Dauch Corporation (DCH) Q1 2013 Earnings Report, Transcript and Summary

Good morning. My name is Kirk, and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the American Axle & Manufacturing First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to Ms. Liz Ventigmilia, Manager of Investor Relations. Please go ahead, Ms. Ventigmilia.

Thank you, and good morning, everyone. I would like to welcome everyone who's joining us on AAM's first quarter of 2013 earnings call. Earlier this morning, we released our first quarter of 2013 earnings announcement. You can access this announcement on the AAM.com website or through our -- the PR newswire services. To listen to a replay of this call, you can dial 1 (855) 859-2056, reservation number 32371382. This replay will be available beginning at noon today through 5 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 that you refer to our filings with the Securities and Exchange Commission. Also during this call, we may refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures, as well as a reconciliation of these non-GAAP measures to GAAP financial information, is available on our website. During the quarter, we will participate in the following conferences: the Barclays 2013 High Yield and Syndicated Loan Conference in Chicago on May 21, the KeyBanc 2013 Automotive and Industrial Conference in Boston on May 29 and the Deutsche Bank Industrial Conference in Chicago on June 13. In addition, we are always happy to host investors at any of our facilities. Please feel free to contact myself or Chris Son to schedule a visit. With that, let me turn things over to AAM's President and Chief Executive Officer, David Dauch.

