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Executives

Christopher Son - Director, Investor Relations, Corporate Communications and Marketing

Dick Dauch - Co-Founder and Executive Chairman

David C. Dauch - President and Chief Executive Officer

Mike Simonte - Executive Vice President and Chief Financial Officer

Analysts

Itay Michaeli - Citigroup

Rod Lache - Deutsche Bank

John Murphy - Bank of America

Chris Ceraso - Credit Suisse

Joe Spak - RBC Capital Markets

Ryan Brinkman - JPMorgan

Brian Johnson - Barclays

American Axle & Manufacturing Holdings, Inc. (AXL) Q4 2012 Earnings Conference Call February 8, 2013 10:00 AM ET

Operator

Good morning. My name is Christie and I will be your conference operator today. At this time, I would like to welcome everyone to the AAM Fourth Quarter and Full Year 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

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

Christopher Son

Thanks, Christie and good morning everyone, and thank you for joining us today and for your interest in AAM. Earlier this morning, we released our fourth quarter and full year 2012 earnings announcement. If you have not had an opportunity to review this announcement, you can access it on the aam.com website or through the PR Newswire Services. A replay of this call will also be available beginning at noon today through 5:00 PM Eastern Time, February 15 by calling 855-859-2056, reservation number 86568260.

Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed. For additional information, we ask that you refer to our filings with the Securities and Exchange Commission. Also, during this call, we may refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information is also available on our website.

Over the next several months, we planned to participate in the following conferences. The JPMorgan Global High Yield & Leveraged Finance Conference on February 26 and 27 and the Bank of America Merrill Lynch New York Automotive Summit on March 27. In addition, we are always happy to host investors at any of our facilities. Please feel free to contact either myself or (indiscernible) to schedule a visit.

With that, let me turn things over to AAM’s Co-Founder and Executive Chairman of the Board, Dick Dauch.

Dick Dauch

Thank you, Chris and good morning everyone. Thank you for joining us today to discuss AAM’s financial results for the fourth quarter and full year of 2012. Joining me on the call today are David C. Dauch, our President and Chief Executive Officer and Mike Simonte, our Executive Vice President and Chief Financial Officer.

To begin my comments today, I will review some highlights of our fourth quarter and full year 2012 results. I will then provide a brief review of our business strategy before turning it over to the David and Mike. After that, we will open the call up for any questions you ladies and gentlemen may have. So, let us get started.

AAM’s fourth quarter 2012 sales grew $736.7 million. For the full year 2012, AAM’s sales were $2.93 billion. Net income in the fourth quarter of 2012 was $319.9 million. And for the full year 2012, AAM’s net income was $367.7 million. AAM’s net income in 2012 was favorably impacted by a tax adjustment of $337.5 million. This related to the reversal of our U.S. deferred tax valuation allowance. AAM’s adjusted EBITDA in fourth quarter of 2012 was $64.5 million. For the full year 2012, AAM’s adjusted EBITDA was $346.7 million. David and Mike will provide additional information regarding the details of our financial results later in this call.

Now, I want to discuss AAM’s aligned business strategy, which is designed to build value for our key stakeholders. This strategy emphasized a commitment to leadership in the areas of first quality, second technology leadership, and third operational excellence. We are keenly focused on maintaining AAM’s high-quality standards. This is the foundation of AAM’s world-class delivery warranty, durability, and reliability performance. Over the last 10 years, AAM has operated in average of less than 10 discrepant parts per million, better than anyone in the world in our business. This is an industry leading quality performance. AAM is achieving technology leadership by delivering innovative new driveline products to the market. These initiatives are improving a diversification of our product portfolio, while increasing our total global served market.

AAM’s R&D spending is increasingly focused on the development of innovative solutions to assist our customers to meet market demands for the following. Higher fuel efficiency, lower emissions, enhanced power (density) and improved vehicle performance which includes safety, ride and handling performance. AAM is committed to sustaining operational excellence with our focus on cost management to deliver exceptional value to our customers. AAM has made many structural cost reductions since 2006. This includes successfully restructuring our North American labor costs. In 2012 AAM completed this critical job eliminating the last of the uncompetitive legacy labor cost conditions in our U.S. operations, good riddance to that problem.

Now we can truly report to you that AAM has achieved market cost competitiveness globally. By following through on these commitments to quality, technology, leadership and operational excellence, AAM can achieve our most critical business objectives. They include the following. First, diversifying our business through the growth of new and existing customer relationships and through the expansion of our product portfolio. Second, achieving globalization by increasing our presence in global growth markets to support our customer’s global platforms. And third, delivering solid financial performance and restoring our balance sheet strength.

We expect our new business backlog which now stands at $1.25 billion for programs launching from 2013 to 2015 to drive our sales growth. As a result AAM is targeting sales of more than $4 billion top line and EBITDA in excess of $500 million by the year 2015. We are excited about the stakeholder value creation opportunities implied by these targets and we look forward to delivering on these commitments.

That concludes my comments today. Thank you very much for your participation. I will now turn the call over to our President and CEO, David C. Dauch. David?

David C. Dauch

Good morning everyone and hello. My comments this morning will focus on three critical areas. First, I will provide some additional detail regarding our operational performance in the fourth quarter of 2012. Second, I will summarize our key AAM accomplishments in 2012 while updating you on our excellent progress in making to achieve AAM’s long-term strategic objectives. And finally, I want to make a few comments in regard to AAM’s 2013 outlook before turning things over to Mike.

In the fourth quarter 2012 AAM’s sales were $736.7 million. This represents an increase of 22% over the prior year. For the full year 2012, our sales were $2.93 billion, up approximately 13.5% as compared to the full year 2011. Excluding the impact of our nearly $10 million of debt refinancing and redemption costs and approximately $6 million of restructuring costs that we booked in the quarter, our adjusted EBITDA was $64.5 million in the fourth quarter of 2012. As we have previously announced the special charges and restructuring costs we incurred in 2012 were primarily related to the closure of our largest factory at the time our Detroit manufacturing complex and our Cheektowaga manufacturing facility.

AAM’s EBITDA margin was approximately 9% of sales in the fourth quarter of 2012. For the full year 2012 AAM’s adjusted EBITDA was approximately $350 million or approximately 12% of sales. AAM’s net income in the fourth quarter 2012 was $319.9 million or $4.21 per share. As previously stated this included a favorable impact of $337.5 million benefit relating to the reversal by U.S. deferred tax valuation allowance. The most important thing I can tell you about this tax adjustment is that it reflects AAM’s positive outlook for continued future profitability. For the full year of 2012 AAM’s net income totaled nearly $367.7 million or $4.87 per share.

2012 was an eventful year for AAM characterized by substantial growth and diversification due to our high-level of global launch activity around the world. In the first half of 2012 as all of you know we achieved strong profit margins. In the second half of 2012, we experienced operational challenges and lower profitability principally associated with the increased level of launch activity in these global locations. We have and are taking the necessary actions to correct the performance issues that weighted on our results in the second-half of 2012. These actions principally addressed two major price points in our operations which we’ve discussed previously.

