使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good afternoon.
My name is Tracy, and I will be your conference facilitator today.
At this time, I would like to welcome everyone to the American Axle & Manufacturing second-quarter conference call. (OPERATOR INSTRUCTIONS).
As a reminder, today's call is being recorded.
I would now like to turn the call over to Mr. Chris Son, Director of Investor Relations.
Please go ahead, Chris.
Chris Son - Director, IR
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 second-quarter 2004 earnings announcement that we released earlier today.
If you have not, you can access it on the AAM.com web site or through the PRNewswire services.
A replay of this call will also be available beginning at 5 PM today through 5 PM Eastern daylight time July 29, 2004, by calling 1-800-642-1687, reservation number 8306854.
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 industry trends which may affect the Company's future operating results and financial position.
Within the meaning of the Private Securities Litigation Reform Act of 1995, forward-looking statements are not guarantees of future results or conditions, but rather are subject to risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed.
Historical results achieved are not necessarily indicative of future prospects for the Company.
For additional information, we ask you refer to the Company's filings with the Securities and Exchange Commission.
This call is also intended to be in compliance with Regulation FD, and is open to institutional investors, security analysts, news media representatives, and other interested parties.
I would also like remind you 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 to GAAP financial information, is included within the supplemental information on our press release, and is also available on the AAM.com website.
We are also audio Webcasting this call through our website, AAM.com.
This call will be archived in the investor section of our website, and will be there for a minimum of one year for later listening.
During the third quarter, our senior executives will be presenting at two major industry conferences -- The JP Morgan/Harbour Auto Conference in Dearborn, Michigan on August 3, 2004, and the 2004 Credit Suisse First Boston Global Automotive Conference in New York on September 9, 2004.
We also plan to be in Dallas and Houston in August.
We look forward to seeing many of you at these events.
In addition, we are always happy to host investors at our facility, either here in Detroit or at our other locations.
Please do not hesitate to call me to arrange such a visit if your schedule permits.
With that said, let me turn things over to the host of our call, AAM's Co-Founder, Chairman, and CEO, Dick Dauch.
Dick Dauch - Co-Founder, Chairman, & CEO
I would like to thank you for joining us today to discuss AAM's financial results for the second quarter of the year 2004.
I'm pleased to be joined today by Joel Robinson, our President and Chief Operating Officer, along with Yogendra Rahangdale, Executive Vice President of Operations and Planning, and Mike Simonte, our Vice President and Treasurer.
Also joining us today is Tom Martin, our Vice President of Finance and Chief Financial Offer.
We were very pleased to welcome Tom to our team on June 1 of 2004.
We're looking forward to his leadership for years to come, and particularly in the areas of cost control.
Tom brings a wealth of international business experience to AAM as we continue to selectively and profitably expand our business with new customers and marketshares -- markets around the world.
I've known Tom for 25 years.
He is an excellent man.
After I discuss some of the highlights of today's release, I will turn things over to Tom to discuss the details of our financial performance.
After that, we will open the call up for any questions you men and women may have.
I was very pleased to report an outstanding order of earnings of $1.02 for the second quarter of 2004.
This is in line with our guidance for the quarter, and meets (ph) the Street consensus.
AAM's reporting earnings for the quarter increased 5 percent versus the 97 cents per share we earned in the second quarter of 2003.
Included in these results is a $12.5 million charge, or about 15 cents per share, related to a voluntary separation program that we established with our state board (ph) of the UAW.
Nearly 250 hourly associates participated in this voluntary program, and terminated their employment with AAM in that process.
If we exclude the impact of the 15 cent charge per share in the quarter and similar items in last year's second quarter, our earnings growth in the second quarter of 2004 compared to 2003, same quarter, will be well over a 10 percent increase on a year-over-year basis.
Let me now provide you with a quick overview of the quarter from an industry perspective.
AAM's sales in the quarter were approximately $930 million, a record for our second quarter.
This is up slightly from last year's second quarter, and consistent with our expectations.
North American light vehicle production was flat for the quarter at approximately 4.2 million units.
General Motors' light truck production was down approximately 2 percent in the quarter to just under 800,000 units.
For the first half of 2004, General Motors' light truck production is down 3.5 percent on a year-over-year basis.
However, GM truck sales for the first half of the year are up 3 percent as compared to one year ago, and are running at industry record levels.
We're pleased with the sales growth that AAM is enjoying with the DaimlerChrysler Corporation.
The Chrysler Group's Dodge Ram heavy-duty pickup truck continues its strong sales performance in the second quarter of 2004.
And as a result, the delivery of AAM's products supporting the programs were up approximately 15 percent.
