American Axle & Manufacturing Holdings Inc (AXL) 2002 Q3 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to the American Axle and Manufacturing third quarter 2002 earnings conference call.

  • During the presentation, all participants will be in a listen-only mode.

  • Afterwards, we will conduct a question-and-answer session.

  • At that time, if you have a question, please press the 1 followed by the 4 on your telephone.

  • As a reminder, this conference is being recorded Wednesday, October 23, 2002.

  • I would now like to turn the conference over to Mr. Dave Demos, Vice President, Investor Relations of American Axle and Manufacturing.

  • Please go ahead, sir.

  • Dave Demos - Vice President Investor Relations

  • Thank you, [Sonja] and good morning, everyone.

  • Thank you for joining us today and for your interest in American Axle and Manufacturing.

  • All of you should have had a chance to review our third quarter 2002 earnings announcement that we released earlier this morning.

  • If you have not, you can access it on the AAM.com website or through the PR newswire services.

  • A replay of this call will also be available beginning at noon today through 5 p.m.

  • Eastern standard time October 30, 2002, by calling 1-800-633-8284, reservation number 20927495.

  • Before I turn the call over to our Co-founder, Chairman, and CEO, Dick Dauch, let me take a minute 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 of the company.

  • For additional information, we ask that you refer to the company's filings with the Securities and Exchange Commission.

  • This call is also intended to be in compliance with Reg FD and is open to institutional investors and security analysts, news media representatives, and other interested parties.

  • We are also audio Webcasting this call through our Website, AAM.com, and this call will be archived in the investor section and will be there for a year for later listening.

  • We will be appearing at the Gabelli conference in Las Vegas on November 6, 2002, and at the Robert W. Baird 2002 Industrial Technology Conference in Chicago on November 12, 2002.

  • We certainly 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's Co-founder, Chairman, and CEO.

  • Dick Dauch

  • Thank you, Dave.

  • Good morning, everyone, and thank you for joining us today to discuss American Axle's financial results for the third quarter of year 2002.

  • I am extremely pleased to report third quarter earnings per share increased 37 percent to 70 cents per share.

  • This is another record for our company and compares to the 51 cents earned in the same quarter of last year.

  • On March 8, we were the first auto supplier to raise earnings guidance for the first quarter.

  • The company's performance has now allowed us to have raised our earnings guidance for three straight quarters.

  • On October 7, AAM raised earnings guidance approximately 10 percent higher than the consensus estimates of 63 cents per share.

  • In the third quarter, AAM delivered earnings that were 1 cent ahead of that guidance.

  • Since AAM became a public company on January 28, 1999, we delivered strong earnings performance and have met Wall Street's expectations each and every quarter.

  • This is the 15th straight quarter AAM has accomplished our financial commitment to our shareholders.

  • As planned, we continue to diversify our customer base while retaining and growing sales to GM.

  • Our very successful launch of the Dodge Ram driveline system, as well as the successful launch of the Hummer/Baby Hummer driveline system, are examples of implementing our diversification and growth strategies.

  • I am pleased to be joined today by Joel Robinson, our President and Chief Operating Officer, along with Robin Adams, our Executive Vice President and Chief Financial Officer, and Patrick Lancaster, our Group Vice President and Chief Administrative 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 will be very happy to field any questions that you men and women may have.

  • The third quarter North American light vehicle production was up approximately 11 percent.

  • Light truck production was about 12.5 percent higher, passenger car production was up about 8.5 percent in the third quarter.

  • AAM sales in the third quarter of 2002 were at a record level of $829 million, up about 11.5 percent from last year's third quarter.

  • Our sales were positively impacted by increased GM light truck production and of the successful launch of the AAM latest technology driveline system products for the Macho heavy-duty Dodge Ram and the Hummer H2 vehicles.

  • Our sales to non-GM customers were up 63 percent in the quarter, principally driven by the additional Daimler-Chrysler, Dodge Ram business.

  • Operating income grew 27 percent in the quarter due to the following four main reasons: First, light truck and sport utility production was up at our customers; second, our ability to successfully execute complex multiple launches on time and at planned quality, cost, and delivery expectations; third, we expanded our product portfolio and our manufacturing flexibility to handle customer mix requirements and rapid changes; fourth, continued focus on productivity improvements and tight cost controls within the company.

  • Not only did we again set a new record for sales and earnings but also for margins as well.

  • AAM has been awarded over $3 billion in new programs in the past three years, and that is inclusive of GM 900.

  • One of AAM's strengths is its ability to manage these product programs and execute these product launches flawlessly, which we have again demonstrated this year.

  • First, we successfully launched the GM Hummer H2 driveline system consisting of our PowerLite independent front drive axles and five-link rear suspension drive axles utilizing our PowerDense gear technology.

  • The Hummer H2 also contains our front auxiliary and rear drive shafts, our unique heavy-duty, lash-free high durability steering linkages; second, our company successfully launched the driveline system for the Dodge Ram heavy-duty series 2500 and 3500 pickup truck.

  • AAM produces the front and rear axles, the front and rear drive shafts for the Dodge Ram heavy duty, also utilizing our latest technology, mass optimization and NVH capabilities.

  • Also featured in the AAM Dodge Ram rear drive axle is AAM's unique TracRite GT torque-biasing differentials, which provides chatter-free, enhanced durability performance in low-traction conditions; thirdly, our Three Rivers, Michigan, facility is now a full-fledged driveline system operation.