First in 2012, our unibody or passenger car driveline operations in Mexico experienced launch issues relating to a products supporting GM’s Cadillac ATS program otherwise known as the Alpha program. As always, AAM made a commitment to maintain continuity of supply to our customers and protect them first and forecast. Due to the difficulties managing the performance of both our internal and external supply chains for this program, we incurred an extensive amount of premium cost, operating wise as well as premium freight cost. We’ve resolved these issues late in the quarter by expanding our supply base for critical components and breaking the constraints or bottlenecks within our own operations. So, we feel this issue is behind us. In total, we incurred premium freight cost of approximately $10 million in the fourth quarter of 2012 due to these and other similar issues. This compares to premium freight expense of $4 million in the third quarter of 2012 and we do not expect this type of expense probably to reoccur in 2013.

The second major operating issue we experienced in 2012 related to the expansion of our axle-making operations in Brazil. In our Araucaria manufacturing facility and Araucaria Brazil, we suffered from a leadership issue that failed to properly prepare the plant for the launch of new products supporting the GM global midsize truck program. Stated quite simply, we were not ready to meet our production requirements in Brazil. As a result, we incurred premium operating cost to keep up. In addition, we have incurred excess – extensive labor cost, premium inbound and outbound logistics, elevated scrap level and significant cost overruns which is not the AAM way.

In response to these developments, we have changed our four levels of AAM’s responsible for our Brazilian operations. In December 2012, we’ve hired a new President for our South American operations. This individual has over 30 years of driveline experience right in the South American markets. And we are pleased to welcome (indiscernible) to our team. He is already making a positive and meaningful difference in the short period of time that he has been on board. While there is some plant loading and supply chain issues that require time to result completely, we expect to make progress improving our financial results in Brazil here in the first half of 2013. And as I mentioned, we’re already making some significant improvements since these issues arose.

By the second half of 2013, we expect to restore the operations to solid profitability. Mike will add additional comments on AAM’s fourth quarter and full year 2012 financial results later on the call. Let me now shift gears and update you in some key 2012 accomplishments, which included the following. First in 2012, we’ve made great stride in executing our diversification initiatives, while expanding and broadening our relationship with GM. In 2012, AAM successfully launched important new business awards with various customers including Mercedes-Benz, Daimler, Jaguar, Land Rover, and Scania, just to name a few. The impact of these programs as well as strong production volumes on other existing programs helped to increase AAM’s non-GM sales to nearly $800 million in 2012.

Including the impact of our Hefei China AAM joint venture, which is not consolidated in our financials, AAM’s non-GM sales were approximately 30% of total sales in 2012. While we continued to drive for more business balance in our revenue stream, we are very pleased about the sales growth and the product program diversity we are achieving in our GM book of business on a global basis. Our expanding global relationship with GM is a very strong driver of profitable growth for AAM right now, which is great news for all of our key stakeholders.

Second, in 2012, AAM was very successful in winning new business. In 2012, AAM’s new business backlog grew approximately 5% rising to $1.25 billion for the three-year period for programs launching between 2013 due to 2015 calendar year timeframe. And the cadence on that new business is approximately $400 million in 2013, $550 in 2014 and $300 million in 2015. The new business awards included in this backlog should help drive AAM’s compounded annual growth to over 10% for the period from 2013 to 2015. This is approximately double the rate of the industry growth expected over the same time period. A key driver in the growth of our new business backlog has been our commitment to develop innovative and advanced technology and driveline products to meet the rapidly changing needs of the global automotive marketplace.

We believe that AAM’s technology leadership is the major differentiator in the markets that we serve, not only today, but also in the future. The diversification attributes of AAM’s new business backlog are noteworthy. Over 50% of our 1.25 billion backlog is for customers other than GM, which will help on our customer concentration reduction or diversity issues. These include new and expanded orders supporting multiple global platforms and including business with Chrysler and Fiat, Daimler Truck, Ford Motor Company, Honda, Jaguar Land Rover, Mercedes Benz, Nissan, Tata Motors, Volvo Powertrain, and others just to name a few. We are also very pleased to report our first Axle order from Ford, our first order of any kind from Honda and our second major program with Nissan.

Second, approximately two-thirds of the new business backlog is for passenger cars, crossover vehicle, and commercial vehicle. So, we are much more than attracting SUV company as people have grown to know us over the years. And approximately 65% of our new business backlogs are for programs outside the U.S. And these awards will help support and strengthen our international and expanding global footprint in Brazil, China, India, and Thailand just to name a few. In addition to this book business, AAM is currently quoted on over $500 million of potential new business with over 95% of these new business opportunities being non-GM programs. This should further help our business diversification as we convert many of these opportunities to book business going forward and target parity between GM and non-GM sales by the 2015 period of time.

The third critical element our accomplishment related in 2012 was our continued expansion of our cost-competitive global manufacturing engineering and sourcing footprint. In 2012, we launched a significant new production at our renowned Thailand facility in the first quarter. Also in the first quarter 2012, we took over eAAM Driveline Systems, which became a wholly-owned subsidiary of AAM. We also expanded our operations in Mexico with the opening of a new net-shape gear facility in Silao called AccuGear. In August of 2012, we opened up our Chennai manufacturing facility located in the Southeastern India to support Daimler Truck. And in addition here in the U.S., we also expanded our operations in Lancaster, Pennsylvania.

Fourth, in 2012, we successfully eliminated the lapse of the uncompetitive legacy labor conditions in our U.S. operations. AAM has now achieved market cost competitiveness at all of our facilities on a global basis, and you all know how hard we work for that over the years. This is a very important development for AAM. Having achieved market cost competitiveness at AAM’s facilities globally, we are confident in our ability to continue growing our new business backlog going forward, which served as the foundation of our profitable growth and our business diversification that both my father and I have outlined for you in our opening remarks here.

Fifth, we made excellent progress in the critical balance sheet initiatives as well. In September 2012, we issued $550 million of new unsecured bonds as an attractive long-term cost of six and five days. We also increased the size of our revolving credit facility by $116 million. With the proceeds of the offering, AAM was able to refinance $250 million of debt maturities that were maturing in the 2014 period of time. AAM now has no significant funded debt maturities until the 2017 period of time, so we have given ourselves some runway and the proper financial support to execute our business plan. We are also able to increase our global pension funding status to approximately 82.5% while satisfying substantially all statutory pension funding obligations for the next three to five years.

Before I turn it over to Mike, let me ramp up by making a few closing remarks regarding AAM’s 2013 and long-term outlook. We believe that the trend in the global automotive market conditions will continue to be positive in 2013. For the full year 2013, we expect the U.S. SAAR to be approximately 15 million units. Based on these industry sales assumptions and the anticipated launch of the AAM’s new business backlog, we expect AAM’s full year sales to grow by approximately 10% to 11% in 2013 as mentioned earlier the $3.2 billion. As we announced in January at the North American International Auto Show in Detroit, we expect our adjusted EBITDA margin to be in the range of 13% to 13.5% on sales in 2013. We were excited to be supporting GM’s important K2XX launch in 2013, which is the full-size truck program. We are confident in our abilities to launch this program flawlessly and anonymously. We look forward to continuing to strengthen our relationship with GM in 2013 and beyond as I’ve mentioned in some of my earlier comments and the relationship we’ve enjoyed to-date.

