American Axle & Manufacturing Holdings Inc (AXL) 2013 Q2 法說會逐字稿

Good morning.

My name is Nicole, and I'll be your conference facilitator today.

At this time, I would like to welcome everyone to the AAM second quarter 2013 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)

As a reminder, today's call is being recorded.

I would now like to turn the call over to Mr. Christopher Son, Director of Investor Relations, Corporate Communications and Marketing.

Please go ahead, Mr. Son.

Great.

Thank you Nicole, and good morning to everyone.

I'd like to welcome everyone who is joining us on AAM's second quarter 2013 earnings conference call.

Earlier this morning, we released our second quarter 2013 earnings announcement.

You can access this on the www.aam.com website or through the PR newswire services.

To listen to a replay of this call, you can dial 1-855-859-2056, provide the reservation number 14713803.

This replay will be available beginning at noon today through 5.00 PM Eastern time August 9.

Before we begin, I would like to remind everyone that the matters discussed on today's call may contain comments and forward-looking statements that are 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 a reconciliation of these non-GAAP measures to GAAP financial information, is available on our website.

We are always happy to talk with 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 President and CEO, David Dauch.

Thank you Chris, and good morning to everyone.

Thank you for joining us today to discuss AAM's financial results for the second quarter of 2013.

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

To begin my presentation today, I will first provide highlights of AAM's second quarter of 2013 results.

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

After that, we will open up the call for Q&A session as we always do.

Let me first state that AAM's financial results in the second quarter of 2013 were highlighted by solid sales growth and improved profitability.

AAM's second quarter financial results include the following.

First, for the second quarter of 2013, AAM's sales were approximately $799.6 million.

This marks the 14th consecutive quarter of year-over-year sales growth for AAM.

Second, our net income was $25.8 million and earnings per share was $0.34 in the second quarter of 2013.

Third, adjusted EBITDA increased 130 basis points sequentially to $102.3 million in the second quarter of 2013.

AAM's EBITDA margins in the second quarter of 2013 was 12.8% of sales beating, what we had indicated earlier.

AAM is benefiting from a strong recovery in the North American light truck market as well as the launch of many new products designed to help our global customers increase fuel efficiency, reduce emissions, improve safety and handling performance.

The combination of these factors, and the continued progress on our operational efficiency, positions us to continue improving AAM's financial performance in the second half of 2013.

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

Let me now shift gears and update you on AAM's continued progress on our aligned business strategy.

This strategy is designed to build value for our key stakeholders and emphasize AAM's continued commitment to quality, operational excellence, and technology leadership.

First, AAM is delivering quality.

We continue to be intensely focused on maintaining AAM's high-quality standards.

This is the foundation of AAM's world-class delivery, warranty, durability and reliability performance which is second to none.

Over the last 10 years, AAM has operated an average of less than 10 discrepant parts per million.

This is industry-leading quality performance.

At AAM, we strive to produce quality products every day.

This is a foundational principle that drives our Associates to provide exceptional service and value to our customers.

Our commitment to consistently delivering industry-leading quality enables AAM to attract new business partners and keep our existing customers coming back for more.

Second, AAM's operational performance continues to improve.

AAM's gross profit in the second quarter of 2013 was 150 basis points higher than our first quarter results.

We are targeting even higher profit margins in the second quarter -- the second half of 2013.

The improvement in our profit margins is significant and reflects our commitment to operational excellence and effective global launch performance.

Critical AAM launches in 2013 include the following.

First, AAM is proud to support the launch of GM's next generation full-size truck pickup truck program and SUVs, also known as the K2XX program.

We started shipping these important new products to GM at a scale in the second quarter of 2013.

GM is transitioning four North American assembly plants to support the K2XX launch.

GM is expected to complete this change over in the first quarter of 2014.

Second, AAM is very pleased to be supporting Chrysler's launch for the all-new heavy duty series Ram pickups in 2013.

In our view, market timing for these critical GM and Chrysler launches has been outstanding.

The full-size pickup truck market is red hot.

We look forward to the opportunity and challenge to supporting what we believe will be very strong demand for these powerful new trucks as we move forward.

Finally, AAM's third major 2013 launch program is the EcoTrac disconnecting all-wheel-drive program.

AAM is launching this important new program in the third quarter of this year at our Three Rivers manufacturing facility in Three Rivers Michigan.

AAM's innovative EcoTrac disconnecting all-wheel drive system enables the vehicle manufacturer to offer a fuel-efficient, environmentally friendly option to provide safety, ride and handling performance of an all-wheel drive system for passenger cars and crossover vehicles.

AAM's EcoTrac system is an industry first and demonstrates our commitment to technology leadership and is a great example of how we're using engineering innovation to strengthen our position as a product process and systems technology leader.

The growth in AAM's new and incremental business backlog provides AAM the opportunity to introduce a variety of new products to the global automotive marketplace over the next several years.

This supports one of our key business initiatives, which is diversification.

Our decision to aggressively invest in the expansion of AAM's product portfolio is paying huge dividends for AAM.

Two key metrics to illustrate this point are the following.

In 2013, AAM's sales of driveline system components supporting the global passenger car and crossover vehicle market will double, growing to approximately $300 million.

Approximately 60% of AAM's new and incremental business backlog supports this critical diversification initiative.

Second, in the second quarter of 2013, AAM's non-GM sales increased $35 million on a sequential basis to $223.8 million.

