American Axle & Manufacturing Holdings Inc (AXL) 2012 Q2 法說會逐字稿

> Operator Good morning.

My name is Tracy 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 2012 Earnings 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) Thank you, Mr. Christopher Son, Director Investor Relations, Corporate Communications and Marketing, you may begin your conference.

Thank you Tracy, and good morning, everyone.

I'd like to welcome everyone who is joining us on AAM's second quarter 2012 earnings call.

Earlier this morning, we released our second quarter 2012 earnings announcement.

You can access this announcement on the aam.com website or through the PR news wire services.

To listen to a replay of this call, you can dial 1-877-278-1452 and provide the reservation number 95285667.

This replay will be available beginning at noon today through 5 PM Eastern Time August 3rd.

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 can not be predicted or quantified, 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 this call, we may refer to certain non-GAAP financial measures.

Information regarding these non-GAAP measures as well as the 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 in New York City.

The JP Morgan 2012 Automotive Conference on August 13th and 14th.

The Credit Suisse Automotive and Transportation Conference on September 4th and 5th.

And the Morgan Stanley Industrial and Automotive Conference on September 12th and 13th.

We also participate in the RBC Capital Markets Conference in Las Vegas on September 12th and 13th, and the Citibank Global Industrial Conference in Boston on September 19th and 20th.

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 Cofounder Chairman and CEO, Dick Dauch.

Thank you Chris, And good morning to everyone.

Thank you for joining us today to discuss AAM's financial results for the second quarter of 2012.

I have several men joining me today, David Dauch, AAM's President and Chief Operating Officer, John Bellanti, our Executive Vice President of Worldwide Operations, along with Michael Simonite, our Executive Vice President and Chief Financial Officer.

To begin my presentation today, I will provide some highlights of AAM's second quarter with 2012 results.

I'll also review the status of AAM's key business initiatives before turning things over to Mike.

After, that we will open the call up to you, ladies and gentlemen, for any questions you might have.

Let me first state that AAM's financial results in the second quarter of 2012 were highlighted by strong sales growth, solid profitability and positive free cash flow.

Our second quarter financial results include the following-- first, for the second quarter of 2012, AAM sales were approximately $740 million.

On a year-over-year basis, AAM sales in the quarter were up approximately $54 million, that's an increase of approximately 8%.

Second point, AAM generated positive free cash flow of $48 million in the second quarter.

And third point, there is one other item to mention regarding our financial results for second quarter 2012.

Our results in the quarter reflect the adverse impact of a special charge and restructuring costs of $36.5 million equivalent to $0.49 EPS, primarily related to the final closures of the Detroit manufacturing complex and Cheektowaga Manufacturing Facility.

As mentioned in our release this morning, these charges included $28.1 million of expense for a contingency related to pension and post retirement benefits.

Mike will cover additional details of this special charge in our financial results later in the call.

Let me now update on you AAMs strategic business initiatives.

First point, AAM continues to focus on delivering industry leading technology innovation for our customers.

This includes an aggressive plan to increase investment in new products, processes, and systems technologies.

In support of these efforts, AAMs R&D spending for the quarter was $28.8 million.

This compares to $27.3 million spent in the quarter year-over-year.

And $30.1 million in the first quarter of 2012.

On the year-to-date basis, our R&D spending has been $58.9 million in the first half of the year of 2012, as compared to $53.6 million in the first half of 2011.

Our Company continues to invest in many new and innovative products focused on the most important industry growth trends.

Such as enhancing fuel efficiency and meeting market demands for lower emissions through AAMs EcoTrac track brand of fuel efficient and environmentally friendly products.

This is helping our customers and boldly the consumer.

This includes AAM's innovative EcoTrac disconnecting all-wheel drive systems.

This system enables a vehicle manufacturer to offer a fuel efficient, environmentally friendly option to provide the safety ride and handling performance of an all-wheel drive assisted [propentiary] car and over crossover vehicle application.

AAM's introduction of the EcoTrac Disconnecting All-Wheel Drive System is perfectly timed for the market as the global OEM's are driving to meet these tighter fuel efficiency and carbon emission standards.

AAM's EcoTrac disconnecting all-wheel drive system is an industry first.

We are the leader.

It's a great example of how AAM is using innovation to strengthen our positions of product process and systems technology leader.

Our Company is also advancing the development of electric drive systems for electric and hybrid vehicles, as well as electric all-wheel drive systems known as E all-wheel drive.

In this area of product development, we continue to leverage AAMs wholly-owned subsidiary e-AAM drive line system based in Trollhatten, Sweden.

AAMs E all-wheel drive systems are designed to improve fuel efficiency and significantly reduces CO2 emissions the driving things for the marketplace.

This is done while enhancing vehicle stability through the use of our proprietary torque vectoring attributes.

These continue to be significant interests in these new products from customers and regions throughout the world.

We are very confident e-AAM's innovative patent protective product lineup will allow us to play a leading role in the development of these important new drive line product segments.

And finally, AAMs technology innovation is expanding and diversifying throughout our global product portfolio.

Our AAM commitment to continuously enhancing existing drive line technologies while also developing new products to support industry growth segments is vital to our success as we continue to earn new business.

This includes first front and rear axles, drive shafts, transfer cases for light truck and SUV application.

Second, rear drive modules, power transfer units and multi-phase drive shafts for passenger car and crossover vehicles.

As well as third, front and rear axles for commercial vehicles.

These successful R&D investments are driving AAM to address a second strategic business initiative.

That being to deliver profitable growth by expanding AAM's new business backlog.

In the second quarter of 2012, AAMs new business backlog increased by approximately $100 million.

This increase primarily reflects expanding awards from multiple global OEM's for programs in both North America as well as Asia.

These expanded programs are expected to launch in the years of 2013 and 2014.

As a result of these new awards, AAMs new business backlog for the years 2012 through '14 is now grown to $1.2 billion gross.

Approximately $350 million of AAMs new business backlog is launching this year 2012.

An additional $450 million will launch in 2013 and the remaining $400 million the following year of 2014.

Approximately 50% of this $1.2 billion in new business backlog is related to passenger cars and crossover vehicles.

More than $600 million of AAMs new business backlog will support our growth in the expanding market [strell] toward Brazil, China, India, and Thailand.

AAM's success in building the new business backlog demonstrate the critical importance of the R&D investments we've had throughout the creation of this Company.

In addition to the booked business and our new business backlog, AAM is currently quoting another $900 million of potential new business opportunity.

This quoting activity provides us with an excellent opportunity to further advance our profitable growth and diversification of [justees].

