American Axle & Manufacturing Holdings Inc (AXL) 2004 Q1 法說會逐字稿

Good morning.

My name is Amber, and I will be your conference facilitator.

At this time, I would like to welcome everyone to the American Axle & Manufacturing first-quarter and full 2003 conference call. (OPERATOR INSTRUCTIONS).

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

Please go ahead, Mr. Dauch.

Thank you, Amber, 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 first-quarter 2004 earnings announcement, as well as our press release reconfirming our 2004 earnings outlook and second-quarter guidance that we released earlier this morning.

If you have not, you can access them on the www.aam.com Website or through the PR newswire services.

A replay of this call will also be available beginning at noon today through 5:00 PM Eastern daylight standard time May 2nd, 2004 by calling 1-800-642-1687, reservation number 650-6648.

Before I turn the call over to our co-Founder, Chairman, and CEO Dick Dauch, let me take a few minutes to read a brief statement.

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 industry trends which may affect the Company's future operating results and financial position.

Within the meeting 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 uncertainty which cannot be predicted or quantified and which may cause future activities or results of operations to differ materially from those discussed.

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

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

This call is also intended to be in compliance with Reg.

FD and is open to institutional investors and security analysts, news media representatives and other interested parties.

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 financial measures, as well as reconciliation of these non-GAAP measures to GAAP financial information, is included within the supplemental information on our press release and is also available on the www.aam.com Website.

We are also audio webcasting this call through our Website, www.aam.com.

This call may be archived in the Investment section of our Website and will be there for a minimum of one year for late listening.

During the second quarter, we will be presenting at the KeyBase (ph) Capital Market conference in Boston on June 10th, the Bank of America conference on June 22, as well as the Wachovia conference in Nantucket on June 25.

We are also planning on conducting internal investment business during the quarter in Dallas, St. Louis, Kansas City, Nashville, Birmingham, Atlanta and Boston.

We certainly look forward to seeing many of you at the conferences or investor visits.

In addition, we are on tap to host investors at our facility either here in Detroit or other our locations.

With that, let me turn things over to the host of our call Dick Dauch, AAM's co-Founder, Chairman and CEO.

Thank you, Rick, and good morning, everyone.

Thank you for joining us today to discuss American Axle's financial results for the first quarter of the year 2004.

I am very pleased to be joined today by our President Joel Robinson, as well as his Chief Operating responsibilities.

Yogendra Rahangale is also here with us, our Executive Vice President with his new assignment in operations and planning, along with Mike Simonte, our Vice President and Treasurer and acting Chief Financial Officer.

Before I start this morning, I would like to Robin Adams for his contribution to AAM since joining our company in 1999, and I certainly wish Robin all the best in the future.

Mike Simonte, our Vice President and Treasurer, has stepped up as AAM's acting CFO.

Mike has been on the AAM financial team for nearly six year and has played an instrumental role in all of our major financial transactions during that time.

Our Board of Directors and myself have complete confidence in Mike's ability, and I am pleased to have Mike join us on this call this morning.

After I discuss some of highlights of today's release, I will turn things over to Mike to discuss the details of our financial performance.

When he finishes, we will open the call up for questions you, the ladies and gentlemen, may have.

Let me start by saying it has been a very busy productive unsuccessful quarter for American Axle & Manufacturing.

We continue to achieve solid financial results while increasing sales to non-GM customers by 13 percent and securing significant new business.

Our diluted earnings per share for the first quarter were 66 cents, excluding the impact of the onetime refinancing charge of $23.5 million or 28 cents per share.

Our results for the first quarter 2004 were 94 cents per share.

This is slightly ahead of analyst consensus estimate.

This is the 21st straight quarter since AAM became a public company that we have delivered earnings performance that has met or exceeded Wall Street expectation.

Let me provide you with a quick overview of the quarter, starting with the market environment.

North American light vehicle production was down approximately 1 percent this quarter.

General Motors light truck production was down nearly 5 percent for the quarter.

The Chrysler group's Dodge Ram heavy-duty pickup truck continues to have strong sales demand, with our unit production volume affiliated with them up over 15 percent.

As a result of these factors, AAM sales in the first quarter of 2004 were approximately $953 million.

This was down slightly from last year's first quarter and is consistent with our expectations and the guidance we have provided for 2004.

AAM continues to make progress by profitably growing the business with new customers.

Sales to non-GM customers increased by $21 million or 13 percent in the first quarter of 2004.

