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Executives

Christopher Son - Director, IR, Corporate Communications & Marketing

David Dauch - President & CEO

John Bellanti - EVP, Worldwide Operations

Mike Simonte - EVP & CFO

Analysts

Itay Michaeli - Citigroup

Rod Lache - Deutsche Bank

John Murphy - Bank of America Merrill Lynch

Chris Ceraso - Credit Suisse

Joe Spak - RBC Capital Markets

Brian Johnson - Barclays

Ryan Brinkman - JPMorgan

Ravi Shanker - Morgan Stanley

Peter Nesvold - Jefferies

American Axle & Manufacturing Holdings, Inc. (AXL) Q3 2012 Earnings Call October 26, 2012 10:00 AM ET

Operator

Good morning. My name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing Third Quarter 2012 Earnings 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 of Investor Relations, Corporate Communications and Marketing, you may begin your conference.

Christopher Son

Thank you, Amanda and good morning everyone. I would like to welcome everyone who is joining us on AAM’s third quarter 2012 earnings call. Earlier this morning, we released our third quarter 2012 earnings announcement. You can access this announcement on the aam.com website or through the PRNewswire Services. To listen to a replay of this call, you can dial 1800-642-1687, provide the reservation number 32991103. This replay will be available beginning at noon today through 5:00 PM Eastern Time November 2nd.

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 available on our website.

During the quarter, we will participate in the following conferences. The Barclays Global Automotive Conference on November 14th in New York and the Bank of America Leveraged Finance Conference on December 3rd in Florida. We will also participate in the Deutsche Bank Global Auto Industry Conference in Detroit on January 15th and January 16th. In addition, we are always happy to host investors at any of our facilities. Please feel free to contact me to schedule a visit.

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

David Dauch

Thank you Chris and good morning everyone. Thank you for joining us on today’s call as we discuss AAM’s third quarter 2012 financial results. Joining me on the call today are John Bellanti, Executive Vice President of Worldwide Operations and Mike Simonte, Executive Vice President and Chief Financial Officer.

I’ll open my comments today with some highlights of AAM's third quarter 2012 results. I will also review the status of AAM’s key business initiatives before turning things over to Mike to discuss the financials. After that, we will open it up for a Q&A session when we’re completed.

Let me first state that AAM’s financial results in the third quarter of 2012 were highlighted by solid sales growth driven by the launch of AAM’s new business backlog. AAM’s third quarter financial results include the following: First, the third quarter 2012, AAM sales were approximately $703 million. On a year-over-year basis, AAM sales in the quarter were up approximately $55 million. That’s an increase of approximately 8.5%.

Second, our non-GM sales in the third quarter were approximately $199 million. On a year-over-year basis, AAM’s non-GM sales increased approximately $25 million. That represents an increase of 14%. Including the impact of the consolidated Hefei-AAM joint venture, non-GM sales were approximately 33% of total sales. For the first three quarters in 2012, AAM sales were approximately $2.2 billion. This represents an increase of $215 million or 11% versus the first three quarters of 2011.

And finally, for the third quarter of 2012, AAM reported a net loss of approximately $8 million or $0.11. Our results in the quarter reflect the adverse impact of special charges and restructuring cost of $13.3 million or $0.18 per share.

These special charges include $10.1 million of debt refinancing cost and $3.2 million of restructuring cost related to the closure of Detroit Manufacturing Complex and Cheektowaga Manufacturing Facility. When excluding these special charges and restructuring costs, AAM generated an adjusted earnings per share of $0.07. Adjusted EBITDA for the third quarter 2012 was approximately $70 million or 10% of sales.

In the third quarter of 2012, we completed a number of successful financing actions. These actions included increasing commitments under our revolving bank credit facility by approximately $116 million and issuing $550 million of 6.625% Senior Unsecured Notes due in the 2022 period of time.

The net proceeds were used for general corporate purposes including to fund the repurchase of all of the 5.25% Senior Notes due in 2014 as well as to fund certain pension obligations. As a result of these actions related initiatives, AAM now has no significant funded debt maturities scheduled in 2017. Mike will cover additional details of the special charges and debt refinancing later in the call.

Let me now discuss what factors impacted AAM’s performance in the third quarter of 2012, as well as the status of our strategic business remissions going forward. The third quarter of 2012 included a high level of global launch activity for the AAM team. In the third quarter, we launched approximately a $100 million of our new business backlog; on a year-to-date basis that’s approximately $250 million of the total backlog that we had identified here in for 2012. These launches included global programs across multiple types of products such as the following:

First, we launched an independent rear drive axle in our Changshu manufacturing China facility. This new launch is now supporting a likewise production of Mercedes C and E Class program.

Second, we are continuing to launch GM’s global mid-sized truck program and related derivative product. This launch is occurring simultaneously in our Araucária manufacturing facility in Brazil, as well as our Rayong manufacturing facility in Thailand.

Third, in August, we announced the grand opening of our Chennai manufacturing facility in India. This is our third regional manufacturing facility in India and we are now supporting the Daimler light and heavy duty commercial vehicle program for the Indian market.

Fourth, we launched a new Transfer Case program with Jaguar Land Rover and our Albion subsidiary located in Glasgow, Scotland.

Fifth, we launched power transfer units, rear drive modules, drive shafts at our Changshu manufacturing facility and our Guanajuato manufacturing facility in Mexico to support a global passenger car program for GM.

And finally, we launched our high efficiency rear drive module with front drive units as well as front-rear drive shaft for the all new Cadillac DTS at Guanajuato manufacturing complex in Mexico.

Due to the complexity of these launches and the higher level of global launch activity in this quarter, there are several factors which adversely impacted margin performance for the quarter. These issues include, first, premium pace associated with maintaining continuity of supply, both with our customers as well as internally to AAM.

Second, operating inefficiencies, such as incurring mass standard manpower and overtime cost and upside processing costs resulted higher operating, tooling and maintenance cost.

Third supplier issues associated with the localization of the supply base in the new global locations; we have had to make some adjustments and apply. Project expense associated with the facility in preparation of future program launches yet to come, such as training costs, production part approval pass run offs as well as the run off of some of our assembly equipment.

And then last is the lower capacity utilization really resulting from a couple of things. First, planned customer downtime on certain existing programs mainly the GMT 900 and the Ram program and then second the launch of ramp up curves of the programs I just covered that we are launching this year and the different capacity utilization associated with that. We will talk to you more about that. We are clearly taking the necessary actions to improve our operating performance. Some of these actions include first working with our customers to align their scheduling with our authorized and install capacity levels; they have been running above that in some cases.