  • It's been done flawlessly, it's fully ramped up producing products such as our 11.5-inch world axle; fourth, we successfully launched production of our latest technology front and rear drives, front auxiliary shafts, rear drive shafts, and heavy-duty steering linkages for the GM Savana and Chevrolet Express vehicles.

  • Our success at launching these new programs facilitates the directly related depth and breadth of our outstanding leadership and management team we have at AAM.

  • We're proud of this organization.

  • These new product launches are results of our historic and proactive focus on R and D. Our investment in R and D is ongoing, and we continue to focus on driveline developments, which will offer significant advantages in terms of improved ride and handling, reductions in Noise, Vibration and Harshness, and ease of assembly in the vehicle architecture as well as other benefits.

  • We are also focusing on R and D results, which will expand our product portfolio.

  • Here are some examples: Newly developed, rear steerable, high-ride chassis module; conventional and multi-link rear-steerable beam axles; and power transfer units, better known to you as PTU units.

  • We have demonstrated these vehicles with our I-ride chassis module to a number of OEMs throughout the world.

  • Turning now to new business - AAM recently secured another $15 million in annual sales for the quarter.

  • For the nine months ended September 30, AAM has secured business at approximately 210 million in annual sales this year.

  • I am pleased to say our crossover vehicle driveline strategy is working well and that we will soon be announcing the particulars on AAM's first PTU application for a future all-wheel drive passenger vehicle.

  • This vehicle will feature AAM's uniquely designed two-axis chain-driven PTU unit.

  • Our family of PTU designs are capable of meeting our customers' rigorous NVH requirements, operational efficiency, and tight packaging constraints, typical of smaller, all-wheel drive passenger car crossover and SUV-type vehicles.

  • We are currently bidding on approximately 800 million in new business for featuring newly developed and highly engineered products of AAM.

  • About 70 percent of those are with customers other than with General Motors.

  • We are confident we will land our fair portion of these due to our advanced technology, world-class quality, impeccable delivery, great warranty performance, and unique packaging advantages we offer to our customers and their platforms.

  • This additional business will further diversify our customer base.

  • With respect to the industry, our company expects 2003 North American production levels to be similar to this year.

  • Let me share four or five good reasons for this - first, vehicle scrap rates are in excess of 14 million vehicles annually; second, the shift to lease vehicles and required replacement of those vehicles; third, strong growth in disposable income; fourth, increased number of drivers, at least 30 million more than 10 years ago in America; fifth, growth of the senior-age drivers - in the last 10 years over 70 years of age has gone from 14 million drivers to 18 million in our country.

  • These are just some of the demographics and statistics that point to another 16 to 16.5 million vehicle-production year ahead for our industry.

  • Focusing on our recent stock price performance, I will once again say I'm disappointed - it's a hell of a buy.

  • AAM has delivered 15 consecutive quarters of strong financial results.

  • We have also delivered on our commitment of strong positive cash flow that began in the third quarter of 2001 exactly when we predicted it would.

  • We continue to increase our non-GM sales concentration while continuing to increase sales with GM.

  • While somewhat disappointed, AAM is maintaining its focus and efforts to increase our shareholder value.

  • We are totally dedicated to that.

  • We are committed to further increasing the value of actual stock by consistently focusing on the following: first, research and development with a major concentration on new product development 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 new AAM products since the 1999 period.

  • We started with 3 percent in 1994.

  • We have totally transformed our product portfolio; third, world-class quality and warranty performance as measured by our customers; fourth, dependable, always on-time delivery; fifth, continuing efforts toward customer diversity; sixth, consistent financial earnings performance - we have established a very strong track record; and, seventh, delivering strong free positive cash flow.

  • I thank you, ladies and gentlemen, for your attention and interest.

  • I'd like to now turn the call over to our chief financial officer, Robin Adams.

  • Robin?

  • Robin Adams - Executive Vice President and CFO

  • Thank you, Dick.

  • As you just heard, we achieved third quarter earnings per share of 70 cents, an increase of 37 percent versus last year and a new record for us for the third quarter.

  • This was 7 cents ahead of Wall Street's expectations prior to our increased earnings guidance earlier in the month.

  • Our operating income, our EBITDA, and our net income margins increased approximately 1 percent in the quarter versus last year, consistent with the quarterly performance we've had for the prior two quarters of this year.

  • We also generated $2.5 million in free cash flow in the quarter after capital spending, which is higher than our previous expectations.

  • If you remember, we told you we thought we'd have a small use of cash in the quarter.

  • Now, let me go over some of the details to help you understand the company's strong third quarter financial performance.

  • As Dick said, sales in the quarter set a new third quarter record for the company.

  • Our sales were up $85 million, or 11.4 percent, to $829 million in the third quarter of this year.

  • This compares to North American vehicle builds up about 10.7 percent in the quarter.

  • So our sales were a little stronger than the industry again.

  • Production by our major customer, General Motors, was up approximately 4.6 percent in the quarter, driven by an estimated 11 percent increase in light truck production.

  • However, if you look at that light truck production, 60 percent of that volume increase was related to the Saturn Vue, the Pontiac Montana, and the Chevy front-wheel drive minivan as well.

  • Without those three products, GM's traditional light truck and SUV vehicle build was up about 5 percent in the quarter year-over-year.

  • Our average content for light truck to light vehicle in the quarter increased $36 or approximately 3 percent versus last year.

  • We're approaching $1,140 content per vehicle.

  • From our customers' perspective, GM trucks represented more than 56 percent of their builds in the quarter as they continue to focus on increasing their light truck market penetration.

