American Axle & Manufacturing Holdings Inc (AXL) 2010 Q1 法說會逐字稿

Good morning.

My name is Christopher and I will be your conference operator today.

At this time, I would like to welcome everyone to the American Axle and Manufacturing first quarter 2010 conference call.

All lines have been placed on mute to prevent any background noise.

(Operator Instructions) I would like to turn the call over to Mr.

Christopher Son, Director of Investor Relations and Corporate Communications.

You may begin your conference.

Thank you, Chris, and good morning, everyone.

Thank you for joining us today and for your interest in American Axle Manufacturing.

Early this morning we leased our first quarter 2010 earnings announcement.

If you have not had an opportunity to review this announcement, you can access it on the AAM.com website or through the PR news wire services.

To listen to replay of this call you can dial 1-800-642-1687, reservation number 69567946814.

This replay will be available beginning at 5:00 PM today through 5:00 PM Eastern time May 7.

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 cause future activities and results of operations to differ materially from those discussed.

For additional information we ask that you refer to our filings with the Securities and Exchange Commission.

Also, during this call we may refer to non-GAAP testimony measures information regarding the non-GAAP measures as well as reconciliation to GAAP financial information, is available on our website.

During the quarter we will participate in the following conferences, the KeyBanc 2010 Automotive and Industrial Conference in Boston on June 2, and the Deutsche Bank 2010 Industrials Conference in Chicago on June 23.

In addition, we are always happy to host investors at any of our facilities.

Please feel free to contact me to schedule a visit.

With that, let me turn things over to AM's Co-Founder, Chairman and CEO, Dick Dauch.

Thank you, Chris, and good morning, everyone.

Thank you for joining us today to discuss AAM's financial results for the first quarter 2010.

Joining me on the call with you ladies and gentlemen today are David Dauch, our President and Chief Operating Officer, along with John Bellanti, our Executive Vice President Worldwide Operations, and Michael Simonte, our Executive Vice President of Finance and Chief Financial Officer.

To begin my presentation today, I will provide some highlights of AAM first quarter 2010 results.

I will also review AAM's critical business initiatives before turning things over to Mike.

After that, we will open the call up for questions that you people may have.

Today I am pleased to report that AAM is reporting profitable results and positive free cash flow for the third straight consecutive quarter.

Let me briefly cover five first quarter financial highlights.

First point, for the first quarter of 2010, AAM sales were $522 million, year-over-year basis AAM sales in the quarter were up approximately $120 million and that's about a 30% increase.

As compared to the fourth quarter of 2009, our sales were up nearly $60 million, thus a sequential increase of 12.5%.

Second point.

AAM's net income, for the first quarter of 2010 was $16.3 million.

This represents diluted earnings per share or positive EPS of around $0.22.

Third point.

AAM's EBITDA for the first quarter of 2010 was $72.6 million, or 13.9% of sales, just a shade less than 14%.

On a year-over-year basis, this is a $53 million improvement.

This is in line with our expectations and guidance and reflects AAM's commitment to drive financial performance to the upper end of our long-term EBITDA margin target of 12% to 15% which we discussed with you previously.

Fourth point.

AAM generated positive free cash flow of $61 million in the first quarter of 2010.

This compares to a $66 million use of cash in the first of 2009, or the ships pass in the night of $127 million period to period.

On year-over-year basis, AAM's free cash flow results were improved by $125 million in that quarter.

Fifth, AAM ended up the first quarter 2010 with more than $500 million, over $0.5 billion, of total available liquidity.

Our financial results for the first quarter of 2010 continued the positive and responsible trend of improved profit and cash flow performance for our shareholders.

These results reflect the favorable impact of improving global industry conditions, the structural benefit of our focus and continuing efforts to sustain reduction in AAM's fixed cost structure where we have fixed both operational as well as financial and operating break even levels.

We are especially pleased to deliver a financial report at this early stage of the economic recovery for our industry and our nation.

Mike will cover more details of our financial results later on this call.

Now I would like to shift gears and update you on AAM's top two critical business initiatives.

First, strengthening AAM's balance sheet.

Second, expanding and diversifying AAM's business profile.

Let me take a moment to discuss these initiatives and the actions AAM has taken starting with strengthening AAM's balance sheet.

At the end of 2009 our company took action by proactively competing $725 million of bank, bond and equity financing transactions.

This successful financing activity accelerated the long-term process of strengthening AAM's balance sheet and capital structure.

Through these transactions we extended debt maturities, reduced leverage, improved AAM's liquidity position, and solidified AAM's financial viability and sustainability.

Our Company is now well positioned to grow in to its capital structure over the next few years.

AAM's top financial priority is to generate free cash flow from operations.

We must do this in order to successfully achieve our long-term goal of reducing our leverage and paying down debt.

Over the last three quarters, AAM is generated positive free cash flow of approximately $80 million, we have a good trend going.

A key area of cash flow focus for AAM is the reduction of capital spending.

For the years 2010 to 2014 we expect to reduce capital spending to a range of approximately 4% to 6% of sales.

This is much lower than our historic rate of capital spend.

We are accomplishing this important objective by aggressively redeploying underutilized capacity at our existing manufacturing locations throughout the world.

