American Axle & Manufacturing Holdings Inc (AXL) 2003 Q2 法說會逐字稿

Good afternoon.

My name is Lynn and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the American Axle & Manufacturing Holdings 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 period.

If you would like to ask a question during this time, press star one on your phone key pad.

If you would like to withdraw your question, press star number two on your key pad.

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

I would now like to turn the call over to Mr. David Demos, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Lynn.

Good afternoon, everyone.

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

All of you should have had a chance to review our second quarter 2003 earnings announcement we released earlier today.

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 through the aam.com web site.

A recall of this call will also be available beginning at 5:00 P.M.

Eastern daylight time today through 5:00 P.M.

Eastern daylight time July 31st, 2003 by calling 800-642-1687 from the United States.

When prompted, caller should enter the reservation number 1453383.

We are also audio webcasting this call through our web site and will archive this call in the investor section for one year for later listening.

Leading today's call will be Dick Dauch, 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 comments and forward-looking statements based on current plans, expectations, events and financial and industrial 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 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 security analysts, news media representatives and other interested parties.

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

Before we begin, let me also mention we will be attending the JP Morgan Arbour Auto Conference in Michigan on August 5, 2003.

We hope to see many of you there.

Also, we are firming up the fall schedule for routine marketing visits to New York, Boston, Chicago and other locations.

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

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

With that said, let me turn things over to Richard Dauch, Am's Chairman and CEO.

Thank you, Dave.

Good afternoon, everyone.

Thank you for joining us today to discuss American Axle's financial results for the second quarter for the year 2003.

I'm extremely pleased to report the record diluted share for the second quarter of 97 cents per share, an increase of over 5% versus the second quarter of year 2002.

Our Company delivered earnings which met the analyst consensus estimates for the quarter.

This is the 18th straight quarter since our Company became a public Company that we have delivered strong earnings performance that meet or beat Wall Street expectations.

In addition today to myself is Robin Adams, our Executive Vice President of Finance and Chief Financial Officer.

I also have Joel Robinson, our President and Chief Operating Officer, and Patrick Lancaster, who's our VP and CAO and Secretary with me.

A.M. sales in the second quarter were at a record level $914 million up nearly 4% from last year's second quarter, which was strong.

Our sales to non-GM customers increased over $71 million or 76% improvement in the second quarter 2003 as compared to the second quarter of year 2002.

Additionally, our non-GM sales now represent over 18% of our total sales in the quarter as compared to less than 11% in the second quarter of 2002.

Let us compare the second quarter of 2003 to the second quart 2002 from an industry perspective.

North American light vehicle production was down an estimated 9% for the quarter while north American light truck production was down 3.7%.

Passenger car production was down over 15% for the quarter.

GM light truck production was down 3 1/2% and unfortunately, GM had the Oklahoma City plant down from early may to the end of June due to extensive damage to the plan caused by tornado.

This negatively impact the A.M. sales of the mid sized sport utility drive line system and other products for Oklahoma city during that period.

Despite the anticipated lower vehicle production levels for the second quarter compared to the strong second quarter of 2002, A.M. sales increased to the reported record level.

This was due in part to increase content per vehicle and our successful fall 2002 driveline system strong selling product for Dodge Ram and GM's Hummer Two.

As many past briefings, I would like to briefly discuss our progress on several key A.M. objectives, aimed at increasing both customer satisfaction and stock order value.

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

As I said, sales for the quarter were at a record level.

We increased R & D spending over 12% quarter over quarter in order to continue to enhance our target product with new products in the marketplace.

In order to support our customer's needs, we are focusing our R & D initiatives to drive value up and make our products and systems even more attractive to our customers.

First on fuel economy through mass reduction reductions and efficiency improvement such as the power dense and power light axles, power lubricants and low friction components.

Second, customer satisfaction through quality performance and features such as A.M.'s track right and differentials and smart bar stabilizer system for improved off road performance.

And third fulfilling marketplace needs through expanded driveline system capabilities.

Assembly friendly chasse models, independent rear drive axles, power transfer units better known as PTUs and other products for emerging market requirements.

We are on track with the conversion of at least seven vehicles from OEM's in North America, South America and Europe in order to demonstrate A.M.'s latest all wheel drive, full systems and module integration capability and technology.

They package beautifully and we have many performance improvements.

In fact, A.M. has recently within awarded front wheel drive based all-wheel drive systems and guaranteed the production contracts two all-wheel drive stems should the OEM's go to market with these vehicles.

Next, I want to discuss warranty performance.

A.M. is clearly the industry leader at quality and we performed at greater levels during this second quarter.

A.M. has a six-month rolling average of 14 parts per man since June 30, 2003. 90% of our shippable products are at zero parts for the last six months.

This translates into many benefits.

Let me give you one idea.

On warranty cost avoidance or money to the bomb bottom line that's over $250 million since 1996.

We continue to emphasize our five zero quality process throughout the world.

And use such problem solving as techniques for ongoing improvements for quality and liability and warranty performance.