  • From our perspective, four-wheel drive and all-wheel drive penetration on the vehicles we supply continues to increase approximately 57 percent in the third quarter versus 55.6 in the third quarter a year ago.

  • As a percentage of total revenue, our non-GM sales increased to 18 percent versus 12 percent in the third quarter of last year and, as Dick said, that's a 63-percent increase, a dramatic change.

  • We did experience sales increase with General Motors; in fact, they were up about 5 percent in the quarter, consistent with their traditional light truck builds, but, again, our non-GM sales grew at the rate of 63 percent in the quarter.

  • This positive diversification is due, in large part, to our launching products appearing on the all-new heavy-duty Dodge Ram pickup trucks, which we talked about, and now we're there and launching them.

  • If you look at the nine months of this year ended September 30th, we were up 11 percent as well -- $254 million to $2.569 billion in sales.

  • This 11-percent growth increase compares to a 7-percent increase in North American vehicle builds, where we outperformed the industry by 4 percentage points again for the first nine months of this year.

  • Sales to customers other than General Motors increased 9 percent for the first nine months of this year, obviously driven heavily by the third quarter performance and our launch of the Dodge Ram product.

  • We do expect our content for vehicle growth to continue to grow, and we're expecting growth of 5 percent in the last three months of this year with the new Hummer H2 program and the Dodge Ram product launch is continuing to fold into our product sales.

  • Four-wheel drive and all-wheel drive penetration for the first nine months of this year was 57 percent - a little over 50 percent versus 54 last year.

  • That penetration continues to grow and we continue to benefit from that.

  • Our gross margins, a continuing story from the first and second quarter, are up versus last year - 13.6 versus 12.9, and this is, again, a 70-basis-point improvement resulting from higher production volumes, significant productivity improvements, and tight cost controls and, remember, this is in a quarter where we launched two major new programs - the Dodge Ram and the Hummer H2.

  • From an incremental basis, we generated an incremental 16 million in gross profit on incremental sales of 85 million or approximately 19 cents of incremental gross profit on the dollar.

  • For the nine-month period, gross margin was 14.1 versus 13.2, again, almost 1 percent for the year.

  • Looking further down the income statement, SG and A expenses for the quarter as a percent of sales were 5.3 percent.

  • That's below prior-year levels of 5.5 percent as a result of the strength in our sales.

  • On a dollar basis, SG and A increased about 3 million in the quarter nominally.

  • Most of that increase was related to increased profit sharing expense and also R and D spending.

  • Our R and D was up over 6 percent in the quarter versus the third quarter last year.

  • On a nine-month basis, our SG and A is slightly below on a percentage of sales - 5.2 versus the 5.4 we had in the first nine months of last year.

  • Looking at the operating income, as Dick mentioned, it was up 27 percent in the quarter, approaching $69 million, operating income margin of 8.3 percent, again, was a 100-basis-point improvement from the third quarter of 2001.

  • On an incremental basis, we earned an incremental 17 cents on the dollar in operating income, on incremental sales in the quarter.

  • Again, while launching the DR and the Hummer 2 programs.

  • For the nine months, operating income increased 28 percent -- $228 million and operating income margin increased by 120 basis points the first nine months of this year, or to 8.9 percent of sales.

  • If you look at EBITDA, EBITDA margin in the quarter was 13.1 percent versus 11.6 percent in the third quarter of last year.

  • Again, that's over a 1-percentage point improvement consistent with our guidance of increasing margins at the rate of about 1 percent a year, approaching 15 percent.

  • That $22 million in increase in EBITDA year-over-year in the quarter on an incremental sales basis translated to 26 cents on the dollar of incremental EBITDA for incremental sales.

  • Nine months for this year EBITDA was $335 million.

  • Again, margin at the EBITDA level, 13.1, up 1.3 percent versus the 11.8 percent margin in the first nine months of last year.

  • Again, we've stated previously that we expect to grow our EBITDA margins approximately 100 basis points this year, and I think the first nine months of 2002 have us reasonably assured of being able to reach that target.

  • If you look at interest expense for the quarter, net interest expense was down 1.5 million versus last year to 13.2 million, and that's the result of our strong free cash flow we've experienced in the last 12 months as well as lower interest rates that we're seeing in the marketplace.

  • Our short-term borrowing rates at the end of the quarter are about 1.5 percent lower than they were at the same time last year.

  • We continue to improve our credit statistics from a coverage perspective, EBID coverage was six times for the last 12 months, ended September 30th, and EBITDA coverage, 8.7 times approaching 9 times.

  • These are certainly investment-grade credit statistics.

  • Our tax rate in the quarter was 36 percent versus 36.5 in the third quarter last year, pretty consistent with where we've been running all year.

  • Looking down in net income, up 43 percent in the quarter to $36.5 million.

  • As a percentage of sales, net income is 4.4 percent versus 3.4 percent as a percent of sales in the third quarter last year - again, a margin improvement of 100 basis points.

  • If we look for the nine months performance, net income increased 48 percent to 123.9 million and as a percentage of sales, 4.8 percent versus 3.6 percent for the first nine months last year - again, 120 basis-points improvement in the first nine months of this year.

  • Looking at the earnings-per-share calculation, fully diluted shares increased close to 3 million shares versus the third quarter last year, and that's a result of the secondary offering we completed late in the second quarter last year.

  • Again, earnings per share in the quarter, 70 cents - 37-percent increase versus the 51 cents earned in the third quarter of last year.