In the coming months, as these developing programs mature to sourcing decisions.

The third and final strategic objective I will highlight this morning is AAM's rapidly improving business diversification.

75% of the programs in our new business backlog are for customers other than the General Motors Company.

They include business awards from Chrysler and Fiat, Volkswagen, Audi, Scania, Nissan, Jatco, Ford, Dymer Truck, Mercedes Benz, Tata Motors, Jaguar-Land Rover, Volvo Powertrain, Mack Truck and Honda.

In addition, approximately 90% of the new business opportunities we are currently quoting, are for customers other than GM.

Together with the launch of our new business backlog, these new business quoting opportunities and other corporate initiatives are expected to drive our non-GM sales close to 50% of our total sales by 2015.

AAMs business diversification efforts also include a significant expansion of business outside of our home market of North America.

Over the past several years, AAM has successfully established a regionally cost competitive and operationally flexible global manufacturing, engineering and sourcing footprint and that's what we've been trying to accomplish.

AAM is now benefiting from many new business opportunities in the fast-growing market of Brazil, China, India, Poland, and Thailand.

Our Company had several major launches remaining yet in this calendar year of 2012.

First, product supporting Dymer's light and heavy-duty commercial vehicles launching at AAM's Pune manufacturing facility and Chennai manufacturing facilities in the country of India.

Second, new transfer case business with Jaguar's Land Rover launched at AAM's Albion subsidiary operated and located is Glassville, Scotland.

Third, we're launching our EcoTrac rear drive module and front drive units for front and rear drive shafts for the all new Cadillac ATS here in North America.

Fourth, we're completing the launch of GM's global mid-size pick-up truck and related derivative product launching in AAM's Araucaria manufacturing facility in Brazil, along with its sister plant Rayong manufacturing facility in Thailand.

Finally, the Tata Ace drive shaft program will be launching at AAMs Pantnagar manufacturing facility located in the northern piece of India.

Before I turn this over to Mike, let me wrap up making a few closing remarks, beginning with AAMs 2012 outlook.

For the full-year of 2012, we expect total US light vehicle sales to be approximately 14 million vehicle units.

This is at the top end of the range that we provided earlier this year.

Based on the industry sales assumption and the anticipated launch timing of AAMs new business backlog, we expect AAMs full year 2012 sales to be hovering around $2.9 million top line.

This applies a full year sales growth rate of approximately 12%.

AAMs profitability will be solid with adjusted EBITDA margins approximating 14% of sales.

In closing, let me emphasize that AAMs the top priority right now is to make effective preparations for the many new product launches that we have scheduled later this year and continue through 2013.

During this time period, we expect to profitably grow AAM sales and significantly improve AAMs business diversification in terms of product mix, customer base and serve markets with the best technology in the business.

AAM has the right management team in place to achieve these goals, and our workforce is very tuned to accomplish things.

AAMs regionally cost competitive, high quality and operationally flexible manufactured footprint is firmly established.

AAMs advanced product process and systems technology positions has us as a leader in product innovation and operations performance.

And finally, we're making excellent progress diversifying AAMs business profile to the growth of our business backlog which now stands at approximately $1.2 billion for programs in the years of 2012 through '14.

That concludes, ladies and gentlemen, my comments for the morning.

I thank each and every one of you for your attention today, and your vital interest and support in AM.

Let me now turn this call over to our Executive Vice President and Chief Financial Officer, Michael Simonite.

Mike?

Thank you Dick, and good morning everybody.

Dick already covered the highlights of our second quarter earnings this morning.

My job is to address further details, starting with sales.

Our net sales in the second quarter of 2012 includes approximately 8% to $740 million as compared to $686 million in the second quarter of 2011.

This year-over-year increase in sales was principally driven by the launch of new business in 2012.

In the second quarter of 2012, AAM launched approximately $85 million of new business.

The most significant launch activity in this quarter supported GM's global pickup program referred to as the GMI 700 from our manufacturing facilities in Araucaria, Brazil and Rayong, Thailand.

We also supported the launch of the Mercedes C and E-class vehicles for the China market from our Changshu, China Manufacturing Facility.

This launch activity drove an increase of nearly $50 million in AAM sales outside of North America on a year-over-year basis.

Over the next three years, AAM expects to launch over $600 million of new business of the markets of Brazil, China, India, and Thailand.

In fact, more than $250 million of this new business launching in these fast growing markets is launching in this calendar year 2012.

This is a very positive development in terms of AAMs business diversification, which as Dick noted is rapidly improving.

¶ On a sequential basis, AAM sales in the second quarter of 2012 were down approximately $12 million or 2%, as compared to the first quarter of 2012.

The primary driver of the sequential decrease was lower production volumes for the GMT-900 program.

In the second quarter of 2012, GM produced approximately 260,000 vehicles in the GMT-900 program.

That compares to 290,000 in the first quarter of 2012.

An increase in new business launched in this quarter, as compared to the first quarter partially offset the decrease in GMT-900 volume.

In the second quarter of 2012, AAM's non-GM sales increased by approximately 8.5% on a year-over-year basis to $198.2 million.

As a percentage of total sales and has adjusted for the impact our Hefei, China joint venture, AAM's non GM sales were approximately 30% of total sales in the second quarter of 2012.

AAMs content per vehicle is measured by the dollar value of our product sales supporting our customers North American light truck and SUV programs.

In the second quarter of 2012, AAMs content per vehicle was $1,439 as compared to $1,504 in the second quarter of 2011, and $1,475 in the first quarter of 2012.

A reduction in deferred revenue recognition related to the 2008 AAM GM agreement and lower four-wheel drive penetration in our customer's North American light truck and SUV programs, were the principle factors driving the lower content per vehicle in the second quarter of 2012, as compared to the second quarter of 2011 and sequentially as compared to the first quarter of 2012.

In the third quarter of 2012, we expect our content per vehicle to bounce back to approximately the same level as in the first quarter or $1,475 and that's really the extent of the seasonal differences in the second quarter as it relates to four-wheel drive mix.

Okay, let's move now to our profitability.

Gross profit was $85.8 million, or 11.6% of sales.

Operating income was $30.3 million, or 4.1% of sales.

Net income in the quarter was $4.7 million.

And our diluted EPS was $0.06 per share.

All of these key profitability metrics were adversely impacted by special charges and restructuring costs that totaled $36.5 million, or $0.49 per share in the quarter.

This included $28.1 million of expense for a contingency related to pension and post retirement benefits, and I'll explain more about that in just a minute.

