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Operator
Good morning.
I will be your facilitator today.
At this time, I would like to welcome everyone to the American Axle and Manufacturing second quarter earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer period.
(Operator Instructions).
I would now like to turn the call over to Mr.
Christopher Son, Director of Investor Relations and Corporate Communications.
Please go ahead.
Christoper Son - Director IR & Corporate Communications
Thank you, Amanda, and good morning, everyone.
Thank you for joining us today for your interest in American Axle and Manufacturing.
This morning we announced our second quarter 2009 financial results.
If you have not had the opportunity to review this announcement you can access it on the AAM website or through the PR Newswire services.
A replay of this call will be available from 5:00 p.m.
today through 5:00 p.m.
eastern time August 12, 2009 by calling 1-800-642-1687, reservation number 15908578.
Before we began I would like to remind everyone that the matters discussed in this conference call may contain comments and forward-looking statements that are within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not guarantees of future results or conditions but rather are subject to risks and uncertainties and should not 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 filings with the Securities and Exchange Commission.
This information is also available on the AAM website.
During the call, we may refer to certain non-gaap financial measures.
Information regarding the non-gaap measures as well as the reconciliation of these non GAAP measures to GAAP financial information is also available on the AAM website.
We are also on the audio webcasting this call to our website AAM.com.
This call will be archived in the investors section of the website and will be there available for one year for later listening.
With that, let me turn things over to AAM's Co-Founder, Chairman and CEO, Dick Dauch.
Dick Dauch - CEO
Thank you Chris, and good morning everyone.
Thank you for joining us today to discuss the AAM financial results for the second quarter of 2009.
Joining me in the call is Mike Simonte, our Executive Vice President, FInance and Chief Financial Officer along with Patrick Lancaster our Executive Vice President, Chief Administrative Officer and Secretary.
Today I will provide a brief update on AAM's second quarter of 2009 financial results.
Then I will shift the focus to detailing the positive actions that we are taking to accelerate the impact of AAM's comprehensive restructuring, resizing and constant recovery plan.
After that I will turn fit to things over to Mike to discuss the details of our financial performance.
Following Mike's comments, we will open the call-up to any questions that you ladies and gentlemen may have.
I will begin by saying that the year 2009 continues to be most difficult and challenging year for AAM and the entire global automotive industry.
Among other factors, sharply fluctuating fuel, metal market and commodity pricing, a global credit crunch, rising unemployment, have resulted in persistent economic weakness and an extended liquidity crisis.
This is significantly eroded consumer confidence and greatly reduced vehicle buying power.
Due to these and other factors, total global light vehicle production is projected to decline by 19% in 2009.
This is in sharp contrast to the robust global growth forecast most industry observers had expected as recently as 18 to 21 months ago.
Foe OEMs and automotive suppliers alike, the turmoil associated with these events has resulted in dramatic revenue rundowns, huge spikes in underutilized capacity, an overabundance of employees in the workforce, an unprecedented spring of bankruptcy filings and liquidation proceedings for the automotive sector.
Closer to home, the tandem bankruptcy filings of Chrysler, LLC and the General Motors Corporation including the accompanying extended summer production shutdowns are devastating the domestic supply base in terms of sales revenue and cash flow in the second and third quarters of 2009.
AAM has been hugely and negatively impacted by these matters.
As of June 30, 2009, AAM was not in compliance with certain covenants in our revolving credit facility agreement.
As a result, we entered into a waiver and amendment which has been extended through August 20, 2009.
Let me state very clearly, it is AAM's primary objective to complete our restructuring outside of bankruptcy process.
There could be no assurance that we will be successful in this regard but rest assured that we are totally focused on the actions necessary to achieve this desired outcome.
Mike and I will have more to say about this later in this call.
Today, AAM is reporting net sales in the second quarter of 2009 of $245.6 million.
This compares to $490.5 million in the second quarter year-over-year 2008.
We estimate the adverse impact of the extended production shutdowns by General Motors and Chrysler to have reduced AAM sales and operating income in the second quarter 2009 by approximately $204 million and $66 million respectively.
That is the equivalent to a loss of $1.18 per share on this one important matter.
The extended production shutdowns by GM and Chrysler required AAM to accelerate and expand our restructuring actions to transition to a new lower projected customer and market requirements and equivalent operating break even levels for our Company.
In the second quarter of 2009, AAM incurred special charges, asset impairment and non recurring operating costs of $191.8 million or $3.46 per share.
These charges are mostly non-cash in the period and primarily related to the following, asset impairments, UAW hourly as well as salaried workforce reduction, including attrition programs and related statutory benefits.
And finally the acceleration of buydown programs, BDP expense for the UAW representative associates and AAM's Detroit, Michigan, Three Rivers , Michigan and Cheektowaga, New York manufacturing facilities.
When you combine all these factors, AAM is reporting net loss in the he second quarter of 2009 of $288.6 million.
That is equivalent to $5.20 per share.
This compares to a net loss of $644.3 million or $11.89 per share in the second quarter 2008.
That period was heavily impacted negatively by the protracted international UAW strike called on AAM and a host of special charges, asset impairments and non-recurring operating costs.
Mike will provide more details on the special charges and our financial results later in this call.
Amid the increasing, challenging global market conditions that we are experiencing this year, AAM remains focused on managing what we control.
We have now nearly completed the comprehensive operational restructuring, resizing and recovery of our business.
This has been done by realigning AAM's global manufacturing capacity and reducing AAM's operating break even level.
As a result of these difficult but neccessary restructuring actions, AAM is achieving permanent and transformational improvements in AAM's cost structure along with excellent operating flexibility.
This will position AAM to return to profitability as part of the viable and sustainable future for our company.
Let me take a moment to update you on AAM's progress on these critical initiatives in the second quarter of 2009.
First, we continued the process of realigning and resizing AAM's global manufacturing capacity and footprint to adjust the new lower projected customer and market requirements throughout the world.
In the second quarter of 2009, the core focus of this activity was the accelerating of the idling and consolidation of our Detroit manufacturing complex.
This and other related actions were finally made necessary by the impact of GM and Chrysler bankruptcy filing and subsequent reorganization plan including the extended production summer shutdown.
