American Axle & Manufacturing Holdings Inc (AXL) 2002 Q4 法說會逐字稿

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  • Operator

  • Good morning everyone and welcome to the American Axle & Manufacturing fourth quarter 2002 earnings teleconference. This call is being recorded. Time permitting, we will be taking questions. You may place yourself in the queue by simply pressing the "1" followed by the "4". If your question has been answered, you can remove yourself from the queue by pressing the "1" followed by the "3". I would now like to turn the conference call over to David Demos, Vice President Investor Relations at American Axle & Manufacturing. Please go ahead Mr. Demos.

  • David Demos - VP Investor Relations

  • Thank you and good morning everyone. Thank you for joining us today and for your interest in American Axle & Manufacturing. All of you should have had a chance to review our fourth quarter and full-year 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, by calling 1-800-633-8284, reservation number 21092304. Also, I hope you have seen our press release this morning regarding increased earnings guidance for the first quarter and full-year 2003, which we will be discussing on this conference call.

  • 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 the 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 web casting 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 JP Morgan Annual high yield conference in New Orleans on January 28th at the Planes, Trains, and Automobiles conference in New York City sponsored by Prudential on February 26. At the Solomon and Smith Barney, 16th Annual Global Industrial Manufacturing conference in New York City on March 11th and 12th. At the Annual Morgan Stanley Global Automotive conference in New York City on April 14th, and at 2003 Automotive and Industrial conference sponsored by MacDonald and Douglas in Boston on June 4th and 5th. We certainly look forward to seeing many of you at those conferences. In addition, we are always happy to host investors at our facilities, either in Detroit or at our other locations. 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.

  • Richard Dauch - Chairman and CEO

  • Thank you Dave. Good morning and Happy New Year to everyone. Thank you for joining us today to discuss American Axle’s financial results for the fourth quarter and full-year of 2002. I am extremely pleased to report record earnings for the fourth quarter of 99 cents, an increase of 60% versus the 62 cents earned in the fourth quarter of 2001.

  • As you know, AAM had a localized fire in our Detroit forge operations in July of 2002, which caused minimal disruption in our operations and absolutely no disruptions to our customers. The insurance proceeds in this fire will result in a booked gain. Adjusting our earnings with the Detroit fire gain, AAM turned 89 cents in the fourth quarter, an increase of 44% over the same period of 2001.

  • This is a 16th straight quarter since AAM became a Public Company that we have delivered strong earnings performance and met Wall Street expectations. For the full year 2002, sales, earnings, and margins were at record levels for our company and Robin Adams will discuss that in detail shortly. As promised, we continued to trend of improving positive free cash flow. AAM's positive free cash flow provided by operations for the quarter was $91.5m, a 61% increase over the fourth quarter of 2001. For the year, AAM generated over $176m of positive free cash flow after capital expenditures, which we are using to repurchase leased assets, pay down debt, and further improve our investment grade credits statistics.

  • I am very pleased we joined today by Joel Robinson, our President and Chief Operating Officer. 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 the details of our financial performance. When Robin finishes, we will open the call for any questions you men or women may have. I trust you have had opportunity to review the earnings press release we made available over the news and wire services earlier this morning regarding the fourth quarter and the year 2002 earnings for AAM.

  • Starting with the market environment, North American light vehicle production was up 2% for the fourth quarter and up 5.9% for the year. Light trucks and SUV's continued to grow much faster than the overall market. Light truck production was up 4.3% for the quarter and 8.4% for the year, while passenger car production was down 9/10th of 1% for the quarter and 3% for the year.

  • AAM sales in the fourth quarter of 2002 were at a record level of $911m, up 15% from last year's fourth quarter. Our sales were again positively impacted by General Motors light truck productions and the positive acceptance of the Dodge Ram heavy-duty pick-up truck and GM's Hummer 2 vehicle, both of which contain the latest technology from AAM for our driveline system products. As you know that Dodge Ram HD pick-up was selected as Motor Trend's 2003 truck of the year. We are extremely proud for them and are content. As a mater of fact, AAM has supplied entire driveline system components for four of the last five Motor Trend Truck of the Year winners. I do not think that's a coincidence.

  • Our sales to non-GM customers were up 68% in the fourth quarter and up 23% for the full year. This represents 14% of our total sales in the year 2002 as compared to 13% in 2001.

  • Operating income grew 32% in the fourth quarter of 2002 and was up 29% for the full year compared to 2001. This significant improvement is due to four continuing factors in our business.

  • First, light trucks and sport utility production was up and remained strong at our customers. Second, in 2002 we successfully executed multiple complex product and plant launches on time and at the planned quality, cost, and delivery expectations. Third, AAM continues to expand its product portfolio and manufacturing flexibility to handle customer product mix requirements. Fourth, our ability to aggressively focus on ongoing productivity improvements and stringent cost controls in all aspects of the value chain.