Thank you, Liz, and good morning, everyone. Thank you for joining us today to discuss AAM's financial results for the first quarter of 2013. Joining me on the call today are Mike Simonte, our Executive Vice President and Chief Financial Officer; and John Bellanti, AAM's Executive Vice President of Worldwide Operations. To begin my comments today, I will provide some highlights of AAM's first quarter 2013 results. I will also review the status of AAM's key business initiatives before turning things over to Mike. After that, we will open up the call for any questions you may have. Today, AAM is reporting solid financial results in the first quarter of 2013 with continued sales growth and improved earnings performance. Let me briefly cover a few key points from our first quarter financial highlights. First, for the first quarter of 2013, AAM's sales were approximately $756 million. This marks AAM's 13th consecutive quarter of year-over-year sales growth. Second, non-GM sales were $188.1 million. Included in the impact of our Hefei joint venture, non-GM sales were approximately 30% of total sales for the first quarter of 2013. Third, net income was $7.3 million, and earnings per share was $0.10 per share in the first quarter of 2013. AAM's quarterly results reflect the impact of $11.3 million or $0.13 per share of debt refinancing and redemption cost. Fourth, AAM's profitability in the first quarter of 2013 improved significantly on a sequential basis. Adjusted EBITDA increased 34% sequentially to $86.6 million in the first quarter of 2013 or 11.5% of sales. And finally, in the first quarter of 2013, we took another major step in improving AAM's balance sheet strength. The debt refinancing activities successfully completed in the quarter were highlighted by the issuance of $400 million of 6.25% of senior notes due in 2021. This supports AAM's future operational and financial flexibility and improves our capital structure. Mike will cover more details of our first quarter 2013 financial results later in the call. Let me shift gears and update you on AAM's continued progress on our aligned business strategy, which is designed to build value for our key stakeholders. This strategy emphasizes AAM's commitment to leadership in the areas of quality, operational excellence and technology leadership. First, AAM is delivering quality. We are keenly focused on maintaining AAM's high-quality standards. This is a foundation of AAM's world-class delivery, warranty, durability and reliability performance. Over the past 10 years, AAM has operated at an average of less than 10 discrepant parts per million. This is an industry-leading quality performance. In the first quarter of 2013, AAM was operating at Six Sigma levels, which is defined as operating below 3.4 discrepant parts per million. At AAM, we strive to produce quality products every day. This is a foundational principle that drives our associates to provide exceptional service and value to our customers. We stand for and consistently deliver industry-leading quality. It's what helps AAM attract new business partners and keeps our existing customers coming back for more. Second, AAM is delivering improved operational performance globally. AAM's financial results in the first quarter of 2013 reflect our commitment to deliver improved profitability and launch performance globally. The launch performance issues that impacted AAM's Guanajuato Mexico operations in the second half of 2012 were substantially resolved by year end in 2012 as we committed to. Our operations in Brazil posted improved results sequentially, and we expect this trend to continue throughout this year in 2013. While we continue to take actions to improve our operating and financial performance, we are focused on preparing for flawless and anonymous launches in 2013. We are supporting several major product, process and facility launches in 2013. The most significant of these are as follows: first, GM's next-generation full-size pickup truck and SUV program, otherwise known as the K2XX; second, both the 2014 model year RAM Heavy Duty pickup trucks; and third, AAM's EcoTrac Disconnecting All Wheel Drive system; and finally, a major capacity increase program for GM's global midsize truck program in Thailand. We are prepared, excited and focused to execute these launches successfully in 2013. Third, AAM is delivering on our technology leadership. AAM's continuing focus on technology innovation helps our business to be vibrant. The addition of new products and ideals, which responds to the rising requirements of the global automotive industry is the primary reason for our optimism for future growth. As global OEMs race to meet tighter fuel emission standards, the automotive industry is entering into a new advanced phase of innovation and design. This encompasses independent drive vehicles, hybrid and electric vehicles, advanced powertrain applications and other equally sophisticated technologies. AAM is meeting these challenges head on with an aggressive plan to increase investment in new technology, including product process and systems as we have always done. This plan is designed to supply manufacturers with products that address these new and emerging market demands. In support of these efforts, AAM's R&D spending in the first quarter of 2013 was $28.5 million. AAM's R&D spending is increasingly focused on the development of innovative solutions to assist our customers to meet the market demands for higher fuel efficiency, lower emissions, enhanced power density and improved vehicle performance, which includes safety, drive and handling performance. AAM continues to invest in many new and innovative products, focused on the most important industry trends and design drivers. Some of these investments include enhancing fuel efficiency and meeting market demands for lower emissions. This includes many axle efficiency improvements, and it is especially evident in AAM's leading rear-drive module capability. These new axles are delivering significant efficiency gains for our customers. We're also improving our torque capacity through power density. Torque capacity improvements are necessary to enable the OEMs to achieve improved fuel efficiency and reduce the emission requirements without sacrificing torque and towing capabilities. We're also reducing noise vibration and harshness characteristics within a vehicle. AAM's NVH performance is constantly improving. As a full-service Systems Integrator, AAM has a full range of NVH capabilities on a global basis, including full vehicle validation capability for a complete range of drivelines to meet the market demand for reduced NVH. AAM has unique and valuable capabilities in this critical engineering discipline. We're also offering unique and industry-leading technologies in the industry through our EcoTrac Disconnecting All Wheel Drive system, which enables vehicle manufacturers to offer fuel-efficient, environment-friendly options to provide safety, ride and handling performance on All-Wheel-Drive systems for passenger cars and crossover vehicles. AAM's EcoTrac Disconnecting All Wheel Drive system is an industry first. This is a great example of how AAM is using innovation to strengthen our position as a product, process and systems technology leader. AAM will be launching our EcoTrac Disconnecting All Wheel Drive system on a global passenger car program for a major global OEM later this year. We are very, very excited about this new product and launch. We're also advancing the development of electric drive applications. In this area of product development, we continue to leverage our wholly owned subsidiary e-AAM Driveline Systems in Trollhättan, Sweden. This technology is designed to improve fuel efficiency and significantly reduce CO2 emissions. This is done while enhancing vehicle stability through the use of proprietary torque factoring attributes. And as we've commented, we've been very close to commercializing this technology, and recently have done such, and we're very proud of what we've accomplished here. And now my last item, AAM is delivering diversification and solid profitability. A key driver in the growth of our new is -- a key driver in our growth is our new business backlog and quoting opportunities that continue to leverage our innovative and advanced technology across the driveline products to meet the rapidly changing needs of the global automotive marketplace. As we've said before, our new business backlog stands at $1.25 billion for the 3-year period covering 2013 through 2015. And that cadence is $400 million in '13, $550 million in '14 and $300 million in '15 as we've communicated before. The new business awards included in this backlog help drive our CAGR, or compounded annual growth rate, to over 10% for the period 2013 through 2015. This is more than double the rate of the industry growth expected over this period of time. In addition to this book business, AAM is working on new and emerging businesses opportunities that are principally for non-GM programs. This should help drive further business diversification as we convert many of these opportunities into book business and target parity between GM and non-GM sales by the 2015 period of time. AAM's improved financial performance is a critical element of our plans to reduce leverage, strengthen our balance sheet and increase stockholder value. We are on track to achieve these objectives and improve our financial strength. Before I turn over to Mike, let me wrap it up by making a few closing remarks about AAM's 2013 and beyond outlook. Our outlook is based on the assumption that the U.S. light vehicle sales will be approximately 15 million units for the full year of 2013. Based on this industry sales assumption and the anticipated launch timing of AAM's backlog with new business, we are targeting AAM's full year 2013 sales to approximate USD 3.25 billion. In the first half of 2013, AAM is targeting adjusted EBITDA as a percentage of sales in the range of 11% to 12%. For the full year 2013, we are targeting adjusted EBITDA margin to range from 13% to 13.5% of sales. As we look further, AAM is targeting full year sales to exceed over USD 4 billion and EBITDA performance of over USD 500 million in the 2015 period of time. This sales and EBITDA target are based on the anticipated launch scheduled programs in AAM's new and incremental business backlog. Our first quarter performance indicates that AAM is on track to achieving its outlook and goals. That concludes my comments for this morning. I thank everyone for your attention today and your vital interest and continued support in AAM. Let me now turn the call over to our Executive Vice President and Chief Financial Officer, Mike Simonte. Mike?

