American Axle & Manufacturing Holdings Inc (AXL) 2012 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the American Axle & Manufacturing third-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).

Mr. Christopher Son, Director, Investor Relations, Corporate Communications and Marketing, you may begin your conference.

Thank you, Amanda, and good morning, everyone.

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

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

You can access this announcement 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 and provide the reservation number 32991103.

This replay will be available beginning at noon today through 5PM Eastern Time November 2.

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 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 available on our website.

During the quarter, we will participate in the following conferences -- the Barclays Global Automotive conference on November 14 in New York, and the Bank of America Leveraged Finance Conference on December 3 in Florida.

We will also participate in the Deutsche Bank Global Auto Industry Conference in Detroit on January 15 and 16.

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 President and CEO, David Dauch.

Thank you, Chris, and good morning, everyone.

Thank you for joining us on today's call as we discuss AAM's third-quarter 2012 financial results.

Joining me on the call today are John Bellanti, Executive Vice President of Worldwide Operations, and Mike Simonte, Executive Vice President and Chief Financial Officer.

I will open my comments today with some highlights of AAM's third-quarter 2012 results.

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

After that, the two of us will open it up for a Q&A session when we are completed.

Let me first state that AAM's financial results in the third quarter of 2012 were highlighted by solid sales growth, driven by the launch of AAM's new business backlog.

AAM's third-quarter financial results include the following.

First, for the third quarter of 2012, AAM's sales were approximate $703 million.

On a year-over-year basis, AAM's sales in the quarter were up approximately $55 million.

That's an increase of approximately 8.5%.

Second, our non-GM sales in the third quarter were approximately $199 million.

On a year-over-year basis, AAM's non-GM sales increased approximately $25 million.

That represents an increase of 14%.

Including the impact of the unconsolidated Hefei-AAM joint venture, non-GM sales were approximately 33% of total sales.

For the first three quarters of 2012, AAM's sales were approximately $2.2 billion.

This represents an increase of $215 million or 11% versus the first three quarters of 2011.

And finally, for the third quarter of 2012, AAM reported a net loss of approximately $8 million or $0.11 per share.

Our results in the quarter reflect the adverse impact of special charges and restructuring costs of $13.3 million, or $0.18 per share.

These special charges include $10.1 million of debt refinancing costs and $3.2 million of restructuring costs related to the closure of our Detroit manufacturing complex and Cheektowaga manufacturing facility.

When excluding the special charges and restructuring costs, AAM generated an adjusted earnings per share of $0.07.

Adjusted EBITDA for the third quarter of 2012 was approximately $70 million or 10% of sales.

In the third quarter of 2012, we completed a number of successful financing actions.

These actions included increasing commitments under our revolving bank credit facility by approximately $116 million and issuing $550 million of 6 5/8% senior unsecured notes due in the 2022 period of time.

The net proceeds were used for general corporate purposes, including to fund the repurchase of all of the 5 1/4% senior notes due in 2014, as well as to fund certain pension obligations.

As a result of these actions and related initiatives, AAM now has no significant funded debt maturities scheduled in 2017.

Mike will cover additional details of the special charges and debt refinancing later in the call.

Let me now discuss what factors impacted AAM's performance in the third quarter of 2012, as well as the status of our strategic business initiatives going forward.

The third quarter of 2012 included a high level of global launch activity for the AAM team.

In the third quarter, we launched approximately $100 million of our new business backlog.

On a year-to-date basis, that's approximately $250 million of the total backlog that we had identified here for 2012.

These launches included global programs across multiple types of products, such as the following.

First, we launched an independent rear drive axle in our Changshu manufacturing China facility.

This new launch is now supporting the localized production of Mercedes' C and E Class program.

Second, we are continuing the launch of GM's global midsize truck program and related derivative product.

This launch is occurring simultaneously in our Araucaria manufacturing facility in Brazil, as well as our Rayong manufacturing facility in Thailand.

Third, in August we announced the grand opening of our Chennai manufacturing facility in India.

This is our third regional manufacturing facility in India, and we are now supporting the Daimler light- and heavy-duty commercial vehicle program for the Indian market.

Fourth, we launched a new transfer case program with Jaguar Land Rover at our LBM subsidiary located in Glasgow, Scotland.

Fifth, we launched power transfer units, rear-drive modules, driveshafts at both our Changshu manufacturing facility and our Guanajuato manufacturing facility in Mexico to support a global passenger car program for GM.

And finally, we launched our high-efficiency rear-drive module with front-drive units, as well as front-rear driveshafts for the all-new Cadillac ATS at our Guanajuato manufacturing complex in Mexico.

Due to the complexity of these launches and the high level of global launch activity in this quarter, there are several factors which adversely impacted margin performance for the quarter.

These issues include, first, premium freight associated with maintaining continuity of supply, both with our customer as well as internally to AAM; second, operating inefficiencies such as incurring some off-standard manpower and overtime costs, and outside processing costs resulted in higher operating tooling and maintenance costs; third, supplier issues associated with the localization of the supply base in new global locations -- we've had to make some adjustments on the fly; project expense associated with the facility in preparation of future program launches yet to come, such as training costs, production part approval cost runoffs, as well as the runoff of some of our assembly equipment.

And then last is the lower capacity utilization, really resulting from a couple of things -- first, planned customer downtime on certain existing programs, mainly the GMT 900 and the Ram program; and then second, the launch ramp-up curves of the programs I just covered that were launched in this year and the different capacity utilization associated with that.

We'll talk to you more about that.

We are clearly taking the necessary actions to improve our operating performance.

Some of these actions include, first, working with our customers to align their scheduling with our authorized and installed capacity levels -- they've been running above that in some cases; second, resourcing additional suppliers in certain areas in global regions to localize the supply base and address some supplier constraints; third, breaking supplier bottlenecks where their capability was not in line with their contracted capacity.

This will help reduce some premium freight and outside processing costs that we are incurring today.

And then internally, we're also addressing some of our own capacity and capability constraints to improve our overall equipment effectiveness and first-time quality.

And at the same time, we are adding additional resources globally around the world to support and expedite the resolution of some of these adverse manufacturing issues and operating issues that we are dealing with.

Mike will discuss the financial performance in further detail later in the call.

Let me now shift and discuss AAM's progress on our diversification and technology initiatives.

AAM's new business backlog for years 2012 through 2014 remains at $1.2 billion.

And as we have previously stated to you, we are actively courting approximate $900 million of potential new business.

We are excited to announce that we have been sourced two new light vehicle programs, one with Ford Motor Company and one with Nissan.

