American Axle & Manufacturing Holdings Inc (AXL) 2014 Q2 法說會逐字稿

Good morning. My name is Kirk, and I will be your conference facilitator today. At this time I would like to welcome everyone to AAM's second-quarter 2014 earnings conference call. (Operator Instructions) As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Christopher Son, Director of Investor Relations, Corporate Communications and Marketing. Please go ahead, Mr. Son.

Thank you, Kirk, and good morning, everyone. I would like to welcome everyone who is joining us on AAM's second-quarter 2014 earnings call. Earlier this morning, we released our second-quarter 2014 earnings announcement. You can access this announcement on the AAM.com website or through the PR newswire service.

To listen to a replay of this call, you can dial 1-855-859-2056 and provide the reservation number 34605137. This replay will be available beginning at noon today through 5 PM Eastern time on August 18.

Before we begin, I would like to remind everyone the matters discussed on this call may contain comments and forward-looking statements subject to risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed. For additional information, we ask that you refer to our filings with the Securities and Exchange Commission.

Also during this call, we may refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures, as well as a reconciliation of these non-GAAP measures to GAAP financial information, is also available on our website.

During the quarter, we will be participating in the following conferences. The 2014 JPMorgan Harbour. Automotive Conference in New York on August 12. The CLSA AJ US Autos conference in New York on September 3. The RBC Capital Markets Global Industrials Conference in Las Vegas on September 9. And the Citi Global Industrials Conference in Boston on September 23. We look forward to seeing many of you there, but we are always happy to host investors at any of our facilities. Please feel free to contact me in order to schedule a visit.

With that, let me turn things over to AAM's Chairman, President and CEO, David Dauch.

Okay, good morning. 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 2014.

Joining me on the call today are Mike Simonte, our Executive Vice President and Chief Financial Officer, and Alberto Satine, AAM's Senior Vice President of Global Driveline Operations.

To begin my presentation today, I'll first provide highlights of AAM's second-quarter 2014 results. I will also review the status of AAM's aligned business strategy before turning things over to Mike. After that, we'll open up the call for any questions you may have.

Let me first state that AAM's financial results in the second quarter of 2014 were highlighted by strong year-over-year sales growth much higher than the industry growth rate, solid profitability, and positive free cash flow generation. There are five key points to support these highlights.

First, for the second quarter of 2014, AAM's sales were $946.9 million. This represents a year-over-year growth of 18% and sequential growth of 10% as compared to the first quarter of 2014. These are great results when compared with a 5% year-over-year growth rate for the USR and a 4% growth rate for North American light vehicle production.

Second, non-GM sales increased by over 33% to $298.1 million, a new quarterly record for AAM. The key drivers supporting non-GM sales growth in the quarter were Chrysler's new Jeep Cherokee and the Ram heavy-duty pickup truck program.

Third, net income was $52.2 million and earnings per share were $0.67 in the second quarter of 2014. This quarter's net income of $52.2 million is more than double last year's reported second-quarter net income and a sequential improvement of over $15 million as compared to the first quarter of 2014.

Fourth, AAM's key operating profitability metrics were much improved both on a year-over-year basis and sequentially. AAM's gross profit in the second quarter was $149 million. EBITDA was $137 million. And both of these profit totals marked new quarterly records for AAM.

And fifth, AAM generated $82.5 million of positive free cash flow in the second quarter of 2014. This strong result keeps us on track to achieve our $100 million free cash flow target for the full year of 2014.

In summary, AAM is benefiting this year from favorable conditions in the North American light truck market as well as the launch of many new products designed to help our global customer base increase fuel efficiency, reduce emissions, and improve safety ride and handling performance. And just as importantly, we believe AAM is well positioned to continue to benefit from these dynamics.

In reviewing our first half of 2014 performance, I would like to highlight a few other items. First, let me talk about our sales. In the first half of 2014, AAM's sales grew by $250 million, or 16% on a year-over-year basis, to $1.8 billion. Sales in the first half of 2014 were primarily driven by strong North American production volumes offset by weaknesses in countries of Thailand and Brazil. Political unrest resulted in much lower consumer confidence in Thailand. This caused a sharp decline in the vehicle market, with vehicle production down approximately 25% for the first half of 2014 as compared to the same period last year. In Brazil, a tighter credit market adversely impacted demand for vehicles in that region.

These factors significantly impacted the demand for global midsized pickup truck programs that AAM supports in those markets. We currently foresee moderate improvement in these regions in the second half of the year.