  • We continue to increase spending on R&D in order to technically enhance current product performance and expand our driveline systems and module capability from light trucks to crossover vehicles including passenger cars and hybrid vehicles. We continue to invest heavily in R&D in order to support AAM's focus on developing new, higher technology products to meet the needs of customers in the future, and these products could be such things as new all-wheel drive systems incorporating PTUs--Power Take Off unit -- and advanced drive shaft for cross over vehicles, and the rapidly growing all-wheel drive passenger car segment.

  • Second, the I-ride independent chassis modules as featured at the North American international auto show on the very prestigious Cadillac 16 and the very outstanding concept Chevrolet [Shiann]. The new family of advanced traction enhancing differentials as used in the Dodge Ram program, an alternative drivelines for emerging hybrid electric vehicles.

  • In the year 2002, approximately 78% of our total sales came from technology introduced since mid 1998. We have totally transformed our product portfolio. For the year ending 2002, our company was awarded new business of approximately $220m of new annual sales. $30m in sales awards were subsequently either cancelled or delayed by OEMs. Thus the remaining $190m was the annual sales awarded to our company from GM and others, utilizing US transmission components in Brazil, drive line components of our Albion facility in Scotland, and various products at our other forging facilities in the world.

  • These awards combined with other awarded business represent a gross new business backlog of approximately $800m through 2005. After the run-out of existing programs in the net new business backlog, it will approximately $400m for that period of time. We are working hard on several opportunities to secure additional business from existing and prospective customers. Currently we are actively quoting our new business totaling approximately $900m with almost 70% of that activity outside of the General Motors Corporation and 45% representing opportunities with foreign or transplant OEM, and over 38% being in passenger car production application. The production launch timing of these programs ranges from year 2004 to 2007.

  • As a part of our crossover vehicle and all-wheel passenger car strategy, we have developed an outstanding line of PTU -- power transfer units, in order to expand our drive line system capability and meet our customer's needs. Our family of PTU designs are capable of meeting of our customers rigorous NVH, that's Noise Vibration Harshness requirements, operational efficiencies, and tight packaging constraints, which are typical smaller, all-wheel drive passenger car and/or crossover type vehicles. Last year, AAM had secured a vehicle program for this product but the OEM cancelled it very late from vehicle program plans. This award of business has created interest in our PTU product line by the other OEMs as well as [inaudible] particularly OEM. AAM is actively quoting these OEMs and these other vehicle programs that are in development. We are currently retrofitting additional vehicles with our all-wheel drive system including the PTU for proof of concept. It is a great product and our driveline system capability and expertise will help to sell it as we grow that business.

  • In the year 2002, our company executed 14 major product launches flawlessly throughout the world for our customers and our shareholders. In 2003, we continued to bring our new technology-based products with the launch of the driveline systems for the exciting new GM mid-size truck called the Chevrolet Colorado and the GMC Canyon as well as the GMC Envoy XUV. AAM will also be supplying driveline system products for the exciting niche vehicles -- Chevrolet SSR Roadster, and that is a rear drive vehicle. We plan being a player in the trend to rear drive passenger cars also.

  • AAM continues to improve its quality performance, a key differentiate in which AAM is the world leader as measured by our customers. We further improved by 49% in the year 2202, versus 2001, obtaining a world class 12-month rolling average of 25 or less, discrepant parts per million. About 90% of our shippable parts have been at zero parts per million for six straight months.

  • Financially, we are pleased to continue to meet all our financial targets. Our margins were up over a 100 basis points in 2002. We generated foreign excess of 100m free cash flow target and reduced our net debt-to-capital ratio, well below our 55% target. As you know, AAM has filed a shop registration with the Securities and Exchange Commission with respect to a secondary sales of approximately 14m shares of common stock owned by our financing partner Blackstone. After sponsoring AAM’s recapitalization 1997 with an ownership of 82%, Blackstone has aggressively reduced its position in the Company to 26% as a part of a planned, quarterly exit strategy. This stock offering allows that strategy to continue. Management is not offering any stock for sale in this registration and maintains over 18% ownership of AAM common stock. In 2003, we are proud that Forbes magazine once again named our company to its prestigious Platinum 400 list of the best big companies in America.

  • Looking ahead, our expectations are that North American Light Vehicle Builds in 2003, will be about 2.5% less than 2002 and despite the estimated decline in industry volumes we believe investors will see that AAM continues to perform well and meet the challenges facing our industry. That should have become more evident with our press release today, raising earnings guidance for the first quarter and the full-year of 2003.

  • AAM is highly motivated for 2003. Our efforts to increase customer and shareholder values by consistently focusing on the following issues. First, sales and earnings growth fueled by the R&D that we continue to expand generating new technology products. Secondly, our world class quality tradition and our world class warranty performance. Third, our dependable always on time delivery. Fourth, concerning our customer diversification very rapidly. Fifth, increasing our EBITDA margins. Sixth, significant improving of cash flow positive. Seventh, major reduced debt. Eighth, normalize capital spending. Ninth, attaining investment grade status.