Over half of AAM's new business backlog is non-GM business.

These important new sales growth opportunities are demonstrated with important customers like Chrysler, Ford, Daimler, Nissan, and others that support our plans of achieving parity in AAM and GM -- non-GM sales by 2015.

The third and final strategy update relates to technology leadership.

AAM's ability to effectively respond and adapt to the changing market requirement is a primary reason for our optimism in AAM's future growth and profitability.

Adapting the design of our rear beam axle portfolio to increase torque handling capabilities while at the same time supporting our customers' initiative to improve fuel efficiency, reduce emissions and optimize performance, is one important example of AAM's ability to gain new sales content by leveraging product process and systems technology leadership.

Another example of AAM's technology leadership is the recent commercialization of our e-AAM hybrid and electric drive systems.

On July 9, 2013, we announced that AAM has secured a new contract with Corus Automotive Company that features AAM's new e-AAM technology.

The vehicle will be produced in China for sale into Chinese and European markets.

The e-AAM hybrid and electric drive system is designed to improve fuel efficiency up to 30% and reduce CO2 emissions while improving safety and providing ride and handling performance, as well.

We are excited to have successfully commercialized this new and innovative product technology.

Together with our legacy expertise in the rear beam axle and our industry first disconnecting EcoTrac all-wheel drive systems, we are a very competitive product portfolio to drive future sales growth opportunities for the Company.

Before I turn it over to Mike, let me wrap up by making a few closing remarks confirming our 2013 outlook.

As we have previously discussed, AAM's 2013 outlook is based on the assumption that US light vehicle sales will be approximately 15 million units for the full-year 2013.

Based on this industry sales assumption and the anticipated launch timing of AAM's new business backlog, we are targeting full-year 2013 sales of approximately $3.25 billion.

For the first six months of the year, we are on track to meet or exceed the 2013 sales target.

In the first half of 2013, we targeted and adjusted EBITDA margins in the range of 11% to 12% of sales.

AAM's actual first-half adjusted EBIT performance was 12.1% of sales.

For the full-year 2013, we are targeting an adjusted EBITDA margin in the range of 13% to 13.5% of sales.

This implies further sequential improvement in AAM's profit margins in the second half of 2013 as compared to the first-half results.

Let me set simply say that we are prepared to meet the challenge and look forward to reviewing our progress with you again in 90 days.

That concludes my comments for this morning.

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

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

Mike?

Thanks David, and good morning to everybody.

My job today is to cover the financial details of our second quarter results, so I'll get right to it, and we'll start with sales.

Net sales in the second quarter of 2013 increased approximately 8% to $799.6 million as compared to $739.8 million in the second quarter of 2012.

The year-over-year increase in second quarter sales relates primarily to gains in non-GM sales, approximately $25 million in the quarter, and higher content per vehicle in our North American light truck programs.

In the second quarter of 2013, sales for all of our driveline product families, North American light truck, global light truck, commercial vehicle and the passenger car and crossover vehicle products, all of these product families were up on a year-over-year basis, and they were also up on a sequential basis.

We feel great about that broad-based strength in our sales.

As compared to the first quarter of 2013, AAM's sales in the second quarter of 2013 were up approximately $44 million, so the sequential increase in sales was $44 million.

This sequential growth in sales relates primarily again to increased non-GM sales, approximately $35 million on a sequential basis increase, and a recovery in GM sales in Thailand.

Keep in mind that our first quarter 2013 sales were adversely impacted by a labor strike occurring at GM's Rayong, Thailand assembly facility.

Those sales returned in the second quarter of 2013.

Also in the second quarter of '13, in total, our non-GM sales increased by approximately 13% on a year-over-year basis to $224 million.

And the second half of 2013, we expect the year-over-year growth trend in AAM's non-GM sales to accelerate, growing by as much as 30% as compared to the second half of 2012.

The launch of AAM's new EcoTrac disconnecting all-wheel drive system and new content on the 2014 model year RAM Heavy Duty series pickup trucks are the primary drivers of this non-GM sales growth acceleration.

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

In the second quarter of 2013, AAM's content per vehicle was $1554.

This was $50 higher on a sequential basis as compared to the first quarter of 2013 and over $100 higher on a year-over-year basis versus the second quarter of 2012.

New content we are providing to GM and Chrysler on their next generation full-size truck programs, again the K2XX and RAM series heavy-duty trucks, this was the primary driver of the increase.

New content on these major North American light truck programs.

Okay.

Let's move now to profitability.

Gross profit was $122.2 million or 15.3% of sales.

Operating income was $61.7 million, 7.7% of sales.

Net income in the quarter was $25.8 million, as David noted, $0.34 diluted per share.

In the second quarter of 2013, AAM's gas derived EBITDA or earnings before interest expense taxes, depreciation and amortization, was $102.3 million for an EBITDA margins of 12.8% of sales.

As David noted, this was 130 basis points higher on a sequential basis as compared to adjusted EBITDA in the first quarter of 2013.

About half of the sequential improvement in EBITDA for the first quarter of 2013 was due to the profit contribution from increased non-GM sales.

The remainder of the sequential improvement in EBITDA for the first quarter -- second quarter of '13 was due to the profit contribution from higher GM sales, lower launch preparation costs, and improved production performance.

