American Axle & Manufacturing Holdings Inc (AXL) 2011 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the American Axle and Manufacturing second quarter 2011 earnings conference call.

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

After the speakers' remarks there will be a question-and-answer session.

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

Christopher Son, Director of Investor Relations Corporate Communications and Marketing.

Please go ahead Mr.

Son.

Thank you, Joanne, and 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 of 2011 earnings announcement.

If you had not the time 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 81986956.

This replay will be available beginning at noon today through 5 PM Eastern Time on May 6.

Before we begin I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results to differ materially from those discussed.

For additional information we ask that you refer to our filings with the SEC.

Also during this call we may refer to certain non-GAAP financial measures.

Information regarding these non-GAAP measures, as well as a reconciliation of these non-GAAP measures to GAAP financial information is also available on our website.

During the quarter we will participate in the following conferences.

The 2011JPMorgan Automotive conference in Detroit on August 10, and the Credit Suisse 2011 Automotive and Transportation conference in New York on September 7.

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.

Thank you, Chris and good morning, everyone.

Thank you for joining us today to discuss AAM's financial results for the second quarter of 2011.

Joining me on the call today are David C.

Dauch, our President and Chief Operating Officer; John Bellanti, our Executive Vice President Worldwide Operations, along with Mike Simonte, our Executive Vice President Finance and Chief Financial Officer.

To begin my presentation today, I will review some highlights of AAM's second quarter of 2011 results.

Today we are pleased to report strong sales, strong earnings and cash flow results for the second quarter of 2011.

Let me briefly cover 4 key second quarter financial highlights.

First, in the second quarter of 2011, AAM's sales were approximately $686 million.

On a year-over-year basis, AAM's sales in the quarter were up approximately $127 million, or 23%.

This favorably compares to 2 things, industry sales growth of 6.5% in the quarter, and a 1% increase in North American light vehicle production for the quarter.

Second point, AAM's non-GM sales continue to grow much faster than our total sales in the second quarter of 2011.

On a year-over-year basis, non-GM sales grew 35% to $182.7 million, or 27% of AAM total sales.

This is a positive trend we expect to continue as we accelerate our actions to achieve significant gains in customer diversification.

Third point, the second quarter of 2011 marked AAM eighth consecutive profitable quarter, over 2 years now with strong sales growth.

In the second quarter of 2011, 4 critical points.

Gross profit increased nearly $32 million on a year-over-year basis to $130.5 million, or 19% of sales.

Operating income was $71.7 million, or 10.4% of sales.

EBITDA increased $21 million to over $104 million in the second quarter of 2011, or 15.2% of sales.

And net income and EPS nearly doubled on a year-over-year basis to $49.2 million and $0.65 per share, respectively.

The fourth and final highlight of AAM second quarter 2011 financial results is the following.

AAM generated positive free cash flow of approximately $82 million in the second quarter of 2011.

Mike will cover more details of our second quarter 2011 financial results in a few minutes.

Let me now shift gears and update you on how AAM is driving performance to build value for our many key stakeholders.

Our strategy to build value is based on 4 major elements.

First, grow our sales faster than the industry; 2, achieve premium profitability as compared to our peers in the industry; 3, significantly improve the diversification and balance in our business; and 4, return to investment-grade credit metrics by 2013.

Let me now comment on each of these objectives.

First, we are on track to grow AAMs total sales to more than $3 billion by 2013.

From the 2011 to 2013 period this represents a CAGR of approximately 11%.

This is more than 50% higher than the industry growth trend expected in the same time period of approximately 7.5%.

To be clear, when we refer to the industry growth rate, we mean growth in North American light vehicle builds.

The second half of 2011 marks the beginning of a strong 2-year period of new business launches for our Company.

During this period, we will launch more than two-thirds of our total $950 million of new business backlog for the years 2011 and 2013.

We're ready to do this in support of our customer the way AAM always does, flawlessly and anonymously.

Our second major initiative to build stakeholder value is to achieve premium profitability as compared to our peer group.

AAM's improved financial performance over the past 8 quarters demonstrates that we are accomplishing this objective.

We made the tough but necessary restructuring calls in the years of 2007, 2008 and 2009, and lowered our operating break-even level to a US SAAR equivalent of approximately 10 million light vehicle units.

Now AAM is benefiting from having accomplished a market-competitive cost structure in substantially all of our global operations.

In those few instances where we have not yet accomplished full market-cost-competitiveness, better known as FLLC, we are committed to finishing the job in the very near future.

Over the past 8 quarters, AAM has achieved profit margins at the top-end of our long-term guidance range for EBITDA of 12% to 15%.

As we grow our sales to more than $3 billion by the year 2013, we expect to grow our EBITDA generation to more than $400 million on an annual basis.

This will help to improve our cash low profile, reduce our leverage, fund our pension liabilities and position AAM to create significant stockholder value.

Our third major initiative to build value for our stakeholders is to achieve significant business diversification.

AAM is making excellent progress on this important initiative.

AAM non-GM sales are growing much faster than our total sales.

On a year-to-date basis through the second quarter of 2011, AAM's non-GM sales grew by a whopping 39% as compared to total sales growth of approximately 23%.

75% of programs in our new business backlog are non-GM business.

Approximately 80% of our new business opportunities we currently are quoting are for customers other than General Motors.

We are well on our way to accomplishing our 2013 non-GM sales target of 40%, we are now targeting at least 50% non-GM sales by the year 2015.

In addition to customer diversification, we're also focused on expanding our product portfolio.