Okay. Moving onto my second item, quality. Quality is one of AAM's foundational strategic principles and a key driver of our culture and our competitiveness. Through the first six months of 2014, AAM is operating under five discrepant parts per million with a strong overall operational performance. We continue to emphasize quality, warranty, reliability, and durability performance, and our business's more stringent standards are demanded by our customers and, for that matter, the industry in general. AAM's commitment to the highest level of quality performance available in the industry is the critical differentiator in the marketplace.

Third, our operational performance. Our top priority of 2014 has been to possibly launch 17 critical programs for our customers. So far, we have successfully executed 16 launches out of the 17 totally planned for the year.

Some of the key launches we have completed include the following. New and improved driveline systems for our two largest North American light truck programs -- that being the GM K2XX full-size SUVs and heavy-duty series pickup trucks, and also Chrysler's all-new Ram heavy duty pickup trucks. AAM also launched our innovative fuel-efficient EcoTrac disconnecting all-wheel-drive systems for the Jeep Cherokee and also the Chrysler 200 nameplates this year.

Precision force transmission components were also launched for Honda and passenger car drive shafts for Chrysler. In addition, we ramped up volume and expanded our supply relationship with Mercedes in China.

Our remaining launch for 2014 relates to a gear set production launch out of our Swidnica, Poland facility, which will be supporting new business we have with JLR that launched in 2015.

And now let me discuss technology leadership. As global OEMs race to meet tighter fuel efficiency standards, the automotive industry is entering new, more advanced phase of innovation and design. This encompasses independent drive vehicles, hybrid and electric vehicles, advanced powertrain applications, and other equally sophisticated technologies. AAM is meeting these challenges with an aggressive plan to increase our investment in advanced product processing systems technology.

With support of these efforts, AAM's R&D spending in the second quarter of 2014 was $24.4 million. From the first half of 2014, AAM spent approximately $50 million on R&D. AAM's R&D spending is focused on the development of innovative solutions to assist our customers to meet market demands for higher fuel efficiency, lower emissions, light weighting, enhanced power density, and improved vehicle performance which include safety and ride and handling performance. AAM's new and innovative products to meet these industry trends include our high-efficiency mast optimized axles, which are already featured on many premium light trucks, passenger car, and crossover vehicles today.

The industry's first EcoTrac disconnecting all-wheel-drive system, which is currently featured on a Jeep Cherokee and the Chrysler 200, is being considered by several other customers. And yes, our e-AAM hybrid and electric drive system technology that we have commercialized with [Chorus] and are scheduled to launch in the late 2016 and early 2017 time period. AAM also remains focused and committed to NVH, otherwise known as noise vibration and harshness. Our NVH lab, which is among the best in the industry, has recently designed and developed critical advancements in driveshaft technology for the K2XX program.

AAM's all-new silent technology features an industry-first liner designed to reduce aluminum driveshaft tendencies to amplify the noise and vibration. The result: a quieter ride for the consumer.

And finally, diversification of profitability. The key driver and the growth of our new business backlog encoding opportunities is AAM's commitment to develop innovative advanced technology driveline products to meet the rapidly changing needs of the global automotive marketplace. AAM's new and incremental business backlog is still valued at $900 million for the program's launch between 2014 and 2016. And I'll remind you $400 million was launched in this year, $300 million is still planned to be launched next year, and $200 million the year after that. The new business backlog included in this new business backlog should help us sustain our three-year compound annual growth rate well above the industry average and growth rate through 2016.

In addition to this booked business, AAM is also working to secure new business awards currently estimated to be over $1 billion of new and emerging business opportunities that we're holding on and working on. These opportunities relate principally to non-GM programs, which will help further our diversification as we move forward.

Before I turn it over to Mike, let me wrap up by making a few closing remarks about an update on AAM's 2014 outlook. Earlier this morning, we updated our 2014 outlook in a Form 8-K filing with the SEC. AAM's 2014 outlook is now based on the assumption that the US light vehicles will range from a total of 16.25 million units to as high as 16.5 million units for the full year of 2014. This is raised from our previous assumption of 16.0 million units.

As we said, AAM is benefiting from favorable conditions in North America light truck market for 2014. However, other key markets such as Brazil, India, and Thailand are providing much weaker than we expected in the beginning of the year. Based on these revised market assumptions, as well as the anticipated launch timing of AAM's new business backlog, we are expecting AAM's full-year 2014 sales to be approximately $3.7 billion.

Let me remind you that this still represents year-over-year sales growth of approximately 16% for the full year 2014 and much more than double the expected growth rate of approximately 5% to the USR. There are no other changes to AAM's 2014 outlook. And just so I'm clear, we continue to target EBITDA margins in the range of 13.5% to 14% of sales for the full year of 2014. We continue to expect CapEx to be approximately 6.5% of sales. And most importantly, we expect to generate positive free cash flow of approximately $100 million this year.