  • On a nine-month basis, earnings per share, $2.39 versus $1.74 and, remember, for the full year last year we earned $2.36 a share.

  • So within nine months, we're slightly ahead of our full-year performance for last year.

  • The fourth quarter's all upside and less relative to last year's performance.

  • We had good, strong, year-over-year comparisons in the quarter as we had in the first and second quarters, and we set new records for quarterly margins, third quarter margins, on every line of the income statement consistently with first and second quarter this year.

  • Now, let me turn to the cash flow side of the equation.

  • Cash provided by operating activities in the third quarter of 2002 was 43.6 million versus 83 million in the third quarter of last year.

  • The third quarter of 2002 was impacted by a seasonal increase in working capital, particularly accounts receivable compared to sales activity in the third quarter of last year.

  • Let me give you an example - September sales were $100 million higher this year than September 2001 versus year-end 2001 - 100 million higher in September this year versus 2001 last year, and $70 million higher than June of this year, driving our working capital in the quarter higher.

  • Last year's September sales due to September 11 were actually 20 million lower than June of the last year, providing a source of cash from working capital in the third quarter last year.

  • So that's story on the receivables and sales side in the quarter.

  • Inventory this year was also up 20 million as well, due to the higher business activities.

  • If you look at our inventory turns, our turns at the end of the quarter were actually 18.5 times versus 17.2 at the end of last year.

  • So the increase in working capital is a function of sales activity, and we had a very strong month in September, from sales perspective, this year.

  • Capital spending in the third quarter was $41 million, $26 million lower than the $67 million spent last year.

  • Again, our capital spending levels continue to decrease.

  • The net result was that generated positive free cash flow in the quarter of 2.5 million versus our previous expectation of a slight use of cash in the quarter.

  • So we outperformed our previous expectation from a cash flow perspective.

  • The capital spending in the third quarter and year-to-date period are in line with our guidance of lower capital spending for the year 2002.

  • We are reducing our capital spending guidance this year from the 250 million to 275 million level we expressed previously, down to 225 to 250 for the full year.

  • On a trailing 12-month basis, we've actually spent slightly more than $225 million in capital, and generated $132 million in positive free cash flow in the last 12 months.

  • The first nine months of this year, we generated $75 million of free cash flow versus a $200 million use in the first nine months of last year.

  • Of the 75 million of free cash flow we generated this year, we've used 35 million of that cash flow to repurchase leased equipment previously sold under sale leaseback agreements.

  • Now let's talk about our debt-to-capital structure.

  • Our total debt at the end of this quarter was $823 million, down $55 million from year-end 2001 and down over $100 million, or 11 percent from where we were a year ago at this time.

  • Our book equity is approaching $700 million.

  • It was $692 million at the end of the quarter from 40 million less than four years ago, at year-end 1998.

  • Our net debt-to-capital was improved from 95 percent a little less than four years ago, to 54 percent at the end of this quarter.

  • As we said previously, we had targeted to reduce our debt-to-capital numbers to 55 percent by the end of this year.

  • We achieved that six months early as we reported it in the second quarter.

  • That's a dramatic improvement in a capital structure in this last three-year time period, despite having invested over a billion dollars in capital to rebuild our facilities and come out with new products, three acquisitions we made in 1998 and 1999, an accumulative 240 million increase in debt related to the three-year transition with General Motors and a change to normal payment terms.

  • We expect to continue to grow our equity base through a strong earnings performance and to reduce our debt levels through continued generation of free cash flow.

  • We previously committed to reducing our debt-to-capital ratio to below 15 percent within the next 15 months or by the end of next year.

  • Our guidance on this has remained unchanged for the past two years, and we are now improving that guidance.

  • Our 15-year target is now to get our debt-to-capital to below 40 percent by the end of next year.

  • Our net-debt EBITDA on a trailing 12-month basis leverage ratio was below 1.9 times.

  • Again, we were below 1.9.

  • As of June, we're below 1.9, at the end of September, well within traditional investment-grade levels.

  • We feel very comfortable today with the financial flexibility we have with our current capital structure at the end of September.

  • We have total available borrowing capacity in excess of $400 million through our existing credit facilities, and we have no major debt maturities coming due this year.

  • Now let's focus on the rest of 2002, the remaining two and a half months.

  • As we've said previously, we anticipate a North American light vehicle build of approximately 16.5 million vehicles for the full year 2002, and that's built in our fourth quarter expectation.

  • Given our third quarter performance, the stronger vehicle build assumption, and our expectation of continued tight cost control, on October 2nd, or earlier this month, we raised our guidance for the full year from $3 a share to $3.20 a share.

  • That guidance, given our third quarter performance, would put our current fourth quarter at approximately 81 cents a share, which would be an increase of 31 percent versus the 62 cents a share we earned in the fourth quarter of last year - another very strong double-digit earnings growth performance for us in the quarter.

  • We would also like to re-confirm our generating positive free cash flow after capital spending this year to be in excess of $100 million, which means we will have positive cash flow in the fourth quarter.

  • When we look at our third quarter's performance, we view it as another quarterly confirmation of our financial strength and leadership and our focus to continue to deliver on commitments we have made to our shareholders.

  • Margins have increased this year close to 1 percentage point, or 100 basis points, in line with the guidance we gave almost two years 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 well behind us with our last 12-month financial performance.

  • We are ahead of our schedule on our debt-to-capital improvement targets and, again, today brought that target down even more for the year-end 2003.