  • I should like to thank our share holders for their major support for 2002. AAM has proven it can rise to the challenge of often times unforgiving automotive industry. 2003 will be another year of challenges, which we thrive on. Greater opportunities and we intend to capitalize upon it. Our company is a premier tier-1 selectively global automotive supplier with solid leadership, management depth and breadth. We will continue to differentiate ourselves in the market place by offering outstanding value and products to our customers and to our shareholders.

  • I want to thank you once again for your attention today and your interest in AAM. Let me now, ladies and gentlemen, turn the call over to our Chief Financial Officer, Robin Adams.

  • Robin?

  • Robin Adams - CFO

  • Thank you, Dick. As you just heard, we reported record fourth quarter earnings per share of 99 cents, an increase of 60% versus the 62 cents for quarter in the fourth quarter 2001. And as Dick mentioned, we recorded a gain as a result of the involuntary conversion of assets related to the fire at our Detroit forge facilities and we recorded that gain in the fourth quarter. The fire occurred in the third quarter. This gain represents the estimated insurance proceeds that are in excess of the book value of certain assets destroyed in the fire less in insurance deductible amount and also less related [profit] and expenses.

  • On the income state, you will see we recorded a $10.4m gain in the other income line item and our income statement will reflect this. The other expenses, primarily profit sharing related to this gain were approximately $2m and is reflected as a reduction of our operating income in the fourth quarter. Now adjusting the quarter for the fire, excluding the gain, as Dick mentioned, our earnings per share were 89 cents a share, an increase of 44% versus what we reported in the fourth quarter 2001.

  • Also, as Dick mentioned, we had our strongest quarter yet from our free cash flow perspective. We generated free cash flow by operations of $91.5m for the fourth quarter. And looking at an annual basis, we generated a $176m of cash flow after capital expenditures for the year. And as Dick mentioned, significantly in excess -- our original expectations when we started the year. Given those highlights, let me go over some of the remaining details of our strong financial performance for the quarter and for the year.

  • Our fourth quarter sales were a record for any quarter in the Company's nine year history. Our sales were up a $119m or 15% in the quarter, $911m versus 792 last year in the quarter. This compares as Dick mentioned in North American vehicle builds up 2% in the quarter. So we outperformed from a sales perspective, 13 percentage points in the industry.

  • Our major customer - General Motors. It builds up about 9.3% in the quarter. If you look at the growth in the quarter, it was driven mainly by a 13% increase in GM light truck production and a 6% increase in the AAM content for light truck and the vehicles that we supply. Our content for light vehicle grew to approximately $1,180 in the quarter, up from $1,118 in the fourth quarter last year. So good, strong, content increases.

  • If you look at our major customer, GM builds--50% of their builds represented by trucks versus 55% in the fourth quarter of 2001, as GM continues to focus on increasing their light truck SUV market penetration.

  • The four wheel drive and all-wheel drive penetration on vehicles we supplied was approximately 62% in the fourth quarter, up from 56% in the fourth quarter of last year and 57% in the third quarter of this year -- the prior quarter.

  • As a percentage of total revenue, we continued to diversify our customer base as our non-GM sales increased to 18% in the quarter versus 12% in the fourth quarter of last year. This represents about a $65m or 68% increase in the sales with our non-GM customers. And again, the primary driver of this is the lifeline system we provide for the Dodge Ram heavy duty pick up truck, which represented almost 50% of those increased sales we had in the quarter. Our GM sales, quarter-over-quarter growth rate was about 8% versus last year.

  • If you look at the total year sales, we were up approximately 12% to just shy of $3.5b versus a little over $3.1b in the year earlier period, and again comparing that to the North American Automotive industry, vehicle builds were up approximately 6% for the year. So we out performed the industry by 6 percentage points in 2002 consistent with our history.

  • Sales to customers other than General Motors, as Dick mentioned, was important for us. It increased 23% for the full year. While our GM sales actually growth rate was 10%. Our content per vehicle that we supplied increased 2% through the full year to an estimated $1,140 versus approximately $1,116 for the full year 2001. And if you remember we had some tough comparison in the first six months of this year on content per vehicle as there was a dramatic mixture change in GM mid-sized SUV’s being launched this year – the 370 program.

  • Four-wheel drive and all-wheel drive for the year penetration was approximately 58.5% versus 55% for last year. So, we continue to see that penetration growth we have expected. The increase in our content per vehicle is primarily a result of sales of the following type of products - higher value-added technology products, the additional four-wheel drive/all-wheel drive penetration, particular to this year, in the fourth quarter the successful launch of the Hummer H2 product for us and also utilizing the Company's latest technology, the launch of our front rear drive axles and front rear-drive shafts used in the heavy-duty Dodge Ram, which as Dick mentioned was Motor Trend magazine's 2003 Truck of The Year.

