American Axle & Manufacturing Holdings, Inc.
Q4 2013 Earnings Call Transcript

Published: 7 Feb 2014

[Operator:]

Good morning, my name is Nicole, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the AAM's Fourth Quarter and Full Year 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Christopher Son, Director of Investor Relations, Corporate Communications and Marketing. Please go ahead, Mr. Son.

[Christopher M. Son:]

Thank you, Nicole, and good morning, everyone, and thank you for joining us today and for your interest in AAM. Earlier this morning, we released our fourth quarter and full year 2013 earnings announcement. If you have not had an opportunity to review this announcement, you can access it on the aam.com website or through the PR Newswire services. A replay of this call will also be available beginning at 2 p.m. today through 5 p.m. Eastern time on February 14 by calling [phone]. Please use reservation number 34605135. Before we begin, I would like to remind everyone that the matters discussed on 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. Over the next several months, we will participate in the following conferences

[David C. Dauch:]

Thank you, Chris, and good morning to everyone. Thank you for joining us today as we discuss AAM's financial results for the fourth quarter and full year of 2013. Joining me on the call today are Mike Simonte, our Executive Vice President and Chief Financial Officer; and Alberto Satine, our Senior Vice President of Global Driveline Operations. Following the retirement of John Bellanti at the end of calendar year 2013, Alberto has taken out a new role running all of AAM's global driveline operations. We wish John the very best in his retirement, and congratulate Alberto on his new important assignment. To begin my comments today, I will review the highlights of our fourth quarter and full year 2013 financial performance. Next, I will summarize AAM's major business accomplishments in 2013. I'll also update you on the actual progress we are making to achieve AAM's long-term strategic objectives. And finally, I'll comment on AAM's 2004 -- or 2014, excuse me, outlook before turning things over to Mike. After that, we'll open it up to calls and questions for you. So let's get started. As everyone knows, 2013 was an extremely busy year and a productive year for AAM. AAM's 2013 financial performance was highlighted by sales growth that outpaced the industry and profitability that solidly rebounded versus our 2012 performance. A quick summary of our 2013 financial performance is as follows. AAM's fourth quarter 2013 sales were $831.3 million. For the full year of 2013, AAM's sales increased by nearly 10% on a year-over-year basis to $3.21 billion. This compares to a 4.3% increase in North American light vehicle builds and the 7.5% increase in the U.S. SAAR. Either way you look at it, AAM's top line grew faster than the key industry benchmarks. AAM's net income in the fourth quarter of 2013 was $29.8 million or $0.39 per share. AAM's fourth quarter results reflect the impact of $25.6 million of debt refinancing cost or $0.32 per share. For the full year of 2013, AAM's net income totaled $94.5 million or $1.23 per share. AAM's full year 2013 results reflect the impact of $36.8 million of debt refinancing cost or $0.46 per share. AAM's adjusted EBITDA in the fourth quarter of 2013 was $113.7 million or 13.7% of our sales. For the full year of 2013, AAM's adjusted EBITDA was $421.8 million or 13.2% of our sales. This is all approximately $75 million as compared to the prior year, and represents the sequential profit conversion of approximately 27%. And finally, AAM closed out the year with strong cash flow results in the fourth quarter. On a GAAP-derived basis, AAM's free cash flow in the fourth quarter of 2013 was $51 million. AAM's free cash flow result in the fourth quarter of 2013 included the adverse impact of cash payments for debt refinancing activities of almost $30 million. This strong performance in the fourth quarter was enough to push AAM's full year 2013 free cash flow to a solidly positive result. For the full year 2013, AAM's GAAP-derived free cash flow was approximately $4 million. For the year in total, we made cash payments of $38.3 million for debt refinancing activity. If we were to exclude the impact of these items, AAM would have reported an adjusted positive free cash flow of over $42 million in 2013. Mike will provide you additional information regarding the details of our financial results later on this call. Let me now shift gears and update you on some major business accomplishments in 2013. First, from a quality standpoint, we continue to operate at world-class levels. Many companies talk about quality, AAM delivers quality to our customers each and every day. Quality is the foundation of AAM's world-class delivery, warranty, durability and reliability performance. In 2013, we finished at 4.4 discrepant parts per million for the year, which is clearly world-class when it comes to driveline and the drivetrain segment. Second, with regard to operational excellence, AAM had 28 successful launches in 2013, and 3 key programs accounted for over 60% of AAM's total sales in 2013 tied to these launches. The first program was a next-generation Ram Heavy Duty series pickup, AAM's 10-year relationship with Ram Trucks continue to strengthen and grow during calendar year 2013. The year started well with AAM's involvement in the launch of the Ram 2500 and 3500 Heavy Duty Truck series and continue with AAM's support of RAM's 2014 model year updates. These updates included a disconnecting front steerable beam axle, an 11.5 rear axle multi-link beam axle, and also included the improvement of Noise, Vibration & Harshness performance. The second major program was the 2014 American truck of the year, and that was the GM's new full-sized pickup truck program or the K2XX. This was AAM's biggest launch of the year in 2013, and was successfully supported by our manufacturing operations in Guanajuato, Mexico and Three Rivers, Michigan. The next phase of this launch will be completed here in the first quarter of 2014 with the launch of GM's heavy-duty pickup trucks and the full-size SUVs. And finally, the third major program was the all-new Jeep Cherokee. In terms of product innovation, 2013 was an exciting year for AAM. AAM's EcoTrac Disconnecting All Wheel Drive system was featured on the all-new 2014 Jeep Cherokee.This industry-first technology helps the Jeep Cherokee achieve all weather traction, superior control, improved fuel economy, safety and reduced emissions. EcoTrac was recently recognized by Automotive News as a PACE Award finalist, which helps put AAM firmly on the map as a global leader in technology innovation. Technology is a significant competitive differentiator in the global automotive marketplace today. In 2013, we made a significant progress in differentiating and demonstrating our ability to be a technology leader, which is really my third major highlight that I want to cover with you today. And a few examples of this are, as I mentioned earlier, the launch