Dauch Corporation (DCH) Q2 2015 Earnings Report, Transcript and Summary

Good morning. My name is John and I will be your conference facilitator today. At this time, I would like to welcome everyone to AAM's Second Quarter 2015 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 call 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.

Great. Thank you, John, and good morning, everyone. I would like welcome everyone who is joining us on AAM's second quarter 2015 earnings call. Earlier this morning, we made two fillings or one filing on the Form 8-K with the SEC, as well as issued some releases. The first of these filings included our second quarter of 2015 earnings announcement and updates to our 2015 outlook and our new business backlog. This filing also includes a release announcing our selection as the target supplier of axles and drive shafts for GM's next-generation full-sized pickup and SUV program. On the other release, we announced this morning organization changes. We will address each of these items in our comments this morning. You can access these announcements on the aam.com website or through the PR Newswire services. To listen to a replay on this call, you can dial 1-855-859-2056, reservation number 34605437. This replay will be available beginning at noon today through 5:00 PM Eastern Time, August 7. Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements that are 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 financial measures, as well as a reconciliation of these measures to GAAP financial information, is available on our website. During the quarter, we will participate in the following conferences: the 2015 J.P. Morgan Automotive Conference in New York City on August 12; CLSA's Auto Conference in New York City on September 9; the RBC Capital Markets Global Industrials Conference in Las Vegas on September 10; and the Citi Global Industrials Conference in Boston on September 17. We are always happy to host investors at any of our facilities. Please feel free to contact Vitalie Stelea in order to schedule a visit. With that, let me turn things over to AAM's Chairman, President and CEO, David Dauch.