Approximately 70% of AAM's $950 million of new business backlog for the years 2011 to 2013 relate to passenger cars, crossover vehicles, as well as commercial vehicle programs.

Included in this new business backlog is a major global passenger car crossover vehicle program that will feature AAM's innovative new EcoTrac disconnecting all-wheel-drive system.

This system enables a vehicle manufacturer to offer fuel efficiency and environmentally friendly options to provide the safety, ride, and handling performance of an all-wheel-drive system for passenger car and/or crossover vehicle.

This is perfectly timed for the market, as global OEMs are driving to meet much tighter fuel-efficiency and carbon emission standards.

AAM's EcoTrac disconnecting all-wheel drive system is an industry first and a great example of how AAM is using innovation to establish our Company as a product, process, and systems technology leader by being extraordinarily creative.

In support of AAM's product diversification initiatives, R&D spending increased by approximately $9 million in the second quarter of 2011 to $27.3 million.

This compares to $18.6 billion in the second quarter of 2010.

The main focus of this investment is to develop new advanced technology products to meet the changing needs of the global automotive marketplace.

AAM is accelerating development of high efficiency, mass-optimized products to assist our customers to meet market demands for higher fuel-efficiency, lower emissions, more sophisticated electronic integration and improved ride and handling performance.

We believe this is a prudent investment in support of AAM's continued leadership in advanced driveline systems technology for the light trucks, passenger cars, crossover vehicles, and commercial vehicles.

AAM's 2011 R&D spending includes costs related to our e-AAM joint venture located in Trollhattan, Sweden.

e-AAM was formed in October of 2010 to develop and commercialize electric all-wheel-drive and hybrid driveline systems, primarily for passenger cars and crossover vehicles.

AAM's e-all-wheel-drive systems are designed to improve fuel efficiency and significantly reduce CO2 emissions.

This is done while enhancing the vehicle stability through use of proprietary torque-factoring attributes.

There's a lot of interest in these new products from customers in every region of the world.

We are confident that e-AAM's innovative patent-protected product line-up will allow us to play a leading role in the development of this important new driveline product segment.

We are also focused on increasing AAM's participation in global growth markets.

From 2011 to 2013 we will launch more than $500 million of new business in the countries of Brazil, China, India, Poland, and Thailand.

We've worked very hard over many years to establish regionally cost-competitive and operation in flexible global manufacturing, engineering and sourcing footprint capability.

We now have it.

AAM is benefiting from these many new business opportunities in the fast-growing segment of markets in the world.

The fourth major initiative to build value for our stakeholders is to return to investment-grade metrics, credit metrics, by 2013.

As of June 30, 2011, we have reduced AAM's adjusted EBITDA leverage to approximately 2.35.

We define adjusted EBITDA leverage as the ratio of net-debt, plus the estimated working capital benefit associated with our accelerated GM payment terms to EBITDA generated over the last 12 months.

This is excellent progress toward our goal of reducing AAM's EBITDA leverage to less than 2 times by 2013.

Also by 2013, we plan to do the following 3 things, increase EBIT, interest coverage about 3 times, reduce our net-debt to market cap ratio under 40%, and achieve positive stockholders equity.

Before I turn it over to Mike, let me wrap up by making a few closing remarks about the broader industry and AAM's updated 2011 outlook.

The US SAAR is currently running at an annual pace of approximately 12 .5 million units through the first half of 2011.

This compares to about 11.2 million unit pace in the same period a year ago.

We expect a gradual economic recovery to continue in the second half of 2011 in our home market of North America.

We continue to base our 2011 outlook on the anticipated launch scheduled for AAM's new business backlog and the assumption that the US SAAR will approximately be 13 million vehicle units in 2011.

In addition to industry sales, vehicle mix continues to be an important driver of our 2011 outlook.

Full-size pickup and SUV mix through the first half of 2011 was slightly higher than 13% of the total US SAAR.

Primarily due to seasonal factors, we expect this to increase in the second half of 2011.

For the full year 2010 full-size pickup and SUV mix was approximately 14%.

We expect something similar for the full year of 2011.

Based on these macroeconomic assumptions, as well as updated customer production schedules and other pertinent information, AAM is again raising its full-year 2011 sales and earnings outlook.

At the midpoint of the range we are raising our sales guidance by $100 million, with sales now expected to range from $2.5 billion to $2.6 billion.

On a year-over-year basis this represents 10% to 15% annual increase.

We also expect to be profitable and generate adjusted EBITDA in the range of 14.5% to 15% of sales in 2011.

For purposes of calculating adjusted EBITDA, AAM is excluding the impact of special charges and restructuring costs that were not contemplated in our previous EBITDA guidance.

This includes debt financing costs and expenses related to the planned closure of the DMC Detroit manufacturing complex.

Let me pause here to make just a few additional comments about our labor negotiations.

Shifts in market demand towards more fuel-efficient passenger cars and crossover vehicles significantly reduced customer production volumes for the conventional light truck program supported by the Detroit manufacturing complex.

Many key product programs sourced to the DMC have been cut by over 50%, and some were eliminated entirely.

Numerous customer assembly plants supported by the Detroit manufacturing complex have been closed.

As result of these developments, the Detroit manufacturing complex has been losing major money for years.

AAM has been proactively discussing these issues and the need for change for many, many years with key stakeholders.

In order to ensure a viable and sustainable future for this facility, it was necessary that first AAM achieve a new market-competitive labor agreement, and 2, win a significant piece of new business for the facility that would overcome the very high-fixed cost of running that complex.

Unfortunately, this did not happen.