We are very enthusiastic about strengthening our relationships with these OEMs.

We will be providing an updated backlog to cover the 2013 through 2015 period of time later this year.

Next, the growth in our backlog is a result of our investments in leading-edge technology from a product, process and systems standpoint.

In support of these efforts, our R&D spending in the third quarter was $31.4 million.

This compares to $31.8 million spent in the third quarter of 2011.

On a year-to-date basis, AAM's R&D spending was $90.3 million in the first three quarters of 2012 compared to $85.4 million in the first three quarters of 2011.

AAM continues to invest in many new and innovative products, focused on the most important industry trends and design drivers.

These trends and drivers include enhancing fuel efficiency and meeting the market demands for lower emissions.

We have industry-leading technology, both through our passenger car as well as our truck application, that drive efficiency and lower emissions.

And we are very pleased to be on the industry leading edge of that.

Second is improving our torque capacity through power density.

Torque capacity improvements are necessary to enable the OEMs to achieve improved fuel efficiency and reduce the emission requirements without sacrificing torque and towing capabilities.

And third, reducing our noise, vibration and harshness, or otherwise known as NVH, in the vehicles, essentially the sound of the vehicles.

Vehicle NVH is constantly improving and becoming more demanding.

As a full-service systems integrator, AAM has a full range of capabilities on a global basis, including the validation capability, to meet the ever-increasing market demands for reduced NVH.

And finally, unique and industry-leading technologies in the industry.

And that really equates to our innovative EcoTrac disconnecting all-wheel drive system, which enables vehicle manufacturers to offer fuel-efficient environmentally friendly options to provide safety, riding handling performance, and all-wheel drive for passenger cars and crossover vehicles.

Our EcoTrac disconnecting all-wheel drive system is an industry first.

This is a great example of how our innovation is strengthening AAM's market position and brand in the marketplace to be a technology leader.

We'll be launching this disconnecting all-wheel drive system on a global passenger car program for a non-GM customer in 2013.

At the same time, we are advancing the development of electric drive systems, and we are doing this for both electric and hybrid-electric type vehicles, as well as our electric all-wheel drive system.

In this area of product development, we continue to leverage our wholly owned subsidiary, eAAM Driveline Systems, in Trollhattan, Sweden.

AAM's all-wheel drive systems are designed to improve fuel efficiency while significantly reducing CO2 emissions.

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

Our focus is to commercialize this product technology by earning a purchase order yet this year, and we are in discussion with multiple OEMs at this time.

In closing, let me emphasize that AAM's top priority for the remainder of 2012 is to take the necessary actions to improve our operating performance and to position AAM for a solid finish in 2012.

We clearly recognize that this is not a traditional AAM operating quarter.

However, we have handled a multitude of global launches this year, and we are going through the growing pains associated with launching these new products in new facilities with new workforces around the world.

As we continue to expand our business, we remain committed to delivering quality, technology leadership, and operational excellence while successfully diversifying our customer base, our product portfolio, and our served market.

That concludes my comments for this morning.

I thank everyone for your attention today and for your continued support of AAM.

Let me now turn the call over to our Executive Vice President and Chief Financial Officer, Mike Simonte.

Mike?

Thank you, David, and good morning to everybody.

David already covered the highlights of our third-quarter earnings, so I'm going to get right into the details, starting with sales.

Net sales in the third quarter of 2012 increased approximately 8.5% to $703 million as compared to $648 million in the second quarter of 2011 -- I'm sorry, the third quarter of 2011 is what I'm comparing to.

This marked the 11th consecutive quarter with year-over-year sales growth for AAM.

On a year-to-date basis through the first three quarters of 2012, AAM's sales were $2.2 billion, up 11% on a year-over-year basis.

This is approximately the same sales trend we expect to achieve over the next three years -- 2013, 2014 and 2015.

That's double the rate of growth expected in the US SAR or the global SAR.

On a sequential basis, AAM's sales in the third quarter of 2012 were down approximately $37 million, or 5% as compared to the second quarter of 2012.

The primary driver of this sequential and seasonal decrease in sales was lower production of GM's full-size pickups, SUVs and vans.

And what I mean by this are the GMT 900 and GMT 610 programs.

In the third quarter of 2012, we shipped product to support approximately 260,000 vehicles in these two programs.

This compares to approximately 300,000 units in the second quarter of 2012.

In total, our sales supporting these two programs -- again, I am speaking to the GMT 900 and GMT 610 -- were down approximately $50 million sequentially as compared to the second quarter.

An increase in new business launched in the quarter partially offset the decrease in GMT 900 and GMT 610 volume.

In the third quarter of 2012, AAM's non-GM sales increased by approximately 14% on a year-over-year basis to $198.8 million.

Adjusted for the impact of our unconsolidated Hefei-AAM China joint venture, AAM's non-GM sales were approximate 33% of total sales in the third quarter of 2012.

And as we've discussed on previous calls, we expect our non-GM sales growth to pick up significantly in 2013 and 2014 based on the nature of our new business backlog.

We measure content per vehicle by the dollar value of AAM's product sales supporting our customers' North American light truck and SUV programs.

These programs we support for GM, Chrysler and Nissan.

In the third quarter of 2012, AAM's content per vehicle was $1466, approximately the same as in the third quarter of 2011 and approximately 2% higher on a sequential basis versus the second quarter of 2012 -- again, a seasonal difference more than anything else, but nonetheless an improvement versus the second quarter.

Okay, let's move now to our profit ventures.

Gross profit in the third quarter of 2012 was $90.7 million or 12.9% of sales.

Operating income in the quarter was $30.1 million or 4.3% of sales.

For the quarter, we reported a net loss of $8.2 million or $0.11 per share.

As David noted, included in these third-quarter results were debt refinancing costs of $10 million and restructuring costs of an additional $3 million related to the closure of our Detroit manufacturing complex and Cheektowaga manufacturing facility.

Excluding the impact of these special items, adjusted EPS was $0.07 per share, and AAM's adjusted EBITDA, or earnings before interest, expense, taxes, and depreciation and amortization, was $70 million or 10% of sales.

The first thing I'm going to say about these results is that all of our key profit metrics in the quarter were significantly lower than our performance in recent quarters and also lower than our own long-term expectations for the business.

Secondly, let me anticipate some questions and review three major issues that affected our operating performance this quarter.

David mentioned these issues; I will provide more detail on the financial impact of these matters.

The three issues are, number one, capacity utilization; number two, project expense; and number three, launch costs.

First let me address capacity utilization.

