Good morning, everyone. My name is Jamie, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing first quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press the star key and the number one on your telephone keypads. If you would like to withdraw your questions, you may press Star and two. As a reminder, today's event is being recorded. At this time, I'd like to turn the floor over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.
Thank you and good morning. I'd like to welcome everyone who is joining us on AAM's first quarter earnings call. Earlier this morning, we released our first quarter of 2023 earnings announcement. You can access this announcement on the investor relations page of our website, www.aam.com, and through their PR Newswire services. You can also find supplemental slides for this conference call on the investor page of our website as well. To listen to a replay of this call, you can dial 1877-344-7529. Replay access code 876-3803. This replay will be available through May 12th.
Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed. For additional information, we ask that you refer to our filings with the Securities and Exchange Commission. During this call, we may refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures, as well as a reconciliation of these non-GAAP measures to GAAP financial information, is available on our website. With that, let me turn things over to AAM's Chairman and CEO, David Dauch.
Thank you, David Lim, good morning, everyone. Thanks for joining us today to discuss AAM's financial results for the first quarter of 2023. Joining me on the call today is Chris May, AAM's Executive Vice President and Chief Financial Officer. To begin my comments, I'll review the highlights of our first quarter financial performance. Next, I will touch on some exciting news in the quarter, including significant developments with our electrification business. The momentum of our technology is clear and is accelerating. The combination of our technology leadership, including power density, mass optimization, efficiency, and NVH expertise, is driving a strong interest in our product portfolio. After Chris covers the details of our financial results, we'll open up the call to any questions that you all may have. Let's begin. AAM's first quarter of 2023 sales were $1.49 billion.
AAM continues to be impacted by downtime at our largest customers and production volatility. We are closely monitoring the overall macro environment, including rising interest rates and consumer sentiment that drives production and demand. We remain focused on factors that we can control. From a profitability perspective, AAM's adjusted EBITDA in the first quarter was $175 million or 11.7% of sales. Disruption in the supply chain and changes to the production schedules adversely impacted AAM in the quarter. This continues to be exacerbated by a tight labor market. We anticipate this backdrop to continue throughout 2023. Remain hopeful that the operating environment should incrementally improve in successive quarters. We experienced launch costs in the first quarter as the company is in the launch mode on some of our most significant launches of the year.
We anticipate these costs to stabilize in the following quarters. Chris will provide more details about our EBITDA performance in the quarter. AAM's adjusted earnings per share in the first quarter of 2023 was a loss of one penny. AAM experienced a cash outflow in the quarter. AAM's adjusted free cash flow use in the first quarter was $17 million. Let me talk about some exciting business updates and key highlights, which you can see on slide four of our investment package. Earlier this year at our Technology Day, we showed the investment community the strengths and the advantages of our electric propulsion product portfolio. Today, that technology foundation is continuing to manifest into tangible results. We are very pleased to announce that AAM will supply Stellantis with e-Beam axles for a future electric vehicle program.
The program is set to launch in the latter part of this decade. We are limited on any other further details that we can share on this significant program. We are clearly demonstrating our capabilities and value proposition in electric propulsion technology and systems integration to the OEM community. This is a great example of how AAM is leveraging the axle heritage of the company with cutting-edge electric propulsion technology leadership of today to drive our future growth. In the past several quarters, we have announced multiple e-Beam awards with EKA, Jupiter and now Stellantis. We expect the momentum to continue as we are in significant conversations with a number of other OEMs. Remember, our e-Beams and EDUs are designed to support multiple vehicle segments and architectures.
AAM made a commitment and investment in the Global Strategic Mobility Fund, which is managed by EnerTech Capital. The investment provides AAM with access to new startup and fully vetted high-tech companies advancing automotive technologies. From a business recognition standpoint, we're excited to share that AAM was once again recognized by General Motors with the Overdrive Award for its efforts in sustainability. This is our third consecutive year of receiving the Overdrive Award, which recognizes suppliers for performance in such areas as purchasing, manufacturing services, customer care, after-sales, and logistics. AAM also made the list of America's Best Large Employers by Forbes, our fourth time in doing so, and Newsweek recognized AAM as one of America's Most Responsible Companies here in 2023. From an ESG perspective, we are also very pleased to announce that we recently published in April our 2022 sustainability report.
