American Axle & Manufacturing Holdings Inc (AXL) 2021 Q1 法說會逐字稿

Good morning. My name is Chad, and I will be your conference facilitator today. At this time, I would like to welcome everyone to American Axle & Manufacturing First Quarter 2021 Earnings Conference Call.

(Operator Instructions)

As a reminder, today's call is being recorded. I would now like to turn the conference over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.

Thank you, and good morning. I'd like to welcome everyone who is joining us on AAM's First Quarter Earnings Call. Earlier this morning, we released our first quarter of 2021 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 Investor page of our website as well. To listen to a replay of this call, you can dial 1 (877) 344-7529, replay access code 10152565. This replay will be available beginning at 1:00 p.m. today through 11:59 p.m. Eastern Time, May 14.

Before we begin, I'd 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.

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

Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AAM's Financial Results for the First Quarter of 2021. 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 2021 results.

Next, I'll touch on some exciting recent business announcements with Ford and REE. And lastly, we'll discuss the challenges within the supply chain and our financial outlook. After Chris covers the details of our financial results, we will then open up the call for any questions that you may have.

In the first quarter of 2021, AAM delivered solid operating performance and strong cash flow generation. Although the industry is facing continuity of supply issues, we continue to navigate through these challenges while delivering very strong results. AAM sales for the first quarter of 2021 were $1.43 billion, up approximately 6% compared to $1.34 billion in the first quarter of 2020. The increase in our revenues on a year-over-year basis primarily reflects the recovery from COVID-19-related industry shutdowns that we experienced last year.

Although North American industry production was down 4% according to third-party estimates, light truck production was up 5% year-over-year and volumes on our core platforms increased 9% year-over-year. Furthermore, light truck inventory on a number of the key platforms that we support remained extremely low. Consumer demand for light trucks remains strong, and our customers are building them as much and as fast as possible. We believe the demand environment for these products will continue for an extended period of time. AAM's adjusted EBITDA in the first quarter of 2021 was $262.9 million or 18.4% of sales.

This margin performance is a first quarter record for AAM. This compares to $213.3 million last year or 15.9% of sales. In addition to benefiting from higher production levels, our intense focus on optimizing the business and flexing our cost structure to align with the global market demand, contributed greatly to our performance in the first quarter of 2021. AAM's adjusted EPS in the first quarter of 2021 was $0.57 per share compared to $0.20 per share in the first quarter of 2020. Cash flow generation was strong in the quarter. We generated adjusted free cash flow of over $174 million compared to $83 million in the first quarter of 2020.

Our operating performance and commitment to reducing capital spending drove this high level of free cash flow. Furthermore, we prepaid over $100 million of our term loan in the quarter. As we previously stated, we are committed to reducing our debt and strengthen our balance sheet throughout 2021. On the business front, we're happy to announce that we are providing both air-cooled and liquid-cooled power transfer units, which are part of our EcoTrac product family for the all-new Ford Bronco Sport. This is a great new product offering for Ford that is being very well received in the marketplace.

And as for electrification, we're excited to announce that AAM and REE Automotive have agreed to jointly develop an exciting new electric propulsion system for e-mobility. As we shared in our last call, REE Automotive is a leading provider of e-mobility solutions. The company's core innovation includes integrating traditional vehicle components into the wheel, allowing for a flat and modular platform. AAM's partnership with REE intends to incorporate our lightweight, highly efficient next-generation electric drive units, which feature fully integrated high-speed motors and inverters into REE's highly modular technology that enables a fully-flat EV chassis for multiple commercial vehicle applications.

The electric drive units will be developed at AAM's Advanced Technology Development Center here in Detroit. We are very excited to partner with REE Automotive to bring new e-mobility technologies to the market. This is an important step in growing AAM's electric propulsion business and expanding our addressable market. In addition, our electrification dialogue with multiple OEMs continues to intensify. And our technology, engineering and new product offerings are attracting strong global interest. 2021 will be an exciting year for us in this space.

Our engineering teams in collaboration with our technical partnerships with Inovance and Hoffer Engineering are quickly achieving technology advancements for our next-generation of products. On a separate but related matter, we are also pleased to announce that AAM will receive a grant from the U.S. Department of Energy in support of the development of our 3-in-1 electric drive unit. This award further recognizes AAM's technology and innovation to support new energy vehicles.