Our action in this regard was also driven by other programs cancellations and/or delays and sourcing decisions made by our customers in the second quarter of 2009.
Second critical point is we continue to make steady progress in our efforts to reduce our operating break even level to approximately 6,000 axles per day.
By this mean we mean 6,000 axles per day in support of the North American light truck and SUV product programs that AAM currently supports for the General Motors company and the Chrysler group.
This is approximately equivalent to a U.S.
SAR of 9.5 to 10 million vehicle units.
This is also less than half of the operating break even level of the company at year-end 2007.
I am pleased to report that AAM is on track to complete this critical initiative by year end 2009.
Third, we have continued to make the necessary adjustments to our hourly and salaried workforce.
In the second quarter of 2009, this activity included voluntary and involuntary attrition program and layoffs.
In the first six months of 2009 alone, AAM has now reduced its salaried workforce by approximately 500 positions.
In total, we project AAM's year end 2009 global workforce to number less than 6,000 men and women.
To put this in context, this is less than half the AAM peak historical employment level and a full 40% lower than year end 2007 just 18 months ago.
Fourth, we are continuing to enhance the diversification of AAM's customer base, product portfolio and global manufacturing sourcing and engineering footprint.
This includes the flawless and anonymous launch of many new product programs in the AAM's new business backlog.
For General Motors, AAM is now supporting the ongoing launch of the new and head turning the rear-wheel drive Camaro, the all-wheel drive versions of the various GM passenger cars and crossovers such as Cadillac SRS and Chevrolet Malibu along with GM's heavy-duty series full-size rear- wheel drive passenger van program.
Other new product program launches for AAM in 2009 include a new global light truck program for VWAG, AAM will support the program from our Araucaria, Brazil operation.
As well as a new light truck for the Indian market manufactured by [Tata] Motors and we'll produce that in our (inaudible) AAM factory in India.
Along with transmission differentials for Audi and different vehicle programs for Audi.
That is the premium division of VWAG and our Company will manufacture these products presently in a (inaudible), Poland and later this year will move to (inaudible), Poland in the month of September.
Also bare spindle axle assemblies with AAM manufactured drive heads for the Mack truck group and that will be done in the United States.
AAM has refocused our production capacity at our Three Rivers, Michigan facility to additionally support this and other programs in the North American commercial vehicle market.
We are extremely proud of the Three Rivers operation in its total cost market competitive operation.
In total, AAM's new and incremental business backlog for programs launching in the years 2009 through 2013 currently stands at approximately $1.1 billion.
It is important to note that this estimate of new and incremental business backlog has been adjusted from our previous estimate dated May 1, 2009.
This was necessary due to the changes of customers' long-range product plans which I refer to as LRPP.
Those were announced the supply base in the second quarter of 2009.
There has been an unusual amount of activity in this regard in the first half of 2009 by all customers.
This was mostly attributable to the bankruptcy filings, however, of GM and Chrysler.
In addition to the $1.1 billion new and incremental business backlog, AAM is currently quoting approximately $900 million of potential new business.
Substantially all of these opportunities are scheduled to launch from year 2010 through year 2013.
Approximately 90% of these new business quotes are with customers other than GM.
Before I turn it over to Mike, let me wrap up by making a few closing comments.
First, I've already said that it is our primary objective to complete our restructuring outside of a bankruptcy process.
We believe bankruptcy is far too extreme and destructive for AAM and our shareholders.
We believe it is the best interest of AAM's many stakeholders including our associates, customers, suppliers, lenders, stockholders and communities to avoid the potential value destruction, risks and distractions associated with a Chapter 11 bankruptcy proceeding.
We are currently working with our key stakeholders on various commercial agreements and financing arrangements that would result in comprehensive, long-term solution outside of bankruptcy for AAM.
I will repeat, there could be no assurance that we will be successful in reaching agreements with these parties and avoid filing for a bankruptcy protection.
However, AAM's entire global management team is focused on doing what is necessary to accelerate and expand cost reductions and other improvements for other overall market competitiveness.
We are prepared to have and implement a winning business model at AAM.
The favorable impact of the actions combined with an anticipated recovery in global light vehicle sales and production levels over the next few years positions AAM to generate significant free cash flows and growth into our capital structure with time.
Second, AAM has nearly completed the comprehensive operational, restructuring, resizing and recovery of our business.
This has been done by realigning AAM's manufacturing global capacity and reducing AAM operational break-even level.
As a result of many difficult but necessary restructuring actions, we are achieving permanent and transformational improvements in AAM cost structure and operating flexibility.
This actions position AAM to benefit from significant operating leverage when economic conditions improve.
This operating leverage will also allow us to continue reducing capital expenditures and fixed overhead to support AAM's $1.1 billion of new and incremental business backlog.
Finally, from an industry perspective, the quick exit of the General Motors company and the Chrysler group from bankruptcy has alleviated a significant amount of uncertainty for AAM and the entire global supply base.
As an essential supplier to these important customers, AAM has collected substantially all of our pre bankruptcy receivables.
AAM does not anticipate collection issues with any subsequent receivables balance.
This was a positive and important development for our Company in the second quarter of 2009.
Perhaps most importantly, there is substantially more clarity about the future operating plans for the General Motors company and the Chrysler group.
Although many details underlying long-range product plans for both companies continue to be adjusted both have emerged from their bankruptcy process as leaner, more competitive and more focused companies than their predecessors.
This is great news for AAM because we expect to have long-term mutually beneficial relationships with both of these major customers.
Given all these factors, we at AAM approach the next several months and quarters with cautious optimism that are best days now lie ahead of us.
Our goal is to position AAM to emerge from these brutal economic and market conditions to become the viable, profitable and sustainable company we desire.
AAM will continue to provide exceptional value to our customers through an outstanding daily track record on product development, engineering expertise, quality performance, warranty reliability and delivery performance as well as advancing technologies along with support of flawless and anonymous launch performance throughout the world.
These critical measures of customer satisfaction and operating effectiveness will continue to be the cornerstone of AAM's long-term success and we now as a worldwide company are better than a six segment performance on quality.
No one else in our peer group that we know of comes close to that.