  • Our after-tax return on invested capital continues to remain at the top end of our industry peer group as evidenced by AT Kearney naming us the best financial performing vehicle supplier in the world last year for cash flow return on invested capital of 16.5 percent.

  • We've invested the $2 billion that we put in this company since 1994 very wisely.

  • It shows up in our performance.

  • As far as 2003 is concerned, we will be providing specific guidance on earnings later this year.

  • What we can say at this point in time is that we do not expect a significant reduction in vehicle builds for 2003.

  • Dick went through the scenario for us and why we're looking at North American vehicle production somewhere in the 16 million to 16.5 million vehicle range, which would be either flat to down about 3 percent from our expectations this year in vehicle builds.

  • If we look at Street estimates for 2003, they currently have a wide - a very wide range - from $3.05 a share to $4.02 a share.

  • We expect to be much more specific to where we fall within that range by year-end.

  • I would expect in the next two months we'll have guidance on 2003.

  • Our capital spending next year, we've talked about that previously, will again be in the $225 million to $250 million range, and we would expect free cash flow to be stronger than 2002 levels, given that scenario.

  • As Dick says, we are obviously very disappointed despite this with the recent movements in our stock price and the valuation multiples in light of our continued strong financial performance.

  • If we think back earlier this year, our stock was trading in the mid-30s and since that time we've raised our earning guidance for 2002 twice - from $2.85 to $3.00 a share, and then just recently from $3.00 to $3.20 a share.

  • If you look at the industry, North American vehicle build estimates for 2002 from the analysts that cover American Axle were 16.3 million vehicles early in the year and are now at 16.5 million vehicles.

  • So their view is stronger for the year than it was previously.

  • For 2003, vehicle build estimates by the analysts, on average, are essentially the same today as they were nine months ago.

  • Despite this, our stock value has dropped dramatically.

  • As Dick said, nothing has changed fundamentally about this company or the industry since that time, and yet our stock now trades at just seven times earnings.

  • While we're extremely disappointed, our response and our focus as a management team is to continue to excel financially, meeting our financial targets.

  • This will eventually be reflected in our stock price and our shareholders will be rewarded for their support and their patience.

  • Thank you very much and now I'd like to turn the call back over to Dave Demos for question-and-answer period.

  • Dave Demos - Vice President Investor Relations

  • Thanks, Robin, and thank you, Dick.

  • We have reserved some time to take questions and it is my understanding that you've received instructions from the operator on how to get in the queue.

  • So at this time, please feel free to proceed with any questions that you may have.

  • Operator

  • Thank you, gentlemen.

  • Ladies and gentlemen, once again, if you do have a question, please press the 1 followed by the 4 on your telephone.

  • You will hear a three-tone prompt acknowledging your request.

  • If your question has been answered, and you would like to withdraw your registration, you may do so by pressing the 1 followed by the 3.

  • If you are using a speakerphone, please lift your handset before entering your request.

  • One moment, please, for the first question.

  • Our first question will come from Wendy Needham with CS First Boston.

  • Please go ahead.

  • Wendy Needham - Analyst

  • Oh, good morning.

  • Dick Dauch

  • Good morning, Wendy.

  • Robin Adams - Executive Vice President and CFO

  • Good morning, Wendy.

  • Wendy Needham - Analyst

  • A couple of quick questions - the dollar content on the power takeoff unit that you were talking about, Dick -

  • Dick Dauch

  • - yes, ma'am?

  • Wendy Needham - Analyst

  • What is the dollar content?

  • Robin Adams - Executive Vice President and CFO

  • You know, Wendy, you're comparing a component in an all-wheel drive system versus a driveline system.

  • Content per vehicle that is going to be significantly less - about a third of where our current system would sell today.

  • Dick Dauch

  • But, remember, the 100-percent additive revenue to us, because this will be our first application of that.

  • So it's total added to us, even though it would be less content than a normal unit that we presently enjoy.

  • Wendy Needham - Analyst

  • So it's, like, $300 to $400?

  • Is that what you're saying?

  • Robin Adams - Executive Vice President and CFO

  • It's going to be anywhere from 200 to 400, depending on the application, the size of the vehicle, torque requirements, all those specifics.

  • Wendy Needham - Analyst

  • Okay, and Chrysler announced a 60,000-unit increase in Ram production.

  • Does that incorporate 2500 and 3500s or are you not involved in that production increase?

  • Dick Dauch

  • I have not, personally, heard what they have announced.

  • So we'd have to study that, and we'll be happy to get back with you quickly.

  • Wendy Needham - Analyst

  • Okay, and then finally, Robin, could you talk about the debt versus the second quarter - the debt did go up, and also the taking one of the sale leasebacks back onto the balance sheet, I think you did.

  • Could you go through that?

  • Robin Adams - Executive Vice President and CFO

  • Yeah, that's exactly what happened in the quarter with respect to debt, Wendy.

  • If you look, we were at slightly positive from a net cash flow perspective, but we repurchased some equipment that we sold in a sale leaseback five years ago that was $35 million.

  • So we put that back on the balance sheet.

  • That increased our debt as a result of that transaction, and, basically, that was the increase in debt in the quarter.

  • Wendy Needham - Analyst

  • Okay, so that's sort of my new starting point there, and do you have any more of these that you would be doing?

  • Robin Adams - Executive Vice President and CFO

  • We have approximately $10 million left in the fourth quarter this year of sale and leaseback.

  • We'd originally said we would purchase about $45 million of equipment we'd previously sold.

