American Axle & Manufacturing Holdings Inc (AXL) 2003 Q1 法說會逐字稿

Good morning, my name is Christi, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the American Axle and Manufacturing first quarter of 2003 conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session.

If you would like to ask questions, press star and then the number 1 on your telephone keypad.

If you would like to withdraw your question, press star then the number 2 on your telephone keypad.

As a reminder, today's call is being recorded.

I would like to turn the call over to Mr. Dave Demos (ph), Vice President of Investor Relations.

Please go ahead, Mr. Demos.

Thank you, Christi, 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 first quarter 2003 earnings announcement that was released earlier this morning.

And as required by SEC rules, we have furnished a copy of this release to the SEC under a form 8-K.

If you have not had an opportunity to review this release, you can access it on the AAM.com web site or through the PR Newswire Services.

For your convenience, a replay of this call will also be available beginning at noon today, through 5 p.m. eastern daylight time, May 9th, 2003, by calling 1-800-642-1687 from the United States.

When prompted, callers should enter reservation number 9473359.

We're also audio web casting this call through our web site, and we will archive this call in the investor section for one year for later listening.

Leading today's call is Dick Dauch Co-founder, Chairman, and CEO who will discuss some of the highlights of today's release followed by Robin Adams our Executive Vice President of Finance and Chief Financial Officer, who will discuss the details of our financial performance.

Immediately after our formal comments, the operator will open up the lines to allow for questions.

I would like to remind everyone that the matters discussed in this conference call may contain statements and forward-looking statements based on current plans, expectations, events, financial and industry trends which may affect the company's future operating results and financial position.

Within the meaning of the Private Securities Litigation Reform Act of 1995, forward-looking statements are not guarantees of future results or conditions but rather are subject to risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed.

The historical results achieved are not necessarily indicative of future prospects of the company.

For additional information, we ask 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.

I would also like to remind you that during the call, we may refer to certain non-GAAP financial measures, information regarding these non-GAAP measures as well as the reconciliation of these non-GAAP measures to GAAP financial information is available on the AAM.com web site under the investor link.

Before we begin, let me mention two of the conferences we will be attending during the second quarter.

We will be at the 2003 automotive and industrial conference sponsored by McDonald Investments in Boston on June 4th and 5th and the Wachovia 13th annual investor conference in Nantucket on June 25th, 2003.

We certainly look forward to seeing many of you at these conferences.

Also, we will be traveling to the following cities for routine marketing visits with investors.

In May, Chicago, Atlanta, Des Moines, Kansas City, St. Louis Milwaukee, Minneapolis.

In June, Baltimore, Boston, Denver, Philadelphia, San Diego and San Francisco.

Let us know if you are interested in meeting with us.

In addition, we're always happy to host investors at our facilities either in Detroit or at other locations.

With that said, let me turn things over to Dick Dauch, AM's Co-founder, Chairman, and CEO

Thank you for joining us today to discuss the results of American Axle and manufacturing for the first quarter of 2003.

American Axle and Manufacturing continues to achieve record financial performance levels.

I'm extremely pleased to report record diluted earnings per share for the first quarter of $1.02 per share, an increase of 36% versus the 75 cents per share earned in the first quarter of 2002.

Our company delivered earnings slightly ahead of our guidance, and three cents ahead of analyst consensus estimates.

This is the 17th straight quarter since AAM became a public company that we have delivered strong earnings performance and met or beat Wall Street expectations.

In addition to Robin Adams, our Executive Vice President and Chief Financial Officer, I am pleased to be joined today by our President Joel Robinson and Patrick Lancaster, our Group Vice President.

AAM sales in the first quarter of 2003 were at a record level of $975 million.

That is up nearly 14% from last year's first quarter.

Our sales continued to be positively impacted as light trucks and SUVs continued to grow faster than the overall market.

Comparing the first quarter of 2003 versus the first quarter of 2002, North American light vehicle production was up an estimated 2% for the quarter, while North American light truck production was up 9%.

And passenger car production was down nearly 6%.

General Motors light truck production, which was up 13% for the quarter, was a primary factor in our sales growth for the quarter.

And additional factors that contributed to the growth is a continued marketplace acceptance of the Dodge Ram heavy duty pickup truck and GM's Hummer 2 vehicle, both of which were launched in the fall of 2002 and contain AM's latest technology driveline systems products.

Our sales to non-GM customers increased by $74 million, up over 78% in the first quarter of 2003, when compared to the first quarter of 2002.

Additionally, our non-GM sales now represent over 17% of total sales in the quarter as compared to 11% in the first quarter of 2002.

Our operating income grew 32% in the quarter, compared to the year earlier period.

The key factors which allowed AAM to generate this significant improvement at the operating level compared to the first quarter of 2002 include the following:

First, our ability to efficiently translate increased production requirements of our customers into AAM'S margins through manufacturing flexibility and planning.

Second, we're reaping the benefits of the 14 successful major program launches flawlessly executed by our company in 2002.

Third, increases in content per vehicle, as we expand our product portfolio and features.

And fourth, associate involvement and team focus on stringent cost

controls in all facets of our business, utilizing the AAM developed productivity process.

Our productivity process incorporates such elements as the ongoing implementation of lean principles in the AAM manufacturing system, improved overall equipment effectiveness, product process and supplier improvement, and the Six Sigma problem solving techniques for continuous improvement.

As I mentioned during our last briefing, AAM is highly motivated in its ongoing efforts to increase customer and stockholder value.

I also mentioned several key objectives at that time.

And I would like to briefly discuss our progress in achieving those objectives.

Number one, sales and earnings growth, fueled by R&D, generated by new technology products.