On a longer term basis we are targeting to exceed $4 billion in total sales by 2015 and achieve over $500 million of EBITDA. All of this will be achieved while advancing AAM’s product customer and geographic diversification. I would like to thank each and every one of you for your attention today and for your vital and continued interest in AAM.

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

Mike Simonte

Thank you, David and good morning everybody and Happy New Year to those that we missed at the Detroit Auto Show Conference. Today, I will review with you the highlights of our financial performance in the fourth quarter and full year 2012. David covered the basics, so I’ll get right into the details starting with sales. AAM’s sales in the fourth quarter of 2012 were $737 million almost 22% higher than the fourth quarter of 2011. On a sequential basis AAM’s sales in the fourth quarter of 2012 were up $34 million, almost 5% versus the third quarter of 2012. AAM’s content-per-vehicle is measured as the dollar value of our product sales supporting our customers North American light truck and SUV programs.

AAM’s content-per-vehicle in the fourth quarter of 2012 was $1,514, up 3% on a sequential basis as compared to $1,466 in the third quarter of 2012 and this also compares to $1,498 in the fourth quarter one year ago in 2011. On a sequential basis the increase in AAM’s content-per-vehicle was due to a favorable mix shift in the fourth quarter of 2012 most notably shipments supporting the Ram heavy-duty series pickup trucks were up 20% in the quarter. The GMT-900 full-size trucks and the GMT-610 full-size vans were also stronger in the fourth quarter as compared to the third quarter. For the full year 2012 AAM’s content-per-vehicle was $1,473. As we have previously discussed, we expect our content-per-vehicle to increase 5% to 10% over the next two years primarily due to the launch of new AAM product content for both GM and Chrysler.

As David said, we experienced operational challenges and lower profitability in the second half of 2012. And this was principally associated with an increased level of launch activity. In addition, we incurred asset impairments and restructuring costs of $6.2 million in the fourth quarter of 2012 and debt refinancing costs of $9.7 million. For the fourth quarter of 2012 all of our key operating profit metrics reflects the impact to these challenges and issues. Gross profit was $84 million or 11.4% of sales. Operating income was $18.6 million 2.5% of sales. EBIT was only $8.8 million or 1.2% of sales and EBITDA was $48.6 million or 6.6% of sales. Excluding the impact of special items AAM’s adjusted EBITDA margin was approximately 9% in the fourth quarter of 2012.

As we previously discussed with many of you at the Detroit Auto Show when we pre-announced our 2012 earnings this was weaker as compared to an adjusted EBITDA margin of approximately 10% in the third quarter of 2012 and approximately 14% that we achieved in the first half of the year. For the full year 2012 AAM’s key operating profit metrics reflect the impact of a solid profit performance in the first half of the year I just mentioned about 14% EBITDA margin offset by two things, really, three I guess. Firstly, the weaker back half of the year profit performance. Two, $41 million of special charges, asset impairments, and restructuring costs, and these related primarily to the closure of our Detroit Manufacturing Complex and Cheektowaga Manufacturing Facility. And finally, the third item is $20 million of debt refinancing cost.

Let me quickly run through the key operating profit metrics for the full year 2012. Gross profit was approximately $400 million or 13.6% of sales. Operating income was $156.4 million or 5.3% of sales. EBIT was $134 million or 4.6% of sales and EBITDA on a GAAP derived basis unadjusted was $286.3 million or just about 10% of sales. So, let me anticipate some questions and comments on the reasons why we fell short of our expectations for the year 2012 and probably also your own expectations. There were four major drivers of the deterioration in our operating profit performance in the second half of 2012 as compared to the first half of the year. The first two are well-known and understood issues. There were no surprises on these two items.

First, our sales mix was weaker in the second half of the year as compared to the first half of the year. This was primarily attributable to the timing of GM assembly plant downtime on the GMT-900 program. In the first half of 2012, we supported GM production of approximately 552,000 vehicles units in the GMT-900 program. In the second half of 2012, our shipments supported GMT-900 production of approximately 483,000 vehicle units. This dynamic reduced our profit contribution on this important program by approximately $15 million per quarter in the second half of 2012. Higher sales from new business launches helped to offset this, but the bottom line is that sales mix adversely impacted our operating profit margins by at least 150 basis points in the second half of 2012.

The second well-known and understood issue to affect the comparison of our second half 2012 operating profit performance versus the first half of 2012 was the reduction in deferred revenue recognition related to the 2008 AAM GM agreement. This accounting issue played out in the first quarter of 2012, but still favorably contributed approximately $7 million of profit in the first half of 2012. This dynamic reduced our operating profit margins by approximately 50 basis points in the second half of 2012. To make clear our analysis of these issues, let me summarize the impact of the first two.

Due to the impact of adverse sales mix and the reduction of deferred revenue recognition related to 2008 AAM GM agreement, we expected our operating profit margins to decline by approximately 200 basis points in the second half of 2012 as compared to the first half of the year. The rest of the deterioration in our performance had to do with two other major drivers and those two items were elevated launch preparation costs and production performance issues. The magnitude of these issues and the cost required to meet our customer obligations was more significant than we expected.

With respect to the first item, launch preparation costs, with couple of things here we talked about. First, we incurred higher project expense in the second half of 2012 as compared to the first half of the year. We define project expense as the non-capitalizable portion of installing new production capacity. This includes certain major facility maintenance activities and rearrangement activities and also process validation costs required to achieve customer certification or PPAP as it’s known in our industry. We also incurred higher R&D spending in the second half of the year as compared to the first half. A major reason for this is higher product validation costs to support the many launches occurring in the second half of 2012 and calendar year 2013.

We also incurred premium operating cost to support increased launch activity in many of our facilities. This includes associates hired for training purposes in advance of the launch of new programs, and other labor inefficiency associated with changeover, startup, and quality containment. We estimate that launch preparation costs reduced our operating profit margins by approximately 150 basis points and the second half of 2012 is compared to the first half of the year. Now with respect to production performance issues that we experienced in the second half of 2012, David already addressed the substance of these issues and more importantly what we’re doing to mitigate their impact. I will not rehash that detail.

Let me just say this from a financial perspective. We estimate that production performance issues reduced our operating profit margins in the second half of 2012 by approximately the same amount as the higher launch preparation costs were approximately 150, maybe 175 basis points as compared to the first half of the year. And just to be clear when I say production performance issues, we mean, the freight – premium freight cost that we incurred to manage inbound and outbound logistics to protect continuity of supply to our customers. The inefficiencies we’ve experienced on a GMI700 launch in Brazil and similar cost premiums and penalties that we incurred to launch new unibody products in 2012 passenger car crossover vehicle, all-wheel-drive and rear-wheel-drive products.

Let me now address our fourth quarter and full year 2012 net income in EPS results. These key profit metrics were favorably impacted by the reversal of our U.S. deferred tax asset valuation allowance. In the fourth quarter of 2012, AAM’s net income was approximately $320 million or $4.21 per share. For the full year 2012, AAM’s net income was approximately $368 million or $4.87 per share. The net impact of reversing the valuation allowance was the one-time benefit of $337 million recorded in the fourth quarter of 2012. This adjustment overwhelmed all the other activity.

