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Operator
Good morning, my name is Andrea, and I will be your conference operator today.
At this time, I would like to welcome everyone to the American Axle and Manufacturing earnings conference call.
(Operator Instructions)
I would now like to turn the call over to our host, Mr.
Christopher Son, the Company's representative for Investor Relations.
- Investor Relations
Thank you, Andrea.
And thank you, good morning, everyone.
Thank you for joining us today and for your interest in American Axle & Manufacturing.
Earlier this morning we released our second 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 newswire services.
To listen to a replay of this call, you can dial 1-800-642-1687 reservation number 86844610.
This replay will be available beginning at 5:00 PM through 5:00 PM Eastern time August 6.
Before we begin, I would like remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed.
For additional information, we ask that you refer to our filings with the Securities and Exchange Commission.
Also, during the call, we may refer to certain non-GAAP financial measures.
Information regarding these non-GAAP financial measures as well as the reconciliation of these measures to GAAP financial information is also available on our website.
During the quarter, we will participate in the following investor conferences.
The JPMorgan Harbor Automotive Conference in Detroit on August 9, and the Credit Suisse Industrials Conference in New York on September 9.
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 AAM's Co-Founder, Chairman, and CEO, Dick Dauch.
- CEO
Thank you, Chris, and good morning, everyone.
Thank you for joining us today to discuss AAM's financial results for the second quarter of 2010.
Joining me on the call today are David C.
Dauch, our President and Chief Operating Officer, John J.
Bellanti, our Executive Vice President Worldwide Operations and Michael Simonte.
Executive Vice President of Finance and Chief Financial Officer To begin my presentation today, let me review some highlights of AAM's second quarter of 2010 results.
Today, we are pleased to report AAM's fourth consecutive quarter with sequential sales gains, improved profits and positive free cash flow.
Let me start with five second quarter financial highlights.
First, for the second quarter of 2010, AAM's sales were $559.6 million.
This is more than double AAM's second quarter of 2009 sales YOY.
Second, AAM's net income for the second quarter of 2010 was $25.5 million.
This represents diluted earnings per share or positive EPS of $0.34.
Over the last four calendar quarters, AAM has posted net income of approximately $110 million.
Third, AAM's EBITDA in the second quarter of 2010 was $83.2 million or 14.9% of sales.
Over the last four quarters, AAM has generated EBITDA of approximately $284 million, well over $0.25 billion.
This represents an EBITDA margin performance of approximately 14.5%.
Fourth point, AAM's sequential profit conversion in the second quarter of 2010 was approximately $0.28 on the dollar, 28%.
For this purpose, sequential profit conversion is measured as the increase in EBITDA for the second quarter of 2010, versus the first quarter of 2010.
Divided by the increase in sales for the quarter.
We are pleased to have exceeded our target of 25% for this very critical financial method.
Fifth and finally, AAM generated positive free cash flow of approximately $68 million in the second quarter of 2010.
On a year-over-year basis AAM's free cash flow results were improved by more than $108 million in the quarter.
For the first quarter of 2010, in total, AAM generated $129 million of positive free cash flow.
AAM's much improved financial performance over the past four quarters reflect a dramatic improvement in the domestic automotive industry.
North American light vehicle production was up approximately 73% in the quarter on a year-over-year basis.
GM light truck production was up over 100%.
AAM's major North American light truck program volumes were up even more increasing approximately 143% if the second quarter of 2010 as compared to the second quarter of 2009.
AAM is benefiting from the recovery in market demand for full size pickups and SUVs, as well as a strong cadence of new product launches throughout the world.
This is rapidly enhancing the diversification of our customer base and served market.
This is very excellent news for AAM.
Our Company is benefiting from the massive structural and permanent cost reductions achieved over the past several years.
These cost reductions reduced AAM's operating break even level to a US SAR equivalent of approximately 10 million vehicle units.
We are and we expect to continue running significantly above this level in 2010.
In addition, we are committed to ensuring that our fixed cost structure remains at the levels necessary to sustain this new, lower operating break even level.
Our Company has been diligent in establishing a regionally cost competitive and operationally flexible global manufacturing, engineering and sourcing footprint with great emphasis on our mini AAM strategy.
We developed and implemented plans to realign AAM's global manufacturing footprint and cost structure with current and projected market requirements.
This is increasing capacity utilization and accelerating AAM's participation in the world's fastest growing automotive markets.