Primarily as a result of the GMC 900 and GMT 610 downtime, our capacity utilization in North America for the major light-truck programs we support for GM, Chrysler and Nissan was a little lower than 80%, down approximately 10 percentage points from our run rate in the first half of 2012.

Now, in addition to this North American light truck situation, we had three major new program launches ramping in the third quarter that were running well below full rate.

And this is typical for programs in the early days of launch.

In our Guanajuato, Mexico, manufacturing complex, our capacity utilization for two new GM programs -- one a rear-wheel-drive program, the Cadillac ATS; and then second, a global all-wheel-drive crossover vehicle program -- ran between 35% to 45% capacity utilization in the quarter.

In the third quarter, we also launched a new global SUV program with GM.

This is referred to as the 31UX.

It's a derivative of the GMI700 program.

Capacity utilization on this new program was also less than 50% in the quarter.

The cost of this capacity utilization shortfall can be measured in terms of lower fixed cost absorption.

Let me explain this in plain English.

For the new programs, this means that the contribution margin [we're done] sales was not high enough to cover all the fixed costs that were necessary to support the programs.

This is not a problem once production reaches full rate; at least we do not expect it to be a problem, given our expectations for these programs.

But until then, our costs exceed the contribution margin earned on the sale of these products.

For existing programs, this means that the contribution margin we earned on the sale of these products was lower than in previous quarters.

Again, what I am speaking to is, what's the impact of the capacity utilization being lower in the third quarter.

We estimate the adverse impact of lower capacity utilization on these programs -- and again, I'm speaking to the GMT900, GMT610, Cadillac ATS, the global CUV program we launched with GM, and the 30UX SUV program -- to be approximately $15 million as compared to the second quarter of 2012.

The second cost headwind in the quarter I'm going to talk about right now is project expense.

We define project expense as the costs that are incurred to install, move, test or improve property, plant and equipment assets that cannot be capitalized under generally accepted accounting principles.

This includes preproduction activities required to validate or run off equipment to ensure that it will be ready to run at rate for the start of regular production.

Project expense was elevated in the third quarter of 2012 as compared to the second quarter of 2012.

This was especially true at our Three Rivers, Michigan, manufacturing facility and our Guanajuato manufacturing complex.

These facilities are preparing for significant launches in 2013, including the EcoTrac all-wheel-drive system introduction, the K2XX, and the new Ram heavy-duty series pickup trucks.

One additional item to note with respect to project expense is that we are relocating and expanding our Lancaster, Pennsylvania, manufacturing facility in support of the Mack truck program.

Excluding restructuring costs associated with the closure of the Detroit manufacturing complex and Cheektowaga manufacturing facility, AAM's project expense in the third quarter of 2012 was approximately $4 million higher than the second quarter of 2012.

The other major cost headwind affecting our third-quarter operating results was launch costs.

Now, in simple terms, launch costs are operating inefficiencies, nonstandard costs, and other premiums incurred at facilities that are launching new business.

This includes premium freight to expedite inbound or outbound logistics, in our case both; extra manpower, including support for training or quality control purposes -- it's typical to have more people in the facility to make sure you get it right in the early days of launch; unplanned overtime and shift premiums can be incurred; outside processing costs can be incurred; scrap and excess consumption of supplies, tooling, maintenance, utilities or similar production support costs.

We incurred all of these types of cost overruns in the third quarter of 2012.

In some cases, we incurred these cost due to issues in our in-house component or assembly operations.

In other cases, it was caused by unanticipated supply disruptions or unexpected changes in customer mix or scheduling.

We did whatever we could do to meet the needs of our customers.

As a result, these cost overruns were more than we expected.

This should help you understand the major issues affecting our operating results in the third quarter of 2012.

If you have additional questions about these matters, we can address them in the Q&A period.

Let me now shift gears to SG&A, interest and other income, starting with SG&A.

In the third quarter of 2012, SG&A -- and this includes research and development spending -- was approximately $60.6 million or 8.6% of sales.

This compares to $59 million or 9.1% of sales in the third quarter of 2011.

And as David already noted, AAM's R&D spending in the third quarter of 2012 was $31.4 million, just a little bit less than the $31.8 million we spent in the third quarter of 2011.

But this was approximately $2.5 million higher on a sequential basis as compared to the second quarter of 2012.

Similar to the seasonality trend we observed last year, we expect our third-quarter R&D spending to be the highest of any quarter in 2012.

This is due primarily to the timing of customer program requirements.

Net interest expense in the third quarter of 2012 was $25.1 million.

This compares to $19.4 million in the third quarter last year.

The average interest rate on our outstanding borrowings was about the same as it was a year ago, 7.8%.

Interest expense is higher this year because our total outstanding borrowings are up.

Other expense in the third quarter of 2012 is $2.2 million, which was $2 million higher expense than we incurred a year ago in the third quarter of 2011.

The major driver of this expense in the third quarter of 2012 was foreign exchange losses.

The Mexican peso strengthened by approximately 6% in the quarter versus the US dollar.

This caused our peso-based expenses and liabilities to be more costly in dollar terms.

Okay, let's move on to cash flow.

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

GAAP cash used in operating activities in the third quarter of 2012 was $221.2 million.

Capital spending, net of proceeds from the sale of equipment, in the third quarter of 2012 was $50 million.

Reflecting this operating activity in CapEx, free cash flow in the third quarter of 2012 was a use of $271 million.

AAM's cash flow in the third quarter of 2012 was significantly affected by two unusual items, or not very -- occurring not very regularly.

The first is a large, supersize pension contribution.

The second is our debt refinancing options.

With respect to the pension funding, we contributed a total of $214 million to our US and UK pension plans in the third quarter of 2012.

This was driven in part by PVGC requirements associated with the closure of the Detroit manufacturing complex and Cheektowaga manufacturing facility.

However, we were motivated to do this for other good and valid reasons, including the opportunity to bring this somewhat volatile off-balance-sheet liability onto the balance sheet in the form of a fixed-rate, long-dated debt obligation.

In the process, we satisfied nearly all of our pension funding requirements for at least the next three or four years.

As to the refinancing actions, in September 2012, AAM issued $550 million of new 10-year unsecured notes bearing interest at 6 5/8%.

In addition to the pension funding and underwriting fees and expenses, the use of proceeds included the repurchase and redemption of all $250 million of the 5 1/4% notes due in February of 2014, and a call of 10% or $42.5 million of the 9 1/4% senior secured notes that are otherwise due in 2017.

The total cash cost of these refinancing actions was approximately $18 million, of which $10 million was incurred in the third quarter of 2012.