We had previously explained why this would occur. If you have detailed questions about this, please use the Q&A period to address this issue. In the summary comment on AAM’s tax accounting in the fourth quarter of 2012, let me now add few key points. First, the fourth quarter of 2012 marked the 12th consecutive quarter in the period for which we could demonstrate curative taxable income. This is a key determinant of when it is appropriate to consider the need for such a valuation allowance under gap. In plain English, this means that we established a track record of being able to utilize the favorable U.S. tax attributes over the past three years.

Second and perhaps most importantly, we have evaluated our ability to utilize AAM’s existing balance of U.S. deferred tax assets in comparison to our future profit projections. AAM’s existing U.S. deferred tax assets include net operating losses and tax credit carry forwards as well as the net favorable impact of tax timing differences relating to the recognition of future income inclusions and expense deductions. Again, let me translate this into plain English. We believe that AAM will sufficient future profitability to realize the current value of our favorable tax attributes in the U.S.

As a result of these in other related points of analysis that are required under generally accepted accounting principles in U.S., we concluded that it was appropriate to reverse the valuation allowance, one of the comment about our fourth quarter tax provision, the adjustment to reverse the U.S. deferred tax asset valuation allowance is measured as at the beginning of the year in which it is recorded. This is a gap requirement. As a result, we will require to the fourth quarter of 2012 to adjust our full year tax provision to reflect a different set of facts and circumstances relating to the deferred tax assets and we had previously addressed in our tax provision for the first three quarters of the year.

The net impact of this dynamic was a benefit provision of approximately $2.5 million in the fourth quarter of 2012. For the full year 2012, excluding the impact of the reversal of the U.S. deferred tax asset valuation allowance we recorded a tax expense provision of approximately $2.3 million which equates to effective tax rate of 7.3%. We have discussed many times in the past we expect our future tax expense provision rate beginning in calendar year 2013 to approximately double to a range of roughly 15% to 20%.

Okay. Let me now cover SG&A interest before turning to cash flow in the balance sheet. SG&A expense, including R&D in the fourth quarter of 2012, was approximately $65 million or 8.9% of sales. This compares to approximately $57 million or 9.4% of sales in the fourth quarter of 2011. For the full year 2012, SG&A increased $11.6 million to $243 million as compared to $231 million, $231.7 million to be exact in 2011. AAM’s R&D spending for the full year 2012 increased almost $10 million in the year-over-year basis to approximately $123 million. This increase in R&D spending accounts for most of the increase in SG&A.

Net interest expense was $28.9 million in the fourth quarter of 2012. This compares to approximately $22 million in the fourth quarter of 2011. For the full year 2012, net interest expense was a $101 million, up from $82.7 million in 2011. In the third quarter of 2012, we took advantage of favorable market conditions for debt issuers to finance the total funding of $225 million we contributed to our U.S. and UK defined benefit pension plans in 2012. As a result of these contributions in the impact of investment returns and other actuarial valuation dynamics, including a further reduction and the discount rate used to measure the pension liabilities, we increased the aggregate funded status of our U.S. and UK pension plans to approximately 83% at year end 2012, up from 62% at the beginning of the year. That’s excellent progress for us and again that’s measured at a discount rate close to 4%.

As David already mentioned at the same time we raised money to make pension contributions, we also refinanced the 2014 debt maturity and called 10% or $42.5 million of our outstanding 9.25% notes. These are the secured notes that are due in 2017. The interest carry on these additional debt obligations as well as higher borrowings to fund other elements of our free cash flow use in the past two years 2011 and ‘12 explain the increase in our net interest expense for the fourth quarter and full year 2012. Keep in mind that beginning in the fourth quarter of 2012 AAM’s net pension expense is reduced to reflect the improvement in AAM’s pension funded status. This helps offset a portion of the increase in our interest expense going forward.

Let me now touch address cash flow and the balance sheet. AAM defines free cash flow to be net cash provided by or in this case use in operating activities, less capital expenditures net of proceeds from the sale of assets, including sale leaseback transactions. Net cash used in operating activities for the full year 2012 was $176 million. Capital spending for the year 2012 again net of the proceeds from the sale of assets was $185 million. Reflecting the impact of this activity, AAM’s free cash flow in 2012 was a use of approximately $361 million, all of this on a GAAP derived basis.

AAM’s free cash flow results in 2012 reflect the impact of a number of unusual or special items. This includes $225 million of pension contributions now that we have made these contributions in 2012, we do not expect any material pension contributions for the next three to five years. Also included in our free cash flow results were $38 million of restructuring payments, $18 million of debt refinancing costs, and $33 million to reflect the impact of a change in GM’s administration of supplier payment terms.

If we were to exclude the impact of these four items, which is not appropriate under GAAP we recognize that we would still report an adjusted free cash flow use in 2012. The principle drivers of this were lower profitability, higher capital spending, and higher inventory levels, all of which were at least this partially related to the impact of the increased launch activity in 2012. AAM’s EBITDA leverage was the ratio at EBITDA to net debt was approximately four times in 2012 year end on an adjusted basis. AAM’s EBIT coverage for the ratio of EBIT to interest expense was approximately two times in 2012 year end also on adjusted basis. Both of these critical protect – credit protection measures were adversely impacted in 2012 by higher borrowings and lower profits. As to liquidity AAM ended 2012 with totaled available liquidity of approximately $492 million. This consists of available cash and borrowing capacity on AAM’s global credit facilities. This is in line with our target for liquidity and at least two months of sales. So, we are in good solid shape from a liquidity perspective.

Alright, so with all that said about 2012, we think it’s time to move on to 2013. As David mentioned, we expect AAM sales to grow faster than the industry in 2013, up approximately 10% to 11% on a year-over-year basis to approximately $3.2 billion. And by the way, this sales outlook is rounded to the nearest $100 million, $3.2 billion. If you’re rounding to the nearest $50 million our sales outlook would be $3.25 billion. AAM’s outlook for EBITDA margin in 2013 is the range of 13% to 13.5% of sales.

Let me take a minute to add some caller to this summary outlook. As we transition to calendar year 2013, we expect a profit boost from the reversal of at least two of the three major profit performance drags, we experienced in the second half of 2012. First, we expect a stronger sales mix in 2013 as compared to the second half of 2012. This was due primarily to our expectation that GMT-900 production will be at least 10,000 units to 20,000 units higher, on a quarterly run rate basis than as compared to the second half of 2012. We also expect strong production volumes in support of the Ram heavy duty pickup truck program in calendar year 2012 – I’m sorry ’13.

Combined with the profit contribution from the launch of our new business backlog in calendar year 2013, we expect to recapture almost of the 150 basis points of margin, we lost in the second half of 2012, due to adverse sales mix. Second, we expect to mitigate the adverse impact of the production performance issues we experienced in the second half of 2012. Although we expect some of the fixes in Brazil to take a couple of quarters to be fully realized, we expect to immediately benefit from reductions and premium freight costs and other operating inefficiencies addressed by our operations management team.