On June 30, 2011, AAM announced plans to close the Detroit manufacturing complex on or after February 26, of the year 2012.

This will occur after the expiration of the current collective bargaining agreement with the International UAW.

AAM currently expects to incur approximately $15 million to $20 million of expense related to the closure of the Detroit manufacturing complex beginning in the second half of 2011 and continuing through the first half of 2012.

This includes costs to relocate assets from the Detroit manufacturing complex to other market-competitive AAM facilities in the state of Michigan.

Now let me move to our second facility to discuss this morning, Cheektowaga manufacturing complex in the State of New York.

The labor negotiation process at that facility is continuing to on-go.

In order to secure a sustainable future for AAM's Cheektowaga manufacturing complex, AAM needs to achieve a market-competitive labor agreement.

We expect to resolve our Cheektowaga negotiations and the related plant-loading decision in the very near future.

Once that is complete, we will make the appropriate disclosures and announcements on the matter.

In closing, ladies and gentlemen, let me emphasize that AAM is well-positioned to successfully achieve our long-term strategic objectives and create significant value for our many key stakeholders.

We are on track to profitably grow AAM sales to be in excess of $3 billion by 2013 and to significantly improve AAM's business diversification and achieve investment-grade credit metrics by 2013.

With a dual focus on driving performance in our daily operations and building value for our many key stakeholders, we're very excited about AAM's plans for the continued profitable global growth, improved balance sheet strength and accelerated business diversification.

Let me now turn this call over to AAM's Executive Vice President of Finance and Chief Financial Officer, Mike Simonte.

Mike?

Thanks, Dick, and good morning, everybody.

Dick has already covered the highlights of our earnings for the second quarter of 2011 so I will get right into the details, starting with sales.

AAM's net sales in the second quarter of 2011 were $686.2 million, that's up 23% on a year-over-year basis.

And as Dick said, that is significantly ahead of most relevant industry benchmarks.

On a sequential basis, AAM's sales in the quarter were approximately 6% higher versus the first quarter of 2011.

Customer production volumes for the major North American light truck programs, and of course that includes SUVs, that we currently support for GM, Chrysler, and now Nissan, these programs were up approximately 15% as compared to the second quarter of 2010.

This was a major driver in our year-over-year sales growth in the quarter.

AAM's sales in the second quarter of 2011 also benefited from stronger mix.

Content-per-vehicle increased approximately 7% in the quarter to $1504 versus $1408 in the second quarter of 2010.

On a sequential basis, content was up about 2% versus the first quarter of 2011.

On a year-over-year basis, the increase in our content-per-vehicle was expected due to higher metal market pass-throughs and the launch of the GMT-900 Heavy Duty Series pickups.

The GMT-900 Heavy Duty launched in June of 2010, so the first 5 months of 2010 was skewed more to the light duty portion of the program.

We discussed this trend on the first quarter call and it also affected the months of April and May and therefore the second quarter of 2011 comparisons.

Our non-GM sales increased nearly (inaudible - technical difficulties) in the quarter on a year-over-year basis to approximately $183 million, and this was approximately 27% of our sales.

As I mentioned also on the first quarter teleconference, if we adjust for the impact of our unconsolidated joint venture at Hefei in China, we are running at nearly 30% non-GM sales on a year-to-date basis in 2011.

Let's now turn attention to profitability, which was very strong in this quarter.

Gross margin was 19% in the second quarter of 2011.

Operating income top $70 million, the operating margin was 10.4% in this quarter.

EBITDA was $104.4 million.

The EBITDA margin was 15.2%.

Net income was nearly double what we did a year ago in the second quarter, $49.2 million, or 7.2% of sales.

And our EPS, and by this I mean diluted EPS, was $0.65 per share.

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

In the second quarter of 2011, SG&A spending increased approximately $10 million on a year-over-year basis to approximately $58.8 million, or 8.6% of sales.

Remember, for us, a major driver of our at SG&A spend is R&D, our SG&A includes R&D spending.

Our 8.6% of sales run rate in the second quarter of 2011 compares to 8.8% in the first quarter of 2011, and 8.7% 1 year ago in the second quarter of 2010.

So relatively consistent.

Most of the increase in our SG&A spending was attributable to R&D.

As Dick mentioned our R&D spending, which in 2011 includes costs relating to our e-AAM joint venture for the development of electric all-wheel-drive and hybrid driveline systems, so that's an element of our cost structure that simply did not exist a year ago, but in this year it does.

Our total R&D spending increased by approximately $9 million on a year-over-year basis in the second quarter of 2011 to $27.3 million.

As Dick already said, we have decided to accelerate our investment in R&D to protect our position in the market and build competitive advantage in advanced driveline product technologies.

This does include the electric all-wheel-drive applications and hybrid driveline systems, and also other fuel-efficient and environment-friendly products for front-wheel-drive, passenger cars and crossover vehicles, numerous high-efficiency axle design attributes for light trucks and rear-wheel-drive passenger car applications, and of course commercial vehicle driveline applications, which are quickly becoming a more important part of our business.

We are excited about these new business opportunities that are developing as a result of our increased focus on these growth areas, and plan to continue to develop these technologies to their full advantage.

Net interest expense in the second quarter of 2011 was $20.2 million, down approximately $2 million versus the second quarter of 2010.

Lower net-debt-outstanding is really the key driver of that reduction, as well as the call of 10% of the 9.25% senior-secured notes, and I will get into that transaction a little bit more here in a second.

We incurred $3.1 million of debt refinancing costs in the second quarter 2011.

