American Axle & Manufacturing Holdings Inc (AXL) 2015 Q2 法說會逐字稿

Good morning.

My name is John and I will be your conference facilitator today.

At this time, I would like to welcome everyone to AAM's second-quarter 2015 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 John, and good morning everyone.

I would like to welcome everyone who is joining us on AAM's second-quarter 2015 earnings call.

Earlier this morning we made two filings -- or one filing on the Form 8-K with the SEC, as well as issued some releases.

The first of these filings included our second quarter of 2015 earnings announcement and updates to our 2015 outlook and our new business backlog.

The filing also included a release announcing our selection as the target supplier of axles and drive shafts for GM's Next Generation full-size pickup and SUV program.

In the other release we announced this morning, organization changes, we will address each of these items in our comments this morning.

You can access these announcements on the AAM.com website or through the PR news wire services.

To listen to a replay on this call, you can dial 1-855-859-2056.

Reservation number 34605437.

This replay will be available beginning at noon today through 5 PM Eastern time, August 7.

Before we begin I would like to remind everyone that the matters discussed in this 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 financial measures, as well as a reconciliation of these measures to GAAP financial information, is available on our website.

During the quarter, we will participate in the following conferences: the 2015 JPMorgan Automotive Conference in New York City on August 12; CLSA's Auto Conference in New York City on September 9; the RBC Capital Markets Global Industrials Conference in Las Vegas on September 10; and the City Global Industrials Conference in Boston on September 17.

We are always happy to host investors at any of our facilities.

Please feel free to contact Vitalie Stelea in order to schedule a visit.

With that, let me turn things over AAM's Chairman, 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 2015.

Joining me on the call today are Mike Simonte, AAM's Executive Vice President and Chief Financial Officer; Alberto Satine, our Senior Vice President of our Driveline Business Unit; and Chris May, our Treasurer.

Before we cover the second-quarter earnings announcement, I'd like to discuss two important announcements that we made this morning.

First, today we announced the appointment of Mike Simonte as the President and Chris May to Vice President and Chief Financial Officer, effective August 1 of 2015.

Mike has been instrumental to our profitable growth and success, and a key leader in building a solid financial foundation for AAM.

His financial experience will be of great benefit to our operations, as we continue to implement our growth strategies while driving operational efficiencies to build stakeholder value through operational excellence, quality, and technology leadership.

Chris has demonstrated outstanding leadership in our finance organization since joining the Company in 1994.

His deep institutional knowledge will offer a smooth transition, and an immediate positive impact on a future direction of our Company.

I'm extremely confident that Chris will continue to effectively lead the finance organization in support of our plan to sustain solid profitability and improved cash-flow performance.

AAM also announced the appointment of Alberto Satine to President of the Driveline business unit, and Norman Willemse to President of the Metal Formed Products business unit, both of which will report to Mike Simonte.

These new appointments continue to strengthen our leadership team that will guide AAM to its next-level profitable global growth, while continuing to expand and diversify our customer base, product portfolio, and served markets.

The second release relates to the sourcing of GM's Next Generation full-size pickups and SUV program.

I'm pleased to report today that AAM has been selected as a target supplier of axles and drive shafts for GM's Next Generation full-size pickup and SUV program.

AAM was selected by GM as the target supplier for this program under GM's Strategic Sourcing Process, otherwise known as the SSP process.

A key objective of the SSP process is to involve critical suppliers early in the process of designing and developing future vehicle applications and programs.

Pending final design direction and completion of the sourcing process, AAM expects to retain approximately 75% of the sales content provided to GM for the current full-size pickup and SUV program.

AAM expects to provide approximately 75% of the light-duty axles, 100% of the heavy-duty axles, and 100% of the rear steel drive shafts for GM's Next Generation full-size pickups and SUV program.

AAM does not expect to provide the aluminum drive shaft, front auxiliary drive shafts, and steering linkages on the future program.

With the strategic sourcing of multi-generations of this program now clarified, AAM is pleased to reaffirm our long-term partnership and relationship with GM.

AAM's innovative product, process, and systems technology, as well as our cost-competitive global manufacturing, engineering, and sourcing footprint, provides a compelling value proposition for all of our customers, including GM.

With the direction of our core program of AAM's business now solidified for many years to come, we will continue to focus on leveraging our long-term commitment to quality, technology leadership, and operational excellence, and drive profitable global growth and business diversification.

Our first focus in this regard is to redeploy the manufacturing and engineering capacity that will be freed up as a result of GM's plans for the Next Generation program.

We expect this capacity in the meantime, to be fully and properly utilized for the next three to four years to support GM's needs on the current K2XX Program.

This gives us ample time to work with other customers to identify the best opportunities to put this available capacity to work.

The annual sales value of AAM's core and emerging new business opportunities currently exceeds $1 billion.

The vast majority of these opportunities relates to non-GM business launches and activities.

Most of these programs have expected launch dates in the 2018 to 2020 period of time, which lines up well, as compared to the expected transition to the Next Generation GM full-size truck program.

One specific program we are working on is in the final stages of the quoting process, and has the potential to offset close to half of the impact of the GM sourcing direction.

While we do not have anything to announce today with respect to that program, we are confident in our ability to identify new business opportunities over the next few years to fill the gap and accelerate our business diversification.

If you have questions regarding these two announcements, we will be able to address those during the Q&A session here today.

So let me now provide some highlights associated with our second-quarter financial results.

Let me first state that AAM?s second-quarter financial performance was highlighted by quarterly records for sales and profit dollars, driven by sales growth that continues to outpace the industry and strong operational performance.

First, for the second quarter 2015, AAM?s sales increased 6% on a year-over-year basis to $1 billion.

AAM's sales growth of 6% compares to 4% year-over-year growth for the USR in the quarter, and 3% for the North American light vehicle production.

The second quarter of 2015 marked the first time in AAM's history that our sales exceeded $1 billion in the quarter, and we're very proud of that.

Second, non-GM sales grew 15.1% on a year-over-year basis, to $343.1 million, a new quarterly record for AAM.

Including the impact of our Hefei China joint venture, AAM's non-GM sales to date were approximately 37% of our total sales for the quarter.

One of the key drivers supporting AAM's non-GM sales growth is our sales to FCA.

The launch of drive shaft in support of FCA's L-series platform and higher shipments deployed in Ram's heavy-duty pickup, and the all-wheel-drive models of the Jeep Cherokee and Chrysler 200, accounted for approximately $30 million of the increase.