These actions and initiatives that I just mentioned were major and significant achievements for AAM, and all AAM's key stakeholders.
Let me now shift gears and take a moment to talk about three critical elements of AAM's operating performance in 2010.
First, AAM continues to maintain world class quality, reliability, warranty, delivery, and launch performance.
That is a mouthful and it is accurate.
This is an increasingly important competitive advantage for AAM.
AAM's quality performance is in the first half of 2010 as measured by our largest customer is world class rolling Six Sigma rolling average nearly 4 discrepant parts per million.
Several plan at zero.
The critical measures of AAM's warranty performance are first CPV, cost per vehicle, and second IPTV, incident per thousand vehicles.
AAM's year to date performance on these measures for General Motors and Chrysler has improved 20% to as much as 55% by part number in 2010.
Our outstanding quality and warranty performance positively support our customers's initiatives to improve their initial quality and you have been reading about that in the paper, where America's products have become the finest in the world.
Reliability, durability, warranty performance on those vehicles respectively.
These measures of customer satisfaction in the automotive industry are more important than ever in terms of making repeat sales, winning new customers, gaining market share and retaining customer loyalty.
Second, AAM remains vitally focused on productivity.
It is what pays the bills.
In the second quarter of 2010 AAM achieved net year-over-year productivity gains in excess of $30 million.
This is in addition to the favorable impact of higher production levels, and more than offset the higher net cost from metal market, foreign exchange, interest, taxes, et cetera in the quarter.
Third point.
AAM remains focused on providing flawless and anonymous launch support for our customers on product programs throughout the world.
In the first half of 2010, AAM successfully completed 18 total major launches, for 10 different customers, in four different continents in the world.
They include, one, front rear axles drive shaft and linkage assemblies for GM's all new HD Heavy Duty series GM900 pickups.
Two, better spindle assemblies for Mack Truck.
Three, commercial vehicle axles for Mahindra, MNAL.
Four, transmission differential for Audi, a premium division of EWAG in Europe, specifically in Poland.
Five, forgings for John Deere, Chrysler and Toyota products.
Upcoming product program launches in the next six months, not all inclusive but priority.
One, rear axles and drive shafts for Nissan, USA van program.
Two, rear axles for the one ton Tata Ace program in India.
Three, several new axle and gear set initiatives, related to our joint venture with the JAC Group in Hefei, China.
We are proud to be associated with these fine companies and look forward to expanding these customer relationships and others in the near future.
In the second half of 2010, AAM will also be completing construction of our first wholly owned manufacturing facility in the country of Thailand, the world's second largest light truck market.
In the short-term the primary focus of our facility is to be located in Rayong, Thailand and will be supporting the launch of GM's next generation global pickup program in 2011 the GM I 700.
Let me now discuss AAM's R&D efforts.
We continue to invest in the development of new, advanced technology products, processes and systems which has always been our DNA and culture to meet the changing needs of the global automotive market place and to leapfrog others that compete with us.
Our R&D spending in the first half of 2010 was $37.7 million.
This represents an increase of nearly 6% as compared to the first half of 2009.
Our Company is developing many new and interrelated products that are targeted for growth segments of the global automotive industry and needed by our customer base.
Our focus today is currently in four areas.
One, we are focusing on enhancing the fuel efficiency of our current products through mass reduction, axle efficiency, advanced metallurgy, packaging, and other related initiatives.
Two, our Company is focused on emerging drive line technology that supports the rapidly evolving design direction of our customers.
This area of activity is especially focused on the all-wheel drive applications for passenger cars, as well as cross-over vehicles.
This includes AAM's innovative and highly successful eco-track, disconnecting mechanical driveline products as well as an even more advanced E-all-wheel drive technology.
These products and technologies feature highly advanced electronic integration.
This provides our customer with a cost effective, fuel efficient means of packaging all wheel drive, handling, and performance characteristics in their front wheel drive vehicle platforms.
Third point, AAM is developing new commercial products for GBW class four, five, six, seven all the way through class eight with a special focus on the emerging markets of the world.
Third point, AAM continues to invest in processing system technologies to support our continuing commitment to build products with the highest levels of quality, warranty performance available in the industry, as well as total traceability.
AAM's success in building up the $1 billion new and incremental business backlog for the years of 2010 to '14, demonstrate the critical importance of these R&D investments.