This included a call premium of $1.3 million we paid in connection with the redemption of $42.5 million, or again 10% of the 9.25% senior-secured notes we issued in December of 2009.

The remaining $1.8 million of debt refinancing costs incurred in the quarter were non-cash in nature, and related to the write-off of unamortized debt issuance cost associated with 2 things, number 1, the retired portion of the 9.25% senior-secured notes; and 2, the GM second-lien term loan commitment, which was terminated effective June 30th of 2011 and of course was never used.

AAM's tax provision in the second quarter of 2011 was a benefit of approximately $200,000.

The underlying run rate of income tax rate in the quarter was about the same as we disclosed for the first quarter of 2011, or approximately 5%.

However, in addition to the underlying run rate we recorded 2 discrete items, as these are referred to in GAAP literature, in the quarter that drove the tax provision to a benefit.

The total impact of these tax adjustments was approximately $2.8 million.

The first of our favorable tax adjustments in the quarter related to the settlement of open income tax audits, so we put a number of open tax years behind us and did so at a slight benefit to the accrual we had booked.

The second discreet item related to a new corporate income tax law in the State of Michigan, which will become effective in the calendar year 2012.

Under the old law, AAM had a deferred tax liability that will not be paid under the new law.

As result, we reversed this liability in the second quarter of 2011 when the new law was passed.

Okay, let's move onto 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.

GAAP cash provided by operating activities in the second quarter of 2011 was very strong, approximately $116 million.

Capital spending was approximately $40 million, right in line with our guidance for the year.

Proceeds from the sale of equipment was approximately $6 million.

Reflecting this operating activity and CapEx.

AAM generated positive free cash flow of approximately $82 million in the second quarter of 2011.

Let's talk about the balance sheet.

We still have some work to do, but we've come a long way in the past 2 years toward our objective of strengthening the balance sheet and improving our credit metrics.

At June 30th of 2011, AAM's net-debt was approximately $714 million.

As compared to year-end 2010, our net-debt position has been reduced by another $50 million.

Principally attributable to our free cash flows generation in the first and second quarter.

AAM's net-debt-EBITDA ratio at June 30th of 2011 on a GAAP-derived basis was approximately 1.9 times.

Now we think it is appropriate to adjust the numerator in this ratio to reflect the estimated working capital benefit associated with the accelerated GM payment terms, and if we do that the ratio would increase to approximately 2.35 times.

So to be clear what I mean is, we consider the working capital benefit associated with the accelerated payment terms to be a form of working capital financing.

So the most appropriate way to analyze this metric is to add that to our total debt, and the ratio then becomes 2.35 times.

It doesn't really matter whether we are talking about 1.86 or 2.35.

In either case, our current EBITDA leverage ratio is now within shouting distance of our goal to be under 2 times by 2013 when we expect to return to investment-grade credit metrics.

That's a hell of lot better than it was just 2 years ago.

Also at June 30th of 2011, AAM's EBIT-to-interest coverage ratio was 2.81 times relatively close to our target of increasing this ratio above 3 times by 2013.

And 1 more credit metric, our net-debt-to-market capitalization ratio was approximately 45% at June 30th of 2011.

Again, not much above our target of 40%.

So we are making excellent progress in getting our balance sheet and order.

The significant improvement in our credit metrics has not gone unnoticed by the rating agencies.

As a result of this improvement, as well as our solid financial performance continuing now over the past 8 quarters, and the progress we've made in our business diversification, both S&P and Moody's upgraded our credit ratings in the second quarter of 2011.

We like the trend, we still want to see some improvement in the ratings, so we will continue to strive for additional credit rating upgrades as we further improve our credit metrics and demonstrate additional progress, and we believe additional significant progress will be achieved on our business diversification initiatives in the next couple years.

Now liquidity at the end of the quarter was $595 million.

I have 3 things to tell you about this.

Number 1, liquidity at quarter-end reflects the impact of a successful, quote, unquote, Amend and extend deal, we completed with respect to the revolving credit facility on June 30th of 2011.

Total available liquidity in this facility was increased from $296 million to $375 million as of the end of the quarter, June 30th of 2011.

More importantly the maturity for $235 million of this facility was extended to June of 2016.

That gives us 5 years for $235 million of this facility.

We appreciate very much those banking partners who stepped up for us.

The balance expires at 2011, about $53 million, which is unchanged from our previous conditions, and June of 2013, or $87 million of the total $375 million facility.

Also pricing, and whether it is drawn or undrawn, both were improved, which tightened up in this amendment and covenant flexibility was expanded, all of this commensurate with the improvement in our credit rating profile since the revolver was most recently amended in 2009.

So this was an important development, a good positive development for our Company.

The second issue from a liquidity perspective at quarter-end is to note that this reflects the redemption of 10%, or as I said $42.5 million, of our 9.25% senior-secured notes, and of course the termination of the GM second-lien term loan commitment effective June 30th of 2011.

The liquidity of $595 million at the end of the quarter reflects about $142.5 million reduction for these 2 items, offset of course by the revolving credit facility increase and, as I mentioned, free cash flow.

Now the third thing I want to talk about liquidity at quarter-end is that it is sufficient.

In fact, it is more than sufficient, to handle the increased working capital investment we expect in the third quarter of 2011 related to the normalization of our commercial relationship with GM.

On June 30th of 2011 we terminated the accelerated net 10-day payment terms with GM that we've enjoyed from September 16th of 2009.

Effective July 1st of 2011, we have reverted to GM's standard supplier payment terms of net 47-paid weekly.

This approximates 50 days.