I mentioned the growth in our sales, quarter over quarter, as for R&D we continually invest heavily in the area in order to technically enhance current product performance and expand our driveline systems, chassis systems, and module capability for light trucks to cross over vehicle application, passenger car and/or hybrid vehicles.

AAM will focus its R&D efforts in the higher growth segments in the marketplace.

We continue to expand our driveline system, product development and customer diversification plans.

For example, AAM is converting at least seven vehicles built in either North America, South America, or Europe in order to further demonstrate our latest all-wheel drive and independent rear-wheel drive system capability packagable to the OEM's platform.

These will be drivable vehicles for our target customers, and in addition to our independent ride, air-ride (ph) suspension, all-wheel drive routable vehicles many of you have seen.

A new development AAM announced further supports our system approach to rapidly advancing driveline product development.

AAM's new synthetic power film lubricant enhances driveline performance and contributes to the AAM advantages to our customers.

When combined with low friction bearings, optimized lighting geometry of the high point gear set in our power light and power dense designs, the lubricant provides significantly reduced axle operating temperatures and improved axle efficiency.

This all translates into improved vehicle fuel economy, important for all segments of the marketplace, especially for SUV vehicles.

We hope to begin production of this new fluid in our driveline system products starting in the year 2004.

That could have a cafe impact of one tenth to three tenth's of a mile per gallon.

That's huge in the auto business.

As a result of these and other R&D initiatives, through the end of the first quarter of 2003, more than 79 % of our sale came from new technology products introduced since mid-1998.

Our focus on these R&D initiatives will facilitate us in securing additional profitable business.

Next, world-class quality and working performance.

Our company continues to improve its quality performance, a key differentiator in which AAM is clearly the industry leader.

AAM continues to obtain world-class quality as measured by our customers with a six-month rolling average of 24 discrepant parts per million as of March 31, 2003.

Over 90 % of our shippable products are at zero parts per million for the last six months. world-class quality leads to reduced warranty costs, improved customer satisfaction, and more new business.

AAM is significantly reduced our customer's warranty costs by over $220 million since 1996.

Dependable on time delivery.

Our company has provided over 33 million driveline and axle systems, over 28 million drive shafts, and over 820 million forgings on time every time since we began operations in March 1 of 1994.

It's through this unique world-class program management, expertise that we've been able to execute launches flawlessly and precisely performed to the customer's needs.

Next, continuing customer diversification.

We're focusing on diversifying our customer base as evidenced by the 78 % increase in non-GM sales for the quarter I've just discussed.

In the first quarter of 2003, our company was awarded another $14 million in new business.

This includes, amongst other programs, a new forged machine and induction hardened wheel bearing spindle program with a Timken Corporation for a future on North American vehicle.

AAM's gross new business backlog is now approximately $900 million through 2006.

After subtracting the run-out of existing vehicle programs, the net new business backlog at this time is approximately $425 million through 2006.

We're working hard on several opportunities to secure additional business from existing and prospective customers.

We're actively quoting on new business currently totaling over one billion dollars, with approximately 70 % of that activity outside of the GM corporation and approximately 25 % representing opportunities with foreign and/or transplant OEMs.

In addition, another 28% are for potential (ph) passenger applications.

We expect OEMs and other customers to make sourcing decisions on approximately 50 % of this activity by the end of year 2003.

Production launch of these programs range anywhere from 2004 through 2007.

Next item I want to discuss is increasing EBITDA margins.

As Robin will discuss later in the call, we continue to make great progress toward our commitment of achieving a 15 % EBITDA margin by end of 2004.

Improving cash flow.

Last year, we promised we would continue the trend of improving positive free cash flow.

We met that promise by generating $177 million of positive free cash flow after capital expenditures.

For 2003, we expect our cash flow target to be in excess of $200 million Reducing debt:

We're very happy to be able to generate free cash flow, show our debt pay down much quicker than we had originally planned, and we expect that to be below the 40 % target by the end of the year.

We have leveled our capital spending, our expectations will be somewhere in the range of 200 to 250 million dollars for this year, as we can maintain business with less than half of that number, and the other half then is allowed for growth and capacity application and new product.

Attaining investment grade: We're very excited we're only one notch away from this.

We're focused on meeting all financial targets that will enable us to generate higher than investment grade credit statistics.

We anticipate we can close (ph) another upgrade hopefully by the end of this year.

I am pleased to see AAM continue to receive recognition for performance.

For 2003.

Forbes again named AAM to its prestigious Platinum 400, listing as one of the best big companies in America.

Additionally, our company was one of the 20 Forbes 500 companies placed on Forbes "Best of the Biggest Value List" for 2003.

Let me now, ladies and gentlemen, cover our product launches for 2003.

Program management capability is a key differentiator for our company.

As I told you, we flawlessly executed the 14 major product launches in 2002, meeting or beating our cost book and budget expectations for each and every program.

This year AAM has launched or will launch at least seven driveline systems programs.

Last December and then January of 2003, we introduced successfully the front rear drive shafts for the Daimler Chrysler Jeep Rubicon built in Toledo as a vehicle and the driveline system and chassis products for the Isuzu Ascender built in Oklahoma City by General Motors.

In the third quarter of this year, AAM will launch driveline system products for the GM Chevrolet SSR, a niche market rear wheel drive vehicle.

We plan on being a player in the trend to rear-drive passenger cars.

Also in the third quarter, AAM will be supplying the drivelines for one of the most adaptable and functional SUVs ever offered.

GM's Envoy SUV launching at their Oklahoma plant.

In addition to Buick Renir (ph), launches at the GM marane (ph) plant will contain our entire driveline system.

As part of our growing business with Daimler Chrysler, AAM will supply the rear drive shafts of the Dodge Durango built at their Newark, Delaware operation.