As for our current generation of electric vehicle products, we are presently in the process of launching multiple new programs globally, including components, subassemblies and electric drive units. These innovations and advancements are allowing AAM to compete to win business with our traditional customer base while also position AAM to win business with new OEM entrants in the space. We are also very pleased to announce that we recently published our 2020 sustainability report. I'm very proud to say we exceeded our initial sustainability goals this year -- this past year, and now are in the process of setting even higher goals. AAM's sustainability program is set by our cultural values and strategic principles as a company that stress teamwork, diversity and inclusion, community involvement and respect for the environment.

Our sustainability program has become more transparent in consideration of the interest of our shareholders, customers, suppliers, associates and other stakeholders. We are deeply committed to profitably growing our business in a way that is sustainable and socially responsible. Before I transition to Chris, I want to talk about our current operating environment and our financial guidance. In my 35-year career in the industry, I've never seen such stress on the value chain stemming from shortages in semiconductors, labor, steel, containers and port delays and the rising commodity prices that we're experiencing. We believe the second quarter 2021 will be the trough of the semiconductor shortage issue with improvement in the second half of the year. However, we expect this issue will carry into 2022.

For AAM, we will continue to work with our customers and our extended supply base to protect continuity of supply. Although there is significant operating uncertainty, especially with the availability of semiconductors, we continue to maintain our current financial guidance. In fact, based on what we know today and assuming our customers continue to prioritize full-size truck production with minimal disruption, we can see a path to the high end of our ranges. Our current guidance remains as follows: from a revenue standpoint, $5.30 billion to $5.5 billion; on an adjusted EBITDA basis, $850 million to $925 million; and adjusted free cash flow of $300 million to $400 million.

Operationally, our business is running extremely well. We continue to manage our expenses, improve our operational efficiency and tightly control capital expenditures. Even with all the pressures we face, we believe 2021 can be an outstanding year for AAM, and this has the AAM team both very motivated and excited.

With that, let me now turn the call over to our Vice President and Chief Financial Officer, Chris May. Chris?

Thank you, David, and good morning, everyone. I will cover the financial details of our first quarter results with you today. I will also refer to the earnings slide deck as part of my prepared comments. So let's begin with sales. In the first quarter of 2021, AAM sales were $1.43 billion compared to $1.34 billion in the first quarter of 2020. Slide 8 shows a walk of first quarter 2020 sales to first quarter 2021 sales.

First, we add back the impact of COVID-19 of approximately $169 (sic) [$169 million]. Then we account for the unfavorable impact of the semiconductor shortage, which we estimate to be approximately $64 million inside the quarter. On a year-over-year basis, we were impacted by GM's transition from a rear beam axle to a new lightweight and highly efficient independent rear drive axle for GM's new full-size SUV, which impacted sales by about $38 million. The first quarter of 2021 is the last quarter of this year-over-year impact to occur. Other volume and mix was negative by $26 million. Pricing had an unfavorable impact of $4 million on a year-over-year basis. Metals and FX accounted for an increase in sales of $44 million.

During the last 6 months, we have continued to see an increase in the primary index-related inputs to the metal-based materials that we purchase. You may recall, we hedged this risk by passing -- with our customers by passing through the majority of index-related changes. The metal portion of this column reflects these elevated pass-throughs on a year-over-year comparison.

Now let's move on to profitability. Gross profit was $227.1 million or 15.9% of sales in the first quarter of 2021 compared to $195.3 million or 14.5% of sales in the first quarter of 2020. Adjusted EBITDA was $262.9 million in the first quarter of 2021 or 18.4% of sales. This compares to $213.3 million in the first quarter of 2020 or 15.9% of sales. As David mentioned, this was AAM's highest first quarter adjusted EBITDA margin in our company's history. You could see a year-over-year walk down of adjusted EBITDA on Slide 9. We benefited from the contribution margin on the increase in net sales from last year, but most importantly, we continued our strong cost reduction actions, reflecting a year-over-year benefit of $28 million.

Let me now cover SG&A. SG&A expense, including R&D, in the first quarter of 2021 was $90 million or 6.3% of sales. This compares to a similar amount in the first quarter of 2020 or 6.7% of sales. AAM's R&D spending in the first quarter of 2021 was $32 million compared to $37 million in the first quarter of 2020. AAM has been able to capture an increase in sales with no net increase in SG&A expense.

