American Axle & Manufacturing Holdings Inc (AXL) 2016 Q2 法說會逐字稿

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  • Operator

  • Good morning.

  • My name is Jonathan, and I will be your conference facilitator today.

  • At this time, I would like to welcome everyone to AAM's second-quarter 2016 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. Jason Parsons, Director of Investor Relations.

  • Please go ahead, Mr. Parsons.

  • - Director of IR

  • Thank you, Jonathan, and good morning.

  • I would like to welcome everyone who is joining us on AAM's second-quarter 2016 earnings call.

  • Earlier this morning, we released our second-quarter 2016 earnings announcement and updated full-year 2016 outlook.

  • You can access this release on our website, www.AAM.com, or through the PR Newswire services.

  • To listen to a replay of this call, you can dial 1-855-859-2056, reservation number 87956019.

  • This replay will be available beginning at 1:00 PM today through the end of the day on August 5.

  • 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 measures, as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website.

  • During the call, -- during the quarter we will participate in the following conferences.

  • The 2016 JPMorgan Automotive Conference in New York City on August 9; the CLSA Autos Assembly in New York City on September 7; and the RBC Capital Markets Global Industrials Conference in Las Vegas, also on September 7.

  • As always, we are 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 and CEO, David Dauch.

  • - Chairman and CEO

  • Thank you, Jason.

  • Good morning to everyone.

  • Thank you for joining us today to discuss AAM's financial results for the second quarter of 2016.

  • Joining me on the call today are Mike Simonte, AAM's President; and Chris May, AAM's Vice President and CFO.

  • To begin my comments today, I'll provide an update on AAM's second-quarter 2016 results, which I am pleased to announce were highlighted by record sales and record gross profit and EBITDA performance I'll also update you on recent product positive business developments for the Company, and lastly, I'll provide an update on our full-year 2016 outlook, before turning things over to Chris.

  • After Chris covers the details of our financial results, we will open up the call to any questions that you all may have.

  • Let me briefly discuss our second-quarter financial results.

  • First, for the second quarter of 2016, AAM's sales increased to a quarterly record of $1.025 billion as compared to $1.004 billion in the second quarter of 2015.

  • On a year-over-year basis, we benefited from higher production volumes on our North American light truck programs, and on our global passenger car and crossover vehicle programs.

  • These production volume increases include the impact of recent successful launches of our new business backlog, with Nissan, Mercedes, Jaguar Land Rover, Fiat Chrysler and General Motors.

  • These increased production volumes in the quarter were partially offset by reductions in sales, related to us exiting the North American commercial vehicle program, lower metal market pass-throughs, and lower sales in Brazil, as a result of lower by buy-ins and foreign currency translation.

  • AAM's non-GM sales in the second quarter of 2016 were approximately $334 million, as compared to $343.1 million in the second quarter of 2015.

  • The impact of exiting that commercial vehicle program in North America, which we discussed with you in the first-quarter call, is driving this decrease, and if you remove this impact, non-GM sales would have been up over $10 million in the second quarter of 2016 on a year-over-year basis.

  • Second, I am pleased to say AAM delivered a record quarterly gross profit and adjusted EBITDA performance for the second quarter of 2016.

  • Gross profit increased by $26.9 million to $191.4 million.

  • In the second quarter of 2016, gross margin was 18.7% compared to a 16.4% in the second quarter of 2015, representing a 230 basis point increase.

  • Adjusted EBITDA increased $17.9 million to $164.8 million in the second quarter of 2016, adjusted EBITDA margin was 16.1% of sales compared to 14.6% of sales in the second quarter of 2015, representing 150 basis point increase.

  • I'd like to take a quick moment to personally recognize all of the AAM associates worldwide whose teamwork, determination and dedication has played a major role in the outstanding operational performance that is required to achieve these record levels of profitability.

  • On a trailing 12-month basis, we achieved adjusted EBITDA of over $600 million for the first time in our Company's history.

  • Third, AAM's net income was $71 million in the second quarter of 2016, or $0.90 per share.

  • This compares to $58.6 million or $0.75 per share in the second quarter of 2015, a year-over-year increase in net income of over 21%.

  • And lastly, AAM generated $105 million of positive free cash flow in the second quarter of 2016, and year to date, AAM has generated a positive free cash flow of $81.2 million.

  • On a trailing 12-month basis through June 30, 2016, AAM's positive free cash flow was over $205 million.

  • AAM's continuous generation of free cash flow and increased operating profitability have resulted in the reduction of AAM's EBITDA leverage ratio to 1.7 times as of June 30, 2016, as compared to 2.2 on June 30, 2015.

  • Our outstanding second-quarter financial results continue to reflect strong capacity utilization in North America, especially as it relates to full-size trucks and SUVs.