The remaining $8 million was paid in the early days of October 2012.

Okay, now if we exclude the $224 million of cash used to fund the pensions in the third quarter and pay the refinancing costs, AAM still used approximately $47 million of cash in the quarter; interest payments of $37 million -- this represents approximately 40% of all the interest we will pay this year; CapEx payments of $50 million or 7% of sales, so running higher than the run rate for the year; and an inventory build of $33 million related to the same operating issues that affected our operating results.

These were the primary drivers of the uses of cash in the third quarter of 2012.

As to the balance sheet, we've already addressed the inventory and debt refinancing actions.

The only other balance sheet issue I will note right now is our accounting for pension and OPEB obligations.

Typically we have our actuaries revalue our pension and OPEB liabilities with updated actuarial assumptions once a year, at year-end.

In the third quarter of 2012, it was appropriate to revalue our hourly pension and our OPEB liabilities to recognize the impact of two items -- the plant closing benefits that will be provided to hourly associates in Detroit and Cheektowaga -- that's the first of two items.

And the second is a plan amendment -- a pension plan amendment, in this case the [SURF], that was approved by the compensation committee in the quarter.

Each of these items have been previously disclosed, so I'm not going to get into more detail at this time.

The discount rate used in this valuation was 4%.

4%.

That's approximately 100 basis points lower than at 2011 year-end.

We used a discount rate of 5.1% at that time.

This drove an increase in our net pension and OPEB liabilities of approximately $95 million in the quarter.

Now, we will revalue the pension and OPEB liabilities again at year-end.

That's a GAAP requirement.

But we do not currently expect any significant impact on our balance sheet as a result of this year-end valuation requirement.

That's because we stepped up to the impact of a lower discount rate right now, September 30, 2012.

Before we start the Q&A, let me wrap up with a couple brief comments on our full-year 2012 outlook.

And this was included in our 8-K we filed earlier today.

For the full year of 2012, we expect our sales to grow by as much as 12% to 14% to more than $2.9 billion.

Also for the full year 2012, we expect our adjusted EBITDA margin to be approximately 12.5% of sales.

This is lower to EBITDA margin than our previous guidance due to the impact of weaker financial results in the second half of 2012.

And as we've discussed, that's due primarily to the launch costs that we are incurring in the back half of the year.

We do expect our financial results to improve on a sequential basis in the fourth quarter of 2012, but not all the way to the levels we achieved in the first half of the year.

From an operations perspective, we expect the next two or three quarters to be choppy due to the impact of launch costs and also intermittent downtime and changeover activities that will be occurring as a result primarily of the GMT900 K2XX transition.

However, we also expect to work through the issues that we are dealing with right now to mitigate underlying bottlenecks, both in our own operations as well as our supplier operations.

David commented on that.

And we do expect to make solid improvement in our operating performance in the next few quarters.

Much of what we have to do is under our control or our suppliers' control, and we're working as an extended supply chain to make that happen.

The operating challenges we face, we believe are temporary.

These challenges are temporary.

The important thing to keep in mind is that we are well positioned to benefit from our launches, including the 2013 launch of GM's all-new full-size pickups and SUVs -- you all know what I mean by that -- and Chrysler's new heavy-duty series Ram pickup trucks, two major programs for our Company, both with important new product introductions in 2013.

These launches and the improved capacity utilization rates that we expect to come along with these launches are now just around the corner.

Also, the stability that we expect once these new programs are launched, and we're not dealing with downtime and changeover in launch costs, that's just around the corner.

So that's really the end of my comments this morning, prepared comments, I should say.

Thank you for your time and participation today.

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

Great.

Thank you, Mike, and thank you, David.

We have reserved some time to take some questions.

I would ask that you please try to limit your questions to no more than two so we can answer all the questions on the line.

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

So, if, Amanda, you can start the Q&A.

(Operator Instructions).

Itay Michaeli, Citigroup.

I guess I just wanted to revisit the 12% to 15% EBITDA margin goal that you've had going forward.

Your latest thinking around that, given some of these temporary setbacks -- if you could talk about that perhaps on a 2013 and even 2014 and 2015 basis, that would be helpful.

All right, Itay.

This is David.

I'll start first; then I'll turn it over to Mike.

We've always said our range was 12% to 15% from an EBITDA standpoint.

The high end of the range is when we have lower material escalation and greater capacity utilization.

The lower end is the opposite.

Clearly, we are experiencing capacity utilization issues on some of our existing programs today, that mainly being the GMT900 and the Ram program as we're going through conversions to get ready for the K2XX and the next-generation Ram program.

You're aware of the material escalation that we've been dealing with all year to the tune of about $40 million to $45 million on an annualized basis.

And then, obviously, we've introduced some operating issues into the third quarter here based on our launches on a global basis.

And as I said in my comments, we've got a lot of new products, a lot of new facilities with new workforces globally around the world.

And we are incurring some launch inefficiencies that typically we don't incur at some of our well-established facilities.

So John Bellanti, myself and others are working on those, but that kind gives you where we are at this point in time.

Our range is still in that 12% to 15%, as Mike indicated to you, and we see us getting stronger here in the fourth quarter over our third-quarter performance in 2012.

And then we'll still have some choppiness maybe into the first and second quarter just because of the critical launches that take place with some of the Ram and the K2XX, but nothing that we shouldn't be able to manage within our existing well-established facilities.

So, Mike, any other comments you want to make?

Yes.

First of all, good morning, Itay.

The only significant comment I'm going to add to this is to keep in mind that our 12% to 15% EBITDA guidance is long-term guidance.

It's intended to be true and consistent over a long period of time.

There are going to be quarters, and we never indicated otherwise, that could be higher or, in this case, a little bit lower than the long-term guidance.

But we do feel confident that this 12% to 15% range is still the right range to think about in terms of the most probable outcomes for our business over the long term.

This full year, still within the range, clearly, at 12.5% roughly on an adjusted basis, and we do expect to improve as we work through the issues that David commented on and reap the benefit of the new business backlog launch going forward.

Great.

And as my follow-up question, appreciate all the detail around the financial impact in the quarter from the product expense and utilization issues.

Can you give us a sense of what that looks like in the fourth quarter, either numerically or just order of magnitude relative to the third quarter?

Do those things get a little bit better, the same, maybe a little -- I mean, probably shouldn't get worse with the 900 production, but just give us a sense of what those items look like sequentially here in the fourth quarter.

Okay.

First of all, Itay, we do not expect capacity utilization to be worse in the fourth quarter.

Absolutely do not expect that.

We do expect it to improve a little bit.

