American Axle & Manufacturing Holdings Inc (AXL) 2019 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the American Axle & Manufacturing First Quarter 2019 Earnings Conference Call.

(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.

Thank you, Allison, and good morning.

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

Earlier this morning, we released our first quarter of 2019 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 also find supplemental slides for this conference call on the Investors page of our website as well.

To listen to a replay of this call, you can dial 1 (877) 344-7529, replay access code 10130211.

This replay will be available beginning at 1:00 p.m.

today through 11:59 p.m.

Eastern Time, May 10.

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 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 information is available on our website.

Over the next couple of months, we expect to participate in the following conferences: the 2019 KeyBanc Capital Markets Industrial, Automotive and Transportation Conference on May 30; the Barclays' High Yield Bond and Syndicated Loan Conference on June 6; and the JPMorgan European Automotive Conference on June 11.

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 CEO, David Dauch.

Thank you, Jason, and good morning to everyone.

Thank you for joining us today to discuss AAM's financial results for the first quarter of 2019.

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

To begin my comments today, I'll review the highlights of our first quarter 2019 financial performance.

Next, I'll comment on the performance in AAM's business units, the progress of our performance improvement plan and status on our critical launches.

Lastly, I'll cover our 2019 financial outlook 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 may have.

Our first quarter financial performance reflects customer downtime due to program changeovers for our 2 largest programs and lower year-over-year light vehicle production volumes in our key markets of North America, Europe and China.

Our results also reflect the sequential performance improvements of our launch and operational efficiencies that we experienced in the second half of 2018.

AAM's sales for the first quarter of 2019 were $1.72 billion compared to $1.86 billion in the first quarter of 2018.

The decrease in our revenues on a year-over-year basis reflects lower global production volumes, including the impact of customer downtime at the GM SUV and Ram heavy-duty truck plants related to program changeovers.

We were also impacted by slower-than-expected customer launch ramp curves for the Ram heavy-duty program and certain transmission and engine component launches.

The impact of these decreases were partially offset by the realization of our new business backlog.

AAM's adjusted EBITDA in the first quarter of 2019 was $245 million or 14.3% of sales.

This is compared to $317 million in the first quarter of 2018 or 17.1% of sales.

AAM's adjusted EPS in the first quarter of 2019 was $0.36 per share compared to $0.98 per share in the first quarter of 2018.

Our profitability on a year-over-year basis was impacted by lower sales and higher manufacturing and launch costs.

Chris will provide additional information regarding the details of our financial results in a few minutes.

Let me now provide an update on our segment financial results, including a progress update on our performance improvement plan.

One thing to quickly note before I get into the details is that we announced the business reorganization at the beginning of the year that reduced our business units from 4 to 3 and reallocated facilities from our powertrain business unit to either our driveline or metal-forming business units.

As a result, we have reported our financials in 2019 for the 3 remaining business units and have recast our 2018 segment financials to provide comparable data.

As it relates to our update of the performance improvement plan, we continue to show our progress on the legacy business unit structure to ensure consistency of our disclosures from period-to-period.

With all that being said, let's dive into our largest business unit.

The driveline business unit recorded sales of $1.13 billion in the first quarter of 2019 and generated adjusted EBITDA of $137.2 million.

Year-over-year driveline profit margins were down due to lower sales, higher launch cost and higher manufacturing cost due to inflationary pressures on such items as material, freight and tariffs.

You'll remember that one major issue that caused us to incur additional premium beginning in the third quarter of 2018 was the changeover between the old 2018 Ram heavy-duty model and the new 2019 Ram heavy-duty model.

As we mentioned in our last call, that changeover was complete for us at the end of 2018.

FCA took the required downtime at their Saltillo plant in January to complete their changeover to 2019.

We are now building only next-generation Ram heavy-duty pickup trucks, and we have properly executed this launch here in 2019.

We are no longer incurring significant premium cost related to this launch and are only experiencing the typical launch project expense that are normally associated with such a major program.