This will avoid future spend to support over $1 billion new and incremental business backlog.

We do not need to spend an elevated level in the future because our infrastructure is set.

We took 16 years to rebuild this baby, it's now rebuilt.

We got the regional cost competitiveness.

We have the high quality of our product, we have the operational flexibility, we have all the value our customers and consumers need.

We are a global manufacturing and engineering and sourcing footprint that are well established.

We are ready to focus on AAM's global resources in the second critical initiative by expanding and diversifying AAM's business profile.

The foundation for this initiative and AAM's profitable global growth, as I said, is the over $1 billion new and incremental business backlog for the years 2010 to 2014 with over $300 million of that this year.

Nearly 50% of this new business backlog is for passenger car and crossover vehicle programs, the hot segments.

Approximately 70% of the business backlog is for end markets outside of the US where the majority of auto growth is.

If there is one thing that the investment community underestimates about AAM is the following.

We are making excellent progress diversifying AAM's customer base, product portfolio and geographic sales concentration.

We expect 2010 to be another breakout year for us as it pertains to this subject.

Approximately two-thirds of this new business backlog launching in 2010 is for new customers other than General Motors.

This includes major programs and major brands supporting Volkswagen, Audi, Nissan, Mack Truck, Tata Motors, Mahindra as well as others.

In addition to the book business, we are currently quoting approximately $900 million, of potential new business.

Substantially all of these opportunities are with customers other than GM.

Many of these opportunities are focused on passenger car and crossover vehicle programs.

Furthermore, a significant portion of this quoting activity is for commercial vehicle programs in emerging markets coming on very strong for our Company.

AAM's advanced product technology and operational excellence positions us well in these important quoting activities.

As we continue to compete in the global driveline market, AAM's regionally cost competitive, high quality and operationally flexible manufacturing footprint is a distinct and major advantage for AAM.

Our global manufacturing facilities were designed to be in close proximity to our customers and the most competitive locations in each region of the world and where the gross segments are.

Let me briefly discuss AAM's activity in some of these growth markets by country or by continent.

First, the country of Brazil.

AAM's converted our Araucaria manufacturing facility from a component machining operation to a full driveline system provider of supplying axles, drive shafts, CV joints, gears, differential cases and machine components and all our customers are extremely pleased with the results.

At the Araucaria facility, we support all key marketing segments pass cars, crossover vehicles, light trucks, SUVs all the way to commercial vehicles.

This includes the rear axles for the VW AG new pickup truck, Volkswagen Amarok, a new double cab pickup that was a successful launch for the South American market.

In the future, this facility will be launching a driveline system for GM's Next Generation Global Pickup Truck Program.

Let's jump to India.

AAM's joint venture operation in Pantnagar, India, is off and running.

The facility is now supporting multiple variations of the Tata truck program and, in addition to our business and engineering office in India, AAM has just launched our second manufacturing facility April 25, few days ago, in Pune and the focus there is more on commercial vehicle segmentation.

These new facilities will consist of drive line systems, manufacturing and machining as well as assembly value added and AAM's Pune manufacturing facility will support our internal global sourcing strategy as well as the external market.

Our first customers in the facility include Mahindra Navistar Automotive Limited, better known as MNAL, as well as Daimler Truck and Bus.

Our Company is also well positioned to increase in participation in the red hot market of China.

AAM's joint venture in Hefei, China is off to a good professional and profitable start.

After earning a profit our first year of operations in 2009 Hefei AAM manufacturing is now exploring growth opportunities in the expanding China market.

This joint venture is dedicated to serving the passenger car, crossover and multipurpose vehicle market in China and allowing us to enter areas that we not been in before.

AAM's Changshu manufacturing facility is our first wholly owned facility of manufacturing in China and the facility was established to support the global expansion initiatives of new and existing customers in the fast growing Asia market.

To date, AAM has secured orders from Volkswagen, Chery, Brilliance, JAC, and Anhui that further diversify customer base and product portfolio.

We are very pleased about this.

Now let's jump to Thailand, specifically Rayong, Thailand.

We will complete our construction of AAM's first wholly owned manufacturing site in the world for that country and that's the second largest light truck market in the world.

In the short-term, the primary focus of the facility will be to support the launch of GM's Next Generation Global Pickup Truck Program for 2011, right on top of us.

AAM will also seek to leverage our regional cost competitiveness in the facilities with sales with close proximity to many OEM operations to support AAM global expansion initiatives.

Now, let's jump to a different continent, Europe.

Here, we are working closely with engineering resources in Germany, AAM's [Vanika] Poland manufacturing site along with quickly becoming the center of AAM's business in Europe.

AAM first major programs, Vanika, is a production of very sophisticated transmission differentials for the VW AG premium brand Audi.

I would like to, before I turn things over to Mike, wrap up by making a few closing comments.

Our message today is quite simple.

AAM's operational restructuring is substantially complete and paying off handsomely.

Our cost structure's aligned with current and projected customer and market requirements.

AAM has returned to profitability and positive free cash flow for the past consecutive quarters.

A positive trend has been established.

We are achieving our target profit guidance.

AAM's capital structure is stabilized.

We have the financial strength and the wherewithal to execute business plan and progressively grow in to this capital structure.