Thank you, Chris, and good morning to everyone. Thank you for joining us today to discuss AAM's financial results for the second quarter of 2015. Joining me on the call today are Mike Simonte, AAM's Executive Vice President and Chief Financial Officer; Alberto Satine, our Senior Vice President of our Driveline business unit; and Chris May, our Treasurer. Before we cover the second quarter earnings announcement, I'd like to discuss two important announcements that we made this morning. First, today, we announced the appointment of Mike Simonte to President and Chris May to Vice President and Chief Financial Officer, effective August 1, 2015. Mike has been instrumental to our profitable growth and success and a key leader in building a solid financial foundation for AAM. His financial experience will be a great benefit to our operations as we continue to implement our growth strategies while driving operational efficiencies to build stakeholder value through operational excellence, quality and technology leadership. Chris has demonstrated outstanding leadership at our finance organizations since he joined the company in 1994. His deep institutional knowledge will allow for a smooth transition, and an immediate positive impact on the future direction of our company. I'm extremely confident that Chris will continue to effectively lead the finance organizations, support of our plans to sustain solid profitability and improved cash flow performance. AAM also announced the appointment of Alberto Satine as President of the Driveline Business Unit, and Norman Willemse to President of the Metalform Products Business Unit, both of which will report to Mike Simonte. These new appointments continue to strengthen our leadership team that will guide AAM's to its next level, profitable global growth, while continuing to expand and diversify our customer base, product portfolio and served markets. The second release relates to the source in GM's next generation full-size pickup and SUV program. I'm pleased to report today, that AAM has been selected as a target supplier of axle and driveshafts for GM's next generation full-size pickup and SUV program. AAM was selected by GM as the target supplier for this program under GM's strategic sourcing process, otherwise known as the SSP process. A key objective of the SSP process is to involve critical suppliers early in the process of designing and developing future vehicle applications and programs. Pending final design direction and completion of the sourcing process, AAM expects to retain approximately 75% of the sales content provided in GM for the current full-size pickup and SUV program. AAM expects to provide approximately 75% of the light duty axles, 100% of the heavy duty axles, and 100% of the rear steel driveshaft for GM's next generation full-size pickup and SUV program. AAM does not expect to provide the aluminum driveshaft, front and auxiliary driveshafts and steering linkages on the future program. With the strategic sourcing of multi generate into this program now clarified, AAM is pleased to reaffirm our long term partnership in relationship with GM. AAM's innovative product, process and systems technology, as well as our cost competitive global manufacturing, engineering and sourcing footprint provides the compelling value proposition for all of our customers including GM. With the direction of a core program of AAM's business now solidifies for many years to come, we will continue to focus on leveraging our long term commitment to quality, technology leadership and operational excellence to drive top global growth and business diversification. Our first focus in this regard is to redeploy the manufacturing engineering capacity that will be freed up as a result of GM's finance for the next generation program. We expect this capacity in the meantime to be fully and profitably utilized for the next three to four years to support GM's need on the current K2XX Program. This gives us ample time to work with other customers to identify the best opportunities to put this available capacity to work. The annual sales value of AAMs core and emerging new business opportunities currently exceed $1 billion. The vast majority of these opportunities relates to non-GM business launches and activities. Most of these programs have expected launch dates in the 2018 to 2020 period of time which lines up well as compared to the expected transition to the next generation GM full-size truck program. One specific program we are working on is in the final stages of the [ph] courting process and has the potential to offset close to half of the impact to the GM sourcing direction. Well, we do not have anything to announce today with respect to that program, we are confident in our ability to identify new business opportunities over the next few years to fill the gap and accelerate our business diversification. If you have questions regarding these two announcements, we'll be able to address those during the Q&A session here today. So let me now provide some highlights associated with our second quarter financial results. Let me first state that AAM's second quarter financial performance was highlighted by quarterly records for sale and profit dollars, driven by sales growth that continued to outpace the industry and strong operational performance. First, for the second quarter of 2015, AAM's sales increased 6% on a year-over-year basis to $1 billion. AAM's sales growth of 6% compares to 4% year-over-year growth for the U.S. SAAR in the quarter and 3% for the North American light vehicle production. The second quarter of 2015 marked the first time in AAM's history that our sales exceeded $1 billion in the quarter. We're very proud of that. Second, non-GM sales grew 15.1% on a year-over-year basis to $343.1 million, a new quarterly record for AAM. Including the impact of our Hefei, China joint venture, AAM's non-GM sales to date were approximately 37% of our total sales for the quarter. One of the key drivers supporting AAM's non-GM sales growth is our sales to FCA, the launch of driveshaft in support of FCA's L-Series platform and higher shipments supporting Ram's heavy-duty pickup and the all-wheel drive model to the Jeep Cherokee and Chrysler 200 accounted for approximately $30 million of the increase. Third, our net income was $58.6 million in the second quarter of 2015 or $0.75 per share. Fourth, AAM's key operating and profitability metrics continued to show strength in the second quarter of 2015. Our gross profit in the quarter was $164.5 million, and our EBITDA was $146.9 million. Both of these results were quarterly highs for AAM. And fifth, AAM generated $100 million of positive free cash flow in the second quarter of 2015. This strong result keeps us on track to achieve our full-year 2015 free cash flow target of $175 million, a target that translates to one of the highest free cash flow yields among the auto supplier peer group. In reviewing our first half of 2015 performance, I'd like to highlight a few items. From an operational perspective, we are currently enjoying high capacity utilization rates in North American facilities due to the strong end market demand for pickups and SUVs. With the large cadence of our largest North American programs more than a year behind us, we have achieved improved operational stability. Our facilities in Three Rivers, Michigan and Guanajuato, Mexico are running exceptionally well supporting these high-volume and high-level demands. We continue to work on productivity initiatives and process optimization at our operations, which should translate into sustained profitability and stable free cash flow generation for many years to come. In the second half of 2015, AAM is laser-focused on flawlessly launching many new customer programs. In Europe, we're delivering full front and rear axles now for Jaguar Land Rover in a new global passenger car program. In Rayong, Thailand, we're launching AAM's first ever major driveline program for Ford in support of a global rear-wheel drive SUV program, and we're in the middle of that launch right now. And in China, we're supporting the next-generation C- and E-class for Mercedes while also expanding our supplier relationship with them and launching independent rear axles for multiple SUV variants for China application. Also in China for FCA, we'll be providing PCUs and RDUs for a third EcoTrac Disconnecting All-Wheel-Drive derivative. And finally here in North America, we'll be providing high-efficiency front and rear axles for the refreshed Nissan Titan light duty truck program later this year. Many of the programs I just mentioned features AAM's advance product technologies, design to increase fuel efficiency, advanced lightweighting initiatives and improved safety ride and handling performance. In supporting these efforts, our R&D spending in the second quarter 2015 was $29.5 million. And in the first half of 2015, we spent approximately $57 million on R&D. AAM remains committed to technology leadership and the advancement of both evolutionary and revolutionary technologies that will propel AAM to the forefront of the global driveline industry. We're confident that our engineering initiatives such as the development of the next generation AAM EcoTrac Disconnecting axle technology, and our [ph] AAM electrification strategies will continue to drive AAM sales growth and diversification. With the future opening of the Advanced Technology Development Center, otherwise known as the ATDC here in Detroit, we will have a state-of-the-art facility to further advance our design, prototype, benchmarking, and validation expertise and where customers will be welcomed to experience AAM's advantage firsthand. Our team of engineers believe that the best way to predict the future is to invent it. And at the ATDC, it will be done there and will be a great place for us to further advance our forward thinking. Let me now make a few remarks regarding an update to our new business backlog and our outlook for 2015. AAM's revised estimate of the backlog of new and incremental business launching from 2015 to the 2017 calendar year period of time is now estimated at $875 million in future annual sales. This compares to a previous estimate of approximately $825 million for the same three-year time period. Our revised estimate is principally reflective of capacity expansion program for a global light vehicle program, particularly in SUV, in the China market. Reflecting the change described above and a launch delay with one of our customer programs, the revised cadence of this backlog now stands at $275 million in 2015, $225 million in 2016, and $375 million in 2017. With respect to our 2015 outlook, we're revising our sales outlook for the full year in 2015 to a range of $3.9 billion to $3.95 billion, down from the initial outlook of $4 billion to $4.1 billion. The primary driver of this reduction in AAM sales target for the full-year 2015 is the impact of lower metal market pass-throughs and foreign currency translation. Our revised 2015 sales outlook also reflects the impact of a launch delay in the customer program I mentioned earlier. AAM's revised 2015 sales outlook is based on the anticipated watch schedule programs in our new and incremental backlog and the assumption that the U.S. dollar runs at a range of 16.5 million to 17 million units for the full year here in 2015. Also with respect to the guidance, we're raising our guidance as it relates to EBITDA and increasing net margin target to 14.25 to 14.5. So we're very pleased with that 50-basis-point improvement. And lastly, AAM is targeting free cash flow for the full year in 2015 of approximately $175 million, which we expect to drive our leverage profile to [indiscernible] by year-end, which is in line with what we're guiding for. Mike will make additional comments on our 2015 outlook in a few minutes. To add to our longer financial outlook from 2015 to 2017, what we have guided remains unchanged at this time. And as we look to the future, we remain focused on delivering our plan to sustain solid profitability and improve our free cash flow performance while leveraging our technology dealership and to develop innovative market-driven products to achieve profitable global growth and business diversification [indiscernible] continuing to delivery extra profit and cash flow performance for the benefit of all of our key stakeholders. We firmly believe that AAM's best days are ahead of us. And with that said, that concludes my remarks for this morning. I thank everyone for your time and attention today and for your vital interest and support in AAM's not only today but for years to come. Thank you and I'll now turn it over to Mike Simonte.

