American Axle & Manufacturing Holdings Inc (AXL) Q4 2020 Earnings Call Transcript

Image source: The Motley Fool.

American Axle & Manufacturing Holdings Inc (AXL -1.19%)
Q4 2020 Earnings Call
Feb 12, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Elisa, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.

David H. Lim -- Head of Investor Relations

Thank you, and good morning. I'd like to welcome everyone who is joining us on AAM's fourth quarter earnings call. Earlier this morning, we released our fourth quarter of 2020 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 1877-344-7529, replay access code, 10150289. This replay will be available beginning at 1:00 PM today through 11:59 PM Eastern Time, February 19.

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 disclosed. 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 C. Dauch -- Chairman of the Board and Chief Executive Officer

Thank you, David, and good morning to everyone. Thank you for joining us today to discuss AAM's financial results for the fourth quarter and full year of 2020. Joining me on the call today are Mike Simonte, AAM's President; and Chris May, AAM's Vice President and Chief Financial Officer.

To begin my comments today, I'll review the highlights of our fourth quarter and full year 2020 financial performance. Next, I'll cover some highlights from 2020, including some updates on the technology and innovation front. And lastly, I'll review our 2021 financial outlook and our three-year new business backlog before turning things over to Chris. After Chris covers the details of our financial results, we will open up the call for any questions that you may have.

AAM delivered solid operating financial results and cash flow performance in the fourth quarter and full year of 2020, as global production continue to recover, resulting in a strong EBITDA conversion. AAM's fourth quarter 2020 sales were $1.44 billion compared to $1.43 billion in the fourth quarter of 2019. Recall, last year, we were impacted by the GM work stoppage and we sold our US casting business.

For the full year 2020, AAM's sales were $4.7 billion. During the year, we experienced slower sales coming from a decline in global production due to the COVID-19 and the sale of our US casting business.

From a profitability perspective, AAM's adjusted EBITDA in the fourth quarter of 2020 was $261.5 million or 18.2% of sales, a fourth quarter record for AAM. AAM concluded a strong second half of 2020 with a solid fourth quarter financial performance, which I'm very, very pleased about.

For the full year 2020, AAM's adjusted EBITDA was $720 million or 15.3% of sales. For the full year, we were impacted by COVID-19 production shutdowns and lower volumes. However, we also managed through a difficult operating environment, delivering strong EBITDA margins in the second half, as production rebounded and our cost structure initiatives took hold.

AAM's adjusted earnings per share in the fourth quarter of 2020 was $0.51 per share. And for the full year 2020, AAM's adjusted EPS was $0.14 per share.

AAM continued to deliver strong free cash flow performance in 2020. AAM's adjusted free cash flow in the fourth quarter 2020 was $173 million. And for the full year 2020, AAM's adjusted free cash flow was $311 million. This is a fantastic result, considering the challenges that we faced during the year. We also reduced our gross debt by nearly $200 million in 2020, paying down approximately $100 million just in the fourth quarter alone. Furthermore, we are committed to reducing our debt and strengthening our balance sheet in 2021. Chris will provide additional information regarding the details of our financial results in just a few minutes.

Let me wrap up 2020 with a look back on some of the key highlights, which you can see highlighted on Slide 4 of our slide deck. The automotive industry faced significant challenges, but AAM worked through it with the dedication of our associates. Operationally, we completed 17 program launches. We received 13 customer quality awards and multiple Supplier of the Year awards from customers such as General Motors and Hyundai. We flexed our cost structure in quick response to pandemic and generated robust EBITDA results throughout the year. And generating significant free cash flow has strengthened our financial profile through gross debt paydowns.

From a technology perspective, we have benefited from a growing and expanding relationship with Inovance Automotive, a leading provider of automotive power electronics and powertrain systems in China. Back in the second quarter of 2020, we won our first eDrive award with them for a new Chinese OEM. Already this year, we announced three additional OEM programs with Inovance. Our alliance with them has created significant value for us by enhancing customer relationships within the swiftly growing Chinese electrification Market.

In addition, and even more exciting, we've recently signed a technology agreement with Inovance to accelerate the development and delivery of scalable next-generation three-in-one integrated electric drive systems, which integrates the inverter, the electric motor and the gearbox. By leveraging the partner's complementary expertise in electric propulsion technology, this collaboration will seek to enhance the power density, efficiency and cost-effectiveness of the electric driveline technology offered in the global electrification market.

Our cooperation with Inovance Automotive will add an exciting new offering to AAM's fast growing portfolio of scalable three-in-one electric drive systems and accelerate our ability to bring new cost-competitive technologies to the market. We are excited to join forces with such a highly accomplished and innovative provider of power electronics technology. At AAM, our goal is to be at the forefront of electrification technology.

We're also working together with REE Automotive, a leader in electric platform technology. The company's core innovation includes integrating traditional vehicle components into the wheel, allowing for a flat and modular platform. We have a small financial investment in REE, and we look forward to further opportunities to drive value from this partnership, utilizing our technology leadership and our operational excellence.

In addition to these exciting partnerships, we continue to make great progress in innovation -- in innovative electric driveline solutions. As we mentioned earlier, we were awarded not only the Automotive News PACE Award for electric drive technology in the Jaguar I-Pace, but also a second award for our outstanding collaboration with JLR. These awards further validate not only our technology, but also our commitment to our customers.

In addition, we have several important electrification launches in 2021, including our high-performance eDrive unit for a premium European OEM that we can't wait to tell you more about, as well as multiple electric powertrain component launches, including one for electric pickup trucks and also one for a commercial truck. We are excited about our prospects in electrification as the industry has begun to pivot in that direction. AAM is ready to support our customers with cutting-edge electrification products, and we look forward to keeping you up to date with our new developments.