The all-new GM mid-sized GMC Canyon and Chevrolet Colorado pickups are to be built in Shreveport, Louisiana later this year, and that is AAM's largest 2003 launch.

The AAM driveline system for these great looking vehicles include our latest power light series front and rear axles.

Earlier this year, AAM filed a shelf registration with the Securities and Exchange Commission, with respect to a proposed secondary sale of approximately 14 million shares of common stock owned by our financial partner Blackstone.

Over the years, Blackstone reduced its position in the company to 26 % as part of a planned orderly exit strategy.

This shelf offering allows that strategy to continue.

Looking ahead to the second quarter and the rest of the year 2003, there is some uncertainty yet in the industry.

This uncertainty has led many companies to be cautious about the second half of the year.

But as we have mentioned earlier in the year, we had expected a decline in industry volumes, and the current production schedules and expectations are consistent with what we had expected.

There are some signs the economy is slowly starting to strengthen, consumer confidence in April rebounded strongly after falling for four straight months.

Confidence appears to be benefiting from the success of the war, the rising stock prices and falling oil prices.

Our major customer GM continues to experience sales gains in various vehicle offerings, as well as achieving strong performance in its truck and SUV sales.

These factors allow us to retain a positive outlook as we work with our customers to monitor their production schedules.

In fact, GM announced its sales for April yesterday, reporting truck sales up over 2% versus year-ago levels.

Full size pickup sales were up 15 and a half percent from last year while full-size SUVs were up 20 %.

Both of these were industry records for the month of April, and AAM is extremely pleased to be the driveline systems supplier for GM on these important vehicle platforms.

As most of you are aware, GM's second quarter production forecast for North America is down approximately ten and a half percent in comparison to last year.

Of that reduction, light truck production represents only 3.7 % of that decrease.

As I had mentioned previously, this fits the estimated reductions that were built into AAM's forecast.

Make no mistake, ladies and gentlemen, 2003 will continue to be a tough year due to uncertain economic climate facing the automotive industry in general, but at AAM, we're highly motivated determined to meet all the objectives I've mentioned earlier, and thus, as we noted in our press release, AAM is standing by the earnings guidance provided earlier this year at $3.65.

AAM has proven it can rise to the challenge in the unforgiving and uncertain automotive industry.

We'll thrive on this challenge and keep focused on our objectives.

This is our commitment to you and our quest to be the best.

I thank each and everyone of you for your attention today and your interest in AAM.

Let me now turn the call over to our Chief Financial Officer Robin Adams to discuss our financials.

Robin?

Thank you, Dick.

As you heard AAM achieved another record performance.

Record first quarter earnings per share of $1.02, an increase of 36 % versus the 75 cents we earned in the first quarter last year.

This is three cents ahead of current Wall Street expectations and 17 cents ahead of original Wall Street expectations before our guidance to increase earnings for the quarter.

We have record earnings on a dollar basis of $54 million, an increase of 39 %, record sales, as Dick said, approaching a billion dollars for the quarter, an increase of 14 %.

Record non-GM sales as we continue to diversify our customer base of $170 million, record first quarter gross margin of 14.8 %, up 100 basis points versus the first quarter of last year.

A net debt-to-capital ratio now below that 50 % level that Dick and I have been talking about for three years now, versus 60 % at the end of the first quarter a year ago, plus we continue to provide significant returns on our after-tax invested capital, and we're over 15 % in the quarter on a trailing 12 month basis.

Now, let me go over some of these items in more detail related to this record financial performance we had in the quarter.

As I mentioned, our first quarter sales were a record for any quarter of the company's history.

Sales were up $116 million, or nearly 14 % to $975 million, as compared to 859 in the first quarter of last year.

As Dick mentioned, this compares to North American light vehicle builds which were up an estimated 2% in the quarter.

So again, we outperformed the industry by in excess of 10 percentage points on the top line growth.

Our major customer General Motors had built up approximately 6% in the quarter.

As Dick mentioned, light truck builds were up 13 % in the quarter, approximately a 3 % increase in AAM content per vehicle this quarter in the full ramp up effect of driveline systems for two hot selling vehicles, the heavy duty Dodge Ram pickup and GM's Hummer H-2 contributed to our strong sales growth in the quarter.

As a result, again, our content per vehicle grew to $1,164 versus 1,135 for the first quarter of last year.

If you look at GM builds in the quarter, light trucks represented more than 59 % of their builds versus 55 % in the first quarter of 2002, as GM continues its strong focus on increasing its light truck market penetration.

Four-wheel drive and all-wheel drive penetration on the vehicles that we support was 61.4 % in the quarter, up from 59.4 % in the first quarter of 2002.

We continue to work at diversifying our customer base, achieving a record $170 million in non-GM sales for the quarter.

This represents a $74 million or 78 % increase in sales with our non-GM customers for the quarter.

The driveline system for the heavy duty Dodge Ram pickup represents a good portion of that increase in our non-GM sales for the quarter as we continue to see the effects of this fall 2002 product launch.

As a percentage of our total revenue, our non-GM sales increased to 17 % of sales for the quarter versus 11 % for the quarter last year.

Gross margin was an all-time record for the company in the first quarter.

We achieved a gross margin level of 14.8 % versus 13.8 in the first quarter of last year.

And again, this is 100 basis point improvement versus last year.

We generated a $26 million improvement in gross profit on the 116 million in incremental sales which translates to 22 cents on the dollar of incremental gross profit on those incremental sales.

Some of the factors that contribute to that gross margin improvement were the effects obviously of higher production levels, also coupled with continued focus on productivity and productivity gains and continued tight cost controls, including reductions in purchased material costs.