  • We're still on target for that 45 million, and I believe we might have about 3 million left in the first quarter next year, and that's it through 2006.

  • Wendy Needham - Analyst

  • Okay, great, thank you very much.

  • Operator

  • Our next question comes from the line of Jon Rogers, Wachovia Securities.

  • Jon Rogers - Analyst

  • Good morning.

  • Dick Dauch

  • Good morning, Jon.

  • Robin Adams - Executive Vice President and CFO

  • Good morning, Jon.

  • Jon Rogers - Analyst

  • Just a couple of questions - Robin, the capex number - you're guiding a little bit lower.

  • Is that a timing issue or is that just a permanent reduction for this year?

  • Is that going to flow into next year a bit?

  • Robin Adams - Executive Vice President and CFO

  • Some of that is permanent, Jon.

  • What we've done is taken a look, again, as we continue to do, given the flexibility we've put in our operations from a capital spending perspective, we continue to look at how we can meet our customer needs and our capacity requirements by getting more productivity out of the investment we have.

  • So a good portion of that is trying to be a little bit more efficient and more innovative with the capital we've got.

  • There is a little bit of timing related to the GMT 355 I190 that will push into the first quarter, but the majority of that is smarter use of capital.

  • Jon Rogers - Analyst

  • Okay, great, and then, Robin, on the contribution margin, the 19 cents to gross profit - could you just give us a little color on that, and how much did the two launches affect that, and, going forward, as Ram ramps up, where do you think that contribution to gross profit can be?

  • Robin Adams - Executive Vice President and CFO

  • You know, if we look at where we've been in the first two quarters of this year on the contribution margin level, we've generated close to 25 cents on the dollar - I think 23 cents on the dollar in the first quarter, 25 cents on the dollar in the second quarter, incremental contribution margin on incremental sales.

  • Again, 19 percent in the third quarter is pretty darn good launching two products.

  • Our target is to achieve that 25 cents on the dollar level, but, again, I think we've mentioned this before, this is a company that's continually launching new products and new programs.

  • It's great if we could hit that 25 cents on the dollar level, but typically we're launching something around here.

  • So 25 cents is the target, we're 23 and 25 in the first two quarters of this year, 19 in the third quarter.

  • The other thing you've got to remember about the third quarter as well is that's the launch quarter, and there's a couple of weeks where our major customers are shut down.

  • So you tend to see a margin in the quarter a little bit tougher, as well, compared to the first and second quarters of the year.

  • Jon Rogers - Analyst

  • Okay, great, and just one last quarter on productivity.

  • I know that you've been close to, I think, for the first six months of the year, about 6.5 hours to generate per 1000 a $1,000 in sales.

  • Do you have any update on that figure for the first nine months yet?

  • Joel Robinson - President and COO

  • Jon, this is Joel Robinson.

  • I'm handling most productivity initiatives for the company, and we're probably around 6.2 hours at this point in time, and we're traveling at about a 10-percent improvement rate over last year.

  • Jon Rogers - Analyst

  • Okay, great.

  • Thanks, guys.

  • Dick Dauch

  • Thank you, John.

  • Have a great day.

  • Operator

  • Our next question will come from the line of Darren Kimball with Lehman Brothers.

  • Please go ahead.

  • Darren Kimball - Analyst

  • Good morning, guys.

  • Dick Dauch

  • Good morning, Darren.

  • Robin Adams - Executive Vice President and CFO

  • Good morning, Darren.

  • Darren Kimball - Analyst

  • I was just wondering if you could give any more color on the crossover driveline award in terms of maybe timing or size?

  • Dick Dauch

  • I'll let Patrick Lancaster respond on that, Darren.

  • Patrick Lancaster - Group Vice President and Administrative Officer

  • We're presently working with a customer on a press release to announce that.

  • Dick Dauch

  • So we would presume, Darren, 30 to 45 days we'll have that to release to the public, and we'll hold hands with you and the other people accordingly.

  • Darren Kimball - Analyst

  • Okay.

  • Can you comment, maybe, on how you're differentiating yourselves, technology-wise?

  • I mean, is there something about this product that is a different approach?

  • Or is it just more the reputation of your company?

  • Joel Robinson - President and COO

  • Darren, this is Joel Robinson.

  • I think, probably, the kickoff to our success to start landing these crossover vehicles was a demonstration model we did when we converted a Chrysler 300M into all-wheel drive technology including our own Power Take-off unit and our own independent rear.

  • We've been able to demo that vehicle to many of our customers, and they have all different requirements but, you know, I think we've demonstrated that we can meet any requirement they put out in terms of crossover PTU vehicles.

  • Dick Dauch

  • Probably three other points on that, Darren, is the way it packages does not disrupt the body shops, the chassis systems, and therefore does not shut down their vehicle assembly capacity and thus keeps their revenue, their market share, and their cash flow, and these are very critical points, which not all of our competitors have taken into consideration.

  • Darren Kimball - Analyst

  • Okay, excellent.

  • I'm also just wondering - there's been some talk that Delphi has secured a [Quadrisphere, phonetic] Award at Ford, and I'm just wondering if you can update us on your efforts to win business in terms of the rear steerable axle?

  • Dick Dauch

  • Darren, I'm not aware of the Ford situation, but we are working cooperatively with Delphi with a couple of the other OEMs and have actually built, together with them, demonstration models for General Motors as well as for Daimler Chrysler, and I can't comment on the Ford program.

  • Joel Robinson - President and COO

  • Yeah, I would answer that the Delphi current supplies a couple of part numbers on that, but I'm not aware of anything with Ford.