Second re-sourcing additional suppliers in certain areas and global regions to localize the supply base and address some supplier constraints.

Third, breaking supply bottlenecks where the capability was not in line with the contracted capacity. This will help reduce some premium freight and outside processing costs we are incurring today. And then internally we are also addressing sort of our own capacity and capability constraints to improve our overall equipment effectiveness and first time quality.

At the same time we are adding additional resources globally around the world to support and expedite the resolution of some of these adverse manufacturing issues and operating issues that we are dealing with. Mike will discuss the financial performance in further detail later in the call, let me now shift and discuss AAM's progress in our diversification and technology initiatives. AAM's new business backlog for years 2012 through 2014 remains at $1.2 billion; and as we've previously stated to you, we are actively reporting approximately $900 million of potential new business. We are excited to announce that we have been sourced two new light vehicle programs, one with Ford Automotive Company and one with Nissan. We are very enthusiastic about strengthening our relationships with these OEMs. We will be providing an updated backlog to cover the 2013 through 2015 period of time later this year.

Next, the growth in our backlog is a result of our investments in leading edge technology from product process and system standpoint. In support of these efforts, our R&D spending in the third quarter was $31.4 million. This compares to $31.8 million spent in the third quarter of 2011. On a year-to-date basis AAM's R&D spending was $90.3 million in the first three quarters of 2012 versus compared to $85.4 million in the first three quarters of 2011. AAM continues to invest in many new and innovative products focused on the most important industry trends and design drivers. These trends and drivers include enhancing fuel efficiency and meeting the market demand for lower emissions. We have an industry leading technology both for our passenger car as well as our truck application that drive efficiency and lower emissions., and we are very pleased to be on the industry leading edge of that.

Second is improving our torque capacity through power density. Torque capacity improvements are necessary to enable time OEMs to achieve improved fuel efficiency and reduce emission requirements, without sacrificing torque and towing capabilities; and third reducing our noise vibration and harshness or otherwise known as NVH in the vehicle, essentially the sound of the vehicles. The vehicle NVH is constantly improving and becoming more demanding. As our full service systems integrators AAM has a full range of capabilities on a global basis including validation capability to meet the ever increasing market demand for reduced NVH. And finally the unique and industry leading technologies in the industry and that really equates to our innovative EcoTrac disconnecting all-wheel-drive system which enables vehicle manufacturers to offer fuel efficient, environmentally friendly options to provide safety ride and handling performance and all-wheel-drive for passenger cars and cross-over vehicles.

Our EcoTrac disconnecting all-wheel-drive system is an industry first. This is a great example of how our innovation is strengthening the AAM’s market position and brand in the market place to be a technology leader. We will be launching this disconnecting all-wheel-drive system on a global passenger car program for non-GM customer in 2013. At the same time, we are advancing the development of electric drive systems and we're doing this for both electric and hyper electric type vehicles as well as electric all-wheel-drive system. In this area of product development, we continue to leverage our wholly-owned subsidiary, e-AAM drive line system in Trollhättan in Sweden.

AAMD all-wheel-drive systems are designed to improve fuel efficiency, while significantly reducing CO2 emissions. This is done while enhancing vehicle stability through the use of proprietary torque vectoring attributes. Our focus is to commercialize this product technology by earning a purchase order yet this year and we're in discussion with multiple OEMs at this time.

In closing, let me emphasize that AAM’s top priority for the remainder of 2012 is to take the necessary actions to improve our operating performance and to position AAM for a solid finish in 2012. We clearly recognize that this is not a traditional AAM operating quarter. However, we have handled a multitude of global launches this year and we're going through the growing pains associated with watching these new products in new facilities with new workforces around the world. As we continue to expand our business, we remain committed to delivering quality, technologically leadership and operational excellence, while successfully diversifying our customer base, our product portfolio in our served market.

That concludes my comments for this morning. I thank you everyone for your attention today and for your continued support of AAM. Let me now turn the call over to our Executive Vice President and Chief Financial Officer, Mike Simonte. Mike?

Mike Simonte

Thank you, David and good morning to everybody. David already covered the highlights of our third quarter earnings, so I am going to get into right into the details starting with sales. Net sales in the third quarter of 2012 increased approximately 8.5% to $703 million as compared to $648 million in the third quarter of 2011. This marked the 11th, consecutive quarter with year-over-year sales growth for AAM. On a year-to-date basis through the first three quarters of 2012, AAM sales were at $2.2 billion, up 11% on a year-over-year basis. This is approximately the same sales trend we expect to achieve over the next three years 2013, ‘14 and ‘15. That’s double the rate of growth expected in the US [arc] or the global [arc].

On a sequential basis, AAM’s sales in the third quarter of 2012 were down approximately $37 million or 5% as compared to the second quarter of 2012. The primary driver of this sequential and seasonal decrease in sales was lower production of GM’s full size pickups, SUVs and vans, and what I mean by this are the GMT 900 and GMT 610 programs.

In the third quarter of 2012, we shipped product to support approximately 260,000 vehicles in these two programs. This compares to approximately 3000 units in the second quarter of 2012. In total, our sales supporting these two programs, again I am speaking to the GMT 900 and GMT 610, were down approximately $50 million sequentially as compared to the second quarter. An increase in new business launched in the quarter, partially offset to decrease in GMT 900 and GMT 610 volume. In the third quarter of 2012, AAMs non-GM sales increased by approximately 14% on a year-over-year basis to 198.8 million. Adjusted for the impact of our unconsolidated Hefei AAM China joint venture, AAMs non-GM sales were approximately 33% of total sales in the third quarter of 2012.

And as we’ve discussed on previous calls, we expect our non-GM sales growth to pick up significantly in 2013 and 2014, based on the nature of our new business backlog. We measured content per vehicle by the dollar value of AAM product sales supporting our customers North America light truck and SUV programs. These programs and we support for GM Chrysler and Nissan. In the third quarter of 2012, AAMs content per vehicle was [$1466] approximately the same as in the third quarter of 2011, and approximately 2% higher on the sequential basis versus the second quarter of 2012. Again a seasonal difference more than anything else, but nonetheless an improvement versus the second quarter.

Okay, let's move now to our profit metrics. Gross profit in the third quarter of 2012 was $90.7 million or 12.9% of sales. Operating income in the quarter was $30.1 million or 4.3% of sales. For the quarter, we reported a net loss of $8.2 million or $0.11 per share.

As David noted, included in these third quarter results were debt refinancing costs of $10 million and restructuring costs of additional $3 million related to the closure of our Detroit Manufacturing Complex and Cheektowaga Manufacturing Facility. Excluding the impact of these special items, adjusted EPS was $0.07 per share and AAM's adjusted EBITDA or earnings before interest expense, taxes and depreciation and amortization was $70 million or 10% of sales.