  • AAM's operational excellence, as we capitalize on productivity and cost reduction initiatives while successfully launching multiple programs with key customers across the globe.

  • And continued growth and expansion of our operations in China and Europe, as operational stability and performance directly contributed to AAM's profitability and operating cash flow.

  • As it relates to business developments in the quarter, AAM continues to succeed in winning new business to offset the future sales impact related to the transition of GM's next-generation full-size truck program, and to continue our growth beyond this transition.

  • At this time, we're pleased to provide you with an update on our progress.

  • AAM now expects that we have covered approximately 60% of the sales impact of the sourcing decision, with new business wins that will launch during the 2018 to 2020 timeframe.

  • This includes another customer program awarded to AAM in the second quarter of 2016 for our EcoTrac disconnecting all-wheel drive technology, which will be manufactured out of our Changshu manufacturing facility in China.

  • And as I mentioned earlier, AAM continues to earn new business featured in our latest innovative driveline solutions, and expects customer demand for our advanced technologies to fuel greater business diversification and profitable growth.

  • Our continued development of industry-leading driveline and metal form product is key to our successful future here at AAM.

  • The good news is that even that with these additional wins, we continue to actively work on over $1 billion of recorded and emerging new business opportunities.

  • So we're not done yet, so stay tuned.

  • Reflecting on AAM's ongoing technology leadership efforts, our R&D spending in the second quarter of 2016 was $35.1 million, and in the first half of 2016, AAM spent $66 million on R&D.

  • This represents increases in terms of both total dollars, as well as a percentage of sales, compared to 2015.

  • While we continue to employ a disciplined process for appropriately allocating capital to these activities, AAM remains committed to advancing both evolutionary and revolutionary technology enhancements, focused on light weighting, fuel efficiency, safety, vehicle performance, connectivity, and yes, electrification.

  • We believe these investments are crucial to advancing our leadership position in the global driveline industry, and we'll continue to allocate the appropriate resources to this activity.

  • Most importantly, you can see this acceptance of these efforts within our new business wins and our backlog.

  • Before I turn it over to Chris, let me cover our updated full-year 2016 outlook.

  • We are still targeting full-year 2016 sales of $4 billion.

  • This is based on anticipating the remaining launch schedule of our programs and our new and incremental backlog, as well as the assumption of the US light vehicles that are at approximately 17.5 million units here in 2016.

  • As a result of our strong operational and financial performance in the first half of 2016, we have increased our full-year profitability and our free cash flow targets for the year.

  • We increased our adjusted EBITDA target for the full year of 2016 to a range of 15% to 15.5%.

  • This is up from our previous range of 14.5% to 15%.

  • AAM EBITDA margins continue to come in at the high end of our peer group, and while we are now targeting free cash flow in the range of $140 million to $160 million for the full year of 2016.

  • This is up from the previously targeted range of $120 million to $140 million.

  • This also takes into consideration our targeted capital spending of approximately 6%, and our targeted free cash flow range also continues to reflect the impact of $30 million to $40 million of cash tax payments related to resolution of transfer pricing items in Mexico.

  • It's been a great first half of the year for AAM, and we're pleased to report another quarter of strong financial results, highlighted by record achievements.

  • There are people who are painting a gloomy outlook for the short-term horizon of the industry, and some have been predicting doom and gloom for quite some time now.

  • While we continue to track industry trends and conditions, AAM remains bullish on the macro environment over the near-term, as it relates to both overall customer demand, and consumer preferences for vehicles and programs that we support.

  • We are also very confident in our ability to operate at robust profitability and operating cash flow levels given the stable production environment and commodity pricing.

  • I think our recent financial performance speaks for itself in this regard.

  • We are very focused on delivering results today, while also growing the Company organically and strategically for the future.

  • This concludes my prepared remarks for this morning.

  • I think everyone for your attention, for your interest, and for your continued support in AAM.

  • Let me now turn the call over to AAM's Vice President and Chief Financial Officer, Chris May.

  • Chris?

  • - VP and CFO

  • Thank you, David, and good morning, everyone.

  • Today, I will cover the financial details of our second-quarter 2016 results, so I'm going to go ahead and get started with sales.

  • Net sales in the second quarter of 2016 increased $21 million to $1.025 billion, as compared to $1.004 billion in the second quarter of 2015.

  • Production volumes for the North American light truck and SUV programs we currently support were up nearly 9% in the second quarter of 2016, as compared to the second quarter of 2015.

  • This includes the impact of the recent launch of front and rear axles on the Nissan Titan.

  • Volumes for the passenger car and crossover vehicle platforms we support were up approximately 15%, and include the impact of recent launches of driveline products for General Motors, Fiat Chrysler, Mercedes-Benz in China, and JLR in Europe.