On a separate note and ICE-related, we are also pleased to share that we have secured the next-generation Ram heavy-duty pickup truck business with Stellantis into the next decade. Stellantis has been a great partner to AAM over the years, and we look forward to extending our mutually beneficial relationship. This award, coupled with the current business that we enjoy today with Stellantis, exceeds several [Phonetic] billion dollars in sales and is a key foundational program for AAM. This program, along with other customer next-generation program awards, will support solid cash flow performance for many years to come for AAM. These are all key developments as we leverage our strong core business to support our electrification technologies as we work to bring the future faster.

I'm also very proud to share that AAM was named on Newsweek's List of America's Most Responsible Companies and to the annual Forbes list of the World's Best Employers for 2020. We look forward to sustaining this positive momentum in 2021 to support our sustainability priority topics and diversity, equity and inclusion initiatives.

Before I turn it over to Chris, let me cover AAM's three-year new business backlog and our 2021 full-year financial outlook that was recently released in our press release. AAM expects our gross new business backlog, covering the three-year period of 2021 through 2023, to be approximately $600 million. We expect the launch cadence of this backlog to be $200 million in 2021, $150 million in 2022, and $250 million in 2023. And this also factors in the impact of updated customer launch timing and the latest customer volume expectations that we've received from our customers.

You can also see the breakdown of our backlog on Slide 7. About 70% of this new business backlog relates to global light trucks, including crossover vehicles, and another 15% relates to hybrid electric powertrains. Nearly half of this will be realized outside of North America, continuing our trend of diversifying geographically on an organic basis.

I'd like to turn to AAM's 2021 financial outlook, which can be seen on Slide 8, and is as follows. AAM is targeting full year sales between $5.3 billion and $5.5 billion in 2021. AAM is targeting adjusted EBITDA of approximately $850 million to $925 million in 2021. And AAM is targeting adjusted free cash flow in 2021 of approximately $300 million to $400 million, which contemplates capital spending of approximately 4.5% of sales.

While launch activity decreases in 2021, there are still some key new programs we will be focused on during the year, including launching a number of our new electrified products that I mentioned to you earlier. From an end market perspective, we see production at approximately 15.5 million to 16 million units for our primary North American market. As it relates to our specific North American programs, we continue to expect favorable mix weighted toward pickup trucks, SUVs and crossover vehicles. Light trucks made up 74% of the production in North America in 2020, and we see no signs of that changing or slowing down in 2021.

Clearly, 2020 was an unprecedented year, laid with numerous challenges and obstacles. However, I am extremely proud of the AAM team in managing through these speed bumps and instituting protocols to keep our associates safe and healthy, while effectively supporting our customers throughout the year.

As we turn our focus on 2021 and beyond, our core business is solidly intact and well protected for years to come, yielding significant free cash flow generation, which will allow us to strengthen our balance sheet and invest in advanced propulsion technologies to drive profitable growth. Needless to say, I'm very, very excited about the about the future for AAM.

That concludes my prepared remarks. Let me now turn the call over to our Vice President and Chief Financial Officer, Chris May. Chris?

Christopher J. May -- Vice President and Chief Financial Officer

Thanks David, and good morning, everyone. I will cover the financial details of our fourth quarter and full year 2020 results with you today. I will also refer to the earnings slide deck as part of my prepared comments. So, let's go ahead and get started with sales.

In the fourth quarter of 2020, AAM sales were $1.44 billion, compared to $1.43 billion in the fourth quarter of 2019. Slide 11 shows a walk down of fourth quarter 2019 sales to fourth quarter 2020 sales. First, we stepped cut down our fourth quarter 2019 sales by $119 million to reflect the sale of the US casting business unit that was completed in December of 2019. Next, we add back the impact of the GM work stoppage from the fourth quarter of last year. Then we account for the unfavorable impact of COVID-19 on our fourth quarter of 2020 sales, which we estimate to be approximately $40 million. At this point, our estimated sales impact from COVID is only for our India and Brazil locations, which have not recovered to pre-COVID levels for us.

On a year-over-year basis, we are also impacted by GM's exit of its Thailand operations by approximately $10 million. And the transition from a rear beam axle to a new lightweight and highly efficient independent rear drive axle for GM's new full-size SUV impacted sales by about $35 million in the quarter. We will have one more quarter of the year-over-year impact for this transition in the first quarter of 2021. Other volume and mix was positive by $38 million, mainly driven by strong light truck mix in North America. Pricing came in at $19 million on year-over-year impact. And metal market pass-throughs and foreign currency accounted for increase in sales of about $7 million year-over-year.

For the full year of 2020, AAM sales were $4.71 billion as compared to $6.53 billion in the full year of 2019. The impact of COVID-19 and the sale of the US casting business was the primary drivers of this year-over-year decrease.

Now, let's move on to profitability. Gross profit was $236.5 million or 16.4% of sales in the fourth quarter of 2020 compared to $183.4 million or 12.8% of sales in the fourth quarter of 2019. Adjusted EBITDA was $261.5 million in the fourth quarter of 2020 or 18.2% of sales. This compares to $193.5 million in the fourth quarter of 2019 or 13.5% of sales. As David mentioned, this was AAM's best fourth quarter adjusted EBITDA margin in our company's history. You can see a year-over-year walk down of adjusted EBITDA on Slide 12. We benefited from higher sales and from our strong cost reduction actions we implemented this year. For the full year of 2020, AAM's adjusted EBITDA was $720 million and adjusted EBITDA margin was 15.3% of sales.