Thank you, David, and good morning, everybody. Let's get right to the financial details of our second quarter 2015 results. I'll start with sales. Our net sales in the second quarter of 2015 increased $57 million or 6% on a year-over-year basis to $1.4 billion. Our growth in non-GM sales was a major factor in our total sales growth for the quarter accounting for $45 million of the $57 million total increase in sales as compared to the second quarter of 2014. In total, non-GM sales increased 15% to $343 million in the quarter. For the full year 2015, we expect non-GM sales to approximate $1.35 billion, an increase of more than $1 billion as compared to the full year of 2009. And during that time period, that represents a compound annual growth rate of 26% in our non-GM sales. This is undoubtedly a key measure of our improved business diversification and we're pleased with our progress and focus on continued improvement in this area. On a sequential basis, AAM sales in the second quarter of 2015 were up approximately $35 million as compared to the first quarter this year. Seasonally higher production volumes related to our North American light truck programs, and a $15 million increase in non-GM sales, these were the primary drivers for the sales growth sequentially. Let's move on to content per vehicle. AAM's content per vehicle is measured by the dollar value of product sales supporting our customers' North American light truck and SUV programs. AAM's content per vehicle was $1,637 in the second quarter of 2015, about the same as the second quarter of 2014. On a sequential basis, content per vehicle is approximately $40 lower due principally to the impact of two things: first, lower metal market pass-throughs, we'll talk more about that in a few minutes; and second, higher productivity commitments. Okay. Let's discuss profitability for the quarter. Gross profit was $164.5 million or 16.4% of sales in the second quarter of 2015. It reflects significant improvement over recent performance. On a year-over-year basis, gross margin is up approximately 70 basis points. Operating income was $93.9 million or 9.4% of sales. On a year-over-year basis, operating margin was improved by 20 basis points. AAM's GAAP-derived EBITDA or earnings before interest expense, taxes, depreciation and amortization was $146.9 million or 14.6% of sales, also improved by 20 basis points. Net income in the quarter was $58.6 million or $0.75 per share. The favorable profit contribution from higher sales and production volumes as well as improved operational efficiency in our driveline assembly operation with the primary drivers of AAM's improved gross margin performance in the second quarter of 2015 when compared to the prior year. Higher R&D spending which is included in SG&A partially offset the improved gross margin, leading to a lower overall improvement in the operating margin and the EBITDA margin by that 14.6% improved upon a very solid and strong 14.4% in the second quarter of 2014. We're very pleased with these results. On a year-to-date basis through the first two quarters of the year 2015, GAAP-derived EBITDA was $284.4 million or 14.4% of sales. This ahead of our budget, ahead of our guidance and the key reason why we are comfortable raising our EBITDA margin guidance for the year. Okay. Before we talk about our cash flow results, let me quickly cover SG&A, interest, and taxes starting with SG&A. In the second quarter of 2015, SG&A, which again I remind you includes R&D, was approximately $70.6 million. That's 7% of sales. This compared to $61.5 million to the second quarter of 2014 and that was 6.5% of sales and $68.5 million in the first quarter of this year 2015 slightly higher than our run rate on a percentage basis at 7.1% of sales. AAM's R&D spending in the second quarter of 2015 was $29.5 million. That's an increase of $5.1 million on a year-over-year basis, an increase of $2.2 million on a sequential basis. Higher R&D spending is the primary driver of increased spending in both the year-over-year and sequential analysis of SG&A expense. In addition to the increase in R&D, higher staffing costs, including higher incentive compensation accruals, also drove SG&A expense higher on a year-over-year basis. Okay. Net interest expense in the second quarter of 2015 was about the same as the first quarter of 2015 at $24.2 million. We expect a similar run rate of interest expense in the second half of 2015. AAM's effective tax rate was approximately 18% in the second quarter of 2015. There are no unusual tax accounting developments to discuss this quarter. On a year-to-date basis, through the first two quarters of the year, AAM's effective tax rate is approximately 16.5%. This is right in line with our guidance range of 15% to 20% for the full-year 2015. If you have any further questions about tax, please ask in the Q&A period. Okay. Let's move on to cash flow. We define free cash flow to be net cash provided by operating activities, less capital expenditures, net of proceeds received from the sale of property, plant and equipment which were negligible in this quarter. GAAP cash provided by operating activities in the second quarter of 2015 was $147.9 million. Net capital spending in the second quarter of 2014 was approximately $47.8 million. Reflecting this operating activity and CapEx, AAM's positive free cash flow in the second quarter of 2015 was $100.1 million. Our free cash flow results in the first half of this year position us to deliver on our target of $175 million of free cash flow for the full year of 2015. On a trailing 12-month basis, AAM's free cash flow is just a little shy of $200 million. So it should be no surprise when we deliver on our full-year guidance. Okay. Let me cover a few items on the balance sheet. AAM's EBITDA leverage, or the ratio of net debt to EBITDA, was down to approximately 2.2 times at June 30, 2015, and that is on an adjusted basis. AAM's EBITDA - EBIT coverage, I should say, or the ratio of EBIT to interest expense, was approximately 3.5 times at June 30, 2015, also on an adjusted basis. And by the way, the only adjustment made in those situations is to exclude the special charges from the third quarter of 2014. Both of these credit metrics were calculated on a trailing 12-month basis. As to EBITDA leverage, we are on track to deliver our target of 2 times leverage by the end of 2015. One final note on the balance sheet. AAM ended the second quarter of 2015 with total available liquidity of approximately $851 million, consisting of available cash and borrowing capacity on AAM's global credit facilities. Before we start the Q&A, let me close my comments this morning by adding some color around our 2015 outlook. As David said, today, we are updating our sales guidance for 2015. As we disclosed in the 8-K this morning, our new sales target for the full-year 2015 is a range of $3.9 billion to $3.95 billion, down from the initial outlook of $4 billion to $4.1 billion. The primary driver for this reduction in sales for the full-year 2015 is the impact of lower metal market pass-throughs and foreign currency translation and nothing else of any substance. There's a minor change relating to a launch delay at a customer program where primarily the change in our sales outlook has to do with lower metal market pass-throughs and foreign currency translation. On a unit volume basis, we expect our full year 2015 production volumes across our entire portfolio of the light truck passenger car, crossover vehicle and commercial vehicle programs we support around the world to be up approximately 12% as compared to the full year 2014. This is approximately the same rate of unifying what we assumed in our initial outlook. With net sales benefit we are realizing from this unit volume growth is being offset this year by changes in metal market levels and foreign currency translation. We estimate that AAM's full year 2015 sales will be adversely impacted by approximately $100 million to $125 million for the combined effect of these two factors as compared to the assumptions underlying our initial outlook. The good news is that these factors do not, and I repeat; do not adversely impact our profitability, whether measured in dollars or margin. One final thing about our sales guidance let me anticipate a question and tell you that AAM's revised sales outlook for 2015 assumes approximately 1,225,000 units of production for the K2XX Program. As you may recall, that's the midpoint of our initial guidance range. From a profitability standpoint, strong customer demand has driven capacity utilization to darn near optimal levels in North America. This has allowed us to raise our 2015 EBITDA margin target to a range of 14.25% to 14.5%, and that translates in dollars to approximately $560 million to $575 million. As far as AAM's key longer-term financial targets, let me just say that we are well positioned to continue delivering strong profit and free cash flow performance. End market demand for our customers' products, as well as our customers' ability to execute program launches and hold or grow share in key markets, is tracking very favorably. It's a great time to be levered to the North American light truck market. It's also a great time to be able to bring disconnecting all-wheel drive technology to the passenger car and crossover vehicle market. We're having more success doing that than anybody. We have a leading position in these markets, and we are having a good success building our new business backlog along these critical lines of spreads. Due to the impact of our new business backlog, we expect AAM's organic growth rate to exceed 5% during the three years 2015 to 2017, and that's significantly ahead of what most experts expect the industry to grow on a unifying basis. While we expect to supplement, and by that I mean increase, that rate of organic growth with inorganic growth initiatives, our guidance is based only on organic growth. As David noted, we have a challenge to redeploy some productive capacity that will be freed up in the future as a result of GM's sourcing decisions on the T1XX. There's no question that's a challenge. However, this is also an outstanding opportunity for our company to grow our non-GM business, to improve our overall business diversification profile and to offset future capital spending requirements associated with launching our backlog. Over the next three years, 2015 through 2017, we expect to continue generating premium EBITDA margins. We expect to generate high free cash flow yields. For example, we're tracking higher to 10% in 2015 and we expect to use the free cash flow generated by our operations to fund investment that will create value for all of our key stakeholders. We have about three years to identify the best opportunities to fill the gap created by GM's T1XX sourcing decisions and that's exactly what we're going to do. This is the end of my comments this morning. Thank you for your time and participation on the call and we're going to stop here and get into the Q&A. Chris, will you get us going there.