  • Looking further down the income statement, growth margin was 14.2% for the quarter reported versus 13.1% reported last year in the fourth quarter. For the full year, gross margin was 14.1% versus 13.2%. If you look at the drivers of that, the major factors impacting us is gross margin improvement on the annual basis with the effective higher production volumes, continued productivity gains we pulled through our operations, tight cost controls in the SG&A area and other areas of our business including reductions in purchase material costs.

  • Selling General and Admin expenses for the quarter were $46.2m little over 5% sales -- 5.1% of sales actually -- versus 40m, again or 5.1% sales in the fourth quarter 2001. As a percentage of sales SG&A remained relatively flat. There was an increase on a dollar basis, that was result of increased R&D spending in that quarter at $13.6m, which is an increase of over 6% from the $12.8m last year, and in addition to that is increased profit sharing expense relative to the fourth quarter last year.

  • For the full year SG&A expenses were $180.5m, again 5.2% of sales, down slightly on a percentage basis versus full year 2001, which was 5.3% of sales -- overall dollar level of 164.4. Our R&D expending for the year was up $2.3m, about 4%, a 54m versus 51.7.

  • Looking at the operating income line, the $83m in the fourth quarter or 9.1% of sales compared to $62.9m or 7.9% [some point] excellent sales reported in fourth quarter 2001. Operating income for the full year a $311m, 8.9% of sales, versus $241m or 7.8% for the full year 2001. And on an annual basis, we generated incremental operating income to totaling about 19 cents on the dollar on our incremental sales growth for the year.

  • Again, this increased performance is due in part to the new technology products we designed for manufacturability. Running on our new [steer jet] equipment and obviously generating higher margins for us. In addition, as we have said continually for last few years we continued to differentiate ourselves through our productivity improvement process, which for the full year 2002 contributed 9% improvement in productivity for us, slightly in excess of our historically average.

  • Looking at the EBITDA margin line item, we were 14.8% in the quarter, but again, the gain from the forge fire impacted that calculation. Excluding that gain and looking at normal operations, our EBITDA margin was 13.9%, up from the 11.9% we reported in the fourth quarter 2001. Now, remember the fourth quarter last year, we took $11.7m charge to reflect the consolidation of our facilities in the UK, and if you eliminate that charge from last years fourth quarter, we have an EBITDA margin of 13.4%. The year-over-year pro forma's on an apples-to-apples basis, that is 13.9 in the fourth quarter this year versus 13.4 last year and that is another 50 basis points improvement in the quarter.

  • If you look at the margins for the full year, EBITDA line items 13.3 excluding the forge fire gains 13.5 on a reported basis versus 11.8 for the full year 2001, 12.2 excluding the charge for the consolidation last year. So, on an apples-to-apples basis 13.5 for 2002 versus 12.2 for 2001, again another over 100 basis points improvement for the year, as we have indicated earlier that was our target for the year and to gets us closer to the commitment we made to be able to approach the 15% EBITDA margin level within the next three years.

  • Further down income statement, if you look at the net interest expense for the quarter was 13.6m up versus 12.2m last year and that increase is principally due to a reduction of capitalized interest, as our capital spending levels have dropped approximately $170m in 2002 versus 2001.

  • Our credit statistics continue to improve, net interest coverage for the year was 6.4 times the EBIT level versus 4.1 last year. EBITDA coverage is in excess of 9 versus 6.2 last year. So some good, strong credit statistics.

  • Our tax rate this quarter was 35%, versus 36.5% last year. Getting us to a full-year tax rate of 35.7% versus 36.5%. Pretty much in the line with the way we’ve been tracking for the year. We’ve been tracking about 35.7 to 36 throughout the year.

  • Our net income in the quarter, again as Dick mentioned, $52.2m as a percent of sales 5.7%, but again excluding net gain from the forge fire, net income was $46.7m and as a percent of sales 5.1% -- a tremendous performance from a margin perspective at the net income line. And again that compares to a fourth quarter last year of reported $31.4m, excluding that charge related to the consolidation it would have been $39.1m, 4.9% of sales. So good market improvement in that income line year-over-year, or any basis you want to look at it.

  • Again, looking at the quarter, excluding that gain, earnings per share were 89 cents. A record fourth quarter level for us. Represents an increase of 44% versus our reported 62 cents for last year, and again excluding that pre-tax charge of the UK consolidation. Our earnings are up in quarter over 15% again.

  • Earnings per share for the full year, excluding net gain, were $3.28 a share, a 10 cent gain from the forge fire versus $2.36 reported in 2001, an increase of 39%. Again excluding the consolidation charge, we’d be up 31% year-over-year, a record performance for us.

  • We had a good strong year-over-year comparisons to the year 2002 all throughout the income statement, no matter what line item you look at, and we continue to set records, unfortunately every line of the income statement whether it be sales or margin perspective for the year.