However, the ramp curve to the full run rate volume for the 2019 Ram HD program has been longer than we expected, and we are still not running at the full rate that we would have expected at this point in time.

We expect FCA to resolve this very -- this issue in the very near term, but this slower ramp has had some impact on our 2019 sales versus our initial expectations.

Before we move on to further performance improvement updates, I'd like to take this time to reaffirm that our GM next-generation full-size truck and SUV launches are on track and we are meeting the high launch performance expectations of both ourselves and our customer.

We have worked extremely well with GM, and these launches have been flawless and [anonymous] to date.

We are currently laser-focused on the upcoming heavy-duty launch.

On the supplier side of the business, we have resolved nearly all the issues that we had previously ramped -- that were previously impacting us.

We have one current issue that is continuing to cause excessive premium cost in order to meet our customer's requirements.

This open issue relates to an aluminum casting supplier for our eDrive units that we continue to work on in order to meet our quality and on-time delivery requirements.

While we continue to make progress, we see this issue carrying into the second quarter of 2019.

While this issue has lingered longer than we expected to, we are meeting our customer requirements and we'll get this issue completely behind us soon.

The final item related to driveline that I'd like to discuss is that as part of the business reorganization in January, the Bluffton manufacturing facility is now part of the driveline business unit.

This was 1 of the 2 legacy MPG plants that we specifically called out in the third quarter of 2018 for its poor launch performance.

In the first quarter of 2019, we experienced lower premium freight, premium labor and scrap costs, and saw increased efficiency at this facility.

While Bluffton is still not running at its full potential, we have seen meaningful improvement and we are on track by the end of the second quarter of 2019 to further improve this performance.

On the metal forming business unit, which continued their strong operating performance, metal forming recorded sales of $483.3 million and segment adjusted EBITDA of $85.3 million in the first quarter of 2019, running at 17.7% adjusted EBITDA margins.

As part of the reorganization of the business, the metal forming business unit has assumed responsibility for the Twinsburg manufacturing facility, which has stabilized its operations and is also on target to meet its performance improvement goals by the end of the second quarter.

The casting business unit recorded sales of $225.3 million and segment adjusted EBITDA of $22.5 million.

This represents a sequential increase in margin performance of over 500 basis points, from 4.9% in the fourth quarter of 2018 to 10% in the first quarter of 2019.

In the first quarter of 2019, we realized the benefits of our efforts and actions that we have taken to address the labor shortage issues in our U.S. foundries.

As a result, we have stabilized our operations, improved our operational efficiencies, lowered our premium labor cost as well as improved our scrap performance.

Last year, nearly all of our U.S. plants were suffering from this labor shortage.

We are now down to 1 facility that still has some work left to do and is in front of them.

We also improved our casting business unit financial performance to increase pricing for certain commercial and industrial customers to offset the impact of higher cost and inflationary pressures.

We have successfully restored EBITDA margins in this business unit to double-digits and we'll work towards continued improved performance throughout the year.

Before I turn it over to Chris, let me provide some quick comments on AAM's 2019 full year financial outlook.

Our previously stated 2019 full year targets remain unchanged.

However, as a result of slower-than-expected customer launch curves and lower-than-anticipated production volumes for certain programs, we currently project that we are trending towards the low end of our range.

As a reminder, AAM is targeting full year sales in the range of $7.3 billion to $7.4 billion in 2019.

For the full year 2019, AAM is targeting adjusted EBITDA between $1.2 billion and $1.25 billion.

And AAM is targeting adjusted free cash flow in the range of $350 million to $400 million.

To wrap things up, AAM continued to improve operational performance in the first quarter of 2019, while supporting our customers and several important program launches.

We are off to a good start in '19 as we make it through another busy year for the company.

We expect to launch over 50 programs this year, and 70% of them are scheduled to be completed by the end of June or the end of the first half of the year.

This activity, along with the expected strong production of GM and FCA full-size trucks that we support, sets us up for a very strong second half of 2019.

We look forward to building momentum throughout the year and achieving our launch and operational performance objectives while enhancing our profitability and free cash flow generation.

That is all for my prepared remarks today.