We will not only continue to focus on controlling our SG&A costs, but also further our investments in key technologies and innovations with an emphasis on electrification. This emphasis includes an appropriate level of funding to be successful to meet our objectives, but it also includes shifting resources from traditional product support to new technology development in a very cost-effective manner.

Let's move on to interest and taxes. Net interest expense was $48.2 million in the first quarter of 2021 compared to $48.7 million in the first quarter of 2020. We expect this favorable trend to continue as we benefit from continued debt reduction. In the first quarter of 2021, we recorded income tax expense of $8.8 million compared to $3.3 million in the first quarter of 2020. As we continue into 2021, we expect our book effective tax rate to be approximately 20%. We would expect cash taxes to be in the $30 million to $40 million range for 2021. Taking all these sales and cost drivers into account, our GAAP net income was $38.6 million or $0.33 per share in the first quarter of 2021 compared to a loss of $501.3 million or $4.45 per share in the first quarter of 2020.

Adjusted earnings per share excludes the impact of the items noted in our press release. Adjusted EPS for the first quarter of 2021 was $0.57 per share compared to $0.20 per share in the first quarter of 2020.

Let's now move on to cash flow and the balance sheet. Net cash provided by operating activities for the first quarter of 2021 was $179 million compared to $139 million last year. Capital expenditures, net of proceeds from the sale of property, plant and equipment for the first quarter was $40 million. Cash payments for restructuring and acquisition-related activity for the first quarter of 2021 were $23 million.

The cash outflows related to the recovery from the Malvern fire we experienced in September of 2020, net of insurance proceeds, were $11 million in the quarter. However, we anticipate the Malvern fire to have a neutral cash impact from the full year as timing of cash expenditures and cash insurance proceeds align over time. In total, we would expect $50 million to $65 million in restructuring and acquisition costs in 2021. This is no change from prior guidance.

Reflecting the impact of this activity, AAM generated adjusted free cash flow of $174.1 million in the first quarter of 2021. From a debt leverage perspective, we ended the quarter with net debt of $2.8 billion and LTM adjusted EBITDA of $769 million, calculating a net leverage ratio of 3.6x at March 31. This continues the trend of a declining leverage ratio and keeps us on track for delivering at least a full turn of leverage reduction this year.

Based on AAM's strong free cash flow in the first quarter of 2021, we prepaid over $100 million on our term loans. We continue to expect to strengthen AAM's balance sheet by reducing our gross debt and lowering future interest payments. In fact, subsequent to the end of the first quarter, AAM paid an additional $89 million on our term loans.

Before we move to the Q&A portion of the call, let me close my comments with some thoughts on our 2021 financial outlook. We are reiterating our targets that we provided on February 12 of this year. Our outlook encapsulates the best information we currently have regarding customer production schedules, their prioritization of building full-size pickups and SUVs and the uncertain backdrop related to semiconductors. And to David indicated, based on these inputs and assumptions, we can see a trend to the high-end of the guidance ranges we provided.

The strong free cash flow number is a result of the focused restructuring and cost reduction initiatives, year-over-year margin growth, working capital optimization and reduced capital spending. Our EBITDA and free cash flow generation will be used to fund our R&D programs, support our future growth and reduce leverage as we are very focused on improving our financial profile.

While we do not provide quarterly guidance, I would expect the second quarter impact related to semiconductors to be greater than the first quarter based on recent customer announcements and supply chain challenges. AAM continues to lay a solid framework for long-term success and shareholder value. We continue to invest in electrification to develop highly efficient electric drive units, sub-assemblies and components, that are a compelling value to OEMs that will drive our growth.

Our customers continue to award us business on core platforms that will yield strong cash flows well into the future and core to AAM, we are passionately focused on managing our cost structure, optimizing our performance and delivering best-in-class results. At the end of the day, the first quarter of 2021 was a fantastic start to the year. We also understand there are near-term challenges and uncertainties related to the supply chain that we must manage and navigate. But this management team is confident in addressing these challenges.

Thank you for your time and participation on the call today. I'm going to stop here and turn the call back over to David, so we can start the Q&A.