Let me now cover SG&A. SG&A expense, including R&D, in the fourth quarter of 2020 was $83 million or 5.8% of sales. This compares to $90 million in the fourth quarter of 2019 or 6.3% of sales. AAM's R&D spending in the fourth quarter of 2020 was $31.1 million compared to $39.8 million in the fourth quarter of 2019. For the year, SG&A expense was down about $50 million, due mainly to our cost reduction actions, both temporary and structural. As we head into 2021, we will continue to focus on controlling our SG&A costs. Equally important, we will further our investment in key technologies and innovations with an emphasis on electrification, including shifting resources from traditional product support to new technology development in a cost-effective manner.

Let's move on to interest and taxes. Net interest expense was $52.3 million in the fourth quarter of 2020 compared to $53.4 million in the fourth quarter of 2019. We expect this favorable trend to continue in 2021, as we benefit from continued debt reduction. In the fourth quarter of 2020, we recorded income tax expense of $13.9 million compared to a benefit of $11.5 million in the fourth quarter of 2019. As we head into 2021, we expect our effective tax rate to be approximately 20%.

Taking all of these sales and cost drivers into account, our GAAP net income was $36 million or $0.30 per share in the fourth quarter of 2020 compared to a loss of $454.4 million or a loss of $4.04 per share in the fourth quarter of 2019. Adjusted earnings per share exclude the impact of items noted in our earnings press release. Adjusted EPS for the fourth quarter of 2020 was $0.51 per share versus $0.13 per share in the fourth quarter of 2019.

Let's now move to cash flow and the balance sheet. Net cash provided by operating activities in the fourth quarter of 2020 was $208 million. Capital expenditures, net of proceeds from the sale of property, plant and equipment, for the fourth quarter was $69 million. Cash payments for restructuring and acquisition-related activity in the fourth quarter of 2020 were $33.6 million. Reflecting the impact of this activity, AAM generated adjusted free cash flow of $172.7 million in the fourth quarter of 2020.

For the full year of 2020, AAM generated adjusted free cash flow of $311.4 million compared to $207.8 million in the full year 2019. AAM was able to offset the impact of lower EBITDA through lower capital expenditures, lower tax payments and working capital benefits, including leveraging the AAM Operating System to reduce inventory levels.

From a debt leverage perspective, we ended the year with net debt of $2.9 billion and [Indecipherable] adjusted EBITDA of $720 million, calculating a net leverage ratio of 4 times at December 31. In the fourth quarter of 2020, we prepaid over $100 million of our term loans. We were pleased to utilize the free cash flow generating power of AAM to strengthen the balance sheet by reducing our debt and lowering our future interest payments. We expect to continue this trend in 2021. AAM ended 2020 with total available liquidity of $1.5 billion, consisting of available cash and borrowing capacity on AAM's global credit facilities. We continue to maintain a strong liquidity position and debt maturity profile.

Before we move to the Q&A, let me close out my comments with some thoughts on our 2021 financial outlook. In our earnings slide deck, we've included walks from 2020 actual results to our 2021 financial targets. You can see those starting on Slide 14. As for sales, we are targeting a range of $5.3 billion to $5.5 billion for 2021. This sales target is based upon a North American production of 15.5 million to 16 million units, a new business backlog of $200 million and attrition of approximately $100 million. We have begun to experience some limited downtime in the first quarter due to supply constraints attributable to the semiconductor chip shortage. We have contemplated what we know today in our guidance, and our target range allows for some variability.

From an EBITDA perspective, we are expecting adjusted EBITDA in the range of $850 million to $925 million. At the midpoint, this performance would represent EBITDA margin growth of over 100 basis points versus last year. As you can see on the walk-down on Page 15, we expect volume and mix to positively contribute as well as continued productivity benefits. As we stated previously, some of our 2020 cost initiatives were temporary in nature, but our focus has been to replace those with more structural savings. We also expect approximately $40 million in pricing and $15 million in higher R&D spending, as we continue to invest in electric propulsion.

From an adjusted free cash flow perspective, we are targeting approximately $300 million to $400 million in 2021, and the year-over-year walk is very simple. The main factors driving our cash flow change is higher EBITDA, a return to more normalized income tax payments and a higher working capital associated with revenue growth. And while on a dollar basis, capex is slightly higher than 2020, we are targeting capex as a percent of sales of approximately 4.5%.

You can clearly see AAM's ability to deliver free cash flow on full display, not only in 2020 actual results but ahead for 2021. The strong free cash flow number for 2021 is a reflection of the benefits we are realizing from our restructuring and cost reduction actions. We are experiencing year-over-year margin growth and continued cost optimization, capex as a percent of sales at the lowest levels in AAM's history, and inventory optimization delivering significant cash flow benefits. We expect to use this free cash flow as well as our enhanced EBITDA to fund our R&D and new product expansion, and at the same time, reduce leverage this year by a full turn or more. Our resilience in restructuring activities in 2020 is fueling our 2021 performance, and we are very excited to continue to strengthen our financial profile and focus on the growing of the business.

That said, we are well positioned for 2021 and beyond. We have and will continue to optimize our business to generate meaningful cash flow and invest in our future product development. This position is driving growth opportunities in electrification and other areas of our business. You can see this in the third year of our backlog and it is the strongest heading into the mid-decade timeframe. We are being awarded next generation of key products that will position our businesses to drive cash flow for many years to come.

In the near and mid-term, we see customers adding production facilities for products we support. This is allowing us to leverage our light truck franchise to contribute to strong cash flow generation capabilities and thus invest and grow our electrification product portfolio. And lastly, our cost optimization is focused on driving future margin growth opportunities. So, couple all that with our flexible operations, variable cost structure and ample liquidity and solid debt maturity profile, and you have a good framework for long-term success. As for now, we expect 2021 to be about operational excellence, margin expansion, free cash flow generation and propulsion innovation. We are looking forward to a great year for AAM.

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 -- Head of Investor Relations

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. So at this time, please feel free to proceed with any questions you may have. Elisa?