  • As David mentioned, sales in the second quarter of 2016 also reflected a year-over-year reduction of approximately $20 million related to exiting a North American commercial vehicle program, as well as lower metal market pass-throughs to our customers and lower sales in Brazil, due to a reduced customer volumes and FX translation.

  • One additional note on metal market, the change in metal market pricing did have less of a year-over-year impact in the second quarter of 2016, than had been in our most recent quarters.

  • This is a result of both recent increases in metal market prices, as well as the reduction of year-over-year comparables in the second quarter of 2015.

  • On a sequential basis, AAM sales in the second quarter of 2016 were up over $56 million, as compared to the first quarter this year.

  • Seasonally higher production volumes related to our North American light truck programs, as well as higher production volumes for global crossover vehicles and passenger cars were the primary drivers for this growth.

  • Moving on to 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.

  • AAM's content per vehicle was $1,609 in the second quarter of 2016, compared to $1,637 in the second quarter of 2015.

  • The year-over-year decrease in content per vehicle related to lower metal market pass-throughs, annual customer productivity price downs, and differences in product mix.

  • In particular on product mix, sales related to GM's full-size van program had seen significant increases in 2016, compared to 2015.

  • That of course is a positive trend for that platform, but a slight drag on content per vehicle.

  • Content per vehicle was essentially flat on a sequential basis.

  • So with that, let's move on to profitability.

  • Gross profit was $191.4 million or 18.7% of sales in the second quarter of 2016.

  • This compares to $164.5 million or 16.4% of sales in the second quarter of 2015.

  • Operating income increased $17.6 million to $111.5 million in the second quarter of 2016, and operating margin in the second quarter of 2016 was 10.9% as compared to 9.4% in the second quarter of 2015.

  • Excluding the impact of a $1 million investment gain related to the final distribution of the reserve yield plus fund, adjusted EBITDA, or earnings before interest expense, income taxes, and depreciation and amortization was $164.8 million or 16.1% of sales.

  • This compares to adjusted EBITDA of $146.9 million in the second quarter of 2015, or 14.6% of sales.

  • Each of these significant operating profitability metrics increased 150 basis points or more on a year-over-year basis.

  • AAM continues to capitalize on favorable capacity utilization trends in North America.

  • We also continue to benefit from lower net manufacturing cost, resulting from productivity improvements and operational excellence, as well as a favorable environment as it relates to certain commodity costs.

  • Overall, our operating profitability for the first half of 2016 reflects the performance of a committed global team, the benefits of AAM's operating system, and the ability to deliver excellent results.

  • Now let me cover SG&A, interest, other income, and taxes.

  • In the second quarter of 2016, SG&A including R&D was $79.9 million or 7.8% of sales.

  • This compares to $70.6 million in the second quarter of 2015, or 7% of sales, and $75.6 million or 7.8% of sales in the first quarter of 2016.

  • A significant driver of higher SG&A spending in 2016 continues to be our increased investment in R&D activities.

  • R&D spending for the second quarter of 2016 was $35.1 million, compared to $29.5 million in the second quarter of 2015.

  • On a sequential basis, R&D spending was up $4.2 million from the first quarter of 2016.

  • As David mentioned, we are focused on allocating the appropriate resources in this area.

  • 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.

  • Interest expense net of investment income in the second quarter of 2016 was $21.9 million, compared to $24.2 million in the second quarter of 2015.

  • Investment income in the second quarter of 2016 included a $1 million gain related to the final distribution of the reserve yield plus find.

  • You may recall many years back in 2008, that redemptions of investments in the reserve funds were suspended.

  • Eight years later, in the second quarter of 2016, we received our final distribution.

  • We had previously written down this investment due to the uncertainty of receiving this distribution, and therefore recorded a gain when we received the cash.

  • Other income was $2.1 million in the second quarter of 2016, as compared to $1.8 million in the second quarter of 2015.

  • This line item includes both gains and losses related to foreign exchange remeasurements, and earnings from our Hefei joint venture.

  • Keep in mind that quarterly foreign exchange remeasurements can increase or decrease other income every period, based on the quarter-end exchange rate.

  • We have benefited recently from this, mainly related to the weakening of the Mexican peso as compared to the US dollar, while we are subject to the uncertainty of currency movements each and every quarter.

  • Now onto income taxes.

  • Income tax expense in the second quarter of 2016 was $20.7 million as compared to $12.9 million in the second quarter of 2015.

  • AAM's effective tax rate was 22.6% in the second quarter of 2016, as compared to 18% in the second quarter of 2015.

  • Our effective tax rate was higher in 2016 as a result of a larger proportion of income being generated in higher tax rate jurisdictions, specifically North America.