To help maintain quality, A.M. is on schedule to replace the current 9000 registration at all of our facilities with the latest TS-169419 by the end of the year.

Our chief facilities in New York recently received Ford's Q1 award.

Our Company is pleased that our major customer GM has seven vehicles with A.M. could be tent in the top three trucks recently published JD Power 2000 Vehicle Dependability Study.

It's positively reflected on our customer's products.

The third point is dependable on-time delivery.

To date, our Company shipped 34 million axle and driveline systems.

Nearly 29 million drive shafts and over 850 million Ford products certain the Company was formed in 1994.

Zero recalls, zero product litigation, true integrity of engineering sophistication.

Logistics is a vital part of the value enterprise and we're always exploring opportunities to reduce costs for our customers such as the moving our world class axel in the fall of 2002 from Mexican operations to the three rivers Michigan drive line facility.

We did this, by the way this part by crafting an innovative operating agreement with our strategic partner the UAW in Three Rivers in order to help convert the plant from a drive shaft to the complete driveline systems.

This also requires the extensive application of A.M.'s lean manufacturing principles.

In order to free up floor space for the move to occur.

I'm pleased to report the business case has been maintained and the Three Rivers team is performing wonderfully.

Next, let's talk about continuing customer diversification.

We recognize the importance of diversifying our customer base and increased our non-GM sales for the quarter 76% compared to the year before quarter.

In the second quarter of 2003, our Company secured 16 million in new business with customers other than gm.

And recent press release, we announced 30 million in sales contracts, 14 million was secured in the first part of the year.

Under the new sales contracts, A.M. will provide an average of 7 million driveline system and transmission components for five different customers including two new customers.

The products included are warm formed near net gears and shafts, hot form wheel spindles, warm form turbine hubs and sleeves for transmission converters.

Wheel hubs and stabilizer bars.

We utilize state-of-the-art processing such as net and near net shape forging technology and improved material yield and streamlining operations.

Our gross new business backlog is approximately $916 million.

Approximately 16 million of the 30 million sales that I just mentioned is net new business which increases our net new business backlog from 425 million to 441 million through year 2006.

The 16 million in net new business take place in year 2005.

We are quoting new business opportunities totaling approximately three-quarters of a billion dollars with approximately 70% of this activity outside of the General Motors Corporation.

As you know, we reported activity quoting a billion in the past.

This number varies based on a variety and expect it to range from 500 million up to 1.5 billion according to the evolution of the OEM's and act activity at that time.

The majority of the variance of last quarter is doe to an OEM from last quarter.

It represents a foreign or transplant OEM opportunity. 40% is directed at passenger car operations and crossover vehicles and production timing for these programs rain from 2005 through 2007.

We expect the OEMs and other customers to make sourcing decisions on at least 40, maybe even 50% of the business by the end of calendar year 2003.

Fifth point is increasing EBITDA margins.

We are committed to approaching the 15% EBITDA margin level by the end of 2004 as we have publicly stated since year 2000.

Robin will discuss our progress toward this goal later in the call.

The sixth point is improving cash flow.

For the full year 2003, we expect cash flow targets to be in excess of 200 million and we're on track to achieve that goal.

Maybe surpass it.

Seven, reducing debt.

We're utilizing the free cash flow we generate to pay down debt and I'm pleased to report the net debt to capitalization has been reduced to 43%.

The goal is to be below 40% by year end.

The next point is leveling capital spending.

We have now normalized our capital spending in the 225 to $250 million range annually.

About half that amount is typical for base capital to maintain business and the other half is for growth, capacity and new products to have plenty of flexibility.

The ninth point is attaining investment credit status.

Our Company currently has better than investment grade run rate statistics.

Robin Adams and his team are working aggressively with a rating agency to secure the rating possibly by the end of this year.

This is critical to our commitment to create more stockholder value.

All nine items I have just reviewed with you men and women and discussed are part of the quest to be the best as the leader in our segment of the industry.

And it brings A.M. an advantage to customers and stockholders.

Looking ahead to the second half of 2003, it's good to see the leading economic indicators are improving once again in our Company.

Our major customers, GM and Dimer in DaimlerChrysler have had record setting sales in the light truck segments that constitute a majority of our Company vehicle sales.

Vehicle inventories while still high are reducing.

The trend is good.

A.M. customers schedules and forecasts are currently in line for the expectations.

GM recently released the third quarter of 2003 production forecast for light trucks and represents an increase of approximately eight-tenths of a percent from the fourth quarter 2002.

While 2003 continues to offer challenges as the economy slowly recovers, we maintain an outlook for the balance of the year.

Our team is dedicated to achieving the objectives and goals tore the year including the previously stated 2003 earnings full-you're guidance.

I thank you very much for your attention and support and your interest in A.M.

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

Robin?

Thank you.

As you just heard the second quarter earnings, 97 cents a share an increase of a little over 5% compared to the second quarter last year.

We also had record sales for the second quarter of 914 million dollars, an increase of nearly 4%.

We attained all-time quarterly gross margins in the quarter, a record of 15.1%.

