American Axle & Manufacturing Holdings Inc (AXL) 2002 Q2 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good morning, everyone. And welcome to the American Axle & Manufacturing second quarter 2002 earnings teleconference. This call is being recorded. Time permitting we will be taking questions. (Caller Instructions.)

  • Now we would like to turn the conference over to Robert Krause, Vice President and Treasurer at American Axle & Manufacturing. Please go ahead, Mr. Krause.

  • Robert Krause - Vice President and Treasurer

  • Thank you. Good morning everyone. Thank you for joining us today, and for your interest in American National and Manufacturing. All of you should have had a chance to review our second quarter 2002 earnings announcement and the second release discussing our earnings guidance that we released earlier this morning. If you have not, you can access them on the aam.com web site, or through the PR Newswire Services.

  • A replay of this call will also be available beginning at noon today through 5:00 p.m. Eastern Daylight Time on July 31st by calling 1-800-633-8284, reservation number 20737981.

  • Before I turn the call over to our Co-Founder, Chairman, and CEO Dick Dauch, let me take a moment to read a brief statement.

  • The matters discussed in this conference call may contain comments and forward-looking statements based on current plans, expectations, events, and financial and industry trends which may affect the company’s future operating results and financial position. Such statements involve 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. The historical results achieved are not necessarily indicative of future prospects for the company. For additional information we ask that you refer to the company’s filings with the Securities & Exchange Commission.

  • This call is also intended to be in compliance with Reg FD, is open to institutional investors, security analysts, news media representatives, and other interested parties. We are also audio web casting this call through our web site. Again, that is aam.com, and this call is archived in the Investor Section, and will be there for a year for later listening.

  • We will be appearing at the JP Morgan Harbor Conference at the Dearborn Michigan Ritz Carlton on August 6th, 2002, and the Credit Suisse First Boston Conference in New York on September 17th, 2002. We look forward to seeing many of you at those conferences.

  • With that said, let’s get to the purpose of today’s call. Let me turn things over to Dick Dauch, AAM C-Founder, Chairman, and CEO. Dick.

  • Richard Dauch

  • Thank you, Bob. Good morning everyone, and thank you for joining us today to discuss American Axle’s financial results for the second quarter of the year 2002. I’m extremely pleased to report second quarter earnings per share increased 28 percent to 92 cents per share. This is a record for our company and compares to the 72 cents earned in the second quarter of year 2001.

  • On March 8th we were the first auto supplier company to raise earnings guidance. At that time we indicated that the second quarter earnings would increase at least 15 percent to 85 cents per share from the 72 cents earned in the second quarter of 2001. In the second quarter AAM delivered earnings that were seven cents ahead of that guidance.

  • The 92 cents we reported for the second quarter were three cents ahead of the FirstCall consensus estimate of 89 cents per share. This was the fourteenth straight quarter, every quarter, since our company has received public recognition that we’ve delivered strong earnings performance and met Wall Street expectations.

  • As promised, due to lower capital spending level and increased operational cash flow our company, AAM, generated $89 million of free positive cash flow in the quarter. This was an increase of $132 million from the second quarter of year 2001. This resulted in the company’s net debt to capital ratio being reduced from 62 percent to 55 percent on June 30, 2002. This is well ahead of our original target date of December 31, 2002.

  • I am also happy to be joined today by Robin Adams, our Executive Vice President and Chief Financial Officer, Patrick Lancaster, our Group Vice President and Chief Administrative Officer, and Yogendra N. Rahangdale, our Group Vice President and Chief Technology Officer.

  • After I discuss some of the highlights of today’s release I will turn things over to Robin for details of our financial performance. When Robin finishes we’ll be very happy to receive any calls or questions that you men and women may have.

  • The second quarter of North America light vehicle production was up approximately seven percent. This included light truck production that was up almost nine percent in the second quarter, and passenger cars up about five percent. AAM sales in the second quarter of 2002 were at a record level, and were up nine percent from last year’s second quarter to $881 million. AAM sales were impacted by a shift in GM product mix to a more mid-sized SUV which resulted in a slight overall reduction in content per vehicle for AAM.

  • Operating income grew some 23 percent in the second quarter as a result of increased volume, coupled with a significant productivity improvement, and our continued focus on tight cost controls. Not only did we set a new record for sales and earnings in the quarter, but also very importantly for margins.

  • We continued our investments in research and development with a major focus on AAM’s new [I-Ride] chassis modules featuring power light independent drive axles with rear steering. We will be installing several four-wheel steer rear systems in demonstration vehicles in August of 2002, next month. These will include these newly developed rear steerable I-Ride chassis module, a multi-link rear steerable beam axle, as well as rear steerable conventional light duty and heavy duty beam axles. All four of these products will integrate rear steering systems into AAM’s driveline systems. Our I-Ride chassis modules will offer significant advantages in terms of improved ride and handling, and reductions in noise vibration harshness, and now offering the rear steerable feature.

  • We also are concentrating on AAM’s power transfer unit better known as PTUs, a key component in the company’s crossover vehicle driveline strategy. As a result of our R&D efforts our company has increased the percentage of new technology products again, introduced since 1988 from 72 percent for the six months ended June 20, 2002, as compared to 68 percent for that same period a year ago.

  • AAM has continued to improve its quality performance. AAM’s quality measures further improved to 14 discrepant parts per million for the six months ended June 30, 2002. This is measured by our customers. From March and May we received an eight-part per minute level. And additionally over 90 percent of our shippable parts have been at zero for over six months.