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

Let me now turn the call over to our Vice President, Chief Financial Officer, Chris May.

Chris?

Thank you, David, and good morning, everyone.

I will cover the financial details of our first quarter of 2019 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 get started with sales.

In the first quarter of 2019, AAM sales were $1.72 billion compared to $1.86 billion in the first quarter of 2018.

Slide 7 shows a walkdown of first quarter 2018 sales to first quarter of 2019 sales.

The year-over-year decrease relates mainly to the impact of the transition to the next-generation GM full-size truck platform as well as lower production volumes related to customer downtime at General Motors SUV and FCA's Ram heavy-duty pickup truck assembly plants as part of their model changeover process.

Together, these 2 programs represented a reduction of $146 million in revenue on a year-over-year basis.

Our new business backlog more than offset normal attrition and other volume and mix factors for existing programs.

The impact of our backlog net of attrition is weighted towards the second half of 2019, with about 60% of it projected to be realized during that time frame.

Sales also decreased by $8 million for normal annual price downs and $12 million for net metal market and foreign currency impacts.

We expect that we'll see a similar decrease in year-over-year revenues in the second quarter when compared to 2018, but then we expect this trend to reverse as we get through the planned customer downtime in the first half of 2019 and, in particular, reach the 1-year anniversary of the new GM pickup truck launch.

Now let's move on to profitability.

Gross profit was $222.2 million or 12.9% of sales in the first quarter of 2019.

Adjusted EBITDA was $245 million in the first quarter of 2019 or 14.3% of sales as compared to $317 million in the first quarter of 2018.

You can see a year-over-year walkdown of adjusted EBITDA on Slide 8. Lower volume and mix impacted EBITDA by $44 million as we saw lower sales on some of our higher contribution margin programs within the quarter.

We were also impacted by normal price downs for the year.

On a year-over-year basis, we were impacted by inflationary pressures on manufacturing costs as compared to a year ago.

On a year-over-year basis, we experienced $9 million in cost increases related to material, freight and tariffs.

The good news here is these pressures seem to have leveled out and we believe that these factors will begin to subside in the second half of the year, especially when compared to 2018.

On a year-over-year basis, we also experienced higher launch and project-related costs in the first quarter of 2019 of about $10 million.

We have made progress in this area since the third quarter of 2018, and we expect to see continued improvement in our launch and project performance as we go throughout the year, not only as a result of improvements in our launch performance, but also reduction in the amount of launches that we will face in the second half of the year.

We also continued to experience run rate inflation on costs such as labors and utilities as compared to the first quarter of 2018.

This also impacted us by $10 million on a year-over-year basis.

We have begun a series of actions that will help mitigate and reduce these inflationary pressures, and we should see positive trending results as the year progresses.

We continue to see the benefit of our integration activities, as cost reduction synergies and the benefits of our business unit consolidation that we implemented in January improved our performance by $10 million in the quarter.

As far as a sequential comparison of our EBITDA, from the fourth quarter of 2018 to the first quarter of 2019, we were in line with the expectations we provided on the last earnings call.

You can see this detail on Slide 9. The EBITDA impact due to volume, mix and pricing was in the lower half of our expected range.

This was driven by sales that were also below the midpoint of our expected range.

Metal market and foreign currency was unfavorable by $3 million.

Normal anticipated project expenses were $6 million, higher than last quarter but came in better-than-expected as the timing for some of these expenses moved into the second quarter.

And we realized $12 million of synergy, launch and operational improvements when compared to the fourth quarter.

All in all, from an operating profit performance, the first quarter of 2019 met our expectations and gives us a foundation to build on throughout the rest of the year.

As it relates to restructuring and acquisition-related costs.

In the first quarter of 2019, we incurred $12.1 million of restructuring and acquisition-related costs.

Let me now cover SG&A, interest and taxes.

SG&A expense, including R&D, in the first quarter of 2019 was $90.7 million or 5.3% of sales.

This compares to $97.3 million in the first quarter of 2018 or 5.2% of sales.