The first thing I'm going to say about these results is that all of our key profit metrics in the quarter were significantly lower than our performance in recent quarters and also lower than our own long-term expectations for the business.

Secondly, let me anticipate some questions and review three major issues that affected our operating performance this quarter. David mentioned these issues; I will provide more detail on the financial impact of these matters. The three issues are number one, capacity utilization, number two, project expense, and number three, launch cost.

First let me address capacity utilization. Primarily as a result of the GMT-900 and GMT-610 downtime, our capacity utilization in North America for the major light truck programs we support for GM, Chrysler and Nissan was a little lower than 80%, down approximately 10 percentage points from our run rate in the first half of 2012.

Now in addition to this North American light truck situation, we had three major new program launches ramping in the third quarter that were running well below full rate and this is typical for programs in the early days of launch.

In our Guanajuato Mexico Manufacturing Complex, our capacity utilization for two new GM programs, one rear-wheel drive program the Cadillac ATS and then second a global all-wheel-drive crossover vehicle program ran between 35% to 45% capacity utilization in the quarter.

In the third quarter, we also launched a new global SUV program with GM. This is referred to as the 31 31Ux; it’s a derivative of the GMI-700 program. Capacity utilization on this new program was also less than 50% in the quarter. The cost of this capacity utilization shortfall could be measured in terms of lower fixed costs absorption.

Let me explain this in plain English. For the new programs, this means that the contribution margin, we earned on sales was not high enough to cover all the fixed costs that were necessary to support the programs. This is not a problem once production reaches full rate and so we do not expect it to be a problem given our expectations for these programs but until then our costs exceed the contribution margin earned on the sale of these products.

For existing programs, this means that the contribution margin we earned on the sale of these products was lower than in previous quarters and again what I'm speaking to is what is the impact of the capacity utilization being lower in the third quarter. We estimate the adverse impact of lower capacity utilization on these programs and again I am speaking to the GMT-900, GMT-610, Cadillac ATS, the Global CUV program we launched with GM and the 31Ux SUV program to be approximately $50 million as compared to the second quarter of 2012.

The second cost headwind in the quarter; I am going to talk about right now as project expense. We define project expense as the cost that were incurred to install, move, test or improve property planned equipment assets that cannot be capitalized under generally accepted accounting principles.

This includes pre-production activities required to validate one-off equivalent to ensure that it will be ready the running rate for the start of regular production. Project expense was elevated in the third quarter of 2012 as compared to the second quarter of 2012. This was especially true with our Three Rivers Michigan Manufacturing Facility and our Guanajuato Manufacturing Complex. These facilities are preparing for significant launches in 2013, including the EcoTrac all-wheel-drive system introduction of K2XX and the new Ram heavy-duty series pick-up trucks.

One additional item to note with respect to project expense is that we're relocating and expanding our Lancaster Pennsylvania Manufacturing Facility in support of the Mack Truck Program.

Excluding restructuring cost associated with the closure of the Detroit Manufacturing Complex and Cheektowaga Manufacturing Facility, AAM’s project expense in the third quarter of 2012 was approximately $4 million higher than the second quarter of 2012.

The other major cost headwind affecting our third quarter operating results was launch cars. Now in simple terms, launch cars are operating inefficiencies, non-standard cost and other premiums incurred at facilities that are launching new business. These includes premium freight to expedite inbound or outbound logistics in our case both, extra manpower including support for training and quality control purposes is typical to have more people in a facility to make sure you get it right in the early days of launch.

Unplanned overtime in shift premiums can be incurred, outside processing costs can be incurred, scrapped and excess consumption of supplies to maintenance utilities or similar production support cost. We incur all of these types of cost overruns in the third quarter of 2012. In some cases, we incurred these costs to the issues in our in-house component or assembly operations.

In other cases, it was caused by unanticipated supply disruptions or unexpected changes in customer mix or scheduling. We did whatever we could do to meet the needs of our customers. As a result, these cost overruns were more than we expected.

This should help you understand the major issues affecting our operating results in the third quarter of 2012. If you have additional questions about these matters, we can address them in the Q&A period. Let me now shift gears to SG&A, interest and other income.

Starting with SG&A. In the third quarter of 2012, SG&A and this includes research and development spending was approximately $60.6 million or 8.6% of sales. This compares to $59 million or 9.1% of sales in the third quarter of 2011. Now as David already noted, AAM’s R&D spending in the third quarter of 2012 was $31.4 million just a little bit less than the $31.8 million we spend in the third quarter of 2011, but this was approximately $2.5 million higher on a sequential basis as compared to the second quarter of 2012, similar to the seasonality trend we have observed last year. We expect our third quarter R&D spending to be the highest of any quarter in 2012. And this is due primarily to the timing of customer programs requirements.

Net interest expense in the third quarter of 2012 was $25.1 million, this compares to $19.4 million in the third quarter of last year. The average interest in our outstanding borrowings is about the same as it was a year ago 7.8%. Interest expense is higher this year because our total outstanding borrowings are up.

Other expense in the third quarter of 2012 is $2.2 million, this is $2 million higher expense than we incurred a year ago in the third quarter of 2011. The major driver of this expense in the third quarter of 2012 was foreign exchange losses. The Mexican peso was strengthened by approximately 6% in the quarter versus the US dollar. This caused our (inaudible) based expenses and liabilities to be more costly in dollar terms.

Okay, let's move onto cash flow, we define free cash flow to be net cash provided by where in the case of this quarter used in operating activities. Less capital expenditures net of the proceeds from sale of equipment. GAAP cash used in operating activities in the third quarter of 2012 was $221.2 million.

Capital spending net of proceeds from the sale of equipment in the third quarter of 2012 was $50 million. Reflecting this operating activity in CapEx, free cash flow in the third quarter of 2012 [where they] use of $271 million. AAM’s cash flow in the third quarter of 2012 was significantly affected by two unusual items are occurring not very regularly. The first is a large supersized pension contribution. The second is our debt refinancing actions. With respect to the pension funding, we contributed a total of $214 million to our US and UK pension plans in the third quarter of 2012. This was driven in part by PBGC requirements associated with the closure of the Detroit manufacturing complex and Cheektowaga manufacturing facility.

However, we were motivated to do this for other good endowed reasons, including the opportunity to bring this at somewhat volatile off balance sheet liability on to the balance sheet in the form of a fixed rate long dated debt obligation. In the process, we satisfied nearly all of our pension funding requirements for at least the next three or four years.

