Dauch Corporation (DCH) Q1 2014 Earnings Report, Transcript and Summary

Good morning, my name is Lindsey, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing First Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator Instructions). As a reminder, today's conference is being recorded. I would now like to turn the call over to Ms. Donnie Landolt, Manager of Marketing & Communications. Please go ahead, Ms. Landolt.

Thank you, and good morning, everyone. I'd like to welcome everyone who is joining us on AAM's first quarter of 2014 earnings call. Earlier this morning, we released our first quarter of 2014 earnings announcement. You can access this announcement on the aam.com website or through the PR Newswire service. To listen to a replay of this call you can dial 1 (855) 859-2056 reservation number 34605136. This replay will be available beginning at 1:00 p.m. today through 5:00 p.m. Eastern time May 9. 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 2014 High Yield & Syndicated Loan Conference in Phoenix on May 20, the KeyBanc 2014 Automotive and Industrial Conference in Boston on May 28, and the Deutsche Bank Industrial Conference in Chicago on June 4. In addition, we are always happy to host investors at any of our facilities. Please feel free to contact Chris Son to schedule a visit. With that, let me turn things over to AAM's Chairman, President and CEO, David Dauch.

Hey, good morning, everyone. Thank you, Donnie. Thank you for joining us today to discuss AAM's financial results for the first quarter of 2014. Joining me on the call today are Mike Simonte, our Executive Vice President and Chief Financial Officer; and Alberto Satine, AAM's Senior Vice President of Global Driveline Operations. To begin my comments today, I'll provide some highlights of AAM's first quarter 2014 results; I will also review the status of AAM's business 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 for the first quarter of 2014 highlighted by strong sales growth that continue to outpace the industry. Let me briefly cover a few first quarter financial highlights. First, for the first quarter of 2014, AAM's sales were approximately $858.8 million. This represents year-over-year sales growth of 40% and sequential sales growth of approximately 3%. AAM's year-over-year sales growth of 40% in the quarter compared to U.S. SAAR growth of approximately 3% in the quarter, and North America line vehicle growth of approximately 4%. Second, AAM's non-GM sales in the first quarter of 2014 increased by more than 50% on a year-over-year basis to approximately $288 million. Including the impact of our China joint venture located in Hefei, China, non-GM sales were approximately 30 some percent of total sales in the quarter. Third, AAM's net income in the first quarter 2014 was $33.6 million or $0.44 per share. This represents a $26.3 million increase as compared to the first quarter of 2013. And fourth, AAM's operating profitability was much improved on a year-over-year basis. EBITDA was $112.5 million in the first quarter 2014 or 13.1% of sales and EBIT was $55.6 million in the first quarter of 2014…

Thank you, David, and good morning, everybody. My job today is to get into the details of our first quarter 2014 financial results. Starting with sales. Lead by higher sales and supported Chrysler's all-new Jeep Cherokee and the heavy-duty Ram pickup trucks, AAM's net sales increased by more than $100 million in the first quarter of 2014 or 14% on a year-over-year basis. Sales ended up at $859 million in the first quarter. Non-GM sales hit a new quarterly record of $288 million. Including the impact of our Hefei, China joint ventures AAM's non-GM sales were approximately 37% of total sales. The 14% growth rate for the first quarter of 2014 was a little lower than what we expect for the full year 2014. This is true because we experience significant customer downtime in the first half of the first quarter, principally related to GM's launch of the K2XX, heavy-duty pickup trucks and full size SUVs. To put this in context, daily production rates for our major North American light truck programs were almost 30% lower in the month of January, as compared to the month of March. AAM's content per vehicle is measured as the dollar value of product sales supporting our customers North American light truck and SUV programs. In the first quarter of 2014 AAM's content per vehicle was $1655, also a new quarterly record for AAM. This represents a $150 year-over-year increase in content per vehicle as compared to the first quarter of 2013, and a $75 sequential increase as compared to the fourth quarter of 2013. The primary driver of this increase is the additional content we are providing to GM and Chrysler on their next-generation full-sized truck programs, of course that's the K2XX and the Ram heavy-duty series pickup trucks. We expect our content…

Okay. Thank you, Mike and David. We've reserved some time to take questions. I ask you to please limit your question to no more than two. So at this time, please feel free to proceed with any questions that you may have.