of the EcoTrac Disconnecting All Wheel Drive system on the Jeep Cherokee, but building off that industry-first technology, this system will also be featured in operating Chrysler's 2015 Chrysler 200 program, which was recently announced by Chrysler at the 2014 North American International Auto Show. We also successfully commercialized our e-AAM technology, having secured a new driveline system contract featuring our hybrid and electric drive systems with a company by the name of Qoros. This system is expected to launch at the end of 2015. And AAM's high-efficiency rear drive module is designed to optimize performance and improve efficiency are featured on the all-new Cadillac CTS, which was recently named the Motor Trend 2014 Car Of The Year. This high-efficiency driveline technology will also be featured on future program launches with Mercedes-Benz and Jaguar Land Rover. So turning to AAM's fourth major business accomplishment, in 2013, we also made great strides in executing our diversification initiatives while also expanding and broadening our relationships with General Motors. In 2013, AAM successfully launched important new business awards with customers other than GM. The impact of these new program awards, as well as strong production volumes and other existing programs, helped to increase AAM's non-GM sales over $900 million in 2013. In the fourth quarter of 2013, AAM's non-GM sales reached a new quarterly record pace of approximately $280 million. Including the impact of AAM's joint venture in Hefei, China, which is not in our consolidated financial results, AAM's non-GM sales were approximately 37% of total sales in the fourth quarter of 2013. Another key driver of AAM's diversification is our new and incremental business backlog. AAM's new business backlog currently stands at over $900 million for the 3-year period covering 2014 through 2016. The new business awards included in this backlog should help sustain AAM's compounded annual growth rate of over 10% through calendar year 2015. This is approximately double the rate of the industry growth expected over the same time period. And in 2014 alone, we expect AAM's sales to grow by approximately 18% on a year-over-year basis. The diversification attributes of AAM's new and incremental business backlog are quite noteworthy. Approximately 70% of AAM's new and incremental business backlog covering the 2014 through 2016 period of time is for new and expanded orders supporting multiple program vehicle manufacturers, including the Chrysler Group, Daimler Truck, Ford, Honda, Jaguar Land Rover, Mercedes-Benz, Nissan, Tata Motors and many others. Approximately 2/3 of AAM's $900 million new and incremental business backlog is for passenger car and crossover vehicle programs. And approximately 70% of AAM's new and incremental business in the backlog is for programs sourced outside of the United States. These awards support AAM's continued expansion in the growing global markets of Brazil, China, India and Thailand. In addition to this book business, AAM's quoted in emerging new business opportunities is over $1 billion. This should help drive further business diversification as we convert many of these opportunities in the book business. And our fifth major business accomplishment I'll highlight for 2013 is that we continue to expand AAM's cost-competitive global, manufacturing, engineering and sourcing footprint. In May 2013, AAM's joint venture with JAC in China saw the launch of a new, state-of-the-art, highpoint gear manufacturing facility in Hefei, China. This investment increased Hefei AAM's full range of product offerings. And with AAM's Changshu manufacturing facility, AAM is now able to provide world-class gear manufacturing solutions to multiple customers in China and the Asian market. In AAM's Rayong manufacturing facility in Thailand, we also expanded the facility and its capabilities by adding highpoint gear manufacturing in this facility as well, becoming the first highpoint gear manufacturing in the country of Thailand. AAM continues to grow in India also, with expansions at all 3 of our facilities in Chennai, Pune, as well as Pantnagar for various machining, assembly and sequencing programs. And AAM is bringing exciting new processes and technologies to this region for the customer base there. AAM also expanded its North American manufacturing footprint with the opening of the Silao manufacturing facility in Mexico, which will complement our Guanajuato manufacturing complex within machine-and-assembly operations. And lastly, we made excellent progress on critical balance sheet initiatives in 2013. During the year, AAM successfully completed over $1.25 billion in new and amended financing arrangements. As a result, we reduced our weighted average interest cost of our debt capital structure by more than 150 basis points as compared to year-end 2012. Reflecting the new terms and conditions of our critical financing arrangements, we now have no significant funded debt maturities until 2018 and beyond. We are pleased to have taken advantage of favorable capital markets and market conditions to help improve AAM's flexibility to manage and grow the business to support the execution of AAM's long-term strategic objectives. Before I turn it over to Mike, let me wrap up by making a few closing remarks regarding AAM's 2014 performance targets and long-term outlook. We believe that the trend and the global automotive market conditions will continue to be positive in calendar year 2014. For the full year of 2014, we expect total U.S. light vehicle sales to increase from approximately 15.6 million vehicles in 2013 to approximately 16 million units in 2014. Based on these industry sales assumptions and the anticipated launch times of AAM's new business backlog, AAM is targeting full-year sales in the range of $3.75 billion to $3.8 billion in calendar-year 2014. This represents year-over-year sales increase, as I said earlier, of approximately 18% versus an expected 3% growth rate for the U.S. SAAR. In other words, AAM continues to grow significantly faster than the industry. As we announced in January at the 2014 North American International Auto Show held here in Detroit, Michigan, we are targeting EBITDA in the range of 13.5% to 14% of sales in calendar-year 2014. The big story for AAM in 2014 and 2015, however, is cash flow. In 2014, AAM is targeting positive free cash flow of approximately $100 million. In 2015, AAM is targeting full year sales to exceed $4 billion and free cash flow in the range of $175 million to $200 million. As we look to the future, we remain very focused in optimizing our profitable growth opportunities through our global expansion, improving the diversification of our business and achieving solid financial performance by executing our aligned business strategy. We are committed to achieving excellence in everything we do, with the ultimate goal of making AAM a leader in every market that we serve globally around the world. I'd like to thank each and every one of you for your time and attention today. Let me now turn the call over to Mike Simonte. Mike?

