American Axle & Manufacturing Holdings Inc (AXL) 2003 Q3 法說會逐字稿

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  • Operator

  • Good morning.

  • My name is Janice, and I will be your conference facilitator today.

  • At this time, I would like to welcome everyone to the American Axle and Manufacturing third-quarter 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. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded.

  • I would now like to turn the call over to Mr. Rick Dauch, Vice President of Investor Relations.

  • Rick Dauch - VP, Investor Relations

  • Thank you, Janice, and good morning everyone.

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

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

  • As required by SEC rules, we have furnished a copy of this released to the SEC under our 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 PRNewswire services.

  • For your convenience, a replay of this call will also be available beginning at 5 PM Eastern Standard Time today through 5 PM Eastern Standard Time November 6, 2003 by calling 1-800-642-1687 from the United States.

  • When prompted, callers should enter reservation number 2706455.

  • 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, our Co-Founder, Chairman, and CEO, who will discuss some of the highlights of today's release, followed by Robin Adams, our Executive Vice President, 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 his conference call may contain comments and forward-looking statements based on current plans, expectations, events and financial and industry trends which may impact or affect the company's future operating results and financial position.

  • Within the meanings 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 companies filing 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 analysis, 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 a reconciliation of these non-GAAP measures his GAAP financial information, is available on the AAM.com web site on the Investor link.

  • I would also like to thank Dominic Martilotti of Bear Stearns for picking up coverage of AAM in the quarter.

  • We now have 12 analysts covering our company, and I would like to thank each of the analysts for their efforts in covering AAM.

  • Before we begin, let me also mention we will be attending the Gabelli Automotive Aftermarket Symposium in Las Vegas, Nevada on November 5th; the Robert Baird Industrial Technology Conference in Chicago, Illinois on November 12th; and the Morgan Stanley Executive Conference in Scottsdale, Arizona on November 18th.

  • We hope to see many of you there.

  • Also, we are currently finalizing schedules for routine marketing visits (ph) to San Francisco, Toronto, New York, Boston, and other locations.

  • Please feel free to let us know if you're interested in meeting with us.

  • In addition, we are 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, AAM's Co-Founder, Chairman and CEO.

  • Dick Dauch - Chairman, Chief Executive Officer

  • Thank you, Rick, and good morning, everyone.

  • We thank you for joining us today to discuss American Axle's financial results for the third quarter of the year 2003.

  • In addition to Robin Adams, our Executive Vice President and Chief Financial Officer, I'm pleased to be joined today with Joel Robinson, our President and Chief Operating Officer.

  • I'm very pleased to report record diluted earnings per share for the third quarter of 71 cents per share.

  • We achieved these results despite reduced industry production levels.

  • Our company delivered earnings which began -- again exceeded the analyst consensus assessments for the quarter.

  • This has 19 straight quarters since AAM became a public company that we have delivered strong earnings performance that has met or exceeded Wall Street expectations.

  • In addition, I'm also pleased to report that our financial performance for the quarter allowed us to achieve one of our key financial targets three months early -- a reduction of our net debt to capital ratio below 40 percent to 38.6 percent.

  • AAM is very proud of these achievements, and as Robin will discuss later in the call, it further solidifies our already investment-grade credit statistics.

  • Looking at production for the third quarter of 2003 versus the third quarter of 2002 from an industry perspective, North American light vehicle production was down an estimated 5 percent for the quarter, with passenger car production down 10 percent and light truck production down 1 percent for the quarter.

  • General Motors' light truck production was up 2.2 percent.

  • Despite these anticipated lower industry production levels, AAM continues to achieve record financial performance.

  • Our sales of $868 million were a third quarter record, up nearly 5 percent versus last year.

  • These record sales levels were driven by increases in our content per vehicle.

  • Additionally, we continue to benefit from strong production of GM's full-size and midsized pickup and SUV programs, along with the heavy-duty Dodge Ram program.

  • Our sales to non-GM customers continue to increase, up $19 million or nearly 13 percent in the third quarter of 2003 versus the same period in 2002.

  • Additionally, our non-GM sales now represent over 19 percent of our total sales in the quarter, as compared to 17.9 percent in the third quarter of 2002.

  • Our sales and earnings growth continues to be fueled by our intense focus on advanced technology products.

  • We have increased our R&D spending by over 14 percent year-over-year in order to continue to enhance our current product portfolio and to target profitable growth opportunities and segments with new sophisticated products in the marketplace.

  • Our focus on innovative R&D helped us recently win more new business awards, which will generate more than $40 million in revenue annually starting in 2004 and 5.

  • These awards include a new driveline systems contract and our first production order for the patented SmartBar technology.

  • We also earned a key new business award for critical transmission components for a U.S.-based OEM.

  • With these new awards, our gross new business backlog is now approximately $956 million for the 2003 through 2006 period.

  • Our net new business backlog has increased from $441 million to $481 million through 2006.

  • We are quoting new business opportunities totaling approximately $800 million, with approximately 80 percent of this activity outside of the General Motors Corporation.

  • Additionally, of 800 million in quote activity, 40 percent represents foreign or transplant OEM opportunity, and approximately 55 percent is directed at passenger car application and crossover vehicles.

  • Production timing for these potential programs ranges from 2005 to 2007, and we continue to expect the OEMs and other customers to make sourcing decisions on about 10 to 25 percent of this business by the end of this year.

  • To compete and also win new business, we continue to develop new exciting products which include the following -- our state-of-the-art assembly-friendly I-Ride chassis modules; also AAM's independent rear-drive PowerLite axles;

  • AAM's power transfer units, better known as PTUs and systems;

  • AAM's TracRite traction-enhancing differentials with electronic locking mechanisms; and, as I discussed, our SmartBar electronic stabilizer systems.

  • As mentioned in our previous call, we continue to be on track with a conversion of at least seven vehicles from OEMs in North America, South America, and Europe in order to demonstrate AAM's latest all-wheel drive, independent rear-wheel-drive, and full systems and module integration capability and technology.

