American Axle & Manufacturing Holdings Inc (AXL) 2012 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the AAM fourth quarter and full year 2012 earnings conference call.

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

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

(Operator Instructions)

Thank you.

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

Thanks, Christy, and good morning, everyone, and thank you for joining us today and for your interest in AAM.

Earlier this morning we released our fourth quarter and full year 2002 earnings announcement -- 2012 earnings announcement.

If you have not had an opportunity to review this announcement, you can access it on the AAM.com website or through the PR Newswire services.

A replay of this call will also be available beginning at noon today through 5 p.m.

Eastern time February 15 by calling 855-859-2056, reservation number 86568260.

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't 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 a reconciliation of these non-GAAP measures to GAAP financial information is also available on our website.

Over the next several months, we plan to participate in the following conferences.

The JPMorgan Global High-Yield Leverage Finance Conference on February 26 and 27, and the Bank of America Merrill Lynch New York Automotive Summit on March 27.

In addition, we are always happy to host investors at any of our facilities.

Please feel free to contact either myself or Liz [Ventimiglia] to schedule a visit.

With that, let me turn things over to AAM's Cofounder and Executive Chairman of the Board, Dick Dauch.

Thank you, Chris, and good morning, everyone.

Thank you for joining us today to discuss AAM's financial results for the fourth quarter and full year of 2012.

Joining me on the call today are David C. Dauch, our President and Chief Executive Officer; Mike Simonte, our Executive Vice President and Chief Financial Officer.

To begin my comments today, I will review some highlights of our fourth quarter and full-year 2012 results.

I will then provide a brief review of our business strategy before turning it over to David and Mike.

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

So, let us get started.

AAM's fourth quarter 2012 sales were $736.7 million.

For the full year 2012, AAM's sales were $2.93 billion.

Net income in the fourth quarter of 2012 was $319.9 million and for the full year 2012, AAM's net income was $367.7 million.

AAM's net income in 2012 was favorably impacted by a tax adjustment of $337.5 million.

This related to the reversal of our US deferred tax valuation allowance.

AAM's adjusted EBITDA in the fourth quarter 2012 was $64.5 million.

For the full year 2012, AAM's adjusted EBITDA was $346.7 million.

David and Mike will provide additional information regarding the details of our financial results later in this call.

Now, I want to discuss AAM's align business strategy which is designed to build value for our key stakeholders.

This strategy emphasizes a commitment to leadership in the areas of first, quality; second, technology leadership; and third, operational excellence.

We are keenly focused on maintaining AAM's high standards.

This is the foundation of AAM's delivery, warranty, durability, and reliability performance.

Over the last 10 years, AAM has operated at an average of less than 10 discrepant parts per million, better than any line in the world in our business.

This is an industry-leading quality and performance.

AAM is achieving technology leadership by delivering innovative new driveline products to the market.

These initiatives are improving the diversification of our product portfolio while increasing our total global-served market.

AAM's R&D spending is increasingly focused on the development of innovative solutions to assist our customers to meet market demands for the following, higher fuel efficiency, lower emissions, enhanced power density, and improved vehicle performance which includes safety, ride, and handling performance.

AAM is committed to sustaining operational excellence with a focus on cost management to deliver exceptional value to our customers.

AAM has made many structural cost reductions since 2006.

This includes successfully restructuring our North American labor costs.

In 2012, AAM completed this critical job, eliminating the last of the uncompetitive legacy labor cost conditions in our US operations.

Good riddance to that problem.

Now, we can truly report to you that AAM has achieved market cost competitiveness globally.

By following through on these commitments to quality, technology, leadership, and operational excellence, AAM can achieve our most critical business objectives.

They include the following.

First, diversifying our business through the growth of new and existing customer relationships and through the expansion of our product portfolio.

Second, achieving globalization by increasing our presence in global growth markets to support our customers' global platforms.

And, third, delivering solid financial performance and restoring our balance sheet strength.

We expect our new business backlog, which now stands at $1.25 billion for programs launching in 2013 to 2015, to drive our sales growth.

As a result, AAM is targeting sales of more than $4 billion top line and EBITDA in excess of $500 million by the year 2015.

We are excited about the stakeholder value creation opportunities implied by these targets and we look forward to delivering on these commitments.

That concludes my comments for today.

Thank you very much for your participation.

I will now turn the call over to our President and CEO, David C. Dauch.

David.

Good morning, everyone, and hello.

My comment this morning will focus on three critical areas.

First, I'll provide some additional detail regarding our operational performance in the fourth quarter of 2012; second, I will summarize our key AAM accomplishments in 2012, while updating you on our excellent progress in making to achieve AAM's long-term strategic objectives.

And, finally, I want to make a few comments in regards to AAM's 2013 outlook before turning things over to Mike.

In the fourth quarter 2012, AAM sales were $736.7 million.

This represents an increase of 22% over the prior year.

For the full year of 2012, our sales were $2.93 billion, up approximately 13.5% as compared to the full year 2011.

Excluding the impact of our nearly $10 million of debt refinancing and redemption costs, and approximately $6 million of restructuring costs that we booked in the quarter, our adjusted EBITDA was $64.5 million in the fourth quarter of 2012.

As we have previously announced, the special charges and restructuring costs we incurred in 2012 were primarily related to the closure of our largest factory at the time, our Detroit manufacturing complex and our Cheektowaga manufacturing facility.

AAM's EBITDA margin was approximately 9% of sales in the fourth quarter of 2012.

For the full year of 2012, AAM's adjusted EBITDA was approximately $350 million or approximately 12% of sales.

AAM's net income in the fourth quarter of 2012 was $319.9 million or $4.21 per share.

As previously stated, this included a favorable impact of $337.5 million benefit related to the reversal by US deferred tax valuation allowance.

The most important thing I can tell you about this tax adjustment is that it reflects AAM's positive outlook for continued future profitability.

For the full year of 2012, AAM's net income totaled nearly $367.7 million, or $4.87 per share.

2012 was an eventful year for AAM, characterized by substantial growth in diversification due to our high level of global launch activity around the world.

In the first half of 2012, as all of you know, we achieved strong profit margins.

In the second half of 2012, we experienced operational challenges and lower profitability, principally associated with the increased level of launch activity in these global locations.

We have and are taking the necessary actions to correct the performance issues that weighed on our results in the second half of 2012.

These actions principally addressed two major flash points in our operations which we've discussed previously.

First, in 2012, our unibody or passenger car driveline operations in Mexico experienced launch issues relating to the product supporting GM's Cadillac ATS program, otherwise known as the Alpha Program.

As always, AAM made a commitment to maintain continuity to supply to our customers and protect them first and foremost.

Due to the difficulties managing the performance of both our internal and external supply chains for this program, we incurred an excessive amount of premium cost, operating-wise as well as premium freight cost.

We've resolved these issues late in the quarter by expanding our supply base for critical components, embracing the constraints or bottlenecks within our own operations, so we feel this issue is behind us.