Before I turn it over to Mike, I'll have a few closing comments.
Let me first state that AAM is significantly outperforming the business plan we outlined for our many key stakeholders in 2009.
This is true, as you measure sales growth, margin expansion, free cash flow, net debt reduction, profitability, and other key credit metrics.
AAM expects full year 2010 sales to range from $2.1 billion to $2.2 billion, representing an annual sales growth of approximately 40% to 45% on a year-over-year basis.
In 2010, AAM expects to be solidly profitable, for the full year of 2010, we are again raising our EBITDA guidance range to a much tighter range of 14% to 15% of sales.
These are the highest in the history of this Company.
On a year-to-date basis in 2010, AAM has generated nearly $130 million of positive free cash flow.
This has helped to rapidly stabilize AAM's capital structure and improve our liquidity position.
As of June 30, 2010, AAM had access to more than $600 million of total available liquidity.
Ladies and gentlemen, AAM is well-positioned to successfully achieve our long-term strategic objectives of profitably growing and diversifying our business.
We intend to accomplish this while continuing to strengthen our balance sheet, solidify our long-term viabilitity and sustainability and building value for our many stockholders and stake holders.
I want to thank each and every one of you for your time and your attention today and your vital interest in our company AAM.
Let me now turn the call over to our Executive Vice President of Finance and Chief Financial Officer Mike Simonte.
Mike?
- Executive Vice President of Finance and Chief Financial Officer
Thank you, Dick.
Good morning, everybody.
Dick already covered the highlights of our earnings for the second quarter of 2010, so I'm going to get right at into the details starting with sales.
AAM's net sales in the second quarter of 2010 were $559.6 million and that is approximately 7% higher on a sequential basis versus the first quarter of 2010.
As Dick mentioned, this was the fourth consecutive quarter of strong sales growth for our Company, and I want you to know the third quarter of 2010 will be the fifth.
AAM is benefiting in 2010 from a remarkable recovery in market demand for full size pickups and SUVs.
As they say, the depth of the full size pickup has been greatly exaggerated.
In fact, this recently under-appreciated but vitally important segment of the industry has once again become a major source of strength for our Company and the entire automotive industry as a whole.
We estimate that total global sales of the GMT 900 product line were up nearly 30% in the second quarter of 2010, on a year-over-year basis.
This is a very favorable development for GM, our customer, of course AAM, and the entire GMT 900 supply chain.
Satisfying the increased market demand for full size pickups and SUVs and particularly the GMT 900 program and the GMT 610, which is a full size van program, these matters are driving a substantial sales gain for our Company in 2010.
Another positive factor is the need for GM to restock dealer inventories that were substantially depleted by year end 2009.
The best thing I can tell you about this is we expect this trend of strong sales and improved production levels to continue in the second half of 2010.
This is why we are again raising our 2010 sales guidance to a range of $2.1 billion to $2.2 billion.
AAM is also benefiting from a strong cadence of new product launches in 2010 that is rapidly enhancing the diversification of our customer base and served markets.
While we have recently learned that some of the programs, these are customer product programs that we expected to launch in the second half of 2010, will be delayed by our customers until early 2011.
We still expect to launch new programs with an annual sales value of approximately $270 million in 2010, that is about 90% of our initial expectations for the year.
AAM's content per vehicle in the second quarter of 2010 was $1,408.
Up approximately $18 versus the first quarter of 2010.
As we discussed on our first quarter earnings call, this increase was expected, due to the launch of the GMT 900 heavy duty series pick-ups in the second quarter.
Non-GM sales in the second quarter of 2010 increased approximately $78 million on a year-over-year basis to $135.2 million.
On a sequential basis, non-GM sales in the quarter increased approximately 9% as compared to the first quarter of 2010.
We continue to have good momentum on our drive to increase non-GM sales to about 40% of our top line by 2012.
Let's now turn our attention to profitability.
AAM's key profit metrics for the second quarter of 2010 were excellent.
All of the key second quarter profit metrics, gross profit, operating income, EBITDA, net income, and EPS were dramatically improved versus the second quarter of 2009.
As compared to the first quarter of 2010, our profit margins were improved by more than 100 basis points on a sequential basis.
AAM's gross margin was 17.7%, in the second quarter.
Operating income topped $50 million.
Operating margin was 9% in the second quarter of 2010.