As Dick just mentioned, we increased our net debt to capital ratio versus over 55% a year ago or second quarter 2002.

In addition, we continue to provide significant after-tax return on invested capital.

We have now improved our after-tax return on invested capital to 15.6% on a trailing 12-month basis.

As you can see, our financial results continue to be right on target with our communicated goals and strategies.

Now, let me go over some of these items a little bit more in detail related to the strong performance we had in the quarter.

Our sales levels, as I said, was a second quarter record.

Sales were up approximately $33 million or nearly 4% to $914 million.

And as Dick mentioned, the sales growth continues to outperform the general industry growth rate quarter in and quarter out, outperforming this quarter by nearly 13 percentage points.

Our major customer general motors, total bills will down.

The light truck production was down 3 1/2% in the quarter versus last year.

Despite year-over-year industry comparisons in addition to the tornado-related disruption at the general motors production facility in Oklahoma City, we reported the 4% sales increase on the quarter, which was primarily driven by several key factors in our business.

The first is a 6.6% increase in our content per vehicle.

Aided by the continued full ramp up of driveline systems for the DaimlerChrysler Heavy Duty Dodge Ram Pickup and GM'S Hummer 2, both of which are selling well.

Our content per vehicle grew to $1174, up from a little over $1100 in the second quarter last year.

Our major customer gm continues its focus on growing its light truck business as well.

Its light trucks represented more than 60% of the bills in the quarter versus 55% in the second quarter of last year.

Also helping our increased sales growth in the quarter relative to the industry was an increased penetration of four-wheel drive.

All-wheel drive penetration on the vehicles we fly was 61% in the quarter, up from 55% in the second quarter a year ago.

As we look at our six-month performance, seams were up $148 million to almost $1.9 billion.

A 9% increase compared to the first half of last year.

This increase again compares to North American Light Vehicle builds which were down nearly 4% for the first half of 2003, so again, we're outperforming the sector by 13 percentage points.

GM light trucks were actually up 4% for the first six months of the year.

As I mentioned or Dick mentioned earlier, our non-GM sales continue to grow approximating 166 million for the quarter.

As Dick mentioned this is a 76% increase with the non-GM customers.

The Heavy Duty Ram pickup represents a significant portion of that industry as we continue to see the effects of that successful fall 2002 launch.

As a percentage of our total revenue, our non-GM sales increased to 18% for the quarter and for the six-month period as well versus 11% in the second quarter last year.

As we move further down the income statement, our gross margin was an all-time record for the Company for the quarter at 15.1% versus 14.9% versus a strong quarter in 2002.

As we look at that, that's a 20 basis point improvement and as you look at it on an incremental basis, we generated $6.3 million versus last year on $32 million of incremental sales.

Basically translating gross profit incremental gross profit at the rate of 20 cents on the dollar.

For the six months ended June 30th, our gross margin was 15%, up 60 basis points compared to the the 14.4% achieved in the same period last year.

Our strategy of focusing on productivity gains and tight controls on the costs helped offset industry volumes that we're seeing.

We believe these are critical was we continue to drive costs out of the entire value chain.

If you look further down the income statement at the SG&A, the expenses for the quarter were 48.5 million or 5.3%, up $4 million versus last year.

The majority of that increase is R & D related as Dick said R & D spending was up in the quarter in line with our guidance.

On a year to year basis, for the first six months, SG & A was basically flat.

We continue to focus our R & D spending for the driveline system to deliver innovative new products, modules and integrated driveline systems to our customers, spending for the driveline system to deliver innovative new products, modules and integrated driveline systems.

At the operating income level, operating income increased nearly 3% in the quarter to 89.3 million or 9.8% of sales versus 87 million or 9.9% for the second quarter 2002.

For the six-month period, operating income is 185 million was a 16% increase versus the same period last year.

Operating margins increased 9.8% for the first six months of the year.

Again, looking at the incremental sales for the first six months of the year on an operating income basis, we generated an incremental 17 cents on the dollar of operating income.

If you look at our EBITDA margin during the quarter, its with a record 14.3% up from 13.9 in the second quarter last year.

For the six months ended June 30th, our EBITDA margin was 14.1% up over 100 basis points from the 13% we had for the first six months of last year.

We continue to improve at the EBITDA level which gets us closer to the commitment we made two years ago to approach the 15% EBITDA margin level by the end of 2004.

Looking at interest expense for the quarter was 12 million versus 12.2 last year.

The decrease in gross interest expense we see was due to lower average interest rates and lower than average borrowings outstanding during the same period.

This was offset by a reduction in capitalized interests in the quarter related to lower construction and progress veer sus the second quarter last year.

As you know, last year was the year of the launch.

We put a significant amount of capital into use in the third quarter of 2002 versus where we are today.

Our tax rate remains unchanged from the fist quarter and our guidance for the year at the 35% level.

As we've mentioned previously, the reason for the decrease and effective tax rate from last year is do you to realization of state tax credits.

We expect that tax rate to remain at the 35% level throughout the remainder of the year.