(Operator Instructions). Your first question comes from the line of Itay Michaeli with Citigroup. Your line is now open.

So just hoping we can start off Mike in discussing the cadence of EBITDA margin for the rest of the year may be particularly around the second quarter, what are some of the big buckets, I know K2XX production should be up sequentially. What are some of the other buckets we should be thinking about in Q2 and for the rest of the year?

Okay. Relatively straight forward Itay. And again on the most critical issue first which is the fact that we do expect significantly higher production activity relative to the K2XX program we would see relative stability on the Ram heavy-duty program in most of the other major revenue contributors for our company, but the K2XX should be up on the range of 40,000 units quarter-to-quarter. So that's going to drive much higher revenue for our company and of course that will be come with premium profit margin impact because we've got all the fixed cost in place and so those incrementals should be pretty good. Now we need that to offset some increase in SG&A spending for sure, but the combination of good operating leverage on increased sales and excellent productivity improvements we're anticipating in the second quarter and for that matter for the rest of the year associated within pretty much through the toughest part of the launch of this program. That's going to drive better profit performance in the second and third quarter. The fourth quarter should be pretty good too, may be a little shy of the second and third quarter we will have to see it all depends on production lines. As you know there are fewer production days due to holidays in the fourth quarter. So I think our best profit margin opportunities will likely be in the second and third quarter but we expect all three quarters to be better than what we experienced in the first quarter.

And then, just my second question as we track the company going forward, what were some of the factors that could lead you towards the low-end or high-end f the full year EBITDA margin range. There may be more company specific, may be update us on the situation in Brazil and how that recovery is coming along other launches you may have, just want to know the key specific things that can kind of sway that margin on a full year basis.

Itay, this is David Dauch. Just to kind of address the different sections of your question started in Brazil as we mentioned to you all before is that we have addressed all of our operating issues that we had in Brazil associated with the GMI 7XX launch so that cost controls there, the performance is there, the only issue that we're dealing with in Brazil at this point in time is that we're seeing a softening in the marketplace as a result of the GMI 7XX light duty pickup truck program. Not only there in Brazil but a little bit in Thailand as well which explained a little bit away may be the GM sales and expenses for the quarter was off a little bit. From an operating standpoint we are doing the things that we need to do, we are restructuring our business to adjust the market demand so no issue there. As Mike and I both covered, we had a good first quarter with respect to our last performance, we only expect to get stronger as the year progresses based on the strength of K2XX volumes strength of the Ram volumes, strength of the charity program and really getting those launching efficiencies out of the way in getting the dual product strategy out of the way we've been running for quite some time. So we feel very good about where we are from our launch standpoint, very good about where we are from an operational standpoint, very good about where we are from a cost control standpoint, but we also seem to be doing better and that's our commitment and that's what we're going to deliver.

And Itay I just add one thing to that. When you talk about the high-end versus the low-end of our earnings guidance range the most critical issue and this would be true for just about any discussion of profitability it's capacity utilization. So to the extent that volumes meet and even exceed the expectations we have for -- the phased expectations we have for the K2XX program. I would say that better than expected performance on the K2XX is the largest single driver that pushes us up the food chain in terms of the higher end of that range.

And that is very helpful. I just think one last one. In any thought on CapEx beyond 2014 now with this new arrangement with GM? Does that affect the trajectory the next couple of years?

Its inline with what we have guided in the past, of this 4% to 6% was what we have guided. Obviously we raised that up up to 6.5% this year because of the agreement with General Motors on the K2XX capacity and mixed program. Other than that, I will trend in the direction that we communicated to you all earlier.

And Itay, just to be clear, this issue the agreement that David just referenced, that is expected to be handled within calendar year 2014.

Great. And thanks for that clarification. Thanks guys.

Okay. Thank you, Itay.

Your next question comes from the line of John Murphy with Bank of America. Your line is now open.

Good morning, guys.

Hi, John.

First question on -- David, on the coding activity, you mentioned a $1 billion I mean you've been talking about that number for a while. I am just curios, how you're seeing the pace of coding activity and your win rate there? And in particular -- potentially the upside with Chrysler, because you seem to be a lot of progress there, and if you can remind us of may be some upcoming recent launches or upcoming launches I should say that you might have on coming up with Chrysler?