And $8.4 million of restructuring costs related to the closure of the Detroit Manufacturing Complex and Cheektowaga Manufacturing Facility.

We recorded the contingency charge in the second quarter due to the impact of new legislation enacted in July of 2012.

Among other things, this new legislation known as MAP-21 or the Moving Ahead for Progress in the 21st Century Act, provides pension funding relief for planned sponsors with under funded pension plans.

Pursuant to this legislation, which was signed into law by President Obama on July 6th of this year, 2012, we estimate that our US statutory minimum pension funding requirements under IRS regulations in the calendar years 2012 and 2013, could be reduced by a total of approximately $20 million.

That's really the benefit associated with this new legislation.

We accrued the contingency charge of $28.1 million in the second quarter of 2012, because we may be required to provide pension and post retirement benefits to certain associates who terminated employment AAM as a result of the closure of the Detroit Manufacturing Complex and the Cheektowaga Manufacturing Facility.

This potential benefit obligation, results from our unique circumstances related to the timing of the closure of these two facilities, the funded status of our pension plans at the beginning of the year, and the impact of this new legislation which again, was signed into law on July 6, 2012.

It is important to note the $28.1 million contingency expense was a non-cash charge.

And also, that any benefit obligations that may result from this matter will be paid out over the next few decades.

Literally decades.

So to recap, we expect our US statutory minimum pension funding requirements under IRS regulations could be reduced by a total of approximately $20 million in 2012 and '13 as a result of the new MAP-21legislation.

Also as a result of the impact of this new legislation, we accrued a non-cash contingency charge of $28.1 million in the second quarter of 2012.

In the second quarter 2012, AAM's GAAP derived EBITDA or earnings before interest expense taxes, depreciation, and amortization, was $66.8 million or 9% of sales.

Excluding the impact of the special charges and restructuring costs related to the closure of our Detroit Manufacturing Complex and Cheektowaga Manufacturing Facility, AAMs adjusted EBITDA in the second quarter of 2012, was $103.3 million or 14% of sales.

Adjusted earnings per share was $0.55 per share, adjusted only again for the closure of the Detroit Manufacturing Complex and Cheektowaga Manufacturing Facility the charges associated with those closures.

Now let me anticipate some questions about the quarter and review three items that affected the comparison of our earnings in the second quarter of 2012 to other periods.

And there will be additional detail on our 10Q on some of these matters.

The first issue is that our gross profit in the second quarter of 2012 reflects the favorable impact of a $5.2 million gain related to the termination of the Legal Services Plan.

Under this plan, we previously provided benefits to certain of our UAW representative associates under a contract that expired earlier this year.

This type of benefit is not market cost competitive.

As a result, we terminated the plan once we were free of the contractual obligation to provide the benefit.

This action was taken separately and independent of our decision to close the Detroit Manufacturing Complex and the Cheektowaga Manufacturing Facility.

In fact, none of the gain we recorded in second quarter of 2012 related to the associates who terminated in connection with the closure of these facilities.

The accounting for benefit terminations in Detroit and Cheektowaga was included in the curtailment gain in the first quarter of 2012.

The second issue affecting the comparability of our financial results in the second quarter of 2012 versus prior periods, is a reduction in the amount of deferred revenue recognition related to the 2008 AAM GM agreement.

Beginning in the second quarter of 2008, and extending through February of 2012, we recorded approximately $4.7 million of deferred revenue recognition each month related to this agreement.

Again under this agreement, GM provided AAM a total of $213 million of financial consideration to share in the cost of transitioning UAW representative associates at our original US locations to a market competitive labor cost structure, and of course now that's been completely accomplished since 2008.

Also during the same time period, starting in the second quarter of 2008 and extending through February of 2012, we recognized the cost of a buy down program for UAW representative associates who continued to work at the original AAM US locations and amortization expense.

In the first quarter of 2012, AAM recognized the final two months of this non-cash deferred revenue and buy down program amortization expense.

On a year-over-year basis, as compared to the second quarter of 2011, the net impact of the cessation of this deferred revenue and amortization expense recognition, was a reduction in sales revenues of approximately $14 million in the quarter.

And a net adverse profit impact of approximately $10 million.

On a sequential basis, compared to the first quarter of 2012, the net impact of the cessation of this deferred revenue and amortization expense recognition was a reduction in sales revenue of approximately $9.5 million and a net adverse profit impact of approximately $6 million.

Now the good news is, we've been talking about this for the last four year and from this point forward our sequential earnings comparisons will be apples-and-apples and there shouldn't be a reason to talk much more to talk about this.

The third and final issue I will address in terms of the comparability of our financial results in the second quarter of 2012, is warranty accounting.

In the second quarter of 2012, AAM recorded a warranty charge of $7 million related to a field action issued by our largest customer.

We are responsible for the cost of this field action, which relates to product we shift to GM and prior periods, not the second quarter of 2012.

This is the first time we have incurred a field action liability.

Before I move on to SG&A, interest and taxes, let me update on you material cost inflation.

As we mentioned in previous discussions about our cost structure this year, material cost inflation is adversely impacting our profit margins in 2012.

For the full-year of 2012, we expect AAM's net material cost inflation to be approximately $35 million to $40 million.

This is about 110 to 130 basis points of margin headwind, and while this is reasonably consistent with our commentary at the end of the first quarter of 2012, it is a larger headwind than what we thought going into the year at roughly 70 to 90 basis points of margin impact.

Approximately half of this full-year impact was incurred in the first two quarters of 2012.

Let me now shift here into SG&A, interest, and taxes starting with SG&A.

In the second quarter of 2012, SG&A, and this includes our R&D spending, was approximately $55.5 million or 7.5% of sales.

This compares to 8.6% of sales in the second quarter of 2011, and 8.2% in the first quarter of 2012.

The decrease in SG&A spending in the second quarter of 2012 as compared to the prior year, reflects lower compensation accurals, partially offset by increased R&D spending.

AAM's R&D spending in the second quarter of 2012 is $28.8 million.

This compares to $27.3 million in the second quarter of 2011, and $30.1 million in the first quarter of 2012.

As we expected, our second quarter of 2012 R&D spending was down a bit from the first quarter of 2012, due to the timing of certain validation and prototype requirements.

Interest expense in the second quarter of 2012 was $23.4 million.

This is up approximately $3 million on a year-over-year basis.

The primary reason why interest expense was higher in the second quarter of 2012, is the impact of higher average outstanding borrowers.

Keep in mind that we issued $200 million of unsecured notes in the fourth quarter of 2011.