Non-GM sales represented 20 percent of our total sales in the first quarter of 2004, as compared to 17 percent previously.

Gross margin for the quarter was 14.3 percent versus 14.8 percent in the first quarter of 2003.

These margins were primarily a result of the lower GM production level, as well as costs incurred related to the temporary work stoppage that AAM experienced in the quarter.

Let me take a moment to talk about the work stoppage.

At midnight on February 25, 2004, our agreement with UAW expired.

As a result of not reaching an agreement before the expiration of the contract, we experienced a short work stoppage at six of our U.S. manufacturing facilities.

I am pleased that we were able to reach an unusually satisfactory agreement with UAW.

This provides us a new full-year contract for consistent labor harmony as AAM has been experiencing in the last 10 years.

AAM's ability to contractually win new business is supported by our commitment to apply its R&D.

With increasing efforts to develop new advanced technology products to meet the needs of global customers, R&D spending in AAM was up 10 percent in dollars for the quarter.

Our commitment and focus on R&D during 2003 allowed us to generate over 88 percent of our sales from new technology products introduced to the market since mid-1998.

We have a very excellent modern product portfolio.

AAM invests heavily in this area in order to technically enhance current product performance and expand our Driveline Systems, chassis systems and module capability from light trucks to crossover vehicles, passenger cars, as well as hybrid vehicles.

These investments have resulted in the development of our family of CPUs, IrDAs and now (inaudible), along with advanced drive shafts for cross-road vehicles and all-wheel-drive vehicle configurations.

These efforts on R&D are targeted at a higher growth segment of the marketplace.

This has positioned AAM to secure additional profitable business with an expanded customer base in new markets throughout the world.

In the first quarter of 2004, AAM announced several new business awards.

A critical award was a lifetime program that we received from a Korean automaker by the name of Ssangyong Motors.

The annual revenues of $40 million when fully launched beginning in next year 2005, we utilized our latest IrDA and ISVA (ph) technology.

We expect this contract to be the first phase of a general cooperation plan between AAM and Ssangyong.

This award when added to our book of business through 2006 results in a gross new business backlog of approximately $600 million and a net new business backlog of approximately $340 million.

During the quarter, AAM also announced that we were selected as a systems integrator for all the driveline components, systems and modules for the new 2008 model year North American off-road support enthusiastic vehicle.

This contract is now (inaudible) at $100 million annually based on the current customer designing direction.

This is a lifetime program contract and includes our IrDA driveline module system.

We are very pleased that our new developed products are going onto many new products in the future.

AAM recently announced that we have been selected as the Driveline Systems and module supplier for a major future GM replacement product program and have now secured over 70 percent of our current book of business for the next 10 years.

AAM continues to work hard on several additional opportunities to secure other new business.

This will be from both existing, as well as new customers.

We are actively quoting on new business totaling approximately $750 million, with approximately 75 percent of this activity outside of General Motors, and approximately 30 percent representing opportunities with foreign and/or transplant OEMs.

In addition, approximately 20 percent is for potential all-wheel-drive or passenger car application.

Production launch timing into these programs ranged from 2006 to 2008.

Let me now switchgears, ladies and gentlemen, and talk about operations.

Joel and his team continue to perform at industry leading levels.

Their focus on quality is a key differentiator in which AAM is the industrial leader.

We continue to retain world-class quality as measured by our customers.

Our six-month rolling average of 7 (inaudible) parts per million is not touched by anybody else in our business in the world.

It is world-class.

It provides our customers major advantages on warranty cost and improves customer satisfaction.

We are proud that our driveline products are on the top-rated trucks and SUVs according to the recently announced J.D.

Power customer satisfaction survey.

As a result of these improved quality levels, it has reduced our customers' warranty costs by well over a $250 million since 1996.

This has been a very busy quarter for AAM and a very successful quarter.

First we celebrated AAM's tenth successful year of existence with every year being profitable.

Second, we completed the refinancing of our debt capital structure at investment grade level, allowing for lower interest expense and more financial flexibility.

This supports our future operational and strategic growth objectives.

Third, we have significantly enhanced our cost (inaudible) with a new labor agreement for automotive suppliers.

Fourth, AAM has secured over 70 percent of our current book of business for the next 10 years.

Fifth, we have earned our first contract with a major Driveline System, which includes the IrDA and ISVA (ph) with an Asian OEM automobile company, Ssangyong Motors.