  • There are no significant discrete events in the second quarter of 2016 that impacted the effectiveness of the tax rate.

  • On a year-to-date basis into the first half of 2016, AAM's effective tax rate was approximately 21.4%.

  • We still expect our full-year effective tax rate to fall within the 15% to 20%, by trending towards the high end of that range as we see it today.

  • Taking all these key drivers into account, net income was $71 million or $0.90 per share in the second quarter of 2016, compared to $58.6 million or $0.75 per share in the second quarter of 2015.

  • This is an outstanding quarterly performance for AAM.

  • All right.

  • Moving 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, and government grants.

  • GAAP cash provided by operating activities in the second quarter of 2016 was $157.3 million.

  • Net capital spending in the second quarter of 2016 was approximately $52.3 million.

  • Reflecting this operating activity and CapEx, AAM's positive free cash flow in the second quarter of 2016 increased to $105 million, this compares to $100.1 million in the second quarter of 2015.

  • For the first half of this year, we have generated $81.2 million of free cash flow, positioning us very well for the full-year 2016, as David mentioned earlier.

  • As of June 30, 2016, on a trailing 12-month basis, AAM's free cash flow yield was over 18%.

  • Let me now address key credit metrics at the end of our current quarter.

  • AAM's EBITDA leverage, or the ratio of net debt to EBITDA, was down to approximately 1.7 times at June 30, 2016 on an adjusted basis.

  • This is a half a turn better than we were just a year ago.

  • We continue to bring our leverage down as we increase operating profitability, and generate significant cash flows.

  • AAM's EBIT leverage or the ratio of EBIT to net interest expense was approximately 4.3 times at June 30, 2016, also on an adjusted basis.

  • Both of these credit metrics were calculated on a TTM basis.

  • We also began our recently-authorized share repurchase program in the second quarter of 2016.

  • As of June 30, 2016, we have repurchased $1.5 million worth of common shares, and $98.5 million remain available for future purchases under this current plan.

  • As we have previously discussed, our approach is to be opportunistic, and to balance this program with other capital allocation needs of our business.

  • Before we start with the Q&A, let me add a few quick comments on AAM's 2016 outlook.

  • As David mentioned, we have increased our adjusted EBITDA margin target by 50 basis points, and increased our free cash flow target by $20 million.

  • These updates reflect strong North American capacity utilization, and outstanding operational performance during the first half of 2016.

  • It also reflects our confidence in the global light vehicle market, especially in the key North American light truck segment, and AAM's ability to execute our operational and financial plan during the remainder of this year.

  • It has been a great six months for AAM, and we're looking forward to the second half.

  • Thank you for your time today and your participation on the call.

  • I'm going to turn the call back over to Jason, so we can start Q&A.

  • - Director of IR

  • Thank you Chris and David.

  • (Caller Instructions)

  • Please feel free to proceed with any questions that you may have.

  • Operator

  • (Operator Instructions)

  • Itay Michaeli, Citi.

  • - Analyst

  • I just have one to ask first on the pace of new business.

  • It looks like you went from 50% coverage last quarter to now 60%, which seems to be a bit of an acceleration from where you were in October of 2015.

  • So hoping you could kind of comment on that and maybe perhaps how we should think about that pace going forward in terms of what you're seeing in bookings, win rates, and other customer interest?

  • - Chairman and CEO

  • Yes, Itay, this is David.

  • As you indicated, we've seen tremendous success in regards to our ability to conquest new business, and offset the impact associated with the T1XX sourcing decision.

  • As you indicated, last quarter we were at 50%, this quarter we're at 60%.

  • So we're very, very pleased in regards to our ability to conquest new business.

  • And clearly as a result of the advanced technology that we put together with our EcoTrac disconnecting all-wheel-drive, some work that we're doing with respect to our traditional lightweight axle applications, and then also work that we're doing in the area of AAM, not to mention what we're doing in the metal form side.

  • So we're very, very confident in our ability, as we said, before to offset the loss of some of the future sourcing of the T1XX program, and we're confident with the backlog of new business being where it is today, and with the over $1 billion that we quoted on going forward, that will deliver and continue to realize the success that we've realized to date going forward as well.

  • - Analyst

  • Great.

  • That's helpful and just my follow-up as we think about margins, even prospectively into 2017.

  • I think your backlog does bump higher next year.

  • So as I think about if some of the SG&A growth this year, prepping for launches next year, are some of the launch costs for next year's backlog perhaps occurring this year, should we think about next year's ramp of backlog to also perhaps include some potential margin headwinds, as you may be increasing the launch cost next year?

  • - VP and CFO

  • Yes.

  • Itay, this is Chris.

