quarter compared to the first half.
And as you know, that's a stronger margin profile product for us, and you'll see a little bit associated with that growth.
Rod Avraham Lache - MD and Senior Analyst
Right.
So it could be below -- when you say that's the range, 17% to 18%, that's the range for the year.
But you're saying that the quarters are also going to fall within that range, some quarters at the lower end, some at the upper end?
Christopher John May - CFO and VP
Yes.
I mean, think about the range -- again, for full year first half performance, we're focused on the top half of that range.
Our expectation, we will fall, full year, within that range, and we will continue in the fourth quarter.
Rod Avraham Lache - MD and Senior Analyst
Right.
Okay.
And do you believe that -- I mean, is that expectation for next year, about 100,000-unit decline, that's in line with expectations and synergies and other factors are sufficient to mitigate that?
David C. Dauch - Chairman & CEO
Yes, Rod.
This is David.
Absolutely.
The -- what GM communicated is in line with what our plan had been.
Clearly, they got some scheduled downtime because of the transition from the K2XX to the T1XX.
And the whole supply base, including AAM, is going to feel a little bit of that impact, but it's not a surprise to us.
It's known.
It has been planned and contemplated in our numbers.
Operator
Your next question comes from the line of Brian Johnson with Barclays.
Brian Arthur Johnson - MD and Senior Equity Analyst
Couple of housekeeping questions and a more strategic question.
The housekeeping question is, can you remind us on the restructuring?
Couple of questions.
One, what's the accrual versus cash payouts today?
Kind of second, as you roll that forward, you mentioned a number in the deck.
Not sure if that's accrual or cash.
But just how was the cash payout against those accruals going to work?
Christopher John May - CFO and VP
Yes.
In terms of how we think about cash payments for the first half of the year in terms of all the restructuring payments, we're about $40 million in terms of expense related to the closing of the acquisition.
The cash payment is very similar, same with the restructuring side.
In terms of guidance going forward, as I mentioned, it will be about $45 million to $60 million in the second half of the year.
And I will think of those as very similar to the cash payment side, equal to the expense, very similar.
Brian Arthur Johnson - MD and Senior Equity Analyst
Okay.
But first half, it ran -- the cash payments ran ahead of expense?
Christopher John May - CFO and VP
Pretty close.
Net-net, close, very close to expense.
Brian Arthur Johnson - MD and Senior Equity Analyst
Okay.
Okay, so it's intercompany things.
Second, we were on the call with Mr. Marchionne yesterday, and he talked about a portfolio review and kind of not doing things that suppliers could be doing better.
Any hope or possibility that FCA or perhaps Ford, with a new CEO, could return to the age-old issues of outsourcing their in-house operations?
Or with some of their declines in car production, maybe keep labor busy, is that just not something we should be thinking about?
David C. Dauch - Chairman & CEO
Yes, Brian.
This is David.
Clearly, they need to look at their product portfolio and identify what's core and what's noncore.
At the same time, they've got to assess what their capital needs and uses are going to be going forward in the future.
Clearly, the supply base is capable, on the axle and driveline side, of supporting that if they made the decision to divest in those assets.
And if Ford or FCA had an interest in divesting that, clearly we'd have an interest in having discussions with them.
Brian Arthur Johnson - MD and Senior Equity Analyst
Okay.
And then final question.
Just kind of thinking of beyond 2018.
How are you thinking about GM's share of the large pickup truck market now and kind of it's been up and down, mainly down in the last few months.
And whether that's something they're going to pullout of, whether they're sort of going stingy on the incentive side just to make sure they have enough inventory.
Just how are you thinking about that?
David C. Dauch - Chairman & CEO
Yes.
GM's product has gotten a little bit long in the tooth compared to some of its competitors because Ford came out with some new product.
Clearly, FCA is coming out with some new product as well.
Typically, when you get long in the tooth you tend to lose a little bit of share.
At the same time, the competitors have been aggressive in regards to some of the incentives that they put forward there.
GM has been very disciplined on their transaction pricing.
So -- but I expect that GM will fight their way and maintain their portion of the market share, and that there'll be some percentage gains here and there or percentage losses across the 3. But that typically, historically, is what had happened based on when new models get introduced and based on where the product portfolio stands in its life cycle.
So overall, I think that GM will be able to protect and maintain their share going forward.
Brian Arthur Johnson - MD and Senior Equity Analyst
And I guess, just final question.