There are fewer down weeks in the fourth quarter and there are fewer production days.

So in terms of that issue, we expect it to be at least flat and maybe a little bit improved, probably a little bit improved over the fourth quarter, and we would see a more significant step-function improvement in the capacity utilization in the first quarter.

Now, these comments that I've made so far relate to the North American light truck programs; I want to be clear about that.

We will see capacity utilization improvements on the other new launch programs that I commented on.

The Cadillac ATS, the global CUV program, the 31UX, will significantly improve those elements of the capacity utilization.

And so overall we will be in an improved position in the fourth quarter.

The second issue you commented on was the project expense.

And in this case, we really don't expect much improvement.

The run rate of project expense, again, principally to prepare our facilities and equipment for launch, and also to incur PPAP costs and other runoff and validation activities to recognize those expenses.

We expect that to be relatively flat quarter over quarter.

Great.

How about the launch costs, just lastly -- is that also going to be flattish sequentially?

Yes, I think the launch cost -- from our perspective, we believe that the third quarter was the trough of performance as it relates to these issues.

We are making some measurable improvement in certain activities in the fourth quarter.

Some activities clearly are going to be hanging with us.

But you listen carefully to what we are saying about guidance, we do expect our fourth quarter to improve, but not all the way.

And some of these operating inefficiencies take more than a couple weeks to fix.

In some cases we need to work them out over two, three, four months, because you've got to get new suppliers or our own operations revalidated or corrected in a way that you just can't do overnight.

So we do expect some improvement in those launch costs in the fourth quarter, but over the course of the next two or three quarters we expect our operating performance to be a little choppy, maybe a little weaker than what we saw in the first half of 2012.

But as we work through the next few quarters, should improve a little bit as we go, and by the back half of next year we expect to be in a much-improved situation.

That's very hopeful.

Thanks so much, guys.

Rod Lache, Deutsche Bank.

A couple things.

One, just to clarify, I heard you go through the $15 million of capacity utilization impact and $4 million project expense.

I missed the launch costs.

Could you repeat that number?

Yes, Rod, we didn't quantify that number.

But certainly, our expectations at the 12% to 13%, maybe 14% EBITDA run rate that we experienced earlier in the year, I think it's fair to say that the significant delta between those expectations and where we ended up in the third quarter had to do with these launch costs.

Okay.

And I'm just wondering -- of these items, the capacity utilization project expense and launch, why do you figure they were unexpected when you published that 8-K earlier in the quarter?

And I guess I'm also not entirely clear on why these things would diminish when you've got $450 million of net new business next year and the K2XX launch.

The new business -- do they go on the same lines?

Does that help you in terms of the capacity utilization?

Can you just give us a little more clarity on what is behind your expectation there?

Yes.

Rod, this is David.

In regards to the 450 for next year as it relates to the launch costs, most of that business is going down well-established lines or things that are in place right now for the GMT900.

We are obviously converting those lines over and incurring some of the project expense now.

Similar thing with the Ram program.

The other programs are just going to be going through what Mike was referring to earlier, accelerated launch curves, but those lines and the cost to put those lines and debug those lines are in place.

So we don't expect to be seeing the same cost experiences that we've seen this year, especially here in the third quarter.

And then clearly on a global basis, like I said to you, we deal with new workforces, new facilities and new products, where they don't completely understand maybe all the driveline product the way that our well-established facilities do.

And so there are some lessons learned there and for us in regards to we need to enhance some of the training and strengthen some of the support.

And that's exactly what we are doing, not only on the existing stuff today, but also the future things for the balance of this year and into next year.

Okay.

And why were these things unexpected?

Was there something that occurred relatively late in the quarter that caused them to be a lot larger than you had anticipated?

There's a few things.

One, some of our customers were pulling well over our establish capacity, we had to get that in line first and foremost.

Typically volume is your friend when you have that situation, but in this case it created some problem.

Second, we had an extended supply chain that was supporting multiple global programs, and that got strained and taxed because of this capacity or our demand over our installed capacity.

Third, our supplier capability and capacity was not in line with the new suppliers that we brought on on a global basis to support some of these launches.

And then as I honestly said, we had some of our own internal capacity and capability issues out of our facilities that quite honestly we didn't expect.

Yes, Rod, this is John Bellanti.

And I would just add to that.

Some of these launches involve some significant new technology that we're launching for the first time, some welding processes and assembly, that we experienced more difficulty than we anticipated when we originally planned it.

And we're addressing that.

Okay.

Specifically with respect to the K2XX launch, they've got four plants.

And my understanding is that that gets kind of spread out over, like, a year of launches for them.

Is there -- you had mentioned that you think that some of this volatility happens over the next two or three quarters.

Are you kind of segregating that out of the K2XX launch?

Is that expected to be more smooth?

Yes.

We expect the K2XX to be much more smooth, although, as Mike indicated, we had roughly 17 weeks of downtime in the third quarter due to customer downtime or schedule adjustments.

We are going to experience probably 12 here in the fourth quarter and then an additional amount, but not as many in the first quarter as they continue the preparation for those major model changes, that being between GM and Chrysler.

So we don't expect major issues on the K2XX.

Several of our products are carryover products.

Any of the -- some of the products that are new are running down similar lines, but just adjustments in size to the axles.

And then we have some new technology that AAM and GM are introducing, and that's where our focus will be on some of the K2XX.

And Rod, it's, again, John Bellanti.

I would just add the K2XX and the Chrysler heavy duty are next generations of launches that we've done several times in the past.

And we've got a lot more experience with those launches.

You shouldn't expect nearly the problems we're having with new customers, new regions, new workforces, and new processes.

And lastly, how should we think about working capital going forward and raw materials?

I'll deal with the second matter first.

On raw materials, we've experienced what we expected to experience this year.

We commented on the last couple calls, I believe, that we expected the margin impact on material cost inflation to be in the range of 110 basis points to maybe 130 basis points of margin impact.

That's up a little bit from the 70 basis points to 90 basis points impact we expected at the beginning of the year, but relatively consistent now for the past couple quarters as we've settled into that run rate.

We do expect some material cost inflation into next year, but at a more moderate or lesser rate.

We are not in a position, Rod, to give a lot more specific color and feedback on our guidance for next year, but the material cost headwinds are still there in 2013, but to a lesser extent.

Working capital, this year we've dealt with -- really the last couple years -- we've dealt with some unusual items as it relates to accounts receivable.

I don't expect any recurrence of those issues next year.

Payables has been moving pretty much as expected, so inventory spend the outlier, really, other than receivables this year.