  • All of AAM’s domestic manufacturing facilities I’m proud to say have achieved early the third party certification, ISO 14001. ISO 14001 is a series of standards, environmental tools, and systems to deal with managing day-to-day operations that impact the environment. All of our facilities have achieved this status ahead of the target date required by our customers which is December 31 of 2002.

  • In the second quarter AAM was awarded new business totaling over $25 million in annual sales. The majority of these awards are from model years 2003 through 2006. For the six months ending June 30, 2002 our company has won contracts this year totaling 190 million in annual sales.

  • We are working hard on several opportunities to secure additional business from existing and prospective customers. Currently we are quoting new business of approximately $900 million. We are confident that we’ll win our share of this potential business due to the advantages we provide to customers. Major advantages include from AAM, advanced technology, world class quality, delivery, warranty performance, and excellent vehicle platform packaging.

  • During the year 2002 we have launched or are in the process of launching many major new products throughout the world, programs for our OEM customers. Several key launches are in process as we speak right now, and that will go through the second and third quarters. First the HUMMER H2, the driveline products including front and rear axles and drive shafts exclusive to AAM, have launched and are launching successfully. And next the Dodge Ram heavy duty series, 2500 and 3500 pickup trucks, for front and rear axles and front and rear drive shafts are launching successfully and have been since July 15th. Third, our 11-1/2 inch world axle is now produced in our third location, Three Rivers, Michigan, and that launched successfully in the second and third quarter and will ramp-up to full volume by October 1. Fourth, electronically controlled 8-1/2 inch axles which feature advanced vehicle stability systems, are to be used on all 2003 GM truck full-sized utilities. That launch has occurred, and it is going very smoothly. Finally, the GM 610 full-sized rear wheel drive van, Express in Savannah, the front axles and the 86 rear axles drive shaft and linkage, launch is occurring as we speak. We’re in excellent shape to meet all customers’ launch dates. At AAM we’re up to the challenges that the year 2002 brings, and we look forward to demonstrating our leadership position in this industry.

  • On July 7th there was a fire at AAM’s Detroit Ford’s facility. There were no injuries to anyone. It did not stop support of critical customer launches. We’re in extremely good shape supporting all consumers throughout the world. AAM is continuing to meet all of our customer schedules while bringing the site back-up to full production. Facility damages are in the process of being repaired. Damaged equipment is being repaired and, or replaced. We will meet all future customer schedules as we go-forward throughout this process.

  • As the CEO of American Axle the only thing I can say I’m disappointed about is our recent stock price performance. We have delivered as we said we would fourteen straight consecutive quarters of strong financial results. We’ve also delivered on our commitment of strong positive cash flow that began in the third quarter of year 2001. We are dramatically increasing our non-GM sales concentration with the current launch of the Dodge Ram program while continuing to grow sales with General Motors. And just today we increased our earnings guidance for the third time in the last 13 months. I may be disappointed, but by no means are we changing or focus and, or our efforts to increase our shareholders’ value.

  • We are committed to further increasing the value of Axle stock by continuing to focus on the following critical seven items. First, research and development, with a major concentration on new product development which includes our state-of-the-art rear steer modules and independent suspensions. Second, introduction of new products. By the end of the year close to 80 percent of our sales will be those new to the market since 1998. Remember, we started with three percent in 1994. Three, continuation of world class quality and warranty performance. Nobody can touch AAM. Fourth, dependable always on-time delivery. Fifth, continuing efforts toward customer diversification. Sixth, consistent financial earnings performance. And finally, delivering strong, free positive cash flow.

  • Lastly, ladies and gentlemen, I’d like to comment on the recent accounting troubles that have rocked this nation’s very foundation of which our economy is based. In 1993 when we began the process of forming AAM we determined the company would operate under a set of core values which included an unshakeable dedication to a strict code of ethics and total integrity. Those core values are the foundation upon which we have built our company. Whether we’re talking about our manufacturing, our personnel, our finance, our accounting policies, procedures, let me assure you there will be no surprises at AAM.

  • Our manufacturing practices are among the best in the world. We treat our associates with dignity, respect, and understanding, and that’s enabled us to work with harmony with all our stakeholders, including our unions. Our accounting practices are straightforward, they’re honest. We review our accounting policies and procedures and the related internal controls that we have in place on a regular basis. Our reputation and the success on our company depends on our ability to instill confidence not only with our customers but also with our investors who depend upon us.

  • To that end ladies and gentlemen, both Robin Adams, our Executive Vice President and CFO, and I will be signing our affidavits as to the accuracy and completeness of our accounting and financial statements when we file our Form 10-Q with the SEC in August 2002.

  • I thank you for your attention and your interest. Let me now turn the call over to our Chief Financial Officer, Robin Adams. Robin.

  • Robin Adams

  • Thank you, Dick.

  • As you just heard, we achieved second-quarter earnings per share of 92 cents, an increase of 28 percent versus the second quarter last year in an all time record for the company. Our margins were at all time highs at every level of the income statement, and operating income EBITDA and net income margins increased approximately one percentage point in the quarter.

  • We also generated $89 million in free cash flow in the quarter after capital spending. We continued our commitment to meet the financial expectations of our investors for the fourteenth straight quarter since we went public.

  • Now, let me go over some of the details in the quarter to help you understand our strong performance for the quarter and for the first half of the year. Sales in the quarter again set an all time record for the company. The prior record was in the first quarter this year. Sales were up $70 million, or nine percent in the quarter to $881 million. This compares to North American vehicle builds which are up approximately seven percent in the quarter. So we continue to outperform the auto industry growth rate, outperforming it by two percentage points this quarter.

