Q1 2023 American Axle & Manufacturing Holdings Inc Earnings Call
Participants
Christopher John May; Executive VP & CFO; American Axle & Manufacturing Holdings, Inc.
David Charles Dauch; Chairman & CEO; American Axle & Manufacturing Holdings, Inc.
David H. Lim; Head of IR; American Axle & Manufacturing Holdings, Inc.
Adam Michael Jonas; MD; Morgan Stanley, Research Division
Dan Meir Levy; Research Analyst; Barclays Bank PLC, Research Division
Gautam Narayan; Assistant VP; RBC Capital Markets, Research Division
James Albert Picariello; Research Analyst; BNP Paribas Exane, Research Division
John Joseph Murphy; MD and Lead United States Auto Analyst; BofA Securities, Research Division
Ryan J. Brinkman; Senior Equity Research Analyst; JPMorgan Chase & Co, Research Division
Presentation
Operator
Good morning, everyone. My name is Jamie, and I will 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. (Operator Instructions).
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.
David H. 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 the 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 (1) 877 344-7529 replay access code 8763803. This replay will be available through May 12.
Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risks and uncertainties, which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed. For additional information, we ask that you refer to our filings with the Securities and Exchange Commission. Also, during this call, we may refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website.
With that, let me turn things over to AAM's Chairman and CEO, David Dauch.
David Charles Dauch
Thank you, David, and 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 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.
So let's begin. AAM's first quarter of 2023 sales were $1.49 billion. AAM continued 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, but we 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, and 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 $0.01. AAM experienced a cash outflow in the quarter and AAM adjusted free cash flow used in the first quarter was $17 million.
Let me talk about some exciting business updates and key highlights, which you can see on Slide 4 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 but we are clearly demonstrating our capabilities and value proposition and 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. And 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. Additionally, AAM made a commitment and investment in the global strategic mobility fund, which is managed by EnerTech Venture Capital. The investment provides AAM with access to new start-up 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 6 shows our guidance, which is unchanged. AAM is targeting sales from $5.95 billion to $6.25 billion, adjusted EBITDA of approximately $725 million to $800 million, adjusted free cash flow of approximately $225 million to $300 million, which assumes a capital spending in the range of 3.5% to 4%. So again, unchanged from earlier guidance.
And 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 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.
And as we've communicated many 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?
Christopher John May
Okay. Thank you, David, and good morning, everyone.
I will cover the financial details of our first quarter review today. I will also refer to the earnings slide deck as part of my prepared comments. So 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, and the primary contributor to the year-over-year sales increase was the Tekfor acquisition, which contributed $101 million to sales. And lastly, metal market pass-throughs 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.
Now 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 9. 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 and efficiencies 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 its 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% to 50% range, primarily due to an increase in the 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 31. 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 17. For sales, we are targeting the range of $5.95 billion to $6.25 billion for 2023. This sales target is based upon a North America production of 14.5 million to 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 to $800 million, and our adjusted free cash flow target is $225 million to $300 million. So 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 and efficiencies 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. So 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?
David H. Lim
We have reserved some time to take questions. I would ask that you please limit your questions to no more than 2. So at this time, please feel free to proceed with any questions that you may have. Jamie?
Question and Answer Session
Operator
(Operator Instructions) Our first question today comes from John Murphy from Bank of America.
John Joseph Murphy
I just want to start on Slide 9. And obviously, the inflation, net performance and other bar there -- column is kind of a big swing factor. So 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 for kind of the big buckets you talked about and how we should think about those going forward? Because I think you kind of alluded to getting much better recoveries towards the second half of the year.
Christopher John May
Yes, certainly, John, this is Chris. I'll take that question. So yes, if you look on Slide 9, you could see that bucket of minus $27 million on a year-over-year basis. I would break that down into the 3 categories that you referred to. Our launch costs, as you know, this is a big backlog year for us. We're launching the Colorado Canyon as one of the larger programs we're launching plus some of the AMG product continues to launch some variance here. That accounts for about 40% to 50% of this.