We've got more inventory in the system.

We're turning right now around 12 times.

That's significantly lower than the 13, 14, 15 times that we like to target.

I think it's probably not reasonable to expect that we can get our turn rate back up to 15 anytime real soon, but we need to target an improvement here, Rod, of to the level of, say, 13 times in the near term, call it the next eight months to 12 months.

So that's really what we're focused on.

Otherwise I expect our working capital to reflect the growth in our business.

Okay, great.

Thank you.

John Murphy, Bank of America-Merrill Lynch.

Maybe ask this question a different way -- as we look at the three buckets of cap project expense and launch costs, and you kind of quantified the three of those as sort of a $19 million sequential hit from the second quarter, is there any way to parse that out between the changeover for the GM trucks versus all the other new projects?

It sounds like the other new projects or launches are really the bulk of it, and the GM truck is a smaller part of it.

I'm just trying to understand the breakout between those two.

Okay.

Well, John, let me address the specific number you mentioned in your question.

The capacity utilization issue I mentioned was about $15 million.

A significant portion of that, probably two-thirds of that, relates to the lower capacity utilization in our North American light truck programs, of course the GMT900 dominating that.

So a significant portion of that was the lower capacity utilization on higher downtime in the third quarter.

We also had significant downtime on the GMT610 program.

That program ran about half of the production level that we saw in the second quarter.

So I think relative to your question, that's an important first point.

The other issues, most of the project expense and most of the operating inefficiencies did not relate to the GMT900 program.

Really those are centered around new program launches.

We did incur some project expense associated with getting our plants ready for the Ram heavy-duty series launch, that's for sure.

But the E-all-wheel-drive launch -- or I should say, I'm sorry, the EcoTrac all-wheel-drive system launch in 2013, we incurred some project expense associated with that.

And then most of the operating inefficiencies had to do with the other program launches.

And a lot of that was concentrated in Brazil and has nothing to do with the GMT900 program.

Okay, that's helpful.

And if I back out that $19 million or so in the third quarter, basically you get to an EBITDA margin of 12.7%.

Is that the kind of number we should be thinking about for next year?

Something in the -- to the low end of your guidance range?

I'm just trying to understand how much will reverse.

If that all reverses out, that's where we end up?

Okay, but keep in mind, that $19 million does not include the launch cost inefficiencies.

So it's a higher number, which we did not quantify.

What I said was sort of the gap between the run rate of activity we had in the first half of the year, call it 13.5% to 14.5%, and where we ended up after you adjust for the capacity utilization, the delta there is the other issues.

So we are not ready to make a comment on 2013 with any level of specificity.

I will say 12.7% seems light, it seems lower, much -- significantly lower, meaningfully lower than what we are expecting for 2013.

But I'm not going to say much more than that right now.

If I back into those launch costs, it sounds like that was almost a $10 million hit.

Does that seem like it's about in the ballpark?

Yes, it's not an insignificant number.

It was a pretty big number.

And when we talk about that number, and Rod ask the question about why was -- why is some of that unexpected, I think the word unexpected in this context has to do with our expectations for the quarter.

We clearly had some vision and visibility to these issues, and that's why in part we issued the 8-K in early September, to address the fact that we had some of these issues.

So these issues don't occur overnight, but they did creep up on us certainly as we entered this quarter and got more involved in the launch activity.

And the extent of these issues, your estimate of $10 million is not too far off from how we would estimate it.

And that's a pretty significant matter for us that we are dealing with right now.

Great.

So I apologize; I'm asking this question again from a different angle.

So the $10 million, the $4 million of project expense are things that are probably going to fade pretty significantly as we step forward and you get through your launch curves here.

And the $15 million from a lower cap use should fade as capacity utilization ramps up on new programs and the GMT900 gets going.

So as we look at the second -- this sounds like stuff that's going to continue to some extent through the first quarter of 2013.

But by the time we get to the back half of 2013 it may have faded pretty significantly, almost completely.

Yes, John, like we said, there's going to be some downtime in the first quarter, still tied to the K2XX/900 conversion.

So we'll experience some of that, but we expect those capacity utilizations to get back up over 90%, where they've drifted down because of some of the downtime right now that we are experiencing and will continue to experience.

So you'll see fourth quarter this year, first quarter next year on some of the existing programs, and then the rest of global programs is just a matter of us working through our launch curves and meeting the accelerated launches of our customers.

Okay.

And then just lastly, as we look at the out years of 2014, 2015, you're going to be launching $400 million to $500 million or so of new programs as it stands now, hopefully maybe more as you win more.

What makes you think that those programs are going to be much more successful and smoother as they ramp up versus what you're going through right now?

The three quarters of our launches this year were on a global basis, the new facilities with new workforces and new products and new technology.

We've got a lot of launches next year to still support the $450 million of backlog that we talked about for 2013.

But when you break it down, there's really four major launches within that.

And that's the Ram product with Chrysler, another global OEM using the EcoTrac type activity, the K2XX program, and then a program with Volvo powertrain.

Those are the four big programs and some derivatives from that.

And those are, for the most part, all being launched in establish facilities with an experienced workforce.

Great, that's very helpful.

Thank you.

Chris Ceraso, Credit Suisse.

Good morning.

So just a few things left to follow up on.

At what point in 2013 do you think that the output on the new GM truck, and I guess the same would go for the Ram, will outweigh the declining output on the T900?

In other words, when do you get to a net positive from a build and a unit perspective?

Is that not until the third quarter?

Yes, I would say roughly in that area, Chris, without getting specific there.

But clearly you understand there's a second-quarter type launch activity.

And we will be building both 900 and K2XX on similar lines as the customers convert over to the new program.

And then we'll have to lead the 900 out while we are accelerating the launch of the K2XX product.

Right.

Okay.

One thing I'd add -- this is Mike -- there is nothing wrong with building 900 product.

That's very good and positive for us.

And while it's true that the balance of activity will start to swing towards K2XX, third quarter, certainly by the fourth quarter, we do expect more stable production levels next year on a total basis.

And so certainly the impact on our operations should be less on this issue in 2013 than it has been in 2012.

Yes.

The big issue still with the 900/K2XX conversion is we are going to be running multiple products on the same line and have greater changeovers than if we were just running the K2XX only and had more efficiency on our line.

So that's what may impact us a little bit from an overall capacity utilization standpoint or throughput standpoint.

So you can chalk that up to the launch costs or operating efficiencies, whatever it may be.

But we wouldn't be realistic if we didn't think we are going to have some increased downtime because of the multiple models we have to work with.

Okay.