Our quarterly run rate of interest expense increased to approximately $24 million as a result of its issuance.

And finally, taxes.

AAM's effective tax rate in the second quarter of 2012 was approximately 27%.

If we adjusted our pretax income for the impact of the non-cash contingency charge of $28.1 million, which did not impact our tax expense in the quarter, AAM's adjusted effected tax rate in the second quarter of 2012 was approximately 5%.

And that's more or less in line with our expectations for this year.

If you have further questions about our tax accounting, just ask in the Q&A period.

Okay let's move on to cash flow.

We define free cash flow to be net cash provided by or used in, in this quarter it was provided by, operating activities, less capital expenditures net of proceeds received from the sale of equipment.

GAAP cash provided operating activities in the second quarter of 2012, was $96.1 million.

Capital spending, net of proceeds from the sale of equipment in the second quarter 2012, was approximately $48.1 million.

Reflecting this operating activity in Cap Ex, AAM's positive free cash flow in the second quarter of 2012, was approximately $48 million.

Now our cash flow results in the quarter included $12 million of cash payments for restructuring actions related to the closure of the Detroit Manufacturing Complex and the Cheektowaga Manufacturing Facility.

It also includes $10.6 million of pension debt payments.

Another factor impacting our cash flow, is the way GM changed the administration of our payment terms beginning in the first quarter of 2012.

As we mentioned in last quarter's earnings conference call, the change to quote-unquote pay and receive terms by GM, adding approximately one week of float in our receivable balances due from GM beginning in 2012.

Based on our current and projected shipment levels and the mode of logistics selected by GM for these shipments, we estimate the aggregate impact of this change to be approximately $40 million in the first three quarters of 2012.

For the first half of 2012, the first quarter and second quarter combined, we estimate the impact to be approximately $28 million.

$12 million of which was incurred in the second quarter of 2012.

If we adjusted our free cash flow results in the second quarter of 2012 for these three items, our free cash flow from quote-unquote running the business, would have been approximately $83 million in the quarter.

And with a strong underlined free cash flow profile at this point in time.

Before we start the Q&A, I will close my comments this morning by commenting on our 2012 outlook.

As Dick mentioned, we are expecting full-year 2012 sales to increase approximately 12% this year to approximately $2.9 billion.

For the full year of 2012, we expect to be solidly profitable with an EBITDA margin of approximately 14%.

Due to the impact of seasonal fluctuations and production and the timing of the GMT900 plant shutdown activity, AAMs sales mix is expected to be weaker in the second half of 2012, as compared to the first half of 2012.

On the GMT900 program alone, we expect production volumes to be lower by 75,000 to perhaps as much as 100,000 in the second half of the year as compared to the first half of the year.

The accelerated pace of news business launch activity in the second half of 2012, will also pressure our margins a bit as we move through the ramp curves on multiple new programs.

Dick mentioned a number of these in his comments.

And as a result, we will experience lower capacity utilization for the early periods of launch, and that's a normal expected situation.

But it's going to affect our margins in this second half of the year.

¶ We expect these dynamics again to drive a lower margin profile as compared to our profit margin performance in the first half of 2012.

But we do see these as temporary challenges that are directly attributable to the process of expanding and diversifying our business.

The important thing, is that we are well-positioned to benefit from the profitable growth and diversification attributes of these launches, including the 2013 launch of GMs all new full-size pickups and SUV's, which is now just around the corner.

So strong profitable growth for our Company.

Excellent progress on diversification, and we're going benefit significantly as these programs reach their maturity and launch, which will be just 6 to 9 months after they in fact do start their launch.

So that is the end of my comments this morning.

Thank you for your time and participation on the call today.

I'm going to stop here and turn the call back over to Chris so that he can start the Q&A.

Okay.

Thank you Mike, and thank you Dick.

We've reserved some time to take some questions.

Due to the number of analysts covering our Company, I'd ask that you can please try to limit your questions to no more than two so we can accommodate everyone.

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

I'll turn the call back over to Tracy for Q&A.

Itay Michaeli with Citi Group.

Thanks, good morning.

Mike, just wanted to clarify what you just said about the GT900 in the second half of the year, was it 75,000 to 100,000 units lower year-over-year?

And then what would that bring the full-year production assumption to?

Yes, no I didn't say year-over-year.

At least I didn't intend to.

What I said was the second half will be lower than the first half of the 2012.

In the first half of 2012, production for this program was approximately 550,000 units.

We see production in this program running between 1 million and maybe 1,025,000 units for the year.

And so The back half of the year will be in the range of 450 million to 475 million.

Okay.

Great.

On a year-over-year basis, I don't have that comparison handy.

But we wouldn't expect to be down year-over-year.

But the specific point I was making, Itay, had to do with the comparison to the first half of the year.

Great.

Thanks, I just wanted to clarify that.

Thanks.

And then how should we think about the cadence of margins in the second half of the year in terms of what you're seeing right now in your production schedules as well as the launches?

How much lower do you think, roughly, Q3 might be than Q4?

Yes, that's a good point.

I probably should have mentioned that in my comments.

The third quarter margin performance should be the lowest for that quarter of our year.

We will have the most launch activity beginning in the third quarter versus the fourth quarter.

And the fourth quarter will begin to benefit from more mature ramp curves and better capacity utilization as it relates to these new programs.

The other thing, Itay, that will affect the third quarter a little bit harder than the second or the fourth quarter for that matter, is the impact of the GMT900 shutdown activity as they continue to prepare their facilities for the launch next year, the K2XX.

In the third quarter of 2012, we see approximately 11 weeks of shutdown activity, and notably and importantly, including five weeks in Fort Wayne, which is their highest volume producing facility.

So, we'll see -- we believe we'll see the third quarter 2012 GMT900production to be the lowest all year, and significantly lower than where we were in the first and second quarters.

Great.

And just lastly, any impact in the quarter from the Hefei JV on equity income?

And how would you expect that to play out in the second half of the year?

Our joint venture in China, Hefei, China with the J&C group is experiencing lower production activity as it relates or as it prepares for the first quarter.

In the second quarter of the year, we had JV brought the contribution of approximately $300,000.

And we would expect the second half of the year to be similar to that, although we think it may be a little bit higher as it relates to that.

Okay.

Great.

Thanks so much guys.

Rod Lache with Deutsche Bank.

Good morning, everybody.

Just a follow up on your comments on the launch costs, just is it your view that the pressure on margins from the launch basically is primarily in the back half of this year or does that partially continue into the beginning of 2013?