Thank you, David, and good morning, everybody. David covered the highlights of our first quarter 2013 financial results, so I'll get right into the details and start that discussion with sales. Net sales in the first quarter of 2013 were $755.6 million. That's up slightly versus the $751.5 million in the first quarter of 2012. When analyzing this year-over-year variance, keep in mind that the first quarter of 2012 benefited from an unusually high GMT900 build. In addition, sales for the RAM Heavy Duty program were lower in the first quarter of 2013 as compared to the prior year, primarily due to launch timing of the new 2013 and a half model year program, of course, the precursor to the later launch this year of 2014 model year RAM Heavy Duty series pickup trucks. In total, sales for the major North American light truck programs we support for GM and Chrysler were off by almost $50 million on a year-over-year basis. For the remaining 3 quarters of 2013, we expect strong sales gains from these programs as compared to the calendar year 2012 quarters. In the first quarter of 2013, AAM's sales were adversely impacted by the labor strike occurring at General Motors' Rayong, Thailand assembly facility. We estimate that lost sales in the quarter from this disruption were approximately $12.5 million, and we had previously disclosed this could be as much as $15 million. However, sales in the last week of the quarter were stronger than we expected as GM began the process of increasing production in that facility. AAM's content per vehicle in the first quarter of 2013 was $1,504. Similar to the trend in total sales, we expect this critical metric to increase during the rest of the year, primarily due to additional content we are providing to GM and Chrysler on their next-generation truck programs. Okay, let's move now to our profitability. Gross profit in the first quarter of 2013 was $104.3 million or 13.8% of sales. Operating income was $44.7 million or 5.9% of sales. Net income was $7.3 million. Diluted EPS was $0.10 per share. GAAP-derived EBITDA was $75.3 million or 10% of sales in the first quarter 2013. All of these key profitability metrics, with the exception of operating income, were adversely impacted by debt refinancing redemption cost of $11.3 million or $0.13 per share that we incurred in the quarter. Excluding the impact of the debt refinancing and redemption cost, AAM's adjusted EBITDA in the first quarter of 2013 was $86.6 million or 11.5% of sales. Adjusted net income, again adjusting for the impact of the debt refinancing and redemption cost, was $17.2 million or $0.23 per share. Although our adjusted EBITDA margin was lower than our results for the first quarter of 2012 and also lower as compared to our full year expectations for the calendar year 2013, the first quarter was 270 basis points better than the fourth quarter of 2012 and right in line with our guidance for the first half of 2013. From our perspective, AAM is off to a good start in 2013. Let me now anticipate some questions about the details of our sequential profit performance. As we have previously discussed, there are 3 major puts and takes for our 2013 profit performance expectations as compared to the second half of 2012. These are: Number one, sales mix, which we expect to improve in 2013, certainly did in the first quarter; production performance, which is improving in 2013, that's our performance that we control; and third, launch preparation costs, which we've said and continue to indicate will increase early in the year, but should be much lower as we end the year. In the first quarter of 2013, sales mix improved as compared to the fourth quarter of 2012, driven primarily by a significant increase in GMT900 production volumes. In the first quarter of 2013, our shipment supporting the GMT900 program were up approximately 35,000 vehicle units on a sequential basis. Again, what I'm specifically saying is as compared to the fourth quarter of 2012. Although this was partially offset by lower RAM Heavy Duty program production, the improved sales mix accounted for more than half of the EBITDA margin improvement in the quarter. We estimate approximately 175 basis points of positive margin impact. One last comment on volume and mix. We already mentioned that our profit performance in the quarter was adversely impacted by the lost sales resulting from the labor strike at GM's Rayong, Thailand assembly facility. We estimate the profit impact associated with this disruption to be approximately $3 million. This partially offset the gain in sales mix. As to AAM's production performance in the first quarter of 2013, we expected to make improvements, and we did. Premium freight was cut by 75% on a sequential basis to approximately $2.5 million in the quarter. While we did not achieve profitability in Brazil, we managed to significantly improve our results in this critical region. In total, we estimate that improved production performance increased our EBITDA margin performance by approximately 250 basis points in the quarter. The third and final major category of cost drivers affecting AAM's sequential profit performance are launch preparation costs. Now on our year-end earnings teleconference, we said that we expect launch preparation costs to increase in the first half of 2013 before being significantly reduced in the second half of the year. And to be clear, when we say launch preparation costs, we are commenting on the following types of costs: Project expense, which includes the non-capitalizable portion of constructing facilities and installing machinery equipment; project expense also includes process validation expenses, one-off, PPAB and related costs. The second area of launch preparation costs are product validation costs. This is the work we do to make sure our product performs as designed. These are typically included in R&D expense. And third, start-up expenses incurred by our manufacturing facilities. To make a long story short, the primary driver here are the people that we hire weeks ahead of actual start of production so that they can be properly trained, and we can hit the ground running at the start of regular production. In the first quarter of 2013, AAM incurred higher project expense as compared to the fourth quarter of 2012. We also incurred higher start-up expenses, and these expenses were significantly centered at our Three Rivers manufacturing facility, which is preparing to launch AAM's industry first EcoTrac Disconnecting All Wheel Drive system. These costs were partially offset by lower product validation costs, which, in some cases, were deferred to the second and third quarters due to changes in customer timing. We had an opportunity to reduce spending for a time, and we took it. In total, the headwinds associated with launch preparation costs