In total, we incurred premium freight costs of approximately $10 million in the fourth quarter of 2012 due to these and other similar issues.

This compares to premium freight expense of $4 million in the third quarter of 2012 and we do not expect this type of expense to recur in 2013.

The second major operating issue we experienced in 2012 related to the expansion of our axle-making operations in Brazil.

In our Araucaria manufacturing facility in Araucaria, Brazil, we suffered from a leadership issue that failed to properly prepare the plant for the launch of new products supporting a GM global midsize truck program.

Stated quite simply, we were not ready to meet our production requirements in Brazil.

As a result, we incurred premium operating costs to keep up.

In addition, we have incurred excessive labor costs, premium inbound and outbound logistics, elevated scrap levels, and significant cost overruns, which is not the AAM way.

In response to these developments, we have changed out four levels of AAM management responsible for our Brazilian operations.

In December 2012, we hired a new president for our South American operations.

This individual has over 30 years of driveline experience right in the South American market.

And we are pleased to welcome [Sydney Delgatio] to our team.

He's already making a positive and meaningful difference in the short period of time that he's been on board.

While there is some plant supply chain issues that require time to resolve completely, we expect to make progress improvement in our financial results in Brazil here in the first half of 2013, and as I mentioned, we are already making some significant improvement since these issues arose.

By the second half of 2013, we expect to restore the operations to solid profitability.

Mike will have additional comments on AAM's fourth quarter and full-year 2012 financial results later on in the call.

Let me now shift gears and update you on some key 2012 accomplishments which included the following.

First, in 2012 we made great strides in executing our diversification initiatives while expanding and broadening our relationship with GM.

In 2012, AAM successfully launched important new business awards with various customers, including Mercedes-Benz, Daimler, Jaguar Land Rover, and Scania, just to name a few.

The impact of these programs as well as strong production volumes on other existing programs helped increase AAM's non-GM sales to nearly $800 million in 2012.

Including the impact of our Hefei, China AAM joint venture which is not consolidated and our financials, AAM's non-GM sales were approximately 30% of total sales in 2012.

While we continue to drive for more business balance in our revenue stream, we are very pleased about the sales growth and the product program diversity we are achieving in our GM book of business on a global basis.

Our expanded global relationship with GM is a very strong driver of profitable growth for AAM right now which is good news for all our key stakeholders.

Second, in 2012 AAM was very successful in winning new business.

In 2012, AAM's new business backlog grew approximately 5% rising to $1.25 billion for the 3-year period for programs launching between 2013 through the 2015 calendar year timeframe, and the cadence on that new businesses approximately $400 million in 2013, $550 million in 2014, and $300 million in 2015.

The new business awards included in this backlog should help drive AAM's growth to over 10% for the period from 2013 to 2015.

This is approximately double the rate of the industry growth expected over the same time period.

The key driver in the growth of our new business backlog has been our commitment to develop innovative and advanced technology and driveline products to meet the rapidly changing needs of the global automotive marketplace.

We believe that AAM's technology leadership is a major differentiator in the markets that we serve, not only today but also in the future.

The diversification attributes of AAM's new business backlog are noteworthy.

Over 50% of our $1.25 billion backlog is for customers other than GM, which will help our customer concentration reduction or diversity issues.

These include new and expanded orders supporting multiple global platforms including business with Chrysler and Fiat, Daimler truck, Ford Motor Company, Honda, Jaguar Land Rover, Mercedes-Benz, Nissan, Tata Motors, Volvo Power Chain, and others, just to name a few.

We are also very pleased to report our first axle order from Ford, our first order of any kind from Honda, and our second major program with Nissan.

Second, approximately two-thirds of the new business backlog is for passenger cars, cross-over vehicles and commercial vehicle.

So, we are much more than a truck and SUV company as people have grown to know us over the years.

Approximately 65% of our new business backlogs are for programs outside the US.

And these awards will help support and strengthen our international and expanding global footprint in Brazil, China, India, and Thailand, just to name a few.

In addition to this book business, AAM is currently quoted on over $500 million of potential new business with over 95% of these new business opportunities being non-GM programs.

This should further help our business diversification as we convert many of these opportunities to book business going forward and target parity between GM and non-GM sales by the 2015 period of time.

The third critical element or accomplishment related in 2012 was our continued expansion of our cost competitive manufacturing engineering and sourcing footprint.

In 2012, we launched a significant new production at our renowned Thailand facility in the first quarter.

Also in the first quarter of 2012 we took over e-AAM driveline systems which became a wholly-owned subsidiary of AAM.

We also expanded our operations in Mexico with the opening of a new net shape gear facility in Silao called AccuGear.

In August 2012 we opened up our Chennai manufacturing facility located in southeastern India to support Daimler truck.

In addition, here in the US we also expanded our operations in Lancaster, Pennsylvania.

Fourth, in 2012 we successfully eliminated the last of the uncompetitive legacy labor conditions in our US operations.

AAM has now achieved market cost competitiveness at all of our facilities on a global basis and you all know how hard we worked for that over the years.

This is a very important development for AAM.

Having achieved market cost competitiveness at AAM's facilities globally, we are confident in our ability to grow our business backlog going forward, which serves as a foundation of our profitable growth and our business diversification that both my father and I have outlined for you in our opening remarks here.

Fifth, we made excellent progress in the critical balance sheet initiatives as well.

In September 2012 we issued $550 million of new, unsecured bonds as an attractive long-term cost of 6.625.

We also increased the size of our revolving credit facility by $116 million.

With the proceeds of the offering, AAM was able to refinance $250 million of debt maturities that were maturing in the 2014 period of time.

AAM now has no significant funded debt maturities until the 2017 period of time, so we've given ourselves some runway and the proper financial support to execute our business plan.

We are also able to increase our global pension funding status to approximately 82.5% while satisfying substantially all statutory pension funding obligations for the next three to five years.

Before I turn it over to Mike, let me wrap up by making a few closing remarks regarding AAM's 2013 and long-term outlook.

We believe that the trend in the global automotive market conditions will continue to be positive in 2013.

For the full year of 2013, we expect the US ZAR to be approximately 15 million units.

Based on these industry sales assumptions and anticipated launch of AAM's new business backlog, we expect AAM's full-year sales to grow by approximately 10% to 11% in 2013 as mentioned earlier, to $3.2 billion.

As we announced in January at the North American otter show in Detroit, we expect our adjusted EBITDA margin to be in a range of 13% to 13.5% on sales in 2013.

We are excited to be supporting GM's important K2XX launch in 2013, which is a full-size truck program.

We are confident in our abilities to launch this program flawlessly and anonymously.

We look forward to continuing to strengthen our relationship with GM in 2013 and beyond, as I mentioned in some of my earlier comments, and the relationship we've enjoyed to date.

On a longer term basis, we are targeting to exceed $4 billion in total sales by 2015 and achieve over $500 million of EBITDA.