So think of this as just getting ready, startup, scrap, runoff, et cetera, as we get up to volume run rate 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. So that's about 40% to 50% economics here. So think material, freight, labor, et cetera, about 30% to 40% of that bucket and the performance would be the rest associated really with a lot of volatility inside the market.
John Joseph Murphy
Okay. That's very helpful. And then David, as we think about Slide 4 the Stellantis e-Beam axle 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?
David Charles Dauch
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 to partner with Stellantis on this electric vehicle program utilizing 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 launched in the latter part of the decade.
So we're excited about what this program means -- it also just validates and verifies our electrification capabilities not only just Stellantis, but to the other OEMs in regards to the extensive R&D capability that we have in paired up with our operational excellence and our quality and the heritage of our company. So we're very, very excited about this award and glad we could announce it here today. And obviously, we're limited in regards to some of the details we can share, but very positive news for AAM.
John Joseph Murphy
I'm sorry, if I can sneak one housekeeping. The 40% to 50% tax rate, Chris, you alluded to for the year, how much of that is cash and noncash? And what's normal?
Christopher John May
Yes. So I mean that would -- I mean, technically, that's our book rate. Our cash taxes for the year around $65 million.
John Joseph Murphy
Okay. And what rate should we think is normal?
Christopher John May
I mean from a cash perspective?
John Joseph Murphy
No. Book and cash -- I mean, a book basis going forward. I mean.
Christopher John May
Like outside of '23I think it's a low 20% range under [current level].
Operator
Our next question comes from Ryan Brinkman from JPMorgan.
Ryan J. Brinkman
I thought to ask around the e-Beam axle award with Stellantis. I know the press release refers to your 3-in-1 eDrive 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? And if that is the case, maybe you can speak to how you're able to manage that.
How are you able to -- or even get into the system integration, how are you able to 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. And then 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 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 to axle than maybe some other suppliers are when putting the unit somewhere else like attached to the engine or transmission because you're an axle expert. How should we think about that?
David Charles Dauch
There is a lot there, Ryan, but I'm going to try to digest it and respond to that here. But yes, we are doing 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 ICE business in the past. You participated in our Technology Day, you saw our 3-in-1 systems that we shared with you all at CES. We're clearly leveraging our heritage and our strength like we said, but we're also partnering with and leveraging our supply base for their components and subsystems. And in this case, we are using a strategic partner to support us with respect to motors and inverters. But 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. But at the same time, we need to work with the OEMs in regards to their software integration for the entire vehicle. So we'll work jointly together in regards to what we need to do to coordinate the software side of things. But 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.
And as I said just in John's earlier comment or question, this is going to open up a lot of other doors to other OEMs as well. So 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.
Operator
Our next question comes from Dan Levy from Barclays.
Dan Meir Levy
First, I 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 what's implied for the metal market, which I think in the last on the 4Q print you said would be a $15 million to $25 million EBITDA headwind.
Christopher John May
Yes, Dan, this is Chris. As it relates to the peso and the metal market, I guess, thinking about our prospective guidance. So 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, 3-year rolling hedge program on the peso. So we are currently benefiting from some of those hedges that were placed last year, 2 years ago, 3 years ago. And 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, let's call it, MXN 18 to the $1. So 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. So as you know, they declined sort of at the tail end of 2022, declined a little bit inside of the first quarter and has 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. But again, we generally do a flat run rate from the end of the quarter embedded in our guidance. So we are protected. As you know, we pass on 80% to 90% of that exposure to our customers up and down, and it changes every 30 days.
Dan Meir Levy
Okay. So just to be clear on the peso in the quarter within the $12 million EBITDA increase on metal market and FX, it sounds like there was probably very little transactional headwind on the peso...
Christopher John May
Yes, correct. Not very much. Correct.
Dan Meir Levy
Okay. Great. And then 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. So I guess I wonder, how much does this change the trajectory of what you're playing for? Does this change the backlog with more CPV, more focused on drive units.