Great. Thank you, Mike, and thank you, David. We reserved some time to take some questions. I would ask that you please try to limit your questions to no more than two. So at this time, please feel free to proceed with any questions you may have. I'll turn it back over to the operator.

[Operator Instructions] Our first question comes from the line of John Murphy from Bank of America Merrill Lynch.

Good morning, guys.

Good morning, John.

Congratulations, Mike, on a well-deserved promotion. And Chris, congrats as well. As we think about the business that's retaining on GM's trucks, I'm just curious if you guys have seen comments on the level of capital intensity and margins on that business? Is it similar to what you have right now or is there some pushback on what has been some very strong margins for you to date?

No. John, this is David. As it relates to the pushback, no. I mean, as we said before, I mean, GM has said they're looking for healthy suppliers. At the same time, you all understand how we're performing on the current K2XX platform in our other business today. So there's no concern in that respect. GM clearly made a decision that they want to do, change their commodity strategy with respect to the next-generation product. We're very grateful and appreciative of reaffirming our long-term strategic partnership with GM. As we've highlighted, we're going to have a significant or the majority part of that business, and there'll be a cash generator for us, just like it is today. And the program doesn't hit for another three or four years, depending on the cadence and the rollout associated with that program. The product is still too early in the development stages to finalize all the pricing and understanding the total margin impact at this point in time, but we're intimately involved as a critical supplier, working on the design of those driveline systems to support the new vehicle requirements. And as we're able to shore up those designs, shore up the program and finalize the source and the negotiations, we'll be better to explain the more detailed impact. But I think you guys can calculate the higher level impact associated with the change in sourcing. So, Mike, I don't know if there's anything else you want to comment on.

John, I would add one additional comment. You asked also about capital intensity. And as you know that by far and away, the most important determinant of our profitability is capacity utilization. And so a critical objective that we have and that we're going to be working on over the next three or so years is to ensure that we redeploy any capacity that's not necessary to support the future generation of products so that we can protect the high capacity utilization levels that we have today. So we are confident that we can do that, and that's why we say that that's going to free up a bunch of capacity we can use to grow our business with other customers and reduce the capital intensity of other elements of our new business backlog.

Okay. And just a second question. I mean, as we think about this, this might be a catalyst for - or motivation for greater transformation in the company. And I'm just curious, as we think about the potential for incremental business wins outside of GM, would you be thinking about greater R&D to support that business and that being processed? And also, is there a much greater motivation here to do a big transformational M&A deal now just given that there is a little bit of pressure coming in the business [indiscernible]? It seems to be a little bit of incremental. We might just to diversify further more quickly and maybe just slightly different products and slightly different customers?

So, John, this is David. First of all, in regards to your first question on the R&D, it's not going to change our approach from an R&D standpoint. I mean, the things that we have done for GM, we've been doing for non-GM customers over the years and we'll continue with that same approach and providing the latest and greatest technology from a productive process system standpoint. So I don't see any change from an R&D standpoint. That way, we conquest new business and we're well positioned. As we stated earlier, we've got $1 billion of [indiscernible] and emerging opportunity. You guys understand our historical hit rate of about $300 million a year. So we're going to fill some of that gap anyway just based on the performance that we have, and 90% of what we're holding is non-GM business today. With respect to your latter question about the acquisitions and did that put pressure on us to deal with things in that 2018/2020 period time, the answer is it's not going to put any more pressure on us. What we've telegraphed and explained to you all along is that we needed to strengthen our balance sheet first and we've been very focused on that since the 2009 period of time when we decided not to file for bankruptcy but rather protect the enterprise value in the business. And you guys have seen that we've had a game plan. We've been executing and delivering on that game plan year after year. We're going to continue to do that. We had three or four years of solid cash and profitability in front of us based on where we are today in the sweet spot of the truck and the SUV, not only here but globally, and we're going to use that to build our workshops and also put us in a position to capitalize on acquisitions that make sense to the business. And whether that's consolidating within the existing driveline space, whether that's expanding into new swim lanes or new markets or new products, that's all still TBD. But trust me, we're very focused on what we need to do both on the organic growth side, as well as on the inorganic growth side of the business.

Great. Thank you very much.

Thank you.

Our next question comes from the line of Rod Lache from Deutsche Bank.

Good morning, everybody.

Hi, Rod.

I was hoping you might be able to just give us a couple other thoughts on this T1 contract. Could you maybe talk about what the content per vehicle looks like ex-the-driveshafts and linkages that you wouldn't have on the new one? And also how should we think about the financial impact of offsetting this with new business wins? How transferrable are the assets? And maybe another way to ask that is if you needed to redeploy the assets that support $500 million of business, how does that affect capital spending? Does it meaningfully change the 5%-ish CapEx to sales that you've been talking about historically?

Rod, this is David. On the T1XX, it's really too early to comment on the content per vehicle until such time as we get the final design direction as to where we're headed with the customer, okay? So I don't really want to spend a lot of time on that. But we're clearly going to have a significant content on the vehicle much like we have today. It's just we're not going to have the 25% of the business that we mentioned to you on the light duty side of the program and the other things that we've guided. So that's my answer to that one. As it relates to assets being transferrable, the answer is yes to that. And so it's very easy for us to move component machining, gear machining, assembly lines to all their applications. So that drives leads into the capital spending side of things. We're not changing our focus and our respect and our guidance in CapEx of 4% to 6% of our sales, so call it that 5%. Better yet, we're just focused on how we find new business to offset the loss that we have utilized in existent capacity that we have in place today. So, I feel very confident based on what we've done to date and what we've done historically, but more importantly the opportunities that are in front of us and how it fits in to some of the capital that we have today.