Some of the key highlights of this report include achieving our SBTi validation of greenhouse gas emission goals, an A- rating on the CDP Climate Change Survey , hiring our first executive for diversity, equity, and inclusion, improving our all safety performance metrics, and establishing a Supplier Sustainability Council while increasing our spend with diverse suppliers. Clearly, AAM is committed to profitably growing our business in a way that is sustainable, socially responsible, and equitable. To close out my comments, slide six shows our guidance, which is unchanged. AAM is targeting sales from $5.95 billion-$6.25 billion, adjusted EBITDA of approximately $725 million-$800 million, adjusted free cash flow of approximately $225 million-$300 million, which assumes a capital spending in the range of 3.5%-4%.
Again, unchanged from earlier guidance. In the continuation of the theme that started in the past several years, the operating environment remains dynamic. We are hopeful to see some stabilization in the second half of the year, and it is difficult to predict when normal will return, but until it does, we will continue to remain focused on cost control, daily performance and execution, continuous improvement, quality performance, and bringing the future faster. As we've communicated many a times before, our aim in the future, and we will continue to drive our efforts towards securing our primary legacy business, generating strong free cash flow, strengthening our balance sheet, advancing our electrification portfolio, and positioning AAM for future profitable growth. I'm very excited about what lies ahead for AAM, and that concludes my remarks.
Let me now turn the call over to our Executive Vice President and Chief Financial Officer, Chris May. Chris?
Thank you, David, and good morning, everyone. I will cover the financial details of our first quarter with you today. I will also refer to the earnings slide deck as part of my prepared comments. Let's go ahead and begin with sales. In the first quarter of 2023, AAM sales were $1.49 billion compared to $1.44 billion in the first quarter of 2022. Slide 8 shows a walk of first quarter 2022 sales to first quarter 2023 sales. In the quarter, pricing was approximately a $5 million impact. Positive volume, mix, and other was $10 million. The primary contributor to the year-over-year sales increase was the Tekfor acquisition, which contributed $101 million to sales.
Lastly, metal market passthroughs and FX lowered net sales by approximately $48 million, with metal and FX both lower. During the quarter, the key full-size truck programs that we support experienced a fair amount of downtime. Overall, while North American production was up year-over-year, our primary full-size truck platforms related products were generally flat year-over-year. Let's move on to profitability. Gross profit was $160.6 million in the first quarter of 2023 as compared to $186.8 million in the first quarter of 2022. Adjusted EBITDA was $175.4 million in the first quarter of 2023 versus $196.1 million last year. You can see the year-over-year walk down of adjusted EBITDA on slide nine.
In the quarter, volume, mix, and other added $4 million of adjusted EBITDA. R&D increased by approximately $8 million to support product launches and our electrification technology development. Net inflation, performance, and other was a headwind of $27 million. For some color on this variance, it is a mix of net inflation for labor and materials, inefficiencies due to production volatility, and launch costs we incurred as we are ramping up significant new programs in the quarter. Going forward, we would expect labor inflation to remain, efficiencies to improve with stability, and launch costs to continue into the second quarter and reduce thereafter. Let me now cover SG&A. SG&A expense, including R&D, in the first quarter of 2023 was $98.3 million or 6.6% of sales.
This compares to $86.1 million or 6% of sales in the first quarter of 2022. AAM's R&D spending in the first quarter of 2023 was approximately $43 million. As we mentioned before, R&D will trend around the $40 million range per quarter as we continue to invest in our electric drive technology, capitalizing on the growing number of electrification opportunities that are before us, including the Stellantis announcement today. The good news here is we continue to see multiple new electric propulsion opportunities driving this investment. Let's move on to interest and taxes. Net interest expense was $44.6 million in the first quarter of 2023 compared to $41.7 million in the first quarter of 2022. Although our total debt is lower at quarter end on a year-over-year basis, the rising rate environment is driving the interest rate increase.
In the first quarter of 2023, our income tax expense was de minimis as compared to an expense of $3 million in the first quarter of 2022. For 2023, we expect our adjusted effective tax rate to be somewhat elevated in the 40%-50% range, primarily due to an increase in a current period valuation allowance. Taking all this into account, our GAAP net loss was $5.1 million in the quarter or $0.04 per share in the first quarter of 2023 compared to a net income of $1 million or $0.01 per share in the first quarter of 2022.