  • Production by our major customer, General Motors, was up approximately 13 percent in the quarter, driven by a 19 percent increase in light truck production. American Axle average content per light truck decreased about $20 in the quarter, or approximately two percent to $1,100 versus the second quarter of last year. This reduction was a result of product mix shifts in GM light trucks, primarily the increase in mid-sized sport utility vehicles.

  • We also saw reductions of approximately 12 percent in non-GM customer sales. And to put that in perspective that reflects $14 million in the quarter. GM trucks represented more than 55 percent of GM’s build in the quarter as GM continues to focus on increasing their light truck market penetration. The four wheel drive and all wheel drive penetration on the vehicles we supply was approximately 55 percent in the quarter, up from 54 percent in the second quarter last year.

  • Sales for the six months ended June 30th were up $168 million, or 11 percent, to a little over $1.7 billion. In this 11 percent increase compared to a five percent increase in North American vehicle builds, a 13 percent increase in GM light vehicle production, and again, a 19 percent increase in GM light truck production.

  • Content per light truck was essentially flat for the six months at $1,118 per vehicle. We do expect content for vehicle growth of five percent at least in the last six months of the year with the new HUMMER H2 and the Dodge RAM product launches. Four wheel drive for the six month period and all wheel drive penetration was approximately 57 percent versus a little bit below 54 percent for the same period last year.

  • Product mix, as Dick said, was a big factor in the second quarter, and for the first six months of 2002. Our sales growth even at record levels was below that of GM light truck production, and content per vehicle growth was lower than in previous quarters. However, this product mix did not hurt our profitability.

  • The majority of our volume growth in the quarter in six months was on GM mid-sized sport utility vehicles that GM is currently launching. Our content per vehicle on those mid-sized sport utility vehicles are approximately $300 per vehicle less than on full-sized trucks and SUVs. This year GM is launching its new DMP370 extended wheel base mid-size SUVs. This is all new truck capacity for General Motors versus last year. The 370 is being built at GM’s Oklahoma City facility which was converted from a passenger car facility last year. So all this incremental content is all new to General Motors and obviously to us. And represents most of their volume growth in the quarter and for the six months.

  • As a percentage of total revenue our sales to GM in the quarter were at an 89 percent level versus an 87 percent level for the second quarter last year. While we experienced strong sales growth increases with General Motors, as I said earlier we also experienced some declines in the quarter and sales with our non-GM customers. Again, approximately $14 million year-over-year in the quarter.

  • However, the trend of GM concentration will be changing as we have begun launching products appearing on the all new heavy duty Dodge Ram pickups. We estimate that this increased sales to non-GM customers will approximate 10 percent on a fully ramped basis.

  • Gross margin was 14.9 percent for the quarter versus 14.1 percent for the second quarter of 2001. This is a record margin performance for the company in the quarter. This 80 basis point improvement was a result of higher production volumes, significant productivity improvements, and continued tight cost controls. We generated an incremental 17.4 million of gross profit in the quarter on the incremental sales of $70 million or approximately 25 cents on the dollar of incremental gross profit. For the six months this year gross margin was 14.4 percent, up one percent versus the 13.4 in the same period last year.

  • Selling, general, and admin expenses for the quarter as a percent of sales were five percent below last year’s quarter of 5.2 percent. On a dollar basis SG&A increased $2.2 million in the quarter, versus last year. Most of that was related to increased profit sharing expense. Our traditional SG&A costs remain flat year-over-year on a dollar basis as we remain focused on continued tight administrative cost controls. For the first six months of this year SG&A was at 5.2 percent of sales versus 5.3 percent last year.

  • At the operating income level, operating income increased 23 percent in the quarter to $87 million. The operating income margin of 9.9 percent again was a new record for the company, and reflected a 120 basis point increase from the second quarter of 2001. We earned an incremental 23 cents on the dollar in operating income for the incremental sales we generated in the quarter. For the six-month period operating income was slightly below $160 million, a 28 percent increase versus last year. Our operating income margin was up 130 basis points to 9.2 percent of sales.

  • With respect to goodwill and SFAS #142 we have completed the full implementation of SFAS #142 with a review of our investment in goodwill. We stopped amortizing goodwill in the first quarter. In the second quarter we reviewed goodwill impairment. That review concluded that we do not have any goodwill impairment, and thus, will not record any one-time charges resulting from the new adoption of SFAS #142.

  • Our EBITDA margin for the quarter was 13.9 percent, another new record for the company, and up from 12.6 percent in the second quarter of last year. EBITDA was up $20 million in the quarter, and translated to an incremental 28 cents on a dollar of incremental sales for us.

  • For the six months ended June 30th EBITDA was $227 million. EBITDA margin was 13 percent, up over one percent from last year’s 11.9 percent. We’ve stated previously that we expect to grow our EBITDA margins approximately 100 basis points this year. And the first half of 2002 got us off to a very excellent start.

  • As we look further down the income statement the decrease in net interest expense for the quarter of $4.7 million to 12.2 million is due to the strong free cash flow provided during the quarter from our operations which resulted in decreased borrowing levels, and also the result of lower average interest rates. Our short-term borrowing rates are approximately two percentage points lower than they were last year at this point in time.

  • We continue to improve our already investment grade credit statistics. Net interest coverage in the quarter on a trailing 12-month basis at the EBITDA level was 5.4 times. EBITDA coverage was eight times, versus 4.1 at year-end, and 6.2 respectively at year-end.