Again, at the net income line, growth of over 5% in the quarter and looking at is a percent of sales 5.6% compared to 5.5% last year.

For the first six months of 2003, net income increased 20%.

Again, on a margin basis, net income's at 5.6% of sales compared to 5% of sales in the first half of last year.

This positive margin improvement year-over-year exemplifies our strength and ability to continue to achieve consistent financial results.

As mentioned previously, we reported earnings per share 97 cents versus 92 last year.

For the first six months of this year, our earnings are at $2 a share versus $1.68 last year.

As Dick mentioned earlier in the call, our business was interrupted as a result of a tornado that damaged General Motors production facility in Oklahoma City.

As a result of this temporary shutdown General Motors had, we filed a business interruption insurance claim with the insurance provider and in the quarter we accounted for a $2.5 million deductible on that policy.

That deductible negatively impacted our earnings to the tune of 3 cents a share.

We also continued an early retirement program that we started in the first quarter of 2003 but continue that into the second quarter.

The early retirement program costs in the second quarter were approximately $5 million or again, approximately 6 cents a share impact.

If you combine the negative impact of Oklahoma insurance deductible and early retirement program, it equates to 9 cents a share from an earnings perspective and 80 basis points of margin in the quarter.

Despite the issues in the quarter, those two items, we continue to demonstrate strong financial performance in a tough operating environment again meeting Wall Street's expectations and good margin comparisons on virtually every line of the income statement.

Moving beyond the income statement, our investment grade credit continues to improve.

Net interest coverage at the end of the quarter is almost seven times and trailing 12-month basis or 6.8 times versus 6.4 at the end of 2002.

EBITDA coverage was 10 times on a trailing 12-month basis versus 9.7 at the end of the first quarter and 9.3 at the end of 2002.

Net debt the trailing 12 months leverage ratio was 1.25 times versus 1.5 times at the end of the first quarter and 1.54 at the end of 2002.

These are higher statistics than the credit statistics since you've seen.

We continue to work with the rating agencies in order to secure the investment grade status which will allow us the greater flexibility within our operations and our ability to provide additional shareholder value, which I'm going to talk about in a few minutes.

Let's look at our cash flow performance for the first half of the year.

Cash in the second quarters was a source for $158 million versus 141 million in the second quarter last year.

This represents a 12% improvement in the quarter from a cash flow perspective resulting from higher earnings and improved working capital.

Capital spending in the quarter was relatively flat versus the year over period last year slightly ahead of $50 million.

And again for the first half of 2003 capital spending was $110 million.

As I've mentioned previously this was in line with our guidance as annual capital spending levels have normalized around the 225 to $250 million level.

As a result of the strong cash from operating activities, we generated positive free cash flow of over $100 million in the quarter. $107 million to be exact versus $89 million in the second quarter of last year.

For the first six months of 2003, we've generated nearly $84 million of free cash flow and on a trailing 12-month basis, we generated close to $190 million in free cash flow.

This free cash flow generation allows us to continue to pay down debt in line with our expectations.

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

Our total debt at the end of the second quarter was $670 million, an 85-million reduction versus the end of the first quarter and a reduction of $124 million from where we were second quarter a year ago.

That's about 11% reduction in the quarter, a 16% reduction versus the year earlier period.

Our book equity continues to grow.

It's now over $830 million, up almost $200 million from the $642 million at the end of the second quarter a year ago.

Remember, this Company had only $40 million of book equity in 1998, so basically, our book equity has grown nearly 30% in the last 12 months and over 20 times the level it was since 1998.

Our net debt to capitalization on a book basis continues to improve and is now at 43% for the quarter, solidly below the 50% level and down from the 55% level for the quarter one year.

That's a 10 percentage point reduction.

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

As we previously discussed, we remain on track 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 the current capital structure we have in place and the financial flexibility it provides us.

As of the end of the second quarter, we had total borrowing capacity of over $550 million to our credit facilities and excess cash available.

Our strong and consistent earnings performance continues to result in improvements in our after-tax return on invested capital to our target level of 15%.

As I mentioned in the outset at the end of the second quarter, our after-tax return on invested capital is 15.6% on a trailing 12 month basis, and that's a 50-basis points improvement from just the first quarter of this year and a 90-basis points improvement from the six months ago year 2002.

We expect to remain above this target level 15% for the remainder of the year.

Looking forward to the second half of 2003, we still remain consistent in our outlook for the second half of the year.

And also continuing to watch our customers' schedules.

The analysts' assumption for north American light build in the 2003 range range from 15.4 million to 16 million vehicles even.

Looking at our customer schedules and projected volume and mix, we feel that in North American vehicle-built level is still realistic.

Judging by some of the news that came out this morning, we are seeing some strength coming back into the economy.

We see nothing at this point in the year that would cause us to adjust our guidance of $3.65 a share for the full year.

That full-year guidance again represents an 11% increase versus $3.28 a share we achieved last year excluding the gain from the Detroit Forest fire.

It's slightly higher than the current analyst consensus estimates of $3.54 a share and that's primarily the result of the different market volume assumptions.