These factors are essential as we proactively work with our customers, GM Daimler Chrysler and others, to continue to drive costs out of the entire value chain.

Moving down on the income statement to SG&A, SG&A expenses for the quarter were $48.9 million, or 5% of sales, versus 46.2, or 5.4 % of sales for the first quarter of 2002.

Our SG&A cost as a percent of sales continue to reflect our tight administrative cost controls.

As Dick mentioned, our R&D spending in the quarter was at 15.4 million.

That's an increase of 12 % versus the 13.7 in last year's first quarter.

That's a 1.7 million dollar increase on a dollar basis and represents a good portion of the $2.7 million increase in SG&A quarter over quarter versus last year.

This increase in R&D reflects our continued commitment to support our customers' needs as well as to be a technology and innovation leader and product and process.

We continue to target our R&D spending at key growth segments of the driveline system market, and Dick covered a good portion of that earlier with you.

Our operating income in the quarter was $95.8 million, or 9.8% of sales, up approximately $23 million compared to the first quarter of last year, up over 100 basis points on a margin basis, nine eight versus eight four.

The operating income margin, again, up 140 basis points versus last year.

If you look at it on an incremental basis, our incremental $116 million of sales translated to incremental operating income at the rate of nearly 20 cents on the dollar.

Good strong continued performance.

As I mentioned earlier, we continue to see increases at all levels of the income statement with respect to margins, again, resulting from the higher production volumes, newer production designed for manufacturability, running on new state-of-the-art equipment, and using our unique productivity improvement process to control costs as well as focus on tight SG&A cost controls.

Our EBITDA margin in the quarter was 13.9%, tying a record from the second quarter of last year, and that's up over 170 basis points from the 12.2 % we had in the first quarter of 2002, and that continues to move us closer to our goal and our commitment that we made over two years ago to help get this business to approach the 15% EBITDA margin level by the end of 2004.

Looking at interest expense in the quarter, we're at 12.5 million versus 11.6 million in the first quarter of last year.

That increase is a result of a decrease in capitalized interest year-over-year related to a lower amount of construction and progress in our business.

As we ratchet down our capital spending to more normalized levels, our construction and process levels drop as well.

Our already investment grade credit statistics continue to improve.

If you look at our net interest coverage at the end of the quarter, it was 6.8 times on a trailing 12 month basis versus 6.4 times at the end of the year.

And the EBITDA level coverage was up to 9.7 times, approaching ten times on a trailing 12 month basis versus 9.3 times at the end of the year.

If you look further down at our credit statistics, our net debt to trailing 12 month EBITDA leverage ratio is down to 1.5 times versus 1.54 at the end of 2002, and we continue to work with the rating agencies in our efforts to secure the investment grade status that we feel we deserve.

Our tax rate in the quarter was 35%, versus 36 % for the first quarter of last year and 35.7 % on a full year 2002, and the reduction in tax rate we expect to hold for the rest of the year, and that's related to state tax credits versus last year.

Net income, as we said increased, 39% to a record $54 million, 5.5% of sales in the first quarter, compared to 38.8 million or 4.5% of sales in the first quarter of 2002.

And again, there's a 100 basis point improvement in margin at the net income line item.

That results in earnings per share of a $1.02 for the quarter, and as I mentioned previously, this is a record level for the company for any quarter in our history, represents a 36% increase, versus the 75 cents a share we earned in the first quarter of last year and, again, compares to the original Street estimates of 85 cents a share that we increased in late January.

We continue to demonstrate strong financial performance in a tough operating environment and continue to set records on virtually every line of the income statement.

Now I'll return to cash flow performance for the quarter.

Cash provided by operating activities in the first quarter of 2003 was a source of 36 million versus a source of 48 million in the first quarter of 2002.

Capital spending was down slightly from last year, 59 million versus 65 million, consistent with our guidance of being - spending at the rate of $250 million as we did last year.

This was in line with the quarter, with respect to the full year expectation.

In addition, we exercised the purchase buyout option of off-balance sheet lease manufacturing equipment as we said we would, totaling $3 million in the quarter versus a $5 million activity in the first quarter of 2002.

As we've said previously, we have currently no remaining lease renewal repurchase options to exercise during 2003,and the first option we do have is in 2006.

As a result, net cash used in operations during the quarter was 26 million, pretty much in line with the 22 million we used in the first quarter of 2002.

If we look at the first quarter of each year, it's traditionally a heavy cash outflow period for the industry and for American Axle, so it's no surprise to us, pretty much in line with our expectations.

And this is due to the increase of working capital investments for the first quarter, resulting from a significantly higher level of activity in March versus a lower level of activity of business in the December at year-end.

As an example, our accounts receivable were up $100 million in the quarter, and the difference is really the sales level in March of this year versus the sales level in December of '02.

We are still on track, as Dick mentioned, to generate at least $200 million of positive free cash flow for the year, and our plan, as we've stated before, is to continue to use our positive free cash flow to pay down that debt this year to improve our debt-to-capital ratio.

Now let's focus on our debt to capital structure.

Our total debt at the end of the first quarter was approximately $755 million.

That's a reduction of over 133 million from where we were a year ago, which translates to about a 15 % reduction on a percentage basis.

Our book equity continues to grow.

It's now over $760 million, up from the 582 million at the end of the first quarter in 2002, or close to 20 times the 40 million dollars equity base we had just at the end of 1998.

That's phenomenal.

Our book equity has grown over 30 % in the last 12 months.

Our net debt to capital on a book basis has improved, as I said, to under 50% to 49.7% for the quarter, versus 60 % a year ago, and Dick and I and the whole team are very pleased to finally break that 50% threshold we've been talking about for two years.