On a year-to-date basis, for the first half of 2013, AAM's adjusted EBITDA was $188.9 million, 12.1% of sales.

Adjusted EBITDA excludes the impact of debt refinancing and redemption costs we incurred in the first quarter of the year.

In 2013, that is the only adjustment required to reconcile this non-GAAP measure from our GAAP derived EBITDA results.

On a sequential basis, AAM's adjusted EBITDA margin performance in the first half of 2013 was improved by almost 300 basis points as compared to the second half of 2012.

Two issues drive this improvement.

Number one, improved North American light truck sales mix.

This is due primarily to higher production of GM full-size pickups and SUVs.

I'm sure most of you remember GM front-weighted production of this important product line in calendar year 2012, and in 2013, the quarterly run rate has been more steady and higher than the second quarter of 2012.

Profit contribution from higher sales also accounted for a significant improvement in AAM's first half of 2013 EBITDA performance.

Improved mix and profit contribution on higher sales, that's the first major driver of improvement in 2013.

The second major driver of improvement in EBITDA performance this year versus the second half of last year is what we call improved production performance.

Now, this is due primarily to lower premium freight costs and improved results in Brazil.

We've talked about these two matters extensively in public settings over the past year, so I won't get into more details at this time, but I will say this was the second major driver of improvement in calendar year 2013.

We still have wood to chop in terms of achieving an even higher profitability target in the second half of 2013, but we're very pleased with the progress we've made so far this year.

Bottom line?

We told you all what we plan to do, and we're doing it.

Let me anticipate a couple questions you may have when you review our 10-Q for this quarter, the second quarter of 2013.

In June, we announced our plan to demolish a significant portion of our Detroit manufacturing complex.

In the second quarter of 2013, we recognized a net gain of approximately $4 million associated with the sale of assets on this site, the Detroit manufacturing complex.

As we work our way through the rest of the year, this net gain that we incurred in the second quarter of 2013 will work its way down.

We will incur approximately $2 million of incremental cost to rearrange and redeploy other assets retained on this site.

So for the year in total, we expect the net upside on this activity to be approximately $2 million, but it was $4 million in the second quarter of 2013.

Also on the second quarter of 2013 and offsetting the impact of the lift associated with that gain, we recorded almost $2.5 million of foreign exchange losses.

The US dollar strengthened significantly and unusually for one quarter versus domestic and peso, the Brazilian real and the Thai baht.

And the movement in these currencies in the quarter drove this unusually high adjustment for our Company.

The net impact of these two items had no significant impact on our results for the quarter, but we thought we should put them out to you nonetheless.

Before reviewing our cash flow results, let me quickly cover SG&A, interest and taxes.

Starting with SG&A.

In the second quarter of 2013, SG&A including research and development spending was approximately $60.5 million or 7.6% of sales.

This was approximately the same at 7.5% of sales in the second quarter of 2012 and 7.9% of sales in the first quarter of 2013.

AAM's R&D spending in the second quarter of 2013 was $27.3 million.

This was comparing to $28.8 million a year ago and $28.5 million in the first quarter of 2013.

As we previously discussed, we expect AAM's R&D spending to be lower in 2013 as compared to 2012, principally due to number 1, the timing of product valuation and prototype requirements to support the launch of new business awards.

The timing of these activities weighed more heavily towards 2012 and 2013 from a spending perspective.

And number 2, higher customer recoveries of ED&D costs.

Just to be clear, I mean engineering design and development costs that are absorbed by our customers.

This is going to be much higher in '13 versus '12, and so these two matters drive the reduction in our R&D spending year-over-year.

Net interest expense in the second quarter of 2013 was $28.6 million.

This was up approximately $5.3 million on a year-over-year basis.

Higher outstanding borrowings, due significantly to our elective pension funding in 2012, is the primary reason why interest expense is up on a year-over-year basis.

And remember, our pension expense is down, so on a net basis, that transaction had no material impact on our earnings.

Final thing to comment here on is taxes.

AAM's effective tax rate was approximately 17% in the second quarter of 2013, in-line with our guidance of 15% to 20% for the full year.

Although it had no significant impact on cash expense in the quarter, we did settle a transfer pricing audit in a foreign jurisdiction in the quarter.

In connection with this audit settlement, we made a one-time cash payment of $4.7 million in the quarter.

As a result of this audit settlement, our cash tax provision was about the same as our book provision in the second quarter of 2013.

And that's notable because in most quarters, for the next few years, we anticipate our cash tax provision to be much less than our book provision.

Let's move onto the cash flow story for our Company in the second quarter.

We defined free cash flow to be net cash provided by or used in operating activities less CapEx.

And CapEx is reported net of proceeds received from sales of equipment and sale-leaseback of equipment.

GAAP cash provided by operating activities in the second quarter of 2013 was $60 million.

Net capital spending in the quarter was approximately $56.7 million, reflecting this operating activity and CapEx, AAM's positive free cash flow in the second quarter of '13 was approximately $3.3 million.

Let me cover a couple quick hitters on the balance sheet.

AAM's EBITDA leverage, or the ratio of net debt to EBITDA, was approximately 4.5 times at June 30, 2013 on an adjusted basis.

This should improve by approximately one full turn by 2013 year-end.

AAM's EBIT coverage, or the ratio of EBIT to interest expense, was approximately 1.4 times at June 30, 2013, also on an adjusted basis.