in the first quarter of 2013 affected AAM's profit performance by almost $10 million. This translates to about 115 basis points of EBITDA margin. So this helps to explain the improvement in our EBITDA margin performance, stronger mix, better performance, higher launch preparation costs. Okay, before reviewing our cash flow results, let me quickly cover SG&A interest and taxes. I'll start with SG&A. In the first quarter of 2013, SG&A, of course, including R&D, was approximately $59.6 million or 7.9% of sales. This compares to 8.2% of sales in the first quarter of 2012 and 8.9% in the fourth quarter of 2012. AAM's R&D spending in the first quarter of 2013 decreased approximately $1.6 million on a year-over-year basis to $28.5 million. This was the primary driver of our lower SG&A spending versus the prior year. On a sequential basis, R&D spending was down approximately $4.6 million in the first quarter of 2013, and again the timing of certain customer validation and prototype requirements drove our R&D spending down slightly in the quarter as compared to the fourth quarter of 2012. Net interest expense in the first quarter of 2013 was $29 million. This was up approximately $5.3 million versus the first quarter of 2012. Higher outstanding borrowings is the primary reason why interest expense is up on a year-over-year basis, and recall that a significant portion of this increase in our higher outstanding borrowings is due to the elected pension funding that we made in calendar year 2012. Interest expense is up, pension expense is down. And finally, taxes. In the first quarter of 2013, our tax provision was a benefit of approximately $2.4 million. This benefit provision resulted from 2 discrete tax adjustments we were required to record in the quarter under GAAP. Both of these adjustments were favorable. The first adjustment related to the expiration of the statute of limitations on a potential tax liability in a foreign jurisdiction. The second tax adjustment related to an election we made on a foreign tax return associated with exchange gains and losses -- foreign exchange gains and losses. Here's the bottom line on taxes. We expect our effective tax rate for the full year of 2013 to be in the range of 15% to 20%. It's absolutely consistent with the expectations that we've laid out to you previously. If you were to adjust our first quarter results to normalize our rate for the quarter to be equal to the projected tax rate for the full year of 2013, our tax provision for the quarter would be approximately $700,000. This will reduce our first quarter net income by approximately $3.1 million or $0.04 per share. So you can make that adjustment to really look at what we did on more of a run rate basis in terms of our P&L performance for the first quarter of 2013. That's all I have to say about taxes right now. If you have further questions, please ask in the Q&A period. We'd be happy to address those. Let's move on to cash flow. We define free cash flow to be net cash provided by or used in operating activities less capital expenditures net of the proceeds received from the sale of equipment and the sale and leaseback of equipment newly purchased. Net cash used in operating activities in the first quarter of 2013 was $26.8 million. Capital spending, net of the proceeds from the sale of equipment and the sale and leaseback of equipment, was approximately $43.9 million in the first quarter of 2013. Reflecting this operating activity and capital spending, AAM's free cash flow in the first quarter of 2013 was a use of approximately $70.7 million, $70.7 million. It is not unusual for our company or other automotive suppliers to use cash in the first quarter. Seasonal working capital trends often drive this type of result. Sales in March are much higher than they are in November and December. Receivables are up. Payables partly offsets that, but our inventory is up as well as we're dealing with much higher levels of business activity at the end of the first quarter as compared to the end of the fourth quarter. Our cash flow results in the first quarter of 2013 were also adversely impacted by debt refinancing activity we've already discussed. This was approximately $8.7 million of cash outlay in the first quarter for tender premiums and other cost related to the redemption of the 7 7/8% notes that we refinanced in the quarter, okay? So let me now cover a couple of quick hitters on the balance sheet. EBITDA leverage, this is the ratio of net debt to EBITDA. Of course, EBITDA on a last 12 months basis was approximately 4.5x at the end of the first quarter of 2013. And this was on an adjusted basis. AAM's EBIT coverage or the ratio of adjusted EBIT to interest expense, again on a last 12 months basis, was approximately 1.6x at the end of the first quarter. Both of these credit metrics -- again I'll calculate it on an LTM basis and to liquidity, AAM ended the first quarter of 2013 with total available liquidity of approximately $457 million, and this consists of available cash and borrowing capacity on our global credit facility. Before we start the Q&A, I will close my comments by discussing briefly here our 2013 outlook. David already covered some of the basics. So let me just say this regarding our 2013 outlook. We are targeting AAM's sales to grow more than 11% on a year-over-year basis to approximately $3.25 billion. As compared to the second half of 2012, we are targeting to significantly improve our profit performance. For the full year of 2013, we are targeting an adjusted EBITDA margin in the range of 13% to 13.5%. In the first half of the year, as we've indicated, we expect our adjusted EBITDA margin performance to be approximately 11% to 12%. Now this is true primarily because we are incurring higher launch preparation cost as we've already said in the first half of the year, and these costs include lower capacity utilization or unabsorbed fixed costs on a number of launch programs including the all-new EcoTrac all-wheel-drive program in Three Rivers. These costs also include the product and process validation, start up training, quality containment and other related activities that we've been discussing and describing to you over the past several quarters in terms of what to expect in our business in calendar year 2013. As we work our way through the major launches we have in front of us in the next 90 days principally, we will shed these extra costs and benefit from higher capacity utilization, better operating leverage and ultimately, higher sales and profits. We hope and expect that the first quarter of 2013 was a good down payment on these expectations. That's the end of my comments this morning. Thank you for your time and participation on the call today. We're going to stop here now and turn the call back over to Liz and start the Q&A.