  • Certainly this year in 2016, you are seeing an increase in some of our R&D spend, supporting some of those quoting activities that David just mentioned, as well as getting prepared for some of these big launches we're facing in 2017 and 2018 and beyond.

  • As it relates to getting prepared for these launches for 2017, you'll start to see some of that project expense impact us in the second half of 2016.

  • And of course you'll encounter that some during 2017, as these come online through the year.

  • - Analyst

  • Great.

  • That's very helpful.

  • Thanks so much.

  • Operator

  • Brett Hoselton, KeyBanc.

  • (Operator Instructions)

  • Brian Johnson, Barclays.

  • - Analyst

  • Could you just maybe to help us understand the sustainability of some of the margin expansions, maybe bucket the 145 basis points year-over-year expansion into what was metals.

  • I thought I heard 20, 30 basis points.

  • What was just raw incrementals, and then where there were either operational or product mix/margin improvements that played out?

  • - VP and CFO

  • Okay.

  • Brian, this is Chris.

  • Yes.

  • We'll talk about year-over-year margin expansion and some of the buckets that you just mentioned really hold true for us.

  • So certainly year-over-year we've had some sales growth, so you do get some benefit of contribution margin associated with that.

  • We do get a little bit of benefit as it relates to FX, and that comes in two forms.

  • One is, that runs through our other income line that we posted here in the second quarter for the remeasurement of our balance sheet and that varies quarter by quarter.

  • And we do have a slight benefit, I would say year-over-year, as it relates to the peso running through our operating margins, but it's not significant.

  • It's a slight benefit, because we do have our hedges on a rolling basis, so we don't experience the true spot that you see here in the second quarter.

  • We also have a little bit of favorability to metal, but year over year that starting to diminish, as the scrap rates, et cetera, are starting to level out on a year-over-year basis.

  • And really quite frankly, the bulk of what you're seeing in terms of our year-over-year improvement is some significant productivity as it relates to material cost, as it relates to logistics cost, as it relates to the throughputs through our operating factory.

  • They are running quite well in this environment, so we're seeing those type of elements now perform into our margin performance

  • - Analyst

  • And on the material cost, is there going to be payback on those in terms of indexing?

  • Or other commodity agreements with your customers?

  • - VP and CFO

  • Well certainly we do have -- we have those agreements in place with our customers, so as those costs go up or down, we generally pass-through 80%-plus of that, either the benefit or the cost, and then obviously we retain the residual piece of that.

  • So there is that arrangement.

  • - Analyst

  • Okay.

  • So is that already reflected in that you've reserved for that, or is that to come in future quarters?

  • - VP and CFO

  • No.

  • We don't reserves that, so I will call it as a pay-as-you-go, and as the industry changed, we passed those through.

  • There are mechanics associated with that.

  • There is generally a little lag period to how the actual index comes in, that pricing could fall in the following month or following quarter, but where there is no reserve for that, it is just pay-as-you-go pass through direction.

  • - Analyst

  • Okay.

  • Second question, we all heard Ford's outlook yesterday, we heard your outlook but just hypothetically, should SAR costs start to come down, two questions.

  • One, have you discussed that possibility with your major customer in terms of the balance with that reduction in volumes in the utilization of each year equally between in-house and American Axle facilities, or does it start go to one or another disproportionately?

  • Certainly, if I were a customer, I'd like to keep my own folks busy.

  • And secondly, is it affecting at all the tenor of discussions if there are any, around further outsourcing of in-house axle operations?

  • - Chairman and CEO

  • Brian, this is David.

  • First and foremost as it relates to current volumes, and we don't see any let up in our current schedules with respect to our major customers, whether it be GM or Ram on the truck programs and SUV programs that we are supporting.

  • So as we said, we're realizing strong performance in demand today, and we continue to see that in our future schedules going forward.

  • So point number one there.

  • Point number two, with respect to -- you are referring to the T1XX, and some of the axle balancing, I'm not concerned about that.

  • We understand what our requirements are.

  • We understand the capacity that's been put into place, and we're working with our customer again to finalize the overall program volume requirements, the architecture, the designs, and the overall pricing.

  • So as soon as we get that solidified, we will be able to communicate that to you and the others effectively and timely.

  • And then the last question that you had, I'm trying to remember --

  • - Analyst

  • The last question was the pace of our discussions in terms of -- Strong industry volumes now, some wonder how long that continues, and I'm growing old waiting for outsourcing from the US industry, but wondering if there is any update on that, and if we're around the cycle that fits into that.

  • - Chairman and CEO

  • No.

  • And the other point was the outsourcing, that's why I couldn't remember.

  • But on the outsourcing side of things, I mean, we haven't heard anything different than FCA still has their in-house axle operations, in concert with them out there.