Well, just start on the launch side of things. I mean obviously, we are still accelerating the launch. The Cherokee platform is DUW platform as that product continue to be received very favorably in the marketplace. Our guidance was inline with what we worked out with Chrysler. Now that they are launching the U.S. platform as the Chrysler 200 program, that is incremental business we had planned with Chrysler and we are launching that as we move forward. We also have the L series driveshaft passenger car program that we will be launching later this year. And then, obviously, the Ram program we discussed the Ram and the high volumes, we are experiencing on heavy duty at this point in time. Those are all positives for us. It's really -- non-GM sale growth or specifically growth with another critical question of all that being Chrysler. And we think there is more opportunities that are out here based on this strong relationship that we build with them. We are holding, like I said, over a $1 billion of opportunity. We expect some decisions to be made here. Really in the third and fourth quarter I think the bigger decision will be made with respect to the opportunities that are out there. But we think we are well-positioned to capitalize on our normal hit rate of 25% to 30% with respect to that. And we are really working on a number of program opportunities globally around the world with multiple OEMs and the majority of what we pulled is non-GM business, which is only going to help further our diversification as we go forward. So nothing really more, John, to add with respect to that. Mike, unless you have anything else?

No, we just kind of -- in the game, we are not at a stage where we can talk about specific customer, specific programs. But in the first quarter or through -- I should say the first four months of the year, we have had a couple of key wins. One in the country of India, one in Brazil, which are crucial to helping those entities cover their fixed cost and improve their profit margin. So we are making progress, as David pointed out. And we do expect to have some good news to report near the end of this year relative to the backlog growth overall.

Okay. And then, just a second question. Just wondering if you could give us a little bit more detail around noted discussions with GM for this CapEx reimbursement, because it -- it does appear to be a little bit unusual? I am just trying to understand if there is other opportunities for you to may be recover more CapEx from customers or this really is the one time issue with mix being very different than what was expected at the launch, at the initial launch of the product?

John, I think it's more the latter than the former and the fact that as we communicated to you before and even GM had communicated, there was a mismatch when we came through the power train configuration and what was planned versus what the reality was, that drove different engine sizes which led to different axle sizes for us and created the mix issues within that. And we needed to work those issues out with General Motors; that is now completed much. Mike and I've both reflected what that impact is, but now that's going to allow us to cap and the mix in-place to support the demand there. As you all know, we have got 1.15 million units built into our model. But our plan is from a K2XX standpoint. We are confident that we can deliver on that and based on the schedule we see them being very strong and hopefully getting strong as we move forward.

Great. And then, just one last quick point of clarification. The parody of GM versus non-GM sales by mid decade, does that include the JVs or the hi-fi JV as well?

It's us, yes.

Okay. Thank you very much.

Okay. John, thanks.

Your next question comes from the line of Rod Lache with Deutsche Bank. Your line is now open.

Good morning, everybody.

Good morning, Rod.

I think I need to insert an if then formula into our model on whether your quarter ends on Tuesdays or not. So how can you (inaudible) that one out?

Pay attention to that in the third quarter.

We will.

That is what it says, that is what going to be for us.

Okay. First, just housekeeping. Was there a gain or anything in the P&L this quarter for that $9.3 million settlement on the contract delay?

The answer is no. No portion of that was in our P&L. We received some cash, we deferred the revenue and we will recognize that over a period of time that we operate that program.

Okay. And also, just a follow-up on Itay's question, the high end versus the low end of your margin guidance. Clearly, just mathematically, it would take more than a $50 million variance in revenue, which is the high end, the low end of your revenue, to swing from a 13.5% to 14% EBITDA margin. So from a utilization perspective that part of it, the swing in revenue and if that's an operating leverage seems like there is more there. Is there something else in terms of execution that you are watching that would swing it one way or the other?