  • AAM is moving forward with the two awarded development contracts for front-wheel-drive-based all-wheel drive systems.

  • These vehicles are currently being evaluated by the OEM customers, and as we stated in last quarter's call, we are guaranteed the production contracts for the two all-wheel drive systems should the OEMs go to market with those vehicles.

  • Our commitment to R&D goes beyond the development of new products.

  • We recently announced the second major expansion of our technical center in Rochester Hills, Michigan.

  • The expansion will incorporate a state-of-the-art road load simulator, which will be used to test and validate chassis and module assemblies and components.

  • In addition, the expanded technical center will provide both increased capability for future product requirements as well as a 25 percent increase in testing capacity on our critical axle and chassis dynamometers.

  • These investments will allow us to expand our testing capability and significantly reduce the time it takes to bring our new products to market.

  • This expansion of our technical center reinforces our focus on providing our customers with high technology, validation testing, and proven driveline systems and other new products designed for manufacturability and durability, as well as developed to meet our customers' current and future needs while enhancing their time-to-market.

  • It is this focus on R&D that we have had for 10 straight years, and AAM's proactive approach to meeting marketplace and customer needs that has allowed us to generate over 80 percent of our sales from new products introduced since mid-1998.

  • Our strong financial performance and our ability to win new business is driven by our innovative technology, creative product packaging, and our continued strong operational focus.

  • We continue to perform to world-class standards operationally.

  • It is the focused, consistent implementation of the AAM manufacturing system tools, including Shainin and "Six-Sigma" techniques, that have made us an industry leader in quality, warranty performance, reliability, delivery, service, and packageability.

  • We continue to establish new benchmark levels of quality.

  • AAM currently has a six-month rolling average of 17 discrepant parts per million as of September 30, 2003, as measured and reported by our customers.

  • As far as dependable, on-time delivery, to date, AAM has shipped on-time every time from March 1, '94 over 35 million driveline and axle systems; over 30 million driveshafts; over 900 million forged products since the company was formed.

  • We are shipping nearly 20,000 complete driveline systems daily, including 600,000 forging and machine components every day, with never a missed delivery.

  • In addition to improving shareholder value, AAM has also undertaken efforts this past quarter to protect and ensure that all AAM stockholders receive fair and equal treatment in the event of any proposed takeover of the company by adopting a stockholder rights plan.

  • Our adoption of this plan will also provide a sound and reasonable means of safeguarding the interests of our stockholders should an effort be made to acquire the company at a price that is not reflective of its fair value.

  • As many of you know, on October 2, 2003, our important partner Blackstone continued its planned orderly exit strategy of its investment in AAM by pricing a secondary offering.

  • Under this offering, including the overallotment, Blackstone successfully sold 7.5 million shares of common stock.

  • After sponsoring AAM's recapitalization in 1997 with an ownership approaching 82 percent, Blackstone has now strategically reduced their position in the company to approximately 12 percent.

  • I would like to take this time to welcome any new shareholders that purchased shares under this offering, and on behalf of AAM, would like to thank them for their strong commitment to AAM.

  • Looking ahead to the remainder of 2003, we are successfully and anonymously launching our products to the all new GM midsize GMC Canyon and Chevrolet Colorado pickup, which GM builds in their Shreveport, Louisiana assembly plant.

  • The AAM driveline system for these all-new and exciting vehicles incorporate newly designed front axles and AAM's state-of-the-art rear-axle design.

  • Both systems feature AAM PowerLite aluminum housing and PowerDense gear technology.

  • The related production, logistics, and supplier involvement for the program are engaging AAM associates throughout the world.

  • Let me give you a quick review of why I say that.

  • Our facilities in Tonawanda and Cheektowaga, New York, are forging and machining the differential and ring gears.

  • Our manufacturing facility in Ohio, Colfor Manufacturing, is forging and machining pinions and clutch gears.

  • AAM Bill (ph) -- Brazil and South America is manufacturing various components for the front axle, such as a differential case and carrier housings.

  • Buffalo Gear and Axle is machining the differential gears, axle shafts, and gears sets, as well as assembling the rear axle.

  • And finally, our facilities in Guanajuato, Mexico are forging and manufacturing certain gears and components and assembling the independent front four-wheel-drive axle shipped directly to Louisiana.

  • It is our unique and disciplined program management capability that has allowed us to remain on schedule and to launch anonymously this product as well as all other products as we launch flawlessly to support our customers and their facilities throughout the world.

  • While 2003 continues to offer us challenges, as the economy slowly recovers, our team is dedicated to achieving our objectives and goals for the year, including again a full-year 2003 earnings guidance of $3.65 per share.

  • This morning, we released guidance for 2004.

  • Our strong financial performance is projected to continue in 2004, with an earnings growth target of $4 per share, excluding the impact of one-time debt refinancing costs.

  • We are also targeting free cash flow in excess of $200 million, and a continued reduction of our debt to capital ratio to below 25 percent in year 2004.

  • Robin will discuss that in greater detail.

  • Make no mistakes, ladies and gentlemen.

  • The outlook for AAM is strong.

  • We have no intention of slowing down.

  • We will accelerate our performance in 2004 and beyond.

  • We're committed to further increasing shareholder value by focusing on the following.

  • First, continue our efforts with R&D to develop and deliver new, innovative, creative products to the marketplace, such as PTUs, chassis modules, all-wheel driveline systems, and electronic differentials.

  • Secondly, to maintain our world-class operational discipline of quality, warranty performance, etc.

  • Third, consistently delivering outstanding financial performance.

  • Fourth, to generate strong positive cash flow.

  • And fifth, to look for strategic opportunities to profitably growth AAM and continue the diversification of our customer base, expanding our product portfolio, and selectively expanding our global footprint.

  • Through these efforts, we will position AAM to provide returns to our valued shareholders and to fund our strategic growth initiatives.