  • Our tax rate in the quarter remained unchanged from prior years at approximately a 36 percent level, and we expect it to remain at that level throughout the remainder of this year. Net income increased 43 percent in the quarter to $48.6 million or a net income margin of 5.5 percent of sales. And that’s a margin increase of 1.3 percentage points compared to the 4.2 percent in the second quarter of last year.

  • For the first six months of this year net income increased 51 percent to $87.4 million, and net income as a percent of sales was five percent. A 130 basis point improvement to the 3.7 percent for the first six months of last year.

  • Fully diluted shares in the quarter increased over 5.5 million shares, versus the second quarter of last year, primarily as a result of our three million share offering that occurred last August, and also the impact of American Axle’s higher average quarterly stock price on the calculation of dilution from options.

  • The end result for us in the quarter was diluted earnings per share of 92 cents, and as I said, represents an increase of 28 percent versus the 72 cents a share we earned in the second quarter last year. The dilution impact of that three million share offering in the quarter, third quarter last year was 10 cents a share. So on an apples-to-apples basis we would have been looking at $1.02 versus 72 cents.

  • Earnings per share for the first six months increased 37 percent to $1.68 versus $1.23 in the first six months of last year. We had good, strong year-over-year comparisons in the quarter, and set new records for quarterly margins on every line of the income statement.

  • Now, let me turn to cash flow. Cash provided by operating activities in the second quarter increased $49 million. It was a source of $141 million in the quarter versus a source of $92 million in the second quarter last year. This improvement was a result of $15 million in higher earnings, and improved working capital.

  • Capital spending in the quarter was $52 million, $83 million below the $135 million we spent in the second quarter of last year. The net results of the operating activities, cash and the capital spending, was that we generated positive free cash flow of $89 million in the second quarter, versus the use of $43 million in the second quarter last year. That’s an improvement year-over-year of $132 million and net cash provided by operations after capital spending.

  • The capital spending incurred in the second quarter and year-to-date periods are in line with our guidance of lower capital spending for the year 2002 in the range of $250 to $275 million, and lower capital spending in the future for the company as we have substantially completed the rebuilding of our facilities to support our newer high technology based products.

  • On a trailing 12-month basis our capital spending is slightly over $250 million. Again, consistent with our guidance. And on the last 12-month basis we generated $140 million in positive free cash flow.

  • Now, let’s talk about our debt-to-capital structure. Our total debt at the end of the quarter was $794 million, a reduction of $84 million versus year-end, and down $203 million or 20 percent from the close to billion dollars level of a year ago. A dramatic change.

  • Our book-to-equity has grown to $642 million at the end of the quarter, from just $40 million a little over three and a half years ago, at the end of 1998. Our net debt-to-capital has improved from 95 percent a year in 1998 to 55 percent during that same time period. We hit, as Dick mentioned, our targeted 55 percent debt-to-capital numbers six months early. That’s a dramatic improvement from a capital structure perspective over this period despite a billion dollars of capital spending, three acquisitions in 1998 and 1999, and a cumulative $240 million increase in debt related to the three-year transition with General Motors to normal payment terms that ended in 2001.

  • We expect to continue to grow our equity base through a strong earnings performance, and also to reduce our debt levels through the generation of positive free cash flow, resulting in a projected debt-to-capital ratio to be below 50 percent within the next 18 months. We’re working to beat that timetable as well. Our guidance on this has remained unchanged for the past two years, and we remain committed to meeting these targets. If you look at a leverage from a net debt to EBITDA perspective on a trailing 12-month basis our net debt to EBITDA was below two, 1.9 times, well within traditional investment grade levels.

  • We feel very comfortable with the financial flexibility of our current capital structure. At June 30th we have total available borrowing capacity of nearly $450 million through our existing credit facilities, and we have no major debt maturities coming due this year.

  • Now let me focus on the rest of 2002 for a moment. We currently anticipate a North American light vehicle build assumption of approximately 16.1 million vehicles for the full year. Slightly stronger than our previous 16 million build assumption. Given our strong second quarter performance the stronger vehicle build assumption for the full year and our expectation of continuous tight cost control we are raising guidance for full year 2002 earnings per share to $3 per share versus our previous guidance of $2.85, and versus last year’s earnings of $2.36 a share.

  • We would also like to reconfirm that we should generate positive free cash flow after capital spending in excess of $100 million this year. The third quarter, as you all know, is a startup quarter in this industry, and therefore, will be slightly negative from a cash flow perspective. But we will back on stream in the fourth quarter with positive free cash flow, ending the year in excess of $100 million.

  • As far as the second quarter’s performance is concerned we view it as another quarterly confirmation of our financial strength and leadership and our focus to continue to deliver on commitments we’ve made to our shareholders. Margins have increased this year close to one percentage point in line with guidance we gave over a year ago. We are now at the upper end of the industry peer group for margins. The skepticism regarding our commitment to reduce capital spending levels, and our ability to generate positive free cash flow should now be behind us with our last 12-month financial performance.

  • We are ahead of schedule on our debt-to-capital improvement targets. Our after-tax return on invested capital continues to remain at the top end of our industry peer group, as well. In fact, in June 2002 A.T. Kearney named American Axle as the best financial performing vehicle supplier in the world based on its 2001 cash flow return on invested capital of 16.5 percent.

  • As Dick said, we are obviously very disappointed with the recent movements in our stock price and our valuation metrics in light of our continued strong financial performance. Our response and focus as a management team is to continue to excel financially with the full expectation that it will eventually be reflected in our stock price, and our shareholders will be rewarded for their support and continued patience.

  • Thank you very much, and now I’d like to turn the call back over to Bob Krause for a question-and-period. Bob.