Thank you, Mike, and David. We have reserved some time to take questions. [Operator Instructions] Kirk, please go ahead.

[Operator Instructions] And your first question comes from the line of Rod Lache from Deutsche Bank.

A couple of things. One is, could you just talk a little bit about how much your Brazil operations improved sequentially? How far away are you from breakeven, and your expectations for when you would get there?

Okay, Rod. I'll make a couple of comments, and David may want to elaborate a little bit. From a purely financial perspective, we had roughly $15 million of P&L hit from our Brazilian subsidiary in the second half of 2012. We were close to breakeven in the first quarter of 2013, but we were a little shy, probably right around $1 million gross profit loss in the first quarter of 2013. Now the improvements that we're making in that business and the ones that we could tangibly access immediately are around the premium freight activity, getting our operations in line, meeting our daily production requirements, and that's going very well. The other area is the area of pricing, and we commented on the fact that we needed to make some improvements to address the economic inflationary trends in that market, and that the pricing improvements that we have in that business would show up in the first half of the year, and that's exactly what happened, Rod.

Okay. And then just another question on the trajectory of margins just first of all, in the short term from Q1 to Q2 if you could just describe some of the pluses and minuses and how you expect that to flow? And then assuming that you exit the year, this year with 14% margins, can you help us understand just broadly what happens next year? You've said before that you give back some pricing on the new truck 12 months after the launch. Could that be offset by the productivity, the nonrecurrence of the launch costs and volume? Do you believe that this exit rate is something that can be sustainable a little bit through next year? Or do -- some new things come down that kind of bring it back down?

Okay, we'll talk about '14. As you might imagine, we're much more focused on '13 right now. In the cadence of our 2013 margins, there's not a whole lot going on first quarter versus second quarter in terms of major changes to the factors that will affect our profit performance. We expect the sales mix to be roughly flat. In fact, we would expect sales mix to be about flat or roughly the same now for the rest of the year. So we've made the improvement we expect to make in that area. Of course, as it relates to our Thailand facility as it stands right now, customers recovering nicely, and we would expect to regain the margin lost on the strike impact in the second quarter. That's roughly about 40 basis points, Rod. In terms of production performance, we do see some opportunities to make some gains in the second quarter. I wouldn't characterize those as major opportunities. I think we see some better opportunities in the back half of the year as we really strive to get Brazil to profitability, for example. But the one thing that we are facing in the second quarter is again the continuation of launch preparation costs. We don't expect any material increases in R&D quarter-to-quarter. The project expense will probably tick up a little bit. The EcoTrac All Wheel Drive system requires a lot of attention in the second quarter as we get ready to launch that product. And so I think big picture, as we said right from the beginning of the year, around 11% to 12% is the expectation we have for calendar year 2013 first half. We're going to do everything in our power to access the higher end of that range. And if we can exceed it, we'll certainly try. But basically we see the same factors that affected our first quarter affecting the second quarter. As we get to the second half of the year, Rod, we do see some significant daylight. And as we look at it what happens in the second half of the year, the biggest opportunity for us is to reduce these launch preparation costs, maybe 150 to 200 basis points of margin improvement on that issue alone. Project expense should be much lower. R&D in terms of product validation expense should be a little lower. We'll have our launch of the EcoTrac system underway. It's going to allow us to absorb fixed cost in Three Rivers and stop the cost driver there associated with people getting ready to launch. And of course, the process validation expenses that were incurring right now. And we do expect those sales to be higher on a quarterly run rate basis, and again that will help us with capacity utilization. So many of these factors, Rod, will carry into calendar year 2014. You're right to point out some of the pricing issues. But from our perspective, we're going to have opportunities to improve our operating efficiency as we get through these major launches, and we're running, for example, in Mexico, with one major program for GM instead of this year having to support 2.