I thank each and everyone of you ladies and gentlemen for your attention the day, your vital interest AAM, let me now turn this call to the Executive Vice-President, Finance and Chief Financial Officer,
Mike Simonte - EVP Finance & CFO
Thank you, Dick and good morning, everybody.
We have a lot to cover this morning so I'm going to get right to it.
Starting with sales, AAM sales in second quarter of 2009 was just $245.6 million that is down from $491 million in the second quarter of 2008.
The key driver of this abnormally low run rate of sales is the impact of the extended summer production shutdowns by GM and Chrysler.
In total, we expect these shutdowns to drive our sales lower by approximately $300 million in 2009, the second and third quarter, and adversely impact our profitability and cash flows in these same time periods by approximately $95 million.
In the second quarter of 2009, we now estimate the reduction in sales due to these shutdowns was approximately $203.6 million.
During the quarter, we produced and shipped approximately 3,300 axles per day for GM and Chrysler.
This compares to a run rate of approximately 6,000 axles per day for the first quarter of 2009 and 8,000 axles per day in the second half of 2008.
This may be obvious, but let me say it anyway, a run rate of 3,300 axle is well below our operating break even level.
Let me give you some further context on the deal breaks.
At the beginning of 2008, AAM's operating break even level was approximately 12,725 axles per day and that is in the rage of 13,500-- I'm sorry, 13,500,000 vehicles U.S.
SAR.
To our efforts to rationalize installed capacity and harness literally hundreds of millions of dollars in annual structural cost reductions from our new labor agreements, we implemented in 2008 and related salaried workforce reductions, we lowered our operating break even to approximately 7,500 axles a day for the 2009 budget.
As we have previously discussed with you, we are now working to lower our break even even further to approximately 6,000 axles a day and we're on track to accomplishing that objective by the end of this year 2009.
This new lower break even target is approximately equivalent to a U.S.
SAR in the range of 9.5 million to 10 million vehicle units.
And was made necessary by even further sales and production decline beyond what we had contemplated in our planning for 2009.
In the second quarter of 2009, these good and valid and important cost reduction efforts, were simply overwhelmed by the crushing impact of the extended production shutdowns.
However, the impact of the sweeping cost-cutting measures will be evident for all to see in the second half of 2009 and into the 2010 calendar year.
So volume was off in the second quarter, we just covered that, (inaudible) was stable.
In the second quarter of 2009, four-wheel drive penetration was approximately 61%.
Very similar to that trend we expect for full year 2009, maybe a little bit higher for the year in total due to seasonal strength in the back half of the year.
In the second quarter of 2009, AAM's content for vehicle was $1,401 versus $1,312 in the second quarter of 2008.
That is an increase of approximately 7% year over year.
In terms of customer mix, our non-GM sales were approximately $57.6 million in the second quarter of 2009 or 23.5% percent of our total sales.
This is approximately the same as the run rate in the first quarter of 2009 of 24%.
And it is in line in for our expectations for this year.
So again, our sales in the second quarter of 2009 were $245.6 million down 50% in the quarter on a year-over-year basis.
We continue to believe that the first half of 2009 will represent the trough in production rates for this brutal industry cycle for the programs we support.
We site the following three factors in supporting this belief.
Number one, the favorable impact of new business launches.
AAM is launching several new product launches that will favorably impact our selling rates in the second half of '09 and into 2010.
Dick already covered this in his comments earlier so I will not get into further details at this time.
Number two, the end of a deep inventory correction cycle that led to a massive imbalance between sales and production in our major product program.
In total, we estimate that GM has reduced inventories by more than 325,000 vehicle units in our major product programs since January 1st of 2008 and I'm comparing to month and July 2009 when I make this comment.
In the second quarter alone, we estimate GM inventory drawdown in our major programs was in the range of 105,000 to 110,000 vehicle units.
That represents lost sales to our company of approximately $150 million and goes a long way in explaining the need and rationale for the extended production shutdowns.
This should also help you understand why our sales in the second quarter of 2009 were approximately $157 million lower on a sequential basis compared to the first quarter of 2009.
The third factor here is most importantly, customers' schedules are picking up.
While our production volumes and operating results in the month of July were again adversely impacted by the extended production shutdowns, the month of August may be a turning point.
Customer production volumes are rebounding nicely.
We are not ready to declare victory yet but we successfully and anonymously restarted operations after the extended production shutdowns.
The improving production volume outlook should allow us to significantly improve upon our year-to-date performance in the remaining five months of 2009.
Let's now move on to the P&L.
In the second quarter of 2009, all of the key measures of profitability including gross profit, operating income, net income, earnings per share and EBITDA were adversely impacted and significantly impacted by the extended production shutdowns as well as special charges, asset impairments and other non-recurring operating costs recorded in the quarter.
And just to be clear, when I use the term special charges during my comments this morning, I am referring to all these onetime items including the asset impairments.
As Dick mentioned earlier, AAM booked $192 million dollars of special charges in the second quarter of 2009.
This equates to $3.46 per share.
These special charges were mostly non-cash in the period.
In total, including the $66 million negative impact of the production shutdown and $192 million for the special charges, AAM incurred a net loss of $288.6 million or $5.20 per share in the second quarter of 2009.
I am going to spend the next few minutes reviewing the special charges recorded in the second quarter of 2009.
The first item is asset impairments Asset impairments totaled approximately $173 million in the second quarter of 2009.
This includes indirect inventory obsolescence and accruals for idled leased assets.
These asset impairments primarily related to the impact of new capacity rationalization actions taken by General Motors and Chrysler as a result of their bankruptcy filings and subsequent reorganization plan.
And this did include the impact of the extended production shutdowns.
These asset impairments also contemplate changes in our companies, AAM I am speaking of operating plans.
Most notably the idling and consolidation of significant portion of the Detroit manufacturing complex.
These additional actions on our part were made necessary by the extended production shutdowns and other program delays in sourcing decisions taken by our customers in the second quarter of 2009.
Number two, the acceleration of BDP expense.
The acceleration of BDP expense of $22.5 million in the second quarter of 2009 was primarily triggered by associates voluntarily electing to terminate employment with our company and accelerate remaining BDP obligations.
This charge also reflects changes in estimates of the number of UAW representative associates that are expected to be permanently idled throughout the term of the existing 2008 labor agreements.