AAM is energized to continue to supporting new product and process launches during the remainder of this year and continuing through the calendar year 2015 period of time. Many of these launches feature exciting new advanced driveline technologies that are enhanced in the diversification of our business and position AAM for solid profitability and consistent free cash flow generation, not only this year but for years to come.

That concludes my comments for this morning. I think everyone for your time and attention today and for your vital interest in support of AAM. Let me now turn the call over to Mike Simonte. Mike?

Well thank you, David, and good morning, everybody. My job today is to cover the financial details of our second-quarter results. So let's get right to it, starting with sales.

Net sales in the second quarter of 2014 increased approximately $147 million to $947 million. Of course, that's compared to approximately $800 million a year ago in the second quarter. The two main drivers for this 18% year-over-year increase in sales are, first, a $74 million increase in non-GM sales. That's a 33% increase for those of you keeping score. And, second, a 23% increase in sales supporting our major North American light truck programs. Partially offsetting the gains from these two growth drivers was weakness in the global light truck programs we support in Brazil, India, and Thailand.

For the first six months of the year, non-GM sales were nearly $600 million; $586 million, to be exact. For the full year of 2014, we should see non-GM sales approach $1.2 billion, and that does not include the Hefei, China, joint venture. Including the impact of our China joint venture, our non-GM sales are trending to approximately $1.350 billion for the full year of 2014. That represents a $1 billion increase in our non-GM sales in 2009, a key measure of our progress improving AAM's business versification and a big driver supporting our sales CAGR, or compound annual growth rate, which is nearly 20% over the past five years.

On a sequential basis, AAM sales in the second quarter of 2014 were up approximately $80 million, or 10.3%, as compared to the first quarter this year. Higher production volumes related to GM's very successful K2XX launch was the primary driver of this increase. And based on the excellent sales results we've seen in the last couple of months, including those reported today, for the month of July, we would expect those strong production volumes to keep on trucking, so to speak, second half of this year.

Moving onto content per vehicle. AAM's content per vehicle is measured by the dollar value of its product sales supporting our customers' North American light truck and SUV programs. In the second quarter of 2014, our content per vehicle was $1,640. This was $86 higher on a year-over-year basis versus the second quarter of 2013 and about flat on a sequential basis. As we have previously discussed, we expect our content per vehicle for the full year 2014 to increase by approximately $100, or 6.5%, in calendar year 2014 on a year-over-year basis.

New content we are providing to GM and Chrysler on their next-generation full-size truck program -- of course, that's the K2XX and the Ram heavy-duty series pickup trucks -- that's a major driver for this significant gain.

Okay. Let's discuss our profitability for the second quarter of 2014. Gross profit was $149 million, or 15.7% of sales. Operating income was $87.5 million, or 9.2% of sales. Net income in the quarter was $52.2 million, or $0.67 per share. In the second quarter of 2014, AAM's GAAP-derived EBITDA, or earnings before interest expense, taxes, depreciation and amortization, was $136.7 million, or 14.4% of sales. EBITDA margin performance in the second quarter of 2014 for AAM was 160 basis points higher than the second quarter of 2013 and 130 basis points higher on a sequential basis.

The favorable profit contribution from higher sales and production volumes this year, calendar year 2014, is the primary driver of improved margin performance in the second quarter. That's true whether you compare it to the prior year or the prior quarter. That's the primary issue here: good margin conversion on our backlog and higher production volumes this year.

On a year-over-year basis, there's another matter to discuss. Our profitability also benefited from a $7 million reduction in launch preparation costs. This consists of a $3 million reduction in R&D spending -- for example, product validation costs -- and a $4 million reduction in project expense, which includes expenses related to equipment runoff, start-up and other non-capitalizable costs related to getting our manufacturing facilities ready to launch new products. These costs were higher in 2013 in advance of launching $400 million of new business this year and growing our topline by about $500 million in total in calendar year 2014.

On a year-to-date basis, for the first two quarters of 2014, our GAAP-derived EBITDA was $249 million, or 13.8% of sales.

Okay. Before reviewing our cash flow result, let me quickly cover SG&A, interest, and taxes, starting with SG&A. In the second quarter of 2014, SG&A -- which remember, includes R&D -- was approximately $61.5 million, or 6.5% of sales. This compares to $60.5 million in the second quarter of 2013, or 7.6% of sales in that period, and $57.1 million for the first quarter of 2014, about flat at 6.6% of sales.

AAM's R&D spending in the second quarter of 2014 was $24.4 million. This compares to $27.3 million in the second quarter of 2013 and $25.8 million in the first quarter of 2014. While we have not grown our R&D spending as much as we anticipated at the beginning of the year, our total spend of $50 million in the first half of 2014 was up more than 5% on a sequential basis as compared to the second half of 2013. We expect R&D spending in the second half of 2014 to be up another 5% to 10% on a sequential basis as compared to the first half of the year.