AAM's R&D spending in the first quarter of 2019 was $34.3 million compared to $38.5 million in the first quarter of 2018.

We continue to manage our R&D expenditures and are benefiting from a focused effort on process efficiencies in this area.

Even with the cost benefits, we believe we continue to make the necessary investments to support our future business growth opportunities at this time.

Net interest expense was $52.7 million in the first quarter of both 2019 and 2018.

The favorable impact of lower overall debt balances were offset by higher interest rates on our variable debt and lower capitalized interest.

In the first quarter of 2019, we recorded a tax benefit of $3 million as compared to an income tax expense of $17.9 million in the first quarter of 2018.

The net benefit in the first quarter of 2019 includes a $9.3 million tax reduction that related to the finalization of regulations for the transition tax we initially recorded at the end of 2017, when the Tax Cuts and Jobs Act was passed.

This onetime benefit has been excluded from our calculation of adjusted EPS.

When you adjust for this benefit and restructuring and integration charges for the quarter, our overall effective tax rate is right around 17.5%.

Taking all of these sales and cost drivers into account, GAAP net income was $41.6 million or $0.36 per share in the first quarter of 2019 compared to $89.4 million or $0.78 per share in the first quarter of 2018.

Adjusted EPS for the first quarter of 2019 was $0.36 per share compared to $0.98 per share in the first quarter of 2018.

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 proceeds from the sale of property, plant and equipment.

AAM defines adjusted free cash flow to be free cash flow excluding the impact of cash payments for restructuring and acquisition-related costs.

Net cash used in operating activities for the first quarter of 2019 was $80.2 million.

Capital expenditures net of proceeds from the sale of property, plant and equipment for the first quarter of 2019 was $124 million.

Cash payments for restructuring and acquisition-related activity for the first quarter of 2018 were $15.6 million.

We continue to expect restructuring and acquisition-related payments to be between $50 million to $60 million for the full year of 2019.

Reflecting the impact of this activity, AAM had a seasonal use of adjusted free cash flow of $189 million in the first quarter of 2019.

It is common for us to have a free cash outflow in the first quarter of the year, as working capital typically is a significant use as we are increasing production, inventory and accounts receivable off of year-end holiday shutdowns.

In addition to lower year-over-year EBITDA, this year's usage was largely due to the timing of customer receipts, supplier payments and rebillable tooling collections were heavily related to launch programs.

From a debt leverage perspective, we ended the quarter with a net debt to LTM adjusted EBITDA or net leverage ratio of 3.2x at the end of March.

This calculation takes our total debt minus our available cash balances divided by the last 12 months of adjusted EBITDA.

This ratio has increased since the end of the year due to year-over-year decrease in first quarter EBITDA as well as the seasonal cash outflow, but this was expected and has no impact on our confidence to get to our target of approximately 2x net debt leverage by the end of 2020.

You'll most likely see a similar LTM EBITDA impact in the second quarter of 2019, and then this trend will reverse in subsequent periods due to cash flow generation and increases in LTM EBITDA amounts.

We also announced in our earnings release today that we are prepaying the final $100 million remaining of our 7.75% notes, which speaks to the confidence we have in our cash flow for the remainder of the year and our continued capital allocation of debt reduction.

We now do not have any significant debt maturities until 2022 and beyond.

As it relates to liquidity, AAM has over $1.2 billion of liquidity as of March 31, 2019, consisting of available cash and borrowing capacity on AAM's global credit facilities.

As we provided in the last 2 quarters and while we work our way through this dynamic time of heavy launch activity, business unit consolidation and operational improvements, we believe a near-term view of expected financial performance is helpful to our investors.

Therefore, we have also included a walk to show how we expect adjusted EBITDA to grow from the first quarter of 2019 to the second quarter of 2019.

While we anticipate several weeks of downtime related to the General Motors heavy-duty pickup truck, we do expect revenues to increase to the range of $1.75 billion to $1.8 billion.

This additional revenue will have a positive impact on adjusted EBITDA.

We also expect another $10 million to $20 million in synergy, launch and operational improvements quarter-over-quarter.