  • Darren Kimball - Analyst

  • Okay, and I'm just wondering if you can comment more broadly about some of the recent in-sourcing tendencies like we saw at Chrysler and just what you - if you could update us on, you know, what you think the prospects are to penetrate Chrysler and Ford over the next few years, given, you know, some of the inherent issues there?

  • Dick Dauch

  • I'll take that, Darren.

  • I think it's outstanding for us to penetrate in a continual way with the Chrysler group of the Daimler Chrysler Corporation and with the Ford Motor Company, now that their divestiture of [background noise] is steady stabilizing, they're finding that dynamic performance is required and, thirdly, remember, there's a union negotiation year coming in 2003 with the UAW, so probably some resourcing in is probably appropriate for them as a business sense and also politically.

  • Darren Kimball - Analyst

  • Okay, thank you very much.

  • Dick Dauch

  • Thank you, Darren.

  • Robin Adams - Executive Vice President and CFO

  • Thanks, Darren.

  • Operator

  • Our next question will come from the line of John Casesa with Merrill Lynch.

  • Please go ahead.

  • John Casesa - Analyst

  • Thanks - very quick - one for Robin and one for Dick.

  • Robin, can you tell us how many Dodge Ram models - what your product is on.

  • You shipped in the third quarter - what do you think the fourth quarter is going to be like, and what does '03 look like in terms of volume for that product?

  • Robin Adams - Executive Vice President and CFO

  • I tell you what, ask Dick a question and by the time he answers it, I'll have the number for you.

  • John Casesa - Analyst

  • My question is about the third point you made - the third or fourth points on why your margins were up in the quarter.

  • You said something about flexibility, and I was wondering if there was anything in particular you did in the quarter that you could outline to us, that impacted your margins?

  • Dick Dauch

  • We would prepare information that we do privately on how we do uptime throughput and flexibility to be proprietary.

  • I do not want to share with you or anybody else.

  • We simply can flex from one product to another because of the way we've put in our process equipment, our programmability, our software, et cetera, over the last five or six years with these capex programs that have gone in, and you see it in the results, you see it in the margins, you see it in the basis points, and that's the way we'll continually do it.

  • John Casesa - Analyst

  • Okay, and you're saying, one, you're better than competition and, two, I presume, you're better than you were last year, is that correct?

  • Dick Dauch

  • We have simply leapfrogged competition and, yes, we're significantly better than we were last year, because there was a continuous improvement philosophy, and we get great ingenuity from our engineers as well as our operating associates on the floor.

  • John Casesa - Analyst

  • Okay, thanks.

  • Robin Adams - Executive Vice President and CFO

  • I've got that other answer for you now, you've given me two minutes.

  • Dodge Ram vehicle builds, the products we're on - slightly below 40,000 units in both the third and the fourth quarter.

  • John Casesa - Analyst

  • Okay, and at what point - or have you yet - reached the full production rate for the program?

  • Joel Robinson - President and COO

  • Well, we're really right at full production at this point in time.

  • John Casesa - Analyst

  • Okay.

  • Joel Robinson - President and COO

  • We've fully launched the plan, and they're complying with their highest schedules.

  • John Casesa - Analyst

  • Okay, so we should be thinking about 40,000 a quarter or so next year?

  • Robin Adams - Executive Vice President and CFO

  • Yeah, that kind of run rate, yeah.

  • On a sales perspective, I think we've said before we were looking at slightly at a 100 million, we're probably closer to 130 this year in the last half of the year, and, again, annualized slightly in excess of 300.

  • So that should give you the increment year-over-year.

  • John Casesa - Analyst

  • That's perfect.

  • Thanks, Robin.

  • Dick Dauch

  • Thanks, John.

  • Operator

  • Our next question will come from the line of Mike Ward with Salomon Smith Barney.

  • Please go ahead.

  • Mike Ward - Analyst

  • Good morning, everyone.

  • Dick Dauch

  • Good morning, Mike.

  • Robin Ward

  • Good morning, Mike.

  • Joel Robinson - President and COO

  • Good morning, Mike.

  • Mike Ward - Analyst

  • Two things - the H2 vehicle - you're including that as your revenue to General Motors, is that correct?

  • Dick Dauch

  • Absolutely.

  • Mike Ward - Analyst

  • Okay, and is that now the highest-content vehicle you have with GM?

  • Robin Adams - Executive Vice President and CFO

  • It's certainly a high-content vehicle.

  • It's a full-size SUV that's got full-time - it's got four-wheel drive, so we've got both the front and rear axle on every one of those vehicles in the drive shaft system.

  • So it's certainly up there.

  • We don't want to talk about specific product pricing on our customer products, but it's got to be one of our top vehicles from a content perspective in line with other full-size SUVs.

  • Dick Dauch

  • And General Motors with the Hummer brand and, of course, with our content on it, are enjoying an excellent acceptance by that product in the marketplace and with increased volumes being predicted, projected, and run.

  • Mike Ward - Analyst

  • Great.

  • As it relates to depreciation and amortization, it looks like there was a spike-up in the third quarter.

  • Was there anything unusual there or was that in the run rate?

  • Robin Adams - Executive Vice President and CFO

  • The only thing unusual is we launched the Dodge Ram program.

  • So all the capacity that we had put in place and sitting around in CIP, construction in progress, or capital in progress, we actually put into service.

  • We had to start depreciating.