Again, new information was available this quarter from our customers especially as it relates to the bankruptcy filings and subsequent reorganization plans and based on this new information, we made the appropriate revisions to our accounting for this program.
The same holds true for the impairments.
On the third item, the curtailment gain, AAM recorded a $17.2 million curtailment gain relating to certain pension and other post-retirement benefits for both hourly and salaried associates for second quarter of 2009.
Unfortunately many associates are leaving our payrolls and when they do they're leaving behind and forefitting benefits that we had previously accrued.
And that is the essence of the curtailment gain.
In addition to these three major items, we also incurred a $13.5 million in special charges relating to ongoing, hourly and salaried attrition programs and statutory benefits, plant closure accruals, and some asset redeployment cost.
For comparison purposes, I want to remind you that we recorded $576 million of special charges in the second quarter of 2008 primarily related to asset impairments, non recurring operating costs, of course hourly and salaried workforce reductions were key factors, and in the second quarter of 2008 we also recorded a significant valuation allowance on our U.S.
deferred tax assets.
In the first quarter of 2009, we reported to you that we pulled through approximately $62 million of productivity gains that helped to offset the impact of lower volumes, metal market and foreign exchange volatility, interest expense and taxes.
In the second quarter of 2009, AAM's year-over-your productivity gains presented in this same manner were approximately $64 million.
Again comparing to $62 million in the first quarter of 2009.
While this point may get lost in the details of our financial record reporting for this quarter which is so heavily dominated by the special charges and the shutdown, it is critically important because it demonstrates that our restructuring efforts have, in fact, taken hold and that we are benefiting from real tangible cost reductions.
I point out that cash flow statement makes this point very well.
The productivity gains referred to above are being generated from good old fashioned structural cost reduction.
This includes hourly and salaried wage and benefit reduction including those related to the new UAW labor agreements we implemented in the second half of 2008.
Also the cost reductions include hourly and salaried workforce reductions.
By the end of 2009, unfortunately, we will have reduced our headcount by 4,000 associates as compared to year end 2007.
We've rationalized installed capacity.
We've idled and consolidated significant portions of our existing continuing capacity.
We've consolidated our supply base and we've made many other smaller day-to-day cost reductions throughout our entire global cost structure.
Let's move on to as SG&A .
This is another topic that requires some discussion.
SG&A, and this includes research and development spending for the quarter, the second quarter 2009 was $45.5 million.
This compares to approximately $45 million in second quarter of 2008 as well.
There is a lot of noise in this year-over-year comparison on this line item.
In the second quarter of 2009, we were incurring costs that simply did not exist in 2008.
As an example, I point out that we're incurring fees paid to a contingent of financial advisors and legal counselors necessary to work our way through our credit capital structure issues.
These costs are driving SG&A higher than our normalized future run rate.
In the second quarter of 2008, we had several one-time benefits not extra cost but benefits that were reduced SG&A expense for the quarter.
We think the most relevant way to assess our SG&A spending is to adjust for one time items fin 2009, convert that to an annual run rate and compare to the full year spending rates in recent years.
So if we start with $45.5 million of actual SG&A expense in the second quarter of 2009 and adjust for two items, first approximately $1 million of special charges relating to attrition programs, and second, approximately $4 million to $5 million of restructuring related fees and costs, our SG&A expend would normalize at approximately $40 million for the quarter.
That is approximately equivalent to an annual run rate of $160 million which is approximately $25 million lower than our 2008 expense and approximately $40 million lower than our 2007 SG&A expense.
So our focus is on driving our SG&A spending down and based on what I just told you, we think we are making good progress running at approximately $160 million annual pace on a normalize basis in the second quarter of 2009.
Now let us turn our attention to cash flow.
GAAP cash used in operations was $5.1 million in the second quarter of 2009, and that compares to a use of $84 million in the second quarter of 2008.
CapEx, this includes deposits that we paid for the acquisition of property and equipment, was approximately flat compared to the first quarter of $36.2 million and $33.6 million in the second quarter 2008.
We define free cash flow to be net cash provided by or used in, in this case, operating activities less CapEx and dividends paid if that is appropriate and that is no longer appropriate in our case.
In the second quarter of 2009, free cash flow was a use of $41.3 million and this compares to a use of $123.7 million in the second quarter of 2008.
Special charges paid in the second quarter of 2009 approximated $15 million.
This related primarily to hourly and salaried attrition programs including some BDP cashout.
We estimate that cash impact of the extended production shutdown to be in the range of $30 million to $35 million in the second quarter of 2009.
Remember the cash flow impact of the shutdown will be more weighted to the third quarter as we restart our operations here in the months of July and August, as opposed to the P&L impact which was much more heavily weighted to the second quarter.
These two items, the special charges of $15 million, the impact of the shutdowns to the range of $30 million to $35 million, these two items pretty well explain the cash flow results for the quarter.
The net impact of everything else was slightly favorable to break-even.
As of June 30, 2009, our company had approximately $283.5 million of liquidity consisting of available cash, short-term investments and committed revolver capacity.
Cash on hand was $272.4 million of this total liquidity.
And by the way I should point out, we have reclassified substantially all of our long-term debt to a current liability in our balance sheet.
This is required under GAAP due to the status of our waiver and amendment of the revolving credit facility.
There were no changes to the maturity of our major debt obligations and we are not currently in default on any of these debt agreements.
But that is an important balance sheet point and I wanted to make sure you understood the basis for making that adjustment.
AAM has currently has sufficient liquidity to operate our business and meet our financial obligations as they come due.
Obviously this is a developing story due to the waiver and amendment of the revolving credit facility as well as the ongoing discussion we are having with our lenders and other stakeholders.
However let me repeat what Dick said, it is out were primary objective to complete our restructuring outside of a bankruptcy process.
Although there could be no assurance that we will be successful in this regard, we are working very diligently to accomplish that objective and continue meeting our financial obligations as they come due.
We are making considerable and rapid progress in our comprehensive restructuring, resizing and profit recovery plan.
We cut our costs and we are now realizing significant productivity gain.
We are reducing the break-even to a level equivalent to a U.S.
SAR of 9.5 million to 10 million vehicle units.