Hey, Rob. Let me add just a bit of financial color to what David said. As it relates to content, it is too early to be more precise. But in our release this morning, we did disclose that we expect to retain approximately 75% of the sales content associated with the program. Now spread across the units of production, that should correlate recently well across the entire portfolio to 25% reduction in content. However, you're going to see more diversity or disparity between the heavy-duty side of the program where we're going to have a relatively greater portion of the content because we're going to have 100% of the axles front and rear versus the light duty seg where we lose a portion of the program. So, if David said it's too early to be more precise, but that is a pretty good indication, the best indication we have right now of the impact on content. And the one other thing I would say about the second part of your question, David made it clear. We do think the same generally about our CapEx requirements in the business and how that translates to supporting the organic growth levels that we anticipate and of course supporting the free cash flow generation targets that we anticipate for the business. But let's be clear, the capital intensity of the $500 million of business, if that fills whatever we lose from GM, the capital intensity on that new business is going to be lower. And it's going to be - it's going to put us in a competitive advantage because those investments are made. Those assets are not 100% perfectly transferrable, but very transferrable to what we're going to do. And that's a big - you're looking for a silver lining here. Our sales team is going to have a new, important tool in their toolbox.

Just to clarify, you're assuming similar levels of production, like 1.2-ish kind of million units in this outlook when you talk about a 25% reduction. And my other question is just if you can comment on what your historical win rate has been. Presumably, your win rates might go up if you have this competitive advantage of being able to redeploy some capital.

Yeah. Rod, with respect to the volumes - this is David - again, we're still holding it, that roughly to 1.2 million units, so very similar, even though this year we're around 1.225 million. And as it relates to the non-GM stuff, I mean, there's plenty of opportunity with respect to what we need to do out there on new business applications. Our historical hit rate has been in that 25% to 30% level. And we've been, as you know, very laser-focused on our sales filter and going through a disciplined approach and leveraging our existing and installed capacity for the programs that we're going after. So with what Mike is saying with some of the available equipment coming to market here in the 2018-2020 period of time, we'll be in a better position to raise that historical hit rate.

Great. Thank you.

Thanks, Rod.

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

Great. Thanks. Good morning, everyone.

Good morning, Itay.

So just a follow-up to Rod's question a bit more. So it sounds like, I think David you mentioned that there's a program that may replace half of the part of the GM business that will be lost. And I think your backlog tends to run a couple of $100 million per year. So if you're able to replace the revenue, can you help us walk into what the margin gap might be? I imagine that the incremental variable margin on the new business will be somewhat lower than the detrimental in the outgoing business. Any kind of way to think about mulling that?

Yes. Itay it’s Mike. Listen, excellent question. It's really the bottom line question when you think about it. We've been talking with investors about this issue for the last few months, you guys know that. And the way we think about this is very simple. The net financial impact of this sourcing decision by GM is going to be the net profit differential between the T1XX business and the business that we win to backfill the capacity and redeploy the capacity. We've been very clear and transparent for years that because of the operating leverage, the purchasing leverage, the relatively low level of complexity we have on a high volume program like the K2, the profitability associated with that program is greater than really any other portion of our portfolio. The larger the program, for example, the Ram, the closer you can get replicating the K2 but the simple fact of the matter is, is the K2 is probably one of the finest if not the finest program for supplier to make a good margin. And it demands a high margin because of the huge capital investment that we have to support it. So when we look at the business that we're going be backfilling this capacity with, we do expect a lower contribution margin. Now, the average that we fill this year - on the K2 program, we're on the 30% area. When we execute well - we certainly have in calendar year 2015 - it's in the 30% area. For most of the other programs that we support, and while there is some differences and some higher and some lower than the number I'm going to tell you, it's going to be similar around the 20% average contribution margin. And so our challenge is to offset this 10% differential with opportunities to drive additional efficiencies in our business, to improve OEE and throughput in our capital intensity so that we can take up a lot of business and reduce our fixed costs. But as we look at this, the challenge for us is to find a way to offset roughly a 10% differential on this issue.

That's very helpful, Mike. Thanks for the detail. And just my second question, so it looks like the margin progress is going fairly well in 2015. You've raised the guidance for the year. I think you kept your 13% to 14% range for 2015 [audio gap]. It just sounds like there's just more momentum in the business. I mean, can you provide a bit of a - there's biased towards the higher end of that given the progress this year, or is there something that you think will kind of potentially bring you down at the current market volume, of course?

Yeah. No. Itay, clearly, there's bias towards the higher end of that guidance range, assuming that the most important elements and the current business conditions continue. What I mean specifically by that is that capacity utilization is high right now. That's highly correlated to production volume. So if the K2 program - we expect the K2 program to stay around current levels through this time period, maybe take a little bit higher. We expect that to be a driver towards the high end of the range. Other issues, Itay that are characteristic of the current environment, material cost inflation is very modest. In fact, we are finding ways to achieve material cost per activity this year for the first time in approximately three years. So, we don't see any major inflationary pressures in the next couple of years. And so that's also characteristic of the high end or possibly higher than the high end of our guidance range. It's important when we talk about extended periods of time when we discuss guidance targets, not to get too carried away with the best possible scenario or for that matter the pessimistic scenario. What we try to do is guide you and other analyst investors to one of the most highly probable outcomes and in our judgment that range of 13% to 14% is most highly probably. Today, clearly, we're focused on the high end of that range and we think that - we think we've got a great chance to do that if we're right about the business conditions over the next couple of three years.

Terrific. Thank you so much for all that detail, Mike. Thank you.

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

Thanks. Good morning. And thanks for all the details as usual. Maybe just to go back to Rod's question and sort of help frame it what it means going forward, is there any way you could tell us how much the drive shafts and steering linkages accounted for currency [indiscernible] percent, is it about 10%, is it something a little bit lower than that?

Again, it depends, Joe, on the specific nature, specific type of drive shaft that we sell into the program. You're not too far off at the 10% level. What we really feel comfortable saying and we don't feel comfortable saying too much more because of the relatively early stages of design and development at the program. We feel comfortable saying that based on what we know right now, the pending file design direction, we value based on applying the sourcing direction on the T1XX to the K2XX, which is very specifically how we determined this disclosure, we feel that we're going to retain about 75% of the content on this program and we've had - pretty clear with you in terms where we expect to retain that content and where we expect that to be lost.