That makes sense.

I think most of the other stuff you've covered a few times, but just one housekeeping item.

Do you have a rough ballpark or an early estimate on what you think interest expense and your tax rate will look like in 2013?

Yes, Chris, as a result of the refinancing activity, interest expense should be running in the neighborhood of $28 million or so a quarter.

And the good thing about that, from a working capital or cash flow standpoint, is that we should see relatively constant interest payment activity each quarter.

So we've retimed some of the payments, and you should see our interest expense matching up a little bit more closely with our interest payments in 2013.

That should smooth out some of the volatile bumps we see right now with most of our interest being paid in the first and third quarter.

So that's the first point.

Second point on tax -- sometime soon, could very well be the fourth quarter, it might be sometime in calendar year 2013 -- we expect to be in a position under GAAP to reverse our valuation allowance on US deferred tax assets.

And what we've said about this issue, Chris, is when that occurs, and we release that valuation allowance and therefore have a need under GAAP to recognize deferred tax liabilities through our provision, we expect our tax provision rate to increase from the roughly 5% to 10% level that we are incurring right now on an effective basis, to 15% to 20% or so.

So for 2013, we do expect our tax provision to trend up.

15% to 20% is the range that we currently expect.

And we've guided to, I guess you would say, for the last three or four quarters as we discuss this issue.

Our cash tax provision, however, should be very low, should continue to be low as we reap the benefits of those deferred tax assets.

And will it be one of these things, Mike, where if you go through Q1, Q2 of next year and it's still at a low rate, but let's say your reverse it in Q3, you're going to have to go back and restate as if you had run it at a 15% to 20% in the first half?

You know, Chris, I don't think so.

That's a good question.

I'll have to doublecheck.

I think the way we have to do it is simply recognize the new tax provision rate going forward from the date we change those valuation allowances.

There could be a GAAP requirement that I'm not tuned up on if we do it in the middle of the year, so we'll have to doublecheck that.

But the basic idea I know is that at the point of time where we release the valuation allowances, deferred tax liabilities will start to run through our provision, and that's going to have to be recognized.

Okay.

Thank you very much.

Joe Spak, RBC Capital Markets.

Good morning, everyone, and thanks again for all the helpful comments.

Most of this has been addressed, and I don't want to beat a dead horse.

I just want to get some sort of clarification.

Based on some of the commentary, I think to John's question, it sounds like maybe the decremental margins on the GMT900 was about 30%.

I know in the past you've said you've tried to manage it to 25%.

Is that sort of the type of improvement we should see sequentially?

Yes.

Yes, the contribution margins, sort of up and down, decremental, incremental, is right around 30%.

And there was nothing unusual in this quarter as it relates to that matter.

Okay.

Great.

And I just wanted to make sure -- when you brought up the tax, the GAAP loss in the quarter, that's not going to change the reversal of the valuation allowance at all for next year?

I'm not sure.

Let me address what is going to happen and hopefully it'll answer your question.

At the time at which we reverse the valuation allowance, we expect to record a large one-time non-cash gain, which would be recognized in our GAAP net income, to release that valuation allowance.

After that point in time, again, the tax provision rate is expected to increase to a range of 15% to 20%.

Of course, that would impact our ongoing net income performance on a quarterly basis.

I guess -- and maybe I misunderstood -- I thought you needed to show a certain number of consecutive quarters of profitability for that to reverse.

I'm just wondering if the actual GAAP loss this quarter changes that at all.

Okay, that's a good -- okay, I understand your question.

So the GAAP requirement, while is not a bright-line test, the GAAP requirement centers around 12 consecutive quarters of profitability.

And yes, the GAAP results for the third quarter need to be factored into that situation, just as every other quarter for the last 12 quarters or three years needs to.

So, yes, that does have an impact.

And sometime soon, we are right around breakeven, slightly positive on that 12-quarter test.

As I said, it's not really a bright-line test, but will work with our auditors.

And at the appropriate time, when it's right, when we are totally compliant with the GAAP literature, we will reverse that valuation allowance.

Let me be clear that the context and premise under which I make these comments is that we are confident, we are confident that we're going to realize the benefit of those deferred tax assets, that we have a business plan going forward that allows us to utilize those tax assets.

And that's why I say we believe it's only a matter of time until we reverse that valuation allowance.

Great, thanks a lot.

Brian Johnson, Barclays.

Morning.

I just want to maybe talk about a longer-term kind of organizational management question.

As you think about some of these launch cost issues, it does seem, as the first question noted, kind of not really what Axle typically delivers to the marketplace.

Both domestically and then as we think about these kind of pods you've established overseas, how do we get some comfort over the next three years that we're going to get back to the kind of flawless execution we are used to?

Yes, Brian, you hit it spot-on.

This wasn't a traditional quarter as you would expect or we would expect.

It clearly comes down to leadership.

I take responsibility for the performance as the CEO of the Company here.

At the same time, I'm working with our team to make sure that we address these issues in a timely manner and that we also have the appropriate leadership in appropriate regions globally in the world to support us.

So we have already made changes to strengthen some of our leadership in some of the outlying global regions with some ex-pats, while at the same time hiring some local nationals that have driveline experience there.

So that's a fair question, and that's the response.

Was this really the first quarter outside the US where you had this kind of volume of launch activity?

Was this kind of a shake-out-all-the-problems-in-the-system kind of quarter?

No, we've had global launch issues before, but nothing to the magnitude that we are dealing with now.

As I said, almost 75% of our launches this year were outside the US.

That clearly put a strain on the organization.

And more importantly, we didn't execute to the plans that we put forward.

And so therefore, as we said earlier, as we are putting more resources towards it, at the same time some of our suppliers let us down in regards to their capacity and their capability, which stressed the system, which created kind of a domino impact.

But that's our job, to manage those things.

And as we've demonstrated in the past, we've done it successfully.

We didn't do it this quarter, and we need to restore that discipline back in the operation, and we'll do that.

And how are you working on getting kind of timely updates?

Again, Axle, in the old days you could walk across the street and see what the plant was up to.

No, Brian, we have daily performance reviews in regards to daily production, daily quality, daily attainments.

If there's issues with the supply base, our team is fully aware of it.

We have operating committee meetings every week to review the overall performance of the Company by region, by plant.

And where there is the itch, we are going to scratch it and we are going to put the right resource there, corporate, regional, and plant, to get the job done.

Okay, thanks.

Brian, I'll just add to that.

John Bellanti.

Operations reviews are in the DNA of our Company.

We conduct them every month.