Hybrids, any kind of update in terms of signings, backlog, discussions?
We heard again from BorgWarner this week that the pace of discussions around the hybrid programs, various flavors, maybe these are increasing model years 2020-ish.
We certainly point that out when we look it up come in competition with Chrysler.
But how are your discussions going?
David C. Dauch - Chairman & CEO
Well, as we communicated to you all before, we've got electrification programs built into our backlog.
That'll be launched starting next year and then ramping up from there.
At the same time, in the market basket and what we're quoting on right now, there are some significant opportunities there and we're knee-deep in discussions on those.
So hopefully, we'll have some further updates for you in the near future.
Operator
Your next question comes from the line of Joseph Spak with RBC Capital Markets.
Joseph Robert Spak - Analyst
Just -- well first of all, I appreciate the bridges on sales and EBITDA.
I guess, I just want to get a little bit more familiar with how you're doing these a little bit.
So in the 65 -- in the sales logs, 65-plus from backlog, volume mix, other.
I mean, it would actually seem like a good chunk of that is backlog, because I know it was still a strong K2 quarter.
But it wasn't up that many units year-over-year.
And then conversely, you had Jeep Cherokee, which was down pretty massively.
So is that, a, an accurate assessment?
And related, is that a net number so you're putting the roll-offs in that bucket as well?
Christopher John May - CFO and VP
Joe, you're thinking about it perfectly.
It's -- yes, it's a net number, so you have some net attrition.
And as you mentioned, Q2 of last year to Q2 of this year, K2 was up very slightly and we did have a decline on the Cherokee program.
So you could think about this almost as a net backlog piece for the second quarter of 2017.
You got (inaudible) on the quarter, but some of the key pieces that you mentioned.
Or also, as you know, the backlog, driving a lot of this is the new D2 platform for General Motors, which is key and has been a significant launch activity here for us in the second quarter.
Joseph Robert Spak - Analyst
Okay.
That's helpful.
And then I guess related, I heard you talk a little bit about no change from -- on the K2 from what sort of GM said as sort of as expected.
But can you -- are you willing to sort of give exactly or a roundabout to the units embedded in the full year forecast for '17?
David C. Dauch - Chairman & CEO
Yes, Joe.
This is David.
I mean, we've got roughly 1.267 units built into our forecast going forward as far as for the full year, which is slightly under where GM's schedules are in, where IHS is.
We feel pretty comfortable about where we are.
Joseph Robert Spak - Analyst
Okay.
That's helpful.
And then one last one.
This one is, I guess, sort of housekeeping.
But if I go back to the bridges, like MPG acquisition synergies plus 6, which -- this is simple math.
If you just annualize it, that's 24.
So how does -- and then I think you said your -- the annualized rate is higher at 38.
So what's the discrepancy there?
Christopher John May - CFO and VP
Yes.
So Joe, think about it this way.
As we close at the beginning of the second quarter and they continue to grow through the quarter, the synergies, realize you're exiting to a little higher pay than you started.
While 6 was an excellent dollar going for the quarter, you have an exit base that's higher.
So you continue to see that build as we go forward.
Operator
Your next question comes the line of Emmanuel Rosner with Guggenheim.
Emmanuel Rosner - MD & Autos and Auto Parts Analyst
So first question on the reiterated guidance in light of the low SAAR assumption.
What are some of the offsetting positive factors that sort of prompt you to be confident with the guidance?
David C. Dauch - Chairman & CEO
Emmanuel, this is David.
Clearly, we're looking at the macro assumption.
And based on historicals you all have seen in the last several months, we thought that it's compelling to bring the U.S. SAAR down to 17.
But it was clearly in our favor right now.
And I said this for the last several quarters is the mix is very favorable to American Axle.
And the sweet spot for us is trucks and SUVs and crossover vehicles and luxury passenger cars.
And each of those segments continue to gain market share going forward, and we expect them to gain market share going forward for quarters to come as well.
So that's really what allows us to maintain our guidance for the year.
Emmanuel Rosner - MD & Autos and Auto Parts Analyst
Okay.
And then sort of going back to sort of the initial question about the 2018 view.
So in light of GM's comments, you seem to be on the sort of like on the same -- on board for that production decline next year, maybe double digits or so in the light trucks.
What are sort of like some of the offset to sort of look for in 2018?