[Michael K. Simonte:]

Thank you, David, and good morning, everybody. And happy new year to those that we missed at the Detroit Auto Show. Today, I will review with you our financial performance in the fourth quarter, touch on the full year 2013 as well. We've already covered the highlights in David's comments, so I'll get right into the details, starting with sales. AAM's sales in the fourth quarter of 2013 were $831 million, up approximately $95 million or 13% as compared to the fourth quarter of 2012. On a sequential basis, AAM's sales in the fourth quarter of 2013 were up approximately $10 million versus the third quarter of 2013. Now keep in mind, there are fewer production days in the fourth quarter due to holiday downtime. So what I'm telling you is that our daily rate of shipments and production, for that matter, was up much more than 3% in the quarter. For the full year of 2013, AAM's sales topped $3,207,000,000, up almost 10% on a year-over-year basis. In the fourth quarter of 2013, non-GM sales increased over 37% on a year-over-year basis to approximately $280 million. This quarterly rate of non-GM sales activity bested our previous quarterly record by more than $50 million. Including the impact of our Hefei, China joint venture, which is not included in our consolidated financial results, non-GM sales represented approximately 37% of our total sales in the fourth quarter of 2013. There were 2 major drivers for this step-function increase in our non-GM sales activity. The first was the launch of AAM's EcoTrac Disconnecting All Wheel Drive system for Chrysler's all-new Jeep Cherokee. The second item relates to new content that we are providing to Ram for its 2014 model year Heavy Duty series pickup program. For the full-year 2013, AAM's non-GM sales increased to more than $926 million, that's up 17% on a year-over-year basis. As we disclosed at the Detroit Auto Show on January 15 of this year 2014, we expect the compound annual growth rate of our total business -- what I mean by that is, AAM's total sales to trend around 11%, 12% through 2015. We expect AAM's non-GM sales to grow at least twice as fast in this time period. One of our critical strategic objectives is to improve the diversification of our business. Customer diversification is not the only measure of diversification, but it is important, and we're pleased to report on our progress in this area. AAM's content-per-vehicle is measured as the dollar value of our product sales supporting our customers' North American light truck and SUV programs. In the fourth quarter of 2013, AAM's content-per-vehicle was $1,579, up $65 on a unit basis or 4.3% on a year-over-year basis as compared to $1,514 in the fourth quarter of 2012. This was also up $19 on a unit basis as compared to $1,560 in the third quarter of 2013. So up $65 on a year-over-year basis, up $19 on a sequential basis. AAM's content-per-vehicle increased in 2013 and will continue to increase in 2014, due primarily to new content we are providing to GM and Chrysler for their North American full-sized truck programs, that being the K2XX and the Ram Heavy Duty series pickups. We expect content-per-vehicle to exceed $1,600 in 2014. Let's move on to profitability. Now the key operating profit metrics in the fourth quarter of 2013 reflects strong year-over-year improvement. Growth profit was $43 million as compared to the fourth quarter -- I'm sorry, was up $43 million as compared to the fourth quarter of 2012, $126.9 million or 15.3% of sales in the fourth quarter. Operating income was up $48 million on a year-over-year basis to $66.4 million. That's 8% of sales in the quarter. Excluding the impact of debt refinancing cost, which totaled $25.6 million in the quarter, adjusted EBIT, or earnings before interest and taxes, more than doubled on a year-over-year basis to $66.1 million in the fourth quarter of 2013 as compared to $24.7 million in the fourth quarter of 2012. The adjusted EBIT margin was 8% in the fourth quarter of 2013. AAM's adjusted EBITDA, earnings before interest, taxes, depreciation and amortization, was up approximately $49 million in the quarter on a year-over-year basis to $113.7 million. The adjusted EBITDA margin was 13.7% of sales. For the full-year 2013, AAM's key operating profit metrics also reflect the big improvement versus the prior year. Gross profit, almost $480 million or 14.9% of sales; operating income, $240 million or 7.5% of sales. Excluding the impact of debt refinancing costs, which totaled $36.8 million for the year and $5.8 million of other special items booked in the third quarter of 2013, adjusted EBIT was $245 million in 2013 as compared to $195 million in 2012. The adjusted EBIT margin for the full year was 7.6%. AAM's adjusted EBITDA was up approximately $75 million on a year-over-year basis to $421.8 million. And we already made that comment to you at the Detroit Auto Show. This translated, as David pointed out, to a net incremental profit margin metric on an EBITDA basis of approximately 27% in 2013. Let me now cover SG&A and interest. Now SG&A expense, and this includes AAM's R&D spending, in the fourth quarter 2013 was $60.5 million. That represents 7.3% of sales. This compares to $65.4 million or 8.9% of sales in the fourth quarter of 2012. For the full-year 2013, SG&A decreased, on a year-over-year basis, approximately $5 million to $238.4 million, that's 7.4% of sales, and compared to $243 million or 8.3% of sales in the full year 2012. AAM's net R&D spending for the full year 2013 decreased $20 million as compared to 2012. And we finished the year 2013 at $103.4 million of R&D expense. There were 2 primary reasons for the reduction in R&D expense, and these are consistent with what we've spoken about all year. The first was the timing of product validation and prototype requirements to support the launch of new business awards. This activity was more concentrated in 2012, particularly the back half of 2012, as compared to 2013. And that's just due to launch timing requirements. The second issue was higher customer recoveries of ED&D, or engineering design and development cost, in 2013. We discussed it at some length in the third quarter call. If you've got questions on it, please ask. But basically, these are the 2 reasons why SG&A declined in 2013 as compared to 2012. In 2014, we expect R&D to pick up, again, on an expense basis and increase in the range of 10% to 15% as compared to the full year 2013, both to support the engineering, design and validation requirements associated with new business launching in the next couple of years, as well as to support an expanded focus on advanced engineering initiatives. You know we've got a lot of success introducing new AAM product technology to support customer demand for high-efficiency driveline products, improved fuel economy, reduced emissions and enhanced safety ride and handling performance. EcoTrac is a great example of this, and so are the rear-wheel-drive IRDAs we're providing on a number of premium passenger car products reaching opportunities to double down on these investments and accelerate the development of further product processing systems technology to strengthen AAM's position and expand our product offerings. Now coming back to SG&A in total. SG&A was down $5 million. R&D was down $20 million. The reduction in R&D expense in 2013 included in SG&A was partially offset by 2 other factors. The first one is increased variable compensation expense. This was driven by improved profitability and the accelerated compensation charge we incurred due to the passing of our Co-Founder and former Executive Chairman of the Board in the third quarter of 2013. The second item was increased spending on IT. At the Detroit Auto Show, in addition to the discussion we had on our R&D spending and how that would increase in 2014, we explained that we are also increasing our investment in information systems technology, including a major focus on upgrading the ERP systems, or enterprise resource planning, that we utilize to run our business. The process of upgrading these and other critical enterprise systems we use to manage engineering, manufacturing and administrative systems ramped up in 2013 and will further increase over the next 2 years. In some cases, we are making long term, and what I want you to do is think about 10 to 15-year time period refresh investments. For example, we haven't had a major upgrade of our primary ERP systems since 1998. In other cases, such as product engineering and manufacturing engineering, we are implementing new capabilities. While we will commit a sizable portion of our CapEx and expense budgets to these initiatives over the next few years, we are targeting improvements in procurement analytics, supply chain efficiency, material control, among other areas, to pay back this investment. So the bottom line on SG&A expense is this