Third, our net income was $58.6 million in the second quarter of 2015, or $0.75 per share.

Fourth, AAM's key operating profitability metrics continues to show strength in the second quarter of 2015.

Our gross profit in the quarter was $164.5 million and our EBITDA was $146.9 million; both of these results were quarterly highs for AAM.

And fifth, AAM generated $100 million of positive free cash flow in the second quarter of 2015.

This strong result keeps us on track to achieve our full-year 2015 free cash flow target of $175 million, a target that translates to one of the highest free cash flow yields among the auto supplier peer group.

In reviewing our first-half of 2015 performance, I'd like to highlight a few items.

From an operational perspective, we are currently enjoying high-capacity utilization rates in North American facilities, due to a strong end-market demand for pickups and SUVs.

With the launch cadence of our largest North American programs more than a year behind us, we've achieved improved operational stability.

Our facilities in Three Rivers, Michigan, and Guanajuato, Mexico, are running exceptionally well, supporting these high-volume and high-level demands.

We continue to work on productivity initiatives and process optimization in our operations, which should translate into sustained profitability and stable free cash flow generation for many years to come.

In the second half of 2015, AAM is laser-focused on flawlessly launching many new customer programs.

In Europe, we're delivering full front and rear axles now for Jaguar Land Rover in a new global passenger car program.

In Rayong, Thailand, we're launching AAM's first-ever major driveline program for Ford in support of a global rear-wheel drive SUV program.

And we're in the middle of that launch right now.

And in China we're supporting the next-generation C and E Class vehicles for Mercedes, while also expanding our supply relationship with them, and launching independent rear axles for multiple SUV variants for China application.

Also in China, for FCA we?ll be providing PTUs and RDUs for a third EcoTrac disconnecting all-wheel-drive derivative.

And finally, here in North America, we will be providing high-efficiency front and rear axles for the refreshed Nissan Titan light-duty truck program later this year.

Many of the programs I just mentioned feature AAM's advanced product technologies designed to increase fuel efficiency, advance light-weighting initiatives, and improve safety, ride and handling performance.

In support of these efforts, our R&D spending in the second quarter of 2015 was $29.5 million.

And in the first half of 2015 we spent approximately $57 million on R&D.

AAM remains committed to technology leadership, and the advancement of both evolutionary and revolutionary technologies that will propel AAM to the forefront of the global driveline industry.

We are confident that our engineering initiatives, such as the development of the Next-Generation AAM EcoTrac disconnecting axle technology, and our EAM electrification strategies will continue to drive AAM's sales growth and diversification.

With the future opening of the Advanced Technology Development Center, otherwise known as the ATDC, here in Detroit, we will have a state-of-the-art facility to further advance our design, prototype, benchmarking, and validation expertise and where customers will be welcome to experience AAM's advantage firsthand.

Our team of engineers believes that the best way to predict the future is to invent it.

And at the ATDC, it will be done there, and will be a great place for us to further advance our forward thinking.

Let me now make a few remarks regarding an update to our new business backlog and our outlook for 2015.

AAM's revised estimate of the backlog of new and incremental business launching from 2015 through the 2017 calendar-year period of time, is now estimated at $875 million in future annual sales.

This compares to a previous estimate of approximately $825 million for the same three-year time period.

Our revised estimate is principally reflects the capacity expansion program for our global light vehicle programs, specifically in SUV in the China market.

Reflecting the change described above and the launch delay with one of our customer programs, the revised cadence of this backlog now stands at $275 million in 2015, $225 million in 2016, and $375 million in 2017.

With respect to our 2015 outlook, we're revising our sales outlook for the full year in 2015 to a range of $3.9 billion to $3.95 billion, down from the initial outlook of $4 billion to $4.1 billion.

The primary driver of this reduction in AAM's sales targets for the full year 2015, is the impact of lower metal market pass-throughs and foreign currency translations.

Our revised 2015 sales outlook also reflects the impact of a launch delay in the customer program I mentioned earlier.

AAM's revised 2015 sales outlook is based on the anticipated launch schedule programs, and our new and incremental backlog, and the assumption that the USR runs at a range of 16.5 million to 17 million units for the full year here in 2015.

Also respect to the guidance, we are raising our guidance as it relates to EBITDA, and increasing that margin target to 14.25% to 14.5%.

We are very pleased with that 50 basis point improvement.

Lastly, AAM is targeting free cash flow for the full year in 2015 of approximately $175 million, which we expect to drive our leverage profile to approximately [2.0] times by year end, which is in line with what we've guided before.

Mike will make additional comments on our 2015 outlook in a few minutes.

To add to our longer financial outlook from 2015 to 2017, what we have guided remains unchanged at this time.

As we look to the future, we remain focused on delivering our plan to sustain solid profitability and improve our free cash flow performance, while leveraging our technology leadership and to develop innovative, market-driven products to achieve profitable global growth and business diversification, all while continuing to deliver excellent profit and cash flow performance for the benefit of all of our key stakeholders.

We firmly believe that AAM's best days are ahead of us.

And with that said, that concludes my remarks for this morning.

I thank everyone for your time and attention today.

And for your vital interest and support in AAM, not only today but for years to come.

Thank you.

I will now turn it over to Mike Simonte.

Thank you, David, and good morning everybody.

Let's get right to the financial details of our second-quarter 2015 results.

I'll start with sales.

Our net sales in the second quarter of 2015 increased $57 million, or 6% on a year-over-year basis, to $1.4 billion.

A growth in non-GM sales was a major factor in our total sales growth for the quarter, accounting for $45 million of the $57 million total increase in sales, as compared to the second quarter of 2014.

In total, non-GM sales increased 15% to $343 million in the quarter.

For the full-year 2015, we expect non-GM sales to approximate $1.35 billion, an increase of more than $1 billion as compared to the full year of 2009.

And during that time period, that represents a compound annual growth rate of 26% in our non-GM sales.

This is undoubtedly a key measure of our improved business diversification.

And we're pleased with our progress and focus on continued improvement in this area.

On a sequential basis, AAM sales in the second quarter of 2015, were up approximately $35 million as compared to the first quarter of this year.

Seasonally higher production volumes related to our North American light truck programs, and a $15 million increase in non-GM sales -- these were the primary drivers for the sales growth sequentially.

Let's move onto content per vehicle.

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

AAM's content per vehicle was $1,637 in the second quarter of 2015, about the same as the second quarter of 2014.