  • Now let me turn to cash flow for a minute. Cash provided by operations in the fourth quarter of 2002 was $151m versus a $125m in the fourth quarter of 2001. Again that is a result of our strong year-over-year earnings. As we have told you previously, our capital spending levels are ramping down from prior years. We spent $50m in the fourth quarter of 2002 versus $69m in the fourth quarter of 2001, a reduction of approximately $19m. This contributes to our free positive cash flow after capital spending of over a $100m for the fourth quarter -- 101m. We previously had a $100m target for the year. So tremendously strong performance in the fourth quarter from a cash flow perspective versus approximately $57m in the fourth quarter of 2001, that is a $45m or 79% increase.

  • The free cash flow we generated in the quarter was used to repurchase $10m in previously sale lease back assets and to reduce our net debt to $90m in the quarter and further improve our capital structure.

  • For the full year cash provided by operations after capital expenditures was $176.5m versus a use of a $142.7m in the year 2001 or a $319m year-over-year improvement. Now remember, 2001 included a $90m one-time detrimental cash outflow related to change in payment terms. So on an apple-to-apple basis, the year improvement is an excess of over $200m.

  • Now this cash flow, inflow, that was primarily result of higher cash earnings and our capital spending levels ramping down. These lower levels help AAM to generate positive free cash flow allowing us to repurchase for the year $45m in assets that we previously sold in our sale leaseback agreement, and also to pay debt down in excess of our previous forecast.

  • Speaking of debt, let's go to through some of our balance sheet items.

  • The $65m increase of receivables at December 31 from a year ago primarily reflects the effect of approximately $120m increase sales activity in the fourth quarter this year versus the fourth quarter last year. And that’s what driving the increase in receivables. Inventories were also up year-over-year, almost $17m as a result of running at these higher production levels. But if you look at it from a turn perspective, our turns actually improved to 18.3 times at year-end on a cumulative basis, versus 17.5 times at year-end 2001.

  • Our current liabilities are up 58m year-over-year, and are also related to increased business levels in the fourth quarter and also a increase in accrued pension expense and profit sharing in the fourth quarter. Post-retirement benefits and other long-term liabilities are up over $75m in the year due to an increase in pension liabilities and accrued post-retirement healthcare cost, and again, those accrued post-retirement healthcare costs are not funded from a cash perspective.

  • From a pension perspective, the funding standards of our pension plans on a PBO basis was a $125m under-funded at year-end, versus a $50m under-funded at year end 2001. And as we’ve told you before, we use the September 30th valuation date for our pension plans and when we look at the value of our assets, the value of our pension assets we’re actually up $10m at that measurement date versus the prior year's measurement date.

  • The $75m increase in the under-funded position then, is primarily result, not of decreased assets but a result of reducing the discount rate from 7.5% that we used in 2001 to 6.75% in 2002, and reducing that discount rate resulted in an increase in the present value of our liabilities. We also reduced our asset returned assumptions at the end of 2002 from a 9.25% in the prior year to 9%. As a result of our under-funded position at year-end, we increased our FAS 87 equity charge $41m, from the $10m at year-end 2001. So, if you look in our equity at year-end 2002, you see a $51m adjustment to shareholders equity, negative adjustment, related to our under-funded pension positions.

  • Our total debts December 31 were $734m down to almost a $145m versus $878m in year-end 2001. Net debt decreased $91m during the fourth quarter alone, as a result of positive cash flow from operations. Our net debt at the end of the year was $725m versus $866m at the year-end 2001. Our book equity has grown to over $700m from just $40m at year-end 1998, only four years ago -- that's increase of over 16 times in the past four years.

  • Our net debt-to-capital on a book basis improved to 51% at year-end versus 62% at year-end 2001. And as Dick mentioned, we significantly exceeded our initial target for 2002 year-end of 55% debt-to-capital. We continued to grow our equity base through a strong earnings performance and we are reducing our debt levels through the continued generation of free cash flow that started in the last half of 2001. As we previously discussed, with the trends continuing, we expect to reduce our book-to-debt capital ratio to below 40% by the end of 2003, this year.

  • Our net debt-to-EBITDA, on an annual basis that leverage ratio at the end of this year, was 1.5 times, far below investment grade levels, compared to last year 2.35 times.

  • We feel very comfortable with our current capital structure and our current financial flexibility. At the end of December 2002, we had total available volume capacity of approximately $500m, a half a billion, to our credit facilities. Our invested capital, net debt and equity remained virtually unchanged for the year-end about $1.4b. Our stronger year-over-year earnings performance resulted in an improvement of our after-tax return on invested capital to 14.7% of the 280 basis points from 11.9% last year and approaching our 15% corporate targets. Again, excluding the forge fire gain, the [ROIT] would be about 14.4%.

  • We are extremely pleased and proud of our record setting financial performance in 2002, and the current financial health of this company. I want take a moment to focus on 2003. If you remember in November 2002, we released guidance for the full-year 2003 earnings per share estimate to be $3.50 a share. In addition, at that time, we said that we expect to generate in excess of $200m of free cash flow, as well as, achieve a debt-to-capital ratio target of less than 40%. And as Dick mentioned, we issued a press release today, raising our earnings for 2003.