So that's a reduction of 3% over last year.

We still intend our earnings to increase over 10%.

Moving from earnings to cash flow, I'll reiterate one more time we are on target to meet or beat our committment to earn over 200 million dollars between 2002 to 2003.

We continue to reduce our outstanding debt and further improve our capital structure.

Our debt to capital structure target of 40% or lower is still our guidance for the back end of the year.

Our strategic direction is clearly focused on creating shareholder value.

We feel our investor grade run rate statistics and continuing efforts to diversify our customer base justifies our rates.

We are currently one notch away from investment grade status after having received two upgrades in the last three years.

Once that upgrade is achieved to investment grades, it will offer the financial flexibility to restructure our existing debt agreements and lower our interest rates.

Additionally it would allow to us consider returning capital well deserved capital to our shareholders via stock buyback and/or dividend payment prompt.

Our first half of 2003 is yet another confirmation of our consistent financial performance and industry leadership.

As Dick said, we continue to differentiate ourselves by bringing the A.M. advantage to our customers through our financial performance and also to our stock holders in our quest to be the best.

Thank you all for your attention and your continued support of American Axel.

Now, I'd like to turn the call back over to Dave Demos for the question and answer period.

Thank you, Robin and thank you, Dick.

We have reserved some time for questions.

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

At this time, I would like to remind everyone if you would like to ask a question, please press star and the number one on your telephone key pad.

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

Your first question comes from Darren S. Kimball of Lehman brothers.

Thank you.

I have a couple of questions.

Let me ask about Three Rivers first.

Can you give a little back round on what prompted the move and what you're doing with the capacity left in Mexico?

Darren, hello, this is Dick Dauch.

Three rivers is one of the original plants we brought into the asset when we traded assets in 1994 and it has an outstanding workforce but the product it had in 1994 was a drive shaft so it's simply a commodity.

As you are globally competitive and react to the customer demands for global pricing, we had to evaluate how to put a more sophisticated product in there.

We put in an axle that was needed, which I've discussed.

We now have the driveline system capability that people are performing flawlessly.

The business is still extremely strong financially and we're utilizing the capacity in both plants.

The Three Rivers operation as well as the [INAUDIBLE] operations very effectively.

And we now have two sorts for drive shaft.

Three Rivers and also Mexico.

We also have three different locations for the 11 1/2 inch axle.

Glasgow Scotland, Mexico as well as Three Rivers.

It gives us great diversity, takes care of our workforce and keeps us competitive.

Okay.

And secondly, I was wondering if you could give a little bit more detail on the early retirement program in terms of the head count you've achieved and what you expect to achieve?

Darren, we prefer not to discuss the head count related to that program, but what we can tell you is financially, we feel that's about a one-year payback for us on those costs.

And certainly helps provide us the flexibility to continue to run our operations.

Darren, that's one of the things that is a good issue when you have a Company with a great productivity system and therefore you can give flexibility for some of your people to opt into early retirement, take a quick hit financially, quick return as Robin just said about a one-year payback.

Okay, let me ask one more and I'll come back into the queue to ask some more.

Can you estimate what the impact of that pickup and four-wheel drive was to the top line in the quarter?

That's a tough one, Darren.

I haven't gone through the math to be honest with you.

We can get back with you on that, Darren.

If you have a phone, I'll have David Demos or Robin call you back yet this afternoon.

Fair enough.

Okay, thank you.

You're welcome.

Thank you, Darren.

Your next question comes from Jon Rogers of Wachovia Securities.

Thank you.

Robin, can you give us a little more color on the insurance receivable?

Should we expect a benefit in the future or did you already get a benefit from the deductible that you paid?

Well, actually, there is no benefit here.

It's a net cost of the Company.

We lost volume.

We had business interruption, Jon, and we've got an insurance contract that covers that additional cost when we loose our business or businesses interrupt us.

So we would have had greater costs in the quart her we not had the insurance.

So what we've done is through an insurance policy, mitigated the significant costs we would have incurred in the quarter related to that lost business or that business interruption, and we've mitigated that down to $2.5 million which is our deductible.

There is no future benefit from an income statement perspective of those costs.

Okay.

That explains it, thank you.

And then, can you give us the working capital component of cash flow, Robin?

I don't have that but we can work through it in the balance sheet.

I'll get back to you on that one as well.

Let me look through the balance sheet.

I'll answer that before we get off the call.

How's that, Jon?

That's perfect.

Then just one more question.

Dick, can you talk a little about the development contracts, maybe the volume and the potential time frame?

And then the last question would be, are the -- if these contracts go to production, are those in the current number, the 750 million that you're quoting right now?

I'll let Pat Lancaster respond to that, Jon.

There's much interest in our all-wheel drive system technology.

We're re outfitting vehicles for valuation by those two OEMs at this point.

They've got to make the decision on whether to go to market with that program so there's a lot of variables here, and the amounts that would be represented by those programs are not included in the amount that we're bidding on.

Jon, I've got that working capital answer for you.