Contemplating these factors, we are targeting margin improvement with adjusted EBITDA to be in the range of $270 million to $280 million for the second quarter of 2019.

At this time, we expect AAM's second half sales to be stronger with our customers' downtime behind us and our new business backlog reaching run rates.

Before we move on to the Q&A, let me end with a few closing comments.

David noted that our current forecast is trending to the low end of our 2019 financial targets due to some slower-than-anticipated launch curves and lighter production than expected for certain programs across the globe.

We also had a couple of items that have taken us a little longer to fully resolve than we originally planned.

By and large, though, we are on track to achieve our performance improvement plans and look forward to increasing revenue, profitability and free cash flow through the rest of the year.

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

I'm going to stop here and turn the call back over to Jason.

Thank you, David and Chris.

We will now turn it over to Q&A.

(Operator Instructions)

(Operator Instructions) Your first question will come from John Murphy of Bank of America Merrill Lynch.

We can move on to the next question.

The next question will come from Brian Johnson of Barclays.

Yes, I want to talk a little bit about 2Q, as 1Q is pretty much in line.

There is, frankly, a significant shortfall versus consensus estimates.

Is there any way you could dimension how much of that is due to perhaps lower than either we or you anticipated production volumes on the 2 big HD platforms you're on, RAM and T1, K2XX versus the cost issue in eDrive versus other pressures like launch costs and so forth?

Yes, certainly, Brian.

This is Chris.

Versus consensus, obviously, you can see the main delta from an EBITDA perspective relates to volume in terms of revenues from that category.

Obviously, some of the Ram curves that we talked about previously a little slower than anticipated, a little weaker on some of our broader base of products from our metal form group as well as in some of our China all-wheel drive take rates.

I would quantify those as the majority of the impact in terms of revenue changes.

The General Motors heavy-duty truck program was certainly -- had been long planned and not new.

And then the balance -- the delta between that contribution margin, of course, you have a little bit associated with the eDrive item that you mentioned.

Okay.

And kind of secondly, as we kind of go through other launches, are you pretty much finished with the major ones by this summer or are there risks in either launch volumes, ramp volumes or launch costs when we get out into 2H?

Brian, this is David Dauch.

We've got over 50 launches this year, of which 70% of those launches are in the first half of the year.

So we're extremely busy right now with most of the big launches being here in the first half of the year.

However, we do have some larger launches in the second half of the year as well.

So -- but we do expect a lot of our launch-related costs or project expenses to be coming down in the second half of the year compared to what we incurred in the first half.

Okay.

And then final question.

As you've gone through the Metaldyne facilities, you've kind of highlighted your progress in fixing some of the things in the 3 business units and those 2 plants.

But is there anything else you've uncovered that's required remedial action to bring a plant or program up to Axle standards?

Brian, this is David again.

Nothing out of the ordinary.

So we've already highlighted the 2 plants that were the problem -- issues to us back in the third quarter of '18, that being Bluffton, and we're making meaningful progress on improving that facility.

And then the Twinsburg facility has stabilized.

But we don't see anything beyond those 2 initial facilities.

Yes, and have you gone through the -- have you sat down with plant management and gone through the upcoming launch programs, the staffing, the machinery they have in place, their supply chains to get comfortable that they're prepared?

We've done very extensive reviews.

We've also reviewed capacity management at each of the facilities.

And we're also re-reviewing our supplier status and capability.

The next question will come from Armintas Sinkevicius of Morgan Stanley.

Just trying to bridge a couple of things here.

The $190 million of free cash flow burn in the first quarter, that implies $550 million roughly in the remaining 3 quarters to get to $350 million.

Can you walk me through what gets us there?

Because if I look at the adjusted EBITDA, the guide implies $955 million for the rest of the year.

CapEx is about $390 million, cash interest maybe $200 million.

So I guess $350 million before I even take into account cash taxes.

So it would just be helpful to get -- to bridge the free cash flow there?

This is Chris.

Look, your comments got you about halfway there.