On a sequential basis, content per vehicle was approximately $40 lower, due principally to the impact of two things.

First, lower metal market pass-throughs.

We will talk more about that in a few minutes.

And second, higher productivity commitments.

Okay, let's discuss profitability for the quarter.

Gross profit was $164.5 million, or 16.4% of sales in the second quarter of 2015; reflects significant improvement over recent performance.

On a year-over-year basis, gross margin was up approximately 70 basis points.

Operating income was $93.9 million, or 9.4% of sales.

On a year-over-year basis, operating margin was improved by 20 basis points.

AAM's GAAP-derived EBITDA, or earnings before interest expense, taxes, depreciation, and amortization, was $146.9 million, or 14.6% of sales; also improved by 20 basis points.

Net income in the quarter was $58.6 million or $0.75 per share.

The favorable profit contribution from higher sales and production volumes, as well as improved operational efficiency in our driveline assembly operations, were the primary drivers of AAM's improved gross margin performance in the second quarter of 2015 When compared to the prior year.

Higher R&D spending, which is included in SG&A, partially offset the improved gross margin, leading to a lower overall improvement in the operating margin and EBITDA margin.

But at 14.6%, improved upon a very solid and strong 14.4% in the second quarter of 2014.

We're very pleased with these results.

On a year-to-date basis, through the first two quarters of the year 2015, GAAP-derived EBITDA was $284.4 million or 14.4% of sales.

This is ahead of our budget; it's ahead of our guidance, and a key reason why we are comfortable raising our EBITDA margin guidance for the year.

Before we talk about our cash flow results, let me quickly cover SG&A, interest, and taxes, starting with SG&A.

In the second quarter of 2015, SG&A, which again I remind you includes R&D, was approximately $70.6 million -- that's 7% of sales.

This compares to $61.5 million in the second quarter of 2014, and that was 6.5% of sales; and $68.5 million in the first quarter of this year 2015, slightly higher than our run rate on a percentage basis at 7.1% of sales.

AAM's R&D spending in the second quarter of 2015 was $29.5 million.

That's an increase of $5.1 million on a year-over-year basis; an increase of $2.2 million on a sequential basis.

Higher R&D spending is the primary driver of increased spending in both the year-over-year and sequential analysis of SG&A expense.

In addition to the increase in R&D, higher staffing costs, including higher incentive compensation accruals, also drove SG&A expense higher on a year-over-year basis.

Net interest expense in the second quarter of 2015 was about the same as the first quarter of 2015 at $24.2 million.

We expect a similar run rate of interest expense in the second half of 2015.

AAM's effective tax rate was approximately 18% in the second quarter of 2015.

There are no unusual tax accounting developments to discuss this quarter.

On a year-to-date basis, through the first two quarters of the year, AAM's effective tax rate is approximately 16.5%.

This is right in line with our guidance range of 15% to 20% for the full-year 2015.

If you have any further questions about tax, please ask in the Q&A period.

Okay; let's move on to cash flow.

We define free cash flow to be net cash provided by operating activities, less capital expenditures, net of proceeds received from the sale of property, plant, and equipment, which were negligible in this quarter.

GAAP cash provided by operating activities in the second quarter of 2015 was $147.9 million.

Net capital spending in the second quarter of 2014, was approximately $47.8 million.

Reflecting this operating activity in CapEx, AAM's positive free-cash flow in the second quarter of 2015 was $100.1 million.

Our free cash flow results in the first half of this year position us to deliver on our target of $175 million of free cash flow for the full year of 2015.

On a trailing 12-months basis AAM's free-cash flow is just a little shy of $200 million.

So it should be no surprise when we deliver on our full-year guidance.

Okay, let me cover a few items on the balance sheet.

AAM's EBITDA leverage, or the ratio of net debt to EBITDA, was down to approximately 2.2 times at June 30, 2015.

That is on an adjusted basis.

AAM's EBIT coverage, or the ratio of EBIT to interest expense, was approximately 3.5 times at June 30, 2015, also on an adjusted basis.

By the way the only adjustment made in those situations is to exclude the special charges from the third quarter of 2014.

Both of these credit metrics were calculated on a trailing 12-months basis.

As to EBITDA leverage, we are on track to deliver our target of 2 times leverage by the end of 2015.

One final note on the balance sheet: AAM ended the second quarter of 2015 with total available liquidity of approximately $851 million, consisting of available cash and borrowing capacity on AAM's global credit facilities.

Before we start the Q&A, let me close my comments this morning by adding some color around our 2015 outlook.

As David said, today we are updating our sales guidance for 2015.

As we disclosed in the 8-K this morning, our new sales target for the full year 2015 is a range of $3.9 billion to $3.95 billion, down from the initial outlook of $4 billion to $4.1 billion.

The primary driver for this reduction in sales for the full-year 2015, is the impact of lower metal market pass-throughs and foreign currency translation and nothing else of any substance.

There's a minor change relating to a launch delay in a customer program; but primarily the change in our sales outlook has to do with lower metal market pass-throughs and foreign currency translation.

On a unit volume basis, we expect our full-year 2015 production volumes across our entire portfolio of the light truck, passenger car, crossover vehicle, and commercial vehicle programs we support around the world, to be up approximately 12% as compared to the full-year 2014.

This is approximately the same rate of unit volume growth we assumed in our initial outlook.

The net sales benefit we are realizing from this unit volume growth is being offset this year by changes in metal market levels and foreign currency translation.

We estimate that AAM's full-year 2015 sales will be adversely impacted by approximately $100 million to $125 million with the combined effect of these two factors, as compared to the assumptions underlying our initial outlook.

The good news is that these factors do not -- and I repeat -- do not, adversely impact our profitability, whether measured in dollars, or margin.

One final thing about our sales guidance.

Let me anticipate a question and tell you that AAM's revised sales outlook for 2015 assumes approximately 1.225 million units of production for the K2XX program.

As you may recall, that's the midpoint of our initial guidance range.

From a profitability standpoint, strong customer demand has driven capacity utilization to darn near optimal levels in North America.

This has allowed us to raise our 2015 EBITDA margin target to a range 14.25% to 14.5%.

That translates in dollars to approximately $560 million to $575 million.

As far as AAM's key longer-term financial targets, let me just say that we are well-positioned to continue delivering strong profit and free cash flow performance.

End market demand for our customers' products, as well as our customers' ability to execute program launches, and hold or grow share in key markets is tracking very favorably.

This is a great time to be levered to the North American light truck market.