All of this will be achieved while advancing AAM's products, customer, and geographic diversification.

I would like to thank each and every one of you for your attention today and for your vital and continued interest in AAM.

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

Mike.

Thank you, David, and good morning, everybody.

And Happy New Year to those that we missed at the Detroit auto show conference.

Today, I will review with you the highlights of our financial performance in the fourth quarter and full year 2012.

David covered the basics, so I will get right into the details starting with sales.

AAM sales in the fourth quarter of 2012 were $737 million, almost 22% higher than the fourth quarter of 2011.

On a sequential basis, AAM's sales in the fourth quarter of 2012 were up $34 million, almost 5%, versus the third quarter of 2012.

AAM's content per vehicle is measured at the dollar value of our product sales, supporting our customers' North American light truck and SUV programs.

AAM's content per vehicle in the fourth quarter 2012 was $1,514, up 3% on a sequential basis as compared to $1,466 in the third quarter of 2012, and this also compares to $1,498 in the fourth quarter, one year ago, in 2011.

On a sequential basis, the increase in AAM's content per vehicle was due to a favorable mix shift in the fourth quarter of 2012.

Most notably, shipments supporting the Ram Heavy Duty series pickup trucks were up 20% in the quarter.

The GMT 900 full-size trucks and the GMT 610 full-size vans were also stronger in the fourth quarter as compared to the third quarter.

For the full year 2012, AAM's content per vehicle was $1,473.

As we have previously discussed, we expect our content per vehicle to increase 5% to 10% over the next two years, primarily due to the launch of new AAM product content for both GM and Chrysler.

As David said, we experienced operational challenges and lower profitability in the second half of 2012 and this was principally associated with an increased level of launch activity.

In addition, we incurred asset impairments and restructuring costs of $6.2 million in the fourth quarter of 2012 and debt refinancing costs of $9.7 million.

For the fourth quarter 2012, all of our key operating profit metrics reflect the impact of these challenges and issues.

Gross profit was $84 million, or 11.4% of sales; operating income was $18.6 million, 2.5% of sales; EBIT was only $8.8 million or 1.2% of sales; and EBITDA was $48.6 million or 6.6% of sales.

Excluding the impact of special items, adjusted AAM's adjusted EBITDA margin was approximately 9% in the fourth quarter of 2012.

As we previously discussed with many of you at the Detroit auto show, when we pre-announced our 2012 earnings, this was weaker as compared to an adjusted EBITDA margin of approximately 10% in the third quarter 2012 and approximately 14% that we achieved in the first half of the year.

For the full year 2012, AAM's key operating profit metrics reflect the impact of the solid profit performance in the first half of the year, I just mentioned 14% EBITDA margin, offset by two things, really three, I guess.

First is a weaker back half of the year profit performance.

Two, $41 million of special charges, asset impairments, and restructuring costs, and these related primarily to the closure of our Detroit manufacturing complex and Cheektowaga manufacturing facility.

And, finally, the third item is $20 million of debt refinancing costs.

Let me quickly run through the key operating profit metrics for the full year 2012.

Gross profit was approximately $400 million, or 13.6% of sales.

Operating income was $156.4 million, or 5.3% of sales.

EBIT was $134 million, or 4.6% of sales, and EBITDA, on a GAAP derived basis, unadjusted, was $286.3 million, or just about 10% of sales.

So, let me anticipate some questions and comments on the reasons why we fell short of our expectations for the year 2012, and probably also your own expectations.

There were four major drivers of the deterioration in our operating profit performance in the second half of 2012 as compared to the first half of the year.

The first two are well known and understood issues.

There were no surprises on these two items.

First, our sales mix was weaker in the second half of the year as compared to the first half of the year.

This was primarily attributable to the timing of GM assembly plant down time on the GMT 900 program.

In the first half of 2012, we supported GM production of approximately 552,000 vehicle units in the GMT 900 program.

In the second half of 2012, our shipments supported GMT 900 production of approximately 483,000 vehicle units.

This dynamic reduced our profit contribution on this important program by approximately $15 million per quarter in the second half of 2012.

Higher sales from new business launches helped to offset this, but the bottom line is that sales mix adversely impacted our operating profit margins by at least 150 basis points in the second half of 2012.

The second well-known and understood issue to affect the comparison of our second half 2012 operating profit performance versus the first half of 2012 was the reduction in deferred revenue recognition related to the 2008 AAM-GM agreement.

This accounting issue played out in the first quarter of 2012, but still favorably contributed approximately $7 million of profit in the first half of 2012.

This dynamic reduced our operating profit margins by approximately 50 basis points in the second half of 2012.

To make clear our analysis of these issues, let me summarize the impact of the first two.

Due to the impact of adverse sales mix and the reduction of deferred revenue recognition related to the 2008 AAM-GM agreement, we expected our operating profit margins to decline by approximately 200 basis points in the second half of 2012 as compared to the first half of the year.

The rest of the deterioration in our performance had to do with two other major drivers and those two items were elevated launch preparation costs and production performance issues.

The magnitude of these issues and the cost required to meet our customer obligations was more significant than we expected.

With respect to the first item, launch preparation costs, there's a couple of things here to talk a bout.

First, we incurred high project expense in the second half of 2012 as compared to the first half of the year.

We define project expense as the non-capitalizable portion of installing new production capacity.

This includes certain major facility maintenance activities and rearrangement activities and also process validation costs required to achieve customer certification, or PPAP as it's known in our industry.

We also incurred higher R&D spending in the second half of the year as compared to the first half.

A major reason for this is higher product validation costs to support the many launches occurring in the second half of 2012 and calendar year 2013.

We also incurred premium operating costs to support increased launch activity in many of our facilities.

This includes associates hired for training purposes in advance of the launch of new programs, and other labor inefficiencies associated with changeover, startup, and quality containment.

We estimate that launch perpetration costs reduced our operating profit margins by approximately 150 basis points in the second half of 2012 as compared to the first half of the year.

Now, with respect to production performance issues that we experienced in the second half of 2012, David already addressed the substance of these issues, and more importantly, what we are doing to mitigate their impact.

I will not rehash that detail.

Let me just say this from a financial perspective.

We estimate that production performance issues reduced our operating profit margins in the second half of 2012 by approximately the same amount as the higher launch preparation costs or approximately 150, maybe 175 basis points compared to the first half of the year.

And just to be clear, when I say production performance issues, we mean the premium freight costs that we incur to manage inbound and outbound logistics to protect continuity of supply to our customers, the inefficiencies we experienced on the GMI 700 launch in Brazil and similar cost premiums and penalties that we incurred to launch new unibody products in 2012, passenger car and crossover vehicle, all.-wheel drive and rear-wheel drive products.

Let me now address our fourth quarter and full year 2012 net income and EPS results.

These key profit metrics were favorably impacted by the reversal of our US deferred tax asset valuation allowance.