It's approximately $50 million in the quarter.

Okay, great.

Thank you very much.

Thank you, Jon.

Your next question comes from Laura Thurow with Robert W. Baird & Company.

Good afternoon.

Good afternoon, Laura, how are you?

I'm well, thank you.

In terms of the debt reduction that's great job there.

I know you said the target ratio for the year end would be 40%.

What are you looking at as your long-term target area, your optimal leverage?

I think Dick and I have talked about this before publicly.

We believe somewhere in the 30% to 40% range is where you need to be long term.

We're targeting the midpoint of the range right now, 35.

Somewhere in that range depending on market conditions is where we feel we need to be.

And again, our initial target is to try and hit 35%.

Sure.

Okay.

Secondly in terms of the non-GM sales.

I know you said a majority of that is the Ram Heavy Duty axle.

What else is in that number, that 18% of sales?

We've got a number of component programs beyond driveline systems.

We just picked up a nice Ford business that we have and the net shape gears.

Obviously, we have Ford business in that, Mercedes-Benz, DaimlerChrysler and we have 75 other customers other than GM that we're shipping in to.

So that gets to be dozens and dozens of companies that take our product that would be in that 18, almost 19% of business.

Great.

Then lastly on the guidance of 365, I'm assuming that's ta GAAP number and excluding the 9 cents -- I'm sorry, includes the 9 cents impact you had in the quarter from the two special items?

Is that the case?

That's right, Laura.

All we're talking about here is GAAP numbers.

Great, great.

That's all I had.

Thank you.

Thank you, Laura.

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

That's refreshing that you are only talking GAAP numbers.

You're welcome, Ron.

Let me just get the deductible thing out of the way.

I probably just did not understand it but you paid a $2.5 million deductible.

What did you get from the insurance Company?

Let me be clear about this.

We incurred costs in the quarter related to business interruption.

We anticipate getting payment from our insurance Company for those costs we incurred.

Right.

All but $2.5 million.

That is a deductible, therefore we won't get reimbursed by the insurance company for that $2.5 million.

And that's the charge that was reflected in the quarter.

That's equivalent to 3 cents EPS.

Okay.

So did you give a number on how much you think you'll recover?

No, we haven't.

Okay.

And then on the -- it looks to me like, I mean, correct me if I'm wrong but the non-GM business that's coming in is coming, it looks like, at the same variable gross margin as the GM business, for example that was down this quarter.

Does that make sense, that question?

I understand the question, Ron.

As we've said before, we don't discuss the profitability individual of either our products or our customers' programs.

So we feel all our business is profitable.

We like all our customers and we'll just leave it at that.

Ron, we have certain benchmarks that we look at before we contract business with anybody, and let's just say all the business that we have whether it's GM or non-GM is meeting our business requirements.

It sounds like you guys are doing a good job on the launch, I guess.

Are you incurring, it sounds like you have low start up costs on the launch.

Is that fair to say?

We're having an exceptional start off.

As a matter of fact, launch is all but over.

We are off and flying.

Ron, let me remind you, third quarter we had more launches as a Company than any other time and third quarter record earnings last year and margins.

We think one of our differentials for our Company is the way we handle launches as compared to competition and our OEMs enjoy that respect it and almost take it as an expectation.

Okay, good.

Then on capital spending, you suggested that you're at normalized levels.

Should you be at below normalized levels or go below normalized levels given the fact that you've redesigned that all of the gm truck axles are pretty much, you know, done for a little while here?

Absolutely not.

Let's just say that might have be what got this asset in trouble when it wasn't under American Axle's administration.

We will invest always aggressively as needed, balance for both product, process and system.

We have the best product portfolio in the world in our business.

We have the best system and flexibility in our business.

We have the best process to produce that product.

And we will never let it fall back.

We will continually use this effectively to be one of our strengths and differentiates.

Does that basically make the peaks lower too then, Dick, if you don't let the Cap Ex trough, then it won't peak as much?

No, we'll stay in the rain of of $225 to 250 per year as we said.

We'll use it for maintenance as we need and that's the way you pull the levers of art of management.

If we get to a point where GM redesigns all of the axles and I don't know for whatever reason they want to change something, will -- could it go out of that range?

Well, you're into speculation now.

Until I know a long-range product plan and then I know the definition of the product in detail, can't analyze the answer to the question you are asking.

But we have the best learned experience sitting in this room of anybody in the world so whoever does it won't do it as efficient as we do.

Thank you very much.

You're welcome, sir.

Your next question comes from Robert Hinchliffe of UBS Warburg.

Bob, how are you today?

Great.

Good to see you the other day.

Like wise.

On margins, if we back out the insurance and early retirement, you are getting close to the 15% EBITDA margin.

Whereto from here?

That's your target.

Sounds like that's the kind of thing you can exceed going forward, is that right?

As we've said before, we'll be darned happy if we can approach those levels.

There's very few suppliers in this sector that even approach that.

Dick's got his arms up in the air telling me we're going to go higher.