We continue with our focus to grow our equity base through strong earnings performance while reducing our net debt levels through the generation of free cash flow.

As we previously discussed and Dick just mentioned, we remain on track, focused and committed to reduce our net debt-to-capital ratio to below the 40% level by the end of 2003.

We feel very comfortable with our current capital structure and our financial flexibility.

At the end of March, we have total available borrowing capacity of approximately $450 million to our existing credit facilities.

Our invested capital, net debt and equity increased to $1.5 billion on a trailing 12 month basis versus the 1.4 at the end of 2002.

Our strong earnings performance continues to result in improvements of our after-tax return on invested capital, as I said, over 15% at 15.1 % in the quarter.

And that's been our target.

We still expect to maintain our investment capital at that targeted level.

Now let's focus on the rest of 2003.

On January 23rd of 2003, we increased, as I mentioned, our first quarter guidance as well as our full year earnings guidance.

We beat our guidance, which was a dollar by two pennies, a dollar and two cents.

At this point in time, we want to reconfirm our full year guidance today.

Our $3.65 full year EPS guidance as projected earnings growth of over 11% versus the $3.28 a share we achieved last year, excluding the Detroit Fire (ph).

And again, about 4% higher than the current analysts consensus of about 3.52 earnings per share.

The North American light vehicle build assumptions that we're seeing in the industry for 2003 range anywhere from 15.4 million vehicles to 16.5 million vehicles, with an estimate of that widespread average being about 15.8 million vehicles.

We are watching our customers build schedules closely, and while we're cautious in the last half of 2003, we see nothing at this point that would cause us to adjust our full year earnings guidance.

Moving from earnings to cash flow for the year, I'll reiterate as Dick just did one more time, American Axle is on target to meet or beat our positive free cash flow commitment of over $200 million for 2003.

And we will continue to use our cash flow to reduce our outstanding debt to further improve our capital structure.

You look at our first quarter 2003 performance, and it's yet another quarterly confirmation of American Axle's financial strength and leadership, our 17th straight quarter.

We are focused on delivering on our commitments to our stockholders.

And as Dick said, we are driven at American Axle by our quest to be the best.

We've demonstrated our ability to differentiate ourselves by bringing the American Axle advantage to our customers and shareholders on an ongoing basis quarter by quarter and will continue to do so.

Our first quarter strong financial performance was just another step in that process and indicative of our commitment to continue to be an industry leader in an industry that continues to be brew tall.

Thank you for your attention this morning, and now I'd like to turn the call back over to Dave Demos (ph) for the question and answer period.

Thank you, Robin, and thank you Dick.

We have reserved some time to take questions.

So at this time, please feel free to proceed with any questions you may have, and we'll have instructions from the operator here for you.

In order to ask a questions, press star and the number 1 on your telephone keypad.

We'll pause just a moment to compile the Q&A roster.

Your first question comes from Darren Kimball of Lehman Brothers.

Hi.

It's actually Andrew Manning (ph).

GM trucks have lost over 200 basis points of market share year to date.

This performance seems to be a lot worse than what GM was expecting, yet your earnings guidance has remained at 365 since January.

Can you sort of clarify exactly what GM light truck production assumption your 365 guidance is based on?

We do not share the information that our customers give us with respect to their vehicle builds, anticipation for the year.

But obviously, as we've said earlier, we were looking for North American vehicle builds anywhere from sixteen three to 16 in that range.

General Motors, we all know what their current market share is.

We're not anticipating any significant losses in GM market share and light trucks and SUVs for the remainder of the year

This is Dick Dauch.

And thank you for your question.

I think the key point here is that April continued the trend of solid truck sales with GM leading the way with a plus 2%.

Our volume continues to be strong.

Obviously our financial results speak for themselves.

We feel very positive as we look ahead

Okay.

Thank you.

You're welcome, sir.

Thank you, your next question comes from Wendy Needham of Credit Suisse First Boston.

Good morning, Dick, Robin, and Dave.

Robin, can we talk a little bit about the second quarter compared with the first?

How is volume looking for you guys in the second versus the first, and margin expectations in the second versus what we just saw you report in the first?

Let me answer both of those questions.

We'll start with the margins first.

As we've said continuously, we expect our margin to approach the 15% level by 2004.

That would take improvement of about 100 basis points a year.

You saw we achieved that in the first quarter.

In order to achieve that growth in margin, we pretty much have to be at that level quarter in and quarter out throughout the rest of the year.

So we continue to expect to see good margin comparisons, second, third, and fourth quarter relative to last year.

So last year you were 14.9 in the second quarter, up from the first.

And so you'd expect a similar pattern this year, that second quarter margin is going to be higher than the first?

Yes we would.

And your truck volumes in the second quarter compared with the first, even -- I know GM has cut their production year-over-year, not to get too complicated here, but how does your output for GM and for Dodge look in the second compared with the first?

It looks very strong, Wendy.

As we said before, although GM is projecting light vehicle builds down somewhere in the 3% range last year, second quarter of last year was an all-time record for GM light truck in SUV build.

So we'll take 3% off of an all-time record any day from a volume perspective.

And add into that mix the Dodge Ram heavy duty program, which we did not have in the second quarter of last year, and we continue -- and the four-wheel drive penetration, and we continue to feel very good about the rest of the year as we indicated, and we've reconfirmed guidance again today because of that.

I think the first call guidance is 94 cents for the second quarter.

Do you want to make any comment on that?

We want to stay with our yearly guidance at 365.

Okay.

Thank you.

Thank you, Wendy.

Your next question comes from Jon Rogers (ph) of Wachovia securities.

Good morning, everybody.

Just Robin, one more point on gross margin.