Your next question comes from the line of Chris Ceraso from Credit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: You just covered a lot of what I was thinking about as well. So not much changed from Q1 to Q2 maybe the expense is up a little bit, but Brazil gets better, Thailand gets better. Is that a decent summary?

Yes, yes. Certainly we're going to try to do better than that kind of put and take watch, but yes, that's exactly right. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. And then I noticed in the quarter if I isolate your business to just the GM revenue and what we believe to be the GM products that you're on, it looked like the content per vehicle was up pretty nicely. Was there anything that changed from let's say the back half of last year to the early part of this year on your content on GM products specifically?

Well, Chris, it's really just mixed math. What I mean by that is the GMT900 was significantly higher on a run rate basis. Recall last year, there was significant downtime in the back half of the year. In the first quarter of 2013, we were up about 35,000 units on that program, and the content contribution on that program is very nice. So no, there wasn't any material change in the nature of the content we're providing, although we did launch the new truck for -- the RAM Heavy Duties, but mostly it's just the fact that the GMT900 volume was up, and that has a positive impact on that calculation.

Your next question comes from the line of Brett Hoselton from KeyBanc.

Back to Rod's question. Outside of price downs, outside of operating efficiencies, do you see any major puts and takes? Obviously, production could be up or down. You've got some new business launches. You want to factor that in, but do you see maybe any other puts and takes that might impact your margins in 2014 in a significant way? And again I'm kind of comparing it to your exit rate versus the second half of '13.

Yes. We think we're going to head into '14 with some tailwind certainly from a production standpoint. The estimates for production on the K2XX program are very bullish at this point in time. And certainly, we would expect opportunity for those to be higher than the production rates that we're seeing in calendar year 2013. If that's true, that's likely also going to be true for the RAM Heavy Duty program and quite possibly the 610 van program. So that could give us an opportunity to have excellent operating leverage and really a darn near perfect environment for us to have a very solid year, both from a profitability and cash flow standpoint, Brett. But as you pointed out, volumes could be up, it could be down. Our perspective this year is to focus on getting our launches made effectively. And if we do that, we're going to exit '13 in a good spot. We're going to set ourselves up for very good performance in '14.

And then secondly, we've kind of seen steel pricing drift a little bit here down, and can you talk a little bit about whether or not you see that as a tailwind or is it even significant? I know you've changed your arrangements with GM. So some of that's going to be passed through and so forth, but would you just generally consider that to be maybe a little gravy or is there actually a potential significant benefit there?

No. Brett, this is David Dauch. As you know, we've got long-term strategic relationships put into place with a number of the different steel mills. We feel that we're buying at a very market competitive level especially based on the fact we're vertically integrated with our forging business and because of the volume level that we put through and utilize therefore, we get the benefit of some of the economy of scale. Clearly, we have the proper material agreements with all of our customers, GM just being one of them, but all of them to make sure that we can pass through the appropriate increases where it applies and where it's been negotiated. But we don't see any substantial change going forward with our business right now.

Brett, if I could just add briefly. The market data that you're tracking, that really reflects the economic risk that is passed through to the customers. The actual base price itself is not following that same trend necessarily, and that's really what drives our economics, so that factor that you're looking at, that would have a much larger impact on GM, Ford, Chrysler and the OEMs that actually take that risk in the supply relationships.

Your next question comes from the line of John Murphy from Bank of America.

This is John Lovallo on for John Murphy. Question for you would be I guess on R&D. It did trail off a little bit in the quarter. I know you guys give some color on this, but I guess what we're trying to kind of think about here it appears to be more efficient use of R&D spend, I mean, versus any kind of program pushouts or delays? I mean, is that a fair way to think about it?

Absolutely. Yes, we put a lot of money into our product and process and systems technology over the years. We're continuing to do that. Not only have we closed some gaps where we had more importantly we've been focused on putting industry-leading technology out there. And now we're bringing in -- we're commercializing it. We're bringing it to market with the EcoTrac Disconnecting All Wheel Drive system, which we said launches later this year. We've also commercialized some of our EcoTrac All-Wheel-Drive technology through our subsidiary there. We've also commercialized and put into production our efficient axles for some of the luxury passenger car work that we're doing. And clearly with how we're changing over the product portfolio with both the RAM and the K2XX, we've got a very modern product portfolio that's out there. And it's a matter of how we continue to advance to stay on the cutting edge ahead of our competition.

Great, that's very helpful.

John, one other quick one I'd add to that. This will be particularly relevant as we work through the year, but the nature of the work we're doing this year, there's a much higher ED&D recovery from our customer base that's going to be factored into the calendar year 2013 activity. That really is different from certainly 2011 and '12. So while the first quarter is really not impacted by that significantly, as we work our way through the year, that will be another factor that reduces our net R&D spending because we have some situations where the customer is actually bearing that cost.

Great. That's very helpful. The second question would be -- is there carryover from Rayong in the second quarter that we should think about?