[Christopher M. Son:]

Great. Thank you, Mike, and thank you, David. We've reserved some time for some questions. So at this time, I'm going to turn it over back to Nicole so we can start with the Q&A.

[Operator:]

Your first question comes from the line of Rod Lache from Deutsche Bank.

[Rod Lache:]

Just one clarification. Did you say that you're still expecting your GAAP tax rate to be maintained at, I guess, 15% to 20% going forward even with this Mexico change?

[Michael K. Simonte:]

Yes, Rod, that's right. The range of 15% to 20%, we had expected a portion, and actually expected the substantive portion of what happened in Mexico when we set out our expectations for tax rates over the next few years. During the course of the legislative process in Mexico, there were other considerations made by the Mexican government, some which would have driven the effective tax rate in Mexico to even much higher levels. Now that did not occur. And so the 15% to 20% range of expectations for book/tax provisions we have contemplates exactly what did happen in Mexico. And so the answer to your question, Rod, is yes.

[Rod Lache:]

Okay. And do you see any changes to sort of the outlook for truck production just given where the inventory is, maybe the shape of this year, is that likely to look any different?

[David C. Dauch:]

Rod, this is David. Right now, we're still filing 1.15 million units for the K2XX program as we did before. So we don't see any changes at this point in time.

[Rod Lache:]

And no changes to the Ram expectations?

[David C. Dauch:]

No, they're staying strong at this point in time for the heavy duty as far as what we're affiliated with.

[Rod Lache:]

Okay. And then you gave us some color on this year's margins kind of suggesting that the lower launch costs in volume will offset this higher SG&A. Could you give us some thoughts on how we should be thinking about margins looking beyond 2014 into 2015, some of the positives and negatives? How we should be thinking about the SG&A, things like R&D and IT, does the lower backlog mix here help your margins? And just directionally, are you thinking up, down, or flat in terms of margins?

[Michael K. Simonte:]

Rod, this is Mike. Listen, we are a -- as we look out to 2014 and '15, we see these as years to earn very strong profit margins. As you know, we were distracted, but in a good way, in an important way, a necessary way by significant launch activity in the last couple of years. And during 2013, in particular, we had a situation where we were supporting 2 different programs in the same plant and in some cases, on the same equipment. This resulted in some of these launching efficiencies that we've discussed. And just the basic process of launch caused us to incur project expenses and startup costs and higher validation expenses than what we would consider a normal rate of activity. So as you look at 2014 and '15, I think you hit on the key points that the launch-related activity, the startup expense should be down. Project expense should be moderated. We do expect a very strong production environment, and what I mean by that is a strong demand environment for these new light truck programs in North America. And so we expect a very strong capacity utilization. And as a result, we do expect an excellent profit conversion opportunity in 2014 and '15. Now we're very busy and focused on the details of 2014. We're not going to say a whole lot more about 2015, but to repeat, that our expectation is to be able to generate $175 million to $200 million of positive free cash flow in 2015. And in order to get that done right, we're going to have a good positive margin performance.

[Rod Lache:]

Should we be thinking that SG&A stays at roughly this level or on a percentage basis?

[Michael K. Simonte:]

Yes, on a percentage basis, our goal is to drive it down a little bit over time. We're in that 7% to 7.5% range right now. That's down from something more like 8%, 8.5% over the last couple of years. A significant reason for that reduction is the fact that we've been incurring costs to support a much larger business footprint. And now, of course, we're gaining the sales throughput from the hard work we've put in the last couple of years. So I would not -- we do not expect our SG&A expense to increase as a percentage of sales. So we do see some opportunities to be more efficient in that area.

[Operator:]

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

[Itay Michaeli:]

Just wanted -- Mike, the comments around the cadence were very helpful for the first quarter. Any more you could share in terms of how much better Q2 could be as the truck platform starts to ramp? And perhaps any color upon how we should think about the cadence for revenue throughout 2014, just given the backlog and some of the timing for the launches?

[Michael K. Simonte:]

Yes, Itay, look, the production outlook for the K2XX program, our base outlook is around 1,150,000 units. That translates to an average quarterly run rate of just under 290,000 units. The first quarter should be lighter than that, maybe 25,000, 30,000 units lighter. The second and third quarter look to be very strong. Seasonally, production and sales ramp up that time of year. They are somewhere in the neighborhood of 62 to 64 production days calculated on a U.S. basis in that time period. And so we would anticipate right now, the middle 2 quarters of this year to be very strong from a unit production and shipment basis, and probably drive our sales to the highest levels we'll see all year during those quarters. So in terms of a little color, that's what we see right now.