Questions and Answers:

Operator

[Operator Instructions] Your first question today comes from Rod Lache with Wolfe Research. Please go ahead.

Rod Lache -- Wolfe Research -- Analyst

Good morning, everybody.

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Good morning, Rod.

Christopher J. May -- Vice President and Chief Financial Officer

Good morning, Rod.

Rod Lache -- Wolfe Research -- Analyst

I was hoping you could maybe just touch on EVs and backlog, maybe just starting out with the background on Inovance in China. What is their market position even prior to their relationship with you? Are the four contracts that you referenced in the backlog that you quoted? And maybe you can, if you can, talk about net backlog. I think that in the past, you've provided a gross backlog number, and I believe that that's what you provided here today. What is the net number, net of attrition?

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Yeah, Rod, this is David. Just working backwards on your questions, from a net standpoint, we typically run off about $100 million a year. So you can do the math across the three-year period of time. With respect to the Inovance organization, a strong and leading producer of power electronics and motors in the China market. They're number two in the overall market in regards to supply of product in that market. Strong in technical competency and manufacturing competency, very compatible to our technology. We're working very hard to develop obviously scalable and integrated technology where we integrate the inverter, the motor and the gearbox all into one unit that's more power-dense, smaller packaging space, greater performance and greater efficiencies of product, while still offering our customers value propositions. That partnership started to realize success with four program awards in China: one that we were awarded last year, three that we were awarded here in January of this year. And we're working on other opportunities in China, while at the same time, working other opportunities, both in Europe as well as in North America, as more and more opportunities are starting to present themselves with respect to the customer long-range product plans and opportunities.

Rod Lache -- Wolfe Research -- Analyst

Were those wins in your backlog? Those four wins you referenced?

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Yes. I apologize. Yes, they were, Rod.

Christopher J. May -- Vice President and Chief Financial Officer

And they obviously are increasing the volume in that period.

Rod Lache -- Wolfe Research -- Analyst

Okay. And secondly, obviously, performance looked pretty strong in Q4 and it looks pretty fine in 2021. But pretty apparent, investors are thinking about the disruption that the industry is facing, and I'm sure you spend a lot of time thinking about that too. Right now, the consequence is low valuations for everybody that is in traditional driveline space. And I'm wondering if you could maybe talk a little bit about how you're thinking about strategic alternatives and options for American Axle, whether you're looking at more acquisitions at this point, divestitures in the conventional driveline business. What is the -- sort of the consequence of the environment that you're seeing right now?

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Yeah, Rod, just in regard -- this is David. In regards to the strategic side of things, when you look at our portfolio, we've pared down a lot of our portfolio and we don't have a lot of material things to divest of at this time. Nothing to announce at this time. But twice a year, we evaluate our portfolio and then make strategic decisions about that. But again, we don't see anything meaningful that's going to have a major impact with respect to the debt paydown. Our debt pay down is going to really come through the strength of our operations and the performance that we're seeing from the cash flow generation, which is only getting stronger, especially with the restructuring efforts that we put into place and have been able to now demonstrate in third quarter, fourth quarter, and you can see the strength of our guidance in 2021 as well.

Clearly, we made a big move in regards to expanding our relationship with Inovance from a technology standpoint, innovation standpoint, heavily focused on electric drive. There were people critical that maybe we were falling behind. We weren't following behind. We're already in production on a number of programs. We've now landed incremental programs, and we've shored up where our gap was, and we are very open about it, in regards to power electronics and motors. We're also working on a number of other next-generation technologies for electric drive with Inovance and independent of Inovance with respect to satisfying the marketplace as we go forward across different vehicle segments and tailored to reach the respective markets that we're in and support.

When it comes to the bigger strategic side of things and the environment that's out there right now, and clearly, there's a lot of uncertainty in the marketplace, just with COVID alone with labor availability and just the health and safety protocols. There is uncertainty out there with this whole global semiconductor shortage. The good news for us is, our largest customer has said they're going to protect the truck platform and do everything possible to protect the truck platform here in 2021, and we're seeing that in their schedules and -- which are very strong throughout the years. We're excited about that. And then, where they are making adjustments, that does have an impact on us. They expect to make some of that up in the second half of the year. And that's not just General Motors, but some of the other customers that were impacted by also here.

There are some other constraints in the marketplace from a supplier standpoint, steel shortages, but we don't have anything that's negatively impacting us because we've secured that going forward. And we're just trying to manage our way through the port delays and the container shortages that are out there too, mainly by putting greater inventory buffers in place just to protect our customers that way. But I do think it's going to put a lot of stress on the supply base going forward in the future, especially as volumes start to ramp up globally, capital -- working capital demands intensify, plus some of the other challenges that we've just talked to with the uncertainty in the marketplace that, that could propose and present some opportunities for us. But again, we'll take everything in balance with what our priority -- our priority right now is to continue to generate the strong financial performance, continue to grow our backlog in new business, which we think that we can add to that three-year period of time, while at the same time making sure that we're deleveraging the balance sheet and paying down the debt.

So long answer to your question, but hopefully that addressed what you're asking for.

Rod Lache -- Wolfe Research -- Analyst

All right. Okay. Great. Thank you.

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Thanks Rod.

Christopher J. May -- Vice President and Chief Financial Officer

Thanks Rod.

Operator

The next question is from John Murphy with Bank of America. Please go ahead.

John Murphy -- Bank of America -- Analyst

Good morning, guys. Just as a follow-up on Rod's question on Inovance, I'm just curious -- I mean, it sounds like it's burgeoning and starting [Phonetic] out of China. But is it going global or are you going to be global with this partnership? And as you're going global and bidding on business -- I mean, you yourselves are potentially in this partnership as well -- are you running into sort of the usual suspects in powertrain and torque management and sort of your axle business? I'm just trying to really understand if you're running into new players or it's the same folks with new technology and really trying to understand your right to play on a stand-alone basis and with Inovance in those discussions.