Yeah, Rod the -- what the critical issues in our profit driving is always the capacity utilization. But as David pointed out -- and I am sitting next to the man making it happen Alberto Satine. But we are working hard to normalize our operations, to achieve productivity. Last year, we had all kinds of different things going on in our facilities, particularly in Mexico related to supporting both the GMT900 and K2XX program. This year, as most of our launch activity is now behind us, the team is really focused on the actions and activities that can drive cost reduction. And so the combination of that with better capacity utilization, higher sales group body has really given us an opportunity to increase our profits.

Okay. And just mathematically, it would seem like you are tracking towards the upper end of it. I just wanted to get your opinion on this. Your revenue in the quarter annualized at $3.43 billion, just taking your revenue x4. So you are $318 million lower than the low end of your revenue guidance range. Your EBITDA annualize at 450, may be its 440 with higher SG&A. And just apply that 30% margin, the incremental margin to that GAAP to the low end of your range, you would be coming up north of 14% margins, like 14.2% margins. Is there something that comes in aside from that increment in SG&A or is there something in the incremental margins or -- that we should be aware of or are you in fact tracking a little bit better than would be implied in your guidance?

Okay. So couple of things I'd comment on, Rod. First of all, the SG&A increase, it's pretty substantial. We would expect -- what we are telling you if SG&A is up $25 million that means that runs around $260 million to $265 million this year. First quarter was $57 million. Average in the next three quarters should be north of $65 million, probably closer to $70 million. So that is big factor limiting the amount of upside relative to our earnings guidance this year. Second issue is, while we are really confident and feel good about what is happening in North America and specifically with the two major truck programs, we support for GM and Chrysler. We are seeing some weakness in other parts of the word, particularly in Brazil and Thailand, mid-sized truck programs we support there are weaker than what we had expected. So that is probably a better drag as well, relative to the expectations we had for the year. So we feel like we are solidly placed to achieve our guidance for this year. I think it would be a little premature for us to be talking about exceeding it, which is why we are sticking with the guidance that we laid out in the year.

Okay. Just lastly, that the non-GM revenue growth on year-over-year basis, can you give us any color on that as your backlog kind of evenly split over the course of the year and what you are seeing in terms of the Ram production year-over-year of the next couple quarters?

Yeah. Rod, we have see Ram productions being relatively stable quarter-to-quarter. The first quarter was not very strong quarter, but I don't expect any of the other quarters this year to be materially different from that. The content that we have on that program is driving a lot of growth for us in that non-GM sale, so expect that to continue. Relative to the Jeep Cherokee program, that is a program that is -- as you know we launched August timeframe in 2013, ramping up in the fourth quarter and here again in the first quarter. I expect that to have a significant impact on our year-over-year comparisons in second quarter and third quarter, with a lesser impact in the fourth quarter simply because we had quite a lot of lime in the fourth quarter last year. The other item I mentioned discussed this, David already mentioned it, that is the drive shaft growth we have with Chrysler, the L series program that launches later this year. These three programs are significant drivers of non-GM sales growth this year. So we are close to run rate based on the cadence of activity we have got now.

Okay. Thank you.

Thanks Rod.

Your next question comes from the line of Joe Spak with RBC Capital Markets. Your line is now open.

Thanks. Good morning, everyone.

Hi, Joe.

Mike did a good job anticipating some free cash flow questions. I did have one question, may be as it relates to the 2015 free cash flow guidance. And I recognize you guys are focused on getting through 2014 first. But obviously, volume is a big driver for the range you provide from '15. I think embedded in that you are looking for fairly flattish K2XX volume. So we can do the math on to sensitive to our volume projections. But, is there anything else we should be thinking about in terms of impacting the '15 free cash flow range like for instance what would a working capital impact be from high or lower volume.

Joe, the walk from 2014 to '15 on cash flow is not really that complicated. We do respect relatively flat within our base guiding expectations, relatively flat K2XX production. Now we do see some growth in another program and that’s what’s going to push ourselves closer or professionally involve that $4 billion level. The working capital I have this year should be much greater. Our sales growth this year is going to be probably close to double or at least much higher than what its going to be next year. So we would expect to have a smaller working capital requirement in 2015. And the other issue beside from just profit conversion on higher sales is CapEx. As David pointed out, we expect our CapEx requirements to moderate as the percentage of sales. In 2015, we'll clearly have lower CapEx than as compared to this calendar year; even as compared to our original guidance of approximately 50%. So lower CapEx lower working capital usage, good performance from operative perspective and incremental sales perspective, those are the issues that drive us up in 2015.