It’s a little bit too early to declare victory, but with one month of 2013 under our belt we’re making excellent progress in this regard. Number three, with respect to the third profit performance drag, we experienced in the second half of 2012, we do expect launch preparation costs to increase further in the first half of 2013. R&D costs will be higher in the first half of 2013 than either the second half of ’12 or the second half of ’13 due to the timing of product validation requirements. Similarly, project expense should be up in the first half of 2013 as compared to the second half of 2012 before settling down in the second half of the year, after we launch the K2XX, the Ram heavy duty and Eco-Trac all-wheel-drive programs. The net impact of these puts and takes is that we expect to improve our EBITDA margin performance in the first half of 2013 to at least 11% to 12% of sales. For the full year 2013, we expect to meet our guidance range for EBITDA margin of 13% to 13.5% of sales.

Thank you for your time this morning. Look forward to addressing your Q&A I’ll stop here and turn it back over to Chris Son.

Christopher Son

Great, thank you, Mike, as well as David Dauch, We’ve reserved some time to take some questions. I would ask that you please try to limit questions to no more than two. So, at this time I’ll turn back over to Christie to handle the Q&A queue.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Itay Michaeli from Citigroup. Your line is open.

Itay Michaeli - Citigroup

Great, thanks, good morning.

David C. Dauch

Good morning, Itay.

Mike Simonte

Good morning, Itay.

Itay Michaeli - Citigroup

I appreciate all the detail on the walk into 2013. Mike, I was hoping we can take a little bit more into the second half outlook, the exit margin would be imply to be very, very strong. What’s exactly driving that? Is that some of the higher content perhaps on the K2XX and kind of what you are just assuming for market conditions in the second half of the year?

David C. Dauch

Okay, Itah, couple of things I would point out. We mentioned that we do expect to recover the impact of the adverse sales mix in calendar year in 2013 and that should be improving as we work away through the year. We also expect a good positive contribution from our new business backlog in this calendar year ’13 and again that’s going to be skewed or weighted to the back half of calendar year 2013. In terms of the launch preparation cost, I mentioned are going to be heavier in the first half of the year. We should see a significant reduction in project expense and even our R&D expense because we’ve got higher customer validation requirements earlier in the year and so, we are going to be able to reduce our spending in that area and the back half of the year to a more normalized level.

The other point I’d make is with respect to the improvement in our operating performance just our plant production cost if you will. The actions that we are taking in places like Brazil, I will take sometime to kick in. So, we’ll be improving that as we work away to the back half of the year. Our guidance range for the first half of the year is 11% to 12%. Of course, we are focused on the higher end of that range to the extent of our ability. So, we do expect higher margin in the second half of the year. We don’t really have to be much higher, Itah in the first half of 2012 to accomplish our objectives. And so, we think that once we get our operations settle down, some of these unusual cost driver settle down. You should be able to return our profit performance to the levels that we enjoyed in the first half of 2012.

Itay Michaeli - Citigroup

That’s helpful. Mike, you mentioned your good start to January with respect to some of the operational issues may be too early to declare a victory to use your words, but and you feel confident now that you have a real strong hand though on a situation. What’s the biggest risk perhaps how you de-risked are some of these operational issues in 2013?

David C. Dauch

Itay, this is David Dauch. As I mentioned in my comments we’ve spoken before the two biggest issues that we had from a performance standpoint, one down in Mexico, that issue for the most part of behind us which we committed to getting done in the fourth quarter last year. At the same time, Brazilian issues we said we are going to take it into the first two quarters of this year. We made substantial progress in regards to stabilized net operation from a production standpoint. But at the same time as we communicated before there is some of the localization in sourcing things and validations things that we need to get done that’s going to take a little time here in the first half of the year. So, I feel very confident that we put a restructuring plan or performance improvement plan in place, the teams at or ahead of schedule with respect to that as Mike indicated January numbers appear to be favorable, that’s one dot, we need to get multiple dots in the performance trend. At the same time, we get the right leadership team focus on the performance metrics of what needs to get done in Brazil, but Brazil, one of the main issue, but we still need to get after which should be no surprise anybody.

Itay Michaeli - Citigroup

Right. And to quick housekeeping one do you have a pension under funding amount for year-end and how much of the 2013 CapEx is being used to support 2014 launch, that’s it all I have? Thank you.

Mike Simonte

Okay, Itay, the first question you asked was the pension funded status at the end of 2012 on a quantitative basis that is approximately $147 million again that’s 83% funded at a discount rate just a little bit north of 4%. With respect to your second question, our increased level of capital spending we’ve been traveling a little bit 6.5%, 7% for the past 12 months and we should be traveling closer to 7% for the next 12 months. A significant portion of that of course is to support the launch of major programs coming in 2013 and the early part of ’14. Of the contribution of higher sales from our new business backlog, many, many of the programs that generate sales in 2014 actually launched at some point of time during calendar year 2013. So what I would tell you, Itay is that most of the capital spending that we are making in calendar year 2012 and ’13 and certainly into the first half of ’14 will be to support the $950 million or so of new business is launching in calendar year ’13 and ’14.

Itay Michaeli - Citigroup

That’s very helpful. Thanks again.

David C. Dauch

You got it.

Operator

Our next question comes from the line of Rod Lache from Deutsche Bank. Your line is open.

Rod Lache - Deutsche Bank

Good morning everybody. Couple of things. One is I was just hoping you could just help us, just bridge this year-over-year EBITDA decline a little bit better, you had in the $4 million of higher D&A, $9 million of lower GM amortization, and I think you called out $10 million of higher premium freight, but you should have had some tailwinds I would imagine from lower pension, and you had a $130 million increase in revenue. That ordinarily would have wiped out that some of those cost items. So, can you help us maybe just bridge that $21 million decline in EBITDA from last year’s fourth quarter, what is missing in that?

Mike Simonte

Okay. So with respect to the fourth quarter Rod, we did have some favorable contribution as you pointed out from higher sales on key programs, but the combination of premium freight costs, labor inefficiencies, and production performance issues that we experienced in Brazil, also in Mexico, in relation to some of the unibody activities, these were the significant drivers of the expense reductions. We had very weak production volumes from our customers in the commercial vehicle area. So, we had very poor capacity utilization in our commercial vehicle operations. In Europe, we had lower production totals from our main customer, Audi, that’s separate from the commercial vehicle activity. And even in India, we had very light production activity some of it relating to production downtime and others relating to weakness in the markets in which we serve. So, I don’t want to oversimplify this, but the major drivers of our weaker performance in the back half of 2012 was simply the mix, which was weak. We didn’t really have the opportunity to overcome some of these challenges with stronger light truck mix in North America. We had weaker or higher I should say launch preparation costs. Project expense was elevated in the fourth quarter just as it was in the third quarter.

Our R&D spending was up another $3 million. A lot of this to higher product validation costs. We added people both SG&A and cost of goods sold to stabilize production to prepare for launch. These activities, Rod are what related to those higher expenses. At the end of the year, I guess the other thing I would mention at the end of the year, we also take very detailed inventory accounting measures and there were couple to maybe $3 million or $4 million of net inventory adjustments that we are taking in the fourth quarter as well. All these issues are drivers of that performance in the fourth quarter.

Rod Lache - Deutsche Bank

And also to follow-up on Itay’s question on the implied margins for the back half of this year just to get to the low end of your guidance would be in the mid 14s. How much should we think these project expenses and R&D expenses could decline? And do you see any of those costs returning in 2014 or is that level of profitability indicative of what you might be able to achieve in the out years?