  • I thank you, ladies and gentlemen, for your attention today, your interest and support of AAM.

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

  • Robin?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Thank you, Dick.

  • As you all heard, we achieved record third-quarter earnings results of 71 cents a share in the quarter, versus 70 cents reported in the third quarter last year.

  • And let me give you some of the highlights of that performance.

  • We achieved record third quarter earnings of $39 million, an increase of 6 percent versus last year's third-quarter.

  • We had record third-quarter sales, as Dick already mentioned, of 868 million, an increase of nearly 5 percent.

  • We continued to diversify our customer base, with non-GM sales representing 50 percent of our sales growth in the quarter.

  • We have significantly improved our generation of free cash flow, improving to $70 million this quarter versus 2.5 million in the third quarter of 2002.

  • We reduced our net debt to capital ratio below 40 percent three months earlier than we had targeted to 38.6 percent versus the 50.7 percent at the end of 2002.

  • And we continue to provide significant after-tax returns on invested capital by maintaining our after-tax ROIC above the 15 percent level, achieving 15.4 percent on a trailing 12-month basis.

  • As you can see, despite what's typically a lean third quarter for the industry, our financial results continue to be on target with our communicated goal and our strategies.

  • Now I would like to review the company's strong financial performance in a little bit more detail.

  • Again, our sales levels were a third quarter record -- up 39 million or nearly 5 percent to $868 million for the quarter.

  • And as Dick mentioned, this compares to North American light vehicle builds which was down an estimated 5 percent in the quarter.

  • So our sales growth continues to outperform the general industry growth rates, outperforming it by 10 percentage points in the third quarter of this year.

  • The increase in sales in the quarter was primarily driven by several key factors in our business.

  • A little over 3 percent increase in content per vehicle to $1,174 per unit, aided by the continued full ramp up effect of AAM driveline systems for the DaimlerChrysler heavy-duty Dodge ram pickup, and increases in the production of GM's full-size pickup and SUV programs.

  • Our non-GM sales continue to grow, as I mentioned, increasing 13 percent in the quarter to $167 million.

  • As a percentage of our total revenue, our non-GM sales now represent 19 percent of sales in the quarter and 18 percent through the first nine months of 2003.

  • We expect our percentage of non-GM sales for the year will remain pretty much at these levels.

  • We also continue to benefit from General Motors' focus on maintaining a strong market share presence in its light truck business.

  • Light trucks represented more than 60 percent of General Motors builds in the quarter versus 56 percent in the third quarter of last year.

  • In addition, the four-wheel-drive and all-wheel-drive penetration rate on the vehicles we supply continues to increase at 61 percent in the quarter versus 57 percent in the third quarter last year.

  • For the first nine months of this year, sales were up $187 million to almost 2.8 billion, which is a 7 percent increase compared to the first nine months of last year.

  • This 7 percent increase again compares to North American light vehicle and GM builds, both of which were down 4 percent for the first nine months year.

  • Moving down a little farther in the income statement, gross margin for the quarter was 13.8 percent versus 13.6 last year.

  • This is a 20 basis point improvement quarter-over-quarter.

  • And we generated an incremental 18 cents of gross profit for every incremental sales dollar we generated versus last year.

  • For the first nine months of this year, gross margin was 14.6 percent, up 50 basis points compared to the 14.1 percent achieved in the same period last year.

  • Again, this represents 21 cents of incremental gross profit for every incremental sales dollar versus last year.

  • Selling, general, and admin expenses, or SG&A, for the quarter were 49.7 million, and pretty much in line with the first and second quarters of this year.

  • The $6 million increase in SG&A versus last year in the quarter is attributable to increased insurance costs and a $2.3 million or 17 percent increase in R&D spending.

  • For the nine months of this year, SG&A costs were at 5.3 percent of sales versus 5.2 percent in 2002, with the higher overall spending levels year-over-year driven by a $6 million increase in R&D spending.

  • You know, as Dick mentioned earlier, the increase in R&D spending really reflects our commitment to support our customers' needs as well as target key growth segments of the driveline systems market.

  • Dropping down to operating income -- increased 1.5 percent in the quarter to $69.7 million or 8 percent of sales versus 68.7 or 8.3 percent of sales in the third-quarter last year.

  • The results of the quarter this year include a $3.4 million charge -- or 4 cents a share -- associated with salary workforce adjustments to meet our current business conditions.

  • We also incurred costs related to the Northeast power outage that occurred in August, and that affected our operating facilities in Detroit.

  • The costs incurred related to the power outage were approximately $2.1 million or 3 cents a share in the quarter.

  • The combined negative impact of these one-time items affected our operating income by $5.5 million, and that is approximately 70 basis points in operating margin and 7 cents a share in the quarter.

  • For the nine-month period, operating income was $255 million, a 12 percent increase versus the same period last year.

  • Operating margins increased 9.2 percent versus 8.9 percent in the first nine months of last year.

  • And on an incremental basis, we generated 14 cents of incremental operating income for every incremental sales dollar.

  • Our EBITDA margin in the quarter was 12.8 percent, slightly down from the 13.1 in the third quarter of last year.

  • And as mentioned earlier, the one-time items in the quarter affected our EBITDA margins as well by 70 basis points.

  • For the nine months ended September 30, 2003 EBITDA margins was 13.7 percent, up 60 basis points from last year's 13.1 percent.

  • We continue to show margin improvements at the EBITDA level, which gets us closer and closer to the commitment we made to approach the 15 percent margin level by the end of 2004.

  • Further down the income statement, net interest expense for the quarter was a little over $11 million versus a little over 13 in the third quarter of 2002.

  • The decrease in interest expense was due to lower average interest rates and effect, as well as the strong cash flow used to pay down debt in the quarter.

  • For the quarter, our tax rate continues to be at the 35 percent level, and this compares to 36 percent last year in the quarter.