Adjusted earnings per share, which excludes the impact of items noted in our earnings press release, was a loss of $0.01 per share in the first quarter of 2023 compared to $0.19 per share in the first quarter of 2022. Let's now move to cash flow and the balance sheet. Net cash provided by operating activities for the first quarter of 2023 was $32.1 million. Capital expenditures, net of proceeds from the sale of property, plant, and equipment for the first quarter of 2023 were $46.2 million. Cash payments for restructuring and acquisition-related activity for the first quarter of 2023 were $4 million. The net cash inflow for insurance proceeds in the operating section of the statement of cash flows related to the Malvern fire was $7 million in the quarter.
Reflecting the impact of these activities, AAM incurred an adjusted free cash flow use of $17.1 million in the first quarter of 2023. We note that historically, working capital is often an outflow in the first quarter, and we experienced that trend this year. From a debt leverage perspective, we ended the quarter with net debt of $2.4 billion and LTM adjusted EBITDA of $726.6 million, calculating a net leverage ratio of 3.3x at March 31st. In the first quarter, we continued to reduce our outstanding debt by over $25 million, and we intend to continue to utilize the free cash flow generating power of AAM to strengthen the balance sheet by reducing our outstanding debt. As for the rest of the year, slide 6 shows our full year guidance.
Our 2023 financial targets are unchanged from when we initially provided them on February 17th. For sales, we are targeting the range of $5.95 billion-$6.25 billion for 2023. This sales target is based upon a North America production of 14.5 million-15.1 million units and select assumptions for our key programs. Underpinning our North America production and sales ranges, we anticipate the GM T1XX program on a year-over-year basis to be flat to up to approximately 5% or 10%. In terms of quarterly cadence considerations, we would expect continued launch costs into the second quarter and customer inflation recoveries more weighted in the second half of the year. While uncertainty remains, we are cautiously optimistic that the operating environment will improve throughout the year.
Our adjusted EBITDA target is $725 million-$800 million, and our adjusted free cash flow target is $225 million-$300 million. Big picture, this quarter has been a busy quarter with critical launch activity, experienced more large truck downtime than expected, has been impacted by volatility inefficiencies, and has had a robust R&D spend. However, the even bigger picture, customer interest in our new electrification products is growing, and our business is transforming with each new award we earn. Thank you for your time and participation on the call today. I'm going to stop here and turn the call back over to David, so we can start the Q&A. David?
Thank you, Chris and David. We have reserved some time to take questions. I would ask that you please limit your questions to no more than two. At this time, please feel free to proceed with any questions that you may have. Jamie?
Ladies and gentlemen, at this time, I'd like to remind everyone in order to ask a question, please press star and the one on your telephone keypads. We'll pause just for a moment to compile the roster. Our first question today comes from John Murphy from Bank of America. Please go ahead with your question.
Good morning, guys. I just wanna start on slide nine. Obviously, the inflation net performance and other, you know, column is, you know, kind of the, you know, a big swing factor. I'm just curious if you could give us a little bit more detail around sort of the exact numbers there on labor and material logistics and launch costs, I think were kind of the big buckets you talked about. How we should think about those going forward, 'cause I think you kind of alluded to getting, you know, much better recoveries towards the 2nd half of the year.
Yeah, certainly, John. This is Chris. I'll take that question. Yes, if you look on slide nine, you could see that bucket of -$27 million on a year-over-year basis. I would break that down into the three categories that you referred to. Our launch costs, you know, as you know, this is a big backlog year for us. We're launching the Colorado/Canyon. It's one of the larger programs we're launching, plus some of the AMG product continues to launch some variants here. That accounts for about 40%-50% of this.
Think of this as just getting ready, start up, scrap, runoff, et cetera, as we get up to volume run rates here for the back half of the year, as our backlog from a revenue perspective is weighted more towards outside the first quarter and comes online through the course of the year. That's about 40%-50%. Economics here, so think material, freight, labor, et cetera, about 30%-40% of that bucket, and then performance would be the rest associated really with a lot of volatility inside the market.
Okay. That's very helpful. David, as we think about slide four, this Stellantis e-Beam win is great news, and congratulations on that. As you see wins like that, how much does that
Sort of open the door to other potential wins at a company like Stellantis. Is this sort of a very specific e-Beam axle application, or is this something that could expand beyond what appears to be just this initial win even into EDUs, et cetera?