If you take sort of the main drivers, EBITDA, CapEx, interest and taxes based on our previously stated guidance associated with those topics, that will get you over $300 million of cash flow in those areas.

But the other element especially critical to understand really is 2, and it relates to working capital.

We consume just on our receivables alone over $200 million of working capital in the first quarter.

That typically flips in the fourth quarter.

So for example, in the fourth quarter of last year, you saw an over $300 million benefit associated with just the receivables.

So the working capital element will flip as the course of the year concludes.

And the other element of working capital that will also reach us to our goals is inventory reductions.

Last year, we grew our inventories well above our year-end 2017 levels because we were preparing for launches and getting ready to sequence those through the course of the year.

We increased those $50 million, $60 million, $70 million.

Our objective, of course, is to reduce inventories in a meaningful way throughout the course of this year.

That will be the other leg of that achievement.

If you put these 2 together, that'll get you pretty close to where you need to be.

Okay, that's helpful.

Got it.

And then adjusted EBITDA, we're down, call it, $5 million versus the guide you put out in the first quarter.

So appreciate the Ram coming in slower and some of the issues with the casting supplier for the eDrive.

But that's down $5 million, though the full year guide -- moving to the low end is down $25 million.

So is that just those factors carrying into the rest of the year or anything else there that bridges us from the down $5 million in the first quarter to down $25 million for the year?

If you think about the midpoint of our consensus on both -- I'm sorry, our guidance was previously $7.35 million of revenue, $1.225 million of EBITDA.

And now we have -- now guided you to the low end of our ranges previously.

So a little more than half of that will be certainly the contribution margin associated with the revenue drop, and eDrive is a key piece of that.

And then as some of these slower launches in terms the -- came out of the first quarter and second quarter were a little slower, you get a little bit of capacity utilization inefficiency on that, that drags a little bit.

And to be frank, FX and metal market moved it a little bit as well.

I mean you put those pieces together, it'll get you near the low end of the range.

Just one more question.

The free cash flow guide, the $1.5 billion for the 3-year guide, does that still remain intact, then?

It was 4 years, 2017 to 2020, yes.

The next question will come from James Picariello of KeyBanc Capital Markets.

Can you talk about what drove casting's notable margin improvement to that 10% level?

I know you mentioned pricing and operating inefficiencies, but just curious what your expectations are for the remainder of the year and how well you expect maybe that pricing to stick?

If I assume some volume recovery within this segment in the back half, if you layer on pricing with some decent operating leverage, could we see profitability return to 2Q of last year at that 11% mark?

Just curious.

James, this is David Dauch.

Clearly, the biggest thing for us in regards to improvements in the casting business was addressing the manpower shortage issue that we were dealing with.

As we indicated, we've addressed the majority, almost all of the facilities with the exception of one.

Once we did that, that helped us stabilize our operation, drove efficiency in our business as well as scrap improvements.

So a lot of it was operational, but again, driven back to having the appropriate manpower available and the appropriate operating patterns put in place to run that facility efficiently.

Then clearly, as you commented, we did benefit from the price adjustments that were put into place on the industrial and the commercial side of the business.

Those prices will stick and that was to address some of the inflationary costs and higher costs that we incurred on the manpower side of things.

And so we're happy to get it back to double-digit performance, and we expect to improve that as the year progresses.

Okay, can you talk about what you're baking in at a high level for Ram volumes in the back half?

Obviously, it looks like launch volumes are a little slower than you had originally anticipated.

I was just wondering when you think that program might hit your run rate volumes?

And would you consider that program to be the primary driver of your guide down?

This is Chris.

That was certainly a piece of the guide down in terms of the lower end of revenue range.

There were some other elements associated with some of our revenues in China and elsewhere.

But as it relates to run rate volumes on Ram, we are expecting them to work through here the second quarter to get up at full rate pretty quickly.

I mean it's a key product in demand, and that's consistent with what they articulated in their public commentary as well.

The next question will come from Joseph Spak of RBC Capital Markets.

I just want to dive a little bit more into sort of this second half inflection in EBITDA.