  • And then Ford still has their in-house axle operations at their Sterling facility.

  • And then internationally I mean you know that the Japanese for the most part have the majority of their axle operations in-house.

  • Whether it's Isuzu, Toyota, and Nissan has put some axles on the outside.

  • And then on the European fronts, JLR and moved to their axle operations out, and BMW and Mercedes have the majority of their operations internally within Western Europe, but as you know, we're providing all of the C and E-class axle applications for Mercedes out of China at this point in time.

  • So no further discussions really on that point at this time.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Ryan Brinkman, JPMorgan.

  • - Analyst

  • So really just another one on the US market after Ford's comments yesterday.

  • And I see you're trimming your SAR estimate to like 17.5 from a range of 17.5 to 18.

  • I guess Ford is thinking more like 17.1 to 17.6.

  • This obviously impacts everyone differently at the top line, right?

  • So I think some of Ford's pressure was on lower demand and pricing for passenger cars, you are a little bit less exposed there.

  • So when you kind of drill it down more granularly, what's happening with the actual vehicles that you are exposed to, full-size pickups, SUVs, that the customer exposure, et cetera?

  • Is there is much deterioration there as there is with the total market?

  • - Chairman and CEO

  • Ryan, as I said earlier, we're not seeing any deterioration in that respect, but obviously we're seeing very strong schedules.

  • Most of the programs that we are supporting have already been through their launches, and they are accelerating into the higher demand, based on the consumer preferences at this point in time.

  • I think in Ford's case, you've got to look at some of their launch cadence as they're going forward, as it relates to they got some conversions that are taking place and maybe putting some pressure on them.

  • But we're not impacted by those programs, or those volume, or the downtime associated with that.

  • But back to your question, the customer programs that we are supporting, trucks SUVs and crossovers are all very strong right now, and they continue to look strong going forward for us.

  • - Analyst

  • Okay great and then just a question on the pace and cadence of repurchases.

  • I know you said the prepared remarks you'd be opportunistic, but I mean you did what $105 million of FCF in the quarter and only bought a couple of million.

  • Were there some restrictions on your ability to buy during the quarter, and how should we think about the relative pace going forward?

  • - VP and CFO

  • Yes, Ryan.

  • This is Chris.

  • We purchased $1.5 million in the quarter, and we are subject to our earnings blackout restrictions, which we faced this quarter and we'll face each quarter going forward.

  • As we mentioned, we're going to be an opportunistic buyer.

  • We're going to assess the market, we're going to assess the capital needs of our business during that period, or what we anticipate in the upcoming periods, and then repurchase accordingly.

  • That's how I would think about the cadence.

  • - Analyst

  • Okay, than the last question is, I think your practice is to really not talk about 2017 until get into even January, but have you noticed the revenue and EBITDA consensus that's out there?

  • And it implies not a lot of incremental margin on the increase in revenue.

  • There's not a lot of earnings growth for US by consensus next year.

  • So I don't expect you to talk about earnings next year but how about incremental margin.

  • Is there any reason to think that falls off a lot next year with a lot of investments coming on, or how to think about broadly margin, incremental margin going forward from here.

  • - Chairman and CEO

  • Ryan, I would say that's -- again, we expect strong demand for our core business today, and you consider margins that we are performing at today.

  • At the same time, we got a backlog of new businesses that's launching at $375 million next year.

  • Some of that business is non-GM business, and we've guided in the Street from the past before, the margin, contribution margin will be a little bit lower on that.

  • We expect to have strong performance in 2017 as well.

  • - Analyst

  • Okay.

  • Congrats on the quarter.

  • Thanks for the color.

  • Operator

  • Rod Lache, Deutsche Bank.

  • - Analyst

  • It's actually Pat Nolan on for Rod.

  • So maybe just one more follow up on the margin question.

  • So it sounds like there wasn't anything extraordinary to call out in the quarter, just seems like really strong execution of flow-through.

  • A while ago, you were thinking 13% to 14% was normal for this business.

  • Has that changed, just based on operationally you are doing better?

  • That you can stay above that range over the mid term?

  • Or is this a -- I guess I'm just trying to think about -- it seems like with the backlog coming online next year, the base business holding in, it seems tough to get margins to come down over the next couple of years back to that normalized range you've previously highlighted.

  • - VP and CFO

  • Yes.

  • As it relates to our margins I think the ones you're referring to, we mentioned maybe a couple years back.

  • And if you think about the environment we're operating in today, they're very strong from a whole sized truck segment for us, which as you know, when that performs, we continue to perform well.

  • But the macro side of the environment we're in today also plays in our favor.

  • Think of metal and FX gives us a little bit upside.