Net interest expense in the second quarter of 2014 was $24.8 million. As expected, this was relatively consistent with the first quarter of 2014. And we currently expect to continue to incur net interest expense at about the same run rate through the end of the year.

AAM's effective tax rate was approximately 17.8% in the second quarter of 2014. This was right in line with our guidance range of 15% to 20% for our effective tax rate this year. There are no unusual tax accounting developments to discuss this quarter. If you have any further questions about tax, we can address those in the Q&A period.

Okay. Let's move on cash flow. We define free cash flow to be net cash provided by or used in operating activities less capital expenditures, net of proceeds received from the sale of equipment, and, if appropriate, sale-leaseback of equipment. GAAP cash provided by operating activities in the second quarter of 2014 was approximately $138 million, more than double the $60 million achieved in the second quarter of 2013.

Net capital spending in the second quarter of 2014 was approximately $55 million. Reflecting this operating activity and CapEx, AAM's positive free cash flow in the second quarter of 2014 was $82.5 million.

Okay. Let me cover a few items on the balance sheet. AAM's EBITDA leverage was a ratio of net debt to EBITDA was approximately 2.9 times at June 30, 2014 on an adjusted basis. We crossed another milestone this quarter under 3 times, which is notable mostly because it keeps us on track to approach our target of two times leverage by the end of 2015.

AAM's EBIT coverage, or the ratio of EBIT to interest expense, was approximately 2.7 times at the end of the second quarter of 2014, also on an adjusted basis. The news here is that we are on track to approach our 2015 target for coverage at 3 times or higher around year-end 2014, and that would be a full year earlier than our long-stated plan. And by the way, both of these credit metrics were calculated on a trailing 12-month basis.

A final note on the balance sheet. AAM ended the second quarter of 2014 with total available liquidity of approximately $684 million, consisting of available cash and borrowing capacity on our global credit facilities.

Before we start the Q&A, I will close my comments this morning by making a few comments -- additional comments on our outlook for 2014. As David said, today we are updating our sales outlook for 2014. Compared to the midpoint of our previous guidance, our new sales guidance of $3.7 billion for the full-year 2014 was reduced by approximately $75 million. While we have seen strength in North America and expect that to continue, the primary reason for our guidance change on sales is the weakness in Brazil and Thailand.

In Brazil, as I'm sure you know, the market in terms of light vehicle production is expected to be down approximately 15% this year. In Thailand, the market, again in terms of light vehicle production, is going to be off approximately 25%. The Thailand SAAR is down even more, maybe as much as 40% this year. In these regions, our sales are trending down more than $100 million as compared to our budget for this year 2014; and, of course, the basis for our outlook previously communicated for this year, 2014.

In Brazil, our sales are trending down approximately 20% from those earlier expectations. This result is a little weaker than the broader market. In Thailand, our sales are trending down approximately 30% more or less in line with the market. While we would like to be immune from the forces of supply and demand in the global economy, we are not, and that's the principle reason why we're going to be a little short of our previous sales guidance for 2014.

However, I feel compelled to remind you that our sales are on track to increase approximately $500 million this year, or 16% on a year-over-year basis. That's, again, more than double the rate of growth expected in the industry. This is great news for AAM, as this provides us the opportunity to significantly increase AAM's profits and cash flow. Sales will be up 16%; we expect our EBITDA to be up higher on a percentage basis. And, as you know, our free cash flow should be improved by at least $96 million on a year-over-year basis. It's going to be a great year for our Company.

All of our other guidance for 2014 remains unchanged. We are targeting EBITDA margin in the range of 13.5% to 14%. CapEx should be approximately 6.5% of sales. And last but certainly not least, we continue to target $100 million of positive free cash flow this calendar year 2014 and have every expectation of accomplishing that objective.

With respect to 2015, we continue to target $4 billion of sales and $175 million, maybe as much as $200 million, of positive free cash flow. And, yes, we believe we're on track to deliver on these targets.

That's the end of my comments this morning. Thank you for your time and participation. I'm going to stop here and turn the call back over to Chris so we can start the Q&A.

Okay, great. Thank you, Mike, and thank you, David. We've reserved some time for some questions. I would ask that you please try to limit your questions to no more than two so we can answer all questions the queue. At this time, I'll turn it back over to Kirk to begin the Q&A roster.

(Operator Instructions) Rod Lache, Deutsche Bank.