  • Our production forecast remained on track in the first quarter and our major customer General Motors continues to run its Light truck assembly plants full including selective overtime. Given these continued production levels, we currently expect our first quarter 2003 earnings will be approximately $1 per share or an increase of 33% versus the 75 cents of share we earned in the first quarter 2002.

  • We also raised our full-year 2003 earnings per share guidance to an estimated $3.65 a share from the previous $3.50 a share guidance. Despite an expected slight decline in industry volumes for the full year 2003, our full year 2003 earnings are expected to be 11% higher than the $3.28 earnings per share we generated in 2002, and again, that's after the forge fire gain. And, 9% higher than the current analysts’ consensus estimates of $3.34 a share and I’ll grant you that that consensus has a wide range, but its 334 on average.

  • As Dick indicated earlier, we look forward to the challenges 2003 will bring in what continues to be a tough industry. It's an opportunity for us to continue to differentiate our company from the rest of the automotive sector. Our 2002 financial performance, and new 2003 earnings guidance are indicative of our commitment to continue to be an industry leader. Thank you for your time, and now I would like to turn the call back over to Dave Demos for the questions and answer period. Dave.

  • David Demos - VP Investor Relations

  • Thank you Robin, and thank you Dick. We reserved some time to take questions and it’s my understanding that you have received instructions from the operator on how to get into the queue. So at this time, please feel free to proceed with any questions you may have.

  • Operator

  • Just as a reminder, to ask a question you must press the "1", followed by the "4". Our first question comes from Steve [Brisky] with Morgan Stanley. Please proceed with our question.

  • Steve Brisky - Analyst

  • Good morning everybody. Can you guys hear me?

  • Richard Dauch - Chairman and CEO

  • Good morning Steven.

  • Steve Brisky - Analyst

  • A couple of things. Rob, and the CAPEX seem to come in lighter than you guys were guiding. Is that a deferral or is that -- is it going to run down here. Or am I imagining that?

  • Robin Adams - CFO

  • Steve -- we did come a little bit lower than what we had originally guided, and Joel’s here. He can talk about the reduction. How much was deferred and how much is just carried over into next year. Joey.

  • Joel Robinson - President and COO

  • Yes. Steve, probably around ball park $25m was a result of better efficiencies in our buying and so forth on the capital spending, 25 is deferred and pushed into the next year.

  • Richard Dauch - Chairman and CEO

  • And basically Steve, what we are getting to is finally worth a normalized capability of our company on CAPEX we’re excellent shape on this. We rebuilt the product plants, we rebuilt the plants, we rebuilt our systems. We are in outstanding shape on that subject.

  • Steve Brisky - Analyst

  • Okay. The variable contribution margin seemed a little lower in the quarter. Was that a mix issue or was that a profit sharing impacting that?

  • Robin Adams - CFO

  • Well, one of the issues again was the profit sharing, as I said. We had a --

  • Unknown Speaker

  • It’s a good problem.

  • Robin Adams - CFO

  • It’s a good problem to have year-over-year and you can see that on the SG&A side, a dramatic increase there. A similar type of increase was at the cost-to-goods line item as well for profit sharing. Again, we -- according to the accounting regulations we were required to also report the profit sharing related to that forge fire gain upped in our operating income as well. So those are two items that impacted the year-over-year incremental comparison. The third item would be, again the depreciation expense, 2002 versus 2001 in the quarter, and that’s why I like to look on an EBITDA basis to look at the true cash performance. On an incremental basis at the EBITDA line item, we generated about 17 cents on the dollar incremental EBITDA.

  • Steve Brisky - Analyst

  • In the fourth quarter?

  • Robin Adams - CFO

  • Yes.

  • Steve Brisky - Analyst

  • And I am just trying to decipher the revenue numbers. I [inaudible] GM truck production up about 13% and your revenue to GM is up about 7. Is that a mix issue that you guys talked about earlier?

  • Robin Adams - CFO

  • There are two things there, Steve. The first one -- and this has occurred in prior quarters as well. About 30% of the incremental increase in GM truck lines year-over-year are the Saturn VUE and the Aztec.

  • Steve Brisky - Analyst

  • Okay.

  • Robin Adams - CFO

  • Not our content. So if you factor that growth -- used about a 70% factor it gets closer to the unit increase that would reflect the type of vehicles we have we have content on and then there is the mix issue on top of that with the increase in the midsized SUVs, which had lower content for vehicle for us than our average swings.

  • Steve Brisky - Analyst

  • Right. And could you just Robin give us the FX impact on -- if there was any on sale of an earnings.

  • Robin Adams - CFO

  • The FX impact was approximately $300,000 in the quarter and that is related to internal transactions.

  • Steve Brisky - Analyst

  • But nothing with the Mexican Peso or anything like that helping you at all?

  • Robin Adams - CFO

  • No the Mexican Peso primarily drives our tax rate and we saw a slight improvement on the Peso in our tax rate, but nothing material there. Nothing that wasn't out of the realm of expectation, we anticipated the devaluation there and kind of built that in our tax provisions throughout the year, expected tax rate.