  • But quite frankly our operations are performing very well, productivity, year-over-year productivity improvements in almost every class category we have is performing, and therefore we are performing at the results we are here today.

  • - Analyst

  • That's helpful.

  • And maybe the other drivers of cash flow, can you maybe discuss CapEx -- I mean, you are winning, it seems a pretty significant amount of new business to replace the GM business that will roll off.

  • Is there going to be an elongated CapEx that's going to start rolling in 2017 or 2018 related to those programs, that made the CapEx will be up at the consolidated level?

  • - Chairman and CEO

  • As we've indicated our CapEx this year will be at 6%, clearly we'll evaluate the new business backlog going forward.

  • But our guidance to the Street is that we'll stay in the range of 4% to 6%, so we don't expect to exceed the 6% level that we are at today, even with the new launches that are in our backlog.

  • - Analyst

  • That's very helpful.

  • Thanks.

  • Good quarter.

  • Operator

  • Emmanuel Rosner, CLSA.

  • - Analyst

  • So great to see you win even additional business to replace the GM one.

  • Can you, apologize if I missed it, can you give a little bit more color on who this new win is -- who is it with?

  • And for which markets and timeframe?

  • - Chairman and CEO

  • Yes.

  • Emmanuel, we can't tell you who the customer is at this time.

  • What we can tell you is that we'll be producing disconnecting all-wheel drive program our EcoTrac out of our China facility, so that tells you the region it's going to be operating.

  • - Analyst

  • Understood.

  • And now that you are like 60% in of replacing the GM business, you have a pretty good visibility in terms of what type of business is coming in.

  • Do you have any sort of like early thoughts in terms of how to you think about profitability of the replacement business versus the outgoing one?

  • I mean, you've obviously set of the past that from a skill point of view, these are obviously smaller program that this scale you would get off the current one, but any further thoughts in terms of how do you think about any long-term impact on profitability?

  • - Chairman and CEO

  • But no.

  • Emmanuel, it's no different than what we've communicated to you and the others in the past.

  • Contribution margins on the full-sized truck have been operating around 30% for us, and the new business awards that we're bringing on, we've guided the Street at 20% to 25%, and we're seeing that business come in, in that range and we are pleased with what we're seeing at this point in time.

  • - Analyst

  • All right that's good to hear.

  • And then just a final one on the large backlog coming in next year.

  • Can you just remind me even directionally how much is non-GM business?

  • - Chairman and CEO

  • In our overall backlog, non-GM business represents about 60%, and the United States, that's probably true with respect to next year, as well.

  • Maybe a little bit higher.

  • - Analyst

  • Okay.

  • Great.

  • Thank you very much.

  • Operator

  • John Murphy, Bank of America.

  • - Analyst

  • Just to triple check, and I hate to beat a dead horse here, but when we think about margins, I mean really the two big buckets of benefit, which are ongoing and micro to you, and you can control are contribution margin and productivity.

  • Is that correct?

  • There's nothing else really that big.

  • ForEx and materials sound like they're very small benefits.

  • But it does seem like this was all within your control and purely execution on contribution margins.

  • Is that correct?

  • - VP and CFO

  • That's correct.

  • - Chairman and CEO

  • Yes, and John again, what we've said all along is that when we are running high capacity utilization and we're in a favorable material environment, we can generate some strong profitability and you're seeing that right now.

  • - Analyst

  • No, it's great, and then just a second question, as we think about the 60% replacement that you have booked to backfill for the lost GM business, I'm just curious if you could match the timing for us, meaning that the truck loss is not all going to occur in calendar year 2018.

  • My understand is it would probably be over a two to maybe even three-year period.

  • Is there a way to timing match that 60% replacement, meaning in year 2018, you might be fully replaced.

  • Or I'm just trying to understand the timing of the roll-off and the roll-on of the replacement business.

  • - VP and CFO

  • Yes, John, you're spot on, the fact that some of the roll-off business will commence in that 2018 period of time, but it's going to take three years for some of the T1XX impact to fully impact us.

  • At the same time, the new non-GM business that we're bringing in that period of time overlaps very close to that.

  • I wouldn't say it's identical, but it's fairly close in that same period of 2018 to 2020 period of time.

  • So again, we're highly confident that we can offset the business, and we're comfortable with where we are with respect to the timing of that replacement business.

  • - Analyst

  • Great.

  • Thank you very much.

  • Operator

  • Joseph Spak, RBC Capital Markets.

  • - Analyst

  • Congrats on the quarter.

  • First question is, did you state how much of the fee basis point increase in EBITDA is solely due to metals?

  • I know you mentioned that for the quarter, but I was wondering for the full year.

  • - VP and CFO

  • For the full year?

  • How much relates to metal?