Thank you, Chris and David. We have reserved some time to take questions. I would ask that you please limit your questions to no more than 2. So at this time, please feel free to proceed with any questions you may have.

(Operator Instructions)

And the first question today will come from Rod Lache with Wolfe Research.

This is Shreyas Patil on for Rod. I just wanted to pick up on that last point about the second quarter. You did mention it's going to be the trough in terms of the semi issue. Any way you can kind of frame the magnitude of the decline based on what you're seeing? And how confident are you that supply is coming back -- is starting to come online and by the second half should improve?

Yes. I would tell you, Shreyas, this is Chris. We disclosed for our first quarter impact from a revenue perspective, a decline of $64 million. What I would tell you, our expectation in the second quarter is it will be greater than that. And then that would moderate below that in the second half of the year on a quarter-by-quarter basis. That's how I would frame it as we sit here today from a revenue perspective. And then obviously, with a little bit more, I would call, customer schedule disruption in the second quarter versus the first quarter. We'll have a little bit of temporary inefficiencies inside of our production schedules, which will just, again, sort of be discrete with inside of the second quarter.

Okay. Okay. And then, in the quarter, it looked like performance and -- the cost performance was quite good. I think it was plus $28 million year-over-year. I was just wondering, was there any semi -- were there any supply chain costs in the quarter? And maybe what were some of the factors that really drove the strong performance?

Yes. I would tell you, inside of that -- inside of our first quarter, we did experience a little bit of drag as it relates to metal market indices. We do pass that through, but we only pass about 90% through. So it was slightly a little bit negative from that perspective. And a little bit associated with premium freight as we coordinated our supply logistics through the semiconductor issues. But in terms of a year-over-year holistically performance, you may recall, in the second quarter of last year as COVID was on -- setting upon the entire industry, we announced and discussed significant cost-saving measures for the balance of the year. And you may recall, we talked about a quarterly run rate of nearly $20 million. So the first quarter last year didn't have that benefit in it, if you will. We are still experiencing and benefiting from those initiatives we started really in the second quarter of last year that continued through the balance of last year and the beginning of this year.

Okay. And then just lastly, on the agreement with REE, I just wanted to understand a little bit more about the scope of this agreement. So it looked like this was going to be codeveloped propulsion system for commercial applications. Could that be something -- is that going to be different from what you already have developed on the light vehicle side in terms of your product portfolio? And then is this kind of an exclusive agreement so they would work with your -- this propulsion system would go into their platform going forward? Just trying to get a sense of that.

Yes. This is David Dauch speaking. As we've communicated to all of you before that we've been working very actively in regard to our next-generation products for electrification. And our designs are modular and scalable. At the same time, we've integrated the motor, the inverter and the gearbox into the EDU. So there's a much smaller packaging space. We wanted to drive power density and performance and performance electrification is really measured in the form of efficiency. We're seeing all of that. We've designed the product, so we can meet various vehicle segments and support the different regions of the world. And clearly, we're adopting and transitioning that product to be able to support REE Automotive's design needs. So that we can support not only theirs but our e-mobility solutions for the marketplace. But this gives them an opportunity to even enhance their product even more as far as the designs that we've come up with. We're integrating that into their chassis design. So it's a full flat type design for commercial vehicle type application. We feel very good about the relationship and the partnership and are excited about what the future holds for our 2 organizations.

We're at an aggressive timeline to develop the product for them, but we have a strong foundation that we're already working from. And expect that we can bring this to the market sooner than later.

Okay. So -- okay. So it's kind of leveraging your existing product. And should we kind of think about content per vehicle kind of similar to what you've talked about in the past, I think it's like $2,500 or something like that?

Yes. But the only thing I would comment to that is there's 4 per vehicle. So the content should be much, much higher for us based on the application and the design strategy to support their platform design, chassis design.

The next question will come from Ryan Brinkman with JPMorgan.

I guess this is the third quarter in a row now you've pretty substantially exceeded sort of either your own margin guidance or consensus expectations. And I realize you've got some difficult year-over-year margin comparisons in the back half of the year, but still wanted to sort of check in on the likelihood of incrementals decelerating from like 61% in 1Q to something more like 16% in the remaining quarters of the year.