As to the refinancing actions, in September 2012, AAM issued $550 million of new 10-year unsecured notes bearing interest at 6.625%. In addition to the pension funding and underwriting fees and expenses, the use of proceeds included the repurchasing and redemption of all $250 million of the 5.25% notes due in February of 2014. And the call of 10% or $42.5 million of the 9.25% senior secured notes that are otherwise due in 2017. The total cash cost of these refinancing actions was approximately $18 million of which $10 million was incurred in the third quarter of 2012; the remaining $8 million was paid in the early days of October 2012.

Okay, now if we exclude the $224 million of cash used to fund the pensions in the third quarter pay the refinancing costs; AAM still used approximately $47 million of cash in the quarter. Interest payments of $37 million, this represents approximately 40% of all the interest we will pay this year; CapEx payments of $50 million or 7% of sales are running higher, its been the run rate for the year and an inventory build of $33 million related to the same operating issues that affected our operating results. These were the primary drivers of the use of cash in the third quarter of 2012.

As to the balance sheet, we've already addressed the inventory and debt refinancing actions. The only other balance sheet issue I will note right now is our accounting for pension and OPEB obligations. Typically, we have our actuaries revalue our pension and OPEB liabilities without these actuarial assumptions once a year at year end.

In the third quarter of 2012, it was appropriate to revalue our hourly pension and our OPEB liabilities to recognize the impact of two items. The plant closing benefits that will be provided to hourly associates in the Cheektowaga; that's the first of two items and the second is our plan amendment, our pension plan amendment, in this case that was approved by the Consultation Committee in the quarter. Each of these items has been previously disclosed, so I'm not going to get into more detail at this time.

The discount rate used in this evaluation was 4%. That's approximately 100 basis points lower than at 2011 year end. We use the discount rate of 5.1% at that time. This drove an increase in our net pension and OPEB liabilities of approximately $95 million in the quarter. Now we will revalue the pension and OPEB liabilities again at year-end, that’s a GAAP requirement. But we do not currently expect any significant impact on our balance sheet as a result of this year evaluation requirement. That’s because we stepped up to the impact of lower discount rate right now, September 30, 2012.

Alright, before we start the Q&A, let me wrap up with a couple brief comments on our full-year 2012 outlook. And this was included in our 8-K we filed earlier today. For the full-year of 2012, we expect our sales to grow by about as much as 12% to 14% to more than $2.9 billion. Also for the full-year 2012, we expect our adjusted EBITDA margin to be approximately 12.5% of sales. This is lower to EBITDA margin than our previous guidance due to the impact of weaker financial results in the second half of 2012 and as we discussed, that’s due primarily to the launch costs that we are incurring in the back half of the year.

We do expect our financial results to improve on a sequential basis in the fourth quarter of 2012 but not all way to the levels we achieved in the first half of the year. From an operations perspective, we expect the next two or three quarters to be choppy due to the impact of launch cost and also intermittent downtime and changeover activities that will be occurring as a result primarily of the GMT-900 K2XX transition.

However, we also expect to work through the issues that we're dealing with right now to mitigate underlying bottlenecks both on our own operations as well as our supplier operations; David commented on more and we do expect the make solid improvement in our operating performance in the next few quarters; much of what we have to do is under our control or our suppliers control and we are working as an extended supply chain to make that happen.

The operating challenges we face we believe are temporary. These challenges are temporary. The important thing to keep in mind is that we are well positioned to benefit from our launches including the 2013 launch of GM’s all new full size pickups and SUVs you all know what I mean by that and Chrysler’s new heavy-duty series RAM pickup trucks; two major programs for our company both with important new product introductions in 2013. These launches and the improved capacity utilization rates that we expect to come along with these launches are now just around the corner. Also the stability that we expect once these new programs are launches and we are not dealing with downtime and changeover and launch cars that’s just around the corner.

So that’s really the end of my comments this morning, prepared comments I should say. Thank you for your time and participation today, I am going to stop here and turn the call back over to Chris, so that we can start the Q&A.

Christopher Son

Great, thank you Mike and thank you David. We have reserved some time for taking questions. I would ask that you please try to limit questions to no more than two so we can answer all the questions on the line. At this time, please feel free to proceed with any questions you may have, so Amanda if you can start the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is going to come from Itay Michaeli with Citigroup. Your line is open.

Itay Michaeli - Citigroup

I guess I just wanted to revisit the 12% to 15% EBITDA margin goal that you have had going forward, your latest thinking around that given some of these temporary setbacks; if could talk about that perhaps on the 2013 and even ‘14, and ‘15 basis that will be helpful?

David Dauch

All right, Itay, this is David Dauch, I’ll start first and then I’ll turn it over to Mike. We’ve always said our range was at 12% to 15% from an EBITDA standpoint. The high end of the range is when we have lower material escalation and greater capacity utilization, the lower end is the opposite. And clearly, we are experiencing capacity utilization issues in some of our existing programs today that mean in the end of June, and the RAM program as we go into conversions to get ready for K2XX in the next RAM program. You are aware of the osculation that we have been dealing with all year to the tune of about $40 million to $45 million on the annualized basis.

And then obviously we have introduced some operating issues into the third quarter here and based on our launches on a global basis and as I said in my comments, we got a lot of new products, a lot of new facilities with new work force globally around the world and that we’re incurring some launching efficiency that typically we don't incur at some of our well established facilities. So John Bellanti, myself and others are working on those, but that kind gives you where we are at this point in time.

Our range is still in that 12% to 15% as Mike indicated to you and we see us getting stronger here in the fourth quarter over our third quarter performance in ‘12. And then we will still have some choppiness maybe into the first and second quarter just because of the critical launches that take place with some of the RAM and the K2XX, but nothing that we should be able to manage within our existing well established facilities. So Mike, do you any comments?

Mike Simonte

Yeah, first of all good morning Itay, the only significant comment, I am going to add to this is keep in mind that our 12 to 15% EBITDA guidance is long term guidance; its intended to be to true and consistent over a long period of time. There are going to be quarters and we never indicated otherwise, they could be higher or in this case little bit lower than the long term guidance, but we do feel confident that this 12% to 15% range is still the right range to think about in terms of the most probable outcomes for our business over the long term. It is full year still within the range clearly at 12.5% roughly on an adjusted basis and we do expect to improve as we work through the issues that David commented on and reap the benefit of the new business that was launched going forward.