This too should significantly improve by year-end 2013 to more than 2 times on an adjusted basis.

And by the way, both of these credit metrics are calculated on a trailing 12 months basis.

As to liquidity, AAM ended the second quarter of 2013 with total available liquidity of approximately $480 million consisting of available cash and borrowing capacity on AAM's global credit facilities.

AAM's liquidity position was increased by approximately $24 million in the second quarter of 2013 on a sequential basis.

Before we start the Q&A, I will close my comments this morning by commenting on our 2013 outlook.

Let me first say that we are not changing our guidance for 2013 today.

Some companies like to send lowball targets, or at least that's what it looks like, at the beginning of the year just so they can increase guidance later in the year.

We don't do that.

When we established our 2013 outlook, we communicated our goals to increased sales by more than 10% on a year-over-year basis.

As David said, we're on track to meet or exceed our sales target in 2013, with sales trending to or a little higher than $3.25 billion for this calendar year.

When we first established our 2000 outlook, 2013 outlook, we also communicated our plan to significantly improve EBITDA margins performance.

The midpoint of our guidance range for adjusted EBITDA margins performance this year, or 13.25% of sales represents, a nearly 150 basis point improvement in profitability on a year-over-year basis.

We understand investor expectations for our profitability are much higher in the second-half of 2013 as compared to the past four quarters.

We have higher expectations as well.

Based on the progress we have reported for the first six months of the year as well as the actions we have taken to prepare for increased sales activity in the second half of 2013, we believe we are well-positioned to deliver on our commitments for higher sales and improved profitability.

That's the end of my comments this morning.

Thanks for your time and participation on the call today.

I'm going to stop here, turn the call over to Chris, and we'll be happy to take your questions.

Great.

Thank you, Mike, and thank you David.

At this time, we reserved some time for some questions.

So at this time, I'll turn it over to Nicole so she can proceed and start the Q&A queue process right now.

(Operator Instructions)

Brett Hoselton, KeyBanc.

Wanted to talk about your margin regression into the back half of the year and into 2014.

Given your outperformance even versus your own expectations, it suggests that while you may still be in that 13% to 13.5% range, it suggests that you would possibly push up into the higher end of that range.

Is that a reasonable expectation?

Or is somehow your performance expectations into the back half of the year maybe deteriorated a little bit versus where you were three or six months ago?

Brett, good morning.

It's Mike.

Listen, our expectations for profitability have certainly not deteriorated from where we thought we'd be when we started the year, but we are pretty much in line with our expectations.

We were ahead of our expectations in the second quarter.

We still have a lot of work to do in the second half of this year to properly support much higher sales level activities, to support the K2XX launch, and you can see with sales activity, GM's going to be pushing on that pretty hard.

And also with respect to the EcoTrac all-wheel drive system that we have launching this quarter -- a lot of work to do.

We feel we're very well-positioned; we're going to see significant increases in our performance.

Brett, our guidance implies a margin over 14% for the second half of this year, and if we can accomplish that, we're going to be very pleased.

And as we think about your margin progression, let's say from the second half of this year into 2014, the major headwinds and tailwinds that you see driving those margins may be higher or lower?

Brett, the issues in 2013 that we have relative to earnings challenges clearly relate to launch.

We have substantial launch-related activity this year.

Those activities will persist into the first quarter of 2013 on the K2XX launch.

But the complexity associated with managing different program activities, in the Mexico plant, for example, in the early days of supporting the EcoTrac launch, which as you know has been delayed for a couple months -- we're facing more headwinds this year than we expect to see next year.

Now, on the other hand, we do expect some moderate commodity inflation to affect our material costs, and we will see moderate wage inflation impacting our labor and wage costs.

But big picture -- we think we're very well-positioned to achieve our targets for the second half of 2013 and roll right into calendar year 2014 in a nice drawn position from a profit profiles perspective.

Finally, just on Brazil -- can you talk about -- about half of 130 basis point sequential improvement was due to some improvement in Brazil and Mexico and launch costs.

Can you quantify the Brazil, where you were first quarter, where you were the second quarter, the improvement and then potentially your glide path as you move into the back half of the year?

Absolutely, Brett.

First of all, the comment and the question that you're asking relates to our year-to-date performance -- six months, 2013, versus the back half of 2012.

And about half of that improvement from roughly 9.3% EBITDA margins second half of last year all the way to 12.1% first half of this year -- about half of that improvement relates to production performance.

And the two major categories of activities here I mentioned were premium cost reduction, premium freight cost reduction -- that was about $10 million improvement sequentially.

And then the improvement in Brazil.

Brazil had recovered in the first quarter of this year to a very slight gross profit loss.

We were steady in the second quarter.

We see that turning around and improving again on the positive side of around a breakeven performance in the second half of this year.

But Brett, what that means is a $15 million improvement sequentially in our Brazilian operating profit performance.

It was a tough back half of last year for a variety of reasons, but we put those issues behind us, and now we're more focused on improving our profit performance in Brazil in 2014 and '15, by focusing not only on the manufacturing stability activities that we've been successful with this year, but pricing initiatives and very importantly, local sourcing of key components right now we're bringing over the border and incurring too many premium logistics costs through these and other costs that we can optimize by localizing.

So the game plan for Brazil is really the same as what we've been discussing now for the past six months.

But we're executing and feel good about our trajectory there.

