American Axle & Manufacturing Holdings Inc (AXL) 2011 Q3 法說會逐字稿

At this time I would like to welcome everyone to the American Axle & Manufacturing third-quarter 2011 earnings conference call.

(Operator Instructions) As a reminder, today's call is being recorded.

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.

Good morning everyone and thank you for joining us today and for your interest in American Axle Manufacturing.

Earlier this morning, we really released our third-quarter 2011 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 16416856.

This replay will be available beginning at noon today through 5.00 PM Eastern time November 4.

Before we begin, I would like to remind everyone that the matters discussed in this call, may contain comments and forward-looking statements subject to risks and uncertainties which cannot be predicted or quantified, and which may cause future activities and results of operations to differ materially from those 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 measures, as well as a reconciliation of these non-GAAP measures to GAAP financial information, is available on our website.

During the quarter, we will participate in the following conferences, Barclays 2011 Global Automotive Conference on November 15, and the BofA Merrill Lynch Credit Conference on December 1 and 2.

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 third quarter of 2011.

Joining me on the call today are David C.

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

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

Today, AAM is pleased to report continued strong sales and profit performance in 2011 with solid third-quarter financial results.

Let me briefly cover for you 4 third-quarter highlights.

First, the third quarter of 2011 marked AAM's seventh consecutive quarter of year-over-year sales growth.

AAM sales in the third quarter of 2011 were approximately $648 million, an increase of $29 million versus the third quarter of 2010.

Through the first 3 quarters of 2011, AAM's sales are now up 16%, as compared to the first 3 quarters of 2010.

AAM's sales growth rate of 16% this year is approximately double the industry growth rate in 2011.

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

On a year-over-year basis, non-GM sales grew approximately 18%, in the quarter to $173.9 million or 27% of AAM's total sales.

This positive trend is a direct result of our actions to achieve significant gains in customer diversification.

Third point, the third quarter of 2011 was AAM's ninth consecutive profitable quarter.

AAM's GAAP earnings were $0.33 per share in the third quarter of 2011.

This reflects the adverse impact of special charges, and asset impairments, and other non-recurring operating costs of approximately $11.9 million or equivalent to $0.15 per share.

Excluding the impact of these special items, AAM's adjusted earnings in the third quarter 2011 were $36.2 million or $0.48 per share.

The special charges we incurred in the third quarter of 2011 primarily related to the planned closure of our Detroit manufacturing complex and the Cheektowaga manufacturing facility in New York.

Our decision to close these facilities was unfortunate, but necessary, due to the failure to achieve standalone market competitive labor agreements to the hourly associates at these locations.

And AAM will honor the current labor agreements in place at these locations through February 25 of next year, 2012.

In the interim, we are taking the actions necessary to flawlessly and anonymously support our customers' production requirement after February 25, 2012, without those facilities.

The work currently sourced to the Detroit manufacturing complex will stay in the state of Michigan.

This business will be relocated to our market cost competitive and operationally flexible Three Rivers Manufacturing Facility near Kalamazoo, Michigan.

The business currently sourced to our Cheektowaga Manufacturing Facility will be resourced to other AAM operations in the states of Ohio, Indiana, as well as the country of Mexico.

All of these operations are market cost competitive and have earned their opportunity for growth and investment.

Mike will discuss the cost and related savings associated with these actions in more detail later in this call.

The fourth point and final highlight item of the third quarter is free cash flow.

In the third quarter of 2011, AAM's free cash flow was a use of approximately $221 million.

As we mentioned during our last earnings call on July 29, 2011, we transitioned from net 10-day terms to GM standard supplier payment terms of net 47 paid weekly in the third-quarter of 2011.

This new arrangement, approximates 50-day terms.

In substance, this transaction is a financing activity, and however, under GAAP, this must be reported as an operating activity in our cash flow statement.

As a result, AAM's free cash flow for the third quarter reflects a one-time use of cash of approximately $190 million related to the termination of the accelerated payment terms with General Motors.

This was a dominant issue affecting our cash flow results in the third quarter of 2011.

AAM planned for this transition and was ready from a liquidity perspective.

AAM's total available liquidity as of September 30, 2011, was approximately $400 million.

This is by far more than sufficient to run our business.

Most importantly we are pleased to have completed the normalization of AAM's commercial relationship with GM in the third quarter 2011.

We appreciate the cooperation we have received from all of our key stakeholders in recent years, including GM, and look forward to continued future collaboration and mutual benefit.

Mike will cover more details of the third-quarter 2011 financial results for you in a few minutes.

I will now shift gears and update you on our progress achieving AAM's long-term strategic objectives.

AAM's strategy is to build value for all key stakeholders based on 3 major elements.

First element, profitably growing AAM's sales faster than the overall industry.

Second, significantly improving AAM's business diversification efforts and third, strengthening AAM's balance sheet.

Let me start with the first, profitable sales growth.

We are on track to meet and exceed AAM's total sales target of $3 billion by 2013.

From 2011 to 2013 period, we expect AAM's compound annual growth rate, or CAGR, to be greater than 10%.

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

During this period, we will launch many, many new products supporting new vehicle platforms for many new customers throughout the world.

The main driver of this growth is AAM's new business backlog and our very excellent advanced product technology.

Today we announced AAM's 3-year backlog of new business launching from 2012 through '14, has grown to approximately $1.1 billion in future annual sales.