Dealer inventories for the programs we support are now substantially normalized.
We are ready to launch many new programs.
Dick walked you through that.
Simply stated, we are ready for volume.
And we are positioned to benefit nicely from the eventual and inevitable recovery and sales and production volumes.
We do not need to return to the glory days of [16] million units for this to be true.
A relatively small improvement in the U.S.
SAR.
For example, a rate equivalent to the (inaudible) rate in the eh U.S.
market of approximately 12 to 12 1/2 million vehicle units will make a big positive difference in AAM's financial results and free cash flows.
That is all I've got here to say this morning in terms of prepared remarks.
Thank you for your time and attention and I will stop here and turn the call over to Chris and we can answer
Christoper Son - Director IR & Corporate Communications
Thank you, Mike and thank you Dick, we have reserved some time to take some questions.
I would ask to limit your questions to no more than two and, so this time, feel free to proceed with any questions that you may have.
Amanda?
Operator
Your first question comes from Rod Lache from Deutsche Bank.
Your line is open.
Unidentified Participant - Analyst
Yes (inaudible) in for Rod Lache today.
I was wondering if you could talk about--you mentioned commercial arrangements with key customers and stakeholders on the 8 K.
Can you talk about the contract with GM, have they come through to the new GM intact?
And also you say that you have sufficient liquidity to meet obligations as they come due, is there anything that you need from GM that could be involved with these commercial arrangements?
Mike Simonte - EVP Finance & CFO
Good morning, Dan.
We are not in a position to discuss the details of the discussions we are having with our stakeholders be it General Motors or the banks or other parties.
We are working on a variety of commercial agreements and financing arrangements that will help us meet our objective here to complete our restructuring outside of bankruptcy.
And obviously everything starts with our relationship with General Motors.
They represent a little bit more than 75% of our total sales and obviously critical to our company going forward.
What I can tell you is that we are shipping under our contracts to General Motors, wer're collecting receivables in the normal course, we have been paid 100% of what is owed to was, or almost 100% I think there is a remaining balance of approximately $30,000 that we're still chasing down.
We have been paid substantially everything we're owed, we are working very cooperatively with General Motors and we expect to have, as Dick said, a long-term mutually beneficial relationship with GM.
Beyond that, I am not going to be able to say much more today.
Dick Dauch - CEO
Dan this is Dick Dauch.
First of all, good morning and thank you for your discussion and your request.
As I understood it, you wanted to know about GM and AAM and our commercial contracts.
All I can say is we are currently working with all those people, and the stakeholders, on various financial alternatives, commercial agreements, capital structure considerations that could result in a comprehensive long-term solution outside of bankruptcy, as Mike has indicated.
We expect to have a long-term mutually beneficial relationship with GM, like we have for the last 15 plus years, our companies, AAM and GM, are continuing to talk and negotiate final terms of assumptions.
And that is part of the background of the contract terms.
Unidentified Participant - Analyst
Thank you and within your break-even target of 9.5 million to 10 million U.S.
SAR rate, can you talk a bit about what your large pick up and large SUV segment share assumptions are within those numbers?
Mike Simonte - EVP Finance & CFO
Yes, we have shown this publicly, we will do it again here.
What we are looking at is a mix between roughly 12% and 13% of full-size pickups and SUVs as a percentage of the total SAR.
Unidentified Participant - Analyst
Can you give us any indication on how the backlog, the $1.1 billion of backlog, rolls on over the next couple of the of the is and that is my last question.
Thank you.
Mike Simonte - EVP Finance & CFO
Yes.
The backlog, there is roughly $700 million that will be launching between the calendar year 2009 and 2011.
As Dick pointed out our launch activity picks up very significantly in the back half of this calendar year 2009 and that will continue nicely through 2010 as a big percentage of the number of programs in our backlog launch.
Dick Dauch - CEO
Let me give a little flavor and that and I indicated earlier in the launches.
With General Motors, we have got this major launch that is going very successfully for GM and ourselves on the Chevrolet Camaro.
As well as the Cadillac SRS', they are currently in launch or at rate.
We are also working right now with Mack truck on that launch here in this second half of '09.
I think I indicated earlier, we have the critical VW launch in Brazil for their robust pickup unit.
We also want to talk about the Audi launch over in Poland which is happening right now in as we speak.
was is happening right now in as we speak.
As well as a little bit later, 30, 60 days, the [Tatung] launch.
We have a lot of launches going and they're going effective and we feel very good about this for revenue.
Unidentified Participant - Analyst
Thank you very much.
Dick Dauch - CEO
You're welcome, Dan.
Have a great day.
Operator
Your next question comes from Brian Johnson of Barclays Capital.
Brian Johnson - Analyst
A couple questions, first following up on the GM issue.
You are listing the $221 million GM post-retirement cost sharing asset as an asset.
Is that now with the new GM or old GM and what they're the status of discussions around that?
Mike Simonte - EVP Finance & CFO
Good morning, Brian.
The GM post-retirement cost sharing asset, as you know, reflects a portion of that obligation that we expect to be receiving from General Motors under the agreements that we've have in place since March 1 of 1994.
We do believe that new GM will honor this obligation to our company and that is the reason we have not recorded the loss relating to the potential inability to recover this asset in full as of June 30th of this year.
As Dick just mentioned, we continue to be in negotiation on the final terms of the assumption by new GM of certain contracts and definitive contract terms.
So, I am not in a position to say much more about that at this point in time.
But as you rightfully point out, we continue to believe that there's a good and valuable asset there.
Brian Johnson - Analyst
And is the timing for those discussions tied into the 20 days on the waiver?
Mike Simonte - EVP Finance & CFO
Brian, fair to say that the next few days and weeks are very important for us to resolve our issues with all these stakeholders and that is exactly what we're working on.
Brian Johnson - Analyst
Okay second question is around the incremental margin, looked like it it was minus 32%.
Is that where you are expecting it, was the magnitude of the shutdown such that you went into the 30's, versus the 20's?
Mike Simonte - EVP Finance & CFO
Yes, that is right, Brian.
And particularly, given the concentration of reduction in the high-volume, very capital intensive full-size pickup and SUV programs with both GM and Chrysler here in this quarter.
The contribution margin, in this case, contribution margin loss will trend up to the low to mid-30s.