In the fourth quarter of 2012, AAM's net income was approximately $320 million or $4.21 per share.

For the full year 2012, AAM's net income was approximately $368 million or $4.87 per share.

The net impact of reversing the valuation allowance was a one-time benefit of $337 million recorded in the fourth quarter of 2012.

This adjustment overwhelmed all the other activity.

We had previously explained why this would occur.

If you have detailed questions about this, please use the Q&A period to address this issue.

As a summary comment on AAM's tax accounting in the fourth quarter 2012, let me outline a few key points.

First, the fourth quarter of 2012 marks the twelfth consecutive quarter in a period for which we could demonstrate cumulative taxable income.

This is a key determinant of when it is appropriate to consider the need for such a valuation allowance under GAAP.

In plain English, this means that we established a track record of being able to utilize the favorable US tax attributes over the past three years.

Second, and perhaps most importantly, we evaluated our ability to utilize AAM's existing balance of US deferred tax assets in comparison to our future profit projections.

AAM's existing US deferred tax assets include net operating losses and tax credit carry forwards, as well is the net favorable impact of tax timing differences relating to the recognition of future income inclusions and expense deductions.

Again, let me translate this into plain English.

We believe that AAM will have sufficient future profitability to realize the current value of our favorable tax attributes in the US.

As a result of these and other related points of analysis that are required under generally accepted accounting principles in the US, we concluded that it was appropriate to reverse the valuation allowance.

One other comment about our fourth quarter tax provision.

The adjustment to reverse the US deferred tax asset valuation allowance is measured as at the beginning of the year in which it is recorded.

This is a GAAP requirement.

As a result, we were required in the fourth quarter 2012 to adjust our full-year tax provision to reflect a different set of facts and circumstances relating to the deferred tax assets that we had previously addressed in our tax provisions for the first three quarters of the year.

The net impact of this dynamic was a benefit provision of approximately $2.5 million in the fourth quarter of 2012.

For the full year 2012, excluding the impact of the reversal of the US deferred tax asset valuation allowance, we recorded a tax expense provision of approximately $2.3 million.

This equates to an effective tax rate of 7.3%.

We've discussed many times in the past we expect our future tax expense provision rate beginning in calendar year 2013 to approximately double to a range of roughly 15% to 20%.

Let me now cover SG&A interest before turning to cash flow and the balance sheet.

SG&A expense, including R&D, in the fourth quarter of 2012 was approximately $65 million or 8.9% of sales.

This compares to approximately $57 million, or 9.4% of sales in the fourth quarter of 2011.

For the full year 2012, SG&A increased $11.6 million to $243 million, as compared to $231 million -- $231.7 million to be exact in 2011.

AAM's R&D spending for the full year of 2012 increased almost $10 million on a year-over-year basis to approximately $123 million.

This increase in R&D spending accounts for most of the increase in SG&A.

Net interest expense was $28.9 million in the fourth quarter of 2012.

This compares to approximately $22 million in the fourth quarter of 2011.

For the full year 2012, net interest expense was $101 million, up from $82.7 million in 2011.

In the third quarter of 2012, we took advantage of favorable market conditions for debt issuers to finance the total funding of $225 million we contributed to our US and UK defined-benefit pension plans in 2012.

As a result of these contributions and the impact of investment returns and other actuarial valuation dynamics, including a further reduction in the discount rate used to measure the pension liabilities, we increased the aggregate funded status of our US and UK pension plans to approximately 83% at year end 2012, up from 62% at the beginning of the year.

That's excellent progress for us and, again, that's measured at a discount rate close to 4%.

As David already mentioned, at the same time we raised money to make pension contributions, we also refinanced a 2014 debt maturity and called 10%, or $42.5 million, of our outstanding 9.25% notes, these are the secured notes that are due in 2017.

The interest carry on these additional debt obligations as well as higher borrowings to fund other elements of our free cash flow use in the past two years, 2011 and 2012, explained the increase in our net interest expense for the fourth quarter and full year 2012.

Keep in mind that the beginning of the fourth quarter 2012, AAM's net pension expense is reduced to reflect the improvement in AAM's pension funded status.

This helps offset a portion of the increase in our interest expense going forward.

Let me now address cash flow and the balance sheet.

AAM defines free cash flow to be net cash provided by, or in this case used in, operating activities, less capital expenditures, net of proceeds from the sale of assets, including sale leaseback transactions.

Net cash used in operating activities for the full year 2012 was $176 million.

Capital spending for the year 2012 again net of the proceeds of the sale of assets, was $185 million.

Reflecting the impact of this activity, AAM's free cash flow in 2012 was a use of approximately $361 million, all this on a GAAP-derived basis.

AAM's free cash flow results in 2012 reflect the impact of a number of unusual or special items.

This includes $225 million of pension contributions.

Now that we've made these contributions in 2012, we do not expect any material pension contribution for the next three to five years.

Also included in our free cash flow results with $38 million of restructuring payments, $18 million of debt refinancing costs, and $33 million to reflect the impact of a change in GM's administration of supplier payment terms.

If we were to exclude the impact of these four items, which is not appropriate under GAAP, we recognize that, we would still report an adjusted free cash flow use in 2012.

The principal drivers of this were lower profitability, higher capital spending, and higher inventory levels, all of which were at least partially related to the impact of increased launch activity in 2012.

AAM's EBITDA leverage or the ratio of EBITDA to net debt was approximately four times in 2012, year-end on an adjusted basis.

AAM's EBIT coverage, or the ratio of EBIT to interest expense, was approximately two times in 2012 year end, also on an adjusted basis.

Both of these critical credit protection measures were adversely impacted in 2012 by higher borrowings and lower profits.

As to liquidity, AAM ended 2012 with total available liquidity of approximately $492 million.

This consists of available cash and borrowing capacity on AAM's global credit facilities.

This is in line with our target for liquidity and at least two months of sales.

So, we are in good solid shape from a liquidity perspective.

All right.

So, with all that said about 2012, we think it's time to move on to 2013.

As David mentioned, we expect AAM sales to grow faster than the industry in 2013, up approximately 10% to 11% on a year-over-year basis to approximately $3.2 billion.

By the way, this sales outlook is rounded to the nearest $100 million, $3.2 billion.

If you are rounding to the nearest $50 million, our sales outlook would be $3.25 billion.

AAM's outlook for EBITDA margin in 2013 is a range of 13% to 13.5% of sales.

Let me take a minute to add some color to this summary outlook.

As we transition to calendar year 2013, we expect a profit boost from the reversal of at least two of the three major profit performance drags we experienced in the second half of 2012.

First, we expect a stronger sales mix in 2013 as compared to the second half of 2012.

This is due primarily to our expectation that GMT 900 production will be at least 10,000 to 20,000 units higher on a quarterly run rate basis than as compared to the second half of 2012.

We also expect strong production volumes in support of the Ram Heavy Duty pickup truck program in calendar year 2012 -- sorry, '13.