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Yeah, John, this is David. Historically, our biggest competitors in the truck side had really been Dana and some of the in-house manufacturing operations. On the passenger car crossover vehicle side, as far as ICE-related as far as ICE-related products, biggest competitor that we really saw out there was GKN, but Dana and Magna and some of the others were out there as well. Clearly, with the electrification market, there is a whole host of new entrants or new players. You've got your traditional driveline guys. They go beyond the ones that I mentioned to you. But you also have the motor and inverter guys that want to spend time in that space as well. You've seen some of the partnerships that are being formed; the recent LG-Magna partnership, the BorgWarner-Delphi acquisition, the Aisin-DENSO relationship, they came together. But we feel that our partnership with Inovance will allow us to compete with any of those going forward. We've got the technology and are working on other advanced technologies. I'm sure, they are as well. We are a proven supplier in the marketplace, and we feel that we can bring a value proposition to our customers.

The biggest thing we need to do is clearly understand their needs, the timing of those needs based on their long-range product plans and make sure that we're ready with proven technology and bookshelf technology to support those, regardless of the vehicle segment, whether it's pickup, crossover, passenger car, and regardless of the region, North America, Europe or Asia. And we're positioning the organization to support that, and we've shifted a lot of resources and reallocated resources internally toward advanced propulsion technologies, heavily weighted toward electrification. But we're not forgetting about our core business. We're protecting that core business by securing next-generation replacement program that will support our cash flow generation for years to come. So that's a very huge positive for us. But we feel very good about the advancement with Inovance. We feel very good about our investment in REE and our discussion with REE, and hopefully, there'll be some growth in those relationships as we go forward. But as I said, we're very excited about what the future holds. Our whole position has been to be agnostic to the market, but the market dictate what type of propulsion system they want between IC engine, hybrid or electrification. What we clearly recognize is that the market is pivoting toward electrification, and we'll make sure that we're properly prepared to win our fair share of the business.

John Murphy -- Bank of America -- Analyst

And David, maybe just a follow-up to that. Can you remind us your content per vehicle potential on an ICE versus EV or maybe trucks and car CUV [Phonetic] platform?

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Yeah. Pickup truck -- full-size truck is around $1,600 of content per vehicle. Crossover vehicles range between $900 to $1,200. Some of the passenger cars are $500 and below, let's say, depending on components or independent systems. When you get into the electrification, as we've said you before, and what we're doing on the Jaguar I-Pace is around $2,500 of content, but that involves both a front EDU and a rear EDU. Clearly, as you move across the different product portfolios, there is an opportunity to grow that in regards to some of the pickup applications. But there's also a possibility to reduce that to size it appropriately for the individual vehicles. I think a big thing that will impact the price but in a favorable way will be these three-in-one integrated solutions, which will allow us to offer a lower-price content per vehicle but give more performance to the vehicle but still command profits to support the overall business.

John Murphy -- Bank of America -- Analyst

Great. Thank you very much.

Operator

The next question is from James Picariello of KeyBanc Capital Markets. Please go ahead.

James Picariello -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys. My apologies if I missed this. But the four new programs in China, are all of those -- the EV programs, are all of those tied to your agreement with Inovance?

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Our technology agreement is a separate matter. We are in that through our relationship with Inovance and our performance with Inovance. But ultimately, we're looking to have a stronger and bigger relationship with Inovance going forward. And this is just one part of it as far as the sourcing that we earn from them. At the same time, the confidence that they have in us and we have in them in regards to the technology to put a technology agreement together. And we think there is better and brighter things ahead of us with that relationship going forward on a global basis.

James Picariello -- KeyBanc Capital Markets -- Analyst

Okay, got it. And what's the latest time frame on your hybrid award with the premium European OEM that's been in the backlog?

David C. Dauch -- Chairman of the Board and Chief Executive Officer

That program is going to be launched in late this year and will roll into the next couple of years, and there is multiple variants that will be coming off of that. So we're very excited about that program, and we're very excited about announcing who that customer is because we've been talking about it for a period of time. But the technology that's going to go into this vehicle will be something you haven't seen as far as the type of performance vehicles that it will be supporting.

James Picariello -- KeyBanc Capital Markets -- Analyst

Got it. And then, just two quick modeling questions. The $15 million in increased R&D within the EBITDA walk, does that just reflect the third quarter commercial settlement that benefited the quarter? And then for the $205 million interest expense, does that account for any debt repayment through the year?

Christopher J. May -- Vice President and Chief Financial Officer

So your first question -- this is Chris. James, good morning. Yes. Your first question as it relates to the R&D, a portion relates to the one-time flip from the third quarter where we had that reimbursement in the third quarter of 2020, but also a slight increase in spending net overall as it relates to R&D, right, because we're directing some of our efforts toward some product expansion from that standpoint. The $205 million of interest, yes, would begin to reflect debt paydown through the course of the year. Obviously, we would -- that would be subject to timing of when any debt payment was done. But yes, it should reflect that as well.

James Picariello -- KeyBanc Capital Markets -- Analyst

Okay, thanks.

Operator

The next question is from Ryan Brinkman of JP Morgan. Please go ahead.

Ryan Brinkman -- JP Morgan -- Analyst

Hi, thanks for taking my question. Are you able to quantify anymore your investment in REE, either in terms of a dollar amount or percent ownership stake? I think I heard you say it was a small investment but I'm mindful of that sometimes with these pre-revenue companies, an initial small investment can turn into a larger one. And then, I'd be interested too in what drove you to make the initial investment. And maybe more broadly, my understanding is REE has designed one of these so-called skateboard-type platforms. And just curious what you think the implications are to American Axle from skateboard-type platforms or the integration of traditional vehicle components into the arch of the wheel?