Can you talk about - I believe that Guanajuato with the Ram is fully ramped now, could you just talk about what the contribution of that plant might have been to your strong gross margins, and maybe tell us a little bit about capacity, how much of your total capacity is now in Mexico?

John, first of all, as we've said previously, we don't disclose publicly the relevant profitability of any of our business with any customer nor any of our plant operations.

But we feel all our business contributes to our overall financial health and all of our manufacturing facilities as well.

Having said that, with respect to the Dodge Ram heavy duty, we are pretty much running at a full ramp rate right now, relative to the first and second quarter of last year when we were not in production, and the third quarter is when we launched that program.

So we'll continue to see favorable sales growth from that heavy duty Dodge Ram into the second quarter and a little bit into the third quarter, as well, as we're launching that program.

But we're running right now at pretty much the type of annual run rate that we expected when we launched that program.

Does that answer your question?

Yes.

Can you talk just quickly about raw materials?

You said you benefited from purchased materials.

I know that you're hedged on steel prices.

Can you just talk about where that market is going and how that could impact your margins going forward?

Well, as we've said before, we've entered into long-term agreements on steel, specifically with steel supplies, but we've also entered into long-term agreements with different suppliers for different commodities and different material sources.

We work very hard and proactively to continue to look at opportunities in the marketplace, to look for additional sources, and at this point in time, there's obvious pressure on material prices in the industry, but we have done a good job of anticipating these price increases and have locked in long-term pricing agreements on most of the commodities we buy, and therefore, we're not seeing any negative impact currently from those prices.

Okay.

Thank you very much.

Your next question comes from David Leiker of Robert W. Baird.

I have two clarification questions first.

Robin, you talked about the 15% EBITDA margin by 2004.

Is that for the full year 2004 or by the end of 2004?

What's the timeframe?

Full year '04 is our - and, again, approach 15% levels, so if we hit 14.8, David, don't come back and beat me up on it.

As we've said previously, that will pretty much approach the highest level in the industry, particularly for someone who is in the business like we are - around bending metal and the shaving and manufacturing complex components rather than assembling.

It's absolutely very good, and we just don't have a historical benchmark because you've done nothing but continue to improve that.

Second one is you don't have any sold receivables transactions, do you?

David, we do sell our receivables, but that's an on-balance sheet transaction.

So you'll see the full value of our receivables on the balance sheet and in our capital structure.

Under debt, you'll see the amount of receivables we sold as a debt obligation of the company.

At the end of March, we had approximately $80 million of debt on our books related to receivables financing, but it's an on-balance sheet transaction

Great.

And then the bigger issue I want to dig through is the - your GM revenues are up about 5%.

We're showing GM's truck build in Q1 is up 13.

I want to reconcile that.

Okay.

Let me help you with that.

Three major factors.

First of all, and this was an issue last year, continues to be, if we look at the growth in volume of the mid-sized SUV, that 36370 program continues to be a bigger portion of GM's builds versus the first quarter of last year.

It was about 12% of their builds in the first quarter of last year.

It's 16 % in the first quarter this year.

So the average content per vehicle on our product for mid-sized SUV is smaller than our company average.

And two other issues, the F-car, which was part of our GM sales in the first quarter and second quarter of last year, went out of production in the third quarter.

So comparison on a sales basis year-over-year, those sales aren't in there.

And it's a reduction with respect to the overall growth.

And finally, some full size van business, the GM 610 as well, the 600, we finished out that vehicle build also in the third quarter of last year.

We don't have the same sales program with respect to the 610 this year.

So if you look at the 13% growth in light truck, factor out that on a sales basis, some of that growth was lower content per vehicle for us.

We no longer have the F-car, and we no longer have some of the 600 business that ran out last year.

It gets you to that 5 % growth level versus the 13.

But you have the Hummer and you have the Dodge Ram.

So it's a begins gout and the net for am is wonderful?

No, that's great and this is the last quarter we're going to see, or one more quarter we're going to see this comparison issue

Exactly right.

We'll take 14 % top line sales growth with the industry growing quarter in and quarter out any time

And then just follow-up on that is there any mix issue as it relates to the four-wheel drive two-wheel drive vehicle that you have

(audio gap)

If you look at the four-wheel drive penetration rate fourth quarter is always the highest for the year and actually the penetration rate in the first quarter relative to last year was up slightly.

So year-over-year there is no deterioration.

It's a little bit [inaudible], relative to the fourth quarter it's down a little bit but that's traditional.

Every fourth quarter our all wheel drive four-wheel drive penetration is the highest point of the year for us

Thank you very much

Your next question comes from Bryan Knoepp of Midwest Research

Quick question here.

Can you talk about new business, sort of ballpark figure, if you sort of back out the slight benefit you'll still have since you're ramping up the ram in the third quarter of last year, so if you sort of took away the incremental benefit from last year's new business, what can we expect for the back half of this year?

As Dick mentioned we've got a gross basis, next year, 900 [inaudible] Net about 425.

But we are seeing a good portion of the benefit of that this year.

As we've said before anywhere from 200, 250 dollars incremental new growth this year, a good portion of that driven by the Dodge Ram, the Hummer H 2.

Dick mentioned the programs we're launching in the back half of the year the Dodge Durango drive shaft program for us.

We will be launching the new 355 program which is the canyon, the canyon and the Colorado that launches in the fourth quarter.

And that's a September/October launch period so we won't see much of the benefit of that in 2003, because it's a late-in the year launch.

We'll see some of that in the fourth quarter.

That will carry through the year 2004.

We are seeing most of the growth year-over-year content growth or relative to new business wins a good portion of that is heavy loaded to the first half of the year

Okay.

One kind of quick follow-up.

I seem to remember hearing a five % content per vehicle growth number for GM and A this year.