Combined with the profit contribution from the launch of our new business backlog in calendar year 2013, we expect to recapture all or most of the 150 basis points of margin we lost in the second half of 2012 due to adverse sales mix.

Second, we expect to mitigate the adverse impact of the production performance issue we experienced in the second half of 2012.

Although we expect some of the fixes in Brazil to take a couple of quarters to be fully realized, we expect to immediately benefit from reductions in premium freight costs and other operating inefficiencies addressed by our operations management team.

It's a little bit too early to declare victory, but with one month of 2013 under our belt, we are making excellent progress in this regard.

Number three, with respect to the third profit performance drag we experienced in the second half of 2012, we do expect launch preparation costs to increase further in the first half of 2013.

R&D costs will be higher in the first half of 2013 than either the second half of '12 or the second half of '13, due to the timing of product validation requirements.

Similarly, project expense should be up in the first half of 2013 as compared to the second half of 2012, before settling down in the second half of the year after we launched the K2XX, the Ram Heavy Duty, and the Eagle Track all-wheel drive programs.

The net impact of these puts and takes is that we expect to improve our EBITDA margin performance in the first half of 2013 to at least 11% to 12% of sales.

For the full year 2013, we expect to meet our guidance range for EBITDA margin of 13% to 13.5% of sales.

Thank you for your time this morning.

We look forward to addressing your Q&A.

I will stop here in turn it back over to Chris Son.

Great.

Thank you, Mike, as well as David and Dick.

We have reserved some time to take some questions.

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

So, at this time, I will turn it back over to Christy to handle the Q&A queue.

(Operator Instructions)

Itay Michaeli from Citigroup.

I appreciate all the detail on the walk into 2013.

Mike, I was hoping you could dig a little bit more into the second half outlook, the exit margin would be implied to be very, very strong.

What's exactly driving that?

Is that some of the higher content perhaps on the K2XX and kind of what you are just assuming for market conditions in the second half of the year?

Okay.

Itay, a couple of things I would point out.

We mentioned that we do expect to recover the impact of the adverse sales mix in calendar year 2013.

And that should be improving as we work our way through the year.

We also expect a good positive contribution from our new business backlog in this calendar year '13.

And, again, that's going to be skewed or weighted to the back half of calendar year 2013.

In terms of the launch preparation costs, I mentioned they are going to be heavier in the first half of the year.

We should see a significant reduction in project expense and even our R&D expense because we've got higher customer validation requirements earlier in the year.

So, we are going to be able to reduce our spending in that area in the back half of the year to a more normalized level.

The other point I would make is with respect to the improvement in our operating performance, just our plant production cost if you will, the actions that we are taking in places like Brazil will take some time to kick in.

So, we will improve that as we work our way through the back half of the year.

Our guidance range for the first half of the is 11% to 12%.

Of course, we're focused on the higher end of that range to the extent of our ability.

So, we do expect higher margins of the second half of the year.

It doesn't really have to be much higher, Itay, than the front half of 2012 to accomplish our objectives.

And so we think that once we get our operations settled down, get some of these unusual cost drivers settled down, we should be able to return our profit performance to the levels that we enjoyed in the first half of 2012.

That's helpful.

Mike, you mentioned a good start to January with respect to some of the operational issues.

Maybe too early to declare victory, to use your words.

And do you feel confident now you have a real strong handle on the situation?

What's the biggest risk, perhaps?

How de-risked are some of these operational issues in 2013?

Itay, this is David Dauch.

As I mentioned in my comments, and we've spoken before, is the two biggest issues that we had from a performance standpoint, one dealt in Mexico.

That issue, for the most part, is behind us which we committed to getting down in the fourth quarter last year.

At the same time, the Brazilian issue, as we said, we are going to take this into the first two quarters of this year.

We made substantial progress in regards to stabilizing that operation from a production standpoint, but at the same time as we communicated before, there's some localization and sourcing things and validation things that we need to get done that's going to take a little time here in the first half of the year.

So, I feel very confident that we put a restructuring plan or a performance improvement plan in place.

The team's at or ahead of schedule with respect to that.

As Mike indicated, January numbers appear to be favorable.

That's one dot.

We need to get multiple dots in the performance trend.

At the same time, we got the right leadership team focused on the performance metrics and what needs to get done in Brazil, but Brazil is probably the main issue that we still need to get after, which is no surprise to anybody.

Two quick housekeeping.

One, do have a pension under funding amount for year end?

And how much of the 2013 CapEx is being used to support 2014 launches?

That's all I have.

Thank you.

Okay.

Itay, the first question you asked was the pension funded status at the end of 2012 on a quantitative basis.

That is approximately $147 million.

Again, that's 83% funded at a discount rate just a little bit north of 4%.

With respect your second question, our increased level of capital spending, we've been traveling a little bit 6.5% to 7% for the last 12 months and we should be traveling closer to 7% for the next 12 months.

A significant portion of that, of course, is to support the launch of major programs coming in 2013 and the early part of '14.

Of the contribution of higher sales from our new business backlog, many, many of the programs that generate sales in 2014 actually launched at some point in time during calendar year 2013.

So, what I would tell you, Itay, is that most of the capital spending that we're making in calendar year 2012 and '13 and certainly into the first half of '14 will be to support the $950 million or so of new business that's launching in calendar years '13 and '14.

That's very helpful.

Thanks again.

Rod Lache from Deutsche Bank.

A couple of things.

One is I was just hoping you could help us just bridge this year over year EBITDA decline a little bit better.

You had $4 million of higher DNA, $9 million of lower GM amortization, and I think you called out $10 million of higher premium freight, but you should have had some tail winds I would imagine from lower pension, and you had $130 million increase in revenue that ordinarily would have wiped out some of those cost items.

So, can you help us maybe just bridge that $21 million decline in EBITDA from last year's fourth quarter?

What is missing in that?

Okay.

So, with respect to the fourth quarter, Rod, we did have some favorable contribution, as you pointed out, from higher sales in key programs, but the combination of premium freight costs, labor inefficiencies and production performance issues that we experienced in Brazil, also in Mexico in relation to some of the unibody activities, these were the significant drivers of the expense reductions.

We had very weak production volumes from our customers in the commercial vehicle area, so we had very poor capacity utilization in our commercial vehicle operations.

In Europe we had lower production polls from our main customer, Audi, that's separate from the commercial vehicle activity, and even in India we had very light production activity.

Some of it related to production downtime and others relating to weakness in the markets in which we serve.

So, I don't want to oversimplify this, but the major drivers of our weaker performance in the back half of 2012 was simply the mix which was week.

We didn't really have the opportunity to overcome some of these challenges with stronger light-truck second North America.

We had weaker -- or higher I should say launch preparation costs, project expense was elevated in the fourth quarter just as it was in the third quarter.

Our R&D spending was up another $3 million, a lot of this to higher product validation costs.