  • As we've previously mentioned, the decrease in our effective tax rate in 2003 was primarily due to the realization of state tax credits.

  • The impact of this reduction in tax rate benefited us by about 1 cents a share in the quarter.

  • We expect the tax rate to remain at the 35 percent level throughout the remainder of the year and into next year.

  • Net income increased approximately 6 percent in the quarter to $38.7 million, representing 4.5 percent of sales versus 4.4 percent of sales in the third quarter last year.

  • An increased in shares outstanding due to stock option exercises reduced that 6 percent year-over-year third-quarter earnings growth by about 3 cents a share.

  • And as mentioned previously, reported earnings per share for the quarter or 71 cents versus 70 cents last year -- and again, was negatively impacted by 7 cents from the salary workforce adjustments and power outage costs we incurred in the quarter.

  • For the first nine months of 2003, net income increased 16 percent to $143.7 million.

  • As a percent of sales, that's 5.2 percent compared to 4.8 percent sales in the same period last year.

  • The positive margin improvement year-over-year exemplifies our strength and our continued ability to achieve consistent financial results.

  • As a result of the earnings performance, our earnings per share for the first nine months this year with $2.71, up 13 percent from the $2.39 a share we earned last year in the first nine months.

  • Moving on to our credit statistics.

  • Our investment-grade credit profile continues to improve.

  • Net interest coverage at the end of the quarter was 7.1 times on a trailing twelve-month basis versus 6.4 times at the end of 2002.

  • EBITDA coverage was up over ten times in the quarter on a trailing twelve-month basis versus 9.3 times at the end of 2002.

  • Our net debt to trailing twelve-month EBITDA leverage ratio at the end of the quarter was a little over 1 versus 1-and-a-quarter times at the end of the second quarter and 1.5 times at the end of the 2002.

  • And these are certainly higher than traditional investment-grade credit statistics for these metrics.

  • Now let's look at our cash flow performance for the quarter and for the first nine months of the year, which continues to be strong.

  • Cash provided by operating activities in the third quarter of 2003 was a source of approximately $132 million, an increase of almost $90 million versus the third quarter of last year.

  • Working capital reductions in accounts receivable of $50 million and inventory of $25 million accounted for a significant portion of the increase, and was due primarily to relative business volumes for June and September in 2003 versus 2002.

  • Capital spending for the quarter was $62.5 million versus a little over $41 million in the year earlier period, and for the first nine months of 2003, capital spending was approximately $173 million.

  • And this spending is in line with our guidance, as we expect it to approach a more normalized capital spending level of $250 million for the full-year 2003.

  • The net result was we generated positive free cash flow of approximately $70 million for the quarter versus 2.5 million in the third quarter of 2002.

  • For the first nine months of 2003, we've generated $153 million in free cash flow and on a trailing twelve-month basis, we've generated over $250 million of positive free cash flow.

  • This free cash flow allowed us to continued to pay down debt ahead of our forecast and improve our capital structure or our debt to capital ratio.

  • Now let's take a minute to focus on our debt to capital ratio.

  • Our total debt at the end of the third quarter was $573 million, almost $100 million reduction versus the 670 million at the end of the second quarter 2003, and a reduction of $160 million versus the 734 million at the end of 2002 -- and that's nearly a 22 percent reduction in the last nine months and a 14 percent reduction in just the last quarter.

  • Our book equity continues to grow rapidly.

  • It is now over $880 million, up over 180 million from the 704 million at the end of 2002.

  • Remember, this company had only $40 million in book equity at the end of 1998 -- and that's just less than six years ago.

  • Basically, our book equity has grown 26 percent just this year alone, and over 20 times the level it was since end of 1998.

  • Our net debt to capital on a book basis continues to improve dramatically.

  • As we previously discussed, we had targeted to reduce our net debt to capital ratio to below 40 percent by the end of 2003 -- and we put this guidance out in the middle of 2001, by the way.

  • At 38.6 percent for the quarter, we have achieved this key financial target three months early.

  • This clearly has pushed us into investment-grade territory on this key financial metric.

  • And we expect to grow to continue to grow our equity base through strong earnings performance in the future while continuing to reduce our debt levels through the generation of free cash flow.

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

  • At the end of the third quarter, AAM has total available borrowing capacity of over $550 million for our existing credit facilities and excess cash.

  • Our strong and consistent earnings performance continues to result in our ability to sustain an after-tax return on invested capital above our target level of 15 percent and significantly above our peer group.

  • At the end of the third quarter, our after-tax return on invested capital on a trailing twelve-month basis was 15.4 percent, up 70 basis points from the end of 2002, and we expect to maintain this performance for the remainder of the year and into 2004.

  • Looking at the remainder of 2003, our outlook for the balance of the year is consistent with the guidance we have been giving since January earlier in the year.

  • We continue to closely monitor our customer schedules.

  • However, we feel that a North American vehicle build of approximately 16 million vehicles is still realistic for 2003.

  • And as Dick mentioned earlier, our guidance of $3.65 a share for the full year 2003 remains unchanged.

  • Our full year guidance, which represents 11 percent increase versus a $3.28 cents we earned last year, excluding the one-time Detroit forge fire gain (ph), is also slightly higher than the current analyst consensus estimate, which is $3.60 a share for the year -- and I would expect that to inch up a little bit after this call.

  • Moving from earnings to cash flow, I'll reiterate that AAM is on target to meet or beat our positive free cash flow commitment of over $200 million for 2003.

  • And again, we will continue to use our free cash flow to reduce outstanding debt and further improve our investment-grade capital structure in the short-term.

  • Our strategic direction is clearly focused on creating long-term stockholder value.

  • And we are working diligently with the rating agencies, and feel that our investment-grade financial statistics, the consistency of our financial performance, the strong backlog of business we have, and our continuing efforts to diversify our customer base justify an investment-grade credit rating.