AAM's new business backlog launching from 2012 to '14 is more than 15% higher than the previous 3-year backlog we discussed with you for 2011 and '13.

AAM's success in building the new business backlog reflects our efforts to diversify the business by increasing AAM's exposure to global growth markets, advancing and innovating AAM's product portfolio and growing AAM's customer base.

The highlights of AAM's $1.1 billion new business backlog launching from 2012 to '14 include the following.

First, approximately 75% of the programs launching from 2012 to '14 are non-General Motors programs.

This includes new and expanded awards from multiple global premium vehicle manufacturers such as Chrysler in the Fiat family for global vehicle platforms; the Daimler truck and the Mercedes-Benz car division of Daimler, Mack truck and Volvo Powertrain Group; Navistar and MNAL, which Mahindra Navistar Automotives Limited; as well as Tata and their affiliate; Jaguar and Land Rover as well as Volkswagen Group along with their brands Audi and Scania, and others.

AAM's new business backlog for 2012 to '14 supports AAM's target of growing non-GM sales to 40% total sales by 2013 and 50% of our total sales by 2015.

The second point, approximately two-thirds of AAM's new business backlog launching from period 2012 to '14 is for passenger car, crossover vehicle and commercial vehicle programs.

This is significantly improving the balance of AAM's future revenue streams.

The third point, over 70% of AAM's $1.1 billion new business backlog for that period of 2012 to '14, is for programs sourced outside of North America.

These awards support AAM's expansion in the fast-growing market of Poland, Brazil, China, India, and Thailand, where we have our own independent plant operating units.

In addition to these new business awards AAM is currently quoting approximately another $1 billion of potential new business opportunities.

Approximately 90% of these new business opportunities are for customers other than General Motors.

This provides us with an excellent opportunity to further advance our business diversification objectives.

The second element of AAM's strategy to build value for our key stakeholders is to achieve significant business diversification.

Our goal of expanding AAM's global manufacturing and engineering footprint took a huge step forward in the third quarter of 2011, as we announced a grand opening of AAM's new Rayong Thailand manufacturing facility.

This stunning new manufacturing operation is AAM's sixth regional manufacturing operation in the continent of Asia.

The Rayong manufacturing facility will allow us to leverage AAM's historic track record of world-class quality, warranty, reliability, delivery, and launch performance.

The Thailand represents the second largest pickup truck market in the world.

Another major element of this initiative is the expansion of AAM's product portfolio.

At our Company we believe that technology leadership is a major differentiator in the market, and we have it.

As a result, AAM is committed to developing innovative new Advanced Technology driveline products and drivetrain products to meet the rapidly changing needs of the global automotive marketplace.

In the third quarter of 2011, AAM's R&D spending increased by approximately $11 million to approximately $32 million.

This compares to approximately $21 million in the third quarter of the previous year.

On a year-to-date basis, our R&D spending has now topped $85 million in 2011 an increase of more than $25 million over the previous year.

Our Company is focused on accelerating the development of high efficiency, mass-optimized products, to meet our customer and the market needs.

They're designed to assist our customers as they improve higher fuel efficiency, reduce emissions, and have more sophisticated electronic integration and improve the ride handling performance for the entire vehicle.

A key example of AAM's continued leadership is the advancement of driveline systems technology, is AAM's innovative and new EcoTrac disconnecting all-wheel drive system.

This system enables a vehicle manufacturer to operate fuel-efficient and environmentally friendly option, to ride the safety, to ride the handling performance of the all-wheel drive systems being integrated into passenger cars and crossover vehicles throughout the world.

AAM's EcoTrac disconnecting all-wheel drive system is a great example of how AAM is using innovation to establish our Company as a product leader processing systems technology leader.

AAM's EcoTrac disconnecting all-wheel drive system will be featured on a major new global passenger car and crossover vehicle program beginning in 2013.

Another example of AAM's technology leadership in manufacturing processes, relates to AAM's TracRite center differential for the brand Audi.

In the manufacture of the center differential, AAM utilizes an industry first by using a cast iron joining process with laser welding.

By using this process, our Company was able to reduce the weight of the center differential by over 4% and the part count by a whopping 32% in the assembly.

The AAM TracRite center differential provided greater performance for the application in a smaller package than our competition could provide.

Examples of this include a 20% torque increase and fuel economy benefit due to mass savings.

As a result of this innovation and manufacturing process, AAM was recently recognized by Automotive News as a finalist for the 2012 Automotive News Pace Award.

The Pace Awards celebrate innovation in automotive suppliers products, their manufacturing process and information technology.

We are very proud to be a part of the finalist group for this prestigious award program.

AAM's R&D spending also continues to include product development investment related to our e-AAM joint venture located in Trollhattan, Sweden.

The primary focus of the e-AAM businesses, is to develop and commercialize electric all-wheel-drive and hybrid driveline systems.

The application is for passenger cars and crossover vehicles.

Let me take a moment here to address the current situation with our joint venture partner, SAAB Automobile AB.

First, e-AAM is is not significantly affected by SAAB's current business circumstance.

e-AAM has been operating, and will continue to operate as a stand-alone autonomous entity.

Second point, AAM has the financial means and strategic intent to continue to funding e-AAM's product development.

This is a top priority for our Company and we're totally prepared to assume full ownership of e-AAM.

Third point, the intellectual property at e-AAM is protected.