I think we'll be very pleased and proud to be able to hit those levels and maintain them.

This is a tough industry.

This is a tough sector we operate in.

And I think we're pleased to have seen the Company's margins grow from 10% four years ago to the 14% level this year and approaching 15% by next year.

I think that's enough for us to do right now.

Fair enough.

You mentioned, Robin, quite a bit about reaching investment grade credit rating.

What kind of conversations, what gives you some sense of confidence in being able to say you might reach this by year end?

Well, you know, the real confidence I get, Rob, is looking at the statistics.

They are stunning.

If you look at the comps in our peer group that our investment grade and you look at any of our credit statistics, we are either -- have the top statistic in that investment grade peer group or are number two, and, you know, so the statistics are really what gives us the confidence that, you know, obviously we feel we deserve the upgrade.

And you look at the statistics and it's difficult to know the facts.

With regards to the timing, though?

I mean, no doubt the statistics are there.

The timing, I guess, it comes down to the rating agencies.

Well, the timing is when the rating agency decides to take the data and evaluate the trends and make the right decision.

Mm-hmm.

And as Robin said, two of last three years we've had upgrades but 95% of the grades have been downgrade in the auto sector.

Therefore, we probably are an anomaly and it's very difficult for the rating agencies to say how is this happening so rapidly and so quickly?

Well, simply performance.

The data is there.

Revenue is growing top line.

Bottom line is improving.

Margins are improving.

EBITDA ratings are improving.

You just heard different statistics here in the last half hour.

Every one of them are improving.

The data is there on diversity of customer base.

The Cap Ex analysis is there.

You name it, the data, the facts say this is an investment-grade Company.

All right.

Sound goods.

Thanks, everybody.

You're welcome, sir.

Your next question comes from John Casesa of Merrill Lynch.

Hi it's Jackie Weiss.

How are you today?

Good, thank you.

The question I wanted to ask has to do with your GM sales mix.

GM truck production was down around 4% in the quarter and your sales to GM were down roughly that amount.

Can you talk about the mix within those?

I think, Jackie, you're right on.

If you look a at GM light truck production in the quarter, our GM sales pretty much mirrored that production mix.

Obviously, we're very happy about the Hummer program that's doing very well in the quarter, but yeah, you've got the call right.

If you look at the data, we're pretty much matching from a mix perspective which is different from last year.

Remember the big mix shift we had in the mid sized SUV, but from a mix perspective, we're consistent with GM production right now.

Jackie, if you look at the overall market in North America, if you take passenger car, the growth is in luxury passenger car.

If you look at truck, it's in pricing trucks, which impacts the GM-800 SUV's.

It impacts the brand Hummer and that nice for American Axle.

You've seen our content per vehicle.

So that's what drives it.

And Dick it's John Casesa, following up on that, does the mix get better for you or worse say 800 versus 360 or Hummer versus the others.

John,it's good to talk to you and that's an excellent question.

We're right on top of it.

And the mix continues to enrich slightly.

So all things being equal, the GM revenues should be better than even the production chains.

Slightly, John.

Okay, I don't want to push it too far.

Do you have a follow-up, Jackie?

Yes, do you expect early retirement costs next quarter or the one after?

At this point in time, we have no further plans that we're open to discuss.

Okay.

Thank you very much.

Thank you, Jackie, and thank you.

Thanks.

Your next question comes from Chris Tarosso of Credit Suisse First Boston.

Hi, guys.

Congratulations, by the way, Chris.

Thanks, Robin.

You mentioned the schedule for trucks is up 1%.

Is that consistent with the schedules that you are seeing or are you using something maybe a little more conservative for your guidance for the year?

Chris, we're not going to say anything other than what our customer is saying publicly and what's respected our schedules for the quarter.

Okay, fair enough.

Now, you sart of cut the new business that you are bidding on a number of different ways, overseas, non-GM.

Can you tell us how much is nontraditional business or business in the four-wheel drive, all-wheel drive or independent rear drive area?

I don't think we can do that, Chris.

We've cut it up and carved the melon about nine different ways, but that is a didn't way to carve it.

Whether it's European, North American, General Motors, Ford, Transplants, World Programs, whatever we've carved it all those different ways.

But to come that way, no, we have not.

I think Dick did mention earlier, though, that seven different programs that were currently actively working on in different phases.

So that gives you a sense of the activity level we have.

In the all-wheel drive portion of the market.

Okay.

Then the last question, I apologize if I don't understand this, but on the insurance, is there any clause in there that you have to pay of that back to the extent that you recover the lost volume on those three 70s?

That's a great question, Chris, and that's exactly right.

There is a mitigation impact here.

And we will need to look at the impact that this business interruption had for the Company over an extended period of time.

But we feel the accounting treatment we took in the quarter reflected our current view of that situation.

Okay.

Thank you very much.

Thank you, Chris.

Your next question comes from Richard Hilgert from Fahnestock Company.

Good afternoon, guys.

Richard, how are you?

Good, thank you.

Just to tack on, isn't there a lot of negotiating room involved in the process when you are talking about whether or not you recouped some volumes or not?