  • Once achieved, it will offer us the financial flexibility to restructure our existing debt agreements, reduce our borrowing rates, and provide us more flexibility to profitably grow our business.

  • Additionally, it will allow us to consider returning capital to our shareholders via stock repurchase program and/or a dividend payment.

  • Now, turning to our expectations for 2004.

  • As Dick already mentioned, we issued a press release this morning announcing that we expect earnings to be approximately $4 per share in 2004.

  • Now, this excludes the impact of expected one-time debt refinancing costs of approximately $22 million or 22 cents -- 26 cents per share which will be required for us to restructure our debt portfolio.

  • The $4 per share reflects a projected earnings growth rate of approximately 10 percent, and is 13 cents higher than the current analyst consensus estimates for American Axle for 2004.

  • Our outlook for 2004 is based on a North American light vehicle build assumption of approximately 16.3 million vehicles.

  • While this represents a slight increase when compared to the expected build for 2003, we anticipate that changes in product mix, resulting in a slight reduction in our content per vehicle, will offset net new business growth of approximately $100 million.

  • A continued focus on productivity will help us reach our target of approaching the 15 percent EBITDA margin level by the end of 2004.

  • Also in 2004, we expect to continue our generation of positive free cash flow of at least $200 billion, while investing $260 million in capital spending.

  • A strong earnings growth and positive free cash flow generation will allow us to further improve our net debt to capital ratio to below 25 percent, and will put our financial metrics in line with single-A rated auto suppliers.

  • We are looking forward to the year 2004 as the year we refinance the debt portion of our capital structure and return capital (ph) to our shareholders, while positioning AAM financially to pursue continued, strategic growth initiatives.

  • Let me stop there on the financials and turn the call back over to Rick for the question-and-answer period.

  • Rick Dauch - VP, Investor Relations

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

  • We have reserved time to take questions, so at this time, please feel free to proceed with any questions you may have.

  • Operator

  • (OPERATOR INSTRUCTIONS) Steve Girsky, Morgan Stanley.

  • Steve Girsky - Analyst

  • Can you hear me?

  • Just a couple of quick questions.

  • Your UAW negotiations start when?

  • Dick Dauch - Chairman, Chief Executive Officer

  • We will be starting negotiations with the UAW in the month of November.

  • Steve Girsky - Analyst

  • And so the contract expires --

  • Dick Dauch - Chairman, Chief Executive Officer

  • February 25, 2004.

  • Steve Girsky - Analyst

  • Okay, so any priorities or any issues there?

  • Dick Dauch - Chairman, Chief Executive Officer

  • Well, I think the important thing, Steve, is to analyze that we've been an independent auto supplier for nearly ten years, working with one of our stakeholders -- that being our unions, UAW and IAM.

  • We have an excellent relationship with them; we work cooperatively together to address issues.

  • We feel that's the exact approach we will have this particular time, and as we get into that negotiations, it will be a process of review.

  • Steve Girsky - Analyst

  • Right.

  • And can you -- this Canyon and Colorado -- could you guys refresh my memory -- is the content per unit higher on that one than on the S-10?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Yes it is, Steve.

  • It incorporates our new PowerLite rear axles.

  • Steve Girsky - Analyst

  • So -- materially higher or no?

  • You're saying the revenues are going to be weaker next year, relatively speaking, because there's going to be a mix shift sort of down towards that end away from the higher pickups, right?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Yes.

  • You know, the mix shift, Steve -- if you think about what's going on, GM's launching their new midsize pickups, as you point out -- the Canyon and Colorado.

  • They're launching the new Envoy XUV right now, and then they've got a Buick Rainier -- all three new products in the midsize area.

  • And we expect to see growth for those products, as well as increased penetration of four-wheel-drive on some of those products.

  • Steve Girsky - Analyst

  • Right.

  • And could do just talk, Dick, to the philosophy toward acquisitions here?

  • You had a few sort of early on a few years ago.

  • You haven't had that many in a while.

  • Anything you're thinking of in that regard?

  • Dick Dauch - Chairman, Chief Executive Officer

  • Well, first of all, as you know,, the whole company was created by acquisition strategy.

  • And then we took about four years to settle our company to resolve the issues of what we purchased.

  • And then in '98, '99, and 2000, we had three other strategic acquisitions.

  • They're all working out very well for us.

  • And if I had something else to announce today, I'd tell you, but I don't.

  • We are always open-minded as it relates to those kinds of opportunities, and I will simply say that there's a couple of things that are exciting, but nothing to announce right now,

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Let me add this, Steve -- as we look at our current capital structure, we think we're better positioned than just about any other supplier in the industry to be able to take advantage of any opportunities in the marketplace.

  • Steve Girsky - Analyst

  • Right.

  • But your investment-grade writing is important to you?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Yes, it is.

  • Dick Dauch - Chairman, Chief Executive Officer

  • It's very important to us.

  • And we've earned it.

  • It's a matter of when we get it.

  • Steve Girsky - Analyst

  • So you wouldn't sacrifice --

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • We will not sacrifice.

  • Steve Girsky - Analyst

  • -- a great rating for an acquisition?

  • Dick Dauch - Chairman, Chief Executive Officer

  • We will not sacrifice that for an acquisition. (multiple speakers) can probably handle both if we need to.

  • Operator

  • Jon Rogers, Wachovia Securities.

  • Jon Rogers - Analyst

  • Robin, I just have a couple questions on the guidance for next year.

  • Can you give us your D&A assumptions for the free cash flow?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • We're looking D&A at slightly below 170 million.

  • Jon Rogers - Analyst

  • Okay, and that -- the 25 percent -- that's a net number.

  • But in terms of your optimal capital structure, you don't want to go that low in terms of debt to total cap -- is that true?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • You know, as we have said before, we think the ideal range for the company is anywhere from 30 to 40 percent.

  • And obviously, the momentum of all this free cash flow and the strong earnings growth could, by the end of next year, put us below 25 percent without any other strategic initiatives by the company.