EBITDA was $83.2 million in the quarter, and that annualizes around $325 million, it's a good pace for us.
AAM's EBITDA margin in the second quarter of 2010 was just short of 15%.
Net income was $25.4 million as Dick mentioned, that is 4.5% of sales.
Diluted EPS was $0.34 per share, and if we excluded $1.7 million of net special charge activity booked in the quarter, EPS would have increased another couple of pennies.
All in all, a very solid quarter for American Axle.
Let's move now to SG&A interest and taxes.
In the second quarter of 2010, SG&A spending, and remember that includes R&D, as a very important element of our total SG&A spent, this was approximately $48.5 million in total.
That is 8.7% of sales.
This compares to SG&A spending of $45.5 million in the second quarter of 2009.
R&D spending in the second quarter of 2010 was approximately $18.6 million, an increase of $1.6 million versus the second quarter of 2009.
So, that is a critical driver in our increased SG&A spending and Dick mentioned earlier how important this activity is for us to drive new business activity and advance our technologies.
That is an important commercial development for our Company.
Let's go to interest.
Net interest expense in the second quarter of 2010 was approximately $22 million.
It is about the same as the first quarter of 2010, and is also consistent with our expected run rate for the second half of the year.
That is all I have to say about interest.
AAM's effective tax rate in the second quarter of 2010 was approximately 9%.
In dollar terms, the tax provision was approximately $2.4 million.
No unusual issues to report on tax, as we've discussed in previous quarters, our tax rate will be lower than the statutory rates, due to the significant tax benefits we have in the US, the UK and other jurisdictions, and of course the lower overall tax rate we have in the country of Mexico.
Okay.
Let's move on to cash flow.
We define free cash flow to be net cash provided by operating activities, less capital expenditures, net of proceeds received from the sale of equipment.
So, our net capital spending.
The second quarter of 2010 was AAM's fourth consecutive quarter of generating positive free cash flow.
GAAP cash provided by operating activities in the second quarter of 2010 was approximately $86 million.
Capital spending, net of proceeds from the sale of equipment, was approximately $18 million.
Reflecting this operating activity and CapEx, AAM generated positive free cash flow of approximately $68 million in the second quarter of 2010, which is an improvement of approximately $109 million on a year-over-year basis.
What a difference a year makes.
On a year to date basis, AAM has generated nearly $130 million of free cash flow, so that is a very high quality of earnings from our perspective, cash flow exceeding our total income performance, and we expect that to be the case when we close the books on the full year 2010.
Let me now change the discussion to the balance sheet.
We still have some work to do, but we've come a long way in a very short period of time on our balance sleet.
At June 30, of 2010, AAM's net debt was approximately $774 million, as compared to year end 2009, this net debt position has been approved by approximately $120 million, of course free cash flow is the primary reason why.
AAM's net debt to trailing 12 month EBITDA ratio at June 30th of 2010, was approximately 2.7 times.
In the business plan we outlined for our many key stake holders in 2009, we didn't expect to be under 3 times on the EBITDA leverage ratio until 2012.
This is what we mean, when we say that we are two years ahead of our long-term plan to strengthen the balance sheet.
And Dick mentioned total available liquidity at quarter end was in excess of $600 million.
Before we start the Q&A, let me just say this, we are very pleased with the progress we are making, yet humble enough to know that we still have work to do to silence questions from those who doubt our ability to sustain our improved financial performance and achieve our long-term sales growth, profitability, and equity valuation objectives.
We are energized to get that job done.
Just watch and see.
That is all I have this morning.
Chris, I think we are ready for the Q&A.
- Investor Relations
Thank you, Mike, and thank you Dick.
We've reserved some time for questions so I would ask that you please try to limit your questions to no more than two.
At this time please feel free to proceed with any questions you may have.
Andrea?
Operator
(Operator Instructions).
Your first question comes from the line of John Murphy with Bank of America.
- Analyst
Good morning, guys.
- Investor Relations
Good morning, John.
- Analyst
I was just wondering if in total in North America if you could give us a gauge of where your capacity utilization was in the quarter.
And where that may be going, hopefully, as volumes, particularly on the GMT 900 ramp up over the next 6 to 12 to 18 months, and if you can really handle a big ramp up if that is the way the industry goes?
- CEO
Let me start with this John and then I'll ask David and Mike or John Bellanti to assist however they feel comfortable with it.