It's actually Pat Nolan on for Rod. I just wanted to get some clarification on Brazil and Thailand that was in the guidance. You said in your comments that it was down $100 million. Is that on a year-over-year or versus the original budget? And can you just size for us what the size of the 20 those businesses is?

Yes, Patrick, a couple of things. The sales numbers that I commented on, they're up about $100 million -- a little bit more than $100 million, in fact. It was based on our expectations for this year and the assumptions that were in our previous guidance.

On a year-over-year basis, the reduction was a little bit less than that. But on a guidance basis, we're going to be off more than $100 million in those two markets.

The sizing of the businesses, the Thailand business more or less $100 million business, and the Brazilian business is expected to be about a $200 million business. They won't get there this year, but we expect them to be able to recover to those levels in the next couple of years as the programs they support recover, the economy recovers, and more importantly the business backlog kicks in for that business.

Got it. And on the 2015 outlook, it looks like you moderated the topline expectations there slightly. I think you're looking for an excess of $4 billion; previously announced $4 billion. Is that just a continuation of the headwinds from Brazil and Thailand, or is there anything else going on there?

Yes, Pat, a couple of things that I would comment on. First, we've made no specific or detailed guidance comments about 2015. We are targeting $4 billion of sales in 2015; we have every expectation of getting there.

Yes, we do expect some of the structural change in a couple of the programs we support in Brazil and Thailand to continue into next year, but there are many other things that could be very positive for us in 2015.

Big picture: we don't have any material different outlook is it relates to 2015 as we have. We continue to be very optimistic about it. And as we fine tune our budget, details, and make our comments about outlook and guidance for that calendar year, around the end of this year, maybe at your conference in January, we'll have a whole lot more to say about it at that time.

Thanks. I'll get back in the queue.

Itay Michaeli, Citigroup.

So just wanted to maybe get into a discussion around the margin range for the year. How should we think about what might cause you to be at the mid, low, or high? It looks like you're kind of trailing at the high end of the range year to date. Revenue should accelerate in the second half. But you did talk about the increase in R&D sequentially. So maybe just help us kind of sort those out in terms of how we should be thinking about that.

Itay, the margin expectations for this year are stable. No change in our expectations: the range of 13.5% to 14%. As you well know, the strengths of the North American light truck program are what help drive us to those higher levels of performance, and certainly that was true in the second quarter of 2014. We had shipments of approximately 309,000 unit equivalents on the K2XX program in the second quarter. That's just outstanding.

And as we look to the second half of the year, our ability to perform at the upper end of that range and to bring in the year at or near the upper end of that range is going to be predicated on the strength of North America.

Great. And any changing thoughts on the cadence? I think last quarter, the thought was Q3 should still remain strong. Looks like production schedules are holding up to support that. Any change of thought to the cadence there?

No, no. In fact, the expectations we currently have, the schedules that we currently have from General Motors, are remarkably stable. And as you have heard me comment many times in the past, this has been true for the last year or two. In the second quarter of 2014, our actual production was within 1,000 units of our expectations for the quarter, right on track. And this third quarter looks to be relatively stable with the second quarter in terms of production for the K2XX program.

Great. And then just lastly, David, it looks like quoting activity is going fairly well here. Any thought to when these potential programs, assuming you do win them, might come online? Are you still quoting for 2016 revenue, or should we think about that mostly beyond 2016?

Itay, we have some that will hit in the 2016 period of time, but most will hit 2017 and beyond.

Okay, great. Thanks, everyone.

Okay, thanks, Itay.

Ryan Brinkman, JP Morgan.

Again on the negative revision of the 2014 revenue and the no change to 2015 despite your increase in the US light vehicle SAAR outlook in both years, is this purely on the international demand issue or is there some sort of mix issue in North America? Perhaps you could clear it up by saying whether you expect stronger North American revenue in 2015 than you presumed previously.

Okay, so Ryan, a couple of things. First of all, I'm not going to use the word negative in any way, shape, or form about our Company this year. We're going to be up $500 million. This is a hugely positive year for a Company.

Second of all, with respect to the North American light truck programs, I said in my comments earlier that we are stronger in North America than our previous comments. We've made no detailed -- we haven't even finished our budget. We haven't even started our budget in substance for 2015. We are targeting $4 billion of sales in 2015.

If you look at the market expectations we have, the SAAR, roughly 16.5 million units with relatively stable General Motors share and light truck mix across the entire market. Production volumes in 2015 would probably be around the same, maybe a little better than 2014.

However, as we look at General Motors' performance selling this truck. as we drive this vehicle, as we look at the potential for the SAAR to run even higher than $16.5 million, there are many reasonable expectations we would have for a lot more strength in 2015.