It's also a great time to be able to bring disconnecting all-wheel-drive technology to the passenger car and crossover vehicle market.

We are having more success in doing that than anybody.

We have a leading position in these markets, and we are having good success building our new business backlog along these critical lines of strength.

Due to the impact of our new business backlog, we expect AAM's organic growth rate to exceed 5% during the three years 2015 through 2017.

And that's significantly ahead of where most experts expect the industry to grow on a unit [line] basis.

While we expect to supplement -- and by that I mean an increase -- that rate of organic growth with inorganic growth initiatives, our guidance is based only on organic growth.

As David noted, we have a challenge to redeploy some productive capacity that will be freed up in the future as a result of GM's sourcing decisions on the T1XX.

There's no question that's a challenge.

However, this is also an outstanding opportunity for our Company to grow our non-GM business, to improve our overall business diversification profile, and to offset future capital spending requirements associated with launching our backlog.

Over the next three years, 2015 through 2017, we expect to continue generating premium EBITDA margins.

We expect to generate high free cash flow yields.

For example, we are tracking higher than 10% in 2015.

We expect to use the free cash flow generated by our operations to fund investments that will create value for all of our key stakeholders.

We have about three years to identify the best opportunities to fill the gap created by GM's T1XX sourcing decisions.

And that's exactly what we are going to do.

This is the end of my comments this morning.

Thank you for your time and participation on the call.

We're going to stop here and get into the Q&A.

Chris, will you get us going there?

Great.

Thank you, Mike and thank you, David.

We've reserved some time to take some questions.

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

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

I will turn it back over to the operator.

(Operator Instructions) John Murphy Bank of America Merrill Lynch

Good morning guys.

Congratulations Mike on what was a well deserved promotion.

And Chris congratulations as well.

As we think about the business that's retaining on GM's trucks, I'm just curious if you guys can comment on the level of capital intensity and margins on that business?

Is it similar to what you have right now, or was there some push back on what has been some very strong margins for you to date?

Now, John this is David, as it relates you know to push back no.

I mean as we said before, GM has said, is they are looking for healthy suppliers.

Same time you all understand how we are performing on the current K2XX platform in our other business today.

There's no concern in that respect.

GM clearly made a decision that they wanted to change their commodity strategy with respect to the Next Generation product.

We're very grateful and appreciative of reaffirming our long-term strategic partnership with GM.

As we've highlighted, we're going to have a significant or the majority part of that business.

And it will be a cash generator for us just like it is today.

The program doesn't hit for another three or four years, depending on the cadence and the roll out associated with that program.

The product is still too early in the development stages to finalize all the pricing and understanding the total margin impact at this point in time.

But we are infinitely involved as a critical supplier working on a design of those drive line systems to support the new vehicle requirements.

As we're able to shore up those designs, shore up the program and finalize the sourcing and the negotiations, we will be better to explain the more detailed impact.

But you guys can calculate the higher-level impact associated with the change in sourcing.

Mike, I don't know there's anything else you want to comment on?

John I would add one additional comment.

You asked also about capital intensity, and as you know, by far and away the most important determinate of our profitability is capacity utilization.

A critical objective that we have, and that we're going to be working on over the next three or so years, is to ensure that we redeploy any capacity that's not necessary to support the future generation of products, so that we can protect the high-capacity utilization levels that we have today.

We are confident that we can do that, and that's why we say that's going to free up a bunch of capacity we can use to grow our business with other customers, and reduce the capital intensity of other elements of our new business backlog.

Okay.

Then just a second question, as we think about this, this might be a catalyst for or motivation for greater transformation of the Company.

Just curious as we think about the potential for incremental business wins outside of GM, would you be thinking about greater our R&D to support that business and the bidding process?

Also, is there a more much greater motivation here to do a big transformational M&A deal?

Now, given that there is a little bit of pressure coming in the business in the out years it seems to be a little bit incremental.

It might just to diversify further, more quickly.

Slightly different products and slightly different customers?

John this is David, first of all, in regards to first question on the R&D.

It's not going to change our approach from an R&D standpoint.

The things that we have done for GM, we have been doing for non-GM customers over the years.

And will continue with that same approach in providing the latest and greatest technology, from our product process system standpoint.

I don't see any change from an R&D standpoint that way to conquest of new business and we're well-positioned.

As we stated earlier, we've got $1 billion of quota in emerging opportunity.

You guys understand our historical hit rate of about $300 million a year.

We are going to fill some of that gap anyway just based on the performance that we have.

And 90% of what we're quoting is non-GM business today.

With respect to your latter question about the acquisitions and does put pressure on us to deal with things in that 2018, 2020 period of time?

The answer is it's not going put any more pressure on us.

What we?ve telegraphed and explained to you all long, is that we needed to strengthen our balance sheet first.

And we've been very focused on that since the 2009 period of time, when we decided not to file for bankruptcy, but rather protect the enterprise value in the business.

You guys have seen that we've had a game plan, we?ve been executing and delivering on a game plan year after year.

We're going to continue to do that.

We have three or four years of solid cash and profitability in front of us.

Based on where we are today in the sweet spot of the truck and SUV, not only here, but globally.

We're going to use that to build our war chest, and also put us in a position to capitalize on acquisitions that make sense to the business.

Whether that's consolidating within the existing drive line space, whether that's expanding into new swim lanes or new markets, or new products.

That's all still TBD, but trust me we're very focused on what we need to do both on the organic growth side as well as on the inorganic growth side of the business.

Great thank you very much.

Thank you.

Rod Lache from Deutsche Bank

Good morning everybody.

I was hoping you might be able to give us just a couple of other thoughts on this T1 contract.

Could you talk about what the content per vehicle looks like ex- the drive shaft and linkages that you wouldn't have on the new one?

Also, how should we think about the financial impact of offsetting this with new business wins; how transferable are the assets?

Maybe another way to ask that is if you needed to redeploy the assets that support $500 million of business, how does that affect capital spending?

Does it meaningfully change the 5%ish CapEx to sales that you?ve been talking about historically?

Rod this is David.

On the T1XX, it's really too early to comment on the content per vehicle until such time as we get the final design direction as to where we're headed with the customer.

I don't really want to spend a lot of time on that, but we're clearly going to have a significant content of the vehicle much like we have today, it's just we're not going to have you know the 25% of the business that we mentioned to you on the light-duty side of the program.

The other things that we've guided.

That's my answer to that one.

As a relates to the assets being transferable, the answer is yes to that.