Michael K. Simonte -- President

Yeah. Ryan, hi, good morning. This is Mike Simonte speaking. I would start by saying a couple of things. David was clear about the fact that we're looking at multiple different strategies to access the new energy vehicle markets going forward. Electrification is the number one focus for our company, and we are looking at ways to bring our electrification technology to the skateboard technology that you just referred to. But we're looking for multiple different ways to bring that technology to market. We were first introduced to this company a couple -- three years ago. We saw the potential that they had. We made a relatively small investment. So when we talk about small, we're talking about cost basis, Ryan. And we've been in contact over the years, looking for ways for us to advance the relationship beyond a -- past the VC-type investment. We saw opportunity in that from the start. And we're optimistic -- I mean, nothing has been done quite yet, but we're optimistic that we can advance this relationship, assist this very creative, ambitious and good group of people that are behind this company to realize their longer-term vision through our industrialization experience. So we see some opportunities there, and we're going to chase it pretty hard.

Ryan Brinkman -- JP Morgan -- Analyst

Very interesting. Thank you. And then just lastly, relative to capital allocation, I heard you say that you're highly focused on debt deleverage. Does that mean that you intend to deploy the full $300 million to $400 million of '21 FCF toward debt paydown? Or with the rising EBITDA helping also, does that maybe leave room for electrification-related M&A? And wanted to check on what you think the market looks like for electrification-related M&A currently. I don't know if the valuations are maybe overheated or whatnot, just given the rise in the market for EV-related stocks or if you think there might still be any attractive opportunities out there.

Christopher J. May -- Vice President and Chief Financial Officer

Yeah, Ryan, this is Chris. I'll start with your first question as it relates to our free cash flow guidance, $300 million to $400 million. Obviously, we will generate that through the course of the year. That will also fund a little bit of some restructuring payments because that's a gross number. Also, as you've seen us in the past, we've had made small investments into our joint ventures where we expanded those in China, and otherwise, I would expect some small capital allocation into that space as well. But then as we mentioned, then our primary objective is continuing to reduce our leverage on this company.

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Ryan, this is David. On the strategic front, clearly, the valuations of some of these power electronic companies is -- far exceeds what we're willing to pay at this point in time and need to pay based on where our balance sheet is. So our priority is clearly to service the balance sheet. But we also don't feel like we're being limited in regards to the opportunities to support our customers with the partnerships that we have in place. And as Mike alluded to you, we're also looking at other creative ways to leverage our technology in core markets as well as new markets.

Ryan Brinkman -- JP Morgan -- Analyst

Okay, very helpful. Thank you.

Operator

The next question is from Dan Levy of Credit Suisse. Please go ahead.

Dan Levy -- Credit Suisse -- Analyst

Hey, good morning. Thank you. So, just first starting with the backlog -- and I apologize if this has been addressed already -- your backlog was effectively flat for '21 and '22 versus the prior year. Can you just maybe walk us through the puts and takes on those years? Is that [Phonetic] simply that incremental business wins are being offset by weaker end markets versus what you assumed last year?

Christopher J. May -- Vice President and Chief Financial Officer

Yeah, I think you had a couple of puts and takes if you think about through the course of 2020. Some of our customers deferred some of that backlog that was in '20 into '21, moved out. You had some attrition kind of recalibrate as well, some volume adjustments in the overall market. But our principle programs -- and a little bit of retiming on some of their program launches. And you've head us talk about this in the past, in some ways, from months to maybe several months through the course of '21 and '22, based on a lot of activity, really COVID-related in terms of how they retime some of their programs. But net-net, the key programs that were in our backlog previously continue to be in our backlog for the next two years, and they're ready to launch and ready to go. So we're able to maintain a good hold on that, and also keep our attrition level at the low end of our previous ranges too. So from a net backlog, we remain pretty strong from that perspective.

Dan Levy -- Credit Suisse -- Analyst

Great. And just on the backlog as well, the eDrive piece, it's up slightly. Some could argue it should be up more. Is that simply, again, just a function of timing of programs? Why it's up $15 million but not more?

Christopher J. May -- Vice President and Chief Financial Officer

Yes. So I think some of the announcements that we've had over the past many months and past quarters and some of the relationships with Inovance that we discussed, so they continue to sort of step in volume increases through the course of that three-year period as these vehicles launch. A lot of these eDrive units aren't launching, for example, this year. They continue to step into '21, '22 and even more in '23. So that's why we kind of curve up through that period.

Dan Levy -- Credit Suisse -- Analyst

Great. Thank you. Okay. Second question is one that's maybe a bit more existential. We saw GM, obviously your largest customer, a few weeks ago put, I guess, more of a line in the sand outlining a target to be fully electric by 2035. This is really the first time that they've highlighted this timing for a full transition. And I realize there's a lot that can happen between now and 2035, and I know they used the word 'aspire' in the release, not binding [Phonetic]. But I guess, my question to you is, as you think through all the things that you need to do with the transition to a full EV world, be it on the product side or the manufacturing side, is 15 years a reasonable period of time for you to make that full transition? Those are my questions.

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Yeah, Dan, this is David. And you're asking me to predict the future a little bit, but at the same time, let me just say this. First and foremost, I applaud GM's efforts for -- to be carbon-neutral by 2040 and eliminate the tail pipe emissions by the 2035 calendar year period of time. That's just good steward [Phonetic] in this in regards to doing what's right for our environment and the other things. At the same time, they've got a leading-edge technology when it comes to electrification. They want to capitalize on that in the marketplace. So we're well aware of their transition and the announcement that it was [Phonetic] not a surprise to us. You mentioned, it's an aspirational goal for them, but at the same time, they wouldn't put it out there if they didn't have a plan in order to deliver on that. But ultimately, the market will be the boss and determine the acceptance rate of electrification.