  • Robert Krause - Vice President and Treasurer

  • Thank you, Robin. And thank you, Dick.

  • We have some time to take questions, and it is my understanding that you have received instructions from Leanne on how to get into the queue. So at this time, I’ll turn it over to Leanne to begin the question-and-answer period.

  • Operator

  • Thank you. (Caller Instructions.)

  • Our first question comes from Wendy Needham with C.S. First Boston. Please go ahead.

  • Wendy Needham

  • Hi. Good morning everybody.

  • Robin Adams

  • Good morning, Wendy.

  • Richard Dauch

  • Good morning, Wendy.

  • Wendy Needham

  • I wanted to talk a little bit about the content per vehicle issue, or issue I guess is the way to put it. It did go down a little bit in the quarter, but it was very clear your margins have improved. So should I conclude that while your revenue on the 370 is lower than average your margins are still very good or better on the 370? And then when I’m thinking about content per vehicle going forward, Robin, I think you said it would grow about five percent but including the Daimler, the Dodge Ram. If I just think about GM content per vehicle will that be up in the second half with the HUMMER coming on?

  • Robin Adams

  • A lot of questions there, Wendy. I’ll answer them all. First of all, as far as the profitability of the GMC 370 product and 360, as we’ve said all along, as we continue to bring new products to market with new technology to provide increased value to our customers we’re paid appropriately for those products. And that’s why, as we talked about increasing our margins close to 15 percent, or approaching 15 percent in the next three years, a key part of that margin growth has been the new products we’re bringing to market. And the 360, 370 has our latest technology. It’s got that integrated oil pan, front axle, and new aluminum power dense light axle on the rear end. So ‘yes’ we continue to see improvement in the value we provide our customer, and obviously the profitability we see on our new products that we bring to market.

  • As far as my comments on content per vehicle for the rest of the year, I did say that we expected content per vehicle growth for the back half of the year in excess of five percent. That does include content on all of the vehicles we’re on, but excluding the Dodge Ram program we still see content per vehicle growth for the last portion of the year. But remember, we’re fighting a year-over-year dramatic increase in GM light truck production for mid-sized SUVs. Last year Oklahoma City wasn’t building any vehicles. This year they’re building full-out.

  • So that – it’s a mixed issue. It’s not a content per vehicle issue. Each one of the vehicles that we have content on has increased year-over-year in the quarter for those relative vehicles. It’s the increased mix of mid-sized SUVs that causes the total calculation for the company to look like it’s less than last year. Does that help you, Wendy?

  • Wendy Needham

  • Yeah, it does. And just one completely unrelated follow-up. The number of diluted shares outstanding at the end of the quarter?

  • Robin Adams

  • Yes. It’s approximately – let me get that exact for you. I’ve got – we’ve got approximately 47 million common shares outstanding. The calculation for fully diluted was – I’m digging it up right now. Fully diluted was 52.8, and so there’s approximately 5.8 million shares related to the dilution affect of options.

  • Wendy Needham

  • Okay. Thank you.

  • Richard Dauch

  • Thank you, Wendy.

  • Operator

  • Our next question comes from John Rogers with Wachovia Securities. Please go ahead.

  • Jon Rogers - Analyst

  • Good morning, guys.

  • Richard Dauch

  • Good morning, John.

  • Jon Rogers - Analyst

  • Just have a quick question, Robin, on the content for the Dodge Ram. I think people have been focused on content per GM vehicle. And just going forward are you going to separate the content per Dodge Ram out? Or how should we look at that? Are we moving more towards the content per North American production unit?

  • Robin Adams

  • John, as you know, we have been and continue to be reluctant to provide content on a specific vehicle. And we don’t intend to provide our actual content on that Dodge Ram vehicle itself. We’ll continue to provide content for the vehicles that the company is on. Obviously, we’ve said previously that the content on that Dodge Ram vehicle is higher than our current average. And that will be the case, but for competitive purposes and for issues with respect to our customer we’re not about to provide the content for every particular vehicle we have on the market.

  • Jon Rogers - Analyst

  • Okay, but let me report …

  • Richard Dauch

  • John, the only thing that I would add to what Robin just said is that the four wheel drive mixed penetration of the Daimler Chrysler Dodge Ram is higher than the present General Motors’ concentration that we enjoy. That might help you.

  • Jon Rogers - Analyst

  • Okay, that’s good. And so, I guess going forward it’ll be content per AAM vehicle that you’ll report?

  • Robin Adams

  • Yes, sir.

  • Jon Rogers - Analyst

  • Okay, and just a follow-up question for Dick. There’s been a lot of talk about raw materials prices, and especially steel prices. And I know that you guys have pretty good hedging and long-term contracts in place. Can you just go through. I mean are you still confident that that contract will hold given the financial quality of some of the steel companies out there?

  • Richard Dauch

  • John, I’m going to ask Yogendra Rahangdale to respond to that question. That is his responsibility. Yogendra.

  • Yogendra Rahangdale

  • John, two things. Number one, we have the contracts, long-term contracts, as you mentioned. But second thing is also we have the price, middle market protection from our customers on many of the middle commodities. So we’re protected two ways, long-term contracts and middle market protection. So I think we are very confident we’ll hold our prices for upcoming years.

  • Jon Rogers - Analyst

  • Great. Thank you very much. Good quarter, guys.

  • Richard Dauch

  • Thank you, John.

  • Operator

  • David Leiker with Robert W. Baird. Your line is now open.

  • David Leiker - Analyst

  • Good morning.