For the quarter, our sales to non-GM customers increased over $25 million, up over 16 percent on a year-over-year basis.
This now represents approximately 21 percent of our total sales.
Our improving financial performance continues to be fueled by two key drivers -- first, our ability to continually reduce costs; and secondly, our intense focus on delivering Six Sigma, which means less than 3.4 parts per million, high-quality, advanced-technology products to all our customers.
These products are delivered on time, every time, with the highest available quality and customer satisfaction levels in the entire industry.
Our quality records (ph) -- competitive advantage in terms of our ability to win new business.
It reduces our costs, enhances our margins, and provides warranty (ph) performance for our consumers.
No other supplier in the sector is able to report performance levels such of that.
Plain and simple -- our relentless focus on quality, productivity, cost reduction, and advanced technology continues to result in enhanced margin growth and overall success.
All our associates understand the need for continuous improvement.
And as a management team, we're fully focused on continuing to support these kinds of results.
In the first half of the year of 2004, our productivity as measured by the reduction in number of labor hours that we need to generate $1,000 (ph) of sales is running well over 8 percent annual improvement.
This is consistent with our long-term productivity rate since we started the company well over 10 years ago.
Let me now discuss AAM's R&D efforts.
AAM's R&D spending by design was well over 10 percent increased in dollars year to year for this particular quarter, about $15.9 (ph) million on a year-over-year basis.
AAM is committed to be a technology and innovation world leader.
We continue to develop new products targeted at a key growth segment of the driveline systems market in the world.
When we started with 3 percent of our sales in 1994 in new technology, we're now at 88 percent our sales in the first half of 2004 from new technology -- generated (ph) this advanced technology product focus that I have discussed with you.
In comparison, during the year 2000, new technology was only 47 percent.
So we have gone from 3 percent to 47 percent to 88 percent -- the best product portfolio in the world, end of statement.
This is a vital payback on AAM's long-term commitment.
Our applied R&D efforts and strategic focus on developing innovative new product improves the safety, ride, handling, and NBH (ph) characteristics of all of our customers' new vehicles.
The most recent example of how our product innovation is helping our customers to respond to a market opportunity is our patented SmartCar (ph) technology, incorporating electronics.
It is permanently and exclusively featured on the all-new Dodge Ram Power Wagon, which will launch later this year.
AAM's SmartCar is an electronically activated roll-control system that allows the driver the choice of whether to engage or disengage the stabilizing bar, depending upon on or off-road conditions.
This technology, together with AAM's new electronically controlled front and rear locking differentials, provides a powerful combination to improve off-road performance and on-road stability for the vehicle.
Our company is proud to support the 2004 reintroduction of the Dodge Ram Power Wagon.
It has not been built since 1980.
We believe this will be yet another very successful product offering for the Chrysler Group's Dodge Ram heavy-duty pickup truck program, and we are very proud to participate and support them in their program.
AAM's innovative technology, creative product packaging, and continued strong operational focus with effectiveness (ph) drives our ability to win these new business awards.
We continue to advance the development of additional exciting new products that will further extend our current product offering and support our business growth initiatives.
The most significant areas of investment includes the following -- first, rear-wheel drive, four-wheel drive, and all-wheel drive driveline systems for passenger cars and crossover vehicles.
This includes the IFDA -- independent front-drive axles, and independent rear drive axles, as well.
Second, torque transfer capabilities, including PTUs -- power takeoff unit -- in one-, two-, or three-axis modes.
Also for front-wheel-drive applications, and transportations (ph) for rear-wheel-drive applications.
And third, driveline modules, especially with our iRide (ph) independent chassis module application for both passenger cars and SUV vehicles.
Now, ladies and gentlemen, let me take a moment to update you on the progress of our business growth initiatives.
First of all, AAM have secured over 70 percent of our current book of business through the year 2014.
I know of no other auto (ph) supplier companies that can make that statement.
We are also finalizing arrangements for our successor program that represents an additional 10 percent to be sourced through AAM, as well, which would take that to over 80 percent.
Once this is complete, with over 80 percent of our booked business locked up for the next 10 years, we will have established a total, rock solid base of business serving as the foundation to support AAM's future profitable growth.
We're doing exactly what we told you we would do.
Today, AAM announced that we have been sourced the independent rear drive axles and independent front drive axles for a major future passenger car program with global implications with a major global OEM.
AAM is currently working with the OEM to design and integrate the driveline product for this program.
We are extremely pleased with this new announcement, as it further validates our R&D efforts and the development of advanced driveline systems by supporting a growing global market segment, and also helps us have better balance on car and truck applications.
We are currently quoting on new business opportunities totaling approximately three-quarters of $1 billion.