As we have gone through this massive change of tremendously low volumes of the previous two, three years into improving volumes, still very modestly low on the SAR, with our restructuring consolidation program, specifically in North America, we are getting back into the 80%-ish plus on the capacity utilization, focusing more toward a 90% capacity utilization objective.
And tell them to bring the (expletive) orders on, we'll build them.
- President and Chief Operating Officer
John, David Dauch here.
As you know, in 2009, we finished right around 80% capacity utilization.
As my father indicated, we are in the 80% to 90% utilization at this point in time as volumes continue to go up, we expect to get up over 90%, and yes we have the capacity to support higher volumes going forward.
- Analyst
If you are exceeding 15% EBITDA margins now at those cap ute levels is it fair to say as that cap ute rises, that you could be significantly higher on that EBITDA margin?
- CEO
John, you are smart enough to know it would probably be a bit higher.
- Analyst
Good enough.
Then just lastly on the backlog, if you could just remind us the backlog beyond 2010, and the cadence beyond 2010.
You've alluded to this before.
I just want to check on an update if you have it.
- President and Chief Operating Officer
From a backlog of new business standpoint, as we've said it sits at $1 billion covering the 2010 through 2014 time frame.
$700 million in the 2010 to 2012 time frame, $300 million launch approximately $300 million this year.
As Mike said, there are some customers that pushed a little bit of the programs back but no major issues there.
Other than that, everything is solid moving forward.
- CEO
John, we have said, and it continues to be true that 2010, '11, '12.
So, the first three years of the backlog, we'll launch approximately $700 million of this backlog.
And we've also said that the book ends, 2010 and '12, are the heaviest concentration of launch in that time period.
So, 2011 we'll be a little skinny, in terms of consolidated sales activity.
But remember, we are driving additional sales growth through our unconsolidated JV, and David's got a number of commercial opportunities that could yet impact the back half of 2011 that we are chasing.
So, we'll say more about 2011 over the next few months as we get down into the details of our 2011 budget.
- Analyst
Great.
Thank you very much.
- CEO
Thank you, John.
Operator
Your next question comes from the line of Himanshu Patel with JPMorgan.
- CEO
Good morning, Himanshu?
Operator
Mr.
Patel, your line is open.
- CEO
Andrea, if we can move onto the next one, maybe we can come back to Himanshu.
Operator
Great your next question comes from the line of Brian Johnson with Barclays Capital.
Your line is open.
- Analyst
Good morning, this is Emmanuel for Brian Johnson.
- CEO
Good morning, Emmanuel, how are you today?
- Analyst
Doing okay.
Thank you.
- CEO
Tell Brian we said hello.
- Analyst
I'm sure he hears you.
First, a follow-up question on the backlog.
Based on comments from Mike in the first quarter, I had expected backlog to pick up sequentially between first quarter and second quarter.
I think I remember Mike saying that the bulk of the launches this year were between 2Q and 3Q.
Is there any way for you to quantify how much more new business you actually saw in the second quarter?
And is the third quarter going to be even higher than that?
- CEO
Emmanuel, your comments are very consistent with what we said in April and what we'll tell you today.
The backlog for this year, I mentioned, should come in around 90% of our $300 million expectation for 2010, so maybe around $260 million, $270 million, $275 million, somewhere in that range.
It is going to be a little bit more back-weighted to the second half of the year.
The first quarter was the lightest quarter.
The second quarter started to pick up steam.
We are launching business.
The next generation heavy duty GMT900 program.
We have some new content on that program and that kicked in around Memorial Day.
The Volkswagen Amarok pickup truck volumes are accelerating on that program as launch is successfully moving along.
The Tata Ace program in India, the Mack Truck program, the Cadillac SRX, these items are all gaining steam for us here in the second quarter.
The second quarter is probably about double where we were in the first quarter from a new business launch perspective.
And, in total, the first half of the year is probably around 40%-ish 45% of what we expect for the whole year.
- Analyst
All right.
Thank you.
That's very clear.
Now, on the, your three quarter ton pickup launch, is there any way for you to quantify how much more content per vehicle you have on that versus a regular half ton?
- CEO
We don't get into the details of our content and really, selling prices for each of these individual products, Emmanuel.
But, the average for our product portfolio heavily dominated by the GMT900 program is roughly $1,400, as you know.
And the heavy duty vehicles can range up from say $1700, to pushing $2000.