Well, I think the most important thing, and you know this, John, is that we have an extensive portfolio in electrification across e-Beams as well as EDUs. We're very pleased, you know, to partner with Stellantis on this electric vehicle program, you know, utilizing the e-Beam technology. We do think there's other opportunities, not only with Stellantis, but other customers, to use similar technology, but also the expanded portfolio that we have. This is a significant win for us. It launches the latter part of the decade, so we're excited about what this program means.
It also, you know, just validates and verifies our electrification capabilities, not only to Stellantis, but to the other OEMs in regards to the extensive R&D capability that we have, paired up with our operational excellence and our quality and the heritage of our company. We're very, very excited about this award and glad we could announce it here today. Obviously we're limited in regards to some of the details we can share, but very positive news for AAM.
I'm sorry, if I can sneak one housekeeping. That 40%-50% tax rate, Chris, you alluded to for the year, how much of that is cash and non-cash and what's normal?
Yeah. I mean, that would I mean, technically, that's our book rate. Our cash taxes for the year, around $65 million.
Okay. I'm sorry, what rate should we think of as normal?
Oh, I mean, from a cash perspective?
No, a book in cash I mean, a book basis going forward. I mean.
Oh, yeah. Like outside of 23, you know, think of the low 20% range under current load.
Got it. Okay. Thank you very much, guys. I appreciate it.
Yeah. Thanks, John.
Our next question comes from Ryan Brinkman from JP Morgan. Please go ahead with your question.
Great. Thanks for taking my question. I thought to ask around, you know, the e-Beam axle award with Stellantis. I know the press release refers to your three-in-one e-Drive technology featuring an integrated motor, inverter, and gearbox. I think that means, but just wanted to confirm if you are integrating your components into the complete system you're providing, your own or your JV partners components, I mean, rather than integrating the components of others. If that is the case, you know, maybe you can speak to how you're able to manage that, how you're able to, or even get into the system integration, how are you able to, you know, provide the system or the components at a lower cost, or maybe it's a more efficient approach, how you were able to win that award.
Do you think you're in a good position to provide these complete integrated systems where you are providing the components to when it is, you know, attached to the axle because you understand the axle, you're probably providing the axle, et cetera. Maybe you're in a better position even to provide integrated systems when they go into the axle than maybe some other suppliers are when putting it the unit somewhere else, like attached to the engine or transmission because you're an axle expert. How should we think about that?
There was a lot there, Ryan, I'm gonna try to digest it and respond to that here. Yes, we are doing the, you know, the full design, the integration, the testing, the validation, and the assembly of the entire e-Beam axle, just like we've traditionally done for our ICE business in the past. You know, you participated in our Technology Day, you saw our three-in-one systems that we shared with you all at CES. We're clearly, you know, leveraging our heritage and our strength, like we said, we're also partnering with and leveraging our supply base for their components and subsystems. In this case, we are using a strategic partner to support us with respect to motors and inverters.
At the same time, as we've mentioned to you all, we'll continue to develop some of our efforts in R&D activity in motors and inverters ourselves. When it comes to the software side of things and the integration side, we're doing a lot of work on the software ourselves. At the same time, we need to work with the OEMs in regards to, you know, their software integration for the entire vehicle. We'll work jointly together in regards to what we need to do, to coordinate the software side of things. You know, we couldn't be happier to offer and ultimately be able to supply in the future here an integrated system on e-Beam axles, for Stellantis.
As I said, just in John's earlier comment or question, this is gonna open up a lot of other doors to other OEMs as well. I'm very excited about this opportunity with Stellantis, the ability to offer integrated e-Beam systems in this particular one, but also prepared to supply integrated EDUs and e-Beams in the future with other customers as well.
Okay, great to hear. Thanks so much.
Thank you.
Our next question comes from Dan Levy from Barclays. Please go ahead with your question.
Hi, good morning. Thanks for taking the questions. First, wanted to ask just on the 1Q bridge and for the guidance for the full year, if you could maybe just talk to a couple of discrete items. A, your transactional exposure on the Mexican peso, and then B, we've obviously seen an increase in steel. I know you're more exposed to SBQ, but, you know, what's implied for the metal market, which I think in the last on the 4Q print, you said would be a $15 million-$25 million EBITDA headwind.