Okay. That's helpful. And then I guess to follow up on Itay's question with the incrementals on any replacement as it's probably being a little bit lower, how does that - how do we - how should we think about your longer-term 12% to 15% target, which, I believe, was always sort of based on you continuing to have all that GM business? So should we think that you need to lock maybe a point or so off the top end or just the whole range moved down a little bit, or do you have any preliminary thoughts?

Well, preliminary thoughts are that we wouldn't anticipate making any change to that. There's a lot of room in that range of 12% to 15%. And specifically that disclosure, which we started making back in 2010, by the way, 2009, that's an even longer-term thought process and really driving towards a bigger range of possible business environments that we would encounter. Again, the higher end of that range, which is characteristic of really outstanding capacity utilization situations and not as much diversity in our business as we have today, that's really been guided down a little bit to the 13% to 14% area. I think it's fair - I think it's very fair to leave 12% in the discussion of longer term. At this stage, we have no reason to guide you to something lower than that.

Okay. And then just quickly on the free cash flow change, it sounds like that's timing. Does that - and maybe it's like $40 million of timing. Does that move into 2016?

Yeah. There's no significant adjustment. We certainly are not trying to signal any significant adjustments to our cash flow expectations for the year. We started the year with initial guidance outlook of $175 million to $200 million. You know that we thought there was a range of possible volume scenarios on the K2 between $1.2 million and $1.250 million. We're selling in right at the midpoint of that range based on everything we know about the program. And there were a couple, relatively minor things, I just bring them up to help you understand our thinking about cash flow. We have some rebillable tooling collections that we had anticipated making this year. We won't collect those until 2016 at this point due to some changes and program timing with our customers, that maybe about $5 million. And we had some other similar activities that are little timing differences. So in those examples, yeah, that'll move into 2016. Otherwise, we're performing pretty much as we expected.

Okay. Thanks a lot, guys.

Thanks, Joe.

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

Good morning, David, Mike, Chris.

Good morning.

And I'm not sure if the other Chris is there yet. So, if he is, hello.

He is.

Good morning.

Congratulations, Mike.

Thank you, Brett.

Okay. So, obviously, the topic du jour is the T1. So, I guess I'm kind of struggling here because it just seems very plain what you're saying. In other words, it seems like, I think the K2XX is being roughly 50% to 60% of your revenue and you're losing 25% of it, which is kind of around 14% of sales or something on those lines. So, is that - am I missing something? Is that math just too simplistic?

Brett, sometimes in life things are more complicated than they seem. This is not one of those situations. You got it right on based on the best of our understanding of the situation today.

Okay. And then you've kind of talked about potential programs that might offset that. So, I'm kind of sitting here thinking about the actual programs here in North America and the other suppliers that have those actual programs. I guess, they seem reasonably well locked up, but are there any particular programs that you think you might have a particular advantage or opportunity to win? I mean, Ford's got their pickup trucks, along with ZF doing the Chrysler stuff. So, the target seems fairly obvious. Is there something else other than what we generally perceive to be the obvious targets that might be out there, that might be able to backfill the capacity?

Yeah. Brett, this David. I mean, I think your thoughts are focused solely on truck. There's a larger market out there with crossover vehicles and passenger car application. So a lot of that capacity can be redeployed in that area as well. But there are some truck applications and opportunities that we're looking at also.

Okay. And then is there - as you kind of look at the decision by General Motors to kind of resource some of the program, what would be, in your opinion, maybe the number one or number two reasons why they chose to do that?

Yeah. I don't really want to speculate on it. I mean, I commented earlier and the fact that clearly we've enjoyed, for the most part, an exclusive relationship with GM the last 20 years. GM has made a sourcing decision from a commodity strategy standpoint to change that to the tune of about 25% on the next-generation product from the light-duty standpoint. We respect GM's position on that. At the same time, like I said, we reaffirmed our long-term strategic partnership on this program and others on a multi-generation type basis. So we're pleased with that. You also has to look at the fact that axles are critical system and one of 19 FMVSS type parts on a vehicle application and therefore GM probably wants to have a better understanding of that content knowing that we've been doing all the design development for driveline systems for them for the last 20-plus years and will for the next several years as it goes to supplier. You're probably better off to ask GM that question than us. More importantly, I'm just respectful of the relationship we've had and most importantly the relationship going forward with them.

And the timing I kind of think it was 2018-2019, is that kind of I think on a preliminary basis kind of roughly where we're thinking.

It's in that range. Again, typical life cycle is five to seven years. I think that the program launched in 2013 period of time. So, that gives you a range and then obviously there's a cadence associated with that launch. So, you will probably won't feel the full impact of everything until later and you can also go back and look at IHS in regards to what they're guiding.

One additional color on I would just have to say to your - David alluded to and I want to make - I just want to make it a little bit more of an emphasis for. Whenever it is they start to launch and we don't have a full clarity and even if we did we're not in a position to talk about it. But if we talk about the 2018-2019 time period for example, it would be 2019 before the material portion of this impact would be stopped by the business. So, I think when earlier in our comments we've said we have three to four years to address this issue, that's what we mean, three to four years, not three. It's longer than three before the full impact would be felt, which is what gives us great confidence that we have time to fill the gap and redeploy the capacity, take actions on the fixed costs if that's what's necessary, and find ways to minimize the impact of this, and quite frankly maximize the opportunity that we have to improve our business diversification profile, grow our relationship with other customers.

And I'm going to ask you this question again, Mike. You already gave me the answer, and I think I understood it, but I just got two e-mails from two different clients basically asking me or suggesting that they're not clear on this. So if I take your total revenue, $4 billion, multiply it by 55%, you're kind of saying that that's roughly equivalent to the full program revenue. And then if I take 25% of that, that's kind of what we're talking about as being resource. Again, it seems like a really simple math, but some people are confused between light-duty versus heavy-duty and all this other stuff like that. But you're basically saying...

Right, right. Right.

...25% of the total revenue.

Right. Okay. So, the K2XX program is just a little short of half our business this year, so let's call it 50%. And what we're saying to you is we expect 25% of that business to be - led to other sources.

Perfect. That seems really simple to me. So thank you very much, Mike. I appreciate your help and congratulations.

You got it. Thank you.

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

Thanks. Good morning, everyone.

Good morning, Ravi.

First of all, Mike, congratulations, and, Chris, welcome.

Thank you.

Thank you.