We added people, both SG&A and cost of goods sold, to stabilize production to prepare for launches.

These activities, Rod, are what related to those higher expenses.

At the end of the year -- I guess the other thing I would mention, at the end of the year we take a very detailed inventory accounting measures and there were a couple to maybe $3 million or $4 million of net inventory adjustment taken in the fourth quarter as well.

All of these issues our drivers of that performance in the fourth quarter.

Okay.

Also to follow up on Itay's question.

On the implied margins for the back half of this year just to get to the low end of your guidance would be in the mid-14s.

How much should we think these project expenses and R&D expenses could decline?

Do you see any of those costs returning in 2014 or is that level of profitability indicative of what you might be able to achieve in the out years?

Okay.

Let me address that sort of one step at a time.

With respect to the back half of 2013 and the magnitude of the spending levels we have on R&D and project expense, project expense was traveling at roughly $4 million maybe $5 million a quarter in the first half of 2012, jumped up to between $7 million and $8 million in the back half of the year, and will take a further increase to somewhere around $9 million or $10 million a quarter in the first half of this year.

Very similar to the bubble or the increase we have in capital expenditures, Rod, these types of expenses and to track a little bit with those trends.

In the back half of 2013, we would expect our spending in this area to decline back to the level of roughly $4 million maybe $5 million a quarter.

I'm going to talk about the back half of '13 before I make any comment about '14.

With respect to R&D spending, we expect our R&D spending to increase somewhere in the range of maybe $3 million to as much as $5 million a quarter in the first half of 2013 and settle back down to a lower run rate in the back half of 2013.

So, there's a fairly sizable impact relating to these quote unquote launch preparation costs which are going to settle down in calendar year 2013 in the back half.

In 2014, Rod, of course we continue to have significant new business backlog launch activity, but most of the programs that are driving the sales increase in calendar '13 and '14 actually launched sometime in calendar year '13.

And so the product validation, the process validation, the early days of launch, all that type of activity is going to be very much emphasized in '13.

In '14, we wouldn't expect improvements per se in those spending levels.

We might see a little bit of inflation.

Some of that's going to depend on how successful we are in winning new business awards we are quoting right now.

And the same thing for -- I think you implied the capital spending since most of these '14 projects are launching in late '13, would capital spending moderate to the more normal 4% to 6%?

Yes, we definitely think that capital spending will begin to normalize or moderate in 2014.

I think in the first half of '14 we would expect to continue funding some of the growth, as I mentioned in Itay's question, but as we get to the back half of '14 we should be back into our range of 4% to 6% comfortably.

Yes, we do expect that to begin moderating, Rod, in '14.

Thank you.

John Murphy from Bank of America.

Just a first question on the backlog.

As we look at the roll-on in '13, '14, and '15 there's a lot of new business coming on.

Just curious, as you look at that new business coming on, how does that differ relative to the business you had more problems with recently?

I'm just trying to understand as we look at this pretty heavy launch schedule in front of us, I just want to make sure we're not going to run into the same operational hiccups you had more recently in Mexico and Brazil.

Yes.

Let's first -- obviously the biggest launch we're dealing with right now is the K2XX launch this year.

We've also got the RAM heavy duty.

Those are being launched at well-established facilities that have been making those products for an extended period of time.

Some of the other future programs that we have forthcoming here, some of the Nissan stuff that we have, a variation of what we are already doing today so that will mitigate some of the launch there.

Some of the other business that we have as far as passenger car business are variations of what we've already experienced some of the pain and launch earlier.

As we go forward, we've now got our leadership teams in place in these global locations.

We've standardize operations in those different global locations as well.

We're doing different things to strengthen our program management and supplier readiness activities which obviously caused us a lot of pain this year, especially out of Mexico when we didn't have a supplier capable of supporting what we needed to have done.

So, there's a lot of lessons learned that we've gone through this past year and 2012 that we're making sure we don't duplicate in 2013 or beyond going forward.

Great.

That's helpful.

And then the $500 million you mentioned you are quoting on, David, what kind of success rate do you typically have or win rate do you have on those kinds of quoting activities, and is the timing of those '14 or '15 or was it '15 and '16 that the bulk of that business dropped?

Typically, John, our hit rate is in the 25% to 30% range; however, we're going through a little bit more detailed sales filter which should drive that performance a hit rate up potentially.

So, that -- those programs are mainly 2015 and out programs.

There's some things from our '14 business or various we have open capacity that could potentially impact the 2014 period of time, but most of everything we are working on is 2015 and beyond.

That's great.

Mike, just one question on the accounts receivable.

They were up 40% year over year.

Obviously out paced sales.

Is that purely just a function of the change in payment terms which we should see that sort of more settle down in line with sales growth going forward?

Yes.

John, yes, let me comment on that.

The increase in accounts receivable reflects the increase in sales activity at the end of the year, year over year.

I told you that our fourth quarter sales in calendar year 2012 was up 22% on a year over year basis.

So, that's a significant driver of the increase.

The $33 million increase that is attributable to the change in administration of (inaudible) of payment terms of supply base is another driver.

And our re-billable tooling balances, these are tooling recoveries that we will make from our customers.

These are higher as well.

This tends to increase in periods of heavy launch because we're not able to collect these costs from our customers until we achieve PPAP certification which is typically near the actual time of launch.

So with elevated launch just like we see CapEx up, we see project expense up, we see some R&D cost up, our re-billable tooling balances recoverable from our customers are also up.

Those are reflected in our accounts receivable.

That might eat a little bit mid-2013 a little bit?

Yes, the re-billable tooling activity should come in down a little bit in calendar year '13.

Obviously, the general sales activities going to go up, so that's going to cause an increase.

We do not and expect any noise around change in payment terms in 2013.

One last question on the pension.

You've got a lot of companies that are similar situation where they've gone through pre-funding yet there's this idea that they might put in a lot of discretionary money into the pension plan above and beyond what's required.

Obviously, you've done some of that this year already.

Are we through this topping off of the pension plan $147 million under fund, asset returns at discount rates really try to take care of the rest for you there or will it be discretionary contributions in 2013 and '14?

John excellent question.

Let me address that from two perspective.

Never say never.

There is a set of facts and circumstances that prove to be beneficial to the Company we might consider discretionary funding before there's going to be any governmental requirement.

It is not our intention at this point in time to make any further discretionary contributions for the next three to five years or so.

Certainly, that's true in the US.

And, the reason is we just did that to a large degree in calendar year 2012.

We are very pleased with the improvement in our funded status.

And our view is, John, that we're going to let the asset returns and the -- well, we believe will eventually be a normalized interest rate environment which would increase the discount rate used to measure these liabilities, we're going to let these dynamics do some work for us and we think that our funded status will probably continue to increase over the next three to five years despite the fact that we are not going to be making any significant additional contributions.

I very much agree with you.

Thanks a lot guys.