Production launch timing for these programs range from 2006 through 2008.
Approximately one-third of this quoted business activity is with Good morning, while nearly 50 percent is in support of foreign or transplant vehicle programs, and much of that remaining to our exciting new driveline product for four-wheel-drive and all-wheel-drive passenger cars and crossover vehicles that I discussed.
Our previously announced contract with SsangYong Motors to provide IRDAs and IFDAs for the Korean market, which we launched very early in the middle of 2005, is AAM's first major new business when leveraging these new technologies.
Before the year is over, we expect to announce more business in that area.
One additional highlight -- in July of this year, AAM opened a technical and business office in Koonay (ph), India.
This extends our global presences as we continue to secure new engineering and other technical resources to support our expanding business growth throughout the world, and specifically, in the continent of Asia.
We will continue to explore further opportunities in the greater continent of Asia in other countries.
AAM continues to be accelerating its performance in 2004 and beyond.
We have built a world-class financial base that is now in full support of our world-class manufacturing system and engineering capabilities We have good fast (ph).
We have found a result here that gives us a position for strategic growth opportunities that present ourselves throughout the world marketplace.
Acquisitions will play a larger role in our profitable growth plan over the next several years.
Through the execution of our total business growth strategy, we will include healthy portions of organic growth and bolt-on acquisitions that will allow us to continue to expand our product portfolio.
There will be a concentricity (ph) in the areas of high-value-added precision machining, metal forming, heat treating, and assembly for drivetrain and powertrain components and system applications.
This, in turn, first, will significantly increase our served market; second, improve our customer diversification; and third, expand our geographic reach.
Finally, it will reduce our concentricity with GM while continuing to grow our business with GM.
We will maintain our hard earned investment-grade credit status as we accomplish all these issues I have discussed with you.
Before I turn the call over to Tom Martin, let us look ahead to the second half of 2004.
So far, the year is shaping up to be consistent with AAM's expectations.
We have built our 2004 budget on the basis of approximately 16.3 million units of light vehicle production in North America.
As we enter into the second half of the year, we are encouraged by several leading economic indicators, and optimistic the U.S. economy is in the midst of a wide-ranging and sustainable growth and recovery.
While 2004 continues to offer us challenges as the economy slowly recovers, our company remains very positive in our ability to achieve our full year 2004 earnings guidance of $4 per share.
This excludes the impact of the onetime debt refinancing costs reported in the first quarter of 2004.
This level of performance is obviously volume dependent, and reviews of current production scheduled leads us to believe that there will be sufficient volume in the second half of the year.
I thank you, ladies and gentlemen, for your continued attention, your vital interest in AAM.
At this time, I would like to turn the call over to our Vice President of Finance, Chief Financial Officer Tom Martin.
Tom?
Tom Martin - VP, Finance & CFO
First of all, let me start by saying how excited I am to join the AAM management team.
I worked very successfully with Dick and many of my new AAM colleagues at Chrysler, and always enjoyed the passion and strong leadership style of these individuals.
As Dick mentioned, American Axle plans are growing the business -- especially internationally.
And I am looking forward to being a positive force in that process.
However, I want to ensure you that we will maintain and build upon the same financial discipline that has made AAM so successful thus far.
This includes taking a careful and analytical approach to new business opportunities, whether organic or M&A, and maintaining a steely tough cost control discipline on an everyday basis.
With that said, let me first summarizes some of AAM's record-breaking financial results for the second quarter of 2004.
Second-quarter earnings were 55.3 million, a new quarterly record for AAM.
EPS were at $1.02 -- also a quarterly high for AAM.
As Dick mentioned, our second-quarter results included the impact of a $12.5 million charge, or 15 cents per share related to a voluntary separation program that AAM established with the UAW.
Without the charge, our earnings growth was stronger than the 5 percent that we reported on a GAAP basis.
Non-GM sales were up 16 percent to almost 200 million in the quarter, representing 21 percent of our total sales in the quarter.
Gross margin was in excess of 14 percent at 14.4.
Operating margin was 9.6 percent.
Excluding the impact of a 15 cents per share charge in the second quarter, our gross margin and operating margin approached the highest quarterly levels in AAM's history, about 130 basis points higher than as reported.
Net debt at the end of the quarter was more than 120 million lower than one year ago.
Net debt to capital ratio was comfortably under 35 percent at 34.7.
Remember -- this significant reduction is after we used 84 million to repurchase approximately 2.2 million shares of AAM common stock in the first half of 2004.
After we paid our first ever quarterly dividend as a public company at the end of June of 15 cents per share, or 60 cents per share on an annualized basis.
Now let me go over these items and others in more detail.