It should not be significant, John, no.

Yes, no. John, GM is pretty well approaching where the volume used to be prior to the strike. But at the same time, we got to just continue to watch what's going on with their workforce over there. They replaced a lot of their existing workers with replacement workers, but they're delivering a good quality product over there, and we expect volumes not only to stabilize, but hopefully improve going forward or increase.

Your next question comes from the line of Itay Michaeli from Citi.

So I just want to clarify, are you still assuming 1 million units of T900 K2XX production this year? And in your answers to the earlier questions around the 2014 perspective outlook and your formal 2015 target, is the assumption still about 1 million units of production there?

Okay, Itay, let me peel that off one at a time. For 2013, $3.25 billion is tracking right around 1,025,000 units of production. As we said before, the customer is communicating to the supply chain to expect to build more. We are probably now also expecting that. But in terms of the math, $3.25 billion, which is our current guidance is based on around 1,025,000 units of production in 2013. Going forward, '14 -- and I can be very specific about '15, our 2015 target of $4 billion of sales, that is still based on 1 million units of production. There's nothing different about that, and so there's certainly some upside, Itay, that's possible on either of these couple analyses, whether you're looking at '13 or '15.

That's great. And just 2 quick follow-up question on cash flow. One, it looks like CapEx is trending closer to 6% of sales in Q1 or are you maybe tracking a little bit below the full year guide? And Mike this -- the positive free cash flow outlook for the year include I believe the $8.7 million of cash flow impact from the debt redemption?

Yes. Right. So the $8.7 million, we didn't have full visibility to that when we provided our guidance at the beginning of the year, but we certainly hope to be able to absorb that and accomplish positive free cash flow. With respect to the timing of CapEx, it just adds timing. We quite frankly, budgeted and expected our CapEx in the first quarter to be a little higher. And just based on the timing of customer activities. I commented, I think David commented also that we had some timing changes, in some cases, minor delays, I guess you'd say, of certain launch activity. Not anything to be concerned about, but they did move out the timing of certain activities, and so that allowed us to defer some of the CapEx into periods later this year.

Your next question comes from the line of Brian Johnson from Barclays.

A couple of questions about operations in Latin America, including Mexico. First, GM produced 7 K2XX in Silao. Can you maybe give of us some color on the ramp up in Guanajuato? And also are a lot of the validation and quality control costs that you talked about, given your factories going to supply, as I understand that the American factories as well for that product going to be out of the way? And the second one, talk about your Brazilian supply chain.

Okay, Brian, this is David. The K2XX, starting in Mexico, GM is clearly on track. They launched the vehicle on April 29 in Silao. They'll have a later launch at their other light duty pickup truck facility later this year. Everything is clearly on schedule both for General Motors, as well as American Axle at this time. We see no issues at this time, we're prepared for the launch. GM is prepared for the launch and we will follow their ramp up schedule as we move forward. As it relates to some of the heavy-duty product that you talked about coming out of our Three Rivers facility in the future, that's a later year launch or early next year launch. That change isn't as large to the heavy-duty platform as it is to the light duty platforms. So most of the changes are already put into place or pulled ahead into the 900 vehicle. So we don't expect as big of a change at the Three Rivers facility as we're experiencing in Mexico right now. So hopefully that addresses your question regarding K2XX. And then with respect to Brazil, as Mike touched on earlier, we've spent a lot of time in regards to stabilizing the operations. They are making sure that we're meeting all of our daily production requirements building in the quality that I mentioned earlier. We've got -- the pricing issue is being worked on. And as we had indicated, it was going to take us into the second quarter of this year and even into the second half to localize some of our material suppliers to the South American markets, specifically Brazil. That is clearly on track to our plan at this point in time. We still have some validation that we need to work through internally, as well as with our customers in certain cases. So that'll take a little bit more time as we go forward, but some of the things that we wanted to get done are already done and on track. We're ahead of schedule with what we had committed to. So we expected to support the sequential improvement in our financials every quarter moving forward here.

Your next question comes from the line of Ryan Brinkman from JPMorgan. Ryan Brinkman - JP Morgan Chase & Co, Research Division: Just another question on the GM full-sized pickup trucks. There's been a few, but you mentioned in response to the last question that I think you're looking for 1,025,000 units. I guess that's of the combined K2XX and GMT900 pickups and SUVs, and that looks to be unchanged. But I'm curious how you think about that number given that we learned during the quarter, that GM's 5.3-liter V-8 in the Silverado and the Sierra will be surprisingly more fuel efficient than the turbocharged V-6 and the F-Series. Maybe you had a better idea than Wall Street that the fuel efficiency would track as well as it did just because you're close to the program. But if not, does that provide some upward pressure on your outlook? And then just second to that, I think you had felt for a long time that IHS was too conservative on their outlook for the program, but it looks like that they have recently upgraded their full your outlook to 1,081,000 from 1,054,000 last month, which was itself upgraded. So I'm surprised to see that your outlook now below their's. Might that be another reason to think that your outlook could be likely to improve as the year progresses?