And then maybe just kind of looking beyond all this noise, with regard to COVID a year ago in semis and commodities this year, how are you just sort of generally thinking about normalized margin potential as we move beyond the current period, including maybe relative to what your answer might have been prior to COVID?

Yes, this is Chris. Certainly, you're spot on, a lot of noise and puts and takes with COVID and semis. But sort of maybe remove that from our conversation and also kind of look a little bit of our performance in the first quarter, always a challenge to extrapolate a full year and run rate performance from a particular quarter. But in terms of key elements to think of on a go-forward basis, certainly, a lot of the cost initiatives and restructuring initiatives we've been putting in place now over the last 12 months, you continue to see that benefit the company. I would expect that to continue to benefit the company on a go-forward basis.

So in discrete, in terms of the first quarter relative to the, I would say, balance of the year of this year, again, excluding semi and a little bit of the impact associated with that in the second quarter. But timing-wise, R&D was a little light in the first quarter. Our full year, how we typically look at that from a perspective of anywhere from $30 million to $40 million a quarter, $35 million to $40 million a quarter, we're a little light in the first quarter. That will sort of ebb and flow with the launching of our electrification activity, but we think sized right to support our objectives.

Pricing from a year-over-year pricing impact in terms of the first quarter, again, a little light that comes on, usually in the -- a little bit second, third and fourth quarters for us. And then cadence of our launches was a little bit light in the first quarter from a project expense that comes online in the back half of the year a little bit. A big picture, we expect -- you can see our full year guidance. You do the math on it. It's nearly 17% at the high end of our ranges, running at a very strong, healthy pace business and continued opportunity to grow margins based on our continued attacking of our cost structure and optimization of footprint and throughput, clearly within line of sight and our guidance would indicate that.

Okay. And then, again, another on the collaboration with REE announced today, I realize they're using a fully flat or skateboard-type chassis. But I'm not sure. Can you remind, would this technological solution qualify as a so-called hub motor approach? And then maybe a related question. I think previously, you haven't been as interested in expanding, at least organically, to compete more in the commercial vehicle driveline market than you do now.

Just given all of the considerable investments that incumbents already have there and what that might imply for margin, et cetera. But I'm just curious, with all of the technological change taking place that could potentially disintermediate maybe a lot of the current investments, and with some of the things that you're looking at with REE, et cetera, if it might make sense or you might be evaluating potential organic expansion into that end market?

Yes. We're very excited about the technology that we have developed. We're very excited about the technologies that we've seen REE Automotive develop. Combined together, we think that we bring differentiating technology to the marketplace to serve multiple vehicle segments, including the commercial vehicle space.

So yes, we're very excited about possibly expanding those certain markets that we have today. And the REE Automotive flat chassis will allow us to open up some of those other type market applications for us. So we're excited. But at the same time, the technology that we're bringing to the table for them gives them more freedom and functionality for their customers as well and will strengthen their product offerings to the marketplace. So we think it can just be a tremendous opportunity for us to work together to address the market where we both can benefit greatly from the partnership.

And the next question will come from John Murphy with Bank of America.

I just wanted to ask a first question on GM's trucks and maybe even some of your lux products that have been protected by the customers so far. If there were incremental pressures that came from chip shortages in the second quarter on production, would you have a higher than normal decremental margin in the second quarter?

And then also, if we think about those potential losses, I'm not saying they're absolutely going to happen, but potential losses, do you think there's capacity to catch back up on some of that lost production, specifically on GM's trucks? It seems like they're kind of running hot. There's not a lot of room to make up that production. But -- so would that just be net lost production that couldn't be made back up later in the year if you see losses specifically around GM's trucks?

Yes, John, this is David. I'm trying to look at it the other way as how can I get that incremental margin. GM's got their products protected from a semiconductor chip issue. They've clearly prioritized their full-size truck. We're seeing the benefit of that. They're seeing the benefit of that. That's fantastic news. Right now, they're running their plants flat out, max overtime where they can. At the same time, you saw or heard in their earnings announcement, they plan on bringing the St. Catharines facility onboard.

So that will add incremental -- or not St. Catharines, excuse me, the Oshawa facility onboard. So that will bring incremental capacity to them going forward in the marketplace. Remember, their inventory levels are extremely low right now because they haven't fully recovered from the strike that took place over a year ago and then obviously, things were impacted with COVID. But right now, we just see pedal to the metal with respect to the GM full-size truck platform.