Christopher John May
So in terms of our backlog, Dan, that commentary related to our recent 3-year backlog we released, so for '23, '24 and '25, this program launches in the latter part of the decade, but it does not change our view on how we are going to market for the products we supply, both from components and drive units. But 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 plus per vehicle. I would put when you have large applications such as this, it would be $2,500 plus, plus. So this will clearly weight towards on a dollar perspective versus a component side. But it does not change how we think about the products we sell into the market and the customers we continue to work with.
Dan Meir Levy
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.
David Charles Dauch
So Dan, this is David. Let me be very clear. We're going to maintain a balanced approach. As we said, we're one of the very few suppliers that can approach the marketplace in different ways here where we can supply components. So 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. So we're going to continue to service the market. There's a demand out there in the market for those areas, and we'll do it in balance.
Dan Meir Levy
Great. If I could just squeeze 1 more in. If you could maybe just comment on the CapEx requirements for a program like this or more broadly, if you're pursuing more drive unit wins.
Christopher John May
Yes. Certainly, Dan. This is Chris. And 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. And that was to keep the capital intensity of new wins in the electrification space and 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 the capital intensity very similar to our traditional products. But large programs require capital to invest in as do small ones, but the intensity level is what's key here. Optimizing the buy also when you get into some of this -- think of this as 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. But again, from an intensity perspective, we would expect it to be similar.
Operator
Our next question comes from Tom Narayan from RBC.
Gautam Narayan
Along similar lines of questioning on the EBITDA bridge, the Q1 bridge and then the full year one you guys gave in Q4. So 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. And then pricing, it looks like the reverse. And I don't know if things maybe have changed since then, but it looks like it was -- you called out like a negative $40 million EBITDA headwind on price for the full year and then it was only negative $5 million for Q1. So curious if you could talk to those 2 volume and price. If anything has changed since Q4 and maybe the dynamics in the remainder of the year for those on EBITDA?
Christopher John May
Yes. Certainly, and 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. 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. So 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. And generally, we see those sort of come online in the first half of the year, not all of discrete with inside of the first quarter. So you'll have a little bit of that sort of step in through as the year progresses.
Gautam Narayan
Okay. And then my follow-up, Magna this morning issued a -- raised their production guidance, global auto production guidance slightly. We're starting to see kind of folks getting a little more constructive on that certainly may be coming from price cutting coming from automakers or views on pricing coming down on a retail perspective for the OEMs. Just curious how you're viewing auto production just in general, do you feel that same kind of view of things getting more constructive? Or is this still challenging and still kind of clouds at the end of the year, supply chain, all that -- all those types of issues.
David Charles Dauch
Yes. I'll take that. This is David Dauch. 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. So there's still some uncertainty and disruption and volatility in the marketplace. We see that continuing, although improving 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 consumer sentiment and demand in the future here. 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 highest that it was at before but still above where we typically had operated at. Labor availability continues to be an issue and companies are going to 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, but still higher than where they were before. So things that need to be dealt with and addressed there. But we do see the second half of the year getting better.
We've guided our -- The Street at 14.5 million 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 the marketplace and the customer and demand. But to wrap it all up, I mean, there's still uncertainty and disruption and volatility in the marketplace. Again, we're going to stay focused on the things that we can control. But we're hopeful that the successive quarters start to show improvement.
Gautam Narayan
Okay. And if I could just sneak one in. Does your guidance incorporate impacts any potential impacts from UAW with the GM?
David Charles Dauch
Absolutely not. We all need to be prepared in regards to potential work stoppage, but we can't build that into our forecasting right now. There is an incident or issue that takes place that obviously the whole marketplace is going to be impacted and we'll all do so accordingly.
Operator
Our next question comes from Adam Jonas from Morgan Stanley.
Adam Michael Jonas
First, just a housekeeping. What percentage or portion of your CapEx spend this year and let's say, near term is devoted to EV, pure EV products?
Christopher John May
Just pure this year, Adam, it's not really -- think of it probably like 1/3 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 products, especially this year that's driving some of our larger backlog, but that's a rough estimate at this point.