  • As we've said, we expect our depreciation to continue to ramp up as we complete the launch of these new programs.

  • Mike Ward - Analyst

  • Okay, so we should be thinking in terms of 150 million as an ongoing rate for D and A?

  • Robin Adams - Executive Vice President and CFO

  • Yeah, probably a little bit higher than that, yeah.

  • Mike Ward - Analyst

  • Okay, very good.

  • Thank you.

  • Dick Dauch

  • Thank you very much.

  • Dave Demos - Vice President Investor Relations

  • Okay, we have time for one more question.

  • Operator

  • Gentlemen, your final question will come from Ronald Tadross with Banc of America Securities.

  • Please go ahead.

  • Ronald Tadross - Analyst

  • Good, I've got a lot of questions.

  • Dick Dauch

  • Good morning, Ron.

  • Ronald Tadross - Analyst

  • Good morning.

  • Okay, your programs - it sounds like your programs were up, like, 6 or 7 percent in the quarter in terms of sales if you include, I guess, the GM programs and then you said - I didn't catch you, Robin, but you said the industry was up 7 percent - your industry?

  • Robin Adams - Executive Vice President and CFO

  • Again, as we walk through the numbers.

  • In the quarter, light vehicle builds were up almost 11 percent, just below 11 percent in the quarter.

  • GM light truck builds were up almost 11 percent in the quarter, but if you take away the Saturn Vue and their two front-wheel drive minivans, the Chevy Venture and the Pontiac Montana, their traditional light truck SUVs were up approximately 5 percent in the quarter.

  • Our sales to General Motors was in line with that growth rate of about 5 percent in the quarter.

  • Ronald Tadross - Analyst

  • Okay, and then you threw out a 7-percent number - what was that?

  • Robin Adams - Executive Vice President and CFO

  • That's a year-to-date number for light vehicle builds.

  • Ronald Tadross - Analyst

  • Okay.

  • So the 5 percent - it sounds like you're doing, like, about 5-percent organic growth if you take the GM up 5 and then the industry up 11, you know, massage it all, you're, like, 7 percent, you know, and then you did 11, so it's 5 organic.

  • Do you agree with that?

  • Robin Adams - Executive Vice President and CFO

  • That's exactly right.

  • Year-to-date, we're exceeding the market 4 to 5 percentage points.

  • Ronald Tadross - Analyst

  • And that was all pretty much the Ram, right?

  • Robin Adams - Executive Vice President and CFO

  • It's the Ram, it's the Hummer, offset by a car that went out of production in the third quarter and things like that, but, yeah, it's the plus and the minuses.

  • Ronald Tadross - Analyst

  • Okay, and the margins on the Ram - are they - and you're at full production.

  • Are they kind of at full margins?

  • Or do you have some way to go there?

  • Robin Adams - Executive Vice President and CFO

  • In the third quarter, obviously, we're launching the program, so we're working through a little bit of launch cost.

  • As you know, we don't talk about margins on individual programs, but, obviously, I think we had a discussion on where we were in the quarter relative to margins.

  • Third quarter is always a weaker quarter for us from a margin perspective, due to launches and due to a two-week shutdown.

  • So we would expect some margin improvement in the fourth quarter relative to third quarter this year.

  • Ronald Tadross - Analyst

  • Okay, and then shifting to the cash flow here - on the working capital - it sounds like the fourth quarter is going to be a source of, like, at least, 70 million, 80 million - is that incorrect?

  • A good number?

  • Or -

  • Robin Adams - Executive Vice President and CFO

  • You're a little bit strong there, but certainly we would expect a good source of cash flow in the fourth quarter not too far off of where we were last year - a little bit below that.

  • Ronald Tadross - Analyst

  • Okay, and then -

  • Robin Adams - Executive Vice President and CFO

  • - We're 75 year-to-date.

  • We expect to be in excess of 100, so -

  • Ronald Tadross - Analyst

  • - Okay, and then on this debt-to-cap target, I didn't hear a number exactly - 40 percent is your target for next year or in the 40-percent area?

  • Robin Adams - Executive Vice President and CFO

  • By year-end next year we expect to approach 40 percent.

  • Ronald Tadross - Analyst

  • And does that include the sale leaseback stuff as debt or no?

  • Robin Adams - Executive Vice President and CFO

  • No, that's balance sheet debt.

  • Ronald Tadross - Analyst

  • Okay, and on capex for next year, then, I guess it sounds like you guys are going to do better than that 200 million number - I think you were talking about a while ago - is that fair to say or you don't want to comment now?

  • Robin Adams - Executive Vice President and CFO

  • I think we previously said for next year we'd be in that 225 to 250 range for 2003, and that's pretty much where we expect to be today for next year - 225 to 250.

  • Ronald Tadross - Analyst

  • Okay.

  • Well, I'll go through the numbers, but your cash flow sounds like it's going to be better next year then.

  • Robin Adams - Executive Vice President and CFO

  • As I said, we think it will be stronger than it was this year.

  • Dick Dauch

  • We think it will be very healthy, Ron.

  • Ronald Tadross - Analyst

  • Okay, good.

  • Thanks a lot.

  • Dick Dauch

  • Have a great day.

  • Ronald Tadross - Analyst

  • Okay, bye.

  • Dick Dauch

  • Okay, thank you.

  • We are appreciative that you participated in this call and your interest in American Axle.

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

  • Have a great day.

  • Operator

  • Ladies and gentlemen, that does conclude our conference call for today.

  • We thank you for your participation and ask that you please disconnect your lines.