Itay Michaeli - Citigroup

Okay, as my follow-up question I appreciate all the detail around the financial impact in the quarter from the product expense and utilization issues, can you give a sense of what that looks like in the fourth quarter, or either numerically or just order of magnitude relative to the third quarter, those things get a little bit better or same, maybe a little - probably shouldn’t get worse with the $900 production. But just give us a sense of what those items look like sequentially here in the fourth quarter.

Mike Simonte

Okay, first of all we do not expect capacity utilization to be worse than the fourth quarter. We absolutely do not expect that. We do expect it to improve a little bit. There are fewer down weeks in the fourth quarter and there are a fewer production days. So in terms of that issue we expect it to be at least slightly and maybe a little bit improve, probably a little bit improved over the fourth quarter and we would see a more significant step function improvement in the capacity utilization in the first quarter. And these comments that I made so far relate to North America light truck programs I want to be clear about that.

We will see capacity utilization improvements on the other new launch programs that I commented on. The Cadillac APS, the global CUV program, the 31UX will significantly improve those elements of the capacity utilization, and so overall we will be in a improved position in the fourth quarter. The second issue you commented on was the project expense, and in this case we really don't expect much improvement, the run rate of project expense again principally to prepare our facilities and equipment for launch and also to incur [PTAP] costs and other run-off and validation activities to recognize those expenses. We expect that to be relatively flat quarter-over-quarter.

Itay Michaeli - Citigroup

How about the launch cost, just lastly, is that also going to be flattish sequentially.

Mike Simonte

The launch cost, from our perspective we believe that the third quarter was the trough of performance as it relates to these issues. We are making some measurable improvement in certain activities in the fourth quarter, some activities clearly are going to be hanging with us. But if you listen carefully to what we are saying about guidance, we do expect our fourth quarter to improve but not all the way and some of these operating inefficiencies take more than a couple of weeks to fix. In some cases we need to work them out over two to three, four months, because you got to get new suppliers or our own operations, revalidated or correct it in a way that you just can't do overnight. So we do expect some improvements in those launch costs in the fourth quarter, but over the course of the next two or three quarters we expect our operating performance to be a little choppy, maybe a little weaker than what we saw in the first half of 2012. But as we work through the next few quarters it should improve a little bit as we go and by the back half of next year we expect to be in a much improved situation.

Operator

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

Rod Lache - Deutsche Bank

A couple of things, one is just to clarify, I heard you go through the $50 million of capacity utilization impact and $4 million project expense. I missed the launch cost. Could you repeat that number?

Mike Simonte

Yeah, Rob, we didn’t quantify that number, but certainly our expectations at the 12% to 13% may be 14% EBITDA run rate that we experienced earlier in the year, I think it's fair to say that the significant delta between those expectations and where we ended up in the third quarter had to do with these launch cost.

Rod Lache - Deutsche Bank

Okay, and I am just wondering, you know, of these items, the capacity utilization project expense and launch, why do you figure they were unexpected when you published that 8-K earlier in the quarter, and I am also not entirely clear on why these things would diminish when you’ve got $450 million of net new business next year and the K2XX launch? Did the new business, did they go on the same lines? Does that help you in terms of capacity utilization? Could you just give us a little bit more clarity on what's behind your expectation there?

David Dauch

Rob, this is David. In regards to the 450 from next year as it relates to launch cost, most of that business is going down, well established lines or things are in place right now for the GMT-900, we're obviously converting those lines over (inaudible) project expense now. Similar things with the ramp program. The other programs are just going to be going through what Mike was referring to earlier, accelerated launch curves, but the cost to put those lines and debug those lines are in place. So we don’t expect to be seeing the same cost, the experiences that we’ve seen this year, especially here in the third quarter and then clearly on a global basis, like I said, it would give us new work forces, new facilities and new products where they don’t completely understand, may be all the drive (inaudible) the way that our well established facilities do and so there is some lessons learn there and for us in regards that we need to enhance some of the training which strengthen some of the support and that’s exactly what we are doing not only on the existing stuff today, but also the future things for the balance of this year and into next year.

Rod Lache - Deutsche Bank

Okay and why were these things unexpected, was there something that occurred relatively late in the quarter that caused them to be a lot larger than (inaudible).

David Dauch

There is a few things one it’s all about customers (inaudible) well over our established capacities but we had to get better in line first and foremost, if we could buy them he is your friend when you have that situation. But in this case it cleared some problem. Second, we had to extend the supply chain that was supporting multiple global programs and that got strained in cash because of this capacity or demand over our installed capacity. Third, our supplier capability and capacity was not in line with the new suppliers we brought on a global basis to support some of these launches. And then as I honestly said we have some of our own internal capacity and capability issues out of our facilities that quite honestly we didn’t expect.

John Bellanti

Rob, this is John Bellanti and I would just say that some of these launches involves some significant new technology that we are launching for the first time, some wealthy processes and assembly that we experienced more difficulty than we had anticipated when we originally planted and we are addressing that.

Rod Lache - Deutsche Bank

Okay. Specifically with respect to the K2XX launch they’ve got four plants and my understanding is that, that gets spread out over like a year of launches for them. You had mentioned that you think some of these volatility happens over the next two or three quarters. Are you kind of segregating that out of the K2XX launches that expect it to be more smooth?

David Dauch

Yeah we expect the K2XX to be much more smooth; although as Mike indicated that we had roughly 17 weeks of downtime in the third quarter due to customer downtime with schedule adjustments. So we are experience probably 12 during the fourth quarter and an then additional amount but not as many in the first quarter as they continue the preparation for those major model changes that will be in between GM and Chrysler. So we don't expect we have major issues on the K2XX. Several of our products are carry over products, and some of the products that are new are running down similar lines, but just adjustments in [five] to the Axle. And then we have some new technology that AAM and GM are introducing and that’s where our focus will be on some of the K2XX.

John Bellanti

Rob, it’s John Bellanti. I will just the K2XX and the Chrysler heavy duty are next generations of launches that we’ve done several times in the past, and we’ve got lot more experience with those launches and shouldn't expect nearly the problems we are having with new customers, new regions, new workforces and new processes.

Rod Lache - Deutsche Bank

And then lastly, how should we think about working capital going forward and raw materials?

Mike Simonte

I will deal with the second matter first; on raw materials we’ve experienced what we expected to experience. This year we commented on the last couple of calls I believe that we expected the margin impact on material cost inflation to be in the range of a 110 basis points maybe a 130 basis points of margin impact, that's up a little bit from the 70 to 90 basis points impact, we expect at the beginning of the year but relatively consistent now for the past couple of quarters as we’ve settled into that run rate. We do expect some material cost inflation into next year, but at a more moderate or lesser rate.