And the fourth point, as e-AAM continues to work on numerous opportunities to incorporate our innovative patent protected technology into future vehicle programs designed by multiple global vehicle OEM in the continents of Europe, Asia, through China, and North America.

We're very excited about the progress we are making in this new product technology and expect to play a leading role in the development of this important new driveline product segment.

We're looking forward to sharing more information about this activity in the future.

The third and final element of our strategy to build value for our key stakeholders is to strengthen AAM's balance sheet.

AAM's sustained and strong profit performance over the past 2 years, has enabled us to make excellent progress in the process of restoring our balance sheet strength.

AAM's leverage and coverage ratios are much improved as compared to our status just 2 years ago.

AAM is on track to achieve the investment grade credit metrics by 2013.

Also, AAM has no significant debt maturities until 2014.

All the major rating agencies such as Moody's, S&P, and Fitch, have upgraded our credit ratings in 2011.

Our Company is on track to fully fund the global pension liability on a GAAP basis by the 2014 and '15 time period.

Perhaps most importantly, AAM's strong profit performance and improving cash flow profile is enabling us to fund the investment necessary to support our profitable global growth.

Ladies and gentlemen, let me emphasize that AAM is well positioned to successfully achieve our long-term strategic objectives with a dual focus on driving performance in our daily operations, and building value for our many key stakeholders, we are excited about AAM's plans for continued profitable growth, accelerated business diversification, improved balance sheet strength and product leadership.

Simply stated, AAM's best days are ahead of us We are on a roll.

Let us now turn the call over to AAM's Executive Vice President Finance and Chief Financial Officer, Michael Simonte.

Mike?

Thank you, Dick, and good morning everybody.

Dick already covered the highlights of our earnings for the third quarter of 2011 so I am going to get right into the details, starting with sales.

AAM's net sales in the third quarter of 2011 were $647.6 million, that is up 5% on a year-over-year basis.

On a sequential basis, AAM's sales in the quarter were down approximately 6% as compared to the second quarter of 2011.

This is right in line with the number of production days in each quarter.

If you adjust for the seasonal downtime taken by our customers in the month of July, there were approximately 59 US production days in the third quarter of 2011 as compared to 63 in the second quarter of 2011 or 6% less on a sequential basis.

The bottom line is this, daily production activity in our major revenue-generating programs was about the same in the third quarter as it was in the second quarter.

Seasonality is the only issue driving the difference in sales.

On a year-over-year basis, remember that in the third quarter of 2010, GM ran through the typical shutdown period in July for most of our major product programs.

This is a primary reason why our sales growth in the third quarter of 2011 is below trend for the entire year.

That was an unusual circumstance in third quarter of 2010.

The content per vehicle in the third quarter of 2011 was $1466.

That was about the same as in the third quarter of 2010.

There were no major changes in program mix, and so we did not expect to see any significant changes in this metric on a year-over-year basis.

Non-GM sales increased more than $25 million in the quarter on a year-over-year basis to approximately $174 million.

This was approximately 27% of our total sales.

As I mentioned, on the second quarter teleconference, if we adjust for the impact of our unconsolidated joint venture in Hefei, China, we're running at nearly 30% non-GM sales in 2001.

On a year-to-date basis for the first three quarters of this year, our sales were just short of $2 billion, that is up $280 million or 16% as compared to the first 3 quarters of 2010.

As Dick mentioned, AAM's sales growth this year in 2011 is twice the growth rate of the industry.

On a year-to-date basis through September, North American light vehicle builds were up 7.8% versus the same period in 2010.

In this same period, AAM's non-GM sales were up 32% on a year-over-year basis or twice the growth rate of our total Company.

I bring these data points out to make a larger point, and this is to support what Dick said, AAM is growing faster than the pace of the overall industry and AAM's non-GM sales are growing even faster, approximately double the pace of our total Company.

These are trends that we expect to continue in the coming years as we launch our $1.1 billion new business backlog for the years 2012 through 2014 and during this time period significantly improve AAM's business diversification.

Okay.

Let's now turn our attention to profitability.

In the third quarter of 2011, our key profit metrics were all impacted by $11.9 million of special charges, impairments, and other nonrecurring operating costs, primarily related to our decision to close the Detroit manufacturing complex and the Cheektowaga manufacturing facility.

Dick already covered this in his comments this morning, so I will not get into those details yet.

In total, these special items reduced our profitability by $11.9 million in the quarter or $0.15 per share.

In total, we expect to incur expense of approximately $30 million to close the Detroit manufacturing complex and Cheektowaga manufacturing facility and to redeploy the capacity of these locations to other AAM facilities.

This total of $30 million includes the impairment charges and other costs that we incurred in the third quarter of 2011.

The cost associated with this activity will be concentrated in the third and fourth quarter of 2011 and the first and second quarter of 2012.

We currently estimate the total cost of $30 million to be split approximately 50/50 in 2011 and 2012.

To be specific, what I mean is, approximately $15 million of expense in each year.

AAM expects total annual recurring cost savings in the range of $15 million to $20 million, probably closer to the upper end of that range, as a result of these capacity rationalization activities.

Okay.

So, in the third quarter of 2011, gross margin was 16%.

If you exclude the special items, it was 17.6% on an adjusted basis, approximately the same as our run-rate of 17.7% for the first 3 quarters of the year in total.

We are very pleased that run-rate of profitability.