Mike Simonte

Okay. Let me address that sort of one step at a time. With respect to the back half of 2013 and the magnitude of the spending levels we have on R&D and project expense. Project expense was traveling at roughly $4 million, maybe $5 million a quarter in the first half of 2012 jumped up to between $7 million and $8 million in the back half of the year. And we will take a further increase to somewhere around $9 million or $10 million a quarter in the first half of this year. Very similar to the bubble or the increase we had in capital expenditures Rod, these types of expenses tend to track a little bit with those trends.

In the back half of 2013, we would expect our spending in this area to decline back to the level of roughly $4 million or maybe $5 million a quarter. And I am going to talk about the back half of ‘13 before I make any comment about ‘14. With respect to R&D spending, we expect our R&D spending to increase somewhere in the range of maybe $3 million to as much as $5 million a quarter in the first half of 2013 and settle back down to a lower run rate in the back half of 2013. So, there is a fairly sizable impact relating to these quote on quote launch preparation costs which are going to settle down in calendar year 2013 in the back half. In 2014, Rod, of course we continue to have significant new business backlog activity, but most of the programs that are driving the sales increase in calendar year ‘13 and ‘14 actually launched sometime in calendar year ‘13. And so the product validation, the process validation, the early days of launch, all that type of activity is going to be very much emphasized in ‘13. In ‘14 we wouldn’t expect improvements per se in those pending levels. We might see a little bit of inflation. Some of that’s going to depend on how successful how we are in winning new business awards we are holding right now.

Rod Lache - Deutsche Bank

Okay. And the same thing I think you implied at the capital spending since most of these ‘14 projects are launching in late ‘13 would capital spending moderate to the more normal 4% to 6%?

Mike Simonte

Yeah, we definitely think that capital spending will begin to normalize or moderate in 2014. I think in the first half of ‘14 we expect to continue funding some of the growth as I mentioned in Itay’s question, but as we get to the back half of ‘14 we should be back into our range 4% to 6% comfortably. And so, yes, we do expect that to begin moderating Rod at ‘14.

Rod Lache - Deutsche Bank

Right, thank you.

David C. Dauch

Thanks Rod.

Operator

Your next question comes from the line of John Murphy from Bank of America. Your line is open.

John Murphy - Bank of America

Good morning guys.

David C. Dauch

Hi John.

Mike Simonte

Good morning John.

John Murphy - Bank of America

Just a first question the backlog as we look at the roll on in ‘13, ‘14, and ’15, so lot of new business coming on. Just curious as you look at that new business coming on, how did that differ than relative to the business that you have had problems with more recently. I am just trying to understand as we look at this pretty heavy launch schedule in front of us, I just want to make sure we are not going to run into the same operational hiccups you have more recently in Mexico and Brazil?

David C. Dauch

Yes, I mean let’s first start I mean obviously the biggest launch we are dealing with right now is the K2XX launch this year. We also got the Ram heavy duty. Those were all being launched at well-established facilities. They have been making those products for an extended period of time. Some of the other future programs that we have forthcoming here, some of the knees-on stuff that we have is a variation of what we are already doing today. So, that will mitigate some of the launch there. Some of the other business that we have as far as passenger car business are variations of what we have already experienced some of the pain in launching earlier as we go forward. We have now got our leadership teams in place in these global locations. We have standardized operations in those different global locations as well. We are doing different things to strengthen our program management and supplier readiness activity, which obviously caused us a lot of pain issue, especially out of Mexico when we didn’t have a supplier capable support in what we needed to have done. So, there is a lot of lessons learned that we have gone through this past year in 2012, but we are making sure that we don’t duplicate in 2013 or beyond going forward.

John Murphy - Bank of America

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

David C. Dauch

Typically John, our hit rate is in the 25% to 30% range. However, we are going through a little bit more detailed sales filter, which should drive that performance or hit rate up potentially. So, those programs are mainly 2015 and out programs. There are some things from our ‘14 business or barriers that we have open capacity that potentially could impact the 2014 period of time, but most of everything that we are working is 2015 and beyond.

John Murphy - Bank of America

Okay, that’s great. And then Mike, just one question on the accounts receivable, they are up 40% year-over-year obviously outpatient sales, is that purely just a function of the change in payment terms which again when we should see that sort of more settled down in line with sales growth going forward?

Mike Simonte

Yeah, John, yes. Let me comment on that, the increase in accounts receivable reflects the increase in sales activity at the end of the year, year-over-year. I told you that our fourth quarter sales in calendar year 2012, was up 22% on a year-over-year basis. So, that’s a significant driver of the increase. The $33 million increase that is attributable to the change in administration by GM of payment terms to the supplier base is another driver. And our re-billable tooling balances, these are tooling recoveries that we will make from our customers. These are higher as well. This tends to increase in period of heavy launch because we are not able to collect these costs from our customers until we achieve PPAP certification, which is typically near the actual time of launch. So, with elevated launch just like we see CapEx, you see project expense up, we see some R&D cost up, our re-available tooling balances were comparable from our customers are also up and those reflected in our accounts receivable.

John Murphy - Bank of America

That might yield a little bit sort of mid 2013, little bit.

David C. Dauch

Yeah, the re-available tooling activity should come down a little bit in calendar year ’13 obviously the general sales activities going to go up so that’s going to cause an increase, but we do not expect any noise around change in payment terms in 2013.

John Murphy - Bank of America

Then just one last question on the pension, you got a lot of companies that are in a similar situation where they gone through pre-funding yet there is this – those idea that they might put in a lot of discretionary money into the pension plan above and beyond what’s required obviously, some of that this year already. We through sort of this topping up the pension plan of $147 million under funding to what asset return to discount rates really try to take care of the rest for you there or will be discretionary contributions in 2013 and 2014.

David C. Dauch

Okay, John, excellent question. Let me address that from two perspective, we never say never, yeah, there is a set of fashion circumstances that proved to be beneficial to the company we might consider discretionary funding before there is going to be any governmental requirement. But it is not our intention at this point in time to make any further discretionary contributions for the next three to five years or so certainly that’s true in U.S. and the reason as we just did that to a large degree in calendar year 2012, we are very pleased with the improvement in our funding status and our view as John that we are going to let the asset returns and the what we believe we’ll eventually the normalized interest rate environment, which would increase the discount rate used to measured these liabilities. We are going to let these dynamics do some work force and we think that our funding status will probably continue to increase over the next three to five years despite the fact that we are not going to be making any significant additional contributions.

John Murphy - Bank of America

I very much agree with you, thanks a lot guys.

David C. Dauch

Thanks, john.

Operator

The next question comes from the line of Chris Ceraso from Credit Suisse. Your line is open.

Chris Ceraso - Credit Suisse

Thanks, good morning, can you hear me?

David C. Dauch

Yeah, good morning, Chris.

Mike Simonte

Good morning, Chris.

Chris Ceraso - Credit Suisse

Okay, just a couple of things left and I hate to comeback and rehash kind of stuff Michael, but can you help us get from the run rate of call it 9% EBITDA margin in Q4 to the 11% to 12% that you are expecting in the first half of ‘13 may be just some of the big buckets. How much lower premium freight that you expect? How much of an improvement in launch related cost etcetera?