Next, we have proven stock repurchase program on February 3, 2004 and repurchased approximately 1.6 million shares of stock.

And seventh, I am extremely proud to announce AAM's first-ever quarterly cash dividend as a public company.

It will be 15 cents per share starting with the second quarter of 2004.

Ladies and gentlemen, the first 10 years of AAM are in the history books, and we have excellent success.

Thank you for your support.

We respect the past, but we are totally focused on the future.

We shall remain focused on continuing our solid operating and financial performance while enhancing stockholder value.

We will continue to focus on the following objectives during 2004.

First, continue our world-class operating in financial performance.

Second, as said earlier, we will earn $4.00 per share for the full-year 2004, so we are restating our previously announced guidance.

This excludes the impact of onetime debt refinancing costs reported to you today and is included in the press release reconfirming our earnings outlook for 2004.

Third, we will continue positive cash flow generation.

We expect to earn $200 million in positive free cash flow in 2004.

Fourth, we will continue to aggressively expand diversity of our customer base while expanding our product portfolio.

And finally, we will maintain our investment grade credit ratings.

AAM is a rock solid company operationally, financially and technically with an outstanding workforce.

All of our associates are committed to accomplish the objectives that I have just mentioned.

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

Let me now turn the call over to our Vice President and Treasurer and acting Chief Financial Officer, Mike Simonte, to discuss our financials.

Mike?

Thank you.

We have got a lot of talk about today from a financial perspective so I am going to get right to it.

First, let me summarize some of our financial results for the first quarter of 2004.

AAM's first-quarter earnings were $36.5 million or 66 cents per share.

Excluding a onetime charge related to debt refinancing and reduction activity that we completed in the quarter of $23.5 million or 28 cents per share, which by the way is consistent with our previous communications on this matter, earnings were $51.9 million or 94 cents per share.

As Dick said, that is just slightly ahead of consensus.

Non-GM sales were up 13 percent on a year-over-year basis, almost $200 million representing 20 percent of our total sales in the quarter.

Gross margin was in excess of 14 percent at 14.3 percent, and our operating margin was at 9.1 percent.

Our debt levels at the end of the quarter were $184 million lower than one year ago, and our net debt to capital ratio is very comparably under 40 percent at 37.7 percent.

Now let me go over these items and others in more detail.

Our sales for the quarter of $953 million were down approximately 2 percent on a year-over-year basis.

Again, this was consistent with our expectations and also consistent with what we told you to expect when we first provided our guidance for 2004 back on October 30th of 2003.

General Motors North American light truck production was down nearly 5 percent for the quarter.

We made up some ground because of our non-GM sales increasing by 13 percent.

And, of course, this was led by a nearly 15 percent increases in (inaudible) products according to Chrysler group's heavy-duty Dodge Ram pickup.

We also benefited from strong market demand for four-wheel drive and all-wheel-drive vehicles, continuation of a trend that has gone on for many years now.

The penetration rate for four-wheel-drive and all-wheel-drive on the programs we support was nearly 65 percent in the quarter, up from approximately 61 percent one year ago.

These factors helped drive our (inaudible) vehicle higher, up nearly $20 a vehicle to $1182 in the quarter as compared to $1164 in the first quarter of 2003.

Gross margin for the quarter was 14.3 percent versus 14.8 percent in the first quarter of 2003.

As Dick mentioned, AAM's market performance in the quarter was affected by a 5 percent reduction in GM production levels.

Our results were also affected by costs related to the temporary work stoppage we experienced in the quarter.

These costs primarily related to overtime premiums and other products required to recover lost production were $5.2 million, approximately 6 cents per share.

Excluding the impact of the temporary work stoppage, our gross margin in the quarter was slightly ahead of last year.

AAM continues to be successful focusing on productivity gains and maintaining tight cost controls.

You will see that in our performance.

SG&A expenses were $49.5 million in the quarter, up approximately 1 percent as compared to the $48.9 million in the first quarter of 2003.

Included in this total, AAM's R&D spending was up 10 percent to nearly $17 million in the quarter, and that is compared to $15.4 million in last year's first quarter.

This increase is in line with our plan for the year, and importantly what we are trying to do is increase R&D spending to maintain our overall SG&A expense at relatively flat levels.

This increase in R&D spending also reflects AAM's commitment to be a technology and innovation leader.