Operating income was $45 million.

The operating margin was 6.9% in the quarter.

Excluding special items, operating margin was 8.7%, again, about the same as our run rate of 8.8% for the first 3 quarters of the year.

EBITDA was $82 million in the quarter on a GAAP derived basis.

AAM's EBITDA margin in the third quarter of 2011, was 12.6%.

Adjusted EBITDA was $93 million or 14.4% of sales.

Net income was $25 million in the quarter, adjusted net income was $36 million or 5.6% of sales, and diluted EPS on a GAAP basis was $0.33 per share, and as Dick already told you, adjusted EPS was $0.48 per share.

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

and as we talk about SG&A, we will talk a little bit about the issue that drove our EBITDA margin down a little bit in the third quarter relative to the run-rate that we expect for the other 3 quarters in this year.

In the third quarter of 2011, SG&A spending, including research and development, increased approximately $6 million on a year-over-year basis to approximately $59 million or 9.1% of sales.

This compares to SG&A spending of 8.7% in the first half of 2011 and 8.6% of sales in the third quarter of 2010.

Consistent with the first half of the year, the increase in our SG&A spending was primarily attributable to R&D in the third quarter of 2011.

AAM's R&D spending, which in 2011 includes costs related to our e-AAM joint venture for the development of electric all-wheel drive and hybrid driveline systems.

In total, R&D increased by approximately $11 million on a year-over-year basis in the third quarter of 2011 to almost $32 million.

On a sequential basis, R&D spending increased approximately $4.5 million in the third quarter of 2011 as compared to the second quarter this year.

But R&D spending in the third quarter was above trend, primarily related to the timing of certain prototype builds and material receipts that were required to meet customer validation requirements.

We are preparing to launch $750 million of new business in 2012 and 2013.

There were a number of important customer deadlines in the second half of this year that are driving higher activity in these areas in the third quarter of 2011.

And again I am speaking about the prototype activity and the turnover keys that we need to support our development of products in the new business backlog.

We expect to R&D spending including e-AAM to average $27 million to $30 million over the next several quarters or $2 million to $5 million less than our third quarter of 2011 spending.

And again this accounts for a little bit of a difference in terms of our overall profitability in the third quarter of this year versus what we expect our trend rate to be moving forward into the fourth quarter.

As Dick said, AAM's strong profit performance has enabled us to accelerate our investment in R&D this year, and we expect next year, to protect our leading market position and build competitive advantage in advanced driveline product technology.

This is an important strategic initiative for our Company that we believe is proving to be very successful.

We are moving quickly to develop innovative electric all-wheel drive applications, hybrid driveline systems, and other fuel-efficient and environment friendly products for front-wheel drive passenger cars and crossover vehicles.

We are setting the standard for numerous high-efficiency axle design attributes for light trucks and importantly, rear-wheel drive passenger car applications.

Our axles and rear-drive modules are becoming lighter, yet more capable, more fuel efficient, and cleaner.

We're also building out our commercial vehicle product portfolio.

We are excited about the many new business opportunities that are developing as a result of these R&D initiatives and plan to continue to develop these and related technologies to their full advantage.

This is a big deal for us.

The growth in our new business backlog, over 15%, versus our previous 3-year backlog, is evidence from our perspective that we are doing the right things to bring innovative, cost-competitive products to the global automotive market.

This supports our objective to profitably grow our Company faster than the overall industry and to significantly improve AAM's business diversification over the course of the next 2 to 4 years.

Net interest expense in the third quarter of 2011 was $19.4 million, down approximately $2 million versus the third quarter of 2010.

Cash provision in the third quarter was $2.3 million or 9% of pretax income.

For the year in total, we still expect our effective tax rate net of the special gains we recorded early in the year, for favorable audit settlements and tax law changes.

So once you adjust for those special one-time gains, we expect our effective tax rate to be approximately 5% to 10% this year, probably on the lower end of the range which is what we communicated to you on the second quarter teleconference.

We continue to benefit from a substantial amount of net operating losses and tax credit carry-forwards in the US.

In total, these tax attributes represent more than $150 million, that is $2 a share, if you're keeping score at home, of net economic value.

This is a substantial, and we believe, under appreciated asset for our stakeholders.

Okay.

Let's move on to cash flow.

We define free cash flow to be net cash provided by, or in the case of the third quarter, used in, operating activities less CapEx, net of proceeds received from the sale of equipment which were immaterial in the third-quarter.

GAAP cash used in operating activities in the third quarter of 2011, was approximately $182 million.

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

Reflecting this operating activity and CapEx, AAM reported a free cash flow use of approximately $221 million in the third quarter of 2011.

As Dick said, the dominant issue affecting our free cash flow results in the third quarter of 2011 was the change in our payment terms with General Motors.

In substance, we believe strongly this is a financing activity, but in accordance with GAAP we reported that as part of our operating activities, and we included in the definition of our GAAP derived free cash flow.

As a result of this change AAM's free cash flow for the quarter reflects a one-time use of cash of approximately $190 million.

Excluding this special item, free cash flow is the use of approximately $31 million in the quarter, approximately the same as the first quarter of 2011.

Now, I bring up this comparison to the first quarter of 2011, because there are seasonal factors that are unique to these quarters in terms of our free cash flow results.

Substantially, all of our interest obligations are currently payable in the first and third quarters of the year.