David C. Dauch

Yeah, no problem. Okay, the improvements that are going to be most significant in that law, Chris, it’s going to be the sales mix issue that’s as I mentioned roughly 150 basis points of margin impact and relates primarily to the lower – unusually low recent in relation to current sales level, production that GM had for the GMT900 program in the back half of 2012. So, if we increase our quarterly production rate by 10, 20, may be even 30, 000 units depending on exactly what you have and we’ll do relative to inventory and startup timing on the K2XX. That’s going to be the significant improvement, one that all of us should have been expecting to impact 2012 negatively, but also bounce back and improve 2013. So, that’s a big impact of getting from roughly 9% up to 11%, 12%.

The other issues the production performance issues are as we’ve already mentioned going to be mitigated significantly in the first half of 2013 at least is compared to the fourth quarter of 2013. The premium freight as we mentioned and I think Rod pointed out in his question was about $10 million in the fourth quarter. We would not expect that to be higher than $2 million, may be $3 million a quarter at any point during 2013 probably low end of that range. So from a magnitude perspective, these two issues alone will do a lot of work for us in terms of helping improve our margins here in the first quarter and second quarter of 2013. The launch preparation cost will be a bit of an offset to that, but we are going to working to improve production performance not just in Brazil and not just in our premium freight, but in our budget, our plan for 2013 includes other favorable drivers including the contribution from new programs launching that will help us to improve capacity utilization at some of our global operations.

Chris Ceraso - Credit Suisse

Okay. As you turnover to the new truck I’m talking about GM in particular is it reasonable that your margin on that program at least initially at launch will be lower than the outgoing program until you get up to full speed and until you start to generate some productivity and have you factored that into your walk to the back half?

Mike Simonte

Yeah we’ve absolutely factored that into our walk to the back half. A couple of things I would say David has made, mentioned of the fact that one of the significant reasons why our margin in 2013 and maybe the early days of ‘14 will be a little bit lower, our contribution margin on the GMT-900 K2XX program is the fact that we need to support both programs on the same production lines then the same facilities for a period of time. So, changeover costs are going to be elevated. We have the normal launch preparation costs that we’ve already discussed they are going to be higher. And we also have other launch issues I guess you would say to manage in the normal course of running our business. Yes, we would typically have better profit margin performance in the second year of launch for example than we would in the first. So, all those dynamics are going to play out. The one thing that’s a lot different actually about the GMT-900 K2XX transition as compared to the business we launched in 2012 is that many of the components we need to manufacture for the K2XX program or either carryover components or consist of a significant consistency with the GMT-900 activity. And so this risk profile certainly not devoid of risk is better for us in relation to our launch in 2013.

Chris Ceraso - Credit Suisse

Okay and then just last one can you give us any more details on the axle win with Ford that you mentioned?

David C. Dauch

Yeah I can’t speak to the specific program. But it’s – obviously the first axle driveline program it’s a program that’s global in nature. And it’s like I said there are first (foray) into Ford Motor Company and we look forward to being a successful on that program and open up other opportunities.

Chris Ceraso - Credit Suisse

Okay. Thank you.

Operator

Your next question comes from the line of Joe Spak from RBC Capital Markets. Your line is open.

Joe Spak - RBC Capital Markets

Hi good morning everyone and again thanks for all the detail. Just one quick clarification on the first half EBITDA margin guidance, you’re saying 11% to 12%, that’s for the first half in totality. So, it is possible the exit the second quarter at a rate similar to or above that is that the right way to think about that?

David C. Dauch

Yes, Joe that’s right, first of all good morning. Yes what we’re saying is that our EBITDA margin for the first half of the year should be 11% to 12%. We do expect there are elements of activity in the first quarter that will make it a little bit more challenging to perform at the high end of that level than it would in the second quarter including the fact that GM had significant downtime on the SUV portion of the GMT-900 program here in the month of January. So, our volume on that key program should improve second quarter versus first quarter at least as in relation to the SUVs. So, yes I think that’s a fair comment. We expect to be able to improve our performance as we work through the year. We will make steady improvement on mitigating some of these production performance issues. While we are feels good about our January performance I would tell you that’s more indicative with the low end of the range, the high end of the range. So, we’re making progress but we still need to keep our heads down and focus on continuing that progress to achieve exactly what you described.

Joe Spak - RBC Capital Markets

Okay. And then I just want to make sure I understand the termination of GM agreement. I thought you said that actually in the first quarter of ‘12 there was still a benefit for you. So, I’m assuming obviously as we roll forward in the first quarter of ’13 on the year-over-year basis it’s – that’s another one of the headwinds we should think about in the first quarter?

David C. Dauch

Yeah that’s exactly right Joe, exactly right it was about $7 million of benefit in the first quarter of 2012 and because it ended in the first quarter that’s the same as for the first half and the same for the full year. So, it’s exactly right.

Joe Spak - RBC Capital Markets

Okay. And then you briefly touched on this. But I think when you announced that you’ll – you mentioned pension expense that obviously goes down maybe even flips to a pension income, it sounds like to offset higher interest expense. Can you give us an order magnitude that would help of where pension expense finished ‘12 and what back can go to in ’13?

Mike Simonte

Yeah, Joe, the best way to think about it in tracking exactly to what we said then, is that we borrowed somewhere between $200 million and $225 million depending on whether you considered the pension contributions we made prior to the borrowing part of the deal. We borrowed the money at roughly six and five eights interest expense. And we expect the impact of that higher interest expense to be offset by lower pension expense. We expect that’s the net impact of that portion of refinancing activity that would be P&L neutral. Interest expense up, pension expense down, so those are some dynamics depending at which profit metric you’re looking at EBITDA or net income for example. But big picture of the net income impact should be neutral. Pension expense was in the neighborhood of $14 million in 2012. There were a lot of puts and takes in this number, Joe. But basically we expect our pension expense to be negligible and as you pointed out could very well the pension income either in 2013 or soon thereafter.

Joe Spak - RBC Capital Markets

Okay, great. Thanks very helpful.

Operator

Your next question comes from the line of Ryan Brinkman from JPMorgan. Your line is open.

Ryan Brinkman - JPMorgan

Hi, good morning. It seems your non-GM revenues are likely to begin to inflect higher pretty soon after not rising a whole lot as percentage of revenue in 2012. Can you maybe just walk us through the cadence some of the launch of non-GM business highlighting individual programs as you are able to and then maybe share what types of products generally that you expect to be launching on these non-GM vehicles, how similar are those products to the products that you currently manufacture? Thanks.

David C. Dauch

Yeah, Ryan this is David Dauch. Clearly we are launching new business with Mercedes that volumes are going to continue to grow. Those are independent rear axles were actual that we play out of our China to facility as I mentioned in my earlier comments. We are making commercial axle business out of our Chennai facility for Daimler. We’ve got the Transfer Case business and other passenger car related business with Jaguar Land Rover that’s similar to what we do today. As I mentioned Nissan, we have additional axle programs at the variation of what we’re doing today with them. We’ve also got the business (indiscernible) some component and machining business. We’ve got some drive share business which is right now wheelhouse similar to what we do today.