So maybe if we could attack that another way, David. I mean, I think we kind of think, historically, they did $1.6 million, $1.7 million on those trucks. I mean, right now, I think capacity is right around 1.2, plus or minus. I'd love to hear your thoughts on that. But as you're bringing Oshawa on, where do you think that takes that up to? And what is the potential upside in revenue? Maybe you take the other side of the coin, right? I agree with you.

Yes. IHS has it around 1.35 million units for that platform. We're close or in line with that. And that does not include Oshawa. So we expect that number to go north of that based on the volume that they ultimately intend to produce out of that facility.

Okay. That's very helpful. And then just a second question on the REE agreement. As you think about the change of the powertrain or potential change in powertrain architecture, and I would say this would be only in limited cases. As you look at that sort of hub setup, however you want to -- whatever you want to exactly call it, what does that mean for your content? Because, I guess, in some ways, the pessimist would say, "Hey, listen, you're basically eliminating axles in that setup." But the reality is, I think you have a lot of content potential there anyway.

So I mean, can you just help us think about what that means for you as far as content, and if there's any real significant risk to your somewhat more traditional setup, even on EVs going forward?

Yes. So John, this is David again. On the traditional products, I mean, obviously, we enjoy a certain content per vehicle today with electrification with similar architectures, but an integrated design, as I mentioned, with the motor, the inverter and the gearbox. We actually we think that we can improve our content or increase our content on the traditional, let's say, driveline system that's in place.

With respect to the REE Automotive and their approach, which is heavily weighted towards the commercial vehicle, but it can obviously expand to other vehicle segments, our content per vehicle should go up greatly because there's 4 for every 1 of the vehicles that are there. So we feel really good about where we are. Our product that we've designed and developed is getting a lot of attention both from the traditional OEMs as well as some of the new entrant OEMs as evidenced by the partnership and collaboration we're putting together with REE and the partnerships that they already have in place with Mahindra and Hino and some of the other customers that they're working with and have announced.

So again, we're extremely excited about our technology, extremely excited about the receptivity from the various customers and happy to be adding to our partnership with respect to REE Automotive.

John, this is Chris. I was going to say, a couple of months ago, when we laid out a lot of our next-generation of architectures, right, we focused very much on it being scalable, modular and can adapt to a lot of different platforms. This is a textbook of what we're talking about.

And just -- I'm sorry, just one follow-up. On that kind of a setup, the payload and towing capacity, how does that compare from a more traditional axle setup as opposed to these hub motor setups, if you will? I mean, are these there for lighter-duty commercial vehicles or could these be kind of things that really truly compete with body-on-frame typical setups?

Yes. Amy, it's still to be proven out going forward here. I think over time -- it's more on the light side, but at the same time, I think it can be enhanced to compete at the other side. But I still think you're going to have body-on-frame vehicles for an extended period of time.

We just want to make sure that we're in a position that we can be agnostic to the market and have the traditional Ice and hybrid applications available while also having electric offerings in the different forms that we're talking about, the traditional design but from electrification standpoint, but now also with this REE Automotive design has come to the marketplace on this, what will I say, load floor -- flat load floor EV chassis.

Next question comes from James Picariello with KeyBanc.

I've got a content question as well, but maybe of the more traditional variety. Can you provide any CPV color on the power transfer units you're supplying to the Bronco Sport?

Yes. Typically, on our all-wheel drive applications where we're supplying front -- meaning -- or a rear-drive model and a PTU, think of it as $1,000 to $1,200 range. And on the Bronco Sport, we're only supplying the PTU. So it's roughly half or slightly less than that is how you should think about it from that perspective.

Okay. That's helpful. And the company took an accelerated depreciation charge in Brazil during the quarter. Last year, at this time, it was in Thailand, concurrent with Axle's exit from the country there, just wondering what your thoughts are on the company's future in Brazil.

We still see a very strong future in Brazil. We're just responding to customer change in their strategy.

The next question will come from Dan Levy with Crédit Suisse.