This is a $40 million issue affecting the comparison of the first and third quarter of the year to the second and fourth quarter of the year.

Second, the timing of our pension and incentive compensation payment is significantly weighted to the first and third quarters in 2011.

For example, in the third quarter of 2011, we paid approximately $18 million of pension funding requirements in the US and the UK.

This is in comparison to $8 million in the second quarter of 2011 and less than $100,000 in the first quarter of 2011.

On a year-to-date basis, our free cash flow was the use of $169 million through the first three quarters of 2011.

Excluding the one-time use of cash related to the change in payment terms with General Motors, adjusted pre-cash flow was a positive $21 million.

And let me make another point, if we further adjusted our free cash flow results to characterize our pension funding requirements, as debt maturities, which is what the rating agencies do in the normal course of their business, assessing our credit metrics, our free cash flow for the year-to-date period ended September 30, was approximately or just short of $50 million.

So there is plenty of free cash flow being developed in the business to pay what we need to pay relative to pension and our CapEx.

Let me now address the balance sheet.

Accounts Receivable at September 30, 2011, was $384 million up $185 million as compared to the second quarter of 2011.

The main issue here is the $190 million increase in balances due from GM on a current basis related to the change in payment terms.

There is no significant change in past-due arrangements.

We are simply stepping up to the aggregate commercial terms, standard commercial terms we have with our customers.

Nothing more, nothing less.

Inventories at quarter-end were $158 million.

This is up approximately $10 million as compared to the second quarter of 2011.

Inventory turns are averaging approximately 15 times in the calendar year 2011 on a year-to-date basis.

At September 30, our inventories were one turn lower than this trend.

This was due to some banking for customer activity and our plant closure activities as well as the system bill for Thailand facility which is starting operations in the fourth quarter of 2011.

In other words, we mobilized inventory to support Thailand in the third quarter, but do not have the sales in our run-rate in the third quarter.

That will occur in the fourth quarter.

At September 30, 2011, AAM's net debt was approximately $936 million.

AAM's net debt to EBITDA ratio, at September 30, 2011, on a GAAP derived basis was approximately 2.5 times.

Excluding the impact of the special charges and other nonrecurring item that we incurred this year principally in the third quarter, this ratio improved to 2.4 times on an adjusted basis.

In either case, adjusted or unadjusted, our current EBITDA leverage ratio is in good shape, tracking in line with our goal to be under 2 times by 2013, when we expect to return to investment grade credit metrics.

Also at September 30, 2011, AAM's EBIT to interest coverage ratio was 2.8 times, relatively close to our target of increasing this ratio above 3 times by 2013.

Total available liquidity at quarter-end was approximately $400 million.

So the bottom line on the third quarter of 2011 for AAM is this, unadjusted earnings of $0.33 per share, adjusted earnings of $0.48 per share, on total revenue growth of approximately 5% year-over-year.

Continued faster non-GM sales growth, this quarter at 18% or 3 times the pace of growth for the Company as a whole.

And continued, steady performance on our credit metrics.

We did not announce any changes in our guidance for the full year 2011 financial results this morning in our press release.

That is because our outlook for 2011 remains the same.

Sales for 2011 should be at the upper end of our guidance range approximately $2.6 billion.

Adjusted EBITDA should be in the range of 14.5% to 15%, again, that is in line with our previous guidance, and we expect to be near the upper end of this range of 14.5% to 15%.

This guidance implies stronger adjusted margin performance in the fourth quarter of 2011.

This is principally related to normalizing our research and development spend for the full-year 2011 trend rate of $27 million to $30 million that I mentioned earlier in my comments.

So to close my comments this morning, let me reiterate what we intend to do over the next 3 years.

Number one, we expect to deliver sales growth in excess of 10% a year and achieve total sales of $3 billion, actually exceeding $3 billion by 2013.

On a longer-term basis we are now targeting $4 billion of total sales by 2015, again, continuing our trend of a sales CAGR in excess of 10% a year during this time period.

Number two, we expect to continue to achieve EBITDA margins at the high end of our long-term guidance range of 12% to 15%.

In dollar terms, this means annual EBITDA generation should be in excess of $400 million, maybe approaching $450 million by 2013.

To finish, we achieve significant measurable progress on business diversification with non-GM sales growing twice as fast as our total sales growth to a target of 40% by 2013 and a target of 50% by 2015.

We expect to return to investment grade credit metrics by 2013.

By this we mean we expect to achieve and sustain EBITDA leverage solidly below 2 times EBITDA coverage solidly higher than 3 times and net debt to capitalization at 40% or lower with positive stockholder equity.

We expect all of this to drive significant enterprise value creation during this time period with a much larger share reserve for our stockholders.

This is our value proposition for you and anybody who cares about our Company.

That is all I have for this morning.

Thank you for our attention and Chris, we are ready for the Q&A.

(Operator Instructions).

Your first question comes from John Murphy with Bank of America-Merrill Lynch.

Good morning, guys.

My first question, on the R&D kick-up in the quarter, just curious, does that have something to do with the GMT 900 or the K2XX being pulled forward a little bit, and is GM being a little bit more demanding on some of the prototypes and stuff they need to see ahead of time?

Is their risk, as they do this through their whole product portfolio, that there could be some bump-ups in R&D that you might see for other programs?

John, Dick Dauch, good morning.

Number 1, it has nothing to do with that.