  • Richard Dauch

  • Good morning, David.

  • Robin Adams

  • Good morning, David.

  • David Leiker - Analyst

  • This is a question I should know the answer to, but I don’t. Your world axle. What vehicles is that all going on?

  • Robin Adams

  • The 11-1/2 world axle goes on General Motors’ products, and now of course, Daimler Chrysler, Dodge Ram products, and we also have 11-1/2 inch axle coming out of our European operations at Glasgow which is the exclusive on the Mercedes Benz six-ton sprinter van for European consumption.

  • David Leiker - Analyst

  • And so the new facility that’s shipping that, that’s going to the Ram?

  • Robin Adams

  • Sir?

  • David Leiker - Analyst

  • That new facility that you said you have a third facility that’s producing that axle? That’s going to …

  • Robin Adams

  • The third new facility which is Three Rivers goes exclusively at this time to General Motors.

  • David Leiker - Analyst

  • Okay, great. And then …

  • Robin Adams

  • That doesn’t mean it couldn’t go flexibly somewhere else. But as of right now I’m answering your question.

  • David Leiker - Analyst

  • Okay. And then a question for you in terms of the GMT800 and how much up side there is still in capacity there. GM’s done a very good job of getting more and more units out of that. Maybe you could just give us some color on that?

  • Richard Dauch

  • I’ll just put it this way. I told General Motors in 1993 whatever vehicles they have framed will have one more axle loaded.

  • David Leiker - Analyst

  • Okay. And then lastly, if you could layout some kind of timetable on the Ram launch? When you actually start shipping axles, and when you expect to hear typical production on that?

  • Richard Dauch

  • I’ll start, and then I’ll turn it over to Yogendra for the finish on this. We started successfully building three different versions of axles with the related drive shafts for the entire driveline system for the Dodge Ram on July 15th. So that’s a couple of weeks ago. And now, we’re moving into a very steady, higher volume per day, and that will ramp-up to full volume somewhere in the early fourth quarter of this year.

  • Yogendra, if you want to add to that, please go right ahead.

  • Yogendra Rahangdale

  • No, our launch is going very well, and we are supporting it, all customer, all their needs right now as we speak.

  • Richard Dauch

  • I might say two other things is they are adding some volume to us, and they are significantly changing some mix to relate to their needs to the market. And we’re having total flexibility to support them. And there’s a very excellent strong relationship building.

  • David Leiker - Analyst

  • Okay, great. Thank you.

  • Richard Dauch

  • Thank you, sir.

  • Operator

  • Our next question comes from Steve Haggarty with Merrill Lynch. Please go ahead.

  • Steve Haggarty - Analyst

  • Good morning, guys. Just two quick questions. First of all, it looks like you’re paying down debt at a pretty rapid pace. Have you reset your goals for where you want to be, Robin or Dick, on a debt-to-capital basis? Because it looks like you’re making such fast progress there. What’s your current target for debt-to-capital?

  • Robin Adams

  • You know, as we’ve said previously, we’ve kind of timed this. We wanted to be below 55 percent by the end of this year. We got there six months early. We also said that we wanted to be below 50 percent by the end of 2003. I think we’re going to push hard, and we’re going to try and beat that, as well. But Dick and I have also said publicly that we think in the long term we ought to be somewhere in that 35 to 40 percent debt-to-cap range is probably where we feel most comfortable running this business. But certainly we’ll continue to evaluate that target going forth, but I’d say that’s our best view today.

  • Steve Haggarty - Analyst

  • Okay, and then just one other question. On the non-GM business which was down again this quarter, should I look for the big turnaround coming from the impact of the Dodge as we roll in through the rest of the year. Is that the product that will really turn that figure around as you roll through the rest of '02?

  • Richard Dauch

  • The answer is an absolute ‘yes.’ Where we were at 89 cents in this past quarter GM revenue, 11 cents non-GM revenue, this will jump dramatically probably another 10 percent. So it will probably be up in the range of 20 to 22 as we get through this launch. Approaching 25 cents non-GM revenue. The big catalyst being the Dodge Ram as it goes toward a full year annual revenue impact for us of somewhere north of $350 million on an annual rate. When you’re in a full year, calendar year 2003.

  • Steve Haggarty - Analyst

  • Okay, thanks a lot you guys, good luck.

  • Richard Dauch

  • First of all, thank you, and professionally good luck on your new assignment. And congratulations.

  • Steve Haggarty - Analyst

  • Thanks a whole lot you guys. It was great working with you. Bye.

  • Robin Adams

  • Bye, Steve.

  • Operator

  • Our next question comes from Ron Tadross with Banc of America Securities. Please go ahead.

  • Ronald Tadross - Analyst

  • Good morning, guys. Thanks for taking the question.

  • Richard Dauch

  • Good morning, Ron.

  • Robin Adams

  • Morning, Ron.

  • Ronald Tadross - Analyst

  • Hey, Dick. You know, as far as I can tell I think you’re the first CEO in the auto parts space to say that you would sign your financial statements at least publicly. I guess my question is have you reviewed them already? You know, I don’t take this lightly. I think, you know, this is pretty serious in terms of CEOs having to sign their financial statements. Have you reviewed them? And if so, do you anticipate any changes?

  • Richard Dauch

  • Robin and I work together in a proactive way. Not because of the legislation that is presently imminent and being given consideration, but because this is our culture. This is how we run our business. We constantly review any and all financial matters of this company. We have re-reviewed it because of the focus on this attention right now. We have also discussed this with our Internal Audit Committee. We have also discussed this with our external auditors. I have signed it. I have committed to you publicly we take it dead serious, and that’s where we’re at.