Adam Michael Jonas
Yes. When do we hit like half or when does that flip?
Christopher John May
Well, it's going to transition over the next couple of years because we -- half of our backlog is associated with -- or nearly half is associated with EV product on the component side as well as some additional EV wins. And then this announcement we had here today is the latter part of the decade. So it's just going to continue to step up.
David Charles Dauch
Yes. So this is David. I mean 40% of our backlog is electrification based today. That backlog covering the '23 to '25 period of time. what we're quoting on is about $1.5 billion of doing incremental opportunities that's 75% or more electrification based. So to Chris' comments, it's going to be the latter part of the decade that we'll start seeing that, but we'll grow into it each year as we went to a new EV business and that backlog grows on the EV space.
Adam Michael Jonas
Just a follow-up. I mean, let me word this carefully. Some of your OEM customers set these volume targets a year or so ago, when the outlook for EVs, when there was like a year waiting list for a Tesla and Tesla is the most profitable car company in the world, and there's just a ton of hype, frankly. And I look at those volume targets now that they're still clinging to, and I'm thinking there's just no way, right, not even close. Now that's just my opinion. And I think some people on this call may have different opinions.
But how do you remain flexible when you're planning for these radically different type of architectures and products. Can you tell us what -- when it's delivered by people that just may not be setting price or cost in the industry and the gap between the checks that their CFOs wrote and then what can actually get cashed. How do you stay nimble on kind of what's baked into the contract or just help us out here because I'm thinking there's this reckoning and I think it's going to happen kind of soon, guys.
David Charles Dauch
Well, this is David. First and foremost, from a manufacturing standpoint, we're going to try to design our operations to be as flexible as possible and to utilize as much equipment from ICE converting over EV, but 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 what some of the EV producers are generating today, especially Tesla. So we've got to be smart about that because there's still a lot of uncertainty in regards to the adoption rates for electrification.
And the other part of that is that we're balanced in regards to our commercial approach with our customers here so we can share and mitigate the risk and address any concerns that come up on fixed cost absorption issues and things along those lines. But you raised a very, very important point. There's still a lot of issues that are potentially going to impact the penetration of EVs. Just the grid itself, the charging systems, the battery technology, the raw material cost. Can the OEMs make money at this or not. But when it's all said and done, it's going to come down to consumer affordability. And 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 got to be smart about looking at what these adoption rates are going to be and the volume penetration.
Operator
And our next question comes from James Picariello from BNP Paribas.
James Albert Picariello
Just on the key customer downtime late in the first quarter, clearly, it seems as though you guys were able to navigate it pretty well and I know you touched on these factors, but what would you attribute to that performance to manage that disruption? And then relative to your expectation for the first quarter's margins to trend sequentially flat or worse what was the biggest clearest favorable surprise on that.
Christopher John May
Yes. In terms of the quarter in that performance bucket that was asked earlier, 10% to 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. And look, what I want to 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, but trying to be nimble, trying to have good communication with customers and flexing as quick as you can, speed matters in this game and managing inventories properly as well. So 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.
James Albert Picariello
Got it. And I know you called out some launch costs set up for the second quarter. Just in terms of the margin cadence for the year, should we assume steady profitability improvement through the year?
Christopher John May
Yes, our guidance would indicate that's correct. But again, we'll have some launch costs here inside of the second quarter and recoveries from customers on some of those discussions are a little back weighted towards the second half of the year versus the first half.
James Albert Picariello
Got it. And my last one is, just congrats on the Stellantis award. Will this cover the nameplates entire production? Or could it be variant specific?
David Charles Dauch
Cover the nameplate production. At the same time, there could be derivatives. That's going to be dependent upon where Stellantis goes with the product. Clearly, we'll be able to adapt and adjust onto their market needs but we also have other products in our portfolio based on what they may be looking for.
Operator
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.
David H. Lim
Thank you, Jamie, and we thank all of you who have participated on this call and appreciate your interest in AAM. We certainly look forward to talking with you in the future. Thank you. Have a good weekend.
Operator
And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining. You may now disconnect your lines.