I'm not here today to sell you on the blue sky scenarios or to overstate what could happen in this program or the positive impact it would have for our Company. But what I'll tell you is that as we see more about how this program performs second half of the year, as we look at General Motors' inventory management, we'll have a much clearer picture of the upside potential for 2015.

Okay, that's really helpful. Thanks. And then obviously, we can see what the Street was expecting for 2Q. I know you don't guide too much to quarter, so I'm just curious maybe how you performed relative to your own expectations in 2Q. Maybe you could say how you performed relative to your own expectations outside of Thailand and Brazil in 2Q.

Ryan, second quarter was a great quarter from our perspective. We were on track for what we expected to accomplish everywhere, as you pointed out, with the exception of Brazil and Thailand.

Ryan, this is David. The biggest issue is we were negatively being impacted by the international sales. We're benefiting from the strength here in North America. At the same time, we've completed 16 of our 17 launches in the first half of the year here.

The next four or five months here is going to really allow us to settle in and drive productivity and throughput and performance and financial performance in the businesses as we go forward here.

And then it sets us up perfectly in regard to the launches that we have before us in 2015 and launch in the $300 million backlog in new business that we already guided people to moving forward.

So we feel very good about this year, as Mike said, and we feel better about what next year has to hold as well.

Okay, great. Perfect. Last question. On GM's conference call last week, they mentioned a supply chain issue limiting their ability to produce as many Cadillac Escalades and GMC Yukon Denali and Yukon XL Denalis as they otherwise might have been able to. I know that those trucks both have the 6.2-liter engine. I'm not sure -- a lot of other things in common, too. I don't know, but I was wondering if maybe this relates in any way to American Axle, and, if it does, if you expect to and when you expect to fully (multiple speakers).

Ryan, that has nothing to do with American Axle. We've covered all and addressed all of our capacity buy and mix issues with the customer. And the more vehicles they build, the more axles they'll get from us. We have no issues with capacity and constraints with General Motors going forward. It's not us.

Great, very helpful. Good to hear. Thanks for all the color.

Yes, thank you.

(Operator Instructions) John Murphy, Bank of America Merrill Lynch.

Just a follow-up question and thinking about Thailand and Brazil. You're not changing your percentage EBITDA margin outlook. Obviously, though, the sales being a little bit lower, the absolute numbers a bit lower.

It would seem to be that your mix is actually improving because North America is stronger and those businesses which theoretically have lower margins are weaker. I'm just curious what is going on here with the margin outlook. It seems like it should be better if those are weaker. Are they just at such nascent stages of launching they can have a big impact on margins positively or negatively?

John, a couple of things I'd point out. As you know and as we've said, North America is performing ahead of our expectations. So all else being equal, we would've expected to do a little better than what we had expected for this year.

But I want to comment -- and these light truck programs in Brazil and Thailand are very attractive contribution margins for us. We do very well in those programs. And so we are missing, quite frankly, the contribution from those sales. That would have been certainly much higher than the overall profit margins of the Company, the overall EBITDA margins of the Company. It would have had a very favorable impact on our ability to do even better than we are this year.

Okay. So when we think about the second-half range on EBITDA, which appears to be $251 million to $269 million, that $18 million high and low variance is really the result of what you think will happen in those markets? Or is that on what might happen with the core North American products?

Yes, it's a little bit of both, John. The production volume, as you know -- we're very sensitive from a profit and cash flow contribution perspective to what happens here in North America. Not just on the K2XX program but also the Ram heavy-duty series pickup truck program, the van program. All three of those are performing very well. And certainly if that continues through the end of the year, then that would drive us to the higher end of our expectations.

We don't have perfect clarity on what type of production we'll see out of Thailand and Brazil. Certainly the stronger those markets are, the better chance we have to accomplish the best outcome possible in those markets. So I'd say those are the two primary issues that we're watching here the rest of the year.

Okay. And then just lastly on the K2XX schedule that you are seeing right now. Are you seeing a little bit of an acceleration versus what you were perceiving before, or are they kind of steady-state and what you've seen from recent releases or earlier releases, I should say?

No, John, as Mike commented earlier, we're seeing solid, consistent schedules from the customer right now in line with what we had discussed with them and in line with what the capacity volume and mix that we worked out with General Motors.

Knowing that there were some issues with the initial program and the mix between V6 and V8 engines and the impact that it had on us, all of that has been worked out, as we said. All of our capacity has been realigned to support the new market demand, and therefore the schedules are in line with what GM has communicated to us and staying steady.

That's great to hear. Thank you very much.

Joseph Spak, RBC Capital Markets.

Thanks. Good morning, everyone. Two questions. First one, maybe just remind us a little bit on the non-GM mix. Obviously, you had good growth there. When does the next wave of that non-GM business really come on? If I recall correctly, I think the 2015 backlog is a little bit more weighted towards non-GM than it was in 2014.