Our whole thing, as I said earlier, was be agnostic to the market, whether it's providing IC engines and hybrids like we're predominantly doing today or providing larger number of electrified units in the future. We're going to be prepared either way. At the same time, we're going to partner with the various OEMs. But in this case, you brought up GM. They are our largest customer, a strategic partner of ours. We've got a proven track record with them. We've been Supplier of the Year to them in the last four years in a row. And so, we're going to get on that journey with them to support carbon-neutral position and also this whole tailpipe emission issue. Our big issue is to make sure that we develop these three-in-one integrated solutions with our partner, Inovance, and some of the other activities we're doing ourselves to offer them as well as other customers a value proposition. And we're trying to design and develop our products where they are scalable and marketable, at the same time, offers economies of scales as more volume comes into play in regards to this technology.

But to answer your question, yes, by that period of time, we can convert our operations. A lot of the components that we manufacture today are transferable to electrification. There are some things we'd have to do to modify our assembly lines to accommodate this type of configuration, but we know how to do that. And then, obviously, there is more that we need to learn on the motor and the inverter side of the business. But we're highly comfortable with our product engineering background, our manufacturing process background and with our partnerships that we can accommodate that. The most important thing to me is the fact that our technology is being recognized and awarded in the marketplace today. We validate that with multiple customers, especially two European OEMs that have proven our capability to be successful and selected that. We're working with GM and we're working with a number of other customers in regards to demonstrating that technology. So we're excited about what the future has to hold with respect to electrification. But we also recognize that there is a lot of things that have to be put into place before electrification will be fully adopted. And when I say that, I talk about the infrastructure, the roads, the grid, the charging station, and talk about all the further advancements in battery technology, especially in cold market conditions or areas and then also just the affordability of the vehicle. Most people can't afford an $80,000 to $100,000 type vehicle. They're going to need to be in that $40,000 to $50,000 or quite honestly the $20,000 to $30,000 range to really get the volume that needs to be done to drive the economies of scale. But with the advancements in technology that we've seen in the last several years, we're going to continue to see that going forward. And I'm highly confident our customer base will find a way to provide a competitive offering for the marketplace for the consumers to buy. That's going to be their choice being a consumer as to are they comfortable with our electric product or not, but IC engines will still be available.

Dan Levy -- Credit Suisse -- Analyst

Great, thank you.

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Thank you, Dan.

Operator

The next question comes from Brian Johnson with Barclays. Please go ahead.

Brian Johnson -- Barclays Capital Inc. -- Analyst

Thank you for taking myself up [Phonetic] here. So it's -- continuing on the question of the prior questioner, GM slated -- at least [Indecipherable] within their 20 [Phonetic] to have an all-electric GMC in roughly '22, '23, as well as electric version of the Silverado and Sierra. I know you don't like to comment on specific programs, but could you maybe help us think through the content opportunities in a dedicated pickup truck, how [Indecipherable] they might be doing the Cybertruck, the Rivian and so forth versus a conversion or a kind of e-powertrain version of an existing platform?

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Yeah, I just want to make sure I'm clear on your question, Brian, that you want to try to understand that the content per vehicle and some of the impacts with respect to content per vehicle based on what GM is doing. Is that how I understood your question?

Brian Johnson -- Barclays Capital Inc. -- Analyst

Yeah. You can answer it specifically for GM. Where would you say the addressable Axle content going on it?

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Yeah, it's...

Brian Johnson -- Barclays Capital Inc. -- Analyst

Pickup truck versus a pickup truck that's been fitted with electric powertrain but off of a legacy platform like the e-F-150 or perhaps what can go on with e-Silverado?

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Yeah, clearly, GM has made announcements already that they have their Ultium battery portfolio. They also have their Ultium electric drive unit portfolio that's going to be supporting the Hummer program and some of these initial pickup truck programs that you mentioned to us. Obviously, those volumes aren't replacing all of the trucks that they're producing today. They will be incremental to the volumes that they're putting out there. They got to determine the receptivity of the marketplace with respect to those products.

There is content for us, but more on the component sub-assembly stage, so say, less than $250 of content in that area. But if we get into the full integrated EDU type systems, then it can be much greater than that, and even north of the $1,600 of content that we provide today. So as we've said, we've already got some benchmarks out there in regards to what we're doing with Jaguar on I-Pace, which is more of a two-in-one solution today with an added inverter. We've got -- what we're doing for the next European OEM. So we have a pretty good understanding what the market prices are for these products. Clearly, the advancements in technology and the ability to develop these three-in-one integrated scalable solutions are going to dictate what the price point is going to be in the future for these products. And we're highly confident that we're going to be able to compete for that going forward.

As I mentioned to you, our content per vehicle on a full-size truck today for IC and hybrid is about $1,600 a content. And going forward, we think it can be that or may be even greater as we go forward here. But there is a lot of dialog that needs to take place with the customer base to really understand their requirements before we can identify what that two content per vehicle is. But we feel very good about what it can mean to us on pickups. At the same time, we think that we can also capitalize on that and the other vehicle segments, think crossovers and passenger cars.

Brian Johnson -- Barclays Capital Inc. -- Analyst

And a follow-on question. As you as you think through the plant footprint you got from Metaldyne and the product set that's primarily based on [Indecipherable] their facilities in the past, targeted engine and transmission components, certainly those plans I think are well utilized and did a great job kind of cleaning up the operational issues that came a couple of years ago. But as you think very long term, is there a way to repurpose that capital equipment toward components that go into electric vehicles, whether it's rough-cutting, rough-forming, gearing that you send to the OEMs who might be in-sourcing his or her e-gearing? Or could you just make body parts and whatnot -- and I think Mr. Musk is out there trying to cast a car like you'll cast a Matchbox toy. So just maybe some thoughts on that infrastructure. And even if it doesn't wind up serving e-motor, eDrive, three-in-one units directly, what's the future of that will be in this kind of hypothetical future?