Thank you very much.

Rod Lache, Deutsche Bank.

Congratulations.

There was a comment, I think, on your first quarter conference call, that you expected maybe 150 to 200 basis points improvement in margins from the first half of this year to the back half of this year as a result of lower launch-related costs.

Is that still in line, or was some of that pulled forward into the second quarter?

Rod, our operating team did a good job of minimizing the launch preparation costs in the second quarter.

Some of those costs were deferred to the third quarter and in particular associated with the EcoTrac all-wheel drive system launch.

Again, that program launch was materially delayed by about two, three months.

And so we are going to incur those types of startup expenses in the third quarter versus the second quarter, but we should be pretty close to that range, Rod, of 150 basis points improvement in the second half of the year.

That's really a material change, but the contribution margins from higher sales clearly will help our second half performance.

We'll get better capacity utilization on a number of our launch programs including the K2XX, but the launch preparation cost mitigation is going to be significant as well.

Okay.

And you've alluded to these customer delays before, but you didn't really change your full-year revenue guidance.

Is there something that is mitigating the slight decline in backlog this year?

Yes.

Rob, as David mentioned in his comments, we are benefiting significantly from the strength in the North American pickup truck market.

So strength in the K2XX and GMT900 programs and strength in the RAM Heavy Duty series program is really offsetting the weakness, if you will -- or the delay, not really weakness, but the delay in the launch of that program.

What's your view on the production of that platform as you look at the back half of this year relative to what you were running at?

Do you have any comments on that?

I'm sorry, which program are you referring to?

The combined K2XX and T900?

The quarterly progression we don't expect to change a whole lot.

We were around, if I recall correctly, 270,000 units in the first quarter and just a little bit short of that into the second quarter.

So at this point in time, we expect maybe a couple more quarters in that area.

I can't recall whether it was you or one of the other guys pointed out that inventory levels are moderating for General Motors; they might even be in a position by the end of the year to have some lower levels of inventory on some key models.

And so we expect GM to push hard on that program.

They are going to be preparing for launch at two facilities in the first quarter of 2014.

So we might expect the third quarter to be a little stronger than the fourth quarter.

But right now, Rod, we are very pleased to be working hard to meet that demand and help them push as fast as they want to go.

All right.

One last one, any high-level thoughts on how we should be thinking about CapEx and working capital in the back half?

And then super high level -- the outlook for 2014 on those measures?

CapEx -- we're still in our guidance for this year and our expectation's right around 7% of sales.

So CapEx -- we did expect CapEx to be a little higher in the second quarter, but we again were able to defer some activity in spending because of launch delays and other activities that our guys have done to improve productivity on our existing (inaudible) machinery equipment.

But we do see CapEx around 7% this year.

We do expect CapEx levels to moderate over the next couple years.

We don't have any different thoughts about that than what we communicated previously, but we do probably expect to be spending around the higher end of the 4% to 6% range for at least the first six months of next year, maybe for the whole calendar year; but then to moderate to something a lot closer to 5% as we move forward.

That's a critical part of our deleveraging process, and the launch cadence for us is very heavy as we pointed out.

The total dollars of launch in the next two years spread out a little bit, but most of those programs are critical validation stages during this calendar year or actually start launching this year.

And so much of the spend, whether it's CapEx or product validation, process validation, these types of activities -- much heavier weighted towards '13 than '14.

And so that's going to help us moderate expense as we go.

Working capital -- we don't see any unusual fluctuations in working capital second half of this year versus first half of this year.

We are incurring some higher receivables associated with rebuildable tooling.

Some of that will be -- a lot of that will be collected in the second half of this year; some of that may roll into the first half of next year.

That may be the only oddball item that's not directly related to our sales activity.

But inventory -- we've done a pretty good job of managing inventory.

Sales are up enough that we might have expected inventory to be up more than $10 million, but because we had more inventory in the system last year, we've been able to moderate inventory growth this year, and that's been helpful.

Thank you very much.

Itay Michaeli, Citi Financial.

Just first want to follow up to Rod's question -- can you share with us first what your 2013 production assumption is for the combined K2XX/T900?

And with some of the movement in the backlog, is $550 million still a decent 2014 outlook here, or has that moved around as well, up or down?

We're not in a position to provide any update on our 2014 backlog.

We've disclosed that as recently as June, and we just don't have any updates today.

We'll be working on our budget for 2014 next couple months, and we'll provide an update on that later this year.

But relative to the K2XX/GMT900, our guidance of $3.25 billion for calendar year 2013 is predicated on something around 1.05 million units.

As I just mentioned in answering the question for Rod, we could see that, and I think at this point in time, we think it's likely that it pushes ahead of that a little bit.

So the first quarter was 270, and we run roughly at that level for the year, we'd be around 1.08 million, which is pretty close to -- I know IHS has been communicating and others in the supply chain are planning for.

We do see higher volumes in that program certainly over the course of the next few quarters.

And if we run to 1.08 million, both David and I alluded to the fact that our sales may get ahead of the $3.25 billion.

That's going to be the reason why.

That's very helpful.

And then two quick housekeeping.

One -- Mike, walk us through how we should think about the tax rate in the second half of the year?

And also just with the pension dynamics improving -- I know you funded most of the underfunded with debt, but if you have any sensitivities or update on how you're thinking about the pension in light of some of the tailwinds we've seen year to date?