Well, we have a much higher number of individual programs launching in calendar year 2012, as it relates or as it compares to 2013.

The difference with 2013, is we've got major programs launching.

So the dollar value of launch activity next year will be very significant.

But the activity that drives a significant amount of capacity utilization shortfalls and also the quote-unquote, launch costs would be higher in 2012 as we see it, as compared to 2013.

In 2013, most of the launch activity, not all, but most of it is the renewal of existing programs.

And so the processes, the people, the training methods responsible are required to launch that activity is very firmly established.

Whereas this year as I pointed out, $250 million of our new business backlog is in Brazil, China, India, and Thailand.

So, there's going to be a more significant impact on our margins as it relates to launch activity this year.

But again, I want to stress that the most significant aspect of our margin headwind this year isn't really quote-unquote launch costs, but it's the normal process of running at less than stated capacity during the ramp of volumes that are launched.

It typically will take between, maybe three to six months for our customers to exercise their full installed capacity on these programs.

And during that time period, the supply chain, as well as our customers are running at less than full capacity utilization.

And that's the significant driver of the margin differential.

Okay and how much of that $350 million of that new business came on this quarter?

Do you have a view on how much comes on in Q3?

Yes Rod, about $85 million of our new business backlog was in the mix in the second quarter of 2012, and we should be just a little bit more than $100 million -- around $110 million each of the third and fourth quarters in the back half of this year.

Okay.

And did I hear you correctly that you raised your 2013 backlog from $400 million to $450 million?

Or am I mistaken?

No, no.

That's correct.

We had a couple of programs expanded in terms of the activity level that we're supporting, and some of that launched in '13 and the balance of it launches in '14.

Okay, lastly sounds like your margins X deferred revenue and amortization were around 13.9% in Q1.

And it sounds like it ramped up a lot to, if I am correct in interpreting this, you had a $7 million warranty charge, so it was like 0.09 better than your reported number, maybe closer to 14.9% in this quarter, but on the lower T900 production.

Is that fair?

Well, we pointed out a number of issues, Rod, that affected our earnings this quarter.

And I think if we look at it that way that might be overstating the positives a little bit.

We had a $5.2 million termination date associated with the legal services plan that offset a significant portion of that warranty issue.

So, we see those two items as largely offsetting each other and the net margins to be a little bit lower than the 14.9% you --

Okay.

Great.

Okay.

Thank you.

John Murphy with Bank of America Merrill Lynch.

Good morning, guys.

Just first on the GM truck production as we think about the remainder of the year and the ramp into next year.

It seems like you're indicating that the third quarter, or it sounds like the third quarter will be around 200,000 units, and then the fourth quarter will be somewhere between 250,000 and 275,000.

I'm just curious, as you get into the fourth quarter and they ramp their plants back up with the new tooling, could they potentially go higher than that if market demand is there?

Would they be capacity constrained and could you produce more if more trucks were demanded?

Hello John.

This is David Dauch.

Mike gave you the numbers and they were pretty all spot on based on what you said there.

GM's got installed capacity on straight term 1.1 million units.

So they have the ability to flex up based on their ramp curve and activity there.

We're in a position that we can support General Motors if they have higher schedules.

John, the only thing I'd like to comment on briefly, I know David and you both were more focused on the fourth quarter.

But you're your comment about third quarter production was a little bit lower than what we see and maybe as a result, maybe your fourth quarter is a little bit higher.

The high end of your estimate for the fourth quarter would reflect I think some activity that is currently not contemplated by GM to react to market conditions, just as you and David alluded to.

But the third quarter will be a little stronger than 200,000 flat, and the fourth quarter probably in the lower half of the range, 250,000 to 275,000.

Okay.

That's helpful.

And if we think about the costs of launching for the K2 XX in sort of April-May next year, would you have incurred all of those this year and next year you'd just be running flat out.

Is that production ramped up or is there some incremental launch costs that will occur next year for that?

Well John there's always going to be some launch costs that are incurred as we launch new programs.

But as Mike said substantially most of our workforce and equipment is in place.

We've got some retool and a few new pieces of equipment that are going in below facts.

So therefore you always have some challenges with that when you launch that.

But as we normally say, we try to incorporate our launch costs into our overall cost planning it's an overall business and we don't really break that out.

We have incurred some launch costs this year in our global operations, as Mike has alluded, but we don't expect anything out of that from an abnormality standpoint going into next year.

Okay.

And then just lastly on the backlog, it seems like it's ramping up.

You have probably one of the strongest backlogs of any supplier out there now at this point for the next three years.

I'm just curious, as you're seeing quoting activity picking up, is there anything that' actually being cancelled or pushed back in your backlog?

Obviously, these are some uncertain times.

So there's some -- Seems to be some tugging and pushing on capital allocations.

But it sounds like you're seeing actually a pick up in quoting activity and maybe a beneficiary of some the weakness out there.

Just curious generally if could you comment on that.

To answer your question, we see nothing being pushed back from a customer standpoint that would negatively impact our backlog.

If anything, we see customers being aggressive on sourcing and program timing which provides an opportunity for us.

And as Mike indicated earlier, we're quoting over $900 million of business right now, substantially non-GM type business.

And we'll achieve our normal hit rate as is relates to the conquest of some of that business.

So we'll hope to grow that back end of the backlog if possible.

If not, then we'll start spilling into the 2015 calendar year, 2016 calendar year based on the programs we're working on.

Okay.

What was your normal hit rate on quoting activity?

I apologize.

I think you mentioned this before.

It said we were in the 25% to 30% range.

Great, thank you very much, guys.

Chris Ceraso with Credit Suisse.

Thanks.

Good morning.

A followup on the backlog question.

Can you just remind us out of that $1.2 billion how much represents programs that you're already supporting?

Very little.

Very little.

There's a very small portion associated with new content on a couple existing programs and the balance of the activity represents new programs.

Now in a couple cases, Chris, as we mentioned in our $100 million expansion of the backlog, that does relate to an expansion of existing awards.

Both of those programs, one of the programs is the GM I-700 program that's technically launching now.

But the capacity requirements for that program are increasing significantly, and so we've increased the amount of backlog associated with that program as it relates to the specific new investment we and to the extended supply chain is making to support higher volumes by GM.

Okay.

And then any programs that you know of that are going away?

Have you backed out to Colorado and Canyon, for example, out of that number?

Now, Chris, that's a great point.

I'm glad you brought it up.

The backlog disclosures that we've always provided are gross backlog disclosures.