So it is reflective of for our cost structure.
What I look at when I look at the second quarter is I compare it to the first quarter after you exclude the impact of special charges and the shutdown itself and from our perspective, Brian, the second quarter looks a lot like the first quarter with two notable exceptions.
I think this is depending on how you calculate that margin difference, maybe factoring in, probably not the first one.
The first one is tax.
We had a $4 million additional tax charge in the second quarter 2009 that relates directly to the accounting for the curtailment gain.
So it is background noise that does not affect our day-to-day operations.
But when you adjust our net performance for these other items that pops out pretty significantly as a difference between the first and second quarter.
The other item of note here is that foreign exchange volatility because of the weakness of the dollar in the second quarter, vis-a-vis the first quarter, we had a $2 million dollar additional hit in the second quarter versus the first quarter on foreign exchange.
So again depending on how you measure the performance in the second quarter versus the first quarter, our bottom line assessment is that it is pretty similar to what we experienced in the first quarter once you adjust for these items.
Brian Johnson - Analyst
And incrementally going to second half, should we be thinking mid 20s or the same 32%?
Mike Simonte - EVP Finance & CFO
Brian, on the programs, the significant large programs that we have operating leverage, it will be closer to that 30 to mid 30's range.
We will be launching a number of new programs as we talked about and some of those will come on with additional fixed costs as well as variables.
So we will see lower positive contribution on some of the new programs so when it all shakes together probably something mid-20s is not a bad assumption.
But I wanted to point out the difference in the characteristics of these two different types of businesses as that we will see a picking up in volume in the second half of the year.
Brian Johnson - Analyst
What are you assuming about GMT 900 production in the second half ?
Mike Simonte - EVP Finance & CFO
Brian, at this stage, we've looked at the total production for the year and again assuming that we are in 9.5 and maybe 10 million SAR environment in the U.S., we see sales of the GMT 900 program somewhere between 675,000 and 700,000 units and see production right around 600,000units.
So the back half of the year will complement what happens in the first half of the year and be in the range of 600,000 units for the year.
Brian Johnson - Analyst
Okay.
Thanks.
Operator
Your next question comes from Joe Amaturo from Buckingham Research.
Joe Amaturo - Analyst
A couple questions.
I guess the first, Mike you mentioned that you plan on meeting all your financial agreements as they become due.
I think it is no secret that August 11, you have an interest payment due.
And then if you read the waiver its says that you need the creditors' approval before making that payment, could you give us some insight on what you would need to accomplish so that the creditors could give the approval to make that $7 million interest payment?
Mike Simonte - EVP Finance & CFO
Joe, the first thing I want to make sure is clear, we do not require the approval of anybody to make that payment.
There is a provision in the waiver that - if we make a payment and the banks have a different view about that, then they can in fact terminate the waiver with a vote of 51% of the bank group, but I think it is important difference that we do not need the specific approval of the bank group to make that payment.
Joe Amaturo - Analyst
Okay.
Could you give us any sense of going back to the GM contracts, what portion of the GM contracts have been finalized and renegotiated versus how much still needs to get them?
Mike Simonte - EVP Finance & CFO
Unfortunately that is a level of detail we are not able to address today.
The key thing is we can say and have said obviously is that we have collected substantially all the receivables that we we're owed pre-bankruptcy.
We are shipping under the awards and programs that we have been sourced and so from the day-to-day operating perspective, we are pretty much working business as usual.
Dick Dauch - CEO
I think I said earlier, Joe, we expect to have long-term mutually beneficial relationship with GM.
And that constitutes, includes, what you are asking about his.
Joe Amaturo - Analyst
Okay.
Generally speaking, with respect to the payment terms, if payment terms from GM were to fluctuate, could you quantify it per day, what that would represent in cash?
So ie if you went from 45 days to 44 days.
Mike Simonte - EVP Finance & CFO
Yes, Joe, first of all, I'm not going to speculate on any change of payment terms.
But if you take a look at our annual sales rate, and convert that to a run rate of sales, per production day, you are in the range of $4.5 million dollars or so with General Motors.
So I think if you were inclined to make that analysis you would probably work off the basis of $4 million to $5 million average per day based on normal seasonal fluctuation.
Joe Amaturo - Analyst
Okay.
Thank you and good luck.
Operator
Your next question comes from Himanshu Patel from JPMorgan.
Your line is open.
Himanshu Patel - Analyst
Hi, Mike.
Could you give a little bit of color on how your thinking working capital should shake out in the second half?
Mike Simonte - EVP Finance & CFO
Yes let me start by walking you through some of the critical elements of other in our second quarter cash flows and I think this will help understand what happens in the third quarter.
On the press release on the cash flow statement, we have a category in our operating activities section of the cash flow statement that sums up to $247 million of other cash flows and what that consists of is the impairments, the P&L impact of the impairments of roughly $173 million and then three critical working capital items.
First of all, accounts receivable which was $122 million source of cash in the second quarter, inventory reductions which was a $13 million reduction or source to cash I should say in the second quarter, and in accounts payable payout of around $60 million.
So these four items receivables, inventories, payables and the adjustment on the cash flow statement for impairments terms explained the other category in the second quarter.
In the third quarter, we will see those working capital items flip.
More or less, it is in the range of $60 million to $65 million which , Himanshu, represents roughly the portion of the liquidity impact associated with a production shutdown which flips or impacts our third quarter.
So roughly 1/3 of the shutdown impact on a liquidity basis hit us in the second quarter of roughly 2/3 in the third quarter and that is going to be the major element of flip and impact on
Himanshu Patel - Analyst
What about fourth quarter, what would happen there?
I think T900 production ramps up even sharper on Q4 versus Q3, right?
Mike Simonte - EVP Finance & CFO
I don't know yet.
From our schedules right now we do not see a strong ramp up.
We see very solid strong schedules in the third quarter, we see very solid schedules in the fourth quarter.
Whether there is significant difference between those two remains to be seen.
Dick Dauch - CEO
One thing I would say, Himanshu, good morning.
Presently the truck plants of General Motors, good news, they are operating, secondly they are also already running daily overtime and significant Saturday overtime.
That gives you a feel of right now and the next 15, 16 weeks.