  • It was a year-over-year piece.

  • It was minor.

  • - Analyst

  • Higher metal prices or change in the metal prices flows through the P&L, and what you're able to pass-through and what you have to absorb?

  • - VP and CFO

  • Can you repeat that, Joe?

  • - Chairman and CEO

  • We're having a hard time hearing you, Joe.

  • You're breaking up on us.

  • - Analyst

  • Can you just remind me how a change in metal prices flows through the P&L, what you're able to absorb, what you're able to pass back on through?

  • - VP and CFO

  • Okay.

  • So as it relates to the metal indices, think we pass-through again either net price increases or price decreases, approximately 80% of that.

  • And mechanically it works and it resets either monthly or quarterly, depends on the customer, based on a variety of index, whether it be the scrap index, aluminum index, things of those nature that are into our products.

  • A slight lag from the actual spot rate I would think about, but generally speaking, 80% or so is passed on to the customer.

  • - Analyst

  • Okay.

  • And then last one, it looks like I know you said you mentioned launched a bunch of business.

  • It looks like the initial margins on that business is actually coming in pretty good.

  • Is there anything to point to there in terms of performance on some of the new launches?

  • Thanks.

  • - Chairman and CEO

  • All I'd say is that we're having an outstanding performance, and of all of our launches globally around the world from an operational standpoint, and we're seeing good margins that are going with that business.

  • At the same time, remember, we're also realizing strong margins with our base core business, too.

  • Operator

  • Matt Stover, SIG.

  • - Analyst

  • I'm going to thoroughly beat this dead horse.

  • I apologize in advance.

  • In the margin question, and thinking about your tax rate, I'm wondering if there was some geographic contribution that contributed to that year-to-year improvement in the margin in the second quarter.

  • And if so, how we would think about that, as we think about the balance of the year.

  • - Chairman and CEO

  • Yes.

  • Tying it back to the tax rate, clearly we've been performing very strong in our North American market, as I mentioned in my prepared remarks, especially as it relates to translation to our effective tax rate.

  • So you are seeing this programs, such as the full-sized truck programs here in North America, and when they run well, we generate high profits in this region, and we pay a higher tax rate associated with that.

  • So there is some level of cadence associate with those platforms, as it relates to our geographic profitability and the tax rate connection.

  • - Analyst

  • I was thinking the flip side, though, because those programs have been running -- they've been running well for a little bit here.

  • It's not like they just popped up this quarter.

  • But I'm wondering if there were any deltas outside of North America that would have year-to-year contributed, or was that just not a factor?

  • - VP and CFO

  • If you follow our effective tax rate, it started to pick up midpoint of last year, running closer towards that 20% range basis.

  • So you start to see this now transition over the last four quarters.

  • - Analyst

  • Okay.

  • I appreciate that.

  • Thank you very much.

  • Operator

  • Irina Hodakovsky, KeyBanc.

  • - Analyst

  • I had a question for you -- for an update on your deleverage plans.

  • In the past, I would say a year ago, I recall you were targeting a 2% interest expense as a percentage of sales.

  • And that was around the 2016 timeframe.

  • We're probably not going to get there this year.

  • Wondering if that's still the goal, perhaps with a later time frame, or has that focus changed?

  • - VP and CFO

  • Our focus continues to be to reduce our interest rate, and as you know, we take an action in the fourth quarter of last year to take off some of our term loan.

  • Right now, our primary drivers of our interest expense are our four principal bonds we have outstanding, two of which are callable.

  • And I would tell you we continue to monitor the market activity and assess those bonds on a go-forward basis.

  • But over a period of time, our objective would be to reduce that fixed cost structure in our business.

  • - Analyst

  • Any idea in terms of what that period of time could be?

  • A year, two years, five, ten?

  • - VP and CFO

  • Two of them are callable now, one is not callable, and one starts callable next year.

  • So we're in a period of time in the near future that we'll just continue to monitor market activity.

  • We'll see.

  • - Analyst

  • Perfect, thank you.

  • And if you could just overall prioritize your uses of cash between perhaps deleveraging the balance sheet, maybe share buybacks, update on acquisition intent?

  • - Chairman and CEO

  • Irina, this is David.

  • Everything is going to be in balance.

  • As we have said before, there's a four critical areas, the organic growth will continue to support the debt management side, and then this year, we brought into effect the whole shareholder activity, as well as we indicated, the desire and interest in regards to strategic activity.

  • So we'll keep things in balance, and we'll set the priorities based on how things present themselves.

  • - Analyst

  • Wonderful.

  • Thank you very much, and congratulations on an excellent quarter.

  • - Director of IR

  • Thank you, Irina.

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

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

  • Operator

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

  • You may now disconnect.