  • Dick Dauch - Chairman, Chief Executive Officer

  • It gives us a lot of flexibility, Jon, as to what we do in the near future.

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • I think, as I said earlier, it puts us in an enviable position within the sector to probably be able to take advantage of any strategic opportunities, more so than anyone else.

  • Jon Rogers - Analyst

  • Right.

  • And then lastly, on the increase in shares outstanding is -- I realize that the diluted share calculation changed with your stock price.

  • But is this -- are there enough options out there, or does the executive options grant package -- should we expect increases like this going forward?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Actually Jon, we would hope to address this once we get an upgrade from the rating agencies.

  • There's obviously ways the company can apply cash to offset the increase dilution from option exercises.

  • And we'd certainly strongly consider that next year -- again, given that upgrade from the rating agencies.

  • Jon Rogers - Analyst

  • Okay.

  • And then just one last question, Robin -- given the upgrade, is there -- I realize that acquisitions are important, but is there a preference between a dividend or a share repurchase?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • I don't think our Board has made a decision on that yet, Jon.

  • I think we're strongly considering both.

  • We're flexible on both.

  • And at this point in time, a decision hasn't been made.

  • And I will say that it doesn't have to be an either/or situation, either.

  • Operator

  • John Casesa, Merrill Lynch.

  • Jackie Weiss - Analyst

  • Hi, it's Jackie Weiss.

  • I wanted to ask about the new business that you're bidding on.

  • Over the last few months, how have you found the bidding been going?

  • Is the pacing of awards as you had expected, and can you say anything about competitive environment?

  • Joel Robinson - President, Chief Operating Officer

  • Jackie, Joel Robinson.

  • I'll give you a little bit of detail on the $790 million (technical difficulty) quoting.

  • And the quoting activity is very brisk right now.

  • About 17 percent of that 791 is General Motors business.

  • About 83 percent is non-GM business.

  • And of that total, to break it down a little farther, we're getting a lot of activity in foreign transplant quoting -- about 40 percent of that.

  • And if you look at the mix of that, there's about 11 percent of that's coming in at crossover type vehicles; 44 percent on passenger cars; and in our own arena, about 44 percent in light truck.

  • Jackie Weiss - Analyst

  • Okay.

  • As far as your EBITDA margin target for the end of '04, can you talk little bit about how you're going to achieve that, given that you're expecting pretty modest growth next year on the top line?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Well, certainly the product mix shift that's holding some of our growth back next year could potentially provide a little bit of margin improvement.

  • But as well, we have an intense focus on productivity in this company, as you well know.

  • We have a very sophisticated system that focuses on OEE (ph) and first-time quality.

  • And we're not going to stop.

  • We've never stopped on productivity.

  • We continue to generate productivity improvements of 7 percent a year.

  • And next year will be just another year of continued productivity improvements in our operations, as well as a continued focus on quality.

  • The quality statistics here are stunning.

  • And that certainly helps reduce costs in our system.

  • John Casesa - Analyst

  • Robin, this is John Casesa.

  • Just following up -- so, to understand this -- sales are about flat next year.

  • Mix is negative next year, correct?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • From a sales perspective.

  • John Casesa - Analyst

  • Are you suggesting that mix could be positive from a margin perspective?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Yes.

  • John Casesa - Analyst

  • And could you share with us what the driver would be there -- what kind of things would favorably impact your margin?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Well, again, a lot of our new products that we're bringing to market are higher technology, provide more value to our customers.

  • And we have said historically -- we get compensated for the value of that technology in our new products.

  • Operator

  • Chris Ceraso, CSFB.

  • Chris Ceraso - Analyst

  • Is any of the expectation for the top line being flat -- does that have to do with your expectation that the GMT 800 may come under some pressure from competitive products next year?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • I think there has been a lot of talk in the media about the overall pressure in that segment of the marketplace.

  • And certainly, that is built into our expectations.

  • This is a very competitive marketplace, and our expectations are that there's going to be competitive all throughout every segment of the light truck and SUV market next year.

  • Chris Ceraso - Analyst

  • Okay.

  • And on the margin improvement, you said you do expect it to improve and '04.

  • Will it make your 100 basis point target, or will it be shorter than 100 basis points next year?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Well Chris, I keep trying to make sure that people understand.

  • We have said we will approach the 15 percent EBITDA level.

  • And we believe by the end of 2004, our EBITDA margins will be approaching that 15 percent level.

  • Now if I hit 14.8 instead of 15, don't beat me up.

  • Chris Ceraso - Analyst

  • Okay.

  • The refi cost for your debt -- does that assume that the upgrade happens, or is this something that is independent of the upgrade to investment-grade?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • You know, I think we've been pretty clear.

  • The key to our ability to successfully refinance our debt as effective as we would like to is really dependent on that upgrade from the rating agencies.

  • And frankly when you look at the statistics, I really can't see any reason for them not to give us an upgrade.

  • But obviously, one of the key parts of that restructuring the debt side of the balance sheet is to provide us the capability to return some capital to our shareholders.

  • And to get a senior credit facility that provides a company with that flexibility typically requires an investment-grade credit rating.

  • Chris Ceraso - Analyst

  • And then lastly, Robin, where would that leave you for the year?

  • What is your expectation for interest expense in '04, assuming that you refinance the way you're hoping to?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Down significantly from this year.

  • Chris Ceraso - Analyst

  • Okay -- no further meaning in that?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • You know, I don't think it would take much time and effort looking at our year-end debt levels assuming some refinancing of the public debt portion.

  • I think most of your know what current rates are in the marketplace -- somewhere around the 7 percent rate.

  • You can I think get there pretty easily.

  • Operator

  • David Leiker, Robert W. Baird.

  • Laura Thurow - Analyst

  • Hi, it's Laura Thurow for David.

  • Just a couple questions -- I may have missed this -- did you talk at all about the timing of the credit upgrade?