We have an exceedingly strong and deep and broad management team and leadership capability.

Our Company has established a regionally cost competitive high quality operational flexible manufacturing footprint.

This is helping us to profitably grow AAM's global sales.

We expect our sales to double from approximately $1.5 billion last year in 2009 to approximately $3 billion in 2013, and this year probably to exceed $2 billion.

AAM is making excellent progress diversifying our business profile, our customer ranks are rapidly growing, we are launching many new sophisticated programs on passenger car, crossover vehicle, commercial vehicle programs and getting ready for the very important full sized truck heavy duty in the next month for GM as well as all New Generation in a couple of years.

We're quoting some $900 million of potential new business and expect quickly grow our sales in China, Thailand, India, Brazil as well as other growth segments of the world.

All this positions our company, AAM, to successfully achieve our critical business objectives of strengthening AAM's balance sheet while expanding and diversifying AAM's business profile.

I want to thank each and everyone of you ladies and gentlemen for you attention today and your vital interest in AAM.

Let me at this time turn our call to over our Executive Vice President of Finance and Chief Financial Officer, Michael Simonte.

Mike.

Thank you, Dick.

Good morning.

Let me start by saying that our first quarter of 2010 financial results do not include much in the way of special charges, restructuring, or other forms of misery such as our industry has endured in recent years.

It is truly a pleasure to speak to you today.

The highlights of AAM's first quarter 2010 earnings report are as follows, number one, strong sales and profitability growth.

Two, positive free cash flow and, three, significantly improved credit metrics.

Let's start with the strong sales in profitability growth.

In the first quarter of 2010, AAM's sales increased approximately 30% to $522 million as compared to $402 million in the first quarter of 2009.

Production rates in our major North American light truck programs were up approximately 25% in the first quarter of 2010, again as compared to the first quarter 2009.

Our first quarter sales increase of 30% exceeded the growth in these critical programs due to gains related to new business launches and faster growth in our global locations.

All of the key first quarter profit metrics, operating income, EBITDA, and net income, were up approximately $50 million, 50, on a year-over-year basis.

Said another way, American Axle achieved an incremental profit conversion rate of approximately 40% as compared to the prior year.

AAM gross margin in the first quarter of 2010 was 16.7%.

AAM's operating margin in the quarter was 8%.

Our EBITDA margin was just short of 14%.

All these metrics are in line with our profitability targets and earnings guidance.

In fact, our 2010 profitability is trending a little higher than we planned due to higher production and capacity utilization rates and effective cost controls.

We, and by that I mean all of AAM's key stakeholders, are seeing an immediate and significant pay back on AAM's operational restructuring which is now substantially complete.

On a sequential basis AAM's first quarter of 2010 sales were up approximately 12% as compared to the fourth quarter of 2009.

On a operating income basis, our sequential profit conversion rate was just short of 25%.

Let me anticipate some questions and make a few comments on our first quarter profitability as compared to the fourth quarter of 2009.

In 2010, we have reinstated pay cuts taken by all of our salaried associates in the US in 2009.

In addition, our improved profitability in 2010 restores the possibility and quite frankly the probability that our hourly and salaried associates may earn awards under our profit sharing and incentive compensation programs.

The costs associated with the items represented more than 10 percentage points of sequential margin performance.

These costs were simply not part of our cost structure in the fourth quarter of 2009 and they are now in 2010.

Also in the first quarter of 2010 we recognized the adverse impact of arbitration ruling related to the transfer of certain production from the Detroit manufacturing complex to another AAM facility.

In connection with this ruling, we recorded a liability for back wages and benefits owed to certain UAW representatives associates in Detroit.

Most of the back wages and benefits expense in the first quarter of 2010 were out of period.

We are currently in discussions with the UAW regarding the details of how this matter will be remediated.

Until those discussions are finalized, it would not be appropriate for us to say too much more about this.

However, the important thing for you to understand today, is that the accounting impact of AAM's liability for this arbitration ruling has not been factored in to the Street's earnings estimates for the first quarter of 2010.

This is significant because if we were to adjust our first quarter results to exclude this item, our earnings would have been higher than the high end of the range of sell side estimates.

Okay.

Let's move on to cash flow, our second financial highlight point.

As Dick mentioned earlier, this was our third consecutive quarter of generating positive free cash flow.

We define free cash flow to be net cash provided by or used in operating activities less CapEx net of proceeds received from the sale of equipment.

GAAP cash provided by operating activities in the first quarter of 2010 was $79 million, very strong performance for our Company.

This compares to a use of $21 million in the first quarter of 2009.

Capital spending net of proceeds from the sales of equipment in the first quarter of 2010, was approximately $18 million.

Reflecting this operating activity in CapEx, AAM generated free cash flow of approximately $61 million in the first quarter of 2010.

Now this includes the receipt of US income tax refund and we disclosed this previously, but this is the refund associated with the ability to carry back net operating losses, so we received a refund at $49 million in the first quarter of 2010.

This was partly offset by special charge payments of approximately $16 million principally to fund attrition program activity accrued in prior years.

Remember, this $16 million special charge payment is part of what we anticipate a total bill to pay here in 2010 of roughly $40 million to $50 million.