We continue to develop new products, targeted at key growth segments of the Driveline Systems market, new business wins such as the Ssangyong Motors award that Dick mentioned earlier, our group that is paying off.

Operating income was $86.9 million or 9.1 percent of sales in the first quarter of 2004.

Operating income was 95.8 million or 9.8 percent of sales in the first quarter of 2003.

As we said earlier, our results for the first quarter of 2004 includes $5.2 million of costs related to the temporary work stoppage.

Excluding the impact of the work stoppage, operating margin was almost flat with the first quarter of 2003, approximately 9.7 percent.

On an incremental basis, our margins -- whether gross margin or operating margin -- were up approximately 35 cents on the dollar in the quarter in relation to lost sales.

That includes the impact of the temporary work stoppage.

Excluding the impact of the work stoppage, we are off only 15 cents on the dollar.

We are pleased with that.

EBITDA was $105.6 million in the quarter or 11.1 percent of sales as compared to 135.7 million or 13.9 percent of sales in the first quarter of 2003.

Excluding the impact of the debt refinancing charge of $23.5 million we booked in the quarter, EBITDA was almost $130 million or approximately 13.5 percent of sales.

And again if we exclude the impact of the temporary work stoppage, EBITDA was just slightly ahead of last year, approximately 14 percent in the quarter.

Below the line, net interest expense decreased by nearly a third to $8.4 million versus $12.5 million in the first quarter of 2003.

The principal reasons for this reduced level of interest expense is the fact that we are borrowing less.

At the end of the first quarter, AAM's debt levels were $184 million lower than they were one year ago.

AAM's lower borrowing costs also reflect the benefits of $1 billion of refinancing we completed during the quarter.

In January of this year, we closed on a new $600 million unsecured revolving bank credit facility.

In February, we tapped the markets for two senior debt issues and concurrent (inaudible) $250 million of new 10-year notes and a coupon of 5.25 percent and $150 million of new convertible notes, on which we will pay interest for seven years at 2 percent.

On March 1 of this year, we used approximately $315 million of net proceeds from these debt offerings through redeemed all the outstanding 9.75 percent senior subordinated notes.

The full impact of these refinancing activities will be reflected in our net interest expense beginning in the second quarter, and you should see another stand on step down from us in terms of the quarterly level of interest expense at the time.

AAM's overall effective tax rate was 34.5 percent in the first quarter, and that is compared to 35 percent last year, and that is really -- there is really not much changed there.

As I mentioned earlier, earnings for the quarter were $36.5 million or 66 cents per share.

It was another good solid quarter for our company.

Moving on to our credit statistics, our net interest coverage was an EBITDA to net interest expense ratio of approximately 11 times on a trailing 12 months basis and up over 12 times -- 12.6 times for the quarter on a stand-alone basis.

Our net debt to EBITDA leverage ratio on a trailing 12 months basis was 1.17 times, just short of 1.2 times.

This is (inaudible) our first year as an investment-grade credit.

Let's turn to our capital performance for the quarter.

Cash provided on our operating activities in the first quarter of 2004 was approximately $4 million, down from $36 million in the first quarter of last year.

Capital spending was just under $50 million in the quarter, and that compares with $59 million in the first quarter of 2003.

As we have previously communicated to you, AAM's capital spending levels have normalized around $250 million a year.

With one quarter behind us and project plans and (inaudible) timing schedules set for the rest of the year, AAM is on track to spend at this level in 2004.

Net cash used in operations, we mentioned this as our cash flow from operating activities less our total capital spending, was $42 million in the quarter.

That compares to $26 million out in the first quarter of 2003.

I want to (inaudible) the first quarter of 2004 we made a onetime lump sum ratification bonus payment of $36.3 million to AAM's hourly associates under the recently ratified four-year master agreement.

Excluding this onetime ratification bonus payment, net cash used in operations was almost break even at $6 million.

That is about $20 million ahead of last year.

We had a very tough first quarter from a cash flow prospective.

The first quarter of each year is traditionally a heavy cash flow period for automotive parts, and it is usually because of seasonal increases in working capital requirements for the most part.

For example, our Accounts Receivable are up more than $100 million at the end of the first quarter from year-end 2003.

That is because sales in the month of March were up about $100 million as compared to December, and that is very common.

We are able to make up about half of that increase in accounts payable, but we increased our investment in working capital nonetheless.

In addition, although we accrue profit sharing all year, we paid out in March each year, and that is another seasonal factor that we deal with.