Yes, that's right, Joe. This year, the non-GM sales growth is dominated by the Cherokee program that we support for Jeep. That's, of course, our EcoTrac all-wheel-drive system and the Ram heavy-duty series pickup truck program, the new content that we're providing there.

As we get into 2015, you'll see another excellent increase in our non-GM sales activity. We'll be launching with Jaguar Land Rover. We'll be launching our first major axle program with Ford. We'll be expanding and continuing to expand our relationship with Mercedes in China. So we're looking forward to all that. We've got a second major program with Nissan that we're going to be supporting as well.

So we'll see good steady improvement in our non-GM activity through this year as we continue to benefit from the volumes on these core programs I mentioned into next year with our backlog.

Okay. And then as we think about 2015, I know way back when, I think you were saying by 2015 you talk about 40% non-GM mix, and then I think you backed off that given the stronger K2XX mix. Now with back with some seems like little bit more maybe caution on the results in Thailand, is there any meaningful change to that mix in 2015?

No, we're still targeting parity between GM the non-GM sales by mid (inaudible) here. And remember that also includes our joint venture, which is off -- not consolidated from a financial standpoint as far as our partnership with [JZ] in China. We'd made that clear earlier.

We'll be pretty close to 40% over the next six months, Joe, including the exposure to the China joint venture. But as you point out, and this is just a great thing for the Company, the strength in our General Motors North American programs are holding us back on that particular metric. But we'll take that trade any day because that's great business for the Company.

Then the R&D, even -- I appreciate the color that basically last year it was $3 million higher because of the launch. But even adjusting for that, it still seem like it's down a little bit in the quarter. Is there something going on? I know you said you were spending more on systems. Is that on track? Is that maybe a little pushed out or delayed?

No, we're right on track in regards to our advanced development technology activity or R&D activity. Obviously, we're spending a lot of time furthering advancements in our disconnecting all-wheel-drive systems and our [Vmaxable] systems as it relates to fuel efficiency and axle efficiency.

We're also spending a considerable amount of time on commercializing and advancing the hydroelectric and full electric applications through e-AAM, and then also working on some advanced product process and systems technology beyond that.

We're doing it more efficiently than maybe what we had identified earlier, and therefore we feel real good about the pipeline we have coming at us with respect to the technology and the ability to support our new and incremental growth opportunities.

Okay. Thanks, guys.

Brian Johnson, Barclays.

Just want to ask not about the specific vehicle outlook for Brazil and Thailand but just a broader question around participating in those markets around, A, the degree of visibility relative to your crosstown neighbors at your key customer you have from those programs. And what that means for managing your business in those countries and your ability to flex up and flex down in countries that are more volatile than, again, the core GMT, K2XX business.

And thirdly, given all that, how should we think about incrementals, decrementals as we take some of the -- our estimates outside end in the revenues coming into those markets and the changes based on forecasts?

Brian, let me start, and I'll turn it to Mike to cover the margin side of things. But, as you know, we had some challenges in Brazil a couple of years ago, and we went out and strengthened our leadership team there. We've got an outstanding leadership team in Brazil, and they've actually done an amazing job considering the circumstances there adjusting our business to the new market demand to keep it financially strong.

Obviously we're being impacted on things we don't control in regards to sales, which is negatively being impacted just based on credit availability in Brazil. We do think that, as we said earlier, that we'll show some moderate improvement in the second half of the year and hopefully even greater improvement as we move forward.

In Thailand, clearly because of the coup or the military issues that took place over there, that set that country back. But, again, that's the largest truck market outside of the US. We expect it will still be a strong market for us. It's just going through a turbulent time this year. But, again, we expect to see some moderate growth coming back in that business.

We're in the right areas both in Brazil and in Thailand to support our customers, the global platform. And we also have built flexibility into our operation where we can flex our manpower and flex our equipment. At the same time, we'll reallocate some of our production requirements globally to try to keep those operations running efficiently.

We're just dealing with the market conditions right now just like any other supplier would have to do with those market conditions. We're confident in our customers' programs. They are just dealing with some of the same issues we're dealing with that being the markets to boss.

Thanks. And I guess my question is given what kind of lead time do you have on production schedules, and what does that mean for incrementals, decrementals in those markets?

Brian, the lead time that we have in terms of production scheduling is really the same throughout the world in terms of having a 16-week look every week, and an annual look and a peek into even a year forward once a month.

So I think the issue that you're rightfully commenting on is just the inherent volatility in these economies and how they are different from what we are used to here. So we have a team, as David pointed out, that is experienced in dealing with this market in Brazil. They did a good job flexing up and down.