If we were to adjust our first quarter free cash flow results to exclude these two items, the income tax refund of $49 million and the special charge payments of $16 million, we would have reported approximately $28 million of free cash flow.

As compared to the more common seasonal first quarter use of cash, this is a very good result for American Axle.

There are three key drivers to our improved free cash flow results in the calendar year 2010.

Number one, higher earnings.

Number two, tight control of working capital and, number three, CapEx managed down to a level of 4% to 5% of sales.

We did a little bit better than that in the first quarter but for the year we're going to be roughly 4% to 5% of sales.

Our third and final area of financial highlight focus is the balance sheet.

At quarter end, AAM's net debt was approximately $839 million, that's total debt less cash on hand.

As compared to year end 2009, AAM's net debt position was reduced or improved by approximately $55 million.

Almost all of this improvement is attributable to our free cash flow in the quarter.

Net debt to market capitalization is back in the neighborhood of 50%.

So we got much more balance in our capital structure.

Net debt to EBITDA is approximately three times based on the run rate of EBITDA generated in the first quarter of 2010.

That's what we thought we could accomplish here in 2010 so we are pleased about that.

Total available liquidity at quarter end was in excess of $500 million.

Now all this is great news for anybody who cares about AAM as our credit profile has been dramatically improved.

We have made the necessary adjustments to our business to enable AAM to grow into it's capital structure over the next two to three years.

We still have a lot of work to do, but we have come a long way in a very short period of time on the balance sheet.

In fact, if our friends at the rating agencies are feeling a little overworked these days, I'm afraid we need to add to that stress.

We need to have our ratings reviewed again because they simply the don't match the current facts and circumstances, not by a long shot.

With that said, let's get to the details starting with sales.

In the first quarter of 2010, AAM's content per vehicle was $1,390.

On a year-over-year basis, this is $34 lower than the $1,424 in the first quarter of 2009.

The biggest reason for this reduction when we talked about this on the last call, is a change in the billing process for consigned components on the RAM Heavy Duty Series pickups.

This change started in the fourth quarter of 2009.

Non-GM sales increased 30% to $124 million in the first quarter of 2010 and that is as compared to the first quarter of 2009.

On a sequential basis, non-GM sales in the quarter increased approximately 21% as compared to the fourth quarter.

That's almost double the rate of our total sales growth on a sequential basis.

Remember that approximately two-thirds of our new business launching this year is non-GM business.

Although the timing of these launches is weighted to the second half of the year in total, we are now booking important sales growth from Three Rivers, Michigan with Mack Truck, from Brazil and China with Volkswagen, from Poland with Audi and from India with Tata Motors.

This improved diversification of AAM's customer base is a very positive development.

Let's move now to SG&A interest and taxes.

In the first quarter 2010 SG&A, and that includes our research and development spending, was approximately $45.3 million, or 8.7% of sales.

This compares to $43.8 million, or 10.9% of sales, in the first quarter of 2009 and $39.4 million, or just about 8.5% of sales in the fourth quarter of 2009.

That's on a sequential basis.

AAM's R&D spending for the first quarter of 2010 was approximately $19.1 million as compared to $18.7 million in the first quarter of 2009.

Net interest expense in the first quarter of 2010 was approximately $22.3 million.

This is relatively consistent, just about in line with our expected run rate for the year.

AAM's effective tax rate was approximately 11% in the first quarter of 2010.

The tax provision was approximately $2 million.

This is more or less right in line with our expectation of an effective tax rate of approximately 15% for the next few years.

We talked a lot about this on recent calls so I'm going to stop here today on taxes.

If you have any questions, we can address them in a few minutes.

Before we start the Q&A, I will close my clients this morning by updating our guidance for 2010.

First of all, let me level set our macro assumptions.

We are planning for the US SAAR 2010 to be in the range of 11 million to 11.5 million light vehicle units.

While a bit lower than US SAAR estimates, we are happy to be conservative in our planning.

We are prepared for a gradual economic recovery was also well positioned maybe as well positioned as any domestic auto supplier, to benefit from higher sales and production levels.

Dealer inventories for major programs while higher than 2009 year end are in line with target levels.

This continues to bode well for our future production schedules.

We expect GMT-900 production in 2010 to range from 825,000 units to 875,000 vehicle units.

That's an increase of approximately 25,000 units versus our previous guidance.

Based on our industry sales assumption and the anticipated timing of new program launches which is a critical issue in our sales growth this year, very positive issue, we are raising our sales guidance to a range of $2 billion to $2.1 billion for 2010.

We spent a lot of time in the past three months helping investor on the sales size analyst community reconcile the 2010 financial models to our guidance range.

The current Street consensus estimate for AAM's 2000 sales is approximately $2.18 billion, or approximately $80 million higher than the high end of our guidance range.

On average, the Street estimate is based on higher assumed US SAAR and higher GMT-900 production we've assumed.

The average in the Street somewhere around 12, 12.5 million units on the SAAR and GMT-900 production closer to 900,000 units, maybe between 875,000 and 900,000 in the estimate on average.

There are several other data points that suggest our guidance could be conservative, we understand that.

First of all, CSM is estimating GMT-900 production in excess of 900,000 vehicle units in 2010.