I spend about 60% to 70% of my time on the road at these plants, looking at daily performance, launch performance, and future financial results.

We're strengthening that, and that's the actions we take.

Okay, thanks.

Brian, This has mine and John Bellanti's personal involvement and leadership, and we will get the results.

Good.

Ryan Brinkman, JPMorgan.

Good morning.

Thanks for taking my call.

All my questions related to launch costs have been answered.

I would just ask, then, briefly if you could help us understand how you think about acquisition opportunity for the firm.

Well, clearly right now our focus is to address our own operating issues first and foremost.

But as I've said when I got put in my new position here is that we will evaluate strategic opportunities, as we always do, but we'll keep it in balance with growing organically and also addressing the other needs of the organization.

As you all know, we need to strengthen our balance sheet and delever the Company from a debt standpoint.

At the same time, we need to continue to show meaningful growth both organically and strategically.

And right now, we're also focused in regards to addressing the operations.

So we are going to take care of the business that we have first before we start thinking about other things.

But at the same time, we'll actively keep our attention open and our eyes open for both organic and strategic growth opportunities.

Okay, that's great.

Thanks for the color.

That's all I have.

Ravi Shanker, Morgan Stanley.

Again, just a few housekeeping items to follow up with.

Sorry if I missed it and you said it; what's your expectation for T900 production for 4Q?

Ravi, it should be relatively close, maybe a little higher to what we experienced in the three quarters.

That's our current expectation.

Got it.

And have you gotten any insight from GM as to their plans with T900 production of the next two or three quarters, given their current inventory levels and the levels of [stand-down] they expect?

Yes.

Our expectations for production on the GMT900 program are not really very different at all from what we thought over the last several months.

And we expect the total volume of production to improve in the first quarter relative to the third and fourth quarter, get back to a more stable, steady overall production level.

Clearly next year will have the transition of product, GMT900 and K2XX.

And as David pointed out, there will be building at different facilities.

GM will be building both K2XX and GMT900 products for a good portion of the year.

But on an overall basis, we expect that the selling rates, the inventory levels, the introduction of new trucks, all that taken into consideration, we expect good, solid production activity in 2013 on this program.

Inventory levels will moderate as we work through the rest of this year.

Today is, what, October 26?

There are only 37 production days left in the months of November and December, and there are 60 selling days.

And just like it does every year, it will help to moderate inventory levels coming into Christmas time.

Understood.

We had another supplier say that they expect the K2XX launch to continue for about 18 to 24 months.

You guys have typically said nine to 12 months.

You still see that as a timeline for your launch, right?

We are still sticking to the timeline that we communicated earlier.

We are not aware of anything else, and nothing has been communicated to us.

Understood.

And finally, any further clarity on the actual launch timing itself?

Are you still sticking with second quarter?

Because I think GM has said they're going to show the truck on December 13, which may be a little sooner than people expected.

But you also heard other reports that it may actually be coming a little later than expected.

So are you still sticking with second quarter?

We are still sticking with the second quarter.

Correct.

Understood.

Thank you so much.

We've got time for one last question.

Peter Nesvold, Jefferies.

(technical difficulty) fitting me in.

Maybe it will be a really short one because I did jump on very late.

So tell me just to read the transcript if you've really just already vetted all this.

So I definitely hear the commitment to getting the launch costs right, and frankly, it's a high-class problem when you've got so much new business coming on.

I guess the concern, perhaps, out there right now is that there are a lot of examples, when you get behind the curve on launches, that it ends up taking longer than you expect.

And Johnson Controls would be the prime example over the last several years.

So what's different in this particular case?

Is there a specific plan, something you can point to, number one?

And number two, what would you say is the normalized EBITDA margin once you do phase in these launch costs -- or, sorry, once you phase in the backlog?

Okay.

Peter, this is David.

Let me take the first part, and I'll let Mike speak to the second part of it.

You're absolutely right -- the only way to beat a launch is up front.

And we got ourselves behind on a couple of these launches, largely because of things that we can control, but also because of the impact of some of our suppliers.

We feel very confident that we can get the supplier thing taken care of.

We've already put a lot of things in place where we are localizing some componentry to the regions that they're being consumed versus having to incur premium freight and other off-standard costs because of their capability and capacity issues.

At the same time, we are not looking to invest in any new equipment.

We just need to debug some of the existing equipment we have, and that's within our control.

So the biggest thing we need to stop is some of the supplier issues that we are dealing with, some of the premium freight issues that we're dealing with, and then deal with the operation inefficiencies that we're dealing with in the launch in our own plants.

Peter, I want to address the margin question.

Earlier on the call, you may have missed it, there was a question that dealt with our long-term EBITDA guidance of roughly 12% to 15%.

You asked a more specific question, which is after you launch this business, what do you expect the normalized level of returns to be in the business?

And what I would say about this is the same thing that, again, we've said about this over the past couple years, is that over time, we expect our EBITDA margin or any other profit margin to decline a little bit over time.

So the upper half of that guidance, long-term guidance range, 13.5% to 15%, which is where we have very steadily been since our restructuring was completed in 2009, that's not really expected to be sustainable over the long term as we launch this entire new business backlog.

That does not mean that we don't expect to have good, solid, improved performance in 2013 or 2014.

But over time, as a larger percentage of our business is represented by programs that are lower in scale or less volume and scale than the GMT900 or even the Ram heavy-duty series pickup truck program, we would expect our margins to come down a little bit.

From our perspective, that's okay if we deal with the fixed cost structure that is currently depressing our cash flow performance.

What I mean by that specifically is we need to moderate our capital spending.

Right now we are trending a little higher than 6%.

Our long-term thoughts about that, in the range of 4% to 6%, so we need to moderate the a little bit.

The second issue deals with pension.

We've addressed that now.

We have no significant pension funding issues for at least the next three or four years, probably a little bit longer than that.

So there's no real significant cash call right now in the business associated with the pension.

And the third issue is interest expense.

Interest expense can come down a little bit in the 2014 time period if we are successful, and we are able to refinance the 9 1/4% notes to something lower.

There is an opportunity in 2014.

Of course, the bigger opportunity is to pay down debt by generating cash in the business.

We have not accomplished that in the last couple years.

That's a significant priority for us in the next couple years.

Clearing out the pension obligations, launching this new business, and of course, clearing out these launch cost problems are keys to our success at being able to do that.

Terrific, that's very helpful.

Thank you, guys.

Thanks, Peter, and we thank all of you for participating on this call and appreciate your interest in AAM.

We look forward to talking with you in the future.

This concludes today's conference call.

You may now disconnect.