[Itay Michaeli:]

That's very helpful. And then 2 quick housekeeping questions. Anything you can share in terms of the outlook for D&A in 2014? I suspect that's probably going to go up and maybe your EBIT margins probably rise a bit faster in '14 in your EBITDA margins. And then on the taxes, any change of the thinking around cash taxes for the next couple of years?

[Michael K. Simonte:]

Okay. Let me address the first question first, and that is D&A. So Itay, you know that we were spending in the range of $210 million to $220 million over, say, 2012 to 2014. Our average useful life for equipment we're launching right now is in that 8 to 9, maybe 10-year time period. So D&A did go up about $25 million in calendar year 2013. We see something similar in 2014, and that's simply the result of putting the equipment in place to support the launches at the level of capital spending that we're incurring right now. The second question had to do with cash taxes. I told you that the all-in cash tax rate for 2013 was around 13%. If you exclude that audit settlement, which those types of payments don't happen every year, we would have had significantly lower. Our expectation is for cash taxes to be about half of our book/tax rate over the next couple of years. So if we're pushing near 20% on a book provision rate, we should be adding just a little bit under 10% on a cash tax provision rate. So really the answer to your question is, no, we don't have any change to expectations with respect to cash tax rate. We will have some increased payments associated with Mexico, but that should be fairly commensurate with the increase in our overall profitability.

[Itay Michaeli:]

Great. And just lastly, David, I think you mentioned quoting about $1 billion of new business. Any color on the timeframe of those potential wins for you? Is it a couple of years out or further than that?

[David C. Dauch:]

Well, as far as the sourcing of the business, we expect it to be probably second half of the year this year as part of the programs that we're working on. But most of the programs that we're working on right now, some have some implications in 2016, but most are 2017 and beyond.

[Operator:]

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

[John Murphy:]

Just, first, simple question. Could you just remind us what the content difference is on the light duty versus the HD K2XX program for you?

[David C. Dauch:]

Yes, we're not going to be too terribly specific, but the average, portfolio average, as you know, is in the upper $1,500 up to about $1,600. There's a couple $300 difference between the light duties and the heavy duties. It depends a little bit on four-wheel drive penetration. Obviously, the most heavily concentrated trucks we sell, the heavy-duty series all-wheel-drive, those content-per-vehicle totals get over $2,000. And we're selling just a single axle on a light duty, you might see as little as $800, $900 depending on the specific axle configuration. So there's a wide variance from top to bottom, but in terms of the portfolio of concentration, light duty to heavy duty, the variability is hundreds of dollars, not closer to $1,000 variance from top to bottom.

[John Murphy:]

But it's fair to say as those trucks are launching in the second, third and fourth quarter, we could see some content-per-vehicle mix that's positive?

[David C. Dauch:]

Absolutely. The main driver of the increase in content-per-vehicle this year, we finished just under $1,580 a year ago. We should be over and significantly over $1,600 this year. The main driver is the new content we're providing on those heavy-duty pickup trucks, both for the Ram program and importantly, for GM on the K2XX.

[John Murphy:]

That's very helpful. Just a second question. Given the relationship with Chrysler seems to be improving as far as your penetration, I'm sure it's always been good, but it seems as far as revenue opportunity, is there the potential for the light-duty Ram to open up to you in the next generation?

[David C. Dauch:]

John, this is David. Right now, this is thus contained within ZF and the partnership that they have with Chrysler. We're not having any discussion with them specifically regarding the next-generation product. It really depends on what their commodity strategy is and what their longer-term interest is in regards to working with American Axle. But to your earlier point that we've got a very strong relationship with Chrysler to growing relationship with Chrysler. We've had tremendous success over the last 10 years on the Ram Heavy Duty. You can now see what we're doing with them with the advanced technology with EcoTrac and the Cherokee, and that's now expanding into the Chrysler 200. And we expect other opportunities to present themselves there as well. So we see better days ahead of us working with Chrysler.

[John Murphy:]

Are those assets potentially something you would be interested in now?

[Michael K. Simonte:]

Well, as we've said before and to everybody, I mean, we'll always look at strategic opportunities. And we just have to balance that with our other priorities of the business at this point in time. But clearly, if there's an interest in regards to Chrysler and/or ZF actually in that business, we would definitely evaluate that.

[John Murphy:]

Okay. And then just lastly, as we look at the changes in the Mexico tax rate, does that change your view on how you're allocating capital between the U.S. and Mexico? I mean, almost a doubling in the tax rate there seems that you might change your mind on how you're out getting capital.

[David C. Dauch:]

John, that's a great question. Let me provide a little bit more color on that. Keep in mind that our global holding company structure owns and operates a substantial portion of the assets, the profit-making assets we have in Mexico. So while that rate increase did increase rather substantially, a significant portion of the profits we make in Mexico are not actually taxed in Mexico. Those will eventually be taxed in the U.S. when we repatriate those earnings. So yes, it has an impact on our decision-making process relative to making investments in Mexico, but the impact is not nearly as significant as you might think because it only relates to the income that's taxed in the country of Mexico.

[John Murphy:]

Good, that's very helpful. One just last one. I mean, everybody keeps focusing on the negative side on the K2XX. But if the volume surprise to the upside and they do 1.3 million, I mean, what is your capacity to support real upside in the K2XX program in aggregate? And what's your view on where GM could go on that capacity as well?