In our GAAP financial statements for the third quarter of 2011, we expect to report a large use of cash, operating use of cash, to reflect the increase in accounts receivable that will occur as part of this transition.

Although GAAP requires this to be reported as an operating activity, in substance, it is a refinancing activity because the accelerated payment terms are, in substance, a form of working capital financing.

We currently estimate the working capital impact of this change in GM payment terms to be in the range of $175 million to $200 million in the third quarter of 2011.

This is $25 million to $50 million higher than our previous estimates due to higher production volume expectations we now have for the third quarter of this year, which as Dick already mentioned, is the primary reason why we are also today announcing a $100 million increase in our 2011 sales outlook.

Now I just mentioned higher production volumes for the third quarter, our outlook is driven higher by higher expectations for the entire year, and that of course includes third and fourth quarter.

The impact of the payment terms is really dependent on volumes in the third quarter, which are markedly higher than what we had expected earlier in the year.

So the bottom line on the second quarter 2011 for our Company, AAM, is this.

EPS was $0.65 per share on revenue growth of 23%, we had $82 million of positive free cash flow, and we made continued steady improvement in our credit metrics.

To close my comments this morning let me just reiterate quickly what we intend to do over the next 3 years.

We tend to deliver sales growth in excess of 10% per year for the next 3 years to $3 billion or higher by 2013.

We intend to achieve EBITDA margin at the high-end of our long-term guidance range of 12% to 15%.

In dollar terms this means that our annual EBITDA generation should be in the range of $400 million to $450 million by calendar year 2013.

Finally, we expect to achieve significant measurable progress on business diversification with non-GM sales growing twice fast as our total sales growth to 40% or more by 2013 and 50% or more by 2015.

We also intend to return to investment-grade credit metrics by 2013, and by this we mean that we expect to achieve and sustain EBITDA leverage solidly below 2 times, EBIT coverage, interest coverage, solidly higher than 3 times and net-debt-to-capitalization ratio at 40% or lower with positive stockholders' equity.

We expect all this to drive significant enterprise value creation, and maybe more important than that, a much larger share reserve for our stockholders as we reduce our leverage and really focus on creating value for equity holders.

That's all I have for this morning.

Thank you for your attention.

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

Thank you, Mike, and thank you, Dick.

We've reserved some time to take some questions.

I would ask that you please limit your questions no more than 2.

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

John Murphy, Bank of America Merrill Lynch.

The EBITDA margin in the quarter of 15.7% is pretty substantially above your long-term guidance, the high-end of your long-term guidance range of 15%.

And we look back the last -- you have 4 quarters -- the first quarter was a little bit below that; but if you look at the last 4 quarters, you've been running in the low 15s on this EBITDA margin.

Is there any reason structurally, as we step forward through the second half of this year and into 2012, that that should be lower?

You guys really outperforming what you're talking about.

I'm just trying to understand if there's anything structurally that would take that margin down?

John, good morning again, this is Mike.

We've said all along that our long-term guidance range up to 15% on EBITDA is not a cap on our ability to generate profitability.

By far and away, the most important determinant of our ability to achieve that type of margin is capacity utilization.

And the production volumes now continuing for about, as you pointed out correctly, 4 quarters, have been very solid, very strong and allowed us to achieve a very high-capacity utilization.

So as long as that continues to be the case, we would expect our fixed-cost absorption to be very strong, and our margin performance to be strong.

We are just not sure as we look forward that we can always count on such outstanding capacity utilization; and that's why, in a range of different scenarios, in a cyclical industry, we've looked at our EBITDA guidance range maybe 15% on the high end and a little bit lower in some other circumstances.

This is David Dauch.

I will just add to this -- on the downside of things, as we've said to you and others, we estimated to see moderate cost inflation from a material standpoint.

We are starting to see some increased pressure in that area there.

Slightly higher than what we had originally thought, but we are working closely with our supply base.

But that might be some wind in the face going forward here; but nothing substantial.

Then just a follow-up on this, on the Detroit facility closure.

Has that been a weight on margins recently, or for the past couple of years?

And I know there's some costs coming up in the second half to execute the closure, but may we see some relief, and actually see some of that equipment has moved to other plants that you actually get even better utilization?

John, this is Dick Dauch.

For years, it has been a weight, negatively, on our Company.

As you know, that is quickly coming to an end, and you'll have to factor that in and how that impacts financials.

John, let me just add briefly to that.

We have said for some time now that we anticipate the opportunity to achieve total savings.

If and when we achieve -- and it is really when at this point -- market-cost-competitiveness for the work that's currently sourced at Detroit and Cheektowaga; we have said that the total cost save associated with those 2 situations is about $10 million to $20 million per year.

And a portion attributable to the Detroit manufacturing complex is around two-thirds, maybe as high as 75% of that total.

So we do expect that to become part of our earnings and cost profile next year, after February 25 of 2012.

Lastly, if I could just sneak in housekeeping -- Mike, you mentioned this accelerated receivables program with GM ending.

Is there a chance that as you build your receivables that you might put an AR facility in place, or increase what you've got to finance those receivables?

So you might effectively get those receivables faster?

John, that's a great question; and you know what, I think that's certainly a possibility.

Our Company had an accounts receivable securitization for many, many years expiring in approximately 2003.

We do think that's a very effective form of working capital financing.

Unfortunately for much of the past several years, our concentration with GM and Chrysler worked against us.

As those 2 companies now have tremendously improved financial situations, I think the possibility for that type of working capital financing will definitely be out there for us, and we will just have to evaluate that against other options that we have.