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Yeah, Brian, you had a lot of questions with a question, but the simple answer is, yes. And what I mean that -- by that is that we have positioned ourselves to go to the market from an electrification standpoint, from a component standpoint, a sub-assembly, so think differentials, also from a gearbox standpoint and also from a fully integrated EDU standpoint. All those component plants that are manufacturing product today that are IC engine and hybrid-related type things, so I think components and gears and shafts and differentials, can clearly be converted over to electric-type product.

As I mentioned earlier on some of the full integrated driveline solutions, those plants can also be converted over. But there's a little bit more work that will need to be done in regards to some of the assembly systems. Most of the component activities can be converted over. I won't say that most of the work that we have that's IC engine-related and hybrid-related today, which -- think 8, 9 and 10-speed transmission, think downsized engines, which leverage balance shafts and dampeners, those products are going to continue for a long period of time, I think a decade, as we get on this journey in regards to electrification. So -- but as the market starts to accept electrification at a greater scale than it is today, then clearly, we'll start converting those facilities over to providing electric product versus IC engine and hybrid. But again, I keep driving and stress and home [Phonetic] that we want to be agnostic to the market and we have strong operational excellence capability and technology capability from a product engineering standpoint, and we will make sure that we have products of relevance that are ready for the market. We just need the market to tell us when they're ready to adapt.

Brian Johnson -- Barclays Capital Inc. -- Analyst

Okay, thank you.

Operator

Thank you. Gentlemen, your last question comes from Joseph Spak with RBC. Please go ahead.

Joseph Spak -- RBC Capital Markets -- Analyst

Thank you, everyone. Maybe just a point of clarification. You mentioned on Slide 5 some of the electric pickup and commercial vehicle component business launching. Is that within the scope of the backlog? Is that new? And I guess, are you considering that within that eDrive component or -- eDrive business or not because it's sort of more components on electric programs but not actual eDrive business?

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Yeah, these are not electric drive units. They are components supporting electric drive unit manufacturing.

Christopher J. May -- Vice President and Chief Financial Officer

Yeah. Joe, this is Chris. And this is included in our backlog. Think about some of the commentary we talked about previously, where we were winning component work on commercial vehicles and pickup trucks for eDrive battery [Phonetic] units, those type of platforms and segments, that would fall into those categories.

Joseph Spak -- RBC Capital Markets -- Analyst

But just to be clear, like if we were to -- I know you're breaking up the backlog into eDrive and sort of the other traditional segments. But if we were to sort of look at it through different lines, which is just content on electric vehicles, it would be above that 15% because this business is spread across that 40% light truck and SUV?

Christopher J. May -- Vice President and Chief Financial Officer

No, it would be in the eDrive because these support -- these we support those vehicles. These support fully electric vehicles.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay, thank you. And then, just maybe one more on the chip shortage because it does seem like some of the automakers are getting a little bit creative maybe on how they'll build vehicles. They're talking about building a good portion of the vehicle but maybe without some of the components that are constrained like chips. So I'm wondering if you think that impacts the cadence of your business because if you're able to sort of still supply, do you still end up shipping and then they can sort of finish the vehicle later, and so you might actually somewhat diverged from what we see in terms of finished vehicle assembly, at least in the first half of the year?

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Joe, this is David. First of all, it's an unfortunate situation that the industry is faced with in regards to semiconductor shortage, but the industry has overcome a lot of other challenges and they'll overcome this one as well. Clearly, it's going to really impact the market in the first half of the year here, but they hope to have it resolved by the second half of the year. Obviously, the OEMs are trying to protect their large profit pools in regards to their trucks and SUVs that benefits American Axle and our continuity of supply there. We are being impacted by some of the crossover vehicles and passenger car applications and even some truck applications, but at the same time some of the OEMs plan to make up those units and have the ability to make up those units as one of those products are available, meaning the chips are available in the future, which they expect to be. At the same time, as you referenced, the OEMs are very creative and they'll find a way to build product where they can even if they're short of a part for a period of time and then they will come back once the chips are available, build those sub-assemblies and integrate those into the final assembly and then ultimately ship those vehicles out once they're validated from a quality standpoint. But overall, we haven't been disrupted too badly. But yes, we have been impacted, was going to be something we're going to have to continue to monitor. It's part of the uncertainty that we were referring to earlier. But right now, our schedules look very strong for most of our products going forward here.

Joseph Spak -- RBC Capital Markets -- Analyst

Just a follow-up. It's more an indirect impact thus far than a direct? Have you had any trouble getting supply where you need it?

David C. Dauch -- Chairman of the Board and Chief Executive Officer

We have a couple tight spots, but we're working with our customers with respect to that as they're allocating chip production and making decisions on which plants to run or not run. But at this time, we're not being directly impacted by this, more indirect.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay, thank you.

David H. Lim -- Head of Investor Relations

Thank you, Joe. 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.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

David H. Lim -- Head of Investor Relations

David C. Dauch -- Chairman of the Board and Chief Executive Officer

Christopher J. May -- Vice President and Chief Financial Officer

Michael K. Simonte -- President

Rod Lache -- Wolfe Research -- Analyst

John Murphy -- Bank of America -- Analyst

James Picariello -- KeyBanc Capital Markets -- Analyst

Ryan Brinkman -- JP Morgan -- Analyst

Dan Levy -- Credit Suisse -- Analyst

Brian Johnson -- Barclays Capital Inc. -- Analyst

Joseph Spak -- RBC Capital Markets -- Analyst

More AXL analysis

All earnings call transcripts