But if we wanted to sensitize the volume, is it occurred to the working capital impact which looks like it's a start may be 12% or 13% of the change in sales. Is that roughly a good number?

Yes, 12% is right on it. We're managing our receivables and payables to about 60 days. On a global basis, there is nothing that we would expect to see different there. It's a little bit lower on those terms in the U.S., but if you could use that and then manage the inventories between 12 to 15 turns you can be right around on 12%. That’s exactly how we model it, Joe, and how we hold ourselves accountable from operating perspective.

And may be a quick one, is there any sensitivity you can provide to the incentive comps, if we for instance monitor your stock price and may be a $50 million change in market (inaudible), and so what the dollar impact brought to the accrual change to this?

It cost us between $1 million and $2 million in the first quarter, we expect to pay that back. If we mark today our stock prices are up relative to where we were at the end of the first quarter. So we're heading in that direction. It’s not a huge issue. What's interesting this issue, Joe, is that it was an expense driver in 2013 it was a flip in the first quarter, so it had a significant sequential impact if you are looking at SG&A performance at one quarter than next? Going forward is probably in the range of $1 million to $2 million issue if the stock price recovers, and if our relative standing among our peers recovers as well.

Your next question comes from the line of Ryan Johnson with Barclays. Your line is now open.

Good morning folks of American Axle and of course congratulations to Chris, who is not on the call.

Good morning, Ryan. He better not be.

Yes, he might be and if he is he won't forget it for the next 20 or 30 years.

That’s for sure.

All right, I wanted to do two things, one, a little bit of T account housekeeping from Mike, and then secondly kind of semi-strategic question for both of you. The T counting is can you take us through the revenue and cost and walk through of the customer payments to discuss what payments support this shift in mix of production? What’s the revenue? What’s deferred revenue? And what are the costs against that?

Okay. So I think it’s all the deferred revenue at start. We collect the cash or in the case of the portion we didn't collect we book the receivable to recognize the fact that over the life of the respective program we'll amortize the amounts of consideration received from General Motors through revenue. And so we've had these type of agreements in the past, it’s pretty common and straight forward for suppliers to recognize. These types of payments are part of the underlying economics of the sales relationship with the customer. So the K2XX program we would expect to run that $34 million off over roughly 5 years and all of this is disclosed in the 10-Q you see it today. And in the case of the other major program that runs out a little bit longer, so we run that over a period of roughly 7 years, specifically disclosed in the 10-Q. Relative to the K2XX program we've got some pricing consideration that we provided General Motors, what I mean by that is we're going to have a lower price on certain components. We'll have a higher price on other components. But the net P&L impact of K2XX agreement is positive, expected to be positive but more like $1 million or $2 million a year, not 34 divided by 5. The other program if I am running out $9 million, there is no other cost implication on the other issue; but if I am running $9 million off over six or seven years you can do the math, it’s not a material impact.

So the cost been booked in CapEx and then will be brought in depreciation as it climbs to revenue.

Correct.

Okay. Second question to get out the weeds. Look the K2XX last month were covering some share, but it still below 38%. The share has ranged anywhere from 32% to 35%, 36% as they I guess in particular try to get back in the low end of the market. Where do you see that share going this year, what are the puts and takes there? I mean, we certainly understand how you get a sequential increase from a Flint and Arlington coming back on line, but then next year we got a one prominent competitor launching an aluminum truck and getting a lot of attention. So how do you see that share rolling after the next couple of years?