Okay.

Let me address that second question first, because we feel pretty darn good about our pension situation at the moment.

What we did last year, Itay, was pretty fun -- to clear at least three years of funding forward on our US and UK defined benefit pension obligations.

It's certainly possible, depending on actuarial assumptions and asset returns, that we could be clear of any material contributions for a period of up to four or five years, but almost for sure, we cleared out the first three years.

Based on what's happened this year, I'd say returns have been good and solid, certainly in line with our expectations.

But the discount rate has moved quite a bit.

And so our funded status has improved significantly during this calendar year.

We're going to have official actuarial support for this, but the estimates that our actuaries have shared with us suggest that the funded status is at or just above 90%, which would be a substantial improvement.

So we feel real good about that.

We see no reason to be anything but pleased with the activity there; and quite frankly, our plan to let asset returns and discount rates do the work for us for the next couple, three years seems to be right on track.

With respect to tax -- really, again, the guidance or the commentary we provide to you today is the same as what we've been saying.

We did have this settlement of an audit which accelerated a cash payment.

Maybe it would've been made second half of this year; maybe it would have been made next year -- probably more likely next year.

But the book provision is expected to be in the range of 15% to 20% this year.

And we would expect that to be reflected in our second half of 2013 results.

Perfect.

Thanks so much for that detail, Mike, and congrats everyone.

Joe Spak, RBC Capital Markets.

Had a little bit of a longer-term question on your goal to eventually get to 50% non-GM sales.

I think you had a 2015 target out there, and I think you alluded to some stronger growth in the back half of this year.

But given the fact that the core business, which are really the GM pickup trucks, is so much stronger than expected, does that change your thinking in the out years at all?

Or maybe even for this year's target?

Are some of the volume assumptions associated with the non-GM business coming up as well?

Joe, this is David Dauch.

To answer your question -- no, it doesn't change the objectives we had, even it with the higher volumes.

So there's number of opportunities we have out there that are substantially non-GM opportunities.

We've got about $1.1 billion of quoted and emerging opportunity that's out there.

So even with the higher GM volumes, we are still targeting parity of our non-GM and GM sales by the 2015 period of time, including some of our joint venture growth in sales as well.

Joe, what I would comment on -- mathematically -- and when we started talking about our non-GM goals back even as late as 2009 -- and really the strategy that we're deploying today is still very closely aligned with the strategy that we announced and communicated and designed, really, in that 2009 time period.

The goals for non-GM sales concentration predicated much lower GMT900 full-size pickup and SUV demand.

So mathematically it's more difficult to get there; and quite frankly if we had adjusted on an apples-to-apples basis those targets of 40% by 2013, and 50% by 2015 way back in 2009, we'd probably have something more like 35% to 45% based on the strength of the GMT900 program.

What I'll tell you is, this is a high-class problem.

This is a very strong foundational portion of our business.

We couldn't be happier for GM and the success they're having launching these products, and of course what it means to the supply chain.

So our goal all along has been to increase our non-GM sales percentages while growing and supporting GM on higher volumes.

That's what we continue to do.

And if we get into 2015 and we're around 45% instead of 50% and the reason is very strong full-size truck production at GM, we'll be just fine with that.

But we'll still keep focused as David pointed out.

We'll still keep focus on the longer-term goal of increasing and growing faster with other customers, and we feel very good about that for our longer-term outlook.

Okay.

Thanks for all that color.

You also did mention the EcoTrac delay.

Is it possible to quantify how much of a headwind that's been?

Well, what I'd tell you is this -- we have 200 people employed in our Three Rivers manufacturing facility to support this program.

These people and all of the intended overhead structure have been in place, and we're eating that cost for the time being.

So it's not insignificant.

But it's part of the business.

There are launch delays all the time.

We're trying to use this time to our advantage to up the ante in terms of training and preparation for go time, because that's just around the corner here in terms of much higher production volumes on that program.

But the fact of the matter is, it's costing us millions of dollars a quarter in the meantime.

Okay.

And last one from me -- just last quarter you mentioned R&D was down.

Some of that was the timing of validations and higher recoveries.

Any change there?

Or is that still expected to be down a little bit in the back half of the year?

It's going to be down for the same reasons we said last time, same reasons I said a few minutes ago -- the timing of product validation activities is lower this year than it was last year.

Keep in mind those tend to be two and three years before launch; now we're a year later and the average cycle for lunch, so that activity just a little bit less.

What also is affecting the R&D spend this year is the recovery of money from our customers, which just wasn't a significant factor in 2012.

It is in 2013, so that's pushing our spending lower.

I think were closer to 4.5% of sales last year, which I think will be a high point; we're going to be around 3.5%, something closer to 3.5% this year and probably going forward.

Thanks a lot, guys.

John Murphy, Bank of America Merrill Lynch.

It's John Lovallo on for John Murphy.

The first question would be a higher level -- truck sales are up about 11.8%, 11.9% year-to-date; and if you look at gas prices, they're up about 10% over the same time period.

The question would be, do you think consumers are becoming somewhat less sensitive to the changes in gas prices?

Or is this really just a replacement cycle kicking in?

John, this is David Dauch.

I'd say a couple things.

I think all the consumers have rebalanced their appetite for energy costs and all of that, based on what's transitioned over the last couple years here.