  • I mean obviously, you expect it in the next year.

  • But -- expecting that earlier rather than later?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Well, as we I think told most people this year, we were going to see the rating agencies in the fourth quarter.

  • And we have done that.

  • And so right now, we are waiting for a response from the rating agencies.

  • Laura Thurow - Analyst

  • Okay.

  • And then secondly, in -- the marketplace is sort of seeing a revival of rear-wheel-drive cars at Chrysler and GM, and it sounds like you might have pretty good involvement in that, given that 44 percent of what you're quoting is of passenger cars.

  • Can you just talk a little bit about that?

  • Dick Dauch - Chairman, Chief Executive Officer

  • This is Dick Dauch, I'll comment first, and then I'll turn it over to Joel.

  • First of all, our company is the premier rear-wheel-drive development capable company in the world.

  • It has been for 10 years, and continues to be.

  • Therefore, we're having significant opportunities with all of the OEMs that are refocusing rear-wheel-drive as an application.

  • And I'll let Joel discuss any generics he might (technical difficulty) want to do on that.

  • Joel Robinson - President, Chief Operating Officer

  • Yes, Laura.

  • We kind of foresaw the evolution of the rear-wheel-drive again, and especially the conversion of the front-wheel-drive vehicles to all-wheel-drive.

  • And we have extensive products on the shelf, technology -- and in fact, have a couple of exclusivity contracts on all-wheel-drive conversions with a foreign OEM.

  • Also, we're getting a lot of interest out of Europe from our ventures into Europe, and we're quoting quite a few programs -- passenger car out of Europe, as well as in South America.

  • And right here -- back here at home.

  • Laura Thurow - Analyst

  • Great.

  • And then just lastly, on new business -- you mentioned the number of 100 million of net new business next year.

  • Can you talk a little bit about the GM/non-GM split there?

  • And then also, do you have a similar number for 2005?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Laura, that's our net new business backlog -- excuse me -- as we've said before, our net new business backlog -- a little bit more than 50 percent of that is non-GM business.

  • So that would pretty much be the expectation.

  • And so that is where we see the growth next year.

  • Laura Thurow - Analyst

  • Do have a net new business number and '05?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • We've not broken that down by '05, '06 or '07.

  • Operator

  • Dominic Martilotti, Bear Stearns.

  • Dominic Martilotti - Analyst

  • Good morning.

  • Dick Dauch - Chairman, Chief Executive Officer

  • Good morning, Dominic, and thank you for picking up coverage on our company.

  • Dominic Martilotti - Analyst

  • Oh, you're welcome.

  • Looking at your debt leverage and kind of how it relates to your all-wheel-drive kind of pursuit.

  • Are you guys kind of looking at reducing your leverage for the possibility of winning contracts and having to invest in the capacity to support such programs?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Well certainly, as we have said before, we're positioning ourselves to be able to grow our business, whether that's through -- built on acquisitions, whether that's increased capital spending -- let me give you a few examples.

  • We actually built a greenfield facility in Mexico to grow our business in that region.

  • In Brazil we got into a joint venture, basically acquired a company.

  • So we will use either method -- depending on the situation, the region of the world -- to be able to fund our strategic growth initiatives.

  • So it could be internal capital, it could be small acquisitions.

  • But roll it all together, and it's still focused on us trying -- continually growing our business strategically in the U.S. market as well as around the world.

  • Dominic Martilotti - Analyst

  • Could you elaborate a little bit more on the all-wheel-drive progress?

  • I know you said a few things earlier, but -- say you were to win some programs there in the neighborhood of 100,000 units.

  • What kind of cap-ex are you looking at to support that kind of business?

  • Dick Dauch - Chairman, Chief Executive Officer

  • Traditionally, we're looking in the range of about 30 to 50 percent in sales on capital, depending on what capacity we might have open in other areas.

  • So if you had $100 million annual sales, it might be the range of $30 to $40 million.

  • Dominic Martilotti - Analyst

  • Okay.

  • And just to follow up there -- you said that you have couple of these products kind of in the hands of the OEMs and they're evaluating.

  • What kind of timeframe are you looking to make some sort of decision, or is it kind of open-ended?

  • Dick Dauch - Chairman, Chief Executive Officer

  • Were hoping to get a decision yet this year in this fourth quarter.

  • And we're looking probably at December.

  • Dick Dauch - Chairman, Chief Executive Officer

  • Janice, we're going that take three more questions, okay?

  • Operator

  • Okay, that's fine.

  • Richard Hilgert, Oppenheimer.

  • Richard Hilgert - Analyst

  • The headcount reduction in the third quarter -- that was 30?

  • Dick Dauch - Chairman, Chief Executive Officer

  • I didn't hear your question.

  • Richard Hilgert - Analyst

  • The headcount reduction in the third quarter -- that was 30 people?

  • Dick Dauch - Chairman, Chief Executive Officer

  • I think you're probably referring where we did a salary workforce thinning?

  • Richard Hilgert - Analyst

  • Yes.

  • Dick Dauch - Chairman, Chief Executive Officer

  • We don't give out specific numbers on that.

  • Richard Hilgert - Analyst

  • Okay.

  • Was that Holbrook, or was that -- I take it that wasn't up in Rochester Hills.

  • Dick Dauch - Chairman, Chief Executive Officer

  • What we do is we always review the entire corporation's needs, and we've always done these things proactively.

  • It is the same thing we've done all 10 years.

  • And we focus on where our needs are to right-size our company.

  • Certainly, we're not in any way endangering -- to make it real clear to you -- Rochester Hills or engineering or technical or R&D.

  • I think I just indicated we've enhanced that in the past quarter -- 14 percent by a dollar value -- and by policy, Robin and I always are in the rule of thumb of 10 percent more dollars per year for R&D and applicable-type support people.

  • Richard Hilgert - Analyst

  • Okay.

  • To make the 365 for the full year, would there need to be any additional thinning in the fourth quarter?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • Richard, no.