The GMT355 program is the largest single expiring program that we have in our portfolio right now, and that should impact our sales in 2013 as it compares to 2012 by about $30 million.

There are other smaller programs that expired, particularly in the forging area or the sheeting area, not real large major axle programs that we're aware of in the 2012 to '14 time period, But we probably have a total of between $50 million and $100 million of expiring program activity resulting in a net backlog in the area of $1.1 billion.

Keep in mind as we reconcile gross to net, whether we talk about gross or whether we talk about net, we're up about $100 million as compared to our previous backlog disclosure.

Right.

Okay and the just to -- as a follow up, it sounded like the guidance was tweaked slightly that you're now talking about the high end of the range.

You previously were $2.9 billion instead of $2.8 billion to $2.9 billion.

And maybe at the low end of the margin range, 14.0% versus 14% to 14.5%.

Is that right, and what's behind the changes?

Yes Chris, this is David Dauch.

As Mike and I said all along, yes, the sales will be up around the $2.9 billion.

But the big issue for us on the margin side of things is the mature headwind that Mike alluded to, at the same time the capacity utilization.

As I've said to you many a times, our capacity utilization in our established facilities is very high right now.

But at the same time, as Mike alluded, we're working through the launch curves of many of our global locations and customer requirements.

So, therefore our capacity isn't fully utilized where it ultimately desires to be.

That's what's putting us at the lower end of the range.

So Mike, I don't know if you want anything else.

No, I think that sums it up.

Another way to think about it, Chris, the GMT900 volumes that we contemplated in our plan for this year are very consistent with our plan and the growth in our business.

The $100 million of additional sales beyond the low end of our initial guidance range is really non-GM programs.

And we've talked many times about the difference in contribution margin profiles of the programs other than GMT900 programs.

So I think it's just a math issue.

We're pleased with our margin performance this year.

It's going to be a little weaker second half of the year versus first half of the year, and particularly weaker in the third quarter as compared to the 14% zip code we have traveling in.

But that's just a matter of seasonality and launch timing, and we're well-positioned to benefit from our new business backlog moving forward.

Mike, I'm sorry, just to follow up, will this kind of carry into the first half of '13 where as you start to launch the K2XX, utilization might be lower in the first half until that program gets up to speed and then maybe in the back half of '13 you get back to pretty robust utilization levels?

I'll make a quick comment, and if David or John want to add.

The situation that GM has right now is that they've got more man capacity than they need so that they can have the adequate time to shut down facilities and properly launch the new program.

So, I don't see any material change in our capacity utilization on the full-size programs heading into next year.

We should see some improvements in capacity utilization on other programs, new watch programs for this year.

David just commented on that.

And so there's going to be a continuation of this current environment we're in of GM taking some shutdown time to make sure the launch goes well.

I think by the time we get to the back half of next year and certainly 2014, what we're going to be talking is upside to current production levels.

And that's really upside to capacity utilization and profitability outlooks that I'm sure GM will have and I know we have in the supply chain.

Okay.

Thank you very much.

Brett Hoselton with Keybanc.

Good morning, gentlemen.

I wanted to continue on with Chris' thought.

As you think about margins going into that 2013 timeframe, what do you see as being the major puts and takes regarding your margins, whether it would be commodities or GMT900, or whatever.

What do you see as the major pluses and minuses, Mike?

Okay, Bret, clearly the launch of the new full-size trucks, not just the K2XX program, but also the next generation Ram Heavy-Duty Series pickup truck programs.

We believe will be a net positive for our growth and our business going forward over the next couple years.

So, I point that out as a, certainly a good guy that's worth mentioning.

We do see some continuing material cost headwinds, but at this stage, we do not see the type of inflation in 2013 and '14 that we're experiencing in 2012.

But one of the reasons why our 2012 headwind is a little bit greater, maybe than what we thought or what others are experiencing, is that we had much lower material cost inflation in 2011 as a result of the timing of contracts, long term agreements we had in place.

And so I know anecdotally we felt like we benefited from lower material cost inflation in 2011.

And I think we're catching up to it a little bit here in 2012.

So I think that's a moderate continuing headwind heading into the next couple years.

And the other benefit that we're certainly focused on achieving is this higher capacity utilization on our launch -- our new launch facilities, Brazil, China, India, and Thailand.

There's a lot of new business activity launching in these facilities, and as we work through that process and get three months, six months, nine months into the process, we're getting better and achieving our business case profitability metrics.

But it takes some time to do that.

So, I think that those are probably the key issues that we're looking at.

The other thing I have to say in this context, is that as we grow our business, the GMT 900 program some of the existing full size truck programs are going to be a lower overall percentage of our total business.

We're growing our non-GM sales and our foreign sales much, much faster and these programs have a lower contribution margin profile.

And that doesn't mean they're bad.

That doesn't -- they're great programs, great opportunities for our Company.

But big picture, there's only one GMT900 of the type of operating leverage and purchasing leverage and margin profile that's required to support such a large fixed cost investment.

That will happen on impact as we move through the long-term, It doesn't impact our margins a whole lot in the next couple years because of the benefits of launching the new program.

But that is something that would also affect us, Brett, as we work through the next two or three years.

And we continue to be focused on reducing our core fixed costs so that as our margins transition through this time period we can still generate strong very free cash flow.

And that's our business plan and we're on track to do that.

And then very briefly, the US funding requirement, the $20 million you referred to earlier for 2012 and '13.

That's a -- is that a combined number for 2012 and '13?

Yes, It's a combined number, and I'm very careful to talk about this.

It's a reduction in the statutory minimum requirement as calculated under the IRS regulations.

Over the last few years, we have accelerated our pension funding beyond what's required.

We may continue to do that.

Our goal and objective as it relates to the pension fund is to achieve a full-funded status on a GAAP basis over the course of the next four years.

We consider this fundamentally to be debt reduction when we make payments in to our pension fund.

So, I want to point out that we do have the opportunity to benefit from this change in minimum pension funding requirements.

What we ultimately choose to do of course would be dependent on free cash flow generation and other parts of our Business and how we allocate cash flow.

Fair enough.

Thank you, gentlemen.

Brian Johnson with Barclays.

Yes, good morning gentlemen.

Building on just where you left off, could you maybe recap for us how we should think about cash flow generation on a normalized basis?

Just start maybe with the operating cash flow.

Couple items.

What's your post GM trade change, term change, working capital days?

And does it differ off from the GMT business versus the rest of the bushiness?

Then what's the ongoing for 2012 and '13 cash restructuring payments left, pension payments left?