It's very easy for us to move component machining, gear machining, assembly lines to other applications.

That leads into the capital spending side of things.

We're not changing our focus and our respect and our guidance on CapEx of 4% to 6% of our sales.

Call it that 5%.

Better yet, we're focused on how we find new business to offset the loss that we had utilizing the existing capacity that we have in place today.

I feel very confident based on what we've done to date, and what we've done historically, but more importantly the opportunities are in front of us.

And how it fits into some of the capital we have today.

Let me add just a bit of financial color to what David said.

As it relates to content, it is too early to be more precise.

In our release this morning, we did disclose that we expect to retain approximately 75% of the sales content associated with the program.

Now, spread across the units of production, that should correlate reasonably well across the entire portfolio to a 25% reduction content.

However, you're going to see more diversity, or disparity between the heavy-duty side of the program where we're going to have a relatively greater portion of the content because we're going to have 100% of the axles front and rear, versus the light-duty side where we lose a portion of the program.

As David said, it's too early to be more precise, but that is a pretty good indication, the best indication we have right now of the impact on content.

The one other thing I would say about the second part of your question.

David made it clear.

We do think the same generally, about our CapEx requirements in the business.

And how that translates to supporting the organic growth levels that we anticipate and of course, supporting the free-cash flow generation targets that we anticipate for the business.

Let's be clear, the capital intensity of the $500 million of business, the tax deals, whatever we lose from GM, the capital intensity on that new business is going to be lower.

It's going to put us in a competitive advantage, because those investments are made; those assets are not 100% perfectly transferable, but very transferable to what we're going to do.

That's a big -- you're looking for a silver lining here, you know our sales team is going to have a new important tool in their toolbox.

Just to clarify, you are assuming similar levels of production like 1.2 million-ish in this outlook when you talk about a 25% reduction?

My other question is just, if you can comment on what your historical win rate has been.

Presumably your win rates might go up if you have this competitive advantage of being able to redeploy some capital?

With respect to the buy ins -- this is David.

Again, we're still holding at roughly 1.2 million units, so it was very similar.

Even though this year we're around 1.225 million.

As it relates to the non-GM stuff, I mean there's plenty of opportunity with respect to what we need to do out there.

New business applications -- our historical hit rate has been in that 25% to 30% level.

We've been, as you know, very laser-focused on our sales filter and going through a disciplined approach, and leveraging our existing and installed capacity for the programs that we?re going after.

With what Mike?s saying, with some of the available coming to market here in the 2018, 2020 period of time, we will be in a better position historically -- to raise that historical hit rate.

Great.

Thank you.

Itay Michaeli from Citi.

Great.

Thanks, good morning everyone.

A follow-up to Rod's question a bit more.

It sounds like, I think, David, you mentioned there is a program that may replace half of the part of the GM business that will be lost.

Your backlog tends to run a couple hundred million dollars per year, so if you're able to replace the revenue, can you help us walk into what the margin gap might be?

I imagine that the incremental variable margin on the new business will be somewhat lower than the decremental and the outgoing business.

Any kind of way to think about modeling that?

Yes.

Itay, it's Mike.

An excellent question.

Really the bottom line question when you think about it.

We've been talking with investors about this issue for the last few months.

You guys know that.

The way we think about this is very simple.

The net financial impact of this sourcing decisions by GM is going to be the net profit differential between the T1XX business and the business that we win to backfill the capacity, and redeploy the capacity.

We've been very clear and transparent for years, because of the operating leverage, the purchasing leverage, the relatively low level of complexity we have in a high-volume program like the K2, the profitability associated with that program is greater than really any other portion of our portfolio.

The larger the program for example, the RAM, the closer you can get to replicating the K2.

The simple fact of the matter is the K2 is probably one of the finest if not the finest program for a supplier to make a good margin.

And it demands a high margin because of the huge capital investment that we have to support it.

When we look at the business that we're going to be backfilling this capacity with, we do expect a lower contribution margin.

Now the average that we deal with here, you know on the K2 program, we're in the 30% area.

When we execute well -- we certainly have the calendar year 2015 -- it's in the 30% area.

For most of the other programs that we support, and while there is some differences and some higher and some lower than the number I'm going to tell you.

It's going to be somewhere around the 20% average contribution margin.

Our challenge is to offset this 10% differential, with opportunities to drive additional efficiencies in our business, to improve OEE and throughput in our capital intensities so that take capital out of business, and reduce our fixed costs.

But as we look at this, the challenge for us, is to find a way to offset roughly a 10% differential on this issue.

That's very helpful, Mike.

Thanks for the detail.

Then just to my second question, it looks like the margin progress is going fairly well in 2015, you raised the guidance for the year.

I think you kept your 13% to 14% range for 2015 through 2017.

It does sound like there's more momentum in the business, can you provide a bit of a -- is there a bias towards the higher end of that given the progress this year?

Or is there something that you think will potentially bring it down at the current market volume, of course?

Clearly there's bias towards the higher end of the guidance range.

Assuming that the most important element to the current business conditions continue.

What I mean specifically by that is that capacity utilization is high right now.

That's highly correlated to production volumes.

So, if the K2 program, and we expected the K2 program to stay around current levels through this time period.

Maybe tick a little bit higher.

We expect that to be a driver towards the high-end of the range.

Other issues, Itay, that are characteristic of the current environment; material cost inflation is very modest.

In fact, we are finding ways to achieve material cost productivity this year for the first time in approximately three years.

We don't see any major inflationary pressures in the next couple of years.

That's also characteristic of the high-end or possibly higher than the high-end of our guidance range.

It's important when we talk about extended periods of time, when we discuss guidance targets, not to get too carried away with the best possible scenario or for that matter, the pessimistic scenarios.

What we try to do is guide you and other analysts/investors to what are the highly probable outcomes.

In our judgment, that range of 13% to 14% is most highly probable.

Today, clearly we're focused on the high end of that range, and we think that we think we've got a great chance to do that if we're right about the business conditions over the next couple, three years.

Terrific.

Thanks for much for all that detail, Mike.

Thank you.

Joe Spak from RBC Capital Markets

Thanks good morning and thanks for all the detail as usual.

Maybe to go back to Rod's question, to sort of help frame it.

What it means going forward, is there anyway could tell us how much the drive shafts, and steering linkages account for current CPV as a percent?

Is it about 10% is it something a little bit lower than that?

It depends Joe, on the specific nature of the specific type of drive shafts that we sell into the program.