And it is just going to depend on mix of our customers.
But they are heavily weighted toward four wheel drive mix and that is very beneficial to the Company.
- Analyst
Okay.
I guess just still on the topic, can you just give us a feel of the cadence of the rollout of these new products?
I know that the production launch was around May.
How much was already produced in the second quarter, and what sort of is the expected run rate in the third?
- CEO
I can give you a quick financial read on that, and then ask any of my colleagues here to fill in any further details.
From a financial perspective the sales contribution started late May.
It affected very positively the month of June, but you are going to see a very, we are seeing and you should expect a real good contribution in the third quarter and fourth quarter as that product is available full stop to General Motors and their dealer community.
- President and Chief Operating Officer
Yes, I would just say Emmanuel from a production standpoint.
In the month of August, we are experiencing volumes that pretty much coincide with what we expect full volume in the program to be.
- Analyst
And can you put any number on that at all?
- CEO
Yes, I mean, listen.
You can take a look at the sales data.
You know it as well as we do, the heavy duty program can be anywhere around 35% to 40%, 45% of the total program sales, depending on the ultimate sell through rates in the marketplace.
This is a great truck.
There is a lot of interest in the heavy duty segment of the industry this year.
All three competitors, not just Ford, not just Chrysler but all three competitors, importantly for us, General Motors have a new product in this marketplace and we think the sales in this product line will be very strong this year.
- Analyst
Okay, thanks.
One final, if I may?
Previously when you were talking about your sales guidance range, you sort of correlated that not only to a SAR range but also to a GMT900 production expectation range.
Can you please tell us what your updated guidance corresponds to in terms of T900 production?
- CEO
Absolutely.
Emmanuel, we started the year with a relatively cautious and conservative posture.
We didn't want to make any commitments or plans in our business that were going to be based on overly optimistic expectations.
I think what David and our team has said consistently is we wanted to overcorrect the business to ensure we got the job done.
As this year's developed, and the sales levels have picked up nicely in the second quarter, the next generation heavy duty product now available for launch and we have visibility to schedules through early mid November, we were very conservative in our thinking about 2010.
And that is great news for the back half of the year.
In the first half of the year, the production levels were in the range of 450,000 to 475,000 units, in terms of annual pace.
And so, the back half of the year is looking reasonably consistent.
We would expect at least 900,000 units of production and probably something closer to a range of 925,000 units to 950,000 units.
So, it's going to be a real solid year for this program.
- Analyst
Thank you very much.
Operator
Your next question comes from the line of Himanshu Patel with JPMorgan.
- Analyst
Hi guys.
Good morning.
Sorry, you may have covered some of this earlier but my main question was just on margins.
Your EBITDA margins are at the upper end of the 12% to 15% range, Mike, that I think you've talked about before.
How much more volume growth can the business see, before your incremental contribution margins really start coming down?
Otherwise, you are going to start over-shooting this range pretty fast.
- CEO
That's okay.
Yes.
Listen, we've never said 15% was the cap on our EBITDA margins.
But, there's a lot of moving parts, as you know, in this business and it is easy to talk about margins this high.
It is a little more difficult to deliver them.
We are certainly capable of handling a lot more volume.
There was a question earlier this morning about that, and just to put it in context, the GMT900 program running [900] maybe [950] pace through the first seven months of this year.
We can handle that all the way up to [1.1%] or [1.2%] before there would be any additional fixed cost investment.
So, I think the answer to your question is we can handle quite a lot of volume, Himanshu, and be in a position to benefit from it.
- Analyst
Okay, and then, Dana just, has been talking about increasing a stake in a China axle joint venture and I'm sure that was in the works for a while.
Can you just talk to us a little bit about your plans in that market?
And specifically, I'm curious, are there opportunities to make any step change increases in your presence there, through something similar?
Where you've got a JV, where maybe you would consider increasing your stake there or something on that order of magnitude or should we just think of building the business organically as you have right now?
- President and Chief Operating Officer
Himanchu, this is David Dauch, clearly Dana has had a longstanding relationship with Dongfeng.
So, they've expanded that relationship.
That is great for them.
With respect to our business as you know we have really taken a twofold strategy into China.
First is to go at it from a wholly owned foreign enterprise standpoint with our own facility in the Changshu, China facility or area.
That facility continues to grow and we are looking to grow that business from an organic standpoint.