  • Ronald Tadross - Analyst

  • Okay. Then changing gears a bit here. Robin, on the GM sales, GM sales up 12 percent. Help me out here. You said GM light truck production was up 19 which is the number I have. Aren’t those the two numbers we should be comparing?

  • Robin Adams

  • We should be certainly looking at GM light truck production growth, but there’s a couple of things when you look at that you need to understand. First of all, included in light trucks are mini vans, and vehicles such as the Roundevous and the Vibe and the Saturn View. We don’t have content on that. Those are front wheel drive based vehicles.

  • Ronald Tadross - Analyst

  • Okay.

  • Robin Adams

  • But, and if you look at GM’s growth in the quarter, and I’ll give you – I think their light vehicle, light trucks were up about 130,000 units in the quarter.

  • Ronald Tadross - Analyst

  • Okay.

  • Robin Adams

  • 30,000 of that, over 30,000 of that was the View, the Roundevouz, and the Aztec. You’re looking then at approximately 100,000 units available to American Axle. And as I said the majority of those units were mid-sized SUVs. Approximately 70,000 of the 100,000 were GMC 370, 360s, where we have lower content per vehicle. So if you look at on a vehicle perspective we certainly enjoyed the revenue from 100,000 of those, 130,000 vehicles. The 30,000 that are front wheel drive based weren’t in the equation. But the 100,000 units, we were all on. It just happens that the average content for those vehicles were heavily weighted to the mid-sized SUVs which, as we said, is about $300 per vehicle less than the full-sized SUVs and trucks.

  • Richard Dauch

  • And the bottom line, Ron, is our margins continue to enhance.

  • Ronald Tadross - Analyst

  • Okay. And then you just clear it up for me. On the non-GM sales you said they were up $14 million in the quarter?

  • Robin Adams

  • I’m sorry. They’re down 14.

  • Ronald Tadross - Analyst

  • Oh, down 14. Okay.

  • Robin Adams

  • On a percentage basis it sounds, you know, 12 percent, 13 percent sounds pretty dramatic. But when you look at it from a dollar perspective, and put it in perspective of the financial implications for the company in the quarter it’s $14 million.

  • Ronald Tadross - Analyst

  • And that was because of changeovers principally?

  • Robin Adams

  • Part of it was changeover, part of it was anticipated volume that was going away. Some of the business we do outside of GM is with competitors of us. Competitors of ours. And over time they will continually move to other sources for that business. Not a big part of business, but …

  • Richard Dauch

  • I think the important thing here, Ron, is that the second quarter ended June 30. That was two weeks prior to the launch of the Dodge Ram which is July 15.

  • Ronald Tadross - Analyst

  • Right.

  • Richard Dauch

  • Plus as it relates to this issue it was a huge impact, impacting our company, and our financial performance is going to be in the third quarter, starting now, looking forward.

  • Ronald Tadross - Analyst

  • Okay, good. And just last question here on payables. What were the payables in the quarter? I don’t think you gave those to us, unless you gave it to on the call, not on the sheet.

  • Robin Adams

  • No, we did give you the payables, Ron. Let me get back to my balance sheet detail. Obviously, we have not filed these statements yet. And, therefore, they still require some review. But I can give you an indication of where we are at. Payables were up approximately $40 million for the first six months of this year.

  • Ronald Tadross - Analyst

  • On a year-over-year basis, you mean.

  • Robin Adams

  • From year-end December.

  • Ronald Tadross - Analyst

  • Oh, okay, okay.

  • Robin Adams

  • It primarily reflects the increase in business activity in December versus June. You see the same thing in receivables. Receivables are up over $40 million, as well.

  • Ronald Tadross - Analyst

  • So where did the working capital improvement come from, in the quarter?

  • Robin Adams

  • Relative to last year it was receivables in the quarter. If you look at the sales level from December to June there was an increase, but if you look back to March there actually was a decrease in receivables.

  • Ronald Tadross - Analyst

  • Okay, but like from the cash flow perspective on a sequential basis where did it come from?

  • Robin Adams

  • Primarily receivables.

  • Ronald Tadross - Analyst

  • Receivables.

  • Robin Adams

  • Receivables decreased in the quarter over $25 million. And again, if you look at sales activity in March we had a very strong March this year, very, very strong in June, typically as Dick said, you start to see some – we had some rolling model changes this year for our customer. And you start to see some weakening a little bit of production as you get to the end of June in anticipation of that two-week shutdown.

  • Ronald Tadross - Analyst

  • Okay, all right. Thanks a lot.

  • Richard Dauch

  • Thank you.

  • Ronald Tadross - Analyst

  • Nice job, guys.

  • Operator

  • Our next question comes from Darren Kimball with Lehman Brothers. Please go ahead.

  • Darren Kimball - Analyst

  • Hi, good morning, guys.

  • Richard Dauch

  • Good morning, Darren.

  • Darren Kimball - Analyst

  • I’ve got a couple questions. I guess in terms of your diversification strategy, I’m just curious about, you know, your patience, if you will. Are you guys working on maybe something in the acquisition area that would, you know, bring about further diversification a little more quickly than your strategy of internal growth?

  • Robin Adams

  • Darren, I’ll take the acquisition related question. I think Dick and I have pointed-out many times we’re very focused on driveline systems. That’s our core business. As we look, and we continually review opportunities in the marketplace from an acquisition perspective, but first of all, they have to fit strategically within our driveline systems competency, in and around that competency. Second, financially they have to be accretive to us. And third, as we look to any of those acquisitions we would be looking to be able to finance those with some portion of debt and equity. In other words, we’re not going to leverage up the balance sheet acquistiions for this company.