We plan to use cash from operations during the first quarter.

We are still on track to generate $200 million in positive free cash flow for the full year 2004.

Let's talk about capital structure for a minute.

AAM's total debt at the end of the first quarter was approximately $571 million, and that is a reduction of $184 million versus the $755 million outstanding at the end of the first quarter of 2003.

That is a 24 percent reduction in just one year.

AAM's total debt increased in the first quarter 2004 by approximately $121 million.

Here are the primary reasons why.

I just explained that we were out cashed of about $42 million in operations.

We also used $14.6 million to fund a (inaudible) redemption of the 9.75 percent notes.

We also repurchased $63 million of our common stock, 1.6 million shares in the first quarter.

Stock Holder's equity was $933 million at the end of the first quarter.

That is down approximately $22 million from year-end 2003.

Net earnings increased equity, but the $63 million stock repurchase in the quarter exceeded those earnings.

We expect to cross over $1 billion in equity later this year.

AAM's net debt to capitalization ratio on a growth basis was at 37.7 percent at the end of the first quarter, down from just under 50 percent one year ago.

We are very pleased with our new lower-cost investment-grade debt capital structure and the improved financial flexibility we enjoy as a result.

At quarter-end, we had total available borrowing capacity over $500 million.

On invested capital next to some of our net debt and stockholders equity increased approximately $100 million in the quarter to approximately $1.5 billion at quarter-end.

On a trailing 12 months basis, our (inaudible) returned on invested capital or ROIC was 14.8 percent, just slightly below our 15 percent target level of return.

By the way, we accept to achieve that for the full year of 2004.

Looking ahead to the rest of 2004, as Dick mentioned, we issued a press release this morning confirming our previous guidance at $4.00 per share for full-year 2004 earnings.

And that, of course, excludes the impact of the debt refinancing charge of $23.5 million or 28 cents per share we reported in this first quarter.

(inaudible) based on assumption, the same assumption that we have had all along of approximately 15.3 million North American light vehicle vehicle sales.

We are still anticipating sales in product mix that should reduce our content per vehicle a little bit from current levels during the rest of the year.

As we told you previously, that may result in a slight reduction in sales for full-year 2004 as compared to 2003.

However, we expect our continued focus on productivity and cost reduction, including interest cost settings, to drive earnings growth in 2004.

By the way, we still expect to approach 15 percent EBITDA by the end of this year.

We also are announcing today for the first time our earnings guidance for the second quarter of 2004.

That is approximately $1.00 to $1.05 per share.

It is important to note that our second-quarter results will include a charge of approximately $13 million or 15 cents per share for lump sum payments we will make to nearly 250 ROIC associates under a voluntary separation program we established with the UAW.

We will make a $1.00 to $1.05 per share, and that will include the charge.

Moving from earnings guidance to cash flow guidance, let me remind you once more that we are on track to generate $200 million in positive free cash flow in 2004.

This cash flow performance will help us reduce our net debt to capital ratio 25 percent or less by the end of the year.

And, of course, we will also help cover our new quarterly cash dividend, which we will pay for the first time as a public company in June of this year as Dick just mentioned to you.

As Dick also said, AAM is accelerating its performance and 2004 and beyond.

We have now built a world-class financial infrastructure to accompany our world-class manufacturing and engineering capabilities.

We believe that we are positioned as well or better than any other supplier in our industry to take advantage of the strategic opportunity that may present itself in the marketplace.

Thank you for your time and attention this morning.

Now I would like to turn the call back over to Rick Dauch for the question-and-answer period.

Thank you, Mike, and thank you, Dick.

We have reserved some time to take questions.

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

(OPERATOR INSTRUCTIONS).

Stephen Girsky, Morgan Stanley.

Can you guys hear me?

Thank you for having us over April 7th for your wonderful conference.

It was great having you.

Just a couple of quick questions.

Were there any onetime costs associated with the labor contract in the quarter?

Yes.

We had $5.2 million.

That was just the strike-related costs, though.

There was no -- like the bonus, how do you expense the bonus?

You amortize it, or what do you do with that?

There are two portions to that bonus.

A portion is being amortized through expense in 2004, and another portion will be amortized over the entire length of the agreement, including 2004 through 2008.

So not much of it hits in the first quarter of 2004, but it will kick in in the second quarter.

Okay and then so when we think about labor costs in '05, do they go down because we are not amortizing this piece of it or what happens?