At the same time I think the marketplace has set itself -- those people that need to buy trucks need to buy trucks because they need it for their profession of some sort, whether it's a construction business, agriculture business, the housing business, whatever it may be.

So I think there's going to be a solid market there regardless of where the prices go as long as it doesn't get too out of line.

John, the other factor that we believe is very critical in this trade-off -- the average age of the truck in the fleet here in North America, pushing past 11 years at the beginning of this year, should be coming down now based on the strong sales we've seen, but not dramatically.

The point is this -- if you compare the fuel efficiency of a truck today to a truck 11 years ago, they're dramatically improved.

So while gas prices are up, the out-of-pocket gas cost is probably not up.

If it is, much lower than the rates of inflation that you commented on.

So we see the truck buyers, as David pointed out, asking more on their utility requirement than any concern about gas prices up or down.

That's very helpful.

Next question would be on one of the initiatives that you guys have been working on, is localizing the supply base in South America.

Is there any update on the progress there?

Again, this is David Dauch.

We are making very good progress, so we're not competing with all our activity at this time because there are certain suppliers and the progress we need to go through some more expensive validation both internally in our own [basket] and potentially even with some customers.

But again, as Mike said, our operations and our financial performance continue to improve in Brazil.

It's largely based on stabilizing the operations, eliminating the premium freight.

And then the big thing we've been working hard on, the second quarter and will continue into the second half of this year, is the localization of that supply base and the material costs.

We've got to deal with product integrity as well, and we're making sure we abide by all the appropriate rules that way.

So the other side, on the Brazilian side, as Mike also commented, was that we have some commercial issues that were also dealing with our customers with respect to some pricing items.

Great.

Thank you, David.

And last question would be -- Mike, just a point of clarification -- you mentioned that R&D on a year-over-year basis will be down.

But how should we be thinking about R&D in the back half versus the first half?

I apologize if I missed that.

The run rate should be a little bit lower; not dramatically lower.

But we would expect our run rate to be a little lower as we get into the back half of the year.

And John, I'll tell you, the primary reason for that is the timing of the customer EGG recoveries.

They're a little bit more back-weighted based on the nature of activity that we're involved in.

Our total headcount supporting this activity not really changed too much first-half to second-half, but changes in the material cost component of our work and the EGG cost recoveries drive the expense a little bit lower -- the net expense, I should say -- a little bit lower in the second half of the year versus the first half.

Great.

Thanks very much, guys.

Brian Johnson, Barclays.

It's Stephen [Hepalon] for Brian.

Just a follow-up to the last question on the backlog -- it looks like backlog might have come in a little bit weak this quarter, I would expect, imagine, due to that EcoTrac disconnecting all the drive platform -- that program delay there.

Just wondering how you see that playing out, I believe you called out in the past a $25 million headwind to be 2013 backlog?

I'm just wondering if the offsets from the Heavy Duty Dodge RAM pickup program as well as K2XX should be able to offset that?

Or if it's still going to be an incremental headwind to 2013 backlog?

This is David Dauch.

That question was asked earlier, actually.

And we do expect the sales from the GMT900 and K2XX as well as the RAM Heavy Duty pickup truck to offset some of the delays we're experiencing with respect to the EcoTrac disconnecting all-wheel-drive, so the answer is yes to your question.

Okay.

And should that spill over into roughly $25 million?

Should we expect that to spillover to 2014?

Again, we haven't updated our backlog.

We'll do that in the coming months here, but we're still projecting the $1.25 billion over the three-year period of time; and clearly some of that $25 million will move into '14 and '15 calendar year.

We're just not updating it right now.

And then second question -- in terms of K2XX production, looks like consensus roughly estimating about a 20% increase year-over-year in 3Q '13.

And I believe, if I recall correctly, back in 1Q '12, it was significant increase year-over-year in production.

I'm just wondering what you guys have learned from that since back in 1Q '12, because I believe there was some higher premium freight costs and labor costs associated with that.

If you guys are going to be able to mitigate those higher productions in 3Q '13 as well as a significant ramp up?

It's David.

It's a major difference between our operating condition in the first quarter of 2012 and the third quarter of 2013.

And we said in the first quarter of '12, what that change would be and how it would be better for us to handle higher volumes now than before.

The major difference is that we are capacitized to higher volume; our supply base is capacitized to higher volume; we expected it and had time to plan for it.

This is not unusual or unexpected.

In the first quarter of 2012, the scenario was completely different -- it was a one-time blip really in activity, so that GM could manage the downtime required in their facilities to prepare for this year's launch.

And we didn't have very much time as a supply base to plan for it, so we made short-term accommodations to support that requirement, and that's meant more premium costs and outside services as opposed to more cost-efficient longer-term strategies that we're deploying today, so the answer is yes.

We would expect to do much better this time around.

This time around, we do have some headwind associated with launching the program and managing both GMT900 and K2XX activity.

We talked about that.

It's no better, certainly no worse than what we had anticipated.

So maybe what you'll see is margins performance improve a little bit, fourth quarter versus third quarter, 2014 versus '13, as we step up to these higher volumes.

But the scenario is much different, 3Q '13 versus 1Q '12.

Okay.

Great.

That was very helpful.

And in terms of overall the margin guidance for 13.0%, 13.5% -- obviously that's predicated on a little bit lower GM K2XX production.

As we see increased volunteer, I believe consensus is around 1.05, 1.08 -- roughly around that area.