  • Richard Dauch

  • I guess the last thing I would say, Darren, on there is that in our five-year looking forward business plan we have no plan for any acquisition. But we have total openness to review acquisition potentiality at any time when it meets the criteria. Of our technologies, our financials, and our competency as we broaden our product portfolio.

  • Darren Kimball - Analyst

  • Okay. And secondly, I just wanted to ask about the larger axle sizes, medium and heavy trucks. We haven’t really talked about them a lot. I guess probably a year and a half ago or so we talked about maybe some opportunities for [Albion] in the wake of the Volvo Renault merger. I’m just curious now that Volvo’s strategy is starting to come to fruition, is that still an opportunity for you guys? Or how do you view that business?

  • Richard Dauch

  • We look at Albion as a major contributor for us, and we are earning some new business over there. We see it as opportunities. It is not a high priority for us, however, at this time. When I talked about coded sales activity, example, about 10 percent of that coding is in the Albion area. And I won’t go into the specifics, but it focuses on five or six different OEMs. And much of it on light vehicle and high technology application. The mid and heavy duty axles that you specifically ask for is just one more opportunity that’s not our highest priority.

  • Robin Adams

  • Darren, let me add one more thing with respect to your previous question, as well, about our growth prospects. Remember we continue to focus, and Dick talked about our new I-Ride modules. And as we’ve said previously before, the potential content for vehicle increase for those modules are an excess $200 per vehicle. And so we see significant growth capability and opportunity for this company as we move to our next product technology.

  • So as Dick said, you know, our long range plan is not dependent on acquisitions. We continue to review them. But we feel very comfortable with our ability to continue to grow the business, branching out from our traditional products, and moving into modules, whether they be steerable or non-steerable, but certainly independent modules are new products for us. We were already awarded a program that starts in model year 2006 that provides us those capabilities to continue to grow.

  • Richard Dauch

  • One other last item on Albion, specifically Darren. Is you may have missed it, but for our sales wins of 2002 we’ve already announced earlier publicly, that we have a significant new business extension for multi years with Renault, Volvo. And so, we’re feeling very good about our Albion contribution, our growth in the future, and our diversity of customer range, and also from product range GDW1, all the way to GDW8.

  • Darren Kimball - Analyst

  • Okay, and just a couple quickies on the financials. It seems like you’re under spending relative to your full year capex objective. And I would think the capital for, you know, for the Ram and if there is a lot of capital for the H2, are already in place. Is there a good chance that you guys are going to come in below the 250 to 275 range?

  • Robin Adams

  • Darren, as you know in this business, it’s very hard to tie-down capital to a day or a week. Let me give you a sense of what we are launching in the back half of the year, though, and that’s that new GM T355 product that we’ll be getting ready for which starts early next year. So we do have some requirements in the back half of the year for product expansion. At this point in time I think we will continue to stay with our guidance, 250 to 275. Maybe we’ll be at the lower end, but you know, you get close to the end of the year, and that big piece of equipment could be $10 million and it comes in January 3rd instead of December 25th. It’s hard to fine-tune those numbers very much.

  • Richard Dauch

  • Darren, I might just say that Yogendra, who joined us today, our Chief Technology Officer, handles the overview for our senior team of the final judgments recommended to me on capital expenditures. He does an outstanding job on it. He and his team are simply becoming more efficient, and much more world focused. And we feel extremely good about what we have already provided.

  • Darren Kimball - Analyst

  • Okay. And just lastly, could you update us on what kind of productivity you’re experiencing in your factories. Thanks very much.

  • Robin Adams

  • From a productivity perspective, Darren, I think you can see that in our financials. We are in the high single-digits from a productivity perspective so far this year. Pretty much in line with our expectations, maybe slightly ahead in some locations.

  • Robert Krause - Vice President and Treasurer

  • And we’ll take one last question.

  • Richard Dauch

  • Thank you, Darren.

  • Operator

  • Our last question comes from Richard Hilgert with Fahnestock & Company. Please go ahead.

  • Richard Hilgert

  • Thanks. Good morning everybody.

  • Richard Dauch

  • Good morning, Rich.

  • Richard Hilgert

  • Hey, this two percent decline in CPV, it really looks to me like this is a positive from the standpoint that since you had so much more mid-sized SUV contributing to the mix it enabled you to really shine on your operating leverage. Is that a fair assessment?

  • Richard Dauch

  • I think you’re reading it very accurately, Richard.

  • Richard Hilgert

  • Okay, good. Also, just a housekeeping item, a minor item. What was the other income in the quarter, Robin?

  • Robin Adams

  • That other income for us continues to be the currency impact of inter-company transactions that we would have with our subsidiaries either in South America, Mexico, or in the U.K. And if you look back at last year we had a couple quarters where it was negative, it was positive, and it just depends on the relative strength of the dollar to those currencies.

  • Richard Hilgert

  • Okay. And lastly, I just wondered with the increase in the unit volumes in that mid-sized segment at GM, how is your capacity utilization there?

  • Richard Dauch

  • We will have one more axle than they have frame vehicles.

  • Richard Hilgard

  • Okay, great. Thanks, guys.

  • Richard Dauch

  • You have a great day. Thank you for your consideration.

  • Robert Krause - Vice President and Treasurer

  • We thank all of you who have participated on this call, and appreciate your interest in American Axle. We look forward to talking to you in the future. Thank you.

  • Operator

  • Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.