Dan, this is Chris. As it relates to the peso and the metal market, I guess thinking about our perspective guide. As you know, the Mexico peso is our largest foreign currency exposure from a cost perspective. As you know, we have large operations inside of Mexico. We are subject to some level of volatility associated with the peso, but we do have a significant, I would call
three year rolling hedge program on the peso. We are currently benefiting from some of those hedges that were placed, you know, last year, two years ago, three years ago. Obviously, I think for the most part of this year, we'll continue to reap some of that benefit. We will have some exposure transactionally as the peso has strengthened, from about 20 to let's call it 18 to the dollar. We'll have a little bit of that, but again, our hedges will protect from a lot of that exposure here this year. As it relates to metal market, we generally provide through our guidance metal market forward-looking sort of at current run rate coming off the quarter.
As you know, they declined sort of at the tail end of 2022, declined a little bit inside of the first quarter and have started to clip up at the end of the first quarter. We've seen some clip up in this activity and cost in April and May, early parts of May. Again, we generally do a flat run rate from the end of the quarter embedded in our guidance. We are protected. As you know, we pass on 80%-90% of that exposure to our customers up and down, and it changes every 30 days.
Just to be clear on the peso in the quarter, within the $12 million EBITDA increase on metal markets and FX, it sounds like there was probably very little transactional headwind on the peso.
Yeah. Yes, correct. Not very much. Correct.
Okay, great. Thank you. Just continuing the line of questions on your Stellantis win. I think in the past you disclosed that half of your backlog was drive units versus the other half of your EV component of your backlog was components or subassemblies. I guess I wonder, you know, how much does this change the trajectory of what you're playing for? You know, does this change the backlog, you know, with more CPV, more focus on drive units?
In terms of our backlog, Dan, that commentary related to our recent, three-year backlog we released, for 2023, 2024 and 2025. This program launches in the latter part of the decade, it does not change our view on how we are going to market for the products we supply, both from components and drive units. Obviously large drive units, e-Beam axles have a very high content per vehicle. You've heard us articulate it can be as high as $25+ per vehicle. I would put when you have large applications such as this, it would be $2,500+ . This will clearly weight towards on a dollar perspective versus a component set. It does not change how we think about the products we sell into the market and the customers we continue to work with.
Well, more so in terms of, does this shift your focus a bit more to some of the larger pieces of content as opposed to the subassemblies which are lower content, or is it still sort of a balanced approach throughout all EV opportunities?
No, Dan, this is David. Let me be very clear. We're gonna maintain a balanced approach. As we said, we're one of very few suppliers that can approach the marketplace, you know, in different ways here where we can supply components. Think gears and shafts, subassemblies, think differentials, which we're already supplying both of those segments today to the industry. We're also supplying gearboxes, which is the third item, and then the integrated systems, whether they be EDUs or e-Beam. We're gonna continue to service the market. There's a demand out there in the market for those areas, and we'll do it in balance.
Great. Thanks. If I could just squeeze one more in. If you could maybe just comment on the CapEx requirements for a program like this or more broadly if you, if you're pursuing more drive unit wins.
Yeah, certainly, Dan, this is Chris. We talked a little bit about this at our Technology Day earlier in the year in terms of some of our goals from a capital perspective. That was to keep the capital intensity of new wins in the electrification space at a consistency and an intensity level very similar to our traditional products. Look, a big program, a big driveline program, of course, requires capital to launch, but from a goal perspective, it's to keep that capital intensity very similar to our traditional products. You know, large programs require capital to invest in, as do small ones, but intensity level is what's key here. Optimizing the buy. When you get into some of this, think of this as an e-Beam axle award that we announced here.
That obviously leverages the core products we do today on the traditional side, so we have a great opportunity to leverage existing equipment through this process as well. Again, from an intensity perspective, we would expect it to be similar.
Great. Thank you.
Yep. Thanks.
Our next question comes from Tom Narayan from RBC. Please go ahead with your question.
Hi. Hey, guys. Thanks for taking the question.
All right, Tom.
Hey, along similar lines of questioning on the EBITDA bridge, the Q1 bridge, and then the full year one you guys gave in Q4. On volume, I mean, it looks as though the remainder of the year obviously should see a pretty sizable kind of ramp relative to Q1. I think you guys called that out. Then pricing, it looks like the reverse. I don't know if things maybe have changed since then or, but it looks like you called it like a - $40 million EBITDA headwind on price for the full year, and then it was only - $5 million for Q1.