Is it reasonable to assume that, based on that higher production, those are going to be expected that we could see some higher operating leverage in the back half of the year, and potentially eclipse that 13.5% EBITDA margins guidance?

I think it's reasonable to assume that our guidance has not changed.

We're guiding to 13% to 13.5% this year, and that contemplates everything we know.

When we have more to say about that, we'll let you know.

Okay.

Thank you.

Ryan Brinkman, JPMorgan.

Congrats on the quarter.

There have been a couple questions already on K2XX and GMT900 production.

I'll just ask you a couple more.

Firstly, it looks like from the June to July forecast, IHS significantly upgraded their 2014 outlook.

It looks like they bumped the pickup production by 56,000 units.

Is this roughly consistent with your own thinking?

What's completely inconsistent with our thinking, Ryan, is we don't make big adjustments on a month over month basis very often.

We've been planning with GM, and of course, GM has been planning internally.

They've done a great job of communicating with the supply base.

A very consistent message around production capacity expectations for this program for years.

The expectations we have for next year are no different than they were a quarter ago, a year ago, or two or three years ago.

Our total capacity in the system to support this program at straight time is around 1.15 million units.

Practical capacity, much higher than that.

IHS has been jumping all over the place in the last couple, three years, trying to forecast this program.

I did not know that they increased their volumes the way you just described, but from our standpoint, the situation is consistent, stable, strong, and we've all been preparing for much higher production volumes in 2014.

That's still true today.

Great That's very clear.

And then just maybe a little bit nearer-term question on the same matter -- I think in response to Rod's question earlier, you suggested that you could see a 270,000 quarterly build over the next couple quarters.

And that's consistent with the consensus, but it would imply only about an 8% year-over-year increase in the back half of '13.

And I know that they've got some late-model inventory they need to work through and maybe they're capacity constrained because of the changeover, but we just keep seeing these monthly sales numbers.

Yesterday the Silverado and the Sierra are up 37% year over year.

So how much longer can production be up 8% and sales up 37%, without providing significant upside risk to the back half here?

That sounds like a question better directed to GM.

What I can tell you is that we're very pleased to see GM's success with these products.

They're doing great.

We see that as a call to action internally, to be prepared to push as hard as we can to support higher production volumes.

So we are taking action as necessary to do just that, Ryan.

I think you're right on at one point you made; and that is that there is still a lot of work to do throughout the entire supply chain including GM's assembly plant to step up to the full launch of the K2XX.

They're working on the second of four facilities right now.

They're going to be taking time in the second half of this year to prepare the final two assembly plants to step up to those higher volumes.

So maybe there's going to be some limitation on activity for a little while, but we are ready to support much higher activity in 2014.

My last question is on commodity prices.

Obviously there's week-to-week movements, just recently; but generally throughout 2Q, we did see a nice decline in commodity costs for some of the ones that I think you're most levered to.

And a couple of other suppliers have called out a little bit of tailwind there relative to their expectations.

So I'm just curious what you see commodities doing for you in the back half of the year?

And maybe just use the opportunity to remind us how it works -- how much of the change in commodity costs are absorbed by you versus your customers?

And is that any different over the near term versus the long term?

Thanks a lot.

Congrats.

Ryan, this is David Dauch.

With respect to commodity prices, we don't see any change in regards to what we've guided you all in the past -- we have solid agreements in place with all of our customers in regards to passing through some of the material escalation that takes place there.

At the same time we have contracts in place with our supply base -- in some cases annualized contracts and others multi-year contracts.

But based on what we've talked to you all about before and what our guidance is, there's no change from a commodities prices standpoint right now.

One additional point, Ryan, that I might add, and that is that the spot by markets or the commodity markets that drive the input cost, the raw material input costs to our supply chain -- generally that's exactly what passed through to the customer.

So David made the point that the elevation in those costs are covered by the customer, but so is the reduction in those costs passed through, the benefit passed through to our customers.

So for us, our agreements with our suppliers are generally longer term in nature, not subject to a lot of volatility quarter-to-quarter.

A little bit more opportunity on a year-over-year basis.

So when we get the [game on] this year and we settle and profitably establish those expectations for '14, we can provide more guidance.

But I think David said the most important thing -- there's no change in our expectations right now.

Great.

Thanks.

Ravi Shanker, Morgan Stanley.

Just one question left.

Can you help us with understanding where the RAM HD program has margins and CPV better than the corporate average?

Okay.

So the RAM Heavy Duty program for us does have content characteristics that are higher than average.

As you know, for our involvement in that program it is 100% exclusively the heavy duty portion of the pickup range.

Whereas for the other programs, we support both light-duty and heavy-duty.

So the content -- we're not in the business of talking to you about margin on specific programs.

We have an effective and proper profit contribution on that program, but I'm not going to comment.

There's no significant variance from corporate average to common average.

And is that program still ramping or is it already concrete?

Well, there's two aspects of the program.

We helped Chrysler introduce a mid-year enhancement to the 2013 model year at the beginning of this year.

And then a second launch for us is to support the 2014 model year, which is occurring right now.

And we're working very closely with Chrysler and the rest of the supply chain to support that.

Understood.

Thank you.

Great.

We thank all of you that participated on this call and appreciate your interest in AAM.

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

This concludes today's conference call.

You may now disconnect.