We obviously had – the newest issue that we are dealing with his our EcoTrac disconnecting all-wheel-drive which is everybody knows that launched this year for us and we’ll roll into a bigger launch in the 2014 period of time. So, that’s probably the one thing that’s really new and different. Some other things that we’re doing with Chrysler on the Ram program and we are right in the middle of launching the 2013 program right now. We have a subsequent launch in 20s – later this year which they call it 2014 model year, which again is some changes to what we’re doing but things we’re very familiar with in that respect. So, again our focus is launching the business that we have right in front of us at the same time we have – we are now taking the less of loan that I mentioned earlier to make sure that we disciplined program management, the supply readiness activity to manage to future launches before this year and then future years as well.

Ryan Brinkman - JPMorgan

That’s really helpful. Thanks and then just last question coming off couple of pretty strong pickup truck months in December and in January which also featured some improved market share and better inventories for General Motors relative to October and November. I was just wondering if given this do you feel any differently about combined K2XX GMT-900 volumes in 2013 I think you had previously guided to that have being flat year-over-year and just any comments on the pickup truck market overall into 2013? Thanks.

David C. Dauch

Our guidance is still roughly nine units on GMT-900 K2XX combination for this year. Clearly the market is growing on the pickup truck side, so there is potential upside there for us as we’ve communicated before. The Detroit International – North American International show – highlighted a lot of new products. General Motors were just one with their K2XX but Ford and Chrysler also had their product out there was 150 and then things they’re doing with Chrysler both the 1500 series and 2500, 3500 series. Tundra, Toyota is coming out with new product, Nissan is coming out with the new product. So, we feel good about where the pickup truck market is going. We feel good about our penetration with those customers in regards to the products going forward. And we are hopeful that K2XX as we see very favorably in the marketplace like it typically is with the launch of a new program and we hope that we can convert that and benefit from that going forward. Mike?

Mike Simonte

Hey, Ryan, one thing I would add, General Motors has made clear to the supply chain to be ready to produce more vehicles to support the production of more vehicles then what we are assuming in our guidance. So, there is clear upside potential of your and I think that upside potential becomes more acute in 2014. So, we’ve got a right in that and most importantly we are making sure there are own operations in our supply chain can handle the higher volume. We do expect higher volume in this program. At some point in time in the next couple of three years perhaps as much as a 1 million to a 2 million of production. We are just little cautious about how quickly that may come due to launch activity, due to the inventory levels, and we don’t want to get too carried away with higher volume assumptions. We don’t want to put excess cost in our system only to have to strip out. We’d much rather play from having upside potential, adding some cost along the way. We find that to be a more prudent way to manage our business. We managed our guidance in the same passion. We are being very exclusive in transparent about our assumptions and also about the upside potential.

Ryan Brinkman - JPMorgan

Great, thank you. I appreciate all the color.

David C. Dauch

Thanks, Ryan.

Operator

Your next question comes from the line of Brian Johnson from Barclays. Your line is open.

Brian Johnson - Barclays

Good morning, team. I just want to ask just two questions here. The first, it’s – I see people starting to go through the math and see have an exit rate of 14%, you’ve talked about good profits or sort of a level of profitability of 2014 that benefits from the launch is being behind you. What I look at your mid-year guidance if I were just to take the 500 divided by $4 billion that would get us closer to 12.5% profit. So is that 14.5% something that we should think about is the new run rate and there is just rounding in that mid 15 or is it going to kind of come and go with the launch activity. Next, I’ll ask a more strategic question.

Mike Simonte

Alright, good morning, Brian, couple of things to say here the first is with respect to our profit margin guidance, we really haven’t provide any specific guidance on 2014, I think what you are commenting on relatively to what we have said make sense and we do expect to exit ’13 in a very solid strong profit margin. We do recognized there could be other inflationary headwinds and we know we’ve got some price reductions or productivity commitments as they referred to pass along to some of our customers. The other dynamics that’s going to cover over the next two or three, four, five years is the fact that is we became a more diverse company as we began to look very much more like our peers with a better balance of revenue between the GMT-900 program and other elements of our business. We do expect a long-term margin performance to decline from the levels that we’ve enjoyed over the past several years.

From our perspective that’s absolutely okay as long as we address the cost drivers associated with our balance sheet. We commented on the pension situation. We’ve commented in respect to the question right to ask about CapEx moderating over the next few years and the other one we have to address and plan to address with the generation of free cash flow as well as lower interest expense over a period of time. If we do that you come for many companies, Brian, that have EBITDA margins in the range of 11%, 12%, 13% to generate a lot of free cash flow. We think we can transition to becoming a much more stable strong growth company with solid profit margins with good cash flow, but at a lower margin.

So, specifically I want to address the comment you made about our longer term 2015 guidance. What we said early specifically what we expect our sales to exceed $4 million and we expect our EBITDA to be at least $500 million at that time period. There are lots of numbers higher than $500 million and I am not trying to be a smart elect, but we do expect to be able to perform at that levels higher than $500 million even at the level of $4 billion potentially depending on how we manage our business, the overall mix of the production pool that come from our customers and the dynamics of the customer relationships to drive the pricing over the long-term conditions. So, we’re not saying the 12.5% is a point estimate for our future margin guidance. What we are saying is that we expect our sales to be at least $4 billion by 2015. We expect our EBITDA to be at least $500 million. The great thing about that information is that it can illustrate that our plan should be achievable and generate substantial free cash flow in the future.

Brian Johnson - Barclays

Okay. And my second question really for Dick Dauch is kind of as you look at it and for Dave as well, but acting as a team, when you kind of look at it the core seems to be here, you are transitioning to a much more diversified company with a broader range of customer and end use applications. And at least the first stage of it’s been kind of rocking, how do we, you have talked a bit about the processes, but how do we really get confidence over the next couple of years that every time there is a new set of new business that rolls on, but it’s a bit out of the wheelhouse, we won’t see launch preparation cost overruns. Are there different things you are doing in terms of hiring more experienced locals or in-market expats? Would you think about acquisitions to get the supply chain and that kind of on-the-ground experience? And how does it go back as you kind of build this backlog to make sure your quoting activity is reflecting the cost of doing business outside of the your wheelhouse?

Dick Dauch

Well, good morning Brian, this is Dick Dauch, thank you for the question, your long-term respect for our company and our needs. We have always from 1993/94 on said that we would selectively globalize our company. And there are some growing pains when you go from a regional outfit to a global outfit. We feel all the base foundation has been established. There was a little bit of a hiccup period in the last three or six months. We grant that. There is nothing there that can’t be overcome by good execution and good performance which will rebuild the credibility for you men and women that analyze and review our performance. Anything that we do need to do we are not going to tell you because we are already doing it or will be doing it and we don’t want our competition to know what we are doing.

Brian Johnson - Barclays

Okay, thanks.

David C. Dauch

Great, thanks Brian. We have got time for one last question.

Operator

Your last question comes from the line of Peter Nesvold from Jefferies. Your line is open.

Unidentified Analyst

Hi, this is Elaine. Sorry, all of our questions have been asked. Thank you.

David C. Dauch

Okay, great. Thanks Elaine. And we think all of you have participated on this call and appreciate your interest in American Axle & Manufacturing. We look forward to talking with you in the future.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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