(inaudible) in '05, that is exactly right.

Okay and can you just go over how you get to the 5.2 million in costs related to the strike?

Yes.

Those costs -- there are some overtime costs and premiums there, some additional breaks and other types of statistics costs associated with getting back on track.

We had never missed a delivery (inaudible) up until this one day work stoppage, and we made up for that very quickly.

But it did require a little bit of extra cost, and that is what is contained in that $5.2 million.

As a matter-of-fact, Steve, the only customer that was impacted was General Motors.

It was around 1500 units, and they were all made up within 10 calendar days.

And the last thing, I am just trying to get at your variable margin.

It did not go down a lot at all.

You pointed that out.

I am just trying to get what it is behind it.

Is it just you were able to basically react to the lower volumes at GM pretty quickly here?

I would say we had the most remarkable recovery from a one day stoppage I have seen in 40 years.

We just had an outstanding workforce, and they performed for us.

But GM's build was down 5 percent in the quarter, and that barely showed up in the margin here?

There was a lot of quick reaction.

There was also a lot of measured and planned action.

These volumes that we saw in the first quarter were very similar, remarkably similar to what we have been planning on since we developed our budget second and third quarter of 2003.

And so really we felt like we had a lot of time to plan for it since we executed the plan.

Right.

And is there anything new in the steel situation?

Anything -- I know you are covered on a lot of it.

Are you going to continue to be covered going forward?

Steve, this is Joel Robinson.

We are keeping a close on that.

We are covered on most of our steel purchases, especially on SBQ VAR stock.

There have been some very small suppliers that we had to help out a little bit, but there is nothing very significant.

Very minimal.

Jon Rogers, Smith Barney.

Good morning.

Good morning and thank you for picking up coverage for our Company.

We are real proud to be participating with you and your team.

Well, you are welcome.

Good quarter.

Just some clarification on next quarter, kind of a follow-up on Steve's question.

It looks like, including this charge for the severance payment, that margins are going to be pretty strong in the second quarter.

Am I looking at that right, or are you expecting better production from General Motors than they might have scheduled?

This is Mike.

We definitely expect to improve our margins in the second quarter, and again we made our commitment for a long time now that we expect to be approaching 15 percent EBITDA margins by the end of the year which now focus on productivity, cost controls, cost reductions.

That is the only way we are going to get there, and that is a gradual process.

It is not going to be all at once. (multiple speakers)

The only other thing important that I would add is that GM's schedule pull to us for the second quarter looks very strong and very encouraging.

We just had another Saturday, for example, put into Osuwa (ph).

So we are real happy with the second quarter pull from GM.

And then I guess on the severance charge, should we look at that as you are actually reducing your employee base, or is this just older employees that are retiring early, in which case you could blend that second-tier wage structure in maybe more quickly than people are anticipating?

Well, John, a couple of things.

First of all, we are going to be reducing the base a little bit there, and that is the whole purpose of the program.

I am going to have Patrick Paige, who is here with me -- he is my Vice President of Human Resources and handles all these relations -- help on that question.

And, Patrick, I want to salute you in front of everybody on a great leadership role to get good harmony between UAW and AAM.

Good morning.

One of these unique issues that we did discuss with the UAW during our collective bargaining discussion was headcount, and by virtue of the buyout program that we did fashion with them, the results of that, the number that Mike shared with you, is going to result in a reduction of the on roll headcount we have in order to meet our productivity and customer and business requirements.

So it will have a positive impact on the Company and also the associates that will depart the Company.

Okay.

Thank you very much.

Jackie Weiss, Merrill Lynch.

I just wanted to follow-up on the question about the variable margin.

You have talked about the relationship between a dollar decline in sales and the resulting approximately 30 cents in lower operating earnings for a while.

Should we change the way we think about that assuming that you guys have lead time in anticipating sales declines?

Well, we certainly try very hard to achieve achieve at least a 25 to 30 percent variable margin performance there.

In this quarter quarter, we were very focused and very successful in containing that to about 15 percent.

You know it really depends on how much lead time we have.

I think the key factor, and you brought it up, was the fact that we did have good visibility through the volumes in that quarter.

We had good planning, good solid execution.

We were able to react to it.

If volumes change more suddenly, we may not have that same opportunity, and we would still think that 25 to 30 percent is a good target for us.

Okay.