Obviously, large synergies from the MPG acquisition, some backlog, anything else to -- in terms of big bucket to think about?
David C. Dauch - Chairman & CEO
Yes.
The only other thing is we're seeing an upswing in regards to some of the industrial and commercial markets as well.
But you hit the key points in regards to the backlog and new business.
We have a strong backlog.
Over the next 3 years, obviously watching $500 million this year, $450 million next year and $550 million the year after that.
But you hit the main items.
The only thing, I guess, that I'd add would be the upswing in some of the industrial and commercial market for us.
Operator
Your next question comes from the line of Ryan Brinkman with JPMorgan.
Ryan J. Brinkman - Senior Equity Research Analyst
Obviously, you're doing a really great job on margins.
So I would have not been surprised to see you have maintained EBITDA while cutting sales and increasing margin outlook today.
So I guess I'm just a little bit surprised, though, that your lowering the SAAR outlook but not the revenue outlook.
Can you talk about what's contributing to your ability to maintain the revenue guide?
Is it that GM said that the lower SAAR is led by pass cars and daily rental and you're under indexed there?
And then I know you're reiterating the guide.
But would you say that if you had to say if risk were to be upside or downside that maybe risk on revenue is to the downside in the back half but risks to margin is on the upside?
David C. Dauch - Chairman & CEO
Brian (sic) [Ryan], quite the opposite.
I mean, I just answered earlier.
I mean, we lowered the SAAR because of the macro conditions, but at the same time, we're benefiting significantly from the mix.
North American full-size truck and SUV continues to show gains quarter-to-quarter and continue to show that going forward here.
We're seeing a big swing in demand to crossover vehicles for midsize and small passenger cars, which are down.
At same time, our global light vehicle business continues to grow.
Our commercial vehicle, as I just mentioned, the industrial and commercial is growing.
And then we're feeling a little bit of the impact on the passenger car coming down through some of the MPG assets that we took over.
But the net of everything is up for us.
And therefore, with lowered SAAR, we can still hold our guidance and forecast for the year.
So we feel very confident about where we are.
Ryan J. Brinkman - Senior Equity Research Analyst
Okay.
That's great to hear.
And then just finally, sort of sticking with margin.
It looks like the first half was kind of 18 in the full year '17.
It looks like maybe the implication is more like 17% margin in the back half, and I know that K2XX is kind of inordinately profitable and softer in the back half.
But I know you've got less exposure there now with MPG.
So I guess I was trying to understand, again, sort of if the lower K2 is -- is that sufficient enough to drive the margin difference?
Or is there some other factor contributing to it?
You called out metals, but -- or again, if the margin guide, if there's any conservatism there because the synergies just continue to come on a little bit more each quarter.
Christopher John May - CFO and VP
Yes, sure.
Ryan, this is Chris.
I'll reiterate our guidance of 17% to 18% and again, driving towards the higher end of that range.
Some elements to think about in the second half, obviously you mentioned the K2 case which does, obviously, work up on our margin a little bit.
But as we're getting ready to launch some of these new significant platforms next year, especially in the full-size truck for both FCA and K2, we'll experience some higher project-type related expenses in the second half.
Metal market continued to work up in the second quarter this year, which generally has a little bit of the following quarter trail to it, so you put a little bit of pressure on our margins associated with that.
The level off some of our stock comp that started in the kind of mid-second quarter for our acquired entity and that picks up a little bit in terms of just a run rate perspective.
But some of that is all being offset by our continued and demonstrated improvements in implementations of our synergy achievements.
So we're pretty excited to offset a lot of that through that process.
And obviously, we work through the FX side as well.
The peso had been strengthening a little bit against this, so we have a little bit of margin room on that but not a whole lot.
But those are some of the things that I think about for the second half.
Operator
Your next question comes the line of Itay Michaeli with Citi.
Itay Michaeli - Director and VP
Just on Slide 13.
Just could you talk a little bit about the pricing of $7 million?
I think you kind of implied that's a pretty small impact relative to what we see definitely from suppliers.
Is that kind of sustainable quarterly pricing impact?
And do you think, I mean it sounds like 14, that you can keep on getting a net benefit to EBITDA from productivity net of pricing?
Christopher John May - CFO and VP
Yes, this is Chris.
First comment, in terms of a pricing perspective, it's a little less than that, 0.5%.
You may recall historically, we've said anywhere from 0.5% to 1% is what we would experience.