[David C. Dauch:]

Yes, John, GM's got a straight time capacity of about 1.1 million units. And obviously, they can flex that up probably to about 1.3 within the -- with operating changes and line speed changes within the 4 facilities that they operate. And as Mike and I said, we're expecting the K2XX volumes to be about 1.15 million units this year. We've got installed capacity that will support that and also be able to flex. The biggest thing that we've been spending time with General Motors on, this past year 2013 and also into this year is just making sure that we align our capacity and mix with the new market demand. And we've been very forefront and transparent with everybody with respect to that. Our team's done a Herculean job in regards to addressing the volume requirements, the shift in demand that's been altered from a mix standpoint in '13. And we'll continue to support our largest customer going forward in '14 as well.

[Operator:]

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

[Brett D. Hoselton:]

First, just a quick number. The unfunded pension, did I read it -- $42 million, was that the number? And I know you'd said that, that's actually largely the nonqualified plan, but was that the correct number?

[Michael K. Simonte:]

Yes, that's right, $42 million. And roughly, $41 million of that is the SERP.

[Brett D. Hoselton:]

Okay. And then secondly, as we think about your free cash flow guidance in 2014, $100 million, that's about $100 million improvement over what you did in 2013. Can you kind just kind of bucket the major components of that improvement?

[David C. Dauch:]

Yes, and Brett, on an adjusted basis, it's about a $55 million, $60 million increase year-over-year. So the underlying operating cash flow performance in 2013, we do expect to carry over. Look, the cash flow situation for our company is pretty simple. The incremental profit margin conversion opportunity we have in 2014 is really the main driver of our improved cash flow performance. CapEx is going to be around the same on a dollar basis, we indicated at the Detroit Auto Show, would be around 6% of sales. And if you run the math on that, it's pretty much flat year-over-year. We do expect an increased working capital investment in 2014. Our sales are going to grow almost $600 million. We'll probably need $60 million, maybe $70 million to cover that. So we're going to use some of the profit, incremental profit, if you will, to cover up that number. But interest expense, our cash payments wrench will be down. Our refinancing payments will be down. Of course, on an adjusted basis, that's not an issue. But we expect basically to build up what we started in 2013. We've got to cover a slightly elevated CapEx in working capital in 2014. We clear that stuff out of the way, that's going to allow the bigger stair step in 2015.

[Brett D. Hoselton:]

And as we think about 2015, it would seem that your revenue is going to grow for any number of reasons. Margin sounds like they may tread water or something. So obviously, your profitability grows. Are there any major pluses or minuses kind of beyond that incremental profitability that you see impacting your 2015 cash flow?

[David C. Dauch:]

Yes, the answer is no. I mean, like I said, we expect a big difference between 2015 and '14 from a cash flow perspective to be a little moderation in our capital spending, a little moderation in our working capital requirements because we do expect the dollar value of our sales growth to be higher in 2014 than what we see currently in 2015. So beyond that, the profitability opportunities and some additional reduction in interest expense, that's going to be the primary driver of improved cash flow performance in 2015.

[Operator:]

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

[Joseph Spak:]

Just real quickly heading back to the quarter. I mean, if we look at the GM and non-GM business sequentially, it looks like GM was down obviously, about 6%, non-GM strong, yet the gross margins were flat. So I guess that implies some pretty decent operating performance on some of the Cherokee business. Is that basically what sort of kept the gross margins flat? And are we at a right run rate on that program yet?

[David C. Dauch:]

On a quarter-over-quarter basis, you did point out the reduction in overall GM revenue and also rightfully pointed out the increase in sales, including the Cherokee program. All that business, as we pointed out before, the overall profit profile of our driveline business, there's not a heck of a lot of difference. The K2XX program does stand out because of the operating leverage we're able to gain on the volume that we have in that program. But basically, our guys did a good job. If we get more totally concentrated in a single program as we built out the GMT900 program, as we return our operations to more of a normalized state, as we get better on the efficiency of launching new equipment that's come on during our launch, all those factors played into our ability in 2014 fourth quarter -- I'm sorry, '13 fourth quarter to hold margins pretty much where they were in the third quarter. So I think, Joe, it's not really just certainly not just the Cherokee program, but a variety of those issues we've been working on to sustain our profitability.

[Joseph Spak:]

Okay. And then if we think about 2015 a little bit towards the end of last year, you guys have sort of hinted that there wouldn't be that steep of a margin drop-off in '15 versus '14. So even if we just take your, call it, 13.5% to 14% guidance for '14 and roll that forward to '15, obviously the price downs get a little bit steeper. So is the main offset we should be thinking about just improved productivity? Or is there something else going on there?

[David C. Dauch:]

Yes, I appreciate -- we appreciate very much everybody's interest in 2015. We're very much more focused on '14 and the things you have to do this year to set ourselves up for '15. But let me make -- kind of help, this is a final comment about 2015 profit margins this morning. You're right, Joe, that we're going to step up to a higher level of productivity commitment or price concession over the course of 2014 and '15. And what we've said before, what we'll repeat today, is that our best opportunity in this time period, 2014 and '15, to offset the negative impact on a standalone basis of the price down is going to be productivity. And it's going to be productivity associated with returning our operations to a normalized state to, again, getting smarter and better and more efficient in utilizing the new equipment that we installed to support these launches. We expect we'll have very strong capacity utilization during this time period. And so those factors are what we expect to be able to offset the impact of that productivity commitment.

[Operator:]

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

[Steven Hempel:]

This is Steven Hempel on for Brian Johnson. Just had a quick question. You guys mentioned earlier on the call that you're looking to provide additional content on the Ram Heavy Duty. I just wondered if you could quantify that additional content, and whether or not that's included in the backlog of roughly $400 million for 2014.

[David C. Dauch:]

Yes, definitely. The additional content we're providing on the Ram Heavy Duty program is included in the backlog. The only aspect of any existing program we have that ends up in the backlog ever is new content. So if we win the successor content on an existing program, none of that's included in the backlog. But when we do have an opportunity to have net content, net new -- and incremental content providers to our customers, that gets reported in that backlog. So yes, it's in there. And we don't provide specific disclosure about the amounts of sales for any of these individual programs. But yes, it's in the backlog.