That would be great if true.

Second, GM is adding a third shift to its Fort Wayne, Indiana production facility in May.

We estimate the GM straight time man capacity for the GMT-900 program will increase to annual pace of approximately 900,000 vehicle units when this occurs.

Again, another very positive development.

Third, we are bullish, and Dick mentioned this, about GM's imminent launch of Next Generation GMT-900 Heavy Duty Series pick ups.

This will drive higher sales and production activity for these critical model variations in the next several months.

It is also possible that you simply have a better crystal ball than we do as it relates to sales and production planning for 2010.

To be clear, we can easily conceive of many reasonable scenarios for the remaining three quarters of this year in which the full year 2010 sales could exceed our current raised guidance of $2 billion to $2.1 billion.

However, we would rather be cautiously optimistic and avoid making commitments that exceed our ability to deliver.

We are absolutely ready to handle higher volumes.

If they come, we expect to benefit to the tune of $0.25 to $0.30 on the dollar of incremental profit contribution.

We are going to control our cost structure and execute.

AAM expects to be solidly profitable in 2010.

AAM expects to post EBITDA margins in the upper half of our long-term guidance range of 12% to 15% of our sales.

Our first quarter results are a good down payment on these elevated profitability expectations.

In closing let me just say this, we are very pleased with AAM's sales growth and are steadily improving profitability cash flow and balance sheet position.

We are confident in our plan and we are happy to let the results do the talking.

I'm done.

Thank you for being with us this morning.

Chris, we are ready to start the Q&A.

All right.

Thank you, Mike and thank you, Dick.

We reserved some time to take some questions.

At this time, I would turn the call back over to Chris so please proceed with any questions that any of the people may have.

(Operator Instructions) Your first question comes from the line of Brian Johnson from Barclays Capital.

Your line is now open.

Good morning.

Good morning, Brian.

Good morning, Brian.

I want to go in a little bit on the cadence of backlog, a couple of issues around the backlog, especially the non-GM backlog.

Maybe three things, one on GM.

Just what kind of uplift do you expect from the heavy duty vehicles and have they built any to date or are they actually -- and when can we expect a change over?

On the non-GM backlog, what's the cadence of it going through and then as you quantify the backlog in your guidance, have you -- was that based on conservative assumptions around Brazil and China and uptake of some of your customers vehicles that is could there be upside in that backlog if the markets continue the red hot growth base?

Brian, this is Dave Dauch.

To address your first question in regards to next generation heavy duty truck that GM is launching, they don't launch that product until May 25.

We actually started production in our own facility to be ahead of them.

There is some uplift there.

I will let Mike speak to more of that as we move forward here.

In the backlog of new business, it sits at $1 billion, $700 million of that launches between 2010 and 2012.

$300 million launches in 2010.

As Mike said earlier, two-thirds is non-GM related business.

Clearly we have a launch plan that we have to execute to support the non-GM business that we are launching here this year.

We are ahead of schedule in regards to most of those launches.

At the same time, the receptivity of those products in the marketplace will determine whether or not we are conservative in regards to the buy-ins we built in to the planning numbers at this point in time.

We are hopeful right now it's positive as far as the outlook on what we are seeing on some of those sales but it is still too early to tell.

I'll turn it over to Mike to discuss the financial outlook.

Brian, a couple of things I would say, first of all the expectations that we have for our 2010 new business backlog launch is pretty much in line with what we had planned for the year.

There is certainly opportunity for upside but at this stage we would simply say that we still feel that our plans to launch approximately $300 million of the backlog is on track.

Much of the significant pieces of that backlog launch in the second and third quarter, maybe a little bit in the fourth quarter of this year.

So the first quarter pace of new business launch was a little bit light relative to what we will see in the second, third and fourth quarter.

Bearing down in to detail as little bit, this next generation heavy duty pickup truck launch we have new content on these vehicles and so that content will begin to help us in the second quarter and of course we will be a big part of third and fourth quarter.

On this program they have built some heavy duty series pick ups over the last six months but constrained from the diesel engine availability and that has caused them to build less for sure, and we see a positive mix shift in the third and fourth quarter relative to the first half of the year as a result of having the full arsenal of heavy duty ready to go with their new diesel engines.

So that's that issue.

The Volkswagen launch is off to a good start here.

That's a pickup truck, the Amarok pickup truck in Brazil.

We do expect higher volumes on a curve to impact our second, third and fourth quarter very favorably.

The MNAL activity will start right now in fact this week but it will pick up as the year goes on.

So, again, we will see bigger lift from that.

Same with our Tata production in Pantnagar, India.

India will see higher sales volume in the end of the year than they are seeing in the first part of the year.

A good portion of our growth in China this year will happen through our joint venture.

Those sales are not consolidated, Brian, but that joint venture activity is moving along very favorably and economically we have good leverage to the growth.

Brazil, India and China definitely accelerating as we work through the rest of this year.

The other program launch I would mention is our Nissan activity with their van program and that's a second half of the year activity as well.

Late in the year so that's a more of a fourth quarter issue and heading in to 2011.

So hopefully we -- there were a number of questions in there and I think I got them down.

If not, maybe you can --.