Ryan, this is David. And first of all I think GM is going to continue to fight for their market share. Typically, as you know, when new vehicles come out they use it to gain market share. GM went down a little bit but their full compliment of their product wasn’t out yet, it's not starting to completely be out there with the latest SUVs and the heavy duties turn to hit the marketplace. You have also seen GM take a different tactic with regards to transactional prices and incentives and they still been able to defend a lot of their transactional price but they have also started to offer some incentives, and you see in the results what happened here from just even from March and April in regards to their performance. So I mean, GM got a great truck in the marketplace, it's the latest truck that's out there. There was a lot of concern in regards to the success of that program and the launch of effectiveness of that program. GM along with American Axle has proven that we have been able to launch that effectively. The biggest issue we had to work our way through is just the capacity and mix issue which as we have covered with you we got that resolved with them. As you have indicated, their largest competitor has a new product offering coming out here. And that's going to be a great product offering, at the same time there is even bigger risk associated with launching that program that it was the K2XX, but there is also some major benefits that can be realized based on the whole fuel efficiency side of thing. So I mean, I think Ford is going to do a great job in regard to the launch of their product. GM is going to continue to do what they need to do; I think they'll both protect their market share. The big issue is going to come down to parts of ownership when its all said and done because yesterday the fuel efficiency benefit associated with a lighter vehicle but there is also some other incremental parts associated with that as well and those are things that are going to have to be ferreted out over time. I can't sit here and tell you what those are exactly right now, but I think you are both are going to continue to be dominant players in the truck marketplace and protect their shares.

And is there aluminum say drive shafts you could be offering say for a mid-cycle refresh of your key platform?

(inaudible) have aluminum drive shaft today and in the past we had supplied aluminum axles to our customers. So we have got plenty of things in our portfolio. We're working on some what I call evolutionary design to continue the efficiency that I have talked about in the max optimization, but we are also working on some revolutionary type designs to really address the more demanding strategic requirements as we move forward. So we can bring competitive solutions that meet our customers' need and ultimately meet the government and the consumer needs of the future as well.

Thank you.

Okay. Thanks, Ryan.

Your question comes from the line of Brett Hoselton with KeyBanc. Your line is now open.

Good morning, gentlemen.

Hi Brett.

Hi Brett.

Wanted (inaudible) just on the free cash flow side. You have identified three different components for the improvement in free cash flow the $75 million to $100 million improvement into '15, can you maybe put a little bit finer point on that to quantify some ranges for the CapEx, working capital and higher profit, I mean what portion is attributable to each of those in your view?

Brett, I think someone else mentioned that we are much more focused on 2014. I'm not going to say too much more, but I will give you a couple pointers here. The sales growth, our sales are going to be and you have got a pretty good indication of our incremental profit margin expectations throughout this time period. So if you address that issue, you can get a pretty good understanding of our expectations around higher profitability that's going to drive some additional cash flow. The working capital is clear its the growth in sales times 12%. And the CapEx, we have said many times before we expect to moderate around the midpoint of the range, maybe 4% to 6%. So don't hold me to that quite yet, we haven’t even -- we just finished the first quarter '14, haven't spent time taking about the 2015 budget detail, but if you are around 5% of $4 billion, maybe even a little bit less, you are going to see a net absolute production in CapEx next year from current level. So those are the analysis points that are going to drive the discussion.

And then switching gears, the GM full size pickup truck for utility, can you remind us where do you see production levels at currently and do you have any particular bias upwards or downwards?

I mean, the K2XX SUVs, Brett, you know are produced in Arlington. That's the one facility that dedicated to building those vehicles. Their capacity level at that facility is a little bit higher than 1,000 units a day that's straight time. They can flex higher with over time. So we guided for delivery around a couple of weeks ago, it's a fantastic vehicle, a major upgrade over the previous iteration of that truck. I think it is going to be very successful program. I don’t know what else to say. Our view is and certainly GM has got confidence in that portion of the program looking at their production plants for Arlington, we would expect that to be very strong production for the next 6 to 12 months at least. And then from here it's a matter of marketplace demand.

I apologize, Mike, I guess I was referring to the overall program style, and in my mind I'm thinking you are kind of thinking around 1.15 million units this year give or take and it sounds likes next year you are kind of thinking in around that same range. Obviously, it's a bit higher than AHS at this point and time, and I was wondering is that still kind of what you are thinking at this point is that what General Motors is communicating to you at that point in time in terms of volume levels?