You're not too far off at the 10% level.

What we really feel comfortable saying, and we don't feel comfortable saying too much more because of the relatively early stages of design and development of the program.

We feel comfortable saying that based on what we know right now, and pending final design direction, we value based on applying the sourcing direction on the T1XX to the K2XX, which is very specifically how we determine this disclosure.

We feel that we're going to retain about 75% of the content on this program.

We've been pretty clear with you in terms of where we expect to retain that content and where expect to be lost.

Okay.

That's helpful.

To follow up on Itay's question.

With the incrementals on any replacement business probably being a little bit lower, how should we think about your longer-term 12% to 15% target which, I believe was always sort of based on you continuing to have, you know, all that GM business.

Should we think that you need to lop maybe a point or so off the top end?

Or does the whole range move down a little bit, or do you have any preliminary thoughts?

Well, preliminary thoughts are, that we wouldn't anticipate making any change to that.

There's a lot of room in that range of 12% to 15%.

Specific to that disclosure, which we started making back in 2010 by the way, 2009.

That's an even longer-term thought process.

And really driving towards a bigger range of possible business environments that we would encounter.

Again, the higher end of that range, which is characteristic and really outstanding.

Capacity utilization, situations, and not as much diversity in our business as we have today.

That's really been guided down a little bit to the 13% to 14% area.

I think it's very fair to leave 12% in the discussion of longer-term.

At this stage, we have no reason to guide you to something lower than that.

Okay.

Quickly on the free-cash flow change.

Sounds like that's timing, and maybe it's like $40 million or so of timing, does that move into 2016?

Yes, there is no significant adjustment.

We certainly are not trying to signal any significant adjustment to our cash flow expectations for the year.

We started the year with an initial guidance outlook of $175 million to $200 million.

We thought that there was a range of possible volume scenarios on the K2 between 1.2 million and 1.250 million.

We are settling in right at the midpoint of that range based on everything we know about the program.

There were a couple relatively minor things.

I just bring them up to help you understand our thinking about cash flow.

We had some re-billable tooling collections that we had anticipated making this year.

We won't collect those until 2016 at this point due to some changes in program timing with our customers.

That may be about $5 million.

We have some other similar activities that are little timing differences.

In those examples, yes, that will move into 2016.

Otherwise, we're performing pretty much as we expected.

Okay.

Thanks a lot guys.

Thanks Joe.

Brett Hoselton from KeyBanc

Good morning David, Mike, Chris.

I'm not sure if the other Chris is there yet.

So if he is, hello.

Congratulations Mike.

Thank you, Brett.

Obviously, the topic du jour is the T1.

I'm struggling here, because it just seems very plain what you're saying.

In other words, it seems like I think of the K2XX as being roughly 50% to 60% of your revenue.

You're losing 25% of it.

Which is kind of, around 14% of sales or something along those lines.

Am I missing something?

Is that math just too simplistic?

Brett, sometimes in life things are more complicated than they seem.

This is not one of those situations.

You got it right on, based on the best of our understanding of the situation today.

Okay.

You talked about potential programs that might offset that.

As I'm sitting here thinking about the axle programs here in North America, and the other suppliers that have those axle programs, they seem reasonably well locked-up.

Are there any particular programs that you think you might have a particular advantage or opportunity to win?

Ford's got their pickup trucks along with ZF doing the Chrysler stuff.

The target seemed fairly obvious.

Is there something else other than what we generally perceive to be the obvious targets that might be out there that might be able to back fill the capacity?

Yes Brett, this is David, I think your thoughts are focused solely on trucks.

There is a larger market out with crossover vehicles and passenger car applications.

A lot of that capacity can be redeployed in that area as well.

There are some truck applications and opportunities that we are looking at also.

As you look at the decision by General Motors to kind of resource some of the program.

What would be, in your opinion maybe the number one or number two reasons why they chose to do that?

Yes, I don't really want to speculate on it.

I commented earlier in the fact that clearly we've enjoyed, for the most part, an exclusive relationship with GM in the last 20 years.

GM has made a sourcing decision from a commodity strategy standpoint to change that to the tune of about 25% on the Next Generation product from a light-duty standpoint.

We respect GM's position on that.

At the same time, like I said, we reaffirmed our long-term strategic partnership on this program and others.

On a multi-generation-type so we're pleased with that.

You also have to look at the fact that axles are a critical system and one of 19 FMDSS-type parts on a vehicle application.

And therefore, GM's probably wanted to have a better understanding of that content knowing that we've been doing all this design developed for drive line systems for them for the last 20 plus years.

And will for the next several years as the exclusive supplier.

You're probably better off to ask GM that question than us.

More importantly, I'm just respectful of the relationship we've and most importantly the relationship going forward with them.

And, the timing, I think of it is 2018, 2019.

Is that on a preliminary basis roughly where we are thinking?

It's in that range.

You know, again the typical lifecycle is five to seven years.

Think about the program launched in the 2013 period of time.

That gives you a range.

Then obviously, there's a cadence associated with that launch.

We probably won't feel the full impact of everything until later.

And you can also go back and look at HIS in regards to what they're guiding.

One additional bit of color I would just emphasize here, David alluded to it and I want to make it a little bit more of an emphasis point.

Whenever it is they start to launch, and we don't have full clarity.

And even if we did we're not in a position to talk about it.

But if we talk about the 2018, 2019 time period for example, it would be 2019 before the material portion of this impact would be felt by the business.

Earlier in our comments, we've said we have three to four years to address this issue; that's what we mean.

Three to four years.

Not three.

It's longer than three before the full impact would be felt, which gives us great confidence that we have time to fill the gap, redeployed this capacity, take actions on the fixed cost if that's what's necessary.

And find ways to minimize the impact of this.

And quite frankly, maximize the opportunity that we have to improve our business diversification profile and grow our relationship with other customers.

I'm going to ask you this question again, Mike.

You already gave me the answer, and I think I understood it.

But I just got two emails from two different clients basically asking me or suggesting that they're not clear on this.

So, if I take your total revenue, $4 billion, multiply it by 55% you are saying that that's roughly equivalent to the full program revenue.

Then if I take 25% of that that's kind of what we're talking about is being resourced.

Again, it seems like a really simple math but some people are confused between light-duty versus heavy duty and all this other stuff like that.

Right.

25% of the total revenue.

Right.

So the K2XX program is just a little sort of half of our business this year, so let's call it 50%.

What we're saying to you is, we expect 25% of that business to be [let] to other sources.