Also I - apologies if I missed this, but did you mention - I mean, you said you got 75% of the T1XX. Do you expect the light vehicle portion of that program to be similar in size with the same number of models as the K2XX at this point?

Ravi, we answered that question earlier, and the answer was yes, as far as total volume application for the program with light-duty and - split between light-duty, heavy-duty and the SUVs.

Got it. Sorry I missed that. Also can you confirm how much of your backlog comes from China today?

Yeah. Yeah. We can get you that specific number. There's a couple of sizeable programs. And by the way, I feel compelled to tell you that the backlog that we have in China is principally in the SUV and crossover vehicle market. The bulk of the major programs that we're launching with our customers today, they are exceeding their program expectations. In fact, we are spending a lot of time working on increasing our capacity for - and talking about increasing capacity for these programs. So while we're understanding that the China market is having some challenges, we're launching with high-quality foreign brands, SUVs and crossover vehicles. These programs are some of the absolute hottest-selling vehicles in the marketplace, and we're very - feel very good about our role on those programs. So we're about 30% - 30% to 35% of our backlog is in that marketplace. It's going to help us really establish our footprint in that market.

Got it. And can you talk about the split between the domestic and the Chinese OEMs, sir?

I'm sorry.

The domestic and the import OEMs.

Okay. We're working with Mercedes. We're working with General Motors. We're working with Fiat Chrysler. We're working with great brands. Of course, when I say Fiat Chrysler, I mean specifically the Jeep product line.

Yeah. Ravi, it's probably 90% of the Western OEMs doing business in China and a little bit with the local Chinese.

Got it. Understood. And last, a housekeeping question, the CPV on the K2XX, obviously it seems to be maturing as it will do at this point in the cycle. Where do you see that going in the near to medium term, I'd say over the next 12 months?

Ravi, the K2XX content for vehicle, you're right on. It's mature in terms of having launched all of the content. It's going to bounce around a little bit, call it around $1,600 area, just a little bit lighter than our full content. Because our full content across our entire portfolio is weighted up a little bit but it does ramp heavy duty program which is only a heavy duty application for us and therefore higher dollar content. The K2XX content is going to go up and down and probably up a little bit as we understand it for four-wheel drive penetration. There's going to be some seasonality between the heavy duty emphasis and the light duty emphasis but that won't matter much. And it's going to be affected a little bit by the productivity commitments that we've offered to General Motors. It's part of the relationship that we have. So, in general, it might work out a little bit to the impact of the productivity commitments. I'm just thinking of the sales impact right now. In metal markets, it's having an impact right now. Metal market actually, could very likely be a source of content growth because the significant reductions we've seen in the metal indices, reduces the amount of pass-through we received from General Motors. So just like it impacts our overall sales, it impacts our content for vehicle calculations as well.

Great. Thank you. And Mike, we'll miss the level of detail and the transparency, and - but I'm confident that Chris can fill your shoes.

Yeah. You won't miss it at all because Chris is as detailed and as focused as I am. So, you'll get the same level of transparency and communication, that's for sure.

Thank you.

Thanks, Ravi.

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

Yes. Good morning and congratulations again, Mike. Just a quick question, does your promotion apart from being well deserved. Any broader moves your company might be making in terms of acquisitions or expansions?

Brian, this is David. Well, like you said, first of all, Mike deserved the promotion. Mike has been a loyal employee to this company for 17 years. He's done an outstanding job shepherding and guiding my father before me and myself with respect to our fiscal management, financial management and capital structure. But he's not your typical CFO with a past, and he understands the operations. He understands the people. He's bringing a leadership quality and a leadership trait. It's what I was looking for to unload some responsibility to myself, to Mike. At the same time, that financial discipline will lend itself well, working with Alberto Satine and Norman Willemse on the operations who are both P&L and financially trained and operationally trained. So we're going to continue to focus on the productivity throughput and performance of our operations, first and foremost. At the same time, we're going to spend a lot of time, as we always have, in regards to looking at the organic growth and looking at what's best as it relates to our capital utilization and getting the return on those investments. But it's clearly - we're positioned ourselves as a company in whole, not just because of a change with Mike, to start doing more growth from an inorganic or strategic standpoint, and therefore Mike's skill sets will complement what we're trying to accomplish and free up some of my time, his time, as well as some of our other leaders' time to spend more time on the acquisition side.

Okay. And then back to the topic du jour, just two or three related questions around Q1. First, the capital equipment you have making driveshafts. I guess, if we were to think about it, is that - can that only be redeployed to make driveshafts, or is it the kind of equipment that could be - maybe use axles as well?

Most of it will be - is dedicated towards driveshaft manufacturing. There may be some machines that we could redirect on heat treat furnace is another [indiscernible], clearly, we can redirect but most of it is dedicated to more drive shaft production.

And did you have aluminum capabilities would you have to invest additional CapEx if you got the drive shafts with the mandate that they become aluminum?

No. We make aluminum product for GM today. We just weren't selected as the source going forward for the next generation program.

Okay. And third because this relates to your growth opportunities. Do you see - kind of two sub questions, was this at all motivated by desire for your client to in-source the T1 drive shafts? And two, as you look externally, are you looking more to take programs and otherwise could have been in-sourced or were in-sourced or you're looking to get programs from local players or other incumbents, Tier 1 incumbents?

I mean, GM at all times whether it's Axles and American Axle or not, if they're going to evaluate their options from a sourcing of components and systems including looking at that in-source, looking at make versus [indiscernible] study they do that on a regular basis just like we do that on a regular basis. So, they'll evaluate I'm sure the in-source opportunity but again that's a discussion with GM in regards to what alternative they want to pursue with respect to what happens at the balance of the T1XX program. As it relates to our business, I mean like we've said before, we're going to continue to work with the other global OEMs to identify new business opportunities whether the light truck SUV, crossover, or passenger car related. We can redeploy a lot of the equipment that we have in place, drive shaft has probably been the biggest limitation that we have there as we just mentioned to you. At the same time, OEM [indiscernible] what's going to be core or non-core for them in the future. And if opportunities present themselves then we'll look at that. But meanwhile, we're just going to look at the organic growth opportunities that present themselves through the normal ARPU packages while also looking at strategic growth that we'll initiate.

Okay. Thank you, and congratulations, Jim and Chris.

Yeah. Thanks, Brian.

Thanks, Brian.

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

Hi. Good morning, everybody.

Good morning, Emmanuel.