It's pretty much in line with that.
We believe we'll be able to continue to hold that into the foreseeable future.
And yes, our corporate activity initiatives throughout the company in addition to our synergy actions that we're taking should continue to offset pricing.
I mean, that's one of our main objectives is to continue to grow margin, offset any negative declines, whether it be through pricing or economic inflation.
So that is a core of our company in terms of our operational excellence.
Itay Michaeli - Director and VP
Great, that's helpful.
And just a follow-up on housekeeping with post-MPG, can you just remind us of the company's commodity impact, the magnitude this year just as well your contracts and pass-throughs and things like that?
Christopher John May - CFO and VP
Yes.
Think about -- we both, as a combined entity, we have a pretty good coverage there.
Think about the 85% to 90% of what we would pass through.
And you can see a little bit of that element and dynamic on the walks we provided from the sales between Pages 13 and 14.
You can see that impact, but -- yes.
So think about 85% to 90% covered on the commodity side as it relates to purchase components.
Operator
Your next question comes the line of John Murphy with Bank of America.
John Joseph Murphy - MD and Lead United States Auto Analyst
Just a first question here.
I mean, I know it's early days, but as you're talking to customers, I'm just curious what kind of revenue synergies you're digging up here with the MPG acquisition.
I mean, we're focusing on costs a lot here, but just curious on what you're hearing out there from your customers as opportunities.
David C. Dauch - Chairman & CEO
Yes, John.
This is David.
First of all, we've met with most of the major customers that we've had already.
And first of all, they're very supportive of the transaction that we did and the integration.
The clear focus that they have right now is just making sure we have production -- daily production as well as protecting customer launches going forward.
From a pricing and from an opportunity standpoint, there's clearly some cross-selling opportunities because of the relations that BMW -- or that MPG had with, let's say, the likes of BMW or some other European or Asian customers that maybe American Axle didn't have.
So we see opportunities that way.
And then clearly, we're looking at other opportunities with respect to what we can do from a pricing standpoint.
But the customers have been very receptive to the acquisition.
They understand our commitment to support their programs.
At the same time, they're clearly going to look for some sort of benefit as we go forward based on the synergy attainment.
And we'll work with each of the customers on a case-by-case basis, not only today, but going forward in the future.
John Joseph Murphy - MD and Lead United States Auto Analyst
Okay.
And then just a second question.
I mean, obviously, you got M-schedules from GM.
You got outlooks from IHS on where the GM truck volume is going to go next year.
Things can change.
Obviously, to the positive and the negative.
I'm just curious, as you think about the variability in the schedule and the potential risk of the downside, where do you kind of see the real material increments?
And how do you respond to potential declines in the schedule?
I mean, is 10,000 units something that you need to react to in a big way?
Or is it 50,000 units?
And how do you react, David?
David C. Dauch - Chairman & CEO
John, as you know, we've been very good about flexing our business both upward when the schedules go up as well as bringing them downward.
And we've got the discipline in place, the management team in place.
At the same time, MPG had a good capability at doing similar type of things.
So we welcome incremental volumes.
We'll find a way to make that product, especially with the capacity that we have today.
We're really driving hard the utilization and that capacity and hopefully, you try to free up some capacity to go after new business.
But in the event that they go the other way, then we understand what we need to do from an operational standpoint.
And clearly, we'll adjust our variable costs and our manpower in line with what the market demand would be.
Chris, I don't know if there's anything you want to add financially.
Christopher John May - CFO and VP
Yes, no, just as David said, you look at the variable elements of our business and the ability to accommodate whatever the market throws at us.
Highly variable in terms of the labor side.
Highly variable in terms of purchase material components.
Over 60% of our costs relate to that.
So we are prepared to, again, accommodate whatever comes our way.
John Joseph Murphy - MD and Lead United States Auto Analyst
Good.
It's helpful.
And then just one last housekeeping.
D&A running sort of roughly annualized, $500 million?
Does that sound about right?
Christopher John May - CFO and VP
Yes, it's about right.
Correct.
Operator
Your next -- your last question comes from the line of Irina Hodakovsky with KeyBanc.
Irina Hodakovsky - Associate
Actually, all of my questions have been answered.
I appreciate the time.
Jason P. Parsons - Director of IR
Thanks, Irina, and we thank all of you who 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 call.
Thank you for your participation.
All participants may now disconnect.