  • Steve Brisky - Analyst

  • Great. Thanks a lot everybody.

  • Robin Adams - CFO

  • Thank you Steven.

  • Operator

  • Our next question comes from the line of Jon Rogers with Wachovia Securities. Please proceed with your question.

  • Jon Rogers - Analyst

  • Good morning guys. I have a question on the tax rate. It looks like, if I back out the gain from the insurance proceeds and tax affect that, it looks like the effective tax rate on the 89 cents is about 33% versus an expectation for about 36%. Am I looking at that right -- does the profit sharing impact that?

  • Robin Adams - CFO

  • Yeah, profit sharing does impact that Jon, that’s the reason the quarter is fairly reflective of the whole transaction. So you need to look at the profit sharing side of it. The effective rate excluding the forge fire transaction is still running about 35% in the quarter.

  • Jon Rogers - Analyst

  • Okay and then with the gain from the insurance proceeds, that was all an equipment benefit, there was no business interruption of that sort, there is really no corresponding offset in third quarter that you guys would have run through the P&L?

  • Robin Adams - CFO

  • John, there was some, we’ll call it business interruptions, but some reimbursement for additional operating expenses as a result of that. We have been receiving that reimbursement on an ongoing basis and reflect that as an offset of the cost we incurred both in the third quarter and fourth quarter. So from an income statement perspective that’s a nonevent for us. We have received proceeds to cover our incremental cost related to that fire.

  • Jon Rogers - Analyst

  • And there was no customer impact?

  • Robin Adams - CFO

  • Yeah. The gain, in and of itself is just related to the fixed asset portion of the damage.

  • Jon Rogers - Analyst

  • Okay. Great. And then just one last question Robin on the 45.2m that you are buying out these capital leases. I realize that is just a financing decision, but how much more of that process is there to go. Are you basically through that process or we will some of it next year?

  • Robin Adams - CFO

  • I think we’ve answered it before but let me refresh it one more time. We have got less than $5m of options to repurchase our leased asset in 2003, and we will more than likely exercise that option. Beyond that our next opportunity to repurchase assets that we have sold and leased back would be in 2006, and the amount of those assets are slightly in excess of $100m. But again that's an optional payment and we'll take some time Jon to make that decision when we've got a couple of years to make that decision.

  • Jon Rogers - Analyst

  • Okay, that's all I had, thanks. Good job guys.

  • Robin Adams - CFO

  • Thanks.

  • Operator

  • Our next question comes from the line Wendy Needham with Credit Suisse First Boston. Please proceed with your question.

  • Wendy Needham - Analyst

  • Good morning.

  • Richard Dauch - Chairman and CEO

  • Hey Wendy.

  • Wendy Needham - Analyst

  • The capital spending number then for '03 would be what?

  • Joel Robinson - President and COO

  • Wendy -- Joel Robinson -- between $225-250m, with 100-110 of that being in maintenance and the rest growth.

  • Wendy Needham - Analyst

  • Okay. And then the D&A has moved up sharply, I guess over the last year or so. What would we expect that to be, would it be about 125 for '03 -- I am sorry 165.

  • Robin Adams - CFO

  • Yeah. We'll be expecting approximately $20m increase in depreciation 2003 versus 2002.

  • Wendy Needham - Analyst

  • Okay, and then -- sorry for this little thing, but the balance -- the current liabilities were not broken out on the release I got. Do you have those payables accrued comp and other?

  • Robin Adams - CFO

  • We don’t have that broken out, Wendy.

  • Richard Dauch - Chairman and CEO

  • We will get it Wendy and get back to you.

  • Wendy Needham - Analyst

  • Thank you. And then finally, do you have content per vehicle for GM for '03 -- estimate?

  • Joel Robinson - President and COO

  • As we have said before, Wendy, we are anticipating content per vehicle growth next year to be in about the 5% range.

  • Wendy Needham - Analyst

  • Okay. Great. Thank you.

  • Richard Dauch - Chairman and CEO

  • Thank for you Wendy.

  • Operator

  • Our next question comes from the line of John Casesa. Please proceed with your question with Merrill Lynch.

  • John A. Casesa - Analyst

  • Thanks very much. Three questions, one for Dick and two for Robin. Dick, so what are your latest thoughts on this PTU business? Do you have any booked contracts yet? What sort of [inaudible] reporting activity.

  • And then for Robin, can you give us Dodge Ram dollar sales and units in the quarter? And also just recap your plans for excess cash flow in '03?

  • Richard Dauch - Chairman and CEO

  • First of all, we are very excited about the PTU business, because we had not been in it. Four years ago, Joel and I decided to develop it -- we have got it. It's already being validated, tested, and packaged. It’s in OEM’s hands several of them right now. So we see that being a real new segment started about 5 years ago at 0% segment in North America. It’s now about 7% application. We did have an OEM purchase order and I won’t say which one. They cancelled that in December of 2002, but we have very excellent activity on that. So we feel very strong about it – we’re encouraged that by the end of this year we will have a program on it.