We are not going to wait, we are not in the position Rob to give a lot more color and feedback on our guidance for next year but the material cost headwinds are still there in 2013 but to a lesser extent. Working capital this year we dealt with through the last couple of years we've dealt with some unusual items as it relates to accounts receivables. I don't expect any recurrence of those issues next year. Payable has been moving pretty much as expected. So inventory has been the outliner really other than receivables this year. We've got more inventory in the system.

We are turn in right now around 12 times, that's significantly lower than the 13 times, 14 times, 15 times that we like to target. I think its probably not reasonable to expect that we could get our turn rate back up to 15 anytime real soon but we need to target that, an improvement here right to the levels say 13 times in the near-term across the next eight to 12 months. So that's really what we are focused on, otherwise I expect our working capital to reflect the growth in our business.

Operator

Our next question comes from John Murphy with Bank of America Merrill Lynch. Your line is now open.

John Murphy - Bank of America Merrill Lynch

To maybe ask this question a different way, we look at the three buckets of capital project expense and launch costs and you kind of quantify that the three of those are sort of $19 million sequential hit from the second quarter, is there anyway to parse that out between the changeover for the GM trucks versus all the other new projects, I mean it sounds like the other new projects or launches are really the bulk of it and the GM truck is a smaller part of it. I'm just trying to understand the breakout between those two?

Mike Simonte

Okay. John let me address the specific number you mentioned in your question. The capacity utilization issue I mentioned was about $15 million, a significant portion of that probably, two-thirds of that relates to the lower capacity utilization in our North American light truck programs across the GMT-900 dominating that. So a significant portion of that was the lower capacity utilization on higher downtime in the third quarter. We also had a significant downtime on the GMT-610 program that program ran about half of the production level that we saw in the second quarter.

So I think relative to your question, that's an important first point. The other issues, most of the project expense and in most of the operating inefficiencies did not relate to the GMT-900 program. Really those are centered around new program launches. We did incur some project expense associated with the getting our plants ready for the Ram heavy-duty series launch, that's for sure, but the EcoTrac all-wheel-drive system launch in 2013, we incurred some project expenses associated with that and then most of the operating inefficiencies had to do with the other program launches and a lot of that was concentrated in Brazil, it has nothing to do with the GMT-900 program.

John Murphy - Bank of America Merrill Lynch

If I back up that $19 million or so in the third quarter, basically to an EBITDA margin of $12.07, I mean is that the kind of number we should be thinking about for next year? I mean something in the, to the low end of your guidance range I'm just trying to understand how much it would reverse, that all reversed it out that's where we end up?

Mike Simonte

Yeah, okay, but keep in mind that $19 million does not include the launch cost inefficiencies. So it’s a higher number which we did not quantify. What I said was sort of the gap between the run rate of activity we had in the first half of the year call it 13.5% to 14.5%, and where we ended up after you adjust with capacity utilization. The delta there is the other issues. So we're not ready to make a comment, John about 2013 with any level of specificity. I will say [12/7] seems a light. It seems significantly lower, meaningfully lower than what we're expecting for 2013 but I am not going to say much more than that right now.

John Murphy - Bank of America Merrill Lynch

If I back in those launch cost, it sounds like that was about almost $10 million hit, is that seem like a (inaudible) in the ball park?

Mike Simonte

Yes, I mean it's not an insignificant number. It was a pretty big number and when we talk about that number and [Ron] asked a question about why is someone that unexpected. I think the word unexpected in this context has to do with our expectations for the quarter. We clearly had some vision and visibility to these issues and that’s why in part we issued the 8-K in early September to address the fact that we had some of these issues. So these issues don’t occur overnight but they did creep up on uncertainly as we entered this quarter and get more involved in the launch activity and the extent of these issues, your estimate of $10 million not too far off from how we would estimate it but that’s pretty significant matter for us that we are dealing with right now.

John Murphy - Bank of America Merrill Lynch

I apologize I am asking this question again from different angle. So the $10 million, $4 million of project expense are things that are probably going to fade pretty significantly as we step forward and you get through your launch curves here and the $15 million from a lower cap you should fade as capacity utilization ramps up on new programs and the GMT-900 gets going. So as we look at the second, I mean this sound like stuff that’s going to continue to some extent through the first quarter of ’13 and by the time you get to the back half of ‘13 it may have faded pretty significantly almost completely?

David Dauch

Like we said there is going to be some downtime in the first quarter still tied to expect 900 conversion, so we will experience some of that, but we expect those capacity utilizations to get backup over 90% where they have drifted down because of some of the downtime right now that we are experiencing and we will continue to experience, so you will see fourth quarter of this year, first quarter of next year, some of the existing programs and then the rest of the global programs is just a matter of us working through our launch curves and [really] the accelerated launches of our customers.

John Murphy - Bank of America Merrill Lynch

Okay and then just lastly as we look at the out years of ’14, ’15, you are going to be launching $400 million to $500 million or so of new programs as it stands now hopefully may be more as you win more, what makes you think that those programs are going to be much more successful and smoother as they ramp up versus what you are going through right now?

David Dauch

The three quarters of our launches this year were on a global basis with new facilities, with new workforce and new products and new technology. We have got a lot of launches next year to still support the 450 or backlog that we talked about for 2013. When you break it down, there is really four major launches within that and that’s the Ram product with Chrysler another global OEM used in the EcoTrac type activity, the K2XX program and then our program with Volvo Powertrain. Those are the four big programs and some derivatives from that and those are for the most part all being launched at existing and established facilities with an experienced workforce.

Operator

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

Chris Ceraso - Credit Suisse

So just a few things left to follow-up on, at what point in 2013 do you think that the output on the new GM truck and I guess the same would go for the Ram will outweigh the declining output on the T-900, in other words when do you get to a net positive from a build and a unit perspective, is that not until the third quarter?

David Dauch

Yeah, I say roughly in that area, Chris. I will get some specific there. We clearly understand there is second quarter type launch activity and we will be building both 900 and K2XX on similar lines as the customers can road over to the new program. And then we will have to leave the 900 out while we are accelerating the launch of the K2XX product.

Mike Simonte

And just one thing I want to add, this is Mike. There is nothing wrong with the 900 product. That’s very good and positive for us and well its true that the balance for the activity will start to swing towards K2XX third quarter certainly by the fourth quarter. We do expect more stable production levels next year on a total basis. And so certainly the impact on our operation should be less on this issue in 2013 then it has been at 2012.

David Dauch

Yeah, the big issue is still with the 900 K2XX conversion as where are going to be running multiple product on the on the same line and have greater changeovers then if we are running K2XX only and have more efficiency in our line. So that certainly impact us a little bit from an overall capacity utilization standpoint or throughput standpoint. So you can chalk that up to launch cars our operating inefficiencies whatever it maybe, but we wouldn’t be realistic if we didn't think we are going to have some increase downtime because of the multiple models we are working with.