Mike Simonte - EVP Finance & CFO
Just be clear, when I said what I said, I meant the daily run rates beginning in the month of August, the weakness in the month of July will obviously have an impact on the total volumes in the third quarter, but the daily run rates are picking up nicely in August and based on the 16 week window we have into the General Motors scheduling, they look pretty good.
Dick Dauch - CEO
And we're also looking nicely above rates of our break-even.
Himanshu Patel - Analyst
And then could you - I know you are in negotiations with GM.
Can you remind us pre any changes and with GM, what was the schedule of payments from GM for the buydown, buy-outs for 2009?
I think there is in amount due in October, wasn't there?
Mike Simonte - EVP Finance & CFO
No.
Payments that we are receiving under the agreement that we reached last May, the cash payments have been fully satisfied in March of 2009.
There is a continuing benefit to our company associated with the waiver of our responsibility for any portion of post-retirement healthcare benefits provided to GM retirees.
That in total was roughly $38 million, $39 million benefit to our company on the balance sheet and it comes in, Himanshu, roughly $1 million to $1.5 million, maybe $2 million increments each year.
From the perspective of any cash we're receiving from GM under that agreement, we've received all those proceeds
Himanshu Patel - Analyst
Mike, could you give us - go through the revolver again, how much was drawn as of the end of June 30?
Mike Simonte - EVP Finance & CFO
Substantially all of that was drawn once you adjust for letters of credit, Himanshu, our total liquidity position was $283.5 million.
I think the short-term investment on the balance sheet which are components of that was approximately $11 million, we had approximately $272 million in cash.
That was substantially all the revolver was drawn.
Himanshu Patel - Analyst
And LCs were around 50?
Is that right?
Mike Simonte - EVP Finance & CFO
A couple million less than that.
Dick Dauch - CEO
Thank you.
Operator
Your next question comes from Chris Ceraso from Credit Suisse.
Chris Ceraso - Analyst
Can you give us a feel roughly for how much business launches in the second half of this year whether it's an annualized revenue run rate or how much revenue you think you will experience in the second half from the new business?
Mike Simonte - EVP Finance & CFO
Yes hold on.
In 2009, Chris, we had a little bit more than $225 million of our backlog.
This number has not changed much as we begin to discuss our backlog disclosures even 12 months ago and talking about to 2009.
The bulk of the programs that Dick has mentioned, come on line in the second half of the year.
We will see a nice contribution from those program.
I will not be more specific about the specific dollars that launched at one time period versus another.
Most of that activity certainly more than 50% of that activity will begin to benefit our top line in the second half of this year and of course will continue into 2010.
Chris Ceraso - Analyst
So the $225 million '09 backlog, is that an annualized number or the amount that you thought would hit the top line '09?
Mike Simonte - EVP Finance & CFO
That is the amount that will hit the top line in '09.
And includes the Mack program, the [Tatung] program, the Volkswagen program, the GM launches, that Dick outlined including the Camaro which of course is already very much a big part of our stable, the SRS program, the Audi and so on and so forth.
Chris Ceraso - Analyst
You mentioned in your comments, Mike, that you were heading towards a 6,000 axles a day break-even and you were at 7,500 at the beginning of the year, where are you now and what are the actions left to do in the second half?
Mike Simonte - EVP Finance & CFO
Chris, we are somewhere between 7,500 and 6,000, probably not far off in the midpoint of that range.
The actions that are yet necessary to take, and most of them have been taken by around the end of the second quarter relate to the salary and hourly workforce reduction.
There is a large number, hundreds of UAW representative associates that unfortunately will be leaving our Detroit manufacturing complex on these buydown, cashouts and that activity is ongoing here into the third quarter.
We had a significant number of salaried positions eliminated, right around at the end of the second quarter, we had a voluntary salary, retirement incentive programs, for example under which approximately 55 people left right on June 30 of this year.
So that action in the second half of the year continue to drive our fixed cost structure down are going to revolve around additional salaried and hourly work force reductions, idling and consolidation of our Detroit manufacturing complex.
Many elements of the Detroit manufacturing complex simply are not coming back up at the end of this extended production shutdown and so we will benefit from the cost reductions associated with that.
We are also fine-tuning our cost structure at virtually every facility around the world so we will hit a bunch of singles there.
The big items are the headcount reduction and the Detroit manufacturing complex.
Chris Ceraso - Analyst
Lastly, taking into account the new business that is launching plus what you are seeing on the schedules for the next 15 - 16 weeks.
Can you take a stab at what you think revenues might look like for the third quarter?
Mike Simonte - EVP Finance & CFO
Chris, I would love to.
We simply are not in the position of the fill confident enough about a variety of different uncertainties that this point to provide guidance.
We have been very clear around what we expect on the GMT 900 production and as you know, 55% to 60% of our top line.
That should give you a pretty good handle of that.
We talked about rather sizable contributions from new business backlog and your first question addresses that.
There's still a whole lot in the way of uncertainties so I'm not going to provide guidance at this point in time.
Hopefully we'll get these uncertainties behind as reasonably soon and provide you some more detailed guidance soon but not today.
Chris Ceraso - Analyst
Okay.
Things, Mike.
Dick Dauch - CEO
Thanks, Chris.
Operator
Your next question from Brett Hoselton KeyBanc.
Mike Simonte - EVP Finance & CFO
Good morning, Brett .
Brett Hoselton - Analyst
Boy this is-- Chris kind of asked my question.
Let me ask it a little bit different way and maybe you are going to pass on this.
As you look at the production schedule for the GMT 900 and then possibly the other production expectations that you have, axles per day expectation as you move into the third and the fourth quarter?
Mike Simonte - EVP Finance & CFO
Yes, as Dick pointed out, we see them certainly from August through the end of the year higher than 6,000 axles a day and in order for that number to move meaningfully higher than 6,000 aday, we would probably need to see some improvement in the GMT 900 outlook beyond the 600,000 units production estimate that I provided earlier.
Brett Hoselton - Analyst
If the actual-- if the actuals--expectations and I understand that it could change, but if it is above 6,000 per day what things might change that might cause you not to be above break-even?
Mike Simonte - EVP Finance & CFO
I am not sure I understand question.