And then are there any things we should be thinking CapEx over the mid-term?

And any other big sources or uses of cash on them that I might not have mentioned?

Okay, that's quite a list.

Let me address it one item at a time.

Brian, the cash restructuring payments, we don't expect to be significant beyond this second quarter of 2012.

We've got most of the heavy lifting behind us.

There might be an additional $2 million to $3 million that trail into the second half of this year.

But beyond that, we don't see any significant issues at this point in time.

That's number one.

Number two, from a pension funding requirement standpoint, we have commented publicly that we see our average pension funding in the range of $50 million a year in terms of minimum pension funding requirements over the course of the next three to four years.

I know some of this is dependent on discount rate environment.

And of course as you move out into 2014, '15, and '16, asset returns and issues such as that as well.

But we do see around $50 million a year pension funding being the average during the next three or four years.

CapEx Brian, is currently running around 6% of sales.

Which is the high end of our long term guidance range of 4% to 6%.

We see our CapEx requirement staying at that higher end of our expectations for a least the next year or so to support the significant amount of new business backlog that's launching in 2013 and 2014.

What we expect is, as we get better yields on our newer facilities, some of which are still only moderately utilized at this point in time, we would expect our CapEx as a percentage of our total sales to come down into at least the mid-point of our range 4% to 6%.

And that should provide some additional support for our free cash flow generation going forward.

So, those are the critical issues on those items.

In terms of working capital, there's not a significant difference in our working capital requirements with GM business versus other business.

GM has more or less normalized their US payment terms now to what is common around the world, at least in our own experiences.

So we see a working capital carry of somewhere in the range of 12% to 15% of new sales that's been trending closer to 12% as we work through our growth in 2011 and '12.

And so I think that's maybe the best way for me to answer your question.

Our net new sales are $100 million, we'd expect another $12 million working capital net investment, receivables, inventories, and payables.

Okay.

And interest expense running in the $100 million a year cash expense?

Yes, it's going to be in that area.

It's a little bit lower than that right now.

But our book expense is right around that level, and our cash expense just a little bit lower because of the amortization of fees.

But certainly $90 million, $95 million cash expense is a pretty good run rate for us.

In 2014, Brian, we have, in our judgement, a significant opportunity to make a step function reduction.

Okay.

Our interest expense, the 9.25 notes are callable in January of 2014.

We, of course, have a good strong cash flow expectation between here and there.

And so there could be some opportunities for us at that point in time.

Okay.

And then just finally cash taxes?

Yes, cash taxes are going to stay low.

We disclosed and commented that we're looking at our valuation allowance on US deferred tax assets, and we have a strong expectation to be able to utilize all those deferred tax assets.

At the end of this year, we think under GAAP standards we'll take a long hard look, and may reverse that valuation allowance.

And quite frankly, we expect to.

At that point in time, our book provision goes up.

We commented that we'd expect our book provision to go up to a range of 15% to 20%.

But our cash taxes will continue to benefit from the existence of the significant deferred tax assets, not just net operating losses but credit capacity that sits behind that.

And so, we would expect to pay any significant amounts of US tax until the 2016, '17 time period.

And as a result, we'd expect our cash tax provision to be in the range of 5% to 10% over this time period.

Okay, thank you.

Very thorough.

Joseph Spak with RBC Capital Markets.

Good morning everyone, and as always thanks for all the detail.

Just two quick follow ons.

On the $900 million you guys are still quoting, is there a chance that can still get tacked onto 2014 or should we be thinking about just 2015 and beyond?

No, there are some small programs that could possibly impact 2014, but most of it is '15 and beyond.

Okay.

Great.

And then with the closure of the two plants, it sounds like there could be a little bit more cash restructuring in the back half of the year.

But have those assets been redeployed yet?

Or will they be?

The assets from those facilities are -- or have been for the most part redeployed.

Those remaining assets are getting redeployed at this point in time.

With respect to the facilities themselves, we're analyzing what our options are.

Okay.

And then just on materials, it -- I think previously you were pointing to some lessening in the back half, now it sounds like it's split more evenly.

Can you point to any one -- is it steel?

Or what is the main Delta?

Most of the material cost headwind this year Joe, is in the area of purchased components.

I'd say our steel costs are subject to long-term agreements.

There's not really any variability or volatility.

But it's really in the area of purchased metallic components.

And what we're dealing with is a supply and demand issue.

And in some cases the supply of components we need to run at higher volume levels than what was originally anticipated for this time period is the capacity is not quite there.

And so it costs a little bit of money for our suppliers to get the additional capacity up and running.

Over the longer-term, we think that our supply chain is taking the actions necessary to support these higher volumes.

But as we work through the launch curves, and in a couple cases we've had significant increases in our customers' schedule requirements on programs just immediately launched, and it caused the entire supply chain to scramble around a little bit and try and meet those higher than contractually obligated demands.

So, it's not significantly different, but I understand what you're saying.

We do expect to see a little bit more of that annual inflation in the back half the year than what we had originally anticipated.

That's correct.

All right, thanks a lot guys.

Emmanuel Rosner with CLSA.

Hello, good morning everybody.

I have a question on your non-GM revenues.

In your backlog update you were saying that 75% of the business launching over the next three years is non-GM, So that should be about $900 million in new business?

Which should imply more than a 40% annual gross rate when we start from the low base that you guys had last year.

So -- but at the same time, non-GM sales only grew 8.5% or so in Q2 and pretty much the same in Q1.

Is there a timing difference between when you guys launched the GM business and the non-GM one?

Is the non-GM one more back end loaded towards '13 and '14?

Yes, a couple things that are important to discuss.

First of all, 2012 was a year of significant GM launch activity.

The global pick up truck program and several passenger car and crossover vehicle programs launching this year no question skews the impact of our GM launch activity into 2012 versus 2013 and '14.

So that is a significant issue.

But I think it might be a matter of semantics in terms of this notion that 75% of our backlog -- 75% of the awards in our backlog are non-GM programs and business.

Some of the GM programs have higher dollar content and therefore comprise a higher percentage of the overall sales that are being launched in this time period.

But 75% of the awards in the backlog are non-GM business.

Okay, so it's 75% of the programs but not necessarily the dollar amount?

Right, because some of that like in the case of this global pickup truck program.

You're talking about 15%, 16% of the entire backlog in one program.

But the predominant volume of new program activity -- remember in order to get the second, third, fourth, and fifth program with a new customer, you've got to really do a great job on the first one.