Chris Ceraso - Credit Suisse

I think most of other stuff you have covered a few times, but just one housekeeping item. Do you have a rough ballpark in early estimate on what you think interest expense and your tax rate will look like in 2013?

Mike Simonte

Yeah, Chris; as a result of the refinancing activity, interest expense should be running in the neighborhood of $28 million or so quarter a quarter. And the good thing about that from a working capital or cash flow standpoint is that we should see relatively constant interest payment activity each quarter, okay so we retime some of the payments and issued CR interest expense matching up a little bit more closely with our interest payments in 2013 and that should smooth out some of the volatile bumps we see right now with most of our interest being paid in the first and third quarter. So that's the first point.

Second point on tax, you know some time soon it could very well be the fourth quarter, it might be some time in calendar year 2013, we expect to be in a position under GAAP to reverse our valuation allowance on US deferred tax assets. And what we've said about this issue Chris is that when that occurs and we release that valuation allowance and therefore have a need under GAAP to recognize deferred tax liabilities through our provision. We expect our tax provision rate to increase from the roughly 5% to 10% level that we are referring right now on an effective basis to 15% to 20% or so.

So for 2013 we do expect our tax provision to trend up, 15% to 20% is the range that we currently expect and we guided to, I guess you would say for the last three or four quarters as we discuss this issue. Our cash tax provision however should be very low; it should continue to be low as we reap the benefits of those deferred tax assets.

Chris Ceraso - Credit Suisse

And will it be one of the things Mike where if you go through Q1, Q2 of next year and its still at a low rate but let's say you reverse it in Q3, you are going to have to go back and restate as if you had run it at a 15% to 20% in the first half?

Mike Simonte

Chris I don't think so, that's a good question. I have to double check, I think the way we have to do it is simply recognize the new tax provision rate going forward from the date we changed those valuation allowances. There could be a GAAP requirement that I am not too in-depth on it; we do in the middle of the year and so we will have to double check that. But the basic idea I know is that at the point of time where we release the valuation allowances, deferred tax liabilities will start to run through our provision and that's going to have to be recognized.

Operator

Our next question comes from the line of Joe Spak with RBC Capital Markets.

Joe Spak - RBC Capital Markets

Most of it has been addressed and I don't want to beat a dead horse, I just want to get some sort of clarification. Based on some of the commentary I think to John’s question it sounds like maybe the detrimental margins on the GMT-900 was about 30%. I know in the past you said you tried to manage at the 25%, is that sort of the type of improvement we should see sequentially?

Mike Simonte

Yes. Yeah, I mean the contribution margin sort of up and down detrimental, incremental is right around 30% and there was nothing unusual in this quarter as it relates to that matter.

Joe Spak - RBC Capital Markets

And I just want to make sure when you brought the tax the GAAP loss in the quarter, that's not going to change the reversal of valuation allowance at all for next year?

Mike Simonte

I'm not sure. Let me what is going to happen and hopefully I’ll answer your question. At the time at which we reverse the valuation allowance, we expect to record a large one-time non-cash gain which would be recognized in our GAAP net income to release that valuation allowance. After that point in time, again the tax provision rate is expected to increase to a range of 15% to 20% and of course that would impact our ongoing net income performance on a quarterly basis.

Joe Spak - RBC Capital Markets

I guess, and maybe I misunderstood should I thought, you needed to show a certain number of consecutive quarters of profitability for that to reverse. I am just wondering if the actual GAAP loss this quarter changes that all?

Mike Simonte

So the GAAP requirement while it’s not a bright lime test; the GAAP requirement stems around 12 consecutive quarters of profitability and yes the GAAP results for the third quarter need to factored into that situation just as every other quarter for the last 12 quarters or three years needs to. So yeah that does have an impact and sometime soon, we're right around breakeven, slightly positive on that 12 quarter test. As I said, it's not really a bright lime test, but we work with auditors and we’ll at the appropriate time, when it's right, when we're totally compliant with the GAAP literature, we’ll reverse that valuation allowance. Let me be clear that the context and premise under which I think these comments is that we're confident that we're going to realize the benefit of those deferred tax assets. Yeah, we have a business plan going forward that allows us to utilize those tax assets and that’s why I say and we believe it's only matter of time until we reverse that valuation allowance.

Operator

Our next question comes from Brian Johnson with Barclays. Your line is now open.

Brian Johnson - Barclays

Good morning. I just want to maybe talk about the longer-term kind of organizational management question. As you think about some of these launch cost issues, it does seem as the first question there to kind of, not really would Axle typically delivers to the marketplace. Both domestically and then as we think about these kind of pods you’ve established overseas how do we get some comfort over the next year three years that we are going to get back to the kind of flawless execution we are used to?

David Dauch

Yeah Brian you hit it spot on. This wasn’t a traditional quarter as you expect or we would expect. It clearly comes down to leadership I take responsibility for the performance as the CEO of the company here. At the same time, I am working with our team to make sure that we address these issues in a timely manner, and that we also have the appropriate leadership and the appropriate region globally in the world to support us. Now we have already made changes to strengthen some of our leadership and some of the outlined global regions with some expats, while at the same time hiring some local nationals as that have drive-by experience there. So that’s a fair question and that’s the response.

Brian Johnson - Barclays Capital

Was this really the first quarter outside the US where you had this kind of volume of launch activity; just kind of a shake out all the problems in the system kind of quarter.

David Dauch

We’ve had some global launch issues before but nothing to the magnitude that we are dealing with now. As I said almost 75% of our launching this year were outside of the US that clearly put a strain on the organization and more importantly we didn’t execute to the plan that we put forward, and so therefore as we said earlier as we are putting more resources towards it at the same time some of our suppliers let us down in regards to their capacity and their capability which stressed the system, which created a domino impact. But that’s our job to manage those things and as we’ve demonstrated in the past we’ve done it successfully we didn’t do it this quarter and we need to restore that just come back in the operation and we will do that.

Brian Johnson - Barclays Capital

And how you are working on getting kind of timely updates, you certainly want to - Axle in the old days you could walk across the street and see what the plant was up to.

David Dauch

Brian we have daily performance reviews in regards to daily production, daily quality and daily attainments. If there are issues with the supply base our teams are fully aware of it. We have operating committee meetings every week to review the overall performance of the company by region and by plant, and whether at the [edge] we are going to scratch, we are going to put the right resource there; corporate, regional and the plant to get the job done.