Just one question with the on the margin side, as we think about a margin that given what you said about the arbitration might actually been in the low - high, mid 14s, can we expect that you could go above 15 with the further growth or are there launch costs that lead you to want to stick to your guidance of upper end of 12% to 15%?

Brian, this is the same thing as our sales guidance.

We think the appropriate way to plan our business and for you to think about us is in the range of 12% to 15%.

We can concede the situations where we can son seed the range but on long-term sustainable basis and, as you point out, dealing with launch costs and all types of things that pop up in the normal course of business, we think 12% to 15% is the right range.

We feel very comfortable we will be in the upper half of that range as we work our way through this year and if we pop through 15% that would be great, but we are planning on 12% to 15% for the long-term.

Okay.

Was there HD ramp down this quarter that affected the mix?

Well there has been a mix shift certainly from the higher end of those heavy duty pickup trucks, particularly what we would provide an 11-1/2 inch axle for the 3500 Series again because of no availability of their diesel engine for this program since October of last year.

So there has been a lower production rate, really no significant production rate of the 11-1/2 other than what supports the gas engine capacity.

We do see a nice turn around in that shift heading out through the rest of this year.

Okay.

Thanks.

Thank you, Brian.

Your next question comes from the line of Himanshu Patel from JPMorgan.

Your line is now open.

Good morning, guys.

You mentioned, Mike, that there was some reinstatement of osterity measures worth about 10 percentage points on contribution margins.

Is that a one-time bump up or sequentially will there be more types of similar costs coming on in Q2?

Yes.

That's a great question.

The answer is, it is a one-time bump up.

Materially, there should not be significant additional sequential impact going forward.

One-time issue comparing 2009 to 2010 and from this point forward we have absorbed it into our cost structure.

On related question your reported sequential contribution margins at the EBIT level look like they are about 21%, but if you exclude the one-time bump up which looks like it's not going to repeat and you exclude sort of the estimated impact of the labor arbitration accrual, it feels like your underlying sequential contributions margins were approaching 40% or there about.

First of all, is that math roughly right?

And, number two, how does that square with your comments about a 25% contribution margin going forward?

When does that sort of step down on contribution margins occur?

We certainly exceeded our 25% to 30% range or target for conversion.

We had excellent capacity utilization, good performance on the cost side and so we feel good about that.

The contribution margin on the GMT-900 program as we said many times is in the range of 30%.

When we are comparing 2010 to 2009, there are a number of unusual items that were occurring in 2009, -- 2008 and 2009 for that matter, as we move ourselves through 2010 and into 2011, we should see more stability and our cost structure really lack of significant nonrecurring and unusual items certainly much less of an issue.

I would expect as we approach our second quarter and third quarter here, Himanshu, to see more normalized sequential margin improvement rates.

We were targeting and continue to target 25% to 30% of our business, 30% is a good number for GMT-900 program, so based on mix that's what is going to determine it.

Okay.

Then the timing of the next generation light duty T-900 program, when is it exactly?

Is it a calendar year 2012 or model year 2012, and then do you know at this stage whether the pick ups are launching first or SUVs are launching first?

This is Dick Dauch.

Are you talking about the K2XX replacement for the full size GM-900?

Yes.

That's about three years from now.

Thank you.

You're welcome, sir, have a great day.

Your next question comes from the line of Joe Amaturo from Buckingham Research.

Your line is now open.

Good morning, guys.

You touched on good capacity utilization.

Maybe could you give us some sense of where you were running in the quarter?

That's the first question.

Yes, Joe, we ended 2009 in the range, I'm speaking of final drive line assembly capacity, we ended 2009 in the range of 75% to 80% capacity utilization.

We saw our 2010 or early part of 2010 capacity utilization creep up a little bit due to higher production volumes and so we were between 80% and 90% of first first 2010.

Okay.

I guess the next question is regarding the GMT-900 production schedule 16 weeks forward.

Could you comment your view of them moving to a third shift and what's going on with the schedules right now, I guess?

This is David.

We are seeing solid schedules from General Motors at this point in time in regards to the T900 program.

At the same time, as you commented, Fort Wayne is adding a third shift here in the beginning of May and that is contemplated in the 16 week schedule we are seeing from General Motors a that point in time.

We are planning for those volumes at this time.

At the same time, we are hopeful we will see increased volumes going forward based on greater market demand.

They shouldn't be any capacity issue right?

No capacity issue.

We are prepared to support the higher volumes if required.

We have not missed a shipment, Joe, in 16 years and two months.

We won't miss it now.

The last one, Mike, is regarding the tax rate.

Could you just go through what we should expect for the remainder of 2010 and going forward on accrual and a cash basis I guess?

Joe, we anticipate in 2010 this the the same guidance we provided last call.

We expect to be in the range of 15% for our effective tax rate for 2010 and really that's our current internal planning assumption going forward.

The difference between 11% in the first quarter and 15% is close to immaterial, maybe a half a million bucks or something.

You are going to see a little bit of choppiness quarter to quarter but we should finish the year around 15% based on what we know right now.

Our cash tax provision will likely be a touch higher only because we got a number of open audit years and we expect and quite frankly hope to close down a few of those things and there may be relatively small but still cash payments associated with closing down the audits.