What we are going to do for GM, on the GM 900 replacement K2XX was already planned.

What we are doing, is our overall view of our business growth, our expansion of services to our customers throughout the world, and we are lighting it up.

Okay.

That is very helpful.

On the $1 billion, Dick, that you mentioned, that you were quoting on an addition to the big increase in the backlog, I was just curious, that $1 billion, what is the timeframe that it could potentially roll on, and if you could remind us what your past success rate, or hit rate has been on winning business that you're quoting on?

Yes, John, this is David Dauch.

Substantially, all the business that we are quoting as far as that backlog, or the $1 billion was non-GM related business.

Some of the business could come on as early as 2013; most of it is going to be in that 2014 period of time and beyond.

Our typical hit rate has been in the 20% to 30% hit rate.

Okay, great.

Lastly, out of curiosity, the Detroit and Cheektowaga real estate and facilities, presumably, you guys, even though you are taking these big charges, still own those.

Is there any chance in the future that those could be restarted or reused and be value-creating assets for you in the future?

When we have a plan to discuss that with you, John, we will tell you.

But, you still own those and they are still on the books, and they're still carried on the balance sheet.

They are yours.

We own them.

And we have a plan, and when we are prepared to tell you, we'll tell you.

Okay.

That is great.

Thank you very much.

Your next question comes from Brett Hoselton with KeyBanc.

Your line is open.

Thank you.

Good morning, gentlemen.

Mike, can you talk about the outlook for GNT 900 production.

You talked about second quarter going into third quarter but what are your expectations going into the fourth quarter, and then as you look out into 2012 and so forth, how do you think, or how do you see, or how is GM talking about the 900 going forward?

Okay, Brett.

Good morning.

A couple of things to point out here.

First of all, it looks like now that 2011 production rate -- total production for the GNT 900 will end up around 1 million units, more of less flat, a little bit higher than the 975,000 units that were built a year ago.

And as we look into 2012, we see this strong level of production continuing.

As you know, General Motors has increased their straight time capacity available for production on this program to 1.1 million units.

That's our estimate, but it should be very close to their estimate.

Brett, this is necessary because GM will be taking some down time in calendar year 2012 to ready their facilities to the 2013 launch of the successor program, K2XX.

There's plenty of capacity in calendar year 2012 to continue at the current rate, even factoring in the downtime.

Quite frankly, we are very encouraged as we look at the sales trends over the last 4 or 5 months and particularly the mix, the full-size scales, the pick-ups and SUVs as a percentage of the overall car, is spiking up quite high here as the year develops, even a little bit higher than the seasonality trends that we expected.

So, we would expect production in this program to remain pretty flat to where we are in 2011.

And then we would anticipate even higher volumes, quite possibly, most likely, as the K2XX is launched and GM exercises their full capacity for this program.

So, we are very bullish about this program and the prospects we have relative to sales over the course of the next couple 3 years.

Mike, as we think about the change over to the K2 program, can you talk just briefly about timing, but more importantly, how should we think about the change over impacting your margins?

Brett, this is David Dauch.

As far as the timing, we are not going to get specific other than 2013 calendar year launch that has multiple models that will roll into 2014.

We won't get into specifics as the plants or the models specifically themselves.

From a margin standpoint, we expect margins to be equal to or better than what we enjoy today.

I apologize.

I did not mean the margins on the new program versus the old program.

What I'm wondering is, normally during a launch period, margins decline a little bit for a company.

I'm wondering what your expectations might be?

We don't expect them to decline during the launch.

That's part of our overall planning process.

Thank you very much, David.

Your next question comes from Himanshu Patel with JPMorgan.

Your line is open.

Hi.

This is [Vivek Alou] for Himanshu Patel this morning.

I have a couple of few questions -- couple of quick questions.

Number one, on your backlog.

Did you guys provide any annual cadence for the backlog and maybe your non-GM sales mix it seems -- it goes from 25% right now to 40% in 2013, can you provide any trajectory on how to grow from 25% to 40% eventually?

Vivek, we haven't really publicized that, and we are not planning on publicizing it as far as the percent of GM other than the 40% by the 2013 period of time and 50% by the 2015 period of time.

As it relates to your earlier question, as far as the cadence of the $1.1 billion backlog, it will be $350 million in 2012, $400 million in 2013 and $350 million in 2014.

Okay, thank you.

My second question was on your 2011 sales guidance.

I guess you guys maintained your sales guidance.

It was despite the fact that CSM has in the past 2, 3 months has raised up the forecast for T900 platform in both third quarter and fourth quarter.

Are you guys just getting conservative here, or maybe you already had higher production forecast for T900.

Or maybe if you can disclose what is your T900 forecast for this year.

This is Mike speaking.

Listen, we've talked with Himanshu and other investors and analysts over the course of the year reconciling the CSM estimates with ours.

The CSM estimates has been significantly lower than the expectations that we had for this program through the course of this year.

Quite frankly, the GM communicated to the supply chain very directly.

I don't know why that is the case.

So, I would say that it is really a case of CSM catching up with the reality.

And we have not changed our outlook for this program from the first day of the year.

We expected relatively flat to slightly higher volumes in this program.

That is exactly where we are at.

That is the reason why our guidance has been consistent throughout this time period.

The last question was on your current quarter.

Your EBITDA fell roughly $15 million this quarter on a roughly $40 million sequential revenue decline, which implies roughly 40% sequential decremental margins.