John Bellanti

Brain, I will just say to that, it’s John Bellanti. I mean operations reviews are in the DNA of our company. We conduct them every month, and I spend about 60% to 70% on my time on the road at these plants looking at daily performance, launch performance and future financial results. We are strengthening that and that’s the actions we take.

David Dauch

And Brain, just as mine and John Bellanti’s personal involvement and leadership then we will get the results.

Operator

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

Ryan Brinkman - JPMorgan

All of my questions related to launch concept has been answered. I will just ask then briefly, if you could just help us to understand how you think about acquisition opportunity for the firm?

David Dauch

Well, truly right now our focus is to just adjust our own operating issues first and for most. But as I said when I get - put in my new position here is that we’ll evaluate strategic opportunities as we always do, but we will keep it in balance with the growing organically and also adjusting the other needs of the organization. As you all know we need to strengthen our balance sheet and do level the company from a debt standpoint but at the same time we need to continue to show meaning growth both organic and strategically, and right now we are also focused in regards to address these operations. So we are going to take care of the business that we have first before we start thinking about other things, but at the same time we will actively keep our (inaudible) open and our eyes open for both organic and strategic growth opportunities.

Operator

Our next question comes from Ravi Shanker with Morgan Stanley.

Ravi Shanker - Morgan Stanley

Again just a few housekeeping items to follow-up with. I'm sorry if I missed it and you said it; what's your expectation for T-900 production for 4Q.

Mike Simonte

Ravi it should be relatively close maybe a little higher to what we experienced in the three quarters. That's our current expectation.

Ravi Shanker - Morgan Stanley

And have you gotten any insight from GM as to their plans with T-900 production over the next two or three quarters, given their current inventory levels and the levels of [sell down] they expect.

Mike Simonte

Yeah, our expectations for production on the GMT-900 program were not really very different at all from what we’ve thought over the last several months, and we expect the total volume of production to improve in the first quarter relative to the third and fourth quarter, get back to a more stable steady overall production level. Clearly next year we will have the transition of product, GMT-900 and K2XX, and as David pointed out they will be building at different facilities. GM will be building both K2XX and GMT-900 products for a good portion of the year. But on an overall basis, we expect that the shelling rates, the inventory levels, the introduction of new truck, all that take into consideration, we expect a good solid production activity in 2013 on these programs. Inventory levels will moderate as we work to the production this year. Today is what October 26, there are only 37 production days left in the months of November-December and there are 60 selling days and just like it does every year, it will help to moderate inventory levels coming into Christmas time.

Ravi Shanker - Morgan Stanley

Understood. We had another supplier say that they expect the K2XX launch to continue for about 18 months to 24 months. You guys have typically said nine months to 12 months. I mean you still see that as the timeline for your launch right?

David Dauch

We are still sticking to the timeline that we communicated earlier. We are not aware of anything else and nothing has been communicated to us.

Ravi Shanker - Morgan Stanley

Understood and then finally any further clarity on the actual launch timing itself. Are you still sticking with second quarter because I mean GM has said they are going to show the truck on December 13, that's maybe a little sooner than people expected but we've also heard other reports that it may actually be coming a later than expected, so are you also sticking to the second quarter?

David Dauch

We are still sticking with the second quarter, correct.

Operator

Our final question comes from Peter Nesvold with Jefferies.

Peter Nesvold - Jefferies

Maybe a little bit earlier short one because I did jump on very late, so tell me just to read this transcript if you really just, already (inaudible) all this, so I definitely hear the commitment to getting your launch costs right and frankly it’s a high class problem when you got so much new business coming on. I guess the concern perhaps out there right now is that there are a lot of examples when you get behind the curve on launches, that it’s taken longer than you expect and (inaudible) controls would be the prime example over the last several years. So what's different in this particular case, is there a specific plan to me you point to number one and number two, what would you say is the normalized EBITDA margin, once you do phase in the launch costs, sorry once you phased in the backlog?

David Dauch

Okay, let me take the first part and I will let Mike speak to the second part of it. You are absolutely right. The only way to [beat] a launch is upfront and we got ourselves behind on a couple of these launches, largely because these things that we [can] control but also because of the impact on some of our suppliers. We feel very confident that we can get the supplier things taken care. We’ve already put a lot of things in place. We're localizing some component treats to the regions that are being consumed versus having to incur premium freight, another off standard cost because of their capability and capacity issues. At the same time, we're not looking to invest in any new equipment. We just need to debug some of the existing equipment we have and that’s within our control. So the biggest thing we need to stop is some of the supplier issues that we're dealing with, some of premium freight issues we're dealing with and then deal with the operational inefficiencies that we're dealing with new launch in our minds.

Mike Simonte

Peter, I want to address the margin question. Earlier on the call, you may have missed it. There was a question that dealt with our long-term EBITDA guidance its roughly 12% to 15%. You asked a more specific question, which is after you launch this business, what do you expect to normalize level of returns to be in the business and what I would say about this is the same thing that again, we’ve said about this over the past couple of years is that overtime we expect our EBITDA margin or any other profit margin to decline a little bit overtime.

So that the upper half of that guidance launch or guidance range 13.5% to 15% which is very steadily been since our restructuring was completed in 2009. That’s not really expected to be sustainable over the long-term as we launch this entire new business backlog. That does not mean that we don’t expect to have good solid improved performance in 2013 or 2014, but overtime as a larger percentage of our business is represented by programs that are lower in scale and less volume in scale in GMT-900 or even the Ram heavy-duty series pick-up truck program.

We would expect our margins to come down a little bit. From our perspective that’s okay, if we deal with the fixed cost structure that is currently depressing our cash flow performance where (inaudible) specifically is we need to moderate our capital spending. Right now, we are trending little higher than 6%, our long-terms thoughts about that in the range of 4% to 6%. So we need to moderate that a little bit. The second issue deals with pension. We’ve addressed that now. We have no significant pension funding issues for at least the next three years or four years probably a little bit longer than that.

So there is no real significant cash call right now in the business associated with the pensions. And the third issue is interest expense. Interest expense can come down a little bit in 2014 time period if we are successful and we are able to refinance the nine in a quarter notes to something lower. There is an opportunity in ‘14 of course the bigger opportunity is to pay down debt by generating cash in the business. We have not accomplished that in the last couple of years, that’s a significant priority for us in the next couple of years. Clearing out the pension obligations, launching this new business and of course clearing out these launch cost problems are keys to our success of being able to do that.

Christopher Son

Thanks Peter and we thank all of you who have participated on this call and appreciate your interest in AAM. We look forward to talking with you in the future.

Operator

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

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