  • We have no plans for any thinning any more.

  • Richard Hilgert - Analyst

  • Okay.

  • During the third quarter -- it wasn't a huge dollar win, but certainly I think it's, from Detroit's perspective, a huge moral win -- you brought over I think it was $30 million in business that had been sourced at a Shanghai company back here to Detroit.

  • I wondered if you talk a little bit about some of the dynamics there.

  • Was it pricing, quality, logistics, all of the above?

  • What was your ability to bring that back to our shores?

  • Dick Dauch - Chairman, Chief Executive Officer

  • I think in general, Richard, what we evaluate is what we call value-added enterprise.

  • And we bring all stakeholders to the party to see what we're focusing on and see where there can be an economic improvement contribution.

  • We are real delighted to have, in the last two or three years, brought products from Mexico back to the States, and we're also pleased to have some products from China that are going to be resourced to the States within AAM.

  • How we do that's proprietary.

  • Richard Hilgert - Analyst

  • Okay.

  • And then last, on the electronic disconnect SmartBar -- I saw in the release that you had the first production intent contract.

  • Wondered how many other potential customers you have looking at this product -- what kind of volumes that could mean for you?

  • Dick Dauch - Chairman, Chief Executive Officer

  • Well, it's a very exciting product, and it's very unique in the industry.

  • It will be on a well-known brand name we can't talk about right now.

  • And I think when this gets out into the rest of the OEM base, we're going to have them knocking on the door.

  • And it's kind of niche volume, because it's for off-roaders primarily.

  • But you're talking about programs of 20,000 units and up.

  • Operator

  • Rob Hincliffe, UBS.

  • Rob Hincliffe - Analyst

  • You were talking earlier about how the 355 clients (ph) are really being sourced throughout American Axle.

  • Are the other products -- 360, 800 -- are they as global in nature for American Axle? (multiple speakers)

  • Dick Dauch - Chairman, Chief Executive Officer

  • No, they were less selectively global, whereas this one, we purposely stretched the band to check our global presence.

  • And as we reported, we're having a flawless launch.

  • It's going marvelous.

  • Our customers are delighted, and they are rapidly accelerating their rate.

  • So it's a very good joint win-win for GM as it relates to AAM content and the way we sourced t it.

  • Rob Hincliffe - Analyst

  • Okay.

  • In reading or hearing a little bit about just enhancements to these sort of innovative agreements you have with the UAW, in terms of even a next lower wage scale -- any comments there on what that allows you guys to do?

  • Dick Dauch - Chairman, Chief Executive Officer

  • Well, I think the important thing is to face into the wind that there is global competition, and that requires an economic reality check and all stakeholders review that.

  • We have had jointly for several years innovative operating agreements with locations such as Cheektowaga, New York and Three Rivers, Michigan.

  • And there's probably discussions going on at many other locations within our company or other auto supplier companies.

  • You've seen some of the discussion that occurred in the last three months that related to that subject -- with Delphi, Visteon and unions.

  • So those are a dynamic process of discussion of gut-check (ph) economics, globally speaking.

  • Rob Hincliffe - Analyst

  • And as it relates to American Axle -- it sounds like it doesn't have to wait until the contract expires to work on that?

  • Dick Dauch - Chairman, Chief Executive Officer

  • I think the key is what I said before -- our company has always for all 10 years been proactive with all parties always truthful, always honest, always data-driven.

  • And then we sit down and evaluate as a family of stakeholders how we can address those subjects and be awarded these new businesses, whether they're coming from China, whether they're coming from Mexico, or an OEM, a tier one, a tier two, direct to the OEM -- whatever -- and our formula seems to work quite well for our company and our stakeholders.

  • Rob Hincliffe - Analyst

  • Okay.

  • And then one last one, maybe I missed this, but -- was there any change in GM terms for the quarter?

  • I know they've been playing around with some of the other suppliers.

  • Did that affect you guys at all?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • No, Robert.

  • In fact, when you look at the year-over-year working capital change in the quarter, in 2002, we launched the Dodge Ram program.

  • And I think as we have mentioned before, the Dodge Ram program is on different terms than the GM business.

  • So that caused increase in working capital in the third quarter 2002 versus 2003.

  • But we've had no change in terms under any of our other contracts.

  • Dick Dauch - Chairman, Chief Executive Officer

  • Last question, Janice.

  • Operator

  • Darren Kimball, Lehman Brothers.

  • Darren Kimball - Analyst

  • Last but not least.

  • I'm just curious Robin if -- is there any factor that you can point to -- looking at your fourth-quarter cash flow expectation that would significantly vary from how you did in last year's fourth quarter?

  • Robin Adams - Chief Financial Officer, Executive VP of Finance

  • You know typically, Darren, the fourth quarter is a quarter where we recover working capital.

  • And again, if you think of our business, you really need to look at sales activity in primarily the last month of the quarter.

  • And September, obviously, it's a strong sales month.

  • December, because of the shutdowns over the Christmas holiday period is a weaker month.

  • So traditionally, we'll generate more cash flow in the fourth quarter through working capital than we will throughout the rest of the year.

  • So there shouldn't be any significant change in working capital generation versus fourth quarter last year.

  • Capital spending could be a little bit higher.

  • But nonetheless, I think if you look back at last year, we generated almost $100 million of free cash flow in the fourth quarter last year.

  • On a trailing 12 month basis, we're slightly ahead of $250 million.

  • And as I said, we expect to be in excess of $200 million for the year.

  • So that would indicate there's another strong fourth quarter of cash flow coming.

  • Rick Dauch - VP, Investor Relations

  • All right, thanks Darren, and we thank all of you who have participated on this call.

  • And we appreciate your interest in American Axle.

  • We certainly look forward to talking with you in the future, and have a great day.

  • Thank you very much.

  • Goodbye.

  • Operator

  • Thank you for participating in today's teleconference.

  • You may now disconnect.