Yeah, Brett, listen absolutely, we have base line expectation of roughly 1,150,000 units of production on this program for 2014 and 2015. That lines up with a U.S. start assumption of around 16 million units, both sides truck mix and by that I mean the percentage of the overall market dedicated to full size truck sales and full-size SUV sales of around 14% to 14.5% that's consistent with where we were and we have that now for the last 15 months or so. And of course GM market share slightly improved from where they were at the tail end of the GMT900 program. There is nothing in our view at this point of time that persuades us from that point of view. And I'd point out that certainly General Motors has spent a lot of time and in the case of American Axle, a lot of money, focused on increasing capacity and adjusted mix so that they can get the marketplace with full force on this program. So we are very confident in this program, we have seen the products, they are great products, and we feel pretty confident despite what anybody else does about this program. We feel pretty confident about these production models for at least the next three years.

Excellent. Thank you very much gentlemen.

Brett, thanks.

Your next question comes from the line of Emmanuel Rosner with CLSA. Your line is now open.

Hi, good morning, everybody.

Good morning, Emmanuel.

I wanted to ask you a question about how you think about your long-term gross rate. Obviously we have an incredibly strong backlog, and there is obviously no assumption that in the long run you can grow revenues that 18% a year or so like this year. But at the same time we look at the backlog, it seems to be sort of slowly decreasing wealth and very strong so $400 million and then $300 and then $200. When you saying about the long term, obviously you are quoting a lot of activity and I'm sure 2016 still have some upside, but what do you view as a sort of like sustainable amount of backlog or I guess growth from new business on a sustainable basis?

Yeah, Emmanuel, this is David. As we said or I said on my earlier comment I mean from 2014 to 2016 we are going to grow over 10% CAGR rate. Obviously, you see this year what the backlog of $400 million we're at a growth rate of 18% for this year, year-over-year. As you indicated, there is still an opportunity basis and things that we are working on that would favorably impacting 2016 period of time. Beyond that we see a lot of things, impacting us in the 2017 period of time. When you look at from an organic side of things, we look at probably in the range of 5% to 7% from a gross standpoint, consistent with what we're talking about from a CapEx standpoint as well, and then all times we had communicated to you as well, I mean that's not assuming a strategic activity that we may take also as we strengthen our organization as we move forward.

Okay. So you don’t believe the next three years or so a very strong backlog is sort of like a one-time opportunity because you are starting obviously you've been very successful at diversifying your mix of business and then that trailing off of that. do you think that there is (inaudible)?

Not at all, Emmanuel. I mean, as I said here before, we're continuing to invest heavily into our technology leadership. That technology leadership as far as passenger cars, crossover vehicle and truck is what's driving our backlog in new business. Now we are being very selective in regards to targeted opportunities that we are going after. So I don’t see it be in the one-time type thing or benefit of being going after the downturn it's more of us managing the different priorities across our business knowing that we still have some significant debt that we need to pay down, but you can see that we are coming into some very strong years from the cash flow generation standpoint and we will balance that with both organic and strategic growth opportunities and CapEx as before. So we're operating the plan we are being disciplined in the plan, we are delivering on the plan and we expect to continuing strengthen delivery on that plan as we move forward.

That's very helpful. And then, Mike, your provided an unprecedented level of detail on 2015, and we are very appreciative of that. I guess one other angle I wanted to ask you about was when you look at, so you spoke about revenue, spoke about free cash flow, how do you think about the margin progression? Obviously, you have solid revenue growth which is positive for the offering leverage, but the same time you sort of assume flat K2XX which typically is pretty solid margin. So any high level thoughts on the margin progression to 2015 or is it just too early?

Emmanuel, I guess one or two other things that we have been discussing relative to margin progression, we do expect relative stability in the K2XX program and we kind of answered that that we do have some pricing productivity commitments or write-downs that we expect to pass along with GM on that program. Over the course of 2014 and 2015, we feel pretty good about our GM to offset the economic impact of those price downs with productivity recovering, if you will, some of the inefficiencies from our launch. So we don't see any major detrimental impact associated with the productivity commitments on the K2XX program. Relative to margin performance, as I said before, it's all that capacity utilization. We do expect some new programs in our backlog to be launched in this time period that can improve capacity utilization. But as we work our way through this calendar year, we'll have a lot more information on the competitiveness and the production plans for other major programs that we are supporting and we'll have more to say about details of that as we go. Make no mistake though; we do expect 2014 and '15 to be time period where we can generate very attractive profit margins for our business. We expect the K2XX and Ram heavy-duty program in particular to be very strong and successful this time period. And so this gives us confidence and we can do a real good job in this time period.