American Axle sales for the quarter of 930 million are about 1.8 percent higher than the second quarter of 2003.
As Dick said, total North American light vehicle production was about flat for the quarter as compared to the prior year.
GM's North American light truck production was down approximately 2 present, led by a 5 percent reduction in the full-size pickups and SUVs.
AAM's topline outperformed the industry in the quarter, because our non-GM sales increased by more than 25 million in the quarter.
A 15 percent increase in sales of AAM products supporting the Chrysler's Group heavy-duty Dodge Ram pickup was the key driver.
The four-wheel-drive and all-wheel-drive penetration rate of 60.4 percent in the quarter is approximately the same level as the 61 percent in the second quarter of 2003.
AAM's shipments for GM's midsize pickup trucks and SUVs, which carry a lower-than-average AAM sales content per vehicle, increased 11 percent in the quarter on a year-over-year basis.
This is due primarily to the strength of recently launched new product offerings such as the all-new Chevrolet Colorado, the GMC Canyon, midsize pickups, and the Chevrolet Super Sport Roadster, or the SSR.
These changes in production volumes and mix were anticipated in reported to you back in October when AAM first announced earnings guidance for 2004.
As a result, AAM content per vehicle decreased slightly to $1,162 as compared to $1,174 one year ago for the same quarter.
We expect these trends to continue in the second half of 2004.
Let's address gross margin.
Gross margin for the quarter was 14.4 versus 15.1 in the second quarter of 2003.
As mentioned, our second quarter results include the impact of a $12.5 million charge related to a voluntary separation program.
Excluding the impact of this charge, our gross margin would have been approximately 130 basis points higher.
We'll start seeing the benefit of this program in our operations in the second half of the year and beyond.
SG&A expenses were 44.2 million in the quarter as compared to 48.5 million in the second quarter of 2003.
For the first half of 2004, SG&A expense was approximately 5 percent of sales.
Included in this total, AAM's R&D spending was up over 10 percent to nearly 16.9 million.
This increase is in line with our plan for the year to increase R&D spending while maintaining AAM's overall SG&A at a relatively flat level.
The key driver in improving SG&A cost in the first half of 2004 as compared to the prior year is the fact that our incentive compensation expense is down on a year-over-year basis.
This is true for a couple of reasons.
First, AAM's incentive compensation plans are based on GAAP earnings.
For the first half of the year, GAAP earnings are down almost 13 percent, and our incentive compensation accruals have been reduced accordingly.
Second, AAM also adapted and set up plan (ph) changes in 2004 that will reduce the estimate aggregate amount of the cash-based incentive compensations payable to our executives on an annual basis.
The same changes adjust the mix of total incentive awards to emphasize the importance of management stock ownership and long-term stock price appreciation.
AAM has made a practice of continuously reviewing all of our costs for savings opportunities.
SG&A expenses are not immune from this relentless search for productivity and cost reduction.
Operating income was 89.2 million, or 9.6 percent of sales in the second quarter of 2004, about the same as the 89.3 million or 9.8 percent of sales that were posted in the second quarter of 2003.
As I said earlier, our results for the quarter include a $12.5 million charge.
Excluding the impact of this charge, operating margin was improved on a year-over-year basis.
EBITDA was 131.2 million in the quarter, or 14.1 percent of sales, as compared to 131.1 million or 14.3 percent of sales in the second quarter of 2003.
Excluding the impact of the charge for the voluntary separation program, EBITDA was well in excess of 15 percent of sales.
Below the line, net interest expense for the quarter was just about half of the prior-year run rate at 5.9 million versus $12 million in the second quarter of 2003.
One significant reason for this reduced level of interest expense is the fact that AAM is borrowing less.
At the end of the first quarter, AAM's debt levels were more than 120 (ph) million lower than one year ago.
AAM's lower borrowing costs now clearly reflect the benefits of the $1 billion of refinancing completed during the first quarter of 2004.
In the second quarter of 2004, the average interest rate on outstanding borrowings was under 4.5 percent, down approximately 20 percent from 5.5 percent in the second quarter of 2003.
AAM's overall effective tax rate 34.5 percent in the second quarter of 2004 versus 35 percent in 2003.
And as I mentioned earlier, GAAP earnings for the quarter were 55.3 million or $1.02 per share.
That is a new quarterly record on a dollar basis, and equal to our previous quarterly record on a per share basis.
Of course, adjusting these results to exclude the charge for the voluntary separation program would only further to distinguish this quarter in AAM's history books.
Moving on to AAM's credit statistics -- net interest coverage, or the EBITDA to net interest expense ratio was approximately 13 times on a trailing 12 month basis