You talking about the volume or own performance?
Brett Hoselton - Analyst
If your current break-even is between 6,000 and 7,500 axles per day, and your current production schedule suggest that axle production is probably going to be above 6,000 for the remainder of the year, that suggests that you will be around break-even,maybe around break-even as you move through the remainder of the year.
My question is am I wrong?
Mike Simonte - EVP Finance & CFO
There are two issues I pointed out.
In the third quarter, obviously the month of July was going to be significantly impacted by the shutdown and when we talk about 6,000 a day, we are talking about August through the end of the year.
So that'sis an issue that we face in the third quarter.
I am not in a position to be much more specific, but you might not be surprised to know that the trajectory of our interest expense is higher and we don't know how much higher.
When we think of break-even, what we think about is essentially a pretax break-even.
So we need to cover our interest when we play break-even.
So to the extent that we may see and slightly will see some increase in interest expense that are simply not able to be estimated right now, we can see some volatility in our earnings around that in the short run until we can generate some cash, pay down some debt and drive further cost reduction and efficiencies into our performance.
Brett Hoselton - Analyst
Okay very fair, switching over to cash-flow.
As you think about things that are less obvious, obviously working capital will change.
What are some of the other material sources and uses of cash through the back half of the year, in other words, sounds like you will not get any more GM payments but are there any material outflows in the form of different restructuring payments, et cetera?
Mike Simonte - EVP Finance & CFO
Two major factors affect our cash flow in the back half of the year.
I think it was Himanshu who asked the question about GM payments.
And as I said, we received 100% of the cash payments we expected from the 2008 agreements by March of this year.
March 26th to be exact.
As it relates to the back half of 2009, the two major outflow issues are going to be the BDP obligations or the buydown payments.
We have the regularly scheduled obligation, we have the August of this year, this is one of three, we started with annual increments in 2008.
We have this annual increment and one remaining 2010.
And then the other aspect of the BDP that we talked about, the fact that we are accelerating some of the 2010 obligations into 2009 as part of the cashout provisions as these associates elect to leave our company they take with them the unpaid the BDP obligation.
Long story short, we see between $60 million and $75 million of BDP payments, being made in the back half of 2009 with heavy weighting towards the third quarter.
That is the first item.
The second item is the working capital issue also I discussed in reference to Himanshu's question, roughly two-thirds of the $95 million total impact of the extended production shutdown, will be an issue for us in the third quarter.
Those are the major items, Brad.
As we continue to ratchet down our cost structure and look for additional productivity, we may incur some additional salary payments, we may incur some additional redeployment cost, things of this nature.
But at this stage I don't see this as the material certainly not anywhere near these other two.
Brett Hoselton - Analyst
Mike, that was a very helpful.
Dick, thank you.
Christoper Son - Director IR & Corporate Communications
We've got time for one last question.
Operator
Your last question comes from John Murphy from the Bank of America.
John Murphy - Analyst
I will make them brief.
Dick, you mentioned that the backlog has ticked down a little bit.
But you also mentioned that you are quoting the business they are bidding on actually ticked up.
In the first quarter you were talking about $800 million that you were quoting on now it looks like it's $900 million.
Is there anything going on there that you are seeing the ability to take some business from other distressed competitors out there?
Is there anything changing in the bidding environment for you ?
Dick Dauch - CEO
Well obviously as we have established ourselves very effectively the last several years throughout the world, we are now having a chance to bid on many OEM that we're not traditional for us.
As I indicated, the 90% of the $900 million that we're quoting on is non-GM.
And there is a nice mixture on that.
Obviously 10% or so is GM.
Another [ INDISCERNIBLE ] will be in the Chrysler group and as you get into Asia, whether it is in the Chinese OEM for Indian OEM, or other very significant and we have other ones coming in as we told you the VW, Nissan, etc.
So we have a real nice mixture and we are being invited in which is even more friendly opportunity because of our incredible engineering quality, delivery and enterprise value, overall value package in advanced, sophisticated technology.
As you get into these cafe and emission issues, of course our product is very helpful on them meeting these new powertrain and drivetrain systems for their requirements.
Mike Simonte - EVP Finance & CFO
Yes John, just a quick clarification, the combination of GM and Chrysler business under quote at this time is in the range of 20% and 25%.
Not just Chrysler, but the combination of GM and Chrysler.
Dick Dauch - CEO
John that is even better because obviously up until now, our history has been for the primary customer of GM and a very important secondary customer Chrysler and now as you can see, over 75% almost 80% of this quoting business is not even GM or Chrysler.
John Murphy - Analyst
Then Mike maybe two housekeeping issues, when you are talking about break even, it seemed like you we're indicating, couple things are saying, the break-even would be equivalent to roughly 600,000 to 700,000 unit build on the GMT 900, does that sound right?
Is is closer to the low end or the high end of that range, or am I completely off?
Mike Simonte - EVP Finance & CFO
No, John, your close.
It is closer to the high end of the range.
Which will track and the mixed levels, 12% to 13% of the SAR for full-size pickups and SUVs.
And the total market between 9.5 and 10 million units.
If it is 600,000 units, we have more work to do.
Because that would be a lower mix and potentially a lower SAR.
But we're seeing things bounce a little bit here so we are hopeful that the 9.5 and 10 million level is an appropriate level to fix our break-evens.
And on the mix, the month of July, a little bit of cause for concern but we will not react too much to one month of activity.
We think that some of the factors that may in fact help in the long run, particularly pick up truck sales are not really evident yet.
We need to boost in the construction trades and home building and these types of things, and I think we will see a little bit better mix as we go forward.
John Murphy - Analyst
And then just on DNA with the impairments in the quarter should we just be taking DNA down about 10% on a run rate basis from $36 million just knocking $4 million off to $32 per quarter.
Mike Simonte - EVP Finance & CFO
Yes, I think DNA-- it will be in that range--will be closer to 140ish or so on a run rate basis.
But not too far off that.
Okay.
Thank you very much.
Christoper Son - Director IR & Corporate Communications
Thank you, John.
And we thank you for participating in the call and appreciate your interest American Axle and Manufacturing.
We look forward to talking with you in the future.
Operator
This concludes today's conference call.
You may now disconnect.