Perfect, that seems really simple to me.

Thank you very much Mike I appreciate your help and congratulations.

You got it.

Thank you.

Robbie Shanker Morgan Stanley

Thanks, good morning everyone.

Morning, Ravi.

First of all, Mike congratulations and Chris welcome.

Thank you.

Did you mention, you said you got 75% of the D1XX.

Do you expect the light vehicle portion of that program to be similar in size with the same number of models as the K2XX at this point?

We answered that question earlier, and the answer is yes.

As far as the total volume application for the program with light duty and split between light-duty heavy-duty and SUVs.

Got it sorry.

Sorry I missed that.

Also, can you confirm how much of your backlog comes from China today?

Yes, we can get you that specific number.

There's a couple sizable programs, and by the way, I feel compelled to tell you that the backlog that we have in China is principally in the SUV and crossover vehicle markets.

For both of the major program that we're launching with our customers today, they are exceeding their program expectations.

In fact, we are spending a lot of time working on increasing our capacity and talking about increasing capacity for these programs.

While we're understanding that the China market is having some challenges.

We're launching with high-quality Ford brands, SUVs, and crossover vehicles.

These programs are some of the absolute hottest selling vehicles in the marketplace.

And we're very feeling very good about our role in those programs.

We're about 30% to 35% of our backlog is in that marketplace, it's going to help us really establish our footprint in that market.

Could you talk about the split between the domestic and the Chinese OEM sir?

I'm sorry --

The domestic and the import OEMs.

We're working with Mercedes, General Motors, Fiat Chrysler, we're working with great brands.

Of course, when I say Chrysler, I mean specifically the Jeep product lines.

Ravi, it's probably 90% of western OEMs doing business in China.

And a little bit with the local domestic Chinese.

Great.

Understand and last a housekeeping question.

The CPV on the K2XX, obviously, seems to be maturing as it will do at this point in the cycle.

Where do you see that going in the near to medium term over the next 12 months?

The K2XX content per vehicle, you're right on.

It's mature in terms of having launched all of the contents.

It's going to bounce around a little bit.

Call it around $1,600 area.

Just a little bit lighter than our full content.

Because our full content across our entire portfolio is weighted up a little bit by the Dodge Ram heavy duty program.

Which is only an heavy-duty application for us.

And therefore a higher dollar content.

The K2XX content is going to go up and down.

Probably up a little bit as we understand it for four wheel drive penetration.

There's going to be some seasonality, between the heavy-duty emphasis and the light-duty emphasis but that won't matter much.

It's going to be affected a little bit by the productivity commitments that we've offered to General Motors as part of the relationship that we have.

In general, it might have [worked out] a little bit for the impact of the productivity commitments.

I'm just speaking of the sales impact right now.

The metal market is having an impact right now.

Metal market actually, could very likely to be a source of content growth.

Because the significant reduction we've seen in the metal indices reduces the amount of pass-through we've received from General Motors.

Just like it impacts our overall sales, it impacts our content for vehicle calculations as well.

Great.

Thank you and Mike, we will miss the level of detail and the transparency, but I'm confident that Chris can fill your shoes.

You won?t' miss it at all.

Because Chris is as detailed and as focused as I am.

You'll get the same level of transparency and communication that's for sure.

Thank you.

Thanks, Ravi.

Brian Johnson Barclays

Yes, good morning and congratulations again Mike.

Just a quick question, does your promotion, apart from being a well-deserved, hint at any broader moves your company might be making in terms of acquisitions or expansion?

Brian, this is David, like you said, first of all Mike deserved the promotion.

Mike's been a loyal employee to this company for 17 years.

He's done an outstanding job shepherding and guiding, my father before me, and myself, with respect to our fiscal management and financial management and capital structure.

He's not your typical CFO of the past.

He understands the operations, he understands the people, he's bringing a leadership quality and a leadership trait.

Is what I was looking forward to unload some responsibilities from myself to Mike.

At the same time, that financial discipline will lend itself well, working with Alberto Setine and Norman Willemse on the operations.

Who are both P&L and financially trained and operationally trained.

We are going to continue to focus on the productivity throughput and performance of our operations first and foremost.

At the same time, we're going to spend a lot of time, as we always have in regards to looking at the organic growth, and looking out what's best as it relates our capital utilization to getting the return on those investments.

Clearly, we're positioning ourselves as a company in whole.

Not just because of the change with Mike, to start doing more growth from an inorganic or strategic standpoint.

And therefore Mike skills sets will complement what we're trying to accomplish and free up some of my time, his time as well some of our other leaders time to spend more time on the acquisition side.

Okay.

Back to the topic du jour.

Just two or three related questions around Q1.

First, the capital equipment you have making drive shafts, if we were to think about it, is that can that only be re deployed to make drive shafts or is the kind of equipment that could be made to use axles as well?

Most of it will be -- is dedicated towards drive shaft type manufacturing.

There may be some machines that we can redirect, heat treat furnaces and other things clearly we can redirect but most of it's dedicated more of a drive shaft production.

And did you have aluminum capabilities, would you've had to invest additional CapEx if you had gotten the drive shafts but with the mandate that they become aluminum?

We make aluminum products for GM today, we just were not selected as the source going forward for the Next Generation program.

Okay.

And third, because it relates to your growth opportunities, do you see, you know kind of two sub questions.

Was this at all motivated by desire of your client to in source the T1 drive shafts?

And two, as you look externally, are you looking more to take programs that otherwise could of been in sourced or were in sourced?

Or are you looking to get programs from local players or other incumbents, tier 1 (inaudible) incumbents?

GM, at all times, whether it's American axle or not, they're going to evaluate their options from a sourcing of components and systems, including look at in sourcing, looking at make versus buy type, they do that on a regular basis.

Just like we do that on a regular basis.

They'll evaluate, I'm sure the in source and opportunity.

But again, that's a discussion with GM in regards to what alternative they want to pursue with respect to what happens with the balance of the T1XX program.

As a relates to our business, like we said before, we're going to continue to work with the other global OEMs to identify new business opportunities.

Whether they're light truck, SUV, crossover, or passenger car related.

We can redeploy a lot of the equipment that we have in place.

Drive shafts probably being the biggest limitation that we have there.

As we just mentioned to you.

At the same time, OEMs have to decide what's going to be core our non-core for them in the future.

If opportunities present themselves then we will look at that.

But meanwhile we?re just going to look at the organic growth opportunities that present themselves through the normal RQ packages.