And maybe we could sort of focus on the performance improvements.

So I think previously, you indicated that, that was going to sort of help by, I think, $35 million for the year.

It was obviously down $10 million this quarter.

You're still having some issues on eDrive and whatnot.

Should we think about that year-over-year performance headwind similar in the second quarter to the first quarter?

And then you have like a $60 million year-over-year benefit in the back half?

A couple of different perspectives here, Joe.

This is Chris.

From a second quarter, when we start to compare second quarter '19 to second quarter '18, that gap will probably remain very similar on an absolute basis.

But keep in mind, second quarter of 2018 was an extremely strong quarter.

So the extent we're maintaining the same delta from that previous high-performing quarter, it means we're improving our trends.

If you want to think about how we're going to get and deliver that second half of 2019, based on the midpoint of our second quarter guidance, that will get us just under $3.5 billion of revenue for the first half of 2019, with a little over $520 million of EBITDA, right?

If you annualize that, it gets you to about a $7 billion company.

We'll bring in over $300 million on a run rate basis of additional sales, some of this on our higher contribution margin as these full-size truck plants are up and running very strong in the second half.

So that will deliver sizable contribution margin to the company.

We have our synergy benefits continuing to step up through the year.

Our business unit consolidation benefits will continue to step up here quarter-over-quarter as well as then the items that you were talking about in a sizable, meaningful fashion, as these abnormal project expense launch-related activities dissipate on us here through the second quarter as well as the normal project expense was first half-weighted to get all of these other launch programs up and running.

And then of course, you're in a more stable operation second half of the year, you're running straight, you're running strong, you're delivering normal core productivity efficiencies.

Okay, that's very helpful.

Thanks for that.

I guess since you brought up synergies and the reorganization savings, like if I look at Slide 8, I know you bucketed those 2 together at $10 million.

Can you give us a breakout there?

And the only reason I ask is because I think you said the business unit consolidation is going to be like $10 million to $20 million for the year.

So I was maybe sort of straight-lining that across the year, maybe that's inaccurate.

But if that's true, then that means the MPG synergies were only $6 million, and I think that would sort of put you below the run rate that you were sort of targeting by this quarter?

So maybe -- so I know long question here, but maybe just sort of give us a little color and like if it's possible to still sort of break out the original MPG savings versus sort of the new reorg savings, like where are you on that run rate synergy level?

No, good question.

First, to be very clear, we are absolutely on track and have delivered the run rate savings for our MPG acquisition.

In terms of that year-over-year $10 million number, a very small amount.

I think about like $1 million or so relates to the BU consolidation.

It took place first quarter.

There was significant other element of the actions that took place at very tail end of first quarter, early part of second quarter and that will step up.

The next question will come from Ryan Brinkman of JPMorgan.

First question on just margin trajectory.

It's been talked about some.

But previously, your guidance implied a strong improvement in the back half relative to the front.

While I think 1Q was better and you're taking the year modestly down, it does seem because of the softer 2Q guide that now this sequential ramp to achieve the full year rate is even steeper.

So can you talk some more about the reasons that have given you the confidence in that ramp?

How much is just the glide path from the sequential improvement you've already made in execution from 1Q to 2Q, and cycling past the volume shortfall issues in 2Q?

I think this would be a lot easier for investors to have confidence in.

Versus how much of the ramp is due to your needing to continue to execute on further performance improvement initiatives or even find other sources of savings that haven't been entirely identified yet, et cetera?

Ryan, this is David.

First and foremost, we're making meaningful improvements on all the operational challenges that we incurred before.

And we've explained that to you through the bubble chart that we put together on Slide 4 here.

We expected to have some of these operational challenges behind us by the end of the second quarter.

The only issue that we're carrying deep into the second quarter is this whole eDrive casting issue.

And that's not a huge issue, but it's an issue that we just want to be transparent with the investment community there.

Clearly, we're very busy and very focused on the launches with over 70% of our launches being in the first half of the year.