Your next question comes from the line of Ryan Brinkman from JP Morgan. Your line is now open.

Good morning. There has already been some backlog questions. I guess what I would do is try to focus on the 2014 number to $400 million number. Since you last briefed us on this in January, I think auto sales first track a little softer and little stronger. So to guess, may be expectations for industry line as a whole got roughly unchanged, however some of the vehicles that are in that backlog I wonder if it could track better this year, just if you are looking to Jeep Cherokee ride which I think has been a pretty big hit, then also the Ram heavy-duty which has been gaining some market share whole price and good pricing support there. So have you tried to recut that number at all since January, and if you have, did you find that made there some upward pressure on it?

Yeah. Ryan, I don't think there is any material upward pressure on that estimate. The production estimates that we expect for this calendar year are very consistent with the estimates we made in building our budget and submitting our plan for this year. So I will say that in a -- certainly, I had a chance to say something like this early today. And so David, we feel great about the success of these programs and what our customers are doing. But that is not different than what we felt 6, 12, 18 months ago. So we take that thought process into our plan. And at least at this stage, we don't see any significant upside associated with that dynamic.

Okay. Great. And just last question. I mean, you talk about how much business you are bidding on and everything. I am just curious, sort of within that if you are gaining you think any incremental trash with some of the more secularly leverage technologies you have like, Disconnecting All Wheel Drive, for example or your high-efficiency axles, what is the latest you are seeing on that front as your conversations with customers?

Yeah. Now that we have the Disconnecting All Wheel Drive vehicle track that entered the marketplace with the Cherokee it's gotten a lot of favorable feedback for the consumer and not to mention other customers. So there is a strong interest from other customers in regards to our technology. So we are having some discussions with them and having some discussions with respective future program applications. Ultimately, that will show us in regard to some emerging opportunities. But right now, (inaudible) any of our coded activity. So we see even more opportunities for the Disconnecting as we go forward, which put our expectation that is going to be. As you know, we already contract some business with our next-generation technology in that area that's we ended up (inaudible) guide. We continue to work on the call to hybrid and hybrid electric type applications with a number of different customers. Again, a lot of its still in regards to early stages of the development cycle and planning for future vehicle obligations. But obviously, that's going to accelerate going forwards because the cap A legislate requirements that are going to take place. And then -- so again, we continue to focus on how do we light weight and get mass out of our products, especially on the truck side. And also bring in the efficiency for fuel economy standpoint. So as we said, our whole technology leadership is really focused on the fuel efficiency and light weighting while still providing small packages that provides the power density that the consumers and are customers are looking for as we move forward. So I am very pleased with where our product portfolio is. I am very pleased with the opportunities that we have in front of us with the first customer base, that will help our overall concentricity reduction with GM but I will do GM business. At the same time, more importantly, leverage our global footprint, our sourcing position that we have around the world that we didn't have before.

Okay. Thank you, Ryan. At this time, we have time for just one more question.

Thank you. Your last question comes from the line of Ravi Shanker with Morgan Stanley. Your line is now open.

Good morning everyone. Thanks for squeezing me in. Just one clarification. If IHSS is to be believe and -- I don't know that we have to believe, but if they are, they are looking for K2XX production of over 300k in 2Q and 3Q which I think is quite a bit above a level that GM has got to produce that for a long time. Are you confident that both GM and you will be able to meet that level of production without any operating issues?

Hey, Ravi. Good morning. As you know, IHS has to schedule GM's plans. GM has set up a production plan. The production plan that they had in mind for second and third quarter, I know they have confidence in, we certainly have confidence in. And it is very close, very similar to the level of production. If you look over the two quarters, very similar to the assumption that you commented on roughly 300,000 units a quarter. So yeah, we don't see -- we certainly have already operated in that level in the month of March and April for that matter. We don't see anything standing in our way. If GM should follow through all this plan and we expect they will, we don't see anything stand in our way being able to help them achieve that.

Yeah, specially now that we have got this capacity issue addressed to them and (inaudible) any of those changes.

Great. Thank you.

Okay. Thank you, Ravi. 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 all of you in the future.

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