And one of the things we're most pleased about in our new business backlog is the extent of new customer relationships that are being developed and the opportunities that we have to win that second and third and fourth award as we have with customers such as Tata, Jaguar, Land Rover, Volvo or Volkswagen and their extended group.

So, that's why we point out that there are 75% of the individual programs we're working on that are with customers other than General Motors.

Okay.

That's very helpful.

And then in your comments on the content per vehicle, you were indicating how in this third we should see some sequential improvement.

Any early indication of what content per vehicle could look like as we move towards next year and the following?

And you launch more business on your top platforms?

Yes, yes.

So keep in mind our content per vehicle is measured on the North American major light truck programs we support.

Right.

And if you look at the dynamics of what's happening there, you've got the normal seasonal fluctuations and we'll bounce back from that in the third and fourth quarter.

And as we get into the second half of next year, and have a heavier concentration of launch activity on the K2XX, and for that matter, the Ram Heavy-Duty program, we do expect higher content.

Our content should be increasing between 5% to 10% on the initial launch.

And then as we work through some of the productivity commitments that we have included in our commercial arrangements over time, we'll give some of that back over the five years or so following launch.

But we do expect our content per vehicle to increase on these newer programs as they are launched.

Okay, that's great.

Thank you very much.

Ryan Brinkman with JP Morgan.

Hello, good morning, thanks for taking my question.

You've given great color on your term GMT900 production volumes and cadence.

But are you able to talk at all about your expectations for combined GMT900 K2XX volumes next year?

HIS automotive forecast called for I think just a 3% in 2013, maybe 1% in 2014.

Do think this is overly conservative based upon your knowledge of the full-size truck segment and you extensive history with this particular product program?

Yes.

I don't know what else to say but yes.

We have a great respect for HIS and the work they do to forecast the industry.

On this particular program over the past couple years, they've had a more conservative position.

I'm not sure why.

We have had some direct conversations with the forecast team there.

So, I know they have access to the same information that we all do.

But there's no question that our customer General Motors, the extended supply chain, we think the market dynamics all point to very solid volume and production on this program.

Certainly not lower, as IHS is hinting around about.

But we think just as they had to increase their forecast expectations for 2011, and they've done the same thing this year.

We think you'll see them increase their production forecast for 2013 and '14 as they have better clarity and visibility for these great products and the market demand for them.

That's helpful.

Thanks.

And I guess you know more about the products than we do or maybe IHS does too.

And then I think you gave good color to Rod's question on backlog cadence, I think it was.

And you just touched on this with Emmanuel, but my question is a little more specific.

Could you talk about the cadence of backlog by type as we go through -- you mentioned that GM was the majority of the new business in 2Q.

But given that so much of the backlog is non-GM, is there a quarter?

Is there a point in time you that think it flips so that non-GM business, with maybe different contribution margin connotations, when does the non-GM business become the majority of new business?

Ryan, that's certainly going to occur in 2013 and 2014.

The significant elements of the GM program launch activity occur in 2012, and then again with another major passenger car and crossover vehicle program in the 2013, '14 time period.

But the other activity including our new disconnecting all-wheel drive system that launches in 2013, and multiple programs with customers around the world, the Jaguar Land Rover business.

The extension of our Tata business.

The Mercedes C and E-class activity that builds on itself from the initial launch that we have this year.

Other expansions in our Business with the Chrysler and Fiat group.

This will impact our new business backlog where the majority of that will be non-GM business in 2013 and '14.

Okay.

Great.

Thanks for that wonderful color.

We've got time for one last question.

Peter Nesvold with Jefferies.

Hello, this is Elaine Clay for Peter, actually.

Thanks for squeezing me in.

I was just hoping to get a little more color on gross margins in the quarter.

Was there any impact to margins from the closures apart from the $36.5 million charge, or where the lower margins just truly do to the lower content per vehicle and just how did any of the other items you mentioned, material costs or utilization, launch costs, et cetera factor in?

The margins in the quarter on an apples-an-apples bases were a little bit lower.

But I think we've addressed the primary drivers of that situation.

I mean we had an accelerated amount of launch activity in the second quarter versus the first quarter.

We had roughly $85 million of new business launching in the second quarter versus closer to $50 million in the first quarter.

We had lower GMT900 production, and just on a mixed basis.

Therefore, we had slightly lower mix, which you commented on affecting our content per vehicle.

So, those are really the significant issues.

In the short term here, the more launch activity we have the lower the capacity utilization we have that's some of our installed capacity, and that does have an impact on margins.

But, the good news is, we're working through it reasonably quickly.

With each passing launch our performance on those programs is improving, and so we expect our customers to get up to full capacity levels.

And of course, our Company will do the same with them within three to six months following the launch of these programs.

Okay, great.

And would you happen to have any insight into the lower four-wheel drive take rate?

And then just lastly, do you expect 3Q gross margin to be down from 2Q?

Okay.

The lower four-wheel drive penetration is predominantly a seasonal trend.

If you go back and look at the second quarter in most years, you see a lower four-wheel drive penetration rate.

And that's just due to weather and the requirements of buyers and this time of the year being a little bit different.

The prospect of snow and other four-wheel drive demand drivers is just not part of the picture this time of year.

The other issue that affected it in the second quarter of 2012 was, again, the lower amount of production to the GMT900 program.

That program has a higher four wheel drive take rate than some the other four-wheel drove or light truck programs that are vetted in that content per vehicle mix.

Particularly the vans and the midsize pickups.

So, it's just a seasonal thing more or less.

Apart from the more structural issue that effected our year-over-year comparison I mentioned in my comments on the deferred revenue recognition.

Otherwise, it's really just seasonal activity.

Okay and then just the 3Q gross margin, is that -- would we expect that to be a similar level to 2Q?

No, I've been very clear in our comments this morning.

We expect our 3Q margins to be lower than our first-half margins.

The GMT900 production will be lower again from the levels we saw in the second quarter.

Launch activity is intensifying.

I mentioned that we expect to see over $100 million of new business launch activity in the third quarter, and so the combination of these factors should drive a lower gross profit -- and then I'm speaking to adjusted gross profit.

Certainly on a GAAP basis our gross profit in the second quarter is lower than what we see going forward.

But on an adjusted basis, we expect the second half of the year to be lower than the first half of the year.

Okay.

Thanks so much.

All right, well thank you, Elaine.

And we thank all of you who have participated on this call and appreciate your interest in AAM.

We look forward to talking with you in the future.

Thank you for joining today's conference call, ladies and gentlemen.

This now concludes the call.

You may now disconnect.