We've got to get the big programs that are the big cash generators for us, that being the GM full-size truck programs and the Ram programs, fully launched in that rate and dialed back in the way they were running prior to the changeovers that were taking place.

Once we get through this big heavy launch in the first half the year, get the major programs dialed back in, put these operational improvement issues behind us, then it's just a matter we should be able to perform at a very high level, which is what our expectation has been all along.

And we continue to reinforce that here today.

Chris, I don't know if you want to comment on that?

Yes, in terms of just run rate conversion from first half to second half, Ryan, think 60%-plus of that margin enhancement will come through the higher volume and contribution margin that drops, 40% on improvement.

But again, that improvement is in the context of our synergies, our BU consolidation, the elimination of all these performance items that we talked about as well as the step down of our project expense -- normal project expense, so that will enhance margin as well.

Okay.

And then just maybe lastly on the 2Q revenue.

Can you talk a little bit more about which are the programs that are generating less revenue in 2Q?

Could you maybe parse it out between like how much of the lower volume is simply because of less underlying demand for these vehicles, which I'm guessing is not the case because you're so concentrated on crossovers, pickups, SUVs, et cetera?

Versus how much is simply relating to different cadence or pace of customer launches, which would indicate more of a timing issue?

We've heard that from several other suppliers this quarter.

They haven't really said which programs are leading to these timing differences, but Explorer has been mentioned a couple of times, I don't think that's material for you.

But maybe just a little bit more color on what's pressuring the revenue in 2Q in the transient or lack thereof, of that pressure?

Ryan, this is David.

First and foremost, we're being impacted based on passenger car volumes coming down on a global basis.

Second, we're being impacted by penetration rates, especially in Asia, coming down at some of our all-wheel-drive platforms.

Third, we're being impacted in regards to a slower ramp of the Ram heavy-duty program than what was planned and expected, but our customer is addressing those issues and expects to have them addressed in the very near term.

And then, the last issue is that there's a couple of other programs that are engine and transmission related, that the launch curves have slid out a little bit.

So that's really what's driving the volume degradation in the second quarter and why we feel so strongly about the second half of the year.

Chris, if there is anything else you want to add?

Yes.

No, and of course, Ryan, what you're pointing out is the degradation of consensus.

Our revenues quarter-over-quarter are increasing based on a lot of the programs we support as well.

And your last question comes from John Murphy of Bank of America Merrill Lynch.

I just had a couple of really quick follow-ups here.

David, you said that 70% of your launches will be done by the end of June.

But I think, Chris, you said 60% of the backlog rolls on in the second half.

Is that correct, is one just an actual count of execution on programs, and the second the revenue benefit coming through in the second half?

Is that correct?

Correct.

Absolutely fair way to think about it.

Okay.

So that has a big impact on the way this year -- the cadence of this year will run, which you kind of alluded to, obviously.

Second is, as we look at the casting business, obviously there is some -- a little bit of an issue there.

But as you look at the opportunity in casting, I mean the whole industry is short of capacity still, is there a greater opportunity there for you maybe in the near term to win some takeover business or really grow that business maybe faster?

Well, we clearly have some open capacity within our operations, within our casting business unit.

Clearly, we will be opportunistic based on customer opportunities.

The biggest thing that we've really been focused on, John, is just stabilizing the business that we do have, and we feel like we've made some very meaningful progress through the last couple of quarters.

And we expect to only get stronger as the year progresses.

Okay.

And then lastly, if I could just sneak this in.

I mean the Ram launch is kind of slipping a little bit more -- the Ram HD -- a little bit more than expected.

Do you have a line of sight on exactly what's going on there or is this more just communication from Chrysler saying -- or if you've got Chrysler saying that they've got a handle on this?

I am just trying to understand how confident are you that this slip will be rectified in the second quarter?

Clearly, FCA has some of their own issues at their Saltillo plant.

They obviously had some other supplier issues, but I feel very strongly that they'll get these issues resolved in the very near term.

Thank you for all -- thank you all for your interest in American Axle.

That will conclude today's call.

The conference is now concluded, and we thank you for attending today's presentation.

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