So just one - just additional question on the next-generation truck. So, I just wanted to make sure I understand the mechanics. So, I understand the driveshaft, you will not be supplying the linkages. The axles themselves, right, you say in the release you expect to provide 75% of the light-duty axles. So someone else is providing 25% of the axles. That's the right way to understand it, right?

Yes.

Somebody else will be providing those axles, yes.

Okay. And were you able to comment on - is it a supplier, or will it be done in-house?

Yeah. Emmanuel, we're not able to comment on that, as I mentioned to Brian in his other question. GM is going to evaluate [indiscernible] evaluate their options, including insourcing, and they've got to make those program decisions, but that's up to GM to make those decisions and communicate it effectively.

Okay. But I guess still on the mechanics. So how does it actually work? There is - so they're making light-duty trucks. Are they just going to be - you will be making 75% of the units and then someone else will be making the exact same axle for the other 25%, or are there specific trucks that you get to say, okay, I'm going to make the axles on those and not on the other ones?

Yeah. I mean, those details are all being worked out with respect to General Motors in regard to what products - is it a regular crew cab? Is it a different type application? We have a pretty good understanding where we think that's going to be. But until GM finalizes the design direction of the program, finalize the total volume expectations for the program, but we've guided it's in line with where we are today, it's probably too early for us to speculate on that. But it's clear that somebody else is going to be providing 25% of axles to support the vehicle production by General Motors on the next-generation product.

Okay. I appreciate this color. So now, I guess focusing on the current K2XX, so you're now looking for roughly the midpoint of the range in terms of, I guess, full-year production which sort of like, again, highlights your excellent forecasting capabilities on this. I'm not sure.

Correct me if I'm wrong. I thought earlier in the year, though, you thought that you might be able to operate at the sort of higher end in terms of demand. Have you seen sort of anything in the near-term schedule that suggests a bit of a deceleration in the schedule, or is it really just great forecasting and it comes at the midpoint?

Great forecasting coming at the midpoint.

So no tweaks on...

No. There's no issues at all in that regard. GM is, from our judgment, very consistently operating their business this year. Their sales success is in line with what we anticipated. The one thing I would tell you is that, and you could see this yourself, they continue to be a little bit lower on inventory levels, particularly on the SUV side of the business. And I think if you ask them, they'll tell you something like they're selling pretty much every one they can make. There are some capacity issues, not axle-related. I want to make it clear, not axle-related. But they're still working through a few things here and there that constrain the mix of certain production issues. They've made huge improvements. They're almost through everything that they need to do there. So we see this improving a little bit as we go but absolutely nothing adverse in the schedules or in our assessment of their market performance. And we feel confident that they'll have the ability to make at least that many and perhaps a few more over the next 12 months.

Yeah. You guys see, schedules are very strong. Jim had fantastic earnings in the second quarter, heavily driven by the truck and SUV production. And they're going to continue to put the pedal to the metal where they can, wherever they can get output out of those facilities, but they're still managing with some constraint as Mike just alluded.

Okay. And then the real final housekeeping. And I apologize if you answered that before. The change in GM revenue in the quarter was maybe a little bit softer than we would had expected. You obviously made it up nicely on the non-GM side. Anything, any big driver in sort of like the revenue growth on the GM side?

Yeah. Emmanuel, just like we talked about for our sales guidance for the full year and our content for vehicle discussion we just had a few minutes ago, our GM revenues are being impacted by lower metal market pass-throughs, as well as a little bit of foreign currency translations when you talk about the business that we have with General Motors in Brazil, and China, and Thailand. But principally, the metal market passers are down a little bit and that's what [indiscernible] the softer sales numbers. If you look at unit volume activity this year, we're right in line on a total portfolio basis with where we expected to be. So the softness that you're alluding to, I saw your note earlier this morning. It relates specifically to the lower metal market pass-through than a touch of foreign currency translation.

Great. Very clear and congrats on the promotions.

Thanks, Emmanuel. Appreciate it.

Great. Thanks, Emmanuel. We've got time for one more question.

Our last question comes from the line of Ryan Brinkman from JPMorgan.

Great. Thanks for squeezing me in. Good morning.

Hi, Ryan.

Hi. So, I don't think many analysts or investors are currently modeling out to 2018 or 2019. But if you were, how we should we think about modeling the financial impact of the [indiscernible] business? So, for example, in the past, I think we were guided to 30% incrementals or decrementals on organic changes in K2XX revenue. And there's been a lot of talk on the call today about decrementals on the K2XX versus incrementals on the new business. But is that even really the right way to necessarily look at it? Because surely 30% is not your all-in margin on that program, just a contribution margin, right? So I imagine that it will be wrong to apply such a harsh decremental on the revenue taken out of the model for the 25% of the business that you're not retaining because you are not investing or capacitizing for that lost business. Should investors think about using a decremental a bit closer to the all-in corporate average margin and modeling the variance between what you're now likely to earn in 2018 and 2019 versus what you would otherwise have earned had you retained 100% of that business.

Okay. So we did have time for one last question. We can - we got time here, Ryan. So, we can slow it down just a touch. I think I understand what you're asking that the net bottom line impact that we think about in our businesses, we anticipate having the opportunity to fill the gap, so to speak, and replace the sales that are going to be lost on the T1XX sourcing decision with other programs. Those other programs will likely have, although we don't for sure, we're going to try to make this not true, but will likely have lower contribution margins. And so we think the net bottom line impact is going to be some diminution in contribution margin for that $500 million of sold business. Now, when you're building a model, you will likely not take the shortcut I just described and build up all the elements. And when you do, I think using the decremental somewhere close to the contribution margin that we have on the current program is the right way to think about it. Of course, when you model the incoming business, you'll model that in with a slightly lower contribution margin and that's what's going to result in this net bottom line impact that we've discussed.

Right. I'm just thinking because now if you lose - if you produce a little bit fewer K2XX volumes, you still got all the people there. You still got facility. I mean, you should be able to - if you didn't, if you weren't able to backflow that, there should be some cost-cutting opportunity there or avoidance of expense...

Absolutely.

...of sort, right?

Absolutely. And that's why our thought process about this is, first and foremost, put those assets back to work. But in any case where that's not true, we're going to take actions to address the fixed cost structure. And so again, the net impact on the business would not be the contribution margins or rather the end profit margin. It should be something more like the EBITDA margins on that business. So we hear you. We understand that and that's exactly how we're going to be managing the business.

Okay. Perfect. That's great to hear. Thanks for clearing that up.

Okay.

Great. Thanks, Ryan. 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.