Is that still, is that still something that's holding?

Our expectations are six % content growth for vehicle this year obviously we'll have to watch mix on that which is a driving factor.

Those mid-sized sufficients continue to become more and more popular and this Buick REN i.e. R gets launched and as you've heard Dick mention that SAAB is also looking to build a new vehicle off that platform.

We're going to have to watch the mix of our product relative to that content per vehicle.

But our expectation currently is still about five % growth year-over-year

That's great.

Thanks a lot

Your next question comes from Rob Hinchliffe from UBS Warburg

You talk about the amount of business you folks are bidding on now.

Can you give a sense is there anything coming down the pipe that you can announce soon.

I know in the fourth quarter you said you had a PTU contract that was pushed out.

What can we expect?

What's coming?

Of the billion plus business we're bidding on currently we're very close on a couple of opportunities in the forging side.

I think those are the closest to being in a position to make an announcement on

I know that's important business.

Relatively small dollar, though; is that right?

Yeah, right.

I guess second, Robin, could you just kind of walk us through the 200 million cash flow forecast for the year, just kind of a cash flow walk

Start with your earnings guidance.

We're expecting depreciation and amortization as we've said before somewhere in the 160 to 170 range.

As we previously said, we defer a significant amount of our taxes.

So we're paying on a cash BAIFLS about 30 cents on the dollar of the taxes we provide for in our income statement.

Looking at -- so that's a benefit from a cash flow perspective.

Looking at our pension and post-retirement health care costs as we've said previously.

That generates anywhere from 30 to 40 million dollars of cash relative to what we expense in our income statement.

Again, most of those retire re-health care costs are not funding on a cash basis.

We have very few retire resin this company because we don't have any of the legacy costs that some of our competitors do.

Virtually all of our expense for retire re-health care is non-cash and sits on the balance sheet.

If you looked at the balance sheet in the first quarter, post retirement benefits and other long-term liabilities were up about 16 million in the quarter, pretty much consistent with the non-cash funding there.

Working capital, as you saw in the quarter, it was a significant use of cash flow but that will turn itself around for the year.

As it typically does you saw the improvement we have in inventory.

We expect improved inventory our turns are close to 20 versus 18, about 18 and a half year-end.

So we're making head way on the working capital side of the business with respect to traditional receivables, payables and inventory.

And then the capital spending at 225 250.

You go through the math.

It's easy to work off of last year's cash flow statement.

There's not going to be significant difference with respect to what we experienced last year except we're going to have higher earnings.

We've got increased depreciation expense.

We'll defer a little bit more taxes and we have increased retire re-health care costs in our income statement that are not related that will provide cash from a cash flow perspective than 2002.

If you just walk across last year's performance versus this year's performance you can easily get in excess of 200 million dollars

One follow-up to that.

Are the payment terms similar with Daimler Chrysler as they are with GM at this point.

Any major differences?

We spent a lot of time discussing how we moved to General Motors to normal payment terms over a three-year period those payment terms are what's considered PROX 25th.

To explain what that means all the product that you would ship in the month of January, you would get paid on February 25th.

The industry is moving and some customers have moved to what's called two plus two.

And as we've said earlier, our Daimler Chrysler business is on a two plus two basis.

That means the sales you generate in January, plus the sales you generate in February you get paid March 2nd.

And those have been our payment terms and that's the way they stay today

Thanks Robin, thanks everybody

Your next question comes from Ronald Tadross from Banc of America Securities

On GM, I guess they rolled out this idea at least of 20 % price/cost reductions over the next three years, I would guess that's kind of the start of negotiations.

What's the story there?

Do you anticipate having to do more on the price side?

Do you think you can offset it with costs?

How should we think about that?

Well, we have valid binding enforceable contracts with all of our business with General Motors.

Lifetime contracts.

Although we work with them to take cost out of the system

Lot of suppliers tell me that those contracts are always up for negotiation.

I mean do you get them mad if you go back to the contract and say we're not going to -- can you be cooperative on this issue and cut cost out or do you just stick to your contracts?

This is Dick Dauch.

Patrick just told you what you need to know.

We have long-term binding contracts, sustainable and legal and therefore that's the answer you need to know.

We always are open to help our customers, especially in this case GM reduce costs by focusing on design and other things where we can have co-beneficial assist to each other.

We have good relationships with them and that's where our unique position is.

Other suppliers are not in the same position as us

Okay.

Let me give you an example of that Ron we talk about our improvement quality.

Since 1996 savings to our customers are in excess of 200 million dollars a year.

On warranty performance.

So they said a dollar drop to their bottom line through no effort of their contribution.

Of 200 plus misdemeanor dollars, because they don't need to pay the warranty that they used to have to forecast

I understand all that and I think that's great.

I guess these purchasing guys tend to get a little focused on the current year price down and I think that's what GM is getting at.

That's a true story, everything you've said is accurate.

We've responded with our situation.

We have a uniquely different situation.

We have long-term contracts.

We have bindable pricing.

We will honor everything.

We've never missed a delivery.

We have spectacular quality, absolutely the best technology and we are rated by them the very best in service parts, all performance measurement stakes.

There is a total value that has to be put into perspective and you can go talk to your purchasing brethren all you want we've responded from AAM to your question

Just a separate question.

Contribution margin has been running about 20 % on the gross line on incremental sales.

As we go from two Q to 3 Q, should we assume a similar contribution margin on the downside or can you do a little better than the 20 %?

As we've said before Ron, there's an amazing thing in this industry that on the upside you're at about 20 cents on the dollar incremental.

That's what you're supposed to do.

I don't know many other suppliers other than us that are able to achieve that.