These are items we accrued through our tax contingency accrual and that's what I'm speaking of.

One other, sorry.

Could you just go over your steel exposure that's a bit topic right now with commodity prices increasing?

Joe, David Dauch here.

We are seeing moderate increases as far as inflation in regards to different commodities.

As it relates to steel, we have long-term agreements put in to place with all of our steel suppliers who we feel like we are protected for this year and next year, at the same time we are monitoring the prices of iron ore because they are trending up in that direction there.

At the same time as you are fully aware, we have got metal market provisions put in to place of all of our customers and our supply base.

We feel comfortable with where we are at this point in time.

Okay.

Great, take care, thank you.

Thanks, Joe.

Your next question comes from the line of John Murphy from Banc of America.

Your line is now open.

Good morning, guys.

Good morning John.

You mentioned that you were bidding on $900 million of new business.

I was wondering if you could comment on the time frame of that potentially rolling on if it was one and what your sort of historical win rate as been on bidding.

This is David again, John.

Our historical rate has been in the area of around 30% over the years.

So we expect to operate in that area there.

Most programs out for bidding at this point in time will be sourced, probably more towards the latter part of this year, maybe some in the second quarter.

Most of the driveline work we are working on is really 2013 and beyond as it relates to the launch timing, there is some metal form work and some potential driveline work that could happen at the end of this year or early next year.

Okay.

Also what do you think the margin potential is for the existing backlog and this potential future backlog, would it be in this 13% to 15% EBITDA range given you are going to use existing capacity and tooling?

Yes.

John, this is Mike.

We think many of these opportunities are going be in that range, they are going to be very attractive opportunities for us because we do have existing infrastructure and capacity in place to handle a lot of it.

There are some programs that might have a slightly lower margin profile in places like India and China, for example, we are seeing some of this.

We have been able to put together a good and effective business case getting a good return on capital because there is less capital associated with some of the programs.

So overall we feel very good about our 12% to 15% margin expectation for the next several years and that factors in to our expectations about margins on the new business.

Then just lastly the arbitration settlement with the UAW.

I know you guys are not calling that out as a special charge, but is that the last in the cost or charges that we should see for restructuring going forward?

Do you think that you are largely done with restructuring charges at this point?

John, look, we are going to be continuously evaluating to improve the cost structure and we're going to follow all the accounting rules and that's likely going to end up with additional charges from time to time.

At this point we don't have any visibility of significant cash base charges other than what we disclosed previously in the range of $40 million to $50 million here this year.

I think it would be unwise for me or anybody else to suggest we wouldn't expect restructuring charges going forward because we are going to be very diligent taking a look at what we are doing and there likely will be some charges but from a cash basis we don't expect them to beyond our expectations for 2010.

Great, thank you very much.

Thanks, John.

Thank you, John.

Your next question comes from the line of Chris Ceraso from Credit Suisse.

Your line is now open.

Thank you, good morning.

Good morning, Chris.

You mentioned earlier, Mike, on the content per vehicle there was a change in the way that you're billing the RAM business.

But if I do the math on your GM revenue and what looks like the gm units it looks like the CPV there was also a bit lower.

Does that sound right?

Yes.

Chris, that's really the results of the mix shift on the heavy duty program.

Lower heavy duty production relative to the overall production and then even within the heavy duty, many fewer 11-1/2 inch axles for us versus 10-1/2 inch axle all that is leading to a little bit of a lower content calculation in the first quarter.

It looked like it took it a step down sequentially from Q4, so was the HD running stronger in Q4?

Yes.

Okay.

All right.

Fair enough.

The -- where were we.

On the you mentioned in the metal market you got protection in 2010 and 2011.

But are there changes that happened with the deal with GM and the financing?

Can you just remind me?

I thought it had something to do with materials and protection, does that change in 2012 then?

What am I thinking about there?

Chris, we got some adjustments in our metal markets how much we can recover in the form of net versus gross, that's the critical issue there but nothing that isn't already contemplated taken in to the financial planning going forward.

Chris, those changes with GM takes place in 2011 on that one particular issue.

As it relates to the overall agreement with General Motors, there is no change in financial circumstances in 2009 or 2010 and then we will adjust and revise certain commercial terms including metal market, warranty cost reductions and other similar matters beginning in 2011 and transition over roughly over a five-year time period to a full implementation of these new (inaudible).

Okay.

The last one you talked about Thailand.

Maybe I'm confused here but I thought that was somewhat of a closed truck market, has that changed?

Is GM going to start building trucks in Thailand?

Thailand is certainly a vibrant truck producing country and market for many producers, not just GM, and we are reigniting our project to support GM over there and so 2011 will be a critical year for AAM and GM as it pertains to Thailand but Thailand is still a vibrant truck producing market and many OEMs participate in it.

Chris, the only thing I would add to that is remember that GM and Isuzu were partnered together and were making product in Thailand as a joint venture when GM had some ownership structure in there.

Now that they have separated, GM has their own independent approach.

Okay.

Thank you.

Thank you, sir.

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

Your line is now open.

Good morning everybody.

Good morning, Rod.

I had a couple of things.

Most of my questions have been answered but I was hoping you can just help us triangulate on a few things to get closer to a cash EBITDA level.