I know you are pretty well hedged on steel prices currently, but was there any gross margin impact from steel prices in the quarter?

Yes.

About $2.5 million.

Okay.

That is all I got.

Thanks.

Chris Ceraso, CSFB.

A few questions.

First, if you could give us an update on where you stand with those development contracts for all-wheel-drive programs and any other new business that you might be bidding on in the all-wheel-drive area?

This is Joel Robinson.

As we mentioned, you know we did give the all-wheel-drive program with Ssangyong Motors for $40 million.

The other two development programs, offshore programs, are still under consideration by the two OEMs, and they have not finalized the plan to come to market with them.

We still hope to hear about that at some point in time this year.

Is there a point at which if we don't hear, we should assume that the OEM is not going forward with that vehicle, or what is your expectation on the timeframe there?

If we know that there is a material change on that, we will let you know.

Right now we are very encouraged that that will turn into a first order.

Good.

What about the resurgence here among passenger cars going back to rear-wheel drive?

How do you see the benefiting you this year, next year and beyond?

Well, we see ourselves as the leader in rear-wheel drive.

You know we start out with all of our major truck and SUV programs, start out with the rear-wheel drive architecture, and convert, as Mike told you, the 60-some percent of all-wheel-drive.

So we have always been a rear-wheel drive supplier, and I feel (inaudible).

In your 300 million backlog of net new business, are there any rear-wheel drive passenger car programs included?

No, not yet.

And then lastly, the $1182 or so content per vehicle that you cited, is that just your GM content per vehicle, or does that include the Ram business?

That includes the Ram business.

And, of course, the strong sales for that product roll the content (inaudible) contributed to that content gain.

So it is definitely a mix of all the major programs that we support.

Josh Peters, UBS.

Good morning.

First this should be real quick.

I'm just looking for the impact of the share repurchases on earnings this quarter?

And can I get a quarter-end share count?

Yes quarter-end share count was just about 52 million shares.

And as I indicated we repurchased, Josh, 1.6 million shares in the quarter.

This occurred right around the beginning of February, so clearly straightforward to do the math.

The shares were out of our diluted days on a weighted average basis so that going forward.

Are you guys assuming any future or share repurchases in getting to your four dollar number for the year?

Well our Board approved a $2.5 million to --2 1/2 million share repurchase program.

We've got two years to execute that.

Depending on market conditions and cash flow investment opportunities and running factors we may very well get back in it, but there are only approximately 900,000 shares left and should not have a material impact on the rest of the year.

One way or the other.

Two more things.

One is on the dividend.

I would just like to get a sense of your thinking, your approach to the?

Are you guys looking to keep your yield competitive with other suppliers or are you leaving room for future dividend growth?

Are you targeting a payout ratio?

What is the way you want to look at dividends here going forward?

Yes, that is a great question.

We have looked at a number of factors in establishing our opening dividend yield.

Of course we looked at our competitors, we looked at our core peers in the automotive industry.

We also looked at the S&P 500 for a broader corporate American indices.

We're very tough when 1 1/2 percent is right about on track with where our peers are, most of our core peers I think the dividend paying us expires as an aggregate of 1.9 percent, that there are some that really intend that you have to be closer to a percent and a half and that is what we think is the appropriate benchmark.

So we're very pleased to start at 1 1/2 percent.

This should be somewhere in the neighborhood of 15 percent, maybe slightly higher of our three times of cash flow on an annual basis.

That leaves us plenty of room if circumstances are right and our Board of Directors think it is fair to increase that over time.

And that would allow us either to increase the yield or maintain it very comfortably at 1 1/2 percent as our stock price moves forward.

Okay.

And also I would like to get your take on the acquisition environment right now?

You guys have talked a lot about having an interest in acquisitions.

I want to get a sense for the big picture, what is available to be bought and where?

How are your customers thinking about their suppliers making acquisitions and what are asking prices like?

First of all it's not our policy to comment on potential acquisitions and we told you before we will confirm it again today we are looking at certain targets.

And we will decide what is best, strategically, to fit within our Company's needs and our objectives.

We will take a look at it as it impacts shareholder value and acquisitions will play a larger role somewhere in the growth plan.

We have nothing to announce to you today.

But all of our established market attractiveness and criteria will be given consideration.

When we're prepared to give you an update, we will call you.

Okay.

Well from a bigger picture like an industry perspective do you feel like the market is all starting to move and there may be some activity that is generally not (indiscernible) you guys are starting to heat up or is that still pretty quiet?