On the downside, for some reason you're closer to 30 cents on the dollar sometimes 35 cents on the dollar.

And it's a little frustrating but the reality is while you're growing the business you are putting in a little bit more what you might fixed cost structure although over the long-term it's variable in the short-term on the downside you don't really have, you're not increase could goes, don't have the ability to take some of that cost out.

So that's the realty of the industry

Thanks, Robin

Your next question comes from Richard Hilgert from Fahnestock and Company

Good morning.

On the GM builds, it shows that there's still running over time.

They're down from the first quarter by about 17,000 units, but with your expectations with what you're seeing in production schedules, counter that against them still running over time, when are we going to see this down three % year-over-year in their truck production?

Are they -- are you seeing a decrease in their production rates coming?

I'll give you an example tomorrow is Saturday and there's going to be six assembly plants running full throttle and one on Sunday.

So it certainly isn't right now.

And in the foreseeable near future, 90 days it looks extremely solid for us.

We just had a very strong first quarter buy in with them, second quarter buy in is down slightly and you would expect as you're getting toward the model year build out of course the third quarter is always the softest because you have the two week down time in July and you have the build out of the previous model year, the present model year and the ramp-up of the next one.

So we see a very good solid year there's nothing here that has any surprises to us

So the production schedule being down like it is, the one that they're showing us, anyway, it doesn't sound like with all the overtime and everything that they're planning it doesn't sound like they're going to be down that much. )) I think Richard you have to talk to GM for any more clarification.

We've shared with you what we can

Thanks.

On the canyon in Colorado launch, what kind of four-by-four penetration are you looking at there?

Sitcom PRABL to prior models or is it better and is your C PV better because of it?

If you look at the pickup truck rink product all wheel drive four-wheel drive penetration rate is significantly lower than what you find on average for this company.

You're typically looking anywhere from 20 to 30.%.

I don't have the exact numbers in front of me but it is significantly lower than our average.

But remember this, Richard, this is simply a new generation of a product that eventually replaces the SNOEM ma and S 10 and it will be at least equivalent to them in four-wheel drive all wheel drive take.

So that is not a surprise to us.

We've had that factored into our financials, into our volume, into our launch planning and with GM.

So I see nothing of any significance there.

But you've also, you're putting on an improved product and you would get a bit more of a premium on the new one?

Engineering changes have to be evaluated for cost and price structure and that's been done

Okay.

Good.

On the backlog of the billion dollars that you're bidding on, are there any other complete drive line contracts that are floating around in that?

Yes, there are, and we're not at liberty to talk specifically.

We have four OEMs.

We're looking at significant drive line contribution on those things and we just have to work on them as those OEMs make their decision-making process

Okay.

Great.

So those contracts would account for a much larger chunk of the backlog.

If I look at this through 2003 to 2007 on that billion dollars we have a real nice break down whether it's drive line or whether it's offshore or whether it's the transplants and even significant piece of that business of potential forging, which also gets into machining value-added content, heat treating and Neiling (ph) it's not just forging that's a misnomer.

The OEs be directing the sourcing on those complete drive line programs in that backlog or would it be completely up to the tier one integrator that it gets sourced?

Richard, it depends on the situation.

Sometimes it is the integrator that would have that influence and digs making responsibility.

And oftentimes it wouldn't be.

You'd have to get into line item detail which we don't choose to do at this point?

Okay.

Sure.

Robin one last one.

With the new headquarters going up, interest expense being capitalized and if it is when does it come on line, when does that hit the expenses?

Richard, I'll tell you we probably aren't capitalizing interest in that but it's not meaningful

Not meaningful.

Not a material issue

Okay.

Thank you.

Your next question comes from Jonathan Steinmetz with Morgan Stanley

Good morning, everybody.

Can you hear me?

Yes, sir, good morning

Quick question on the backlog or the business you're bidding on.

Of the one billion dollars, I know you can't give detail but can you give us order of magnitude what the largest chunks in there might mean?

I'll give you some response to that John thing.

Of the over billion dollars we're bidding on here in the first quarter of 2003, let's say a quarter of that is with General Motors and that's with different brands that they have in different continents.

And a couple of them over 100 million dollars each.

We also have a nice sized program with Ford Motor Company that we're reviewing with them.

Daimler Chrysler is significant.

It would probably be 35 to 40 % of that with seven or eight different programs ranging from small change to something that is multi-hundreds of millions.

World programs, get into another hundred million plus, forging gets into almost 200 million, because forging again has machining as well as heat treatment and kneeling content and has good margin capability.

So that gives you some whiskers (ph) on it

Thank you very much

We have time for one more question.

Thank you, gentlemen, your last question comes from Jackie Weiss with Merrill Lynch

Hi, you actually just answered my question, but do you happen to you used to talk about your backlog pro forma for non-GM business for your pro forma for your blowing as a %age of your current sales.

Do you happen to have an update for that number?

You used to talk about it at 76 %?

Jackie, actually that number represented booked business that had not been in production yet.

We had anticipated our non[inaudible] Business would grow to about 24 % of sales.

Right now we're looking at 20 % for 2003 and again what we're fighting against is a great problem they have.

Our GM business continues to grow at double digit rates.

So when we get the calculation that our non-GM business would grow to 24 % since that time our GM business has grown dramatically.

We'll be at 24 % this year.

We'll be in excess of 20 % next year.

I can't tell you if it will be 24 but we're certainly moving in that direction trying to swim upstream against the GM business that continues to grow strongly for us

Thanks a lot

Tell John Casesa we said hello

I certainly will.

Thank you, Christi and we thank all of you that have participated on this call and appreciate your interest in American Axle.

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

Have a great day

This concludes today's American Axle and Manufacturing first quarter of 2003 conference call.

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