We also pursued a strategic initiative in regards to entering into a joint venture with the JEC organization, a vehicle OEM manufacturing.
We partnered with them on their driveline business.
We've had nothing but success out of that joint venture, and if there is an opportunity to expand that joint venture to serve a greater portion of the market above and beyond what we are serving today, then clearly we'll look at doing that as well.
We are going to continue with our dual pronged approach to the Asian market, specifically China, per your question both organically and strategically where possible.
- Analyst
Are those two partnerships or subsidiaries, are they light vehicle focused or is there some commercial vehicle in there as well?
- President and Chief Operating Officer
Right now, it is light vehicle focused, but we'll look to adjacent markets where appropriate.
- Analyst
Okay, great, thank you.
Operator
Your next question comes from the line of Dan Galves with Deutsche Bank.
Your line is open.
- Analyst
Good morning guys, Rod is listening in from offsite today.
- President and Chief Operating Officer
Good morning, Dan.
- Analyst
Just wanted to ask about SG&A.
Can you give us a sense the run rate that you are at right now, is there anything in the second quarter that will be moving up and down in terms of the trajectory going forward?
- CEO
Nothing substantial, we were a little bit higher, maybe than our run rate.
But the primary issue, I told you that R&D was up about $1.6 million in the quarter.
And we've got, as we've said on previous calls, we put back salaries to the 2008 levels after taking 10% cuts in 2009.
So, that's driving about $2 million a quarter of additional spending.
We also have some opportunities, our management team, whether that be our executives or our line managers, and all the way down to our hourly associates and salary associates and part of profit sharing plans, we do have incentive compensation programs that we are accruing expense for this year.
We expect that cost to be back in our business this year, so that's another driver of expense.
And, with the increased level of profitability in the second quarter, versus the first quarter, we had a little bit more of that variable expense in the second quarter.
So, you are going to see on a dollar basis, you'll see that SG&A number up and down a little bit, based on overall profitability because that is how we time out the profit sharing and bonus expense.
But, otherwise, no.
The pace of spending is reasonably consistent with what we expected.
- Analyst
Okay.
Thanks.
And could you remind us of your expectations for CapEx?
Potentially this year, and maybe next year?
And when does investment spending on the new GM truck programs begin, in terms of R&D and CapEx?
- Executive Vice President Worldwide Operations
Okay.
This is John Bellanti
The first thing I would say is we are maintaining our position of CapEx spending on a yearly basis in that 4% to 6% range and we are well within that for 2010 and working on 2011 right now.
The investment on the K2xx program from an engineering develop and prototype standpoint will begin in early 2011.
The CapEx spending for that program will predominantly be pushed into the 2012 tax range.
- CEO
A couple of important things to note here Dan.
I'll start with the K2xx and then I'll talk a little bit more about 2010.
On the K2xx a lot of investors and analysts have asked us questions about -- very similar to yours.
What type of spending are we going to have in this program?
I would remind you that we have a substantial amount of underutilized capacity available to us to handle this program.
We talked about it in the context of how much volume can we handle here.
We are not expecting significant new investment requirements on this program.
There could very well be engineering changes and new opportunities for our Company to provide additional product attributes to the customer and we are looking for those opportunities and we are confident about those opportunities.
If and when we have more to say about that, we will.
But as John pointed out that is probably a 2012 issue.
Okay.
The other issue, here is 2010.
Our guidance for 2010, John said very clearly, 4% to 6% generally.
It was 4% to 5% for this year.
We are going to accomplish that objective.
CapEx should be at or just below $100 million for the year.
It is going to be more back weighted to the second half of the year.
We have timing issues, relating to customer PPAP schedules, we are obviously not trying to spend money until we need to, so we have controlled things very nicely here in the first half of the year and we will spend a little bit more, not quite double but close to that range in the second half of the year.
So, just wanted to keep you posted on that.
- Analyst
Okay.
Thanks.
Just one follow-up on that.
Are you saying that the K2xx program, the components on that are essentially carry over from the current program and you won't see a real significant increase in investment spending for that program?
- President and Chief Operating Officer
No, that is not the case.
This is David Dauch.
GM is still trying to define what the vehicle requirements are as it relates to horsepower, torque, load carrying capabilities and other features, until such time as they finalize what that is we won't understand the impact on our current products.