And I do think John, there's a chance that we could find some ways to do that.

Brian Johnson, Barclays Capital.

2 sets of questions.

Drilling down on the plant closure labor cost savings; and then secondly, more strategically, about the Company, kind of 2013 to 2015.

On the plant closing, can you remind us of the non-cash EBITDA headwind from rolling off of your GM labor recovery agreements, restructuring agreements?

And then, how the plant closure savings, which I imagine are cash, could work to offset that?

No problem, Brian.

We have, associated with the 2008 agreement with General Motors, wherein they agreed to help us fund the transition of legacy labor that occurred during that timeframe; and as result of the negotiation with the UAW in 2008, GM agreed to pay us total consideration of approximately $213 million.

This amount of money was recognized as revenue over the term of this agreement, which was the period of benefit to General Motors; and of course all of this in compliance with GAAP standards.

So, we have roughly $4.7 million of revenue per month attributable to this cash that they paid us, and this agreement that they paid to us mostly in 2008 and 2009.

So we have roughly, I think it is $57 million roughly, of income per year.

Some of that's offset by expenses associated with the buy-down program, which was part of the legacy labor transition that GM helped us to fund.

We had approximately $140 million of expense associated with the buy-down program over this time period that was also amortized as expense.

So we had non-cash revenue on the agreement with GM, we have non-cash expense associated with the buy down payments that of course GM helped us to fund.

On the expense side of the GAAP standards, we had to accelerate that expense, so it is not recognized ratably over the entire 4-year time period; to the extent that some of the associates who were paid these buy-down payments actually left our Company, we had to accelerate some of those expense charges.

Right now in, 2011, the run rate of expense is around $18 million.

So $18 million of the $140 million is recognized this year.

So $57 million on the revenue side, $18 million on the expense side.

Now we see 3 issues helping us to offset that $40 million contribution roughly to our EBITDA generation going forward.

Number 1, as I mentioned and Dick mentioned, we terminated the early payment terms with General Motors.

That cost us a 1% discount, and that discount now will be reversed, and we will simply gain 100% of our sales price on our sales to General Motors.

That's going to be $15 million to $18 million a year, so a good chunk of the $40 million will be offset on the cash basis with that issue.

The second issue is the one you mentioned, and that's the labor costs savings that we were not able to achieve in 2008, that we will achieve in 2012.

So we see a total potential cost savings of $10 million to $20 million; and I just mentioned in response to John's question, that two-thirds, maybe 75%, in that range, of the total cost savings is attributable to Detroit.

So that, at this point in time, we're planning to achieve after February of 2012.

Finally, we have ongoing productivity programs here.

I think, Brian, you've known us a long time, you know that we have literally hundreds of individual productivity initiatives; and we're probably going to need $10 million to $15 million of additional productivity, much of which will come from the launch of a very significant new business backlog.

So we do expect to replace the non-cash EBITDA generation associated with these special agreements with cash-based contribution margins associated with these 3 issues.

And we do think that's going to be showing up in our cash flow statement in a very positive way 2012, 2013, 2014 and so on.

Next question is both tactical and strategic around your key customers' key platform.

I guess a couple things -- 1, your sense of production schedules through this year; and then number 2, how you are thinking about changeover to a new model line and then the transition effects of that on American Axle; and then third, how should we thinking, especially in light of CAFE regulations coming out today, of the successor platform -- your content on it, the margin opportunity on that, and so forth.

Brian, I will start in the reverse.

As far as the successor product, the K2XX, that is our business, that is our platform.

We recognize the changes in the CAFE legislation.

Obviously we're trying to introduce some new fuel-efficient products into that vehicle.

And we'll have to work with GM in the future beyond the K2XX platform as it relates to what they are looking at doing there.

With respect to the volumes and the programs themselves, we are very confident in the schedules that we are seeing at this point in time.

We are running higher than we even had budgeted.

Clearly there's some inventory build by design by General Motors; and they've publicly come forward with that, by raising their inventory levels in the field to that 110-plus-type-day.

Clearly they're going to have to make some necessary adjustments at their assembly plants to accommodate the major model change going from the GMT900 platform to the K2XX platform.

There's 4 assembly plants that will have to go through extensive downtime to accommodate that changeover.

So clearly we are working closely with General Motors to accommodate those down times and their planning for their schedules.

Is that some time beginning 2012, end of 2012?

I think GM will tell you when it is going to be, I don't know that we should get out in front of that, but 2012 is the public commentary I've seen them make so far.

Brian, I'd make a couple comments.

It is clear from General Motors' public comments and from our view of the market, that we would expect 3 or 4 things to drive better or stronger sales of these products going forward.

The mix -- and by mix, we mean the percentage of the SAAR dedicated to this full-size pickup and SUV market -- the mix is seasonably weighted to the back half of the year.

So we expect mix to improve this year, and that's part of the inventory situation.

You've got 125 production days in the front half of the year, something like 115 in the back half of the year; so seasonally you're going to expect some inventory buildup this time of year to address those issues.

So we think improving mix over the next 6 months will go a long way to improving General Motors' inventory situation.

Secondly, we do, as Dick mentioned, continue to see a gradual economic recovery, and particularly in some of the areas of the economy that are particularly sensitive to pickup demand.

These trucks are aging in the fleet, and so we continue to expect good, solid sell-through on this.

If you look at GM's activity, they are adding capacity for this program.

Significant capacity.

They are adding third shift at 2 of the 4 facilities yet this year.

Line speeds are being adjusted.