We'll also look at strategic growth that we'll initiate.

Okay.

Thank you and congratulations again.

Thanks.

Emmanuel Rosner from CLSA

Good morning, everybody.

One additional question on the next generation truck, I just want to make sure I understand the mechanics.

I understand the drive shaft you will not be supplying the linkages.

The axles themselves, you're saying that in the release you expect to provide 75% of the light-duty axles.

Someone else is providing the 25% of the axles?

That's the right way to understand it right?

Somebody else will be providing those axles yes.

Were you able to comment on is it a supplier, or will be done in-house?

Yes, we're not able to comment on that.

As a mentioned to Brian and his earlier question, GM's going to evaluate their options including in sourcing.

They've got to make those program decisions.

But that's up to GM to make those decisions and communicate it effectively.

Still on the mechanics how does it actually work?

There is -- so they're making, you know, light-duty trucks, are there just going to be -- you will be making 75% of the units, and someone else will be making the exact same axle for the other 25%?

Or other specific trucks that you can say okay I'm going to make axles on those in not on the other ones?

Yes, those details are all being worked out with respect to General Motors in regards to what products.

Is it a regular crew cab, is it a different type of application?

We have a good understanding of where we think that's going to be.

But until GM finalizes the design direction of the program, finalizes the total buying expectations for the program, but we've guided it in line with where we are today, it's probably too early for us to speculate on that.

But it's clear that somebody else is going to be providing 25% of axles to support the vehicle production by General Motors on the Next Generation product.

Okay.

I appreciate the color.

Focusing on the currency [2XX] you're not looking for roughly the midpoint of the range in terms of full-year production, again highlights your excellent forecasting capabilities on this.

I'm not sure, correct if I'm wrong, I thought earlier in the year ago you thought that you might be able to operate the sort of higher end in terms of demand.

Have seen anything in the near-term schedule that suggests a bit of deceleration in the schedules?

Or is it really just great forecasting and it comes the midpoint?

Great forecasting coming in at the midpoint.

No no --

There's no issues at all in that regard, GM from our judgment is very consistently operating their business this year.

Their sale success is in line with what we anticipated.

The one thing I will tell you, and you can see this yourself, they continue to be a little bit lower on inventory levels.

Particularly on the SUV side of the business.

If you asked them, they'll tell you something like they're selling pretty much every one they can make.

There are some capacity issues not axle related, I want to make it clear.

Not axle related.

But they're still working through a few things here and there that can strain the mix of certain production issues -- they've made huge improvements.

They're almost through everything that they need to do there, so we see this improving a little bit as we go.

But absolutely nothing adverse in the schedules, or in our assessment of their market performance.

We feel confident that they'll have the ability to make at least that many perhaps a few more over the 12 months.

The schedules are very strong.

GM had fantastic earnings in the second quarter heavily driven by the truck and SUV production.

If they're going to continue to the pedal to the metal where they can, wherever they can get output out of those facilities but they're still managing at some constraints as Mike just alluded.

Okay.

The real final housekeeping, and I apologize if you answered before.

The change in the GM revenue, in the quarter, was maybe a little bit softer than we would have expected.

You obviously made it up nicely on the non-GM side; anything, any big driver in the revenue growth in the GM side?

Yes, just like we talked about for our sales guidance, for the full-year and our content per vehicle discussion we just had a few minutes ago.

Our GM revenue is being impacted by lower metal market pass-throughs, as well as a little bit of foreign currency translation.

When you talk about the business that we have with General Motors and Brazil and China and Thailand.

Principally, the metal markets passers are down little bit and that's what leads to softer sales numbers.

If you look at unit volume activity this year, we're right in line on a total portfolio basis, with where we expected to be.

The softness that you are alluding to, I saw your note early this morning, it relates specifically to the lower metal markets pass-throughs and a touch of foreign currently translation.

Great.

Very clear and congratulations on the promotion.

Thanks.

Great, we have time for one more question.

Ryan Brinkman from JPMorgan.

Morgan

Great.

Thanks for squeezing me and good morning.

Hi Ryan.

I don't think many analysts or investors are currently modeling out to 2018 or 2019.

But if you were, how should we think about modeling the financial impact of the (inaudible) 2XX business?

So for example, in the past, I think we were guided to 30% incrementals or decrementals on an organic changes in K2XX revenue.

And there's been a lot of talk on the call today about decrementals on the K2XX versus incrementals on any new business.

Is that even the right way to necessarily look at it?

Surely 30% is not your all-in margin on that program.

Just the contribution margin right?

I imagine that it would be wrong to apply such a harsh[detrimental on the revenue taken out of the model for the 25% of the business that you are not retaining because you are not investing or capacitizing for that lost business.

Should investors think about using a decremental a bit closer to the all-in corporate average margins in modeling the variance between what you are now likely to earn in 2018 and 2019 versus what you would otherwise had earned between had you retained a 100% of that business?

So we did have time for one last question.

We've got time here Ryan, so we can slow down just a touch.

I think I understand what you're asking.

The net bottom-line impact that we think about in our business, is we anticipate having the opportunity to fill the gap so to speak and replace the sales that are going to be lost on the T1XX sourcing decision with other programs.

Those other programs will likely have, although we don't know for sure, we're going to try to make this not true, we'll likely have lower contributions margins.

And so we think the net bottom-line impact is going to be some diminution and contribution margins for that $500 million or so of business.

Now, when you're building a model, you will likely not take the shortcut I just described, and build up all the elements.

When you do, I think using the decremental, somewhere close to the contribution margin, that we have on the current program, is the right way to think about it.

Of course when you model the incoming business, you'll model that in with a slightly lower contribution margin and that's what's going to result in this net bottom-line impact that we've discussed.

Right.

I was just thinking because, now, if you they produce a little bit fewer K2XX volume you've still got all the people there, you're still got facility.

You should be able to, if you didn't, if you weren't able to backfill that there should be some cost cutting opportunity there.

Or avoidance of expense.

Absolutely.

That's why, our thought process about this, is first and foremost put those assets back to work.

But in any case, where that's not true, we're going to take actions to address the fixed cost structure.

And so again the net impact of the business would not be the contribution margin, but rather the end profit margin which would be something more like the EBITDA margins on the business.

We hear you, we understand that and that's exactly how we are going to be managing the business.

Okay.

Perfect that's good to hear.

Thanks for clearing that up.

Okay.

Great thanks Ryan and we thank all of you that 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.