Can you be a bit more specific in quantifying this arbitration accrual taken through P&L?

I'm backing in to around $6 million but not sure what you are using as the high end of the range.

Does that have also any implications for your future cost structure.

Also related to this, you disclosed previously that you are amortizing your contract costs as well as the GM payments over the course of the contract.

Can you just refresh us on at this point what are the net adjustments flowing through your P&L related to that?

Okay.

Let me deal with the last issue fist because it's relatively straight forward and simple.

On the amortization of agreements with General Motors we got roughly $75 million of revenue, roughly $20 million of expense flowing through in calendar year 2010.

That's relatively ratable throughout, Rod, throughout the course of the year.

That's the amortization impact, net impact just a little bit more than %50 million for 2010.

Relative to the arbitration ruling, Rod, unfortunately we are not going be in a position today to be very specific about the numbers.

We are in the process of working through those details with the UAW and when we conclude that, we'd be happy to tell you all those details.

What we said is the amount of that accrual was enough to push our EPS if we were to exclude that over the high end of the range so we would have been higher, we understand the high end of the range to be roughly $0.26.

We would have been higher than $0.26.

It does have some implication on our cost structure going forward.

Rod, a couple things.

Number one, with these higher volumes that we are seeing, we had been preparing to restart production at Detroit potentially anyway.

If we see higher volume, there is literally no difference between where we are going to be and what we are doing right now.

If volumes do come back a little bit and do not exceed the levels that we are planning on then maybe you could argue there is a couple of million dollars per quarter on impact on the cost structure, relatively speaking that's a small problem for us to manage and we will find other productivity offsets to address that.

Thanks for the clarification because I was at 28.

You were looking at the 26.

That $20 million of cost, that's the amortization of the contract cost, is that correct?

I'm sorry say that again.

The $20 million of expense you said $50 million of revenue and $20 million of expense flowing through, the $20 million of expense related to the amortization?

There is a number of different agreements, the answer is yes.

Okay.

Just --

We do just fine compared to $0.28 as well my friend.

Right.

Okay.

Thank you.

If you can maybe give us a little bit of color on the Q2 production for T900 given this heavy duty changeover and, lastly, either Dick or Mike, on your comments on the capital structure, you're suggesting that you will grow in to this over the next couple of years, I was wondering if you, are you ruling out any external capital raise.

Are you sort of suggesting based on free cash flow that's what you expect to be using to grow in to your long-term capital structure?

Rod, this is David Dauch.

In regards to the capital structure side of things, clearly we want to generate cash from operations to pay down our debt there.

We will use every means available to us if required in regards to possibly even raising additional equity like we did in December of last year.

We are not ruling that out but at the same time we are very focused on generating the profitable cash flow from the operations.

Rod, it's very hard for us to answer a question like that so open ended because there are any number of business developments that may make it very important, very positive and beneficial for us to raise additional equity capital if we had a chance to grow this business and accelerate our diversification, so we would not rule it out.

There is no question about it.

As David pointed out, we are definitely focused on free cash flow as the way for our existing business to grow in to its capital structure.

The first part of your question had to do with GMT 900 production into and through the second quarter.

Rod, what I would say is that since General Motors restarted production back in August of 2009 after the extended shutdown, the production levels have been relatively stable in the range of 850,000 to roughly 900,000 unit annual pace depending on minor adjustments as you work through individual time periods.

That is exactly what we see now through the month of July.

We have visibility through gel that's the pace we see continuing.

With more and more data points, that may make us more and more likely to step up to the level of production that I last knew you were predicting for this program, little bit light compared to the 920,000 units that I know you were expecting earlier this year.

That's certainly possible we simply want to be cautious as we approach our planning and our cost structure management.

Thanks.

Thanks Rod we got time for one last question.

Your final we comes from the line of Brett Hoselton from KeyBanc.

Your line is now open.

Good morning, Dick, Dave, Mike, Chris.

Good morning, Brett.

Couple of thoughts here.

First of all, when do you expect arbitration to be finalized?

One month, one quarter, one year event?

When do you think it might be finalized?

Very soon.

Okay.

Dick, in your opening comments I think you used the expression over a billion dollar backlog, but yet, David, you were talking about a billion dollar backlog.

Is that a minor thing?

It doesn't sound like you are trying to revise our sales backlog up.

I'm just -- .

Not trying to revise it, slightly over a billion dollars.

Can you talk about potential for joint venture partners globally?

I know you have considered pursuing that and you've been working on that.

Can you talk a little bit about that, maybe some additional ones, possibly in China?

Brad, as you know we have been very successful with your joint ventures, first in regards to China that Mike alluded to earlier in the launch last year a profitable year and we are off to a good year this year and we are looking to expand that relationship wherever possible.

At the same time there are some other things we are working on throughout Asia, in regards to both India and China, because of the growth expected in those markets nothing here to today for us to announce but at the same time we are active in to this future side of the business.

Okay.

Very good.

Thank you very much gentlemen.

Have a great day and a great weekend.

Thank you, Brett, and thank you all of you for participating on the call and appreciate your interest in American Axle Manufacturing.

We look forward to talking with you in the future.

This concludes today's conference call.

You may now disconnect.