[Steven Hempel:]

Okay, great, that's helpful. And then in terms of leverage as you look out to '15 and beyond, I believe before you've mentioned you're targeting to get that to below 2x. And rough calculations here, by fiscal year '15 end timeframe, we're looking at around 2x. Could you just provide us any update on capital allocation priorities moving forward past 2015, 2016 and beyond?

[David C. Dauch:]

Yes. So Steve, let me just summarize. I think you got it right. The near-term goal, I would call it, it's not necessarily the ultimate objective of the company. But the near-term goal is to return our leverage ratio to 2x by 2015, coverage ratio over 3x. And we'd like to see a mix of debt and equity capital such that debt represents about 1/3 of our total capital base and equity about 2/3. That's really our objective that we laid out first in 2009 and hope to accomplish by 2015. Now in terms of capital allocation, again, there's really nothing new here. We are dedicating capital to 2 primary objectives of priorities right now, that's growth and diversification of our business and debt reduction. There are other things we'd like to consider in the future. We think the playbook opens up for things such as additional strategic investments, returning cash to shareholders, those types of things, but that's more of a 2015 and beyond-type consideration in terms of magnitude at this point in time. Our focus, in terms of capital allocation, is clearly on the first 2 objectives I laid out.

[Steven Hempel:]

Okay. And then one quick last one. Just want to get your thoughts on expanding into Europe. I look at your backlog and it looks like it went up to around 7% of the backlog as opposed to 2% prior. Just given that, that market's basically at a 20-year low, do you see any opportunities moving forward for that to increase? Or just if you can just provide some thoughts on that market outlook and potential opportunities for expansion in that market?

[Michael K. Simonte:]

Yes, Europe only makes up about 3% of our sales today. And we've been working very hard the last several years in regards to putting our manufacturing footprint in a very competitive position models to advance in our product technologies. We've secured some great business with Jaguar Land Rover, as we've mentioned earlier. We've got good business with a number of other customers there. And if the market recovers there and the relationships that we're developing over there, we clearly expect our European business to be able to generate more sales and profits for the overall business moving forward.

[Operator:]

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

[Ravi Shanker:]

So when we met back in December, you had said that you were trying to pursue reimbursement of some of the costs for both the Thailand production change, as well as the K2XX axle issues from GM. Has there been any progress with that?

[David C. Dauch:]

Yes, Ravi, this is David. Yes, we've brought resolution to the issues with respect to the Thailand site. So that's a closed matter and was -- been contemplated in our 2013 financials. At the same time, with respect to some of the operating premiums, yes, we've worked out our relationship to support the new market demand requirements with an unanticipated mix change. And as I indicated earlier, we're continuing to work with General Motors to make sure we get complete alignment of both volume and mix as we go forward across light-duty pickup, light-duty SUV and heavy-duty pickup.

[Matthew T. Stover:]

So any settlements would already be in your '13 numbers or your '14 guidance?

[David C. Dauch:]

Yes, right, the Thailand situation was resolved in the fourth quarter, cash received, and yes, in the numbers.

[Ravi Shanker:]

Got it. A couple of clarifications. Earlier when you were talking about D&A in '14, did you say that the increase in D&A in '14 would be the same as the increase in D&A in '13 versus '12?

[Michael K. Simonte:]

Yes, pretty much the same, Ravi, that the amount of capital that we're going to place in service in 2014 is pretty similar to what we're doing in 2013. And as a result, the increase in D&A will be about the same.

[Ravi Shanker:]

And then just finally, again, back in December, if I'm not mistaken, I think you'd said that one of the drivers of a weaker margin in the fourth quarter versus the third quarter would be an R&D true-up in 4Q, which didn't seem to happen. I'm wondering if there is something there that either got moved in '14 or if you just were more efficient with that?

[David C. Dauch:]

What we spoke to, Ravi, in total was an increase in SG&A expense. On an adjusted basis, if you exclude that special item we've booked in the third quarter, our SG&A was around $52.5 million. In the fourth quarter, SG&A was back to about $60 million. And so all in, SG&A, the effective R&D and other costs came back to the sort of run rate we had for the full year and the fourth quarter. And that was in line with our expectations. And R&D was up a little bit, Ravi, just not as much as you might have expected.

[Operator:]

Your next question comes from the line of Ryan Brinkman from JPMorgan.

[Ryan J. Brinkman:]

So most of my questions have been answered, but just one, and it's been touched on some. GM's full-size pickup truck sales has been softer over the last couple of months. And hopefully, this is just related to winter weather and we'll see a snapback soon. But it also seems like there's some element there of emphasizing price over volume a little bit more than maybe the sell side or investors have presumed. This was discussed on GM's earnings call yesterday. I'm curious if the balance of price versus volume that the company is pursuing has tracked any differently than maybe you would expect it?

[David C. Dauch:]

Ryan, our volumes with General Motors and K2XX are staying very strong right now. At the same time, GM clearly has their own strategy in regards to what they want to do with the transaction price. We were not involved with that. All we care about right now and what we see right now is very strong schedules for all products, both the pickup truck, light duty and heavy duty, as well as the SUV going forward. But as Mike indicated, as we're going through the ramp and launch of the SUV and the heavy-duty pickup, our production and sales will be down a little bit in the first quarter compared to the full year of 2014.