  • John A. Casesa - Analyst

  • And do you – is this the kind of thing that you think, five years out could be a material percentage to your sales -- 10-15% given the way the market is going?

  • Richard Dauch - Chairman and CEO

  • I think it would be too early for me to give recommendation of a percent on that. I just think that we have got outstanding interest in it. We are going to the RFQ process that will generate purchase orders and then from there we will get to what percent that would be for revenue generation.

  • John A. Casesa - Analyst

  • Thanks.

  • Robin Adams - CFO

  • Steve let me answer. I mean, John -- I am sorry. Let me answer the Dodge Ram question. The sales that we reported this year related to the Dodge Ram program -- we originally estimated under 25m turned out to be about a 140m. I am not going to give you the units because to divulge the content per vehicle on that would be providing some proprietary information competitive there that we just don’t want to do. We'll roll that into our current calculations. So...

  • John A. Casesa - Analyst

  • That’s a full year number, Robin?

  • Robin Adams - CFO

  • Yes. We give that as full year number and obviously that ramps in the third quarter. So it’s approximately $140m in 2002, and as we’ve said before that is about a $300m program. So we will see another 160m of that year-over-year growth into 2003 from that program.

  • Richard Dauch - Chairman and CEO

  • Now see all their launches are behind them now, John and it is flat flying and by the way we have got heavy-duty truck of the year.

  • Robin Adams - CFO

  • On the use of free cash flow, obviously, for 2003, our direction and intention is to pay -- continue to pay debt down to improve that capital structure to get it below that 40% level. Our intention, first here is to get that investment rate credit ratings that we feel strongly that we deserve though we understand the ratings agency’s issues. So that would be priority number one. Once we get that line, obviously, we continue to look for opportunities in the marketplace and should enough [inaudible] place to feel we will be in a great position to be able to fund that to grow our business.

  • Beyond that we'll certainly take a hard look at its dividend policy, but at this point in time with our existing credit facilities we are precluded from paying any dividends both on our bank debt and our subordinated debts. So that would require some type of restructuring of our debt portfolio. And we would also take a good hard look at what’s going on in the current environment for tax legislation with respect to dividends. But, certainly, ones we got that debt-to-capital below certain level, got the investment to a credit rating, restructured our debt portfolio -- our next step would be able to take a good hard look at dividends. And obviously the -- again the tax legislation would play a factor in our decision there.

  • John A. Casesa - Analyst

  • Thanks, guys.

  • Richard Dauch - Chairman and CEO

  • Thank you. And Ramona we can take one last question please.

  • Operator

  • One moment for that next question. The next question comes from the line of Richard Hilgert with Fahnestock & Company. Please proceed with your question.

  • Richard Hilgert - Analyst

  • Hi, guys. Can you hear me okay.

  • Richard Dauch - Chairman and CEO

  • Go ahead, Richard.

  • Richard Hilgert - Analyst

  • [inaudible].

  • Richard Dauch - Chairman and CEO

  • Richard, can you hear us.

  • Richard Hilgert - Analyst

  • Yeah, okay. Hi, Don. The PT [inaudible].

  • Richard Dauch - Chairman and CEO

  • Richard, you are breaking up badly. We cannot understand your question, sir. I may have to ask the operator to help us for technology here.

  • Operator

  • Richard, are you online. It looks like his line has disconnected from the conference.

  • Richard Dauch - Chairman and CEO

  • We will take one another question if you have one.

  • Operator

  • One moment, the question is from Monica [Kenny] with Morgan Stanley.

  • Richard Dauch - Chairman and CEO

  • Okay, thank you.

  • Steve Limb - Analyst

  • Hi Good morning. This is actually Steve [Limb] for Monica. Just in terms of your pension expense and contribution for '02 and '03 please?

  • Robin Adams - CFO

  • I am sorry, what was the question?

  • Steve Limb - Analyst

  • Yes, pension expense and cash contribution for FY02 and your estimates for FY03 please?

  • Robin Adams - CFO

  • We are not going to provide estimates for 2003. I can tell you our pension expenses average $20-25m for the last few years and 2002, it's no different from that number -- from an expense perspective.

  • Steve Limb - Analyst

  • So will it be an add-back or is it a cash flow for '03? They way, I guess, the way it was this year.

  • Robin Adams - CFO

  • The add-back with respect to cash flow is the result of the post retirement heath care cost, not necessarily the pension cost. We fund our pension expense on a cash basis plus some on annual basis.

  • Steve Limb - Analyst

  • So in terms of the total add-back, will it be similar to this year?

  • Robin Adams - CFO

  • I think at least this year’s level may be slightly higher.

  • Steve Limb - Analyst

  • Okay, great. Thank you.

  • Richard Dauch - Chairman and CEO

  • Very much. Okay. Thanks to all of you who have participated in this call. We appreciate your interest in American Axle, and we certainly look forward to talking with 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.