Curious if you could talk to those two, volume and price, if anything's changed since Q4, and maybe the dynamics in the remainder of the year for those on EBITDA.
Yeah, certainly. Tom, this is Chris. From a volume perspective, I think in my prepared comments, we articulated from a range perspective, especially on the full-size truck programs that we support, how we see the full year playing out. From a pricing perspective, or in addition from a volume, our backlog is also, it's a big backlog year for us. It is more weighted from a revenue perspective outside of the first quarter as we're launching some of these programs inside of the first quarter. That's another key component to think about. From a pricing perspective, yes, we did have $40 million stepping into the year on a year-over-year bridge. That is still our expectation. Generally, we see those sort of come online the first half of the year, not all discreetly inside of the first quarter.
You'll have a little bit of that sort of step in as the year progresses.
Okay. Thanks. My follow-up, you know, Magna this morning issued a raised their production guidance, global auto production guidance lately. We're starting to see kind of folks getting a little more constructive on that, certainly maybe coming from price cutting, coming from automakers or views on pricing coming down on a retail perspective for the OEMs. Just curious how you are viewing auto production just in general. Do you feel that same kind of view of things getting more constructive, or is this still, you know, still challenging and still kind of clouds at the end of the year, supply chain and all that, all those types of issues? Thanks.
Yeah. Yeah. I'll take that. This is David Dauch. Yeah, well, first of all, in the first quarter, we clearly were impacted negatively in regards to unexpected downtime from our customers because of supply chain issues or semiconductor-related matters. There's still some uncertainty and disruption and volatility in the marketplace. We see that continuing, although improving, you know, quarter-over-quarter as we go forward here. Obviously, the macro environment is challenged still. Interest rates are rising, so we'll see how that impacts, you know, consumer sentiment and demand in the future here. You know, the wage inflation is still sticky. We're dealing with that. We're also dealing with economic issues that you're all aware of, both raw material and components wise.
Energy is softening a little bit in regards to Europe from the highs that it was at before, still above where we typically had operated at. Labor availability continues to be an issue, companies are gonna have to run their businesses differently going forward than how we did pre pandemic. That's just a fact of reality. I think freight issues, the increases have subsided still higher than where they were before. Things that need to be dealt with and addressed there. You know, we do see the second half of the year getting better. You know, we've guided the street at 14.5 to 15.1 million units here in North America.
We're hopeful that we're at the higher end of that, but we're also prepared to operate to the lower end if we need to, based on, you know, the marketplace and the customer demand. It's, you know. To wrap it all up, I mean, there's still uncertainty and disruption and volatility in the marketplace. Again, we're gonna stay focused on the things that we can control, but we're hopeful that the successive quarters start to show improvement.
Okay. If I could just sneak one in. Does your guidance incorporate impacts, any potential impacts from UAW with GM?
Absolutely not. We all need to be prepared in regards to a potential work stoppage, but we can't build that into our forecasting right now. If there is an incident or issue that takes place, then obviously the whole marketplace is gonna be impacted. We'll all do so accordingly.
Got it. Thank you.
Yep. Thanks.
Our next question comes from Adam Jonas from Morgan Stanley. Please go ahead with your question.
Hey, guys. First just to housekeeping. What percentage or portion of your CapEx spend this year and, let's say, near term, is devoted to EV, pure BEV products?
just pure BEV this year, Adam, you know, think of it probably like a third as you're starting to launch some of these components that are near term, some of the AMG product, but we're still launching a fair amount of our conventional product, especially this year. That's driving some of our larger backlog. What's a rough estimate at this point?
Yeah. When do we hit like half or When does that flip?
It's gonna transition over the next couple of years because we, you know, half of our backlog is associated with, or nearly half, right, is associated with EV product on the component side, as well as some additional EDU wins. This announcement we had here today is the latter part of the decade. It's just gonna continue to step up.
Adam, this is David. I mean, 40% of our backlog is electrification based today. You know, that backlog covering the 2023 to 2025 period of time. What we're quoting on is about $1.5 billion of new and incremental opportunities that's 75% or more electrification based. To Chris's comments, it's gonna be the latter part of the decade that we'll start seeing that, but as we'll grow into it each year, as we win new and new EV business and that backlog grows on the EV space.