[Michael K. Simonte:]

Ryan, let me comment just briefly on some aspect to what you said. I think somebody else made a comment earlier about there being some negativity about the pace of K2XX sales for some reason. We don't understand that line of thinking at all. And what you said about sales being weak for a couple of months is not true. Sales were weak in January, that's one month. If you take a look at what happened in the fourth quarter, there was tremendous momentum. The sales in December were very strong. And I'm not one to make a lot of excuses about weather interrupting sales activity, but I don't know what the heck polar vortex means. What I think it means is it's a huge inconvenience for everybody, and all you want to do in this part of the country is go into your house and stay there. And so we think there's clearly a little bit of aberration in that one-month statistic. And so before we all run around like Chicken Little, and I'm not ascribing this to you, but sort of a general -- the commentary I've heard in public in recent weeks in reading in the newspapers. Before we run around and overexaggerate about a one-month trend, let's see where we end up in February and March. Seasonally, January is a very tough month for sales of pickups. And we're not at all concerned about what we see at this point in time. We see a great truck program with a very competitive market position. And we expect again to have a lot of success selling this truck in 2014.

[Ryan J. Brinkman:]

Right, that's really reassuring to hear. A lot of companies have pointed out, Starbucks, a lot of companies, the winter weather impact. I guess just one final one, then. On working capital, it was discussed some. I'm looking at the bridge from $4 million of free cash flow to $100 million next year. It looks like you can get there, a lot of the way there with the increase in the EBITDA that's implied by the midpoint of your guidance like $519 million, I think, versus $422 million in 2013 to pay a lot of tax -- even less cash taxes. Then you're going to have to step down in cash interest. CapEx should be a little bit of a help at the kind of midpoint of your guidance, I think. So that does imply that there's another sort of offset in there somewhere, I guess, on working capital. Just is there any reason to kind of think that working capital might work a little bit differently than we're used to going forward, maybe as you expand overseas more, have any longer supply chains? Or anything to think about there?

[David C. Dauch:]

Yes, Ryan, I think you've got a good handle on the basic puts and takes relative to the cash flow. On working capital, I do expect '14 to be a little unusual only in the sense of the magnitude, not really the basic underlying issues. We've already stepped up, I think, to the changes that we would experience in relation to supply chains in 2012 and '13. In 2014, again, we expect our sales to grow by almost $600 million. Our net working capital requirement is around 12% of sales. Net incremental sales is what I'm speaking to. So I expect maybe a $60 million, $70 million increase in working capital investment. And what I mean by that, specifically, accounts receivable, inventory and payables net in 2014. Now our inventory levels jumped up a little bit at the end of '13. So while our receivables performance was very strong, payable's sort of normal, we did leave some opportunity to take some inventory out of the system. And so the outset we're looking for in 2014 that we hope to offset some of this working capital investment is to normalize some inventory levels, particularly in Mexico. So big picture, the answer to your question is no. I don't see any fundamental difference in terms of payment terms or supply chains or anything like that. I think it's just going to be a matter of performance at this point.

[Michael K. Simonte:]

We've got time for one more question.

[Operator:]

Your next question comes from the line of Emmanuel Rosner from CLSA.

[Emmanuel Rosner:]

Wanted to follow up actually on Ryan's question a little bit more on the K2XX, and no negativity at all on this side, maybe quite the opposite. But just, I guess, objectively, the market share of GM in the pickup, full-sized pickup trucks was something like 32%, 33% for the past 3 months. So the weather is certainly something that's impacting all the players in here. But in terms of just pure market share, it was like 32%, 33% each of the past 3 months. That compares to about maybe 35%, 36% for the full year, which admittedly, at the beginning was taking advantage of a sell-down of the old model. Now you were mentioning at the beginning of the call, with a lot of granularity that we really appreciate, that embedded in your estimates you're looking at about a 2-point share gain for GM's pickup, full-sized pickups in 2014. Can you maybe tell us how you would expect sort of like the market share trends to happen through this sort of like reach your target and maybe talk a little bit about the sensitivity of volumes through sort of this assumption, if you can?

[David C. Dauch:]

Yes, okay. Emmanuel, let me level to a couple of issues. As you know, from time to time, we provide sensitivity analysis to take a look at the SAAR and the expected mix in market share, and build up from a market analysis standpoint what we expect volume to be. We agree with your trend. We calculate the market share a little bit differently. Our estimate of market share in 2013 at the pickup for the full-size General Motors was around 37%. And we do see a couple 3% decline in the month of January. We've already addressed that. But during the month -- during the calendar year '13, we saw a relatively consistent performance running around that 37% of the market. And if you wanted to square out after the call at exactly the metrics, we get these metrics from words, so it's not anything we're doing other than compiling the data and calculating the share. Look, I think from our perspective, we think GM gets stronger as the year goes on. We think that matches their production cadence because of the launch activity in the first quarter. They did not build the inventory in the first month of the year. They're pretty flat with where they were at the end of the year, again relating to the downtimes. So even though sales were down, so were production. We would expect GM to build momentum as this year rolls on. We think as they introduce both the SUVs and heavy-duty pickup trucks, they're going to be in a very strong position to capture sales from customers who are waiting for those products. And so my only comment would be we're expecting 38%, maybe 39% market share this year, up from 37% last year. 38% is what is sort of embedded in our assumption in terms of GM building 1,150,000 units to get to 39% or even 40% at the upside. And 1% of the market is somewhere in the neighborhood of 15,000, 20,000, 25,000 trucks depending on whether you're talking about just light duty or light duty and heavy-duty. So a good opportunity for our company should GM be able to convert on that.

[Emmanuel Rosner:]

Great, I appreciate the granularity. And then just one question on your commercial vehicle business. Can you maybe remind us what part of -- what portion of your business it represents now and where you see that trending over the next few years, and where the opportunity is there?

[David C. Dauch:]

The commercial vehicle business represents less than 10% of our business today. We clearly have some growth in our backlog. So you'll see some of that increase over time. Most of the growth, as we've proactively communicated with you all, is in the Asian markets, specifically India and China for us, partly with our joint venture partner and other diversified customers within China. But then clearly, as volumes grow with Daimler in India and we continue to support other requirements in that market. So that's really where we are in commercial vehicle.

[Christopher M. Son:]

Thanks, Emmanuel, and we thank all of you who have participated on this call, and appreciate your interest in AAM. We look forward to talking with you in the future.

[Operator:]

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