First, just a question on the guidance for the year and maybe the cadence for how the year plays out. And specifically, could you give us a sense for maybe how much premium freight you incurred in the first quarter? How we should expect that over the course of the year? And then just second, as far as the dynamic on commodities goes? Because I know that there's a lot of it is pass-through, but maybe you could give us a sense for the cadence on what to expect on the metal market or commodity side? And how much -- what the spill-through effect into 2022 might be?

Yes, sure, Dan. This is Chris. First on your premium freights, sort of I mentioned earlier in the call, we spent I would say maybe a few million dollars inside of the first quarter on premium freight for a variety of reasons, most of it related to coordinating with our supply chain and some of the disruptions that we've been talking about. I would expect that to increase a little bit here into the second quarter and then sort of dissipate for the back half of the year from a premium freight perspective.

As it relates to metals, just as a reminder, we -- the metal pass-through elements of our agreements are really contractual by design, and they're set to certain indices inside of the market, depending on the metal. These prices reflect current market pricing every 30, 60 or 90 days, and they will reset automatically through that process. So as metal goes up, we will reset prices. And it's typically anywhere from a 30 to 90-day lag on the change of the indices. So that dynamic, both with our supply base as well as with our customer base, and it will pass-through.

So you'll have, over a period of time, this flows very well together during different quarters, once in a while, it can get just from a timing perspective a little decoupled, but then it reconnects the subsequent quarter, if that makes sense. So based on current prices today, you see the impacts for us in the first quarter. If they go down, our metal passers would go down. If they go up next month, they'll go up. So it's hard to predict on a go-forward basis as they're subject to market conditions.

So let's just assume that prices stay flat versus -- going forward into 2022 by -- there won't be as much of an effect because most of the lag is a little more limited. Is that correct?

Yes. So if prices stay flat to where they are today. So you may -- if you look back at the indices, as I sort of mentioned earlier, they've been trending up sort of month-to-month-to-month through the first quarter. So you'll have some kind of recalibration in the second quarter, as I mentioned, you have a little bit of a lag, and then they would run flat from there.

Okay. Great. My second question, I just want to zoom out and think about the cycle for a second. We have this massive inventory rebuild ahead given just how tight the inventory is and how strong the demand has been. And so whenever the supply gets back online and probably tells us that you're potentially well positioned into 2022, that could maybe help accelerate deleveraging.

So I know you can't take any action right now given there's a lot of macro uncertainty. But maybe you could give us a sense as you have better visibility, and if your earnings stream starts to accelerate, you could give us a sense of what type of options that opens up, what the playbook is, what are the things that you might be doing, which you aren't doing right now.

I assume that there's some opportunity to accelerate the prepayment. Is that -- what's the flexibility there? And how does that affect the EV development? So what is an accelerating cycle and a large inventory rebuild enabling you to do that you can't do today so as much of today?

This is David Dauch. As we indicated, we see a very bright future and a very strong demand for the various platforms that we support for years to come, especially because of where the inventory levels are and because of the consumer demand that exists in the marketplace. And as I said, as fast as the OEMs can build them, the consumers are buying them. So I think it's going to take an extended period of time to rebuild the inventory levels. That's going to put us in a very healthy position to generate a lot of cash for our business. We'll use that cash as we always have to continue to support our organic growth, a big shift in our organic growth is towards electrification.

So we'll continue to fund our R&D in electrification. And then again, with the intent of profitably growing our backlog of new business. In addition, we'll stay very focused and very disciplined with respect to paying down debt. And we'll accelerate paying down debt much like we just paid $100 million this past quarter with respect to further supporting our commitment to get this balance sheet where it needs to be.

Chris, I don't know if you want to add to that.

And Dan, this is Chris, you asked what type of debt we would have prepayable. Our entire term loan stack that's due in 2024 is prepayable at par at any time. And then the bonds in the subsequent years are now starting to fall into callable position. So we have a lot of options available to us to address that.

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

If we go back in time a little bit, we know that GM sort of made a sourcing decision on sort of the axles for the new pickups and you retained some, and they took some in house. They've obviously been protecting that program, which I think, overall, has sort of helped you. I guess what I'm curious to know is, and what I have less visibility into is sort of the mix within the mix of that and whether you think the plants and programs within that pickup truck mix have favored the axles you supply. Do you have any sense of that?

Between GM and AAM, we're making all the axles we can to support their vehicle production. And as they expand their vehicle production, we expect that we'll be making more axles going forward.