This is despite the fact that you guys collared some of the charges related to your planned closure of the Trident Cheektowaga facilities.

Did you guys incur any incremental manufacturing inefficiencies in the quarter.

Or maybe there are other items driving down the EBITDA margin this quarter?

Please explain.

I am glad you asked this question.

Let me address it very directly.

We view our decremental margin in this quarter, third quarter versus second quarter, to be approximately 21% relative to EBITDA.

On an adjusted basis, our third-quarter EBITDA was approximately $93.2 million and this compares to adjusted EBITDA of approximately $101.4 million in the second quarter.

Recall, in the second quarter, we had a 1-time gain associated with the sale of equipment.

So really, when you take a look at our margin performance in this third quarter, there were no significant production or manufacturing inefficiencies of any kind to talk about.

We simply had this increase, a little volatility, in our research and development spend in this third quarter, which had an impact on the absolute margin, but when you look at the sequential decremental margin, it is pretty much in line with what we would expect at 21%.

Okay, that is very helpful.

Thanks a lot.

Your next question comes from Rod Lache with Deutsche Bank.

Your line is open.

Good morning.

It is Dan Galves in for Rod.

It seems like the backlog of new business is increasing significantly in 2012, maybe 150 year-over-year, to about 350 in 2012.

Can you help us with the cadence of how that new business comes on quarterly, and are there any specific year-over-year launch costs that we should be baking into the model for 2012?

As I said, we are not getting into the specifics of the launch cadence itself, and we have taken into consideration in our planning, what our launch costs are and it's reflective in the numbers that we have.

We are not giving guidance at this point in time for 2012.

What is critical to note is in the backlog is we are adding a lot of new business with Chrysler Fiat, expanding our relationship with Daimler and Mercedes Benz, growing the commercial vehicle business with Navistar and Volvo and Mack and Scania.

And then we've added new customers in JLR and Honda.

And then we've got some GM business in the backlog as well.

So we're getting the customer diversity that we've been looking for and we've been stating we've been going out and conquesting, and you are going to start seeing more and more of the non-GM sales impact our future sales going forward as a Company.

More on a long-term basis.

It sounds like you are basically telling us that even though the non-GM percentage of your business is going up significantly, that it shouldn't impact the EBITDA margins that you are putting up right now by 2013.

Can you just remind us of how you are thinking about the range of the long-term margins?

What are the biggest impacts that we should be looking at in terms of whether you'd be closer to the middle or closer to the high end of the 12% to 15%?

Dan, again, this is Mike speaking.

Our long-term EBITDA guidance range, we've had out there.

We continue to believe it's the right way to assess our business.

The range of 12% to 15% EBITDA margin.

12% implies relatively lower capacity utilization, and relatively high material cost inflation.

That is not the environment that we have been operating in for 2010 and 2011.

We have been at the higher end of our range, which is characterized by very strong capacity utilization, and relatively modest or moderate material cost inflation.

So our capacity utilization has been strong and inflation has been moderate.

As we look out over the next couple of years, we would see a few things.

Number 1, we would expect material cost inflation at least in the 2012 to 2013 time period to be going up a little bit, relative to where we were in 2010.

We don't really see any major issues in terms of our production efficiency or the margin performance associated with the new business backlog.

There's quite a lot of this backlog that launches in existing facilities, where we have infrastructure ready to go and so this is going to be very accretive to places like Thailand, Brazil, China, and India.

So that will help us in terms of overall margin performance.

Big picture, we would expect to moderate a little bit from the very top end of our guidance range but we definitely see ourselves, Dan, in the upper half of that guidance range based on what's in front of us and what we plan to launch.

Thanks, that's impressive.

One more question.

Is there anything you can update us on in terms of your pension or OPEB underfundedness how that's moved this year?

Yes.

Absolutely.

This question is one that unfortunately we can't answer with any precision until December 31st, because we won't set the discount rate until that point in time for -- for the actual measurement.

But I can tell you this.

We started the year at roughly $253 million in unfunded deficit.

We are making contributions.

We are realizing asset return in this plan.

So we expect, other than for the discount rate, to reduce this deficit during the course of this year.

Right now, it looks like we would reduce our discount rate in the range of 50 to 75 basis points if we were to measure these liabilities right now, and that would suggest that our unfunded deficit may increase on a net basis of all these factors by somewhere around 10%.

So not a significant move, and I would simply point out that it's quite possible by the time we get to the end of the year, and depending on where the interest rate market is, and asset returns are, it's quite possible we could do even better than what I just told you, but we don't see any significant increase in this pension deficit at the end of this year.

Okay, thanks.

How about OPEB?

OPEB, we would expect to see relatively consistent.

There's a little bit of a discount rate move there, so maybe the net OPEB liability for our Company, maybe that increases to approximately $300 million.

Keep in mind, that liability is a long-dated light cash call liability for our Company.

It's equivalent to a 5% debt obligation, if you compare the annual funding requirements to the book value of the deficit, or in this case, the liability.

So that's not something -- we don't think that's in the same category at all, as it relates to the pension deficit.

That pension deficit is a debt that we intend to pay off over the course of the next 3 years, and right now, it looks like we are going to be successful doing it.

Great, thanks a lot.

Your next question comes from Chris Ceraso with Credit Suisse.

Your line is open.

Hi, guys.