I mentioned earlier in response to John's question that this program does have an attractive contribution margin. So the fact is that losing these sales, we do lose the opportunity to bring that margin in. So you're going to see decrementals that are little bit better than 25% because of our ability to be flexible with some of our cost structure.

But keep in mind, this is the same type of investment that we have -- fixed capital investment we have in Brazil, Thailand, or the US. And so in the short run, if we lose those sales, we're going to lose the margin. There's really not much difference really in terms of the impact on an incremental or decremental basis in those markets.

Was your workforce more flexible, say, in Mexico than in Brazil?

No, we have flexibility across all of our global operations manpower-wise. Our biggest issue lied in the US in the past, and we dealt with that back in 2008. And we've got the ability and flexibility to adjust with the marketplace in all of the other global markets.

Okay. So as Mike is saying, then, the decrementals are more driven by the program profitability than having labor agreements that give you a fixed cost in a volatile (multiple speakers).

Absolutely, absolutely.

Okay. Thanks.

Okay, Brian. Thank you.

Okay. At this time, we've got time for one more question.

Emmanuel Rosner, CLSA.

So just first one point of clarification on this year's guidance again. Your free cash flow guidance is unchanged, obviously despite lower revenues. Is that simply a function of the fact that there was some conservativism incorporated in the previous guidance, or do you have something that is offsetting the nice money you would have made in Brazil and Thailand?

Emmanuel, it certainly wasn't intentional to have any significant amount of conservativism built in. We are doing a little better than we expected managing inventory this year. Our sales are going to be up, as you know, $500 million. We do not expect an increase in our gross inventory levels, so that performance has been a real bright spot in terms of our cash flow performance and helping us to minimize the working capital impact we would otherwise see associated with that growth in sales.

The other thing I would comment on is, again, just inherent to working capital requirements. $75 million, $100 million increase in sales would equate to a $10 million to $12 million working capital requirement. And we're going to miss that, obviously, with sales being a little bit lower than our previous guidance.

So better-than-expected inventory performance and just the inherent working capital requirements being lower, those are the two things that really helped to offset the contribution margin loss on those sales.

Okay, that's great. And then a follow-up on the emerging market demand. And besides just the cyclical pressures that we're seeing right now and that are impacting your revenues, is there any risk that some of the new business in your backlog that relates to these regions may come at risk of either being pushed back or canceled?

We obviously saw about a year or so ago when GM had canceled a potential expansion over there. When you look at your new business over the next two or three years, can some decisions be made around that based on essentially lower level of demand in those countries?

Emmanuel, this is David. We only really have one major program that's in our backlog that's going to -- that would be under consideration, what you're asking your question. Right now there's no change to that timing, and we expect to launch that program next year on time at the volume that's planned at this point in time.

Okay. And then just one on the content per vehicle, if I may. There was this very, very slight downtick in CPV between Q1 and Q2. Obviously, nothing major. I'm just curious if you could tell us how you see that walk evolve throughout the rest of the year. I know for the full year, you're looking at about a $100 increase.

Yes, Emmanuel, it's mainly mix tied to four-wheel-drive penetration is really the main issue.

Nothing notable there.

Don't read too deep into it.

And for the second half?

It's going to be consistent -- relatively consistent with the performance we've seen through the first half of the year. As you know, there could be some seasonality associated with four-wheel-drive mix and heavy-duty trucks, which are slightly higher content-wise from a four-wheel-drive situation. So we might see some volatility, 1% to 2% range, over the course of the year. But when you take a look at the four quarters this year, look at the average annual rate, you'll see you're probably within 1%, maybe 2% each quarter from the average annual rate.

Oh, great. And then one final one. I don't know if you could comment yet on this or not, but there's obviously some noise around Detroit of GM maybe bringing forward the -- by a few months, maybe more than that, the next redesign of K2XX potentially to sort of react to some other redesigns among the competition. Is that anything that you're seeing or that you can talk about?

Emmanuel, it's nothing that we can talk about. Obviously, you need to talk directly with General Motors with respect to that. Obviously, they not going to sit idle with Ford taking the actions that they've taken on the aluminum truck for the F-150 program. So if GM is prepared to pull that program ahead, then obviously the supply base is going to have be in a position to support that, and AAM will be an important part of it. We'll make sure we do our part.

But at this point in time, we shouldn't comment on it. We're not going to comment on it. You're better to talk to Good morning about it.

All right, that sounds fair. Thank you very much.

Great. Thank you, Emmanuel. And we thank all of you that have participated on this call and appreciate your interest in AAM. We look forward to talking with you in the future.

This concludes today's conference call. You may now disconnect.