And so their total capacity for this program will be up 150,000 to 200,000 units from where we started calendar year 2010 by the time these adjustments are complete.

So that allows GM to deal with the shutdown, address a growing market and be in a position to manage through this.

And they've said -- and I'm just repeating what they've said -- that inventory will increase a little bit at the front-end of this process and will normalize through this process.

So in terms of how we look at it, Brian, andI hope I'm answering your question, this is how we are evaluating and how we look at the situation.

Himanshu Patel, JPMorgan.

A few more questions on the Detroit facility.

First of all, can you just give us a status on what's exactly happening with the union right now?

Is this pretty much a done deal, or are there still any talks going on between the union and you guys?

We've announced to you our position.

The closure of the factory will occur.

The union and us have our understanding, the workers' understanding of that.

Everything's proceeding very normal in the work-out of the collective bargaining agreement through February 25 of 2012.

And there will be other discussions occurring as it relates to the associates.

I think in the past, you guys have indicated your preference is to not shut down Detroit, and get it down to a competitive wage rate.

That would obviously be a prerequisite, and I think the logic was that you had invested a significant amount of capital into that facility over the last several years.

Can you, given this development, can you talk about the impact of this on prospective CapEx for American Axle over the next couple of years?

I will have John Bellanti give you a response.

I would say this, Himanshu, predominantly all of the capital that we've invested in the Detroit facility is either slated for a program in our backlog or a small portion available for future programs.

So we've accommodated through the use of very flexible equipment, starting with the GMT800 investment, the ability to redeploy that capital.

And that's the intent that we are executing right now.

Much of it's already been redeployed as the volumes in Detroit have gone down.

Himanshu, this is David Dauch.

As you know, we've guided in the past that our CapEx in the future will be in the range of 4% to 6% of our sales.

We are still holding true to that.

Clearly we are at the high end of that at this point of time, based on launching some major programs in the backlog, including the K2XX.

But as John indicated, we are moving forward with reallocating and redistributing the assets from our Detroit site to global operations around the world.

So it sounds like maybe there's just a little bit of friction costs with moving around equipment, but no big impact on CapEx spending after this year?

I think you have it accurate.

Separately, the GM comment --we all heard publicly, GM's year-end T900 target inventory level was 100 or 110 days or so.

I'm curious, first of all, do you guys agree with that level?

But, more importantly, do you hear something differently from GM internally about what they are targeting for inventories; because I think most of us would agree externally, that relative to where the company has typically ended inventories on that platform, 100 days-plus would be higher than normal.

We fully support with GM has stated to you.

Brett Hoselton, Keybanc.

It is Matt Mishan in for Brett.

I don't know if I missed it or not, but what was the impact of the new business agreement on EBITDA year-over-year?

The impact of the new business agreement on the EBITDA year-over-year.

So you're speaking of the issue --

The dollar amount -- I think you said it was $5.5 million last quarter.

Yes, it was a little bit higher in the second quarter because of higher volumes; metal market rates were a little bit higher, so some of the scrap revenue adjustments were higher.

And of course because volumes were higher, the price concessions were higher as well.

So a little bit higher than that run rate.

If the backlog is significantly starting to launch, should we expect higher launch costs going forward?

We don't typically split off or think about our launch cost separate from any other part of our cost structure, particularly our fixed-cost structure.

We've been launching 25 to 30 programs a year for as long as I can remember.

That might tick up a little bit going forward, but the launch cost impact, Matt, is contemplated in our forward earnings guidance, and we don't expect this to be something that's going to significantly affect or change our results.

And lastly -- a clean-up item -- what tax rate are you expecting for the back half?

Matt, what we've disclosed that our underlying run rate of tax for this year is going to be about 5%; and remember, it is going to be maybe 5 to as high as 10% for the time being.

What I mean is, after 2011, until 1 very important issue is resolved.

And I mentioned this, I think on our last call; but if not, I will say briefly here.

We have a valuation allowance booked on our US tax assets, and we are now in a position, and have been for some time, that we are utilizing those tax assets.

The major tax asset, of course, I'm talking about, is our net operating loss carry forwards, but there's also significant tax credits that we have available to us and that we do expect to use in the future.

Under GAAP, in order to reverse a valuation allowance once it is taken against such an asset, what you need to have is significant positive evidence of your ability to generate profitability and utilize those assets.

And under GAAP, the benchmark that's most commonly used for that is, 12 quarters, or 3 years.

For us, that 12-quarter time period would extend through most or all of 2012, and so for the time being we would expect our tax provision run rate to be in the range of 5% to 10%, closer to 5% for this calendar year.

After that point in time, we could expect it to increase to maybe a range of 15% to 20%, because at that point in time we would no longer have the valuation allowance on our assets; and we would, at that point in time, recognize deferred tax liabilities here in the US, separate and apart from the valuation allowance accounting.

Rod Lache, Deutsche Bank.

It is Dan Galves in for Rod.

Some of your peers have talked about struggling to hire enough engineers to get R&D to their targeted level.

Are you guys having those same issues?

I guess what I'm asking is, do you expect the R&D line to continue to grow going forward?

Dan, this is Dick Dauch.

We've always been very focused on engineering, applied engineering.

We have an extraordinary talented team, we are in great shape on that.

We continue to recruit, we continue to expand globally in the application.

We have no problems on that.

So you're just expecting R&D to grow in line with the sales level?

We will continue to grow; historically, we have normally spent about 10% more dollars per year than we did the previous year on R&D.

We had a bit of a dip during the 2008-2010 period, but we are back to very aggressive, strong positive R&D applications.