Certainly the market has movement on that issue in a positive way.

We've got plenty of dry powder to do what we need to do when we find the right fit, the right need technologically, marketwise, financially and accretiveness.

So stay tuned.

Laura Thurow.

Robert W. Baird.

I just wanted to follow-up on the question on your quoting opportunities.

On the last quarter call you talked about significant quoting opportunities you had in Europe.

I'm just curious if you have any update there or how much of the 30 percent you're quoting outside of North America right now is in Europe?

Let me give you the rundown on that.

Joel Robinson.

Our official RFQ's is about $111 million and we also attract what we call emerging opportunities which our customers long-range product plans where we are considered as a candidate an RFQ and that stands at about $261 million for a total of about $372 million of opportunity in Europe.

Okay.

And I think the rest of my questions have been answered.

One follow-up on the share repurchase with the 900,000 shares remaining.

Should we expect that you would use that to repurchase those shares as you did the first 1.6 million?

Well I think the 1.6 million shares came up in really one transaction in connection with the issuance of the convertible notes.

So I do expect that the next 900,000 shares will be handled a little bit differently.

The primary reason for us to establish the stock repurchase program is to mitigate the impact on an ongoing basis to some extent, not share for share, of our stock option program.

So we would expect and that was really the point to establish the program in the first place for that to happen over time since we simply eased the impact of the dilution.

We are going to take two more questions.

Mike Heiffler (ph) of Deutsche Bank.

I just have a couple of questions maybe for Mike.

Just to circles back to the margin questions earlier, Mike, can you walk us through the components of margin expansion?

How do you get from the 14 percent EBITDA margins to the 15 percent level?

How much of that is coming from productivity?

How much of it is coming from other sources?

Maybe one for Joel, of the 750 million that you're quoting on, you mentioned -- well, Dick mentioned some of it starts in 2006 or could potentially start in '06.

How much of the quoting is for '06 and when would we know if you win that business?

Okay.

My comments start with the margins question and how we get to 14 to 15 percent.

The answer is good continued everyday focus on productivity and cost reduction.

This has been what we have done for a long time now.

We have got a variety of different productivity initiatives;

Joel Robinson has spoken to these at length in many public forums -- our AAM manufacturing systems and other related programs of productivity and issue and programs and that's how we're going to get there.

Now the other aspect is we continue to work with our supply base to look for opportunities to have material cost reduction.

And on that basis year-over-year we continue to have some gains there.

So the two key factors are going to be continued productivity focus.

We improved our productivity by 7 percent a year.

We have another good opportunity this year.

And also material cost reduction.

So would you say there are each worth about 50 basis points?

Well, you know they are both going to contribute.

In some years, it is going to be -- even in some years one way or the other, but they are both going to be important contributors in our performance.

Guys, as far as the new business 2006 and 2008, most of it will be in the latter part of 2006 where we will have a couple of programs launched including Ssangyong and there is probably be about $60 million worth of forging content that will happen.

Cary Stormhill with Lehman Brothers.

Andrew Maney, good morning.

As a follow-up to Mike's question, if we assume the high end of your second quarter earnings guidance your total first half earnings will be roughly $2 per share?

Implying that another $2 of earnings will be necessary in the second half of the year to make your $4 target?

I think your earnings are usually lower in the second half of the year for the usual seasonal reasons.

Are your costs and productivity savings more back half weighted this year than in past years?

No, not really.

We continue to build on those cost and productivity savings on a quarter-over-quarter basis a little bit at a time.

But, there is volume and mix differences in the year.

And as I mentioned to you, we have this fairly significant $13 million charge coming in the second quarter of this year.

If we take that charge out of the second quarter, obviously, our earnings performance will be stronger and we will carry some of that over into the back half of the year.

Thank you.

That is helpful.

If you could just common, too, to the pension and Oped (ph) benefit structure and some of your two-tier and three-tier plans?

Did the new hires have defined contribution plans?

It depends on where they hire into the Company.

There are defined benefit plans established for nearly all of our hourly associates.

And so, if they joined here domestically, they are going to be joining into a devised asset plan but in some cases they will be at lower (indiscernible) levels.

Where you can divide contribution plans is going to be for salaried (indiscernible).

Okay.

Thanks Andrew.

We thank you all of you for participating on this call.

We appreciate your interest in American Axle.

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

Have a great day.