Some of our products may be in a carry over situation, others are going to possibly receive dramatic enhancements based on the direction of the vehicle, and until we get further definition from the customer we really can't comment further than that.
- Analyst
Thanks a lot, everybody, I appreciate that.
- CEO
Have a great day.
Operator
Your next question comes from the line of Matthew Michaun with KeyBanc.
- Analyst
Good morning, guys, I'm in for Brett Hoselton today.
- CEO
Good morning.
- Analyst
Could you talk a little bit about your thoughts on GMT900 production in 2011?
- Executive Vice President Worldwide Operations
It's going to be higher.
- Analyst
It's going to be higher than 2010?
- Executive Vice President Worldwide Operations
Yes.
- Analyst
Okay.
That's positive.
Then, where is CSM wrong in their assumptions there?
I believe they have it coming down.
- CEO
Hey, Matt, listen.
We are very optimistic about this program, about the recovery in demand for these products.
We haven't seen any significant amount of improvement in the housing market yet and we all know that is going to spark additional demand for these pickup programs.
We think the sales for this program are going to improve 2011 versus 2010.
Remains to be seen what GM does with the timing of their inventory restocking.
We are certainly benefiting from that issue in 2010 and we don't believe that 2011 will include the same type of production for inventory restocking that we'll see in 2010.
That could be 50,000, 75,000 units this year.
But, we are very optimistic about 2011.
We'll have more to say about 2011 in terms of the details and how we make assessments about this, when we talk about that after we finish our budget.
More likely later this year, early next year.
- Analyst
Okay.
And as well, I mean, I believe you kept or you didn't give an update on the backlog, I would say and this is probably another one word answer for you.
But as you, as you are looking at the 2011 through 2015 and then when you're updating, would you say the backlog is biased higher?
- Executive Vice President Worldwide Operations
Is what higher.
I'm sorry.
- Analyst
Is the backlog going to increase?
- Executive Vice President Worldwide Operations
As we said, our backlog of business did hit $1 billion.
We expect to maintain that $1 billion going forward at a run rate and if anything we expect it to increase based on organic opportunities that are out there.
- Analyst
Thank you very much.
- CEO
Have a great day, thank you, Matt.
- Investor Relations
Thanks, Matt, we have got time for one more question.
Operator
Your final question comes from the line of Chris Ceraso with Credit Suisse.
- Analyst
Thank you, good morning.
- Investor Relations
Good morning, Chris.
- Analyst
Just a couple of things.
On the backlog, if you look at customers that you are bringing into the business and your expected growth with GM, where do you think your mix of non-GM business will be in 2011 or '12?
- Executive Vice President Worldwide Operations
Well, before we go there totally, let's just indicate that GM, Chrysler, obviously continued to grow as customer base with us, and we are delighted to have that business.
Obviously, we have just indicated we are going to be growing very rapidly.
Nissan, Volkswagen, and many others.
And probably in the next 12, 15 months, we'll probably be moving closer to a threshold of 40% non-GM business as a Company in the 2011, '12 sector.
- CEO
Yes, Chris.
That's right.
We've been saying for a few months now, publicly, we are really starting to build some momentum on this issue.
And we think, by 2012, we are targeting a 40% non-GM sales contribution and we see some nice opportunities available with other customers, to make that happen.
So, again, we'll be updating this guidance.
We are not saying anything about 2011 at this point, although we expect to make nice progress between here and there.
- Analyst
Okay, thanks.
Any changes, Mike, to the cost structure in the second half of year versus the first half either up or down or has the business model pretty much stabilized at this point?
- Executive Vice President of Finance and Chief Financial Officer
There's nothing significant, Chris.
There is always tweaks that we are making.
There's ongoing productivity improvements.
We did have a little bit of restructuring activity here relating to the closure of our sale of manufacturing facility.
We'll see a little bit of positive contribution from that, but there is nothing significant that is going to move the needle for you, Chris.
- Analyst
Okay that is all for me.
Thanks guys.
- CEO
Thank you, Chris.
Have a great day.
- Executive Vice President Worldwide Operations
Great.
Thank you, Chris.
- Investor Relations
Great, thank you, Chris.
We thank all of you who have participated on this call and appreciate your interest in American Axle & Manufacturing.
We look forward to talking to with you in the future.
Operator
Ladies and gentlemen, thank you for your participation in today's conference.
This concludes the program, you may now disconnect.