And Mike, you want to add anything to that, you're welcome to.

The only thing I would add, Dan, and I think Dick said perfectly what I was thinking going forward.

This year is a little unusual, because not only do we have the aggressive strong growth expectation around R&D at the level that Dick just discussed, but we also have the introduction of e-AAM to our cost structure, which gives us a little bit of a double-impact of growth this year.

E-AAM by itself is going to be somewhere in the $10 million, maybe $12 million range for this year.

Could be even a little bit higher, depending on what transpires in the second half of the year with our opportunities there.

So you've got that, plus the normal run rate of activity across the other portions of our business.

So you're going to see a little bit higher rate of growth this year.

But next year, I would expect it to be somewhere, as Dick mentioned, around 10%, and as we're building out our 2012 plans, we will give you some good indication of that.

Related to the closure of Detroit, can you update us on your capacity to support your key North American truck programs?

Essentially, does this impact the amount of the SAAR level you can actually support with your current capacity and facilities?

We've always said to our customers -- I will have David Dauch give you a specific answer to your specific question -- that we'll have 1 more axle built than they have trucks framed and cars framed.

So we've never missed 1 in almost 18 years; we don't expect to miss any in the future.

How we are reallocating our production and how we are doing our plant loading has been done, and it is an extremely good shape.

We have plenty of upside, potential, and opportunities; and I will let David response specifically.

Based on some of the reloading that we are doing here, I actually see us expanding some of our capacity capability to support higher volumes, mainly because of the efficiency that we are going to realize, based on the consolidation of some of the assets in the facilities.

Let's hope for higher volumes.

Thanks for the time.

Chris Ceraso, Credit Suisse.

A couple of items here.

I guess it may be still up in the air, or maybe not, whether the K2XX program is going to stay body-on-frame, or if it's going to go to a lambda-like uni-body program.

But maybe could just help frame for us what the impact is from your perspective in terms of the potential content or the profitability, depending on which way that program goes -- recognizing that it is yours either way.

That vehicle program is General Motors'.

We've worked very carefully with them.

It looks to be a continuation of body-on-train.

And we are well-locked and loaded with them on what they need of all the different base models and derivatives and plant loading.

So it is really an immaterial issue to us.

David, you mentioned something about material cost maybe tracking a little bit higher than you thought.

If you look in the market, it looks like steel prices are down a little bit.

So maybe you can elaborate on what you are seeing that's driving your material cost up versus your earlier expectation?

It's just some of the other metallic parts, Chris, is really where it is.

We are seeing some pressure in the casting area; obviously that was the 1 area that was very majorly impacted during the downturn.

Clearly we are seeing impacts in regards to some of the other commodity prices out of there, too; but it is mainly in the metallic area and the engineered product areas.

And then -- I don't want to beat a dead horse -- we've talked about GM's inventory position; but recognizing that even if the 100 to 110 is a reasonable level, they are currently a little bit above that.

So even if industry sales go to the -- call it 14% level that you are talking about -- do you trail that a little bit?

Or does GM trail that a little bit to try to bring those stock levels down from 120 and change down to 110 or 100 even?

Chris, this is Mike.

Listen, first of all, we don't believe their inventories are anywhere near 120 days.

I understand how that 120-day number is calculated; it is a backward-looking number.

As we look forward with stronger mix in the second half of the year, stronger expected sales over the next 6 to12 months, we see this inventory more like 95 to 100 days.

And we think by the end of the year, they will get this thing where they need it to be, to position themselves to address the market in 2012.

So from our perspective, I get a little antsy when I hear that because I understand how Wards calculates that on a going-backwards basis, but nobody in this industry manages inventories based on what they sold last month.

They manage it on what they think they need to sell, and position themselves for the next 3 to 6 months; and on that basis, we think GM is managing this very well.

All right, thanks Chris.

We've got time for one last question.

Peter Nesvold, Jefferies.

Question on the margin guidance.

If I take the midpoint of the sales range for the year, and the midpoint of EBITDA margin range for the year, and I back out the really great first and second quarters that you've had so far, which clearly have been above expectations, I get an EBITDA margin implied of about 14.4%.

So is there a step-down because of the material costs that you've talked about a few times?

Is it seasonal?

Is it conservatism?

What would drive that down from 15.8% to 14.4%?

Peter, this is Mike.

David mentioned about the material costs.

That issue is affecting the entire year of 2011.

We don't really at this point see it having a more significant impact in the back half of the year -- maybe a little bit.

But the answer to your question lies in a comment I made earlier about capacity utilization and fixed-cost absorption.

And what happens in our business, and maybe our Company is just a little bit more illustrative of this trend than others; but there are more production days in the first half of the year than the second half of the year -- roughly 10 more in the front half of the year than the back half of the year.

And a great deal of our fixed-cost overhead is absorbed on a pro rata basis.

Costs like our SG&A costs, our R&D expense, and of course our in-plant overheads tend to be spread fairly evenly through the course of the year under GAAP.

So what happens when we have higher production volumes and higher capacity utilization in the first and second quarter -- we get a little bit better opportunity to make our margins.

In the back half of the year, we might see a little bit lower margins; but that's why we guide to a range, and for us this year, of 14.5% to 15%, we don't see any variance or any significant variance to our guidance expectations in the back-half of the year versus the front-half of the year.

That's really the material issue that I would think is addressing this question.

Thank you, Peter, and we thank all of you that participated on this call and appreciate your interest in American Axle Manufacturing.

We certainly look forward to talking with you in the future.

This concludes today's conference call.