Thanks. Just a follow-up. I mean, let me word this carefully. Some of your OEM customers set these volume targets, you know, a year or so ago when the outlook for EVs, you know, when there was like a year waiting list for a Tesla, and Tesla was the most profitable car company in the world, and, you know, there was just a ton of hype, frankly. I look at those volume targets now that they're still clinging to, and I'm thinking, "There's just no way, like not even close." Now, that's just my opinion. I think some people on this call may have different opinions. How do you remain flexible when you're planning for these radically different type of architectures and products?
Can you tell us when it's delivered by people that just may not be setting price or cost in the industry and, you know, that the gap between the checks that their CFOs wrote and then what can actually get cashed? How do you stay nimble and kinda what's baked into the contract or just help us out here? 'Cause I'm thinking there's this reckoning, and I think it's gonna happen kinda soon, guys.
Yeah, you know, again, Adam, this is David. First and foremost, from a manufacturing standpoint, we're gonna try to design our operations to be as flexible as possible and to utilize as much equipment from ICE, you know, converting over to EV. As we've talked in the past before, there is some dedicated equipment towards EV-related technologies, so we just need to be smart as to how we invest. We need to be sensitive to your point in regards to volumes. All the volumes right now are forecast other than, you know, what some of the EV producers are generating today, especially Tesla. You know, so we've gotta be smart about that, because there's still a lot of uncertainty in regards to the adoption rates for electrification.
The other part of that is so we, you know, we're balanced in regards to our commercial approach with our customers here, so that we can share and mitigate the risk and address any concerns that come up on fixed cost absorption issues and things along those lines. You know, you raise a very important point. There's still a lot of issues that are potentially gonna impact the penetration of EVs. You know, just the grid itself, the charging systems, the battery technology, the raw material cost, can the OEMs make money at this or not? When it's all said and done, it's gonna come down to consumer affordability.
Right now, the average electrification price for a vehicle is $66,000, which is beyond where the mass market is, and that's why we've gotta be smart about, you know, looking at what these adoption rates are gonna be and the volume penetration.
That's great. Have a good weekend, guys. Thanks.
Yeah. Thanks, Adam. Appreciate it.
Our next question comes from James Picariello from BNP Paribas. Please go ahead with your question.
Hi, guys.
Good morning, James.
Just on the key customer, you know, downtime, you know, late in the first quarter, you know, clearly, you know, it seems as though, you know, you guys were able to navigate it pretty well. I know you touched on these factors, but what would you attribute to that performance to manage that disruption? Relative to your expectations for the first quarter's margins to trend sequentially flat or worse, you know, what was the biggest, you know, clearest favorable surprise on that front?
Yeah. In terms of, you know, the quarter in that performance bucket that was asked earlier, you know, 10%-20% of that, I would call year-over-year bridge, is associated with performance impacts from that volatility in terms of dimensionalizing some of that inside the quarter. Look, you know, what I'll tell you, James, is continuing to be nimble with production schedules, it's a challenge. You see it dragging through some of our performance in these year-over-year walks. Trying to be nimble, trying to have good communication with customers and, you know, flexing as quick as you can, speed matters in this game, and managing inventories properly as well.
It's a lot to handle and obviously it's not optimizing our performance, so that's why we see some upside in the future when things stabilize.
Got it. I know you called out, you know, some launch costs, you know, set up for the second quarter. Just in terms of the margin cadence for the year, should we assume a steady profitability improvement, you know, through the year?
Yes. Our guidance would indicate that's correct. Again, we'll have some launch costs here inside of the second quarter and recoveries from customers on some of those discussions, you know, are a little back weighted towards the second half of the year versus the first half.
Got it. My last one is just, you know, congrats on the Stellantis award.
Oh, thank you.
Will this cover the nameplate's entire production or could it be variant specific?
It'll cover the nameplate production. At the same time, there could be derivatives. That's gonna be dependent upon where Stellantis goes with the product. Clearly, we'll be able to adapt and adjust to their market needs. We also have other products in our portfolio based on what they may be looking for.
Got it. Congrats again. Thanks.
Okay. Yeah, thanks again. Have a good weekend.
Ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to David Lim for any closing remarks.
Thank you, Jamie. We thank all of you who have participated on this call and appreciate your interest in AAM. We certainly look forward to talking with you in the future. Thank you. Have a good weekend.
Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining. You may now disconnect your lines.