Joe, keep in mind, we supply the heavy duty, the SUV and the split is only on the light-duty, right? So as those other ones grow, we benefit from that directly.

Yes. Joe, as we've said to you before, they have an installed capacity. They're utilizing that installed capacity and the incremental growth has been supported by AAM.

Okay. And then maybe just to go back to the joint development agreement with REE. I guess, can you just talk a little bit more about this? Like what types of vehicles do you expect, I guess -- or a range of vehicles do you expect this to be applicable for? And maybe a little bit, if you can, sort of who's doing what? And like how far into the propulsion -- like the propulsion system, do you go? I think they -- I believe they might have sort of like a skateboard architecture as well, I'm assuming like you're not getting into that element, but any more color there would be helpful.

Yes. We're not getting into their core space of the skateboard or the module of the platform. What we're doing is integrating our newly innovative designs with the integrated motor inverter and gearbox capability into the wheel and configurations for all 4 wheels that allows them to have an even lower and more compact fully flat chassis that supports multiple vehicle program applications, heavily weighted on the commercial vehicle side of things, but it can expand multiple segments.

Okay. So it's better suited for larger vehicles is the application? Or...

It can be scaled up and down the vehicle segments, but targeted towards the middle to the higher end right now.

Gentlemen, your last question comes from Brian Johnson with Barclays.

Just I want to follow-up. We -- everyone focuses on driveline, rightly so, as it's a big segment. However, it looks like some pretty dramatic margin improvement in metal forming, the businesses in part you got from Metaldyne that had some issues. So could you maybe talk a little bit about the margin expansion there and where it could go?

Brian, this is David. I'll make some first or initial comments, and Chris can pick up from there. But obviously, we took over the Metaldyne operations and incorporated into our operations, which were as large or larger. We've really worked very hard over the last 3 years, as you're aware, to fully integrate that capability. We've consolidated facilities. We've increased capacity utilization at the remaining facilities. We've optimized the workforce appropriately to the new market demand. At the same time, we've integrated a lot of AAM advancements from an operating standpoint into the facility, which drives throughput and productivity.

So we're very pleased about that. We've been able to minimize some of the CapEx expenditures that each of the individual companies may have spent because of some excess capacity that existed there. Because of the market conditions that are out there right now and our buying power in the marketplace, we've been able to pick up some new business in the metal forming side as well, one, because of some of the open capacity but also our buying power from a steel standpoint, that's been very positive for our company.

At the same time, we've got a proven reputation in the industry from an operational excellence standpoint. And we're seeing customers come to us to protect their continuity of supply in this dynamic environment.

Chris, anything you want to add?

Yes. Brian, as you think about the margin performance in that business unit, what's historically quite strong for us as well, 16%, 17%, you're now seeing it sort of at the 18% to 19% plus. And the vast majority does have to do with that capacity rationalization, both from physical plant also throughput optimization in terms of inside our factories, but also some purchasing power with our strong broad steel buys and things like that have also benefited this group. That was part of the thesis when we acquired MPG and how it would benefit this business unit.

And then, Brian, this is David again. The only other thing I would say is you're thinking traditional forgings only from metal forming, but we've also are doing a lot of work there in regard to the sintered business. So think powder metal connecting rods and core powdered metal parts. And we're also doing some high-pressure die casting from an aluminum standpoint in that business segment.

Good. Second question is a bit more housekeeping, prompted by the train whistle behind your headquarters. As we kind of think about Q2, is there any sort of shipments that you were able to book leaving the factory, particularly in Silao that may not -- when you kind of talk about the end of 2Q, to the extent there's shutdowns or production disruptions in 2Q that, in effect, the parts are on their way, so you might see a little dip in terms of orders? Or is it more even if that happens because of the rebuild that another colleague talked -- competitor colleague talked about, you're not really worried about that?

Brian, this is Chris. The customers, for the most part, take delivery at our docks, they do ship rail, they do ship truck. But once they take delivery at our dock, that's our sale. That would be the simplest way to think about it.

So could there be some work in process that they wouldn't need to order in 2Q?

That would probably most likely depend on their initial July shutdown plans. But again, they'll book weekly orders. They take delivery at our dock, we book the sale.

Okay. Thank you, Brian, 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. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.