Chris Ceraso from Credit Suisse.

Just a couple of things left.

I hate to come back and rehash this kind of stuff, Michael, but can you help us get from the run rate of call it a 9% EBITDA margin in Q4 to the 11% to 12% that you are expecting in the first half of '13?

Maybe just some of the big buckets.

How much lower premium freight do you expect?

How much of an improvement in launch-related cost, et cetera?

No problem.

Okay.

So, the improvements that are going to be most significant in that [law], Chris, is going to be the sales mix issue.

That's, as I mentioned, roughly 150 basis points of margin impact and relates primarily to the lower, unusually low at least in relation to current sales level, production that GM had for the GMC 900 program in the back half of 2012.

So, if we increase our quarterly production rate by 10,000, 20,000, maybe even 30,000 units depending on exactly what GM will do relative to inventory and start up timing on the K2XX, that's going to be a significant improvement, one that all of us should have been expecting to impact 2012 negatively but also bounce back and improve 2013.

So, that's a big impact of getting from roughly 9% up to 11% to 12%.

The other issues, the production performance issues are, as we've already mentioned, going to be mitigated significantly in the first half of 2013, at least compared to the fourth quarter of 2012.

The premium freight, as we mentioned, and I think Rod pointed out in his question, was about $10 million in the fourth quarter.

We would not expect that to be higher than $2 million, maybe $3 million a quarter, at any point during 2013, probably low end of that range.

So, from a magnitude perspective, these two issues alone will do a lot of work for us in terms of helping improve our margins here in the first quarter and second quarter of 2013.

The launch preparation costs will be a bit of an offset to that, but we are going to be working to improve production performance not just in Brazil, not just on premium freight, but our budget in our plan for 2013 includes other favorable drivers including the contribution from new programs launching that will help us to improve capacity utilization at some of our global operations.

Okay.

As you turn over to the new truck, I'm talking about GM in particular, is it reasonable that your margin on that program, at least initially at launch, will be lower than the outgoing program until you get up to full speed and until you start to generate some productivity?

Have you factored that into your walk through the back half?

We absolutely have factored that into our walk to the back half.

A couple of things I would say, David has made mention of the fact that one of the significant reasons why our margin in 2013 and maybe the early days of '14 will be a little lower our contribution on the GMC 900 K2XX program is the fact that we need to support both programs on the same production line and the same facilities for a period of time.

So, changeover costs are going to be elevated, we have the normal launch preparation costs that we've already discussed are going to be higher.

And we also have other launch issues, I guess you would say, to manage in the normal course of running our business.

Yes, we would typically have better profit margin performance in the second year of launch, for example, than we would in the first.

So, all those dynamics are going to play out.

The one thing that's a lot different actually about the GMC 900 K2XX transition as compared to the business we launched in 2012 is that many of the components we need to manufacture for the K2XX program are either carryover components or consist of significant consistency with the GMC 900 activity.

And so this risk profile, certainly not devoid of risk, is better for us in relation to our launch in 2013.

Okay.

Then just last one.

Can you give us any more details on the axle win with Ford that you mentioned?

Yes.

I can't speak to the specific program, but it's obviously the first axle driveline program, it's a program that's global in nature.

Like I said, it's our first foray into Ford Motor Company and we look forward to being successful on that program and open up other opportunities.

Okay.

Thank you.

Joe Spak from RBC Capital Markets.

Good morning, everyone.

Thanks for all the detail.

Just one quick clarification on the first half EBITDA margin guidance.

You said 11% to 12%.

That's for the first half in totality, so it is possible to exit the second quarter at a rate similar to or above that, is that right way to think about that?

That's right.

First of all, good morning.

Yes, what we are saying is that our EBITDA margin for the first half of the year should be 11% to 12%.

We do expect -- there are elements of activity in the first quarter that will make it a little more challenging to perform at the high end of that level than it would in the second quarter, including the fact that GM had significant down time on the SUV portion of the GMC 900 program here in the month of January.

So, our volume on that key program should improve second quarter versus first quarter, at least in relation to their SUVs.

So, yes, I think that's a fair comment.

We expect to be able to improve our performance as we work for the year.

We will make steady improvement on mitigating some of these production performance issues.

While we are feeling good about our January performance, I would tell you that's more indicative of the low end of the range than the high end of the range.

So, we are making progress but we still need to keep our heads down and focus on continuing that progress to achieve exactly what you described.

Okay.

And then I just want to make sure I understand the termination of the GM agreement.

I thought you said that actually in the first quarter of '12 there was still a benefit for you.

So, I'm assuming obviously as we roll forward in the first quarter of '13 on a year over year basis, that's another one of the headwinds that you think about in the first quarter?

That's exactly right, Joe.

That's exactly right.

It was about $7 million of benefit in the first quarter of 2012.

Because it ended in the first quarter, that the same for the first half and the same for the full year.

So, that's exactly right.

Okay.

And then, briefly you touched on this.

I think when you announced that deal, you mentioned pension expense.

That obviously goes down, maybe even that flips to a pension income it sounds like, to help offset higher interest expense.

Can you give us an order of magnitude there of where pension expense finished '12 and what that could go to in '13?

Joe, the best way to think about it in tracking exactly to what we said then is that we borrowed somewhere between $200 million and $225 million depending on whether you consider the pension contributions we made prior to the borrowing part of the deal.

We borrowed the money at roughly 6.625 interest expense and we expect the impact of that higher interest expense to be offset by lower pension expense.

We expect that the net impact of that portion of the refinancing activity to be P&L neutral.

Interest expense up, pension expense down.

So, there are some dynamics, depending on which profit metric you are looking at, EBITDA or net income, for example.

But big picture, the net income impact should be neutral.

Pension expense was in the neighborhood of $14 million in 2012.

There were a lot of puts and takes to this number, Joe, but basically we expect our pension expense to be negligible and as you point out, could very well be pension income either in 2013 or soon thereafter.

Okay.

Great.

That's very helpful.

Ryan Brinkman from JPMorgan.

Your line is open.

Since your non-GM revenues are likely to begin to inflect higher pretty soon after not rising a whole lot as a percentage of revenue in 2012, can you maybe just walk us through the cadence of some of the launch of non-GM business highlighting individual programs as you are able to?

And then maybe share what types of products generally that you expect to be launching on these non-GM vehicles?

How similar are those products to the products that you currently manufacture?

Thanks.

Ryan, this is David Dauch.

Clearly, we are launching business with Mercedes.

That buying is going to continue to grow.

Those are independent rear axles that we supply out of our China facility.

As I mentioned in my earlier comments, we are making commercial axle business out of our Chennai facility for Daimler.

We have got transfer case business and other passenger car related business with Jaguar, Land Rover that is similar to what we do today.

As I mentioned, Nissan, we have additional [beam] axle programs as a variation of what we are doing today with them.

We've also got business Scania, component and machining business.

We've got some driveshaft business which is right in our wheelhouse similar to what we do today.