This is Rob Moffett filling in for Chris.

Good morning.

I just want to go back to the idea of the potential for operational inefficiencies.

I understand that they're specifically related to the facility closures.

I understand there weren't any this quarter, and could we expect them in maybe 1Q or 2Q 2012 as you physically shut down the production and shift it?

No.

Look, we will incur some costs that are contained within the $30 million that I told you to expect, roughly $15 million this year and next year, but we expect to incur nothing more than those costs to effect this transition.

This is relatively straightforward -- it's a very important, very complex activity we're undertaking, I don't mean to under-sell that at all, but it's something we do in the normal course of business every day.

We know how to do it, we're prepared to do it, we have excellent corporate and management expertise, and we will execute this for our customers flawlessly and unanimously, and within this guidance that we're providing to you today.

That's our strong field.

Okay, and then, so, ex the costs, which will be roughly $15 million in 2012, we should expect to then see the total annual cost savings of $15 million to $20 million in 2012?

Yes, maybe not quite the total, because we won't have that business relocated and operational until March, but we're going to get a good amount of that in 2012, and you'd expect to see the full impact in 2013.

Okay, fair enough.

And just going back to the topic of material cost inflation, I think you mentioned that you expect that to be higher in 2012.

I guess, can you give us like a cadence from where we are today in 2012, do material costs go lower through the first half of 2012 and then accelerate in the back half in your view, and what specifically are we talking about?

Is that all steel?

Well, Rob, You know the nature of our products.

We are, obviously, heavily dependent on metals.

Listen, we're not prepared to give you any guidance relative to 2012 today, other than sort of the general issue that we expect material cost inflation to be a bigger headwind, that shouldn't be news to anybody, in fact, we've been hearing about it from all of you for months now, in terms of what to expect.

We do expect more cost inflation relative to this issue.

I can think of only one other time period since I've been with the Company, and that was 2004-2005, where we have a net material cost inflation budget assumption.

It's not a huge number, but it is a net material cost inflation, and it's an issue that we and other companies are managing through.

At this point, we don't see any significant quarter-to-quarter differences, and we don't buy in the spot market, Rob, we buy over longer-term agreements with our suppliers, and so when we do provide additional color on 2012, we can speak a little bit more to this issue, but we don't see -- we're not going to talk about the quarter-to-quarter issues, because we don't really see any that are significant to talk about at this point in time.

All right, fair enough.

Thanks, guys.

Your next question comes from Ravi Shanker with Morgan Stanley.

Your line is open.

Good morning.

I don't think I heard you guys talk about this yet.

Could you walk us through a bit what, if any, impact you guys are going to see from this highland flooding?

This is David Dauch.

From a highland flooding standpoint, our direct facility is not impacted by the flooding.

We do have a couple of suppliers that we're working with, but we continue put contingency plans in place.

The bigger thing that we'd need to adjust our operations would be to what GM's schedules are, and right now, it does look like they are being impacted.

We don't know the total amount yet, but we'll adjust accordingly.

I think you'll a slower ramp through the balance of this year, and then they'll get their issues under control, and then we'll be right at it from a full ramp standpoint.

Okay, but the new time facility won't be delayed in any way?

No, our facility is ready to rock and roll.

We're adjusting to the customer.

Okay, great.

Thank you.

All right, thanks TJ.

We've got time for 1 last question.

Your last question comes from Peter Nesvold with Jefferies & Co.

Your line is open.

Good morning.

This is Elliott Lawrence for Peter.

How are you?

Good morning.

Sorry if I might have missed the beginning of your call.

I just wanted to delve in slightly on the gross margins for the quarter.

I'm not sure if you could give some color on the impact in terms of steel coverage from GM.

Was that point at all for the gross margins this quarter?

I'm sorry, please repeat the question.

Sure, just was curious, a little bit more color on the gross margins for you guys.

Wondering if steel recoveries from GM, if that had any impact on individual --

No, no.

Listen, if you adjust for one issue, and that is the special charges we took relative to the closure of Detroit and Cheektowaga, and the third quarter, the dominant issue was an impairment charge that we were required to take under GAAP relative to our Cheektowaga assets, if you adjust for that issue, our gross margin in the quarter was roughly the same as what it has been all year.

There was no significant issue relating to the GM agreement other than for the third quarter of 2011, and this was of course an important issue, but one that I think you already know about, we terminated the early opinion terms on June 30, and now, no longer pay GM a 1% discount.

That discount was returned to our sales and operating margins in the third quarter, so that was actually a factor, a favorable factor, offsetting some of the other issues that we talked about, but no, there was no other significant issues.

Okay, so assuming that you're not going to have the same type of issues, you mentioned some cost issues in the quarter.

Ex those, I guess it was $4 million, should be expected in the fourth quarter in terms of plant closures.

The margins shouldn't be impacted by anything else externally?

Right.

The plant closures -- we will see some additional 1-time costs associated with the plant closure activity and redeployment in the fourth quarter.

The GM commercial agreements are static, third quarter versus fourth quarter, they'll be relatively consistent.

We expect to have another strong quarter from an operating performance standpoint.

We're executing, the volumes are there, shouldn't be much of a change, quite frankly.

Very good.

Well thanks, and congratulations on a good quarter.

All right, thank you.

All right.

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

We look forward to talking with you in the future.

Thank you.

This concludes today's conference call.

You may now disconnect.