Maybe you know something we don't, Richard.

There's a program from each OEM comes to us.

We usually look at it from a 16-week window.

We're on it, as I told John Casesa earlier, mix may be slightly enriched.

All we have to do is execute it as you put it together.

Yeah, so if the unit volumes, you know, you could easily say, well, the unit volumes would have been this way in this quarter anyway.

We're not really recouping any unit volumes here.

Right?

Richard, I hope you're not working for the insurance Company right now, but I mean, you're asking us some questions that basically, you know, we're not going to -- we don't want to discuss this over the --

That would be to your benefit, though.

Yeah, let's just suffice it to say, Richard, we took accounting treatment in the quarter in consideration with what our external auditors view.

The accounting treatment was and also in with in depth discussions of the insurance company and accountant the insurance company hired to review this claim.

Okay, thanks.

On the remaining debt that you have, if we see a pickup in interest rates, is there much impact on the remaining debt?

How much is variable?

How much is fixed?

If you look at our debt structure today, Richard, we've got approximately $300 million of nine and three-quarters note.

That is fixed rate financing.

The rest of our debt is primarily floating rate.

And that's what, tied to LIBOR?

Yes, LIBOR or CP.

Okay.

Had lastly, you are in the process of changing over of wet cut to dry cut on the rain gear process here in Detroit.

I wonder where you stand on that change over?

We're in extremely good shape on that.

I'll have Joel give you some information in a second, but maybe many people on this call would not know what you are talking about.

Conventional gear cutting or gear generation was done on a five-cut process for opinion and the ring.

We have gone to a two-cut process and we've gone from a wet cut from oil to coolant to dry.

We are having dramatically excellent performance and Joel will now give you specifics he'd like to share at this time.

Hi, Richard, how are you doing?

Hey, how are you doing, Joel?

Good.

Richard, we've got two phases left to finish the project here for the Company.

This fall will be in the range of 75 to 80% and by next early summer, we'll have the whole Company converted to dry cut.

Okay.

Thanks, Joel.

Yep.

Thank you, Richard.p

Your next question comes from Charles Brady of Credit Lyonnais Securities.

Hello, guys?

How are you today?

Very good.

And yourself.

We'll have a disturbance on this call.

Maybe you can't hear it but I can.

It may be your line, I don't know, but I'm trying to listen to you.

I just had two quick ones as most have been answered.

One, I was interested if there was any significance to the rise in your cash balance?

And I feel obligated to take a whack at this horse myself.

I'm just wondering how the recovered funds will be accounted for?

Let me answer the cash balance question first.

The reason we have our building a cash balance at this point in time, we have no short-term debt to repay.

Anything we would have repaid at the end of the quarter we would have lost the commitment on, so therefore,hat's sitting on the balance sheet as we continue to review our options with the strong cash flow we'll be generating the last half of the year.

The second part of your question was related again to --

To the Insurance.

The recovered funds how had it will be accounted for?

The recovered funds we get from the insurance company will cover the costs we incurred from the second quarter as a result of not being able to ship product to General Motors, Oklahoma City facility that we'd otherwise had planned to ship.

Does that answer your question?

That'll do for now.

I'll get back to you later.

Thank you, Chuck.

Lynn, we have time for one more question.

Thank you, gentlemen.

Your last question comes from Mike Bruynesteyn from Prudential.

Could you clarify the breakup between the content per vehicle on existing programs versus new programs?

You know, Mike, we do that calculation based on vehicles, all vehicles and do not separate it versus new versus existing programs.

So we don't have that data and we don't track it that way.

The important thing for us is the vehicles that we provide content product to regardless of whether they are new or old have more content than the other vehicles we are providing to.

The other thing, as long as I've got a second here, let me answer the Jon Rogers's question with respect to how much increase was related to the increase of four-wheel drive.

Same thing, we don't keep our data in that method.

But you can take our total sales from the second quarter last year, divide by 1.51, which was the or five whatever the penetration rate for four-wheel drive was last year, multiply it times 1.61, the penetration rate for the second quarter this year and 'll come up with the difference.

It's not going to be accurate to the dollar, but directionally it will give you some indication.

Sorry, Mike if you had another question.

I didn't mean to jump in.

I guess what I'm trying to get at here is more qualitatively where the greatest opportunities lie, is it with new programs or is there a lot more where you've got your foot in the door and you can boost your content on programs that you are already on as they, you know, get redesigned or cost saving programs go in place?

Mike, they are both very, very lucrative fields.

The present field will always have engineering.

Therefore, price ability, whatever.

New programs as the Dodge Ram attested are always welcome.

The Hummer program always welcome.

So both are fertile fields for us.

Thanks a lot.

Thank you, Mike, have a great day.

Okay, thank you, Lynn.

We thank all of you for participating in the call and appreciate your interest in American Axle.

We look forward to talking to you in the future.

Have a great day.

Bye now.

This concludes today's American Axle & Manufacturing Holdings second quarter of 2003 conference call.

You may now disconnect.