We obviously have the newest issue that we are dealing with is our EcoTrac disconnecting all-wheel drive which, as everybody knows, that launches this year for us and will roll into a bigger launch in the 2014 period of time.

So, that's probably the one thing that's really new and different.

Some other things that we are doing with Chrysler and the Ram program and we are right in the middle of launching the 2013 program right now.

We have a subsequent launch later this year which they call their 2014 model year which, again, some changes to what we are doing but things we are very familiar with in that respect.

So, again, our focus is launching the business that we have right in front of us.

At the same time, we are now taking lessons learned that I mentioned earlier to make sure that we have the disciplined program management, the supply readiness activity to manage the future launches before us this year and in future years as well.

That's really helpful.

Thanks.

And then just the last question.

We're coming off a couple of pretty strong pick-up truck months in December and in January which also featured some improved market share and better inventories for General Motors relative to October and November.

I was just wondering if given this if you feel any differently about combined K2XX GMC 900 volumes in 2013?

I think you previously guided to that being flat year over year?

And just any comments on the pickup truck market overall into 2013.

Thanks.

Our guidance is still roughly 1 million units on a GMC 900 trucks combination for this year.

Clearly, the market is growing on the pickup truck side.

So, there is potential upside there for us as we communicated before.

The Detroit International -- North American International Show highlighted a lot of new product.

General Motors was just one with their K2XX, but Ford and Chrysler also had their product out there with the 150 and the things they're doing with Chrysler, both the 1500 series and the 2500, 3500 series.

Tundra, Toyota is coming out with a new product.

Nissan is coming out with a new product.

So, we feel good with a pickup truck market is going.

We feel good about our penetration with those customers in regards to products going forward.

And we are hopeful that the K2XX is received very favorably in the marketplace like it typically is with the launch of a new program.

We hope that we can convert that and benefit from that going forward.

Mike?

Ryan, one thing I would add, General Motors has made clear to the supply chain to be ready to produce more vehicles or to support the production of more vehicles than what we're assuming in our guidance.

So, this clear upside potential here, and I think that upside potential becomes more acute in 2014.

So, we've got a line on that and most importantly we are making sure that our own operations and our supply chain can handle the higher volume.

We do expect higher volume in this program.

At some point in time in the next couple three years perhaps as much as 1.1 million to 1.2 million units of production.

We are just a little cautious as to how quickly that may come due to launch activity, due to the inventory levels.

We don't want to get too carried away with higher volume assumptions.

We don't want to put excess cost in our system only to have to strip it out.

We'd much rather play from having upside potential and adding some cost along the way.

We find that to be a more prudent way to manage our business.

We manage our guidance in the same fashion.

We're being very explicit and transparent about our assumptions and also the upside potential.

Great.

Thank you.

I appreciate all the color.

Brian Johnson from Barclays.

I just want to ask two questions here.

The first, I see people trying to go through the math and see you have an exit rate of 14%.

You talked about good profits or sort of a level of profitability in 2014 that benefits from the launches being behind you.

Yet when I look at your midyear guidance, if I were just to take the 500 divided by 4 billion, that would get us closer to 12.5% profits.

So is that 14.5% from something that we should think about is the new run rate and there is just rounding in that mid '15 or is it going to kind of come and go with the launch activity?

Next, I'll ask a more strategic question.

A couple things to say here.

The first is with respect to our profit margin guidance.

We really haven't provided any specific guidance on 2014.

I think what you are commenting on relative to what we have said makes sense.

We do expect to exit '13 at a very solid, strong profit margin.

We do recognize there could be other inflationary headwinds and we know we've got some price reductions or productivity commitments as they are referred to, to pass along to some of our customers.

The other dynamic that's going to occur over the next two or three or four or five years is the fact that as we become a more diverse company, as we begin to look very much more like our peers with a better balance of revenue between the GMC 900 program and other elements of our business, we do expect our long-term margin performance to decline from the levels that we've enjoyed over the past several years.

From our perspective, that's absolutely okay as long as we address the cost drivers associated with our balance sheet.

We've commented on the pension situation.

We've commented in respect to the question Rod asked about CapEx moderating over the next few years.

And the other one we have to address and plan to address is the generation of free cash flow is lower interest expense over a period of time.

If we do that, you can come from many companies, Brian, that have EBITDA margins of the range of 11%, 12%, 13% that generate a lot of free cash flow.

We think we can transition to becoming a much more stable, strong, growth company with solid profit margins and good cash flow, but at a lower margin.

So, specifically I want to address the comment you made about our longer term 2015 guidance.

What we said very specifically was we expect our sales to exceed $4 billion and we expect our EBITDA to be at least $500 million at that time period.

There are lots of numbers higher than $500 million, and I'm not trying to be a smart alec, but we do expect to be able to perform at levels higher than $500 million, even at the level of $4 billion potentially depending on how we get in our business, the overall mix of the production polls that come from our customers and the dynamics of the customer relationships that drive the pricing over the long-term conditions.

So, we are not saying that 12.5% is a point estimate for our future margin guidance.

What we are saying is that we expect our sales to be at least $4 billion by 2015 and we expect our EBITDA to be at least $500 million.

The great thing about that information is that if you can illustrate our plan should be achievable to generate substantial free cash flow in the future.

Okay.

My second question really for Dick Dauch is kind of -- and for Dave as well but acting as a team, when you kind of look at it, the core seems to be here you are transitioning to a much more diversified company with a broader range of customer end use applications.

At least the first stage of it has been kind of rocky.

How do we -- you talked a bit about the processes but how do we really get confidence over the next couple of years that every time there's a new set of new business that roles on that is a bit out of the wheelhouse we won't see launch preparation cost overruns.

Are there different things you are doing in terms of hiring more experienced locals or end market [ex-pats]?

Would you think about acquisitions to get the supply chain and that kind on-the-ground experience?

And how does it go back as you kind of build this backlog to make sure your quoting activities reflecting the cost of doing business outside of your wheelhouse?

Good morning, Brian.

This is Dick Dauch.

Thank you for the question and your long-term respect for our Company and our needs.

We've always, from 1993 on said that we would selectively globalize our Company and there are some growing pains when you go from our regional outfit to a global outfit.

We feel all the base foundation has been established.

There was a little bit of a hiccup here in the last three months to six months.

We grant that.

There is nothing there that can't be overcome by good execution and good performance which will rebuild the credibility for you men and women that analyze and review our performance.

Anything that we do need to do, we're not going to tell you because we are already doing that or will be doing it.

We don't want our competition to know what we are doing.

Okay.

Thanks.

We've got time for one last question.

Peter Nesvold from Jefferies.

Hi.

This is [Elaine].

Sorry, all of our questions have been asked.

Thank you.

Thanks Elaine.

Thanks all of you who have participated on this call and appreciate your interest in American Axle & Manufacturing.

We look forward to talking with you in the future.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.