Yes, okay. Yes, listen, first of all, I think I had mentioned to Rod -- Itay, I'll be very clear with you. We do see upside potential to the 1,025,000. Itay's question I interpreted to be very specifically around what was the assumption built into the models that drive the guidance. Of course, we have many other programs in our business. So we have not, at this point in time, made an adjustment to our full year sales outlook. But with respect to this program, we do see some upside. IHS has been very conservative now for 2 or 3 years. I think we've noticed the same increase in their outlook for production as you have, and we see that being much more in line with what the customer has been communicating to the supply chain and probably represents a reasonable upper bound for what's going to happen here in calendar year 2013. So we do see some upside on that program, Ryan, and we're very pleased about it. We're very pleased about the expected performance of these vehicles with respect to fuel efficiency, and we do expect it to be a very competitive product given the recent upswing in the overall market conditions, we see this as a major tailwind for our company. Not just the fact that the GMT900 K2XX transition will be good, but we see the strength in this market helping the RAM Heavy Duty program -- the large vans we support for General Motors and many other programs we're a part of. So we see the current market conditions setting up very nicely for our company for the next couple of years. Ryan Brinkman - JP Morgan Chase & Co, Research Division: Great. That's all very good color. Just another one -- you've guided the 7% CapEx as a percentage of sales for the full year. And while we've only just begun the year, it looks like the trend thus far is that your sales are coming a little better-than-expected and your CapEx may become a little bit lower than expected. It looks like about 5.8% of sales in the quarter. So did 1Q maybe track lower than your expectation. You didn't really provide the cadence earlier, I don't think. Or did you always just assume more spending as the year progresses whether that support the K2XX launch or something else that you've anticipated?

Ryan, you and the others should still plan 10% with sales for CapEx for the year. It's just the timing issue as Mike communicated earlier.

Your next question comes from the line of Joe Spak from RBC Capital Markets.

Just if we could go back to R&D real quick, I think last quarter you said it would be about $3 million to $5 million higher in the first half, but still down for the year. Now it sounds like there's been a little bit of a change in the timing, but also some greater efficiency. So how should we think about -- is that $3 million to $5 million higher still accurate, but maybe pushed out? Or are there actually more savings than you thought a quarter ago?

Yes, Joe, this is Mike. I do think the R&D spend is not likely to be a lot higher than what it was in the back half of last year. That isn't changed in the last 90 days or so as we have managed the timing of the various launches that we have to support, and we have been able to find some efficiencies in our R&D activities, and we've managed to get some things done at a lower validation cost, lower than we had anticipated. I guess that's maybe the best way to say it. So that is an opportunity that we've taken to improve our 2013 cost structure with respect to R&D.

Okay. Great. And then if I sort of back envelope do all the puts and takes you said on the sales in the quarter, it looks like maybe about call it $50 million to $60 million of backlog or new business came in this quarter. Just was wondering if you think that's directionally right and also if that still obviously implies the greater ramp in the back half. Is that how you're thinking about the business coming on this year?

Joe, we said we were going to launch $400 million of business this year across the full year, 1/3 in the front half of the year, 2/3 in the back half of the year. So we're still on schedule for that.

And, Joe, the major -- I'll just add a little bit more color to that. The major programs that drive the sales gain this year are launched. The EcoTrac All-Wheel-Drive system, the K2XX of course, the additional content and the RAM Heavy Duty series pickup truck program. And with the exception of the RAM, those launches are yet to come in terms of financial impact. So that's the reason behind what David just being right on.

Your last question comes from the line of Ravi Shanker from Morgan Stanley.

Your non-GM business was down year-on-year. Can you let us know what exactly drove that and also remind us how much of the backlog comes from non-GM this year and what the cadence of that is going to be?

Yes, Ravi, on a year-over-year basis, we noted that the RAM heavy-duty series pickup truck program was down. And from a dollars and cents standpoint, that's the significant reduction. We did see some additional weakness in some commercial vehicle business, but that was relatively small as compared to the RAM program activity being lower. In terms of launch, we talked about the EcoTrac program being a significant non-GM program this year. Of course, the RAM Heavy Duty series pickup truck programs and other things that we're involved in, in China and India. So we have a higher percentage of non-GM versus GM. I'll get back to you after the call. I don't have the detail with me right now, but it's certainly much more than 50% non-GM business this year. Last year, as you recall, we had a much more GM-centric launch cadence for backlog. This year, it flips, and it's much more non-GM. I think it's in the neighbor of 2/3, 1/3 roughly, but I can confirm that detail for you later.

Got it, and just a follow-up, the EcoTrac launch, I think that's on the Cherokee. So how much of that is in the U.S. versus China?

It's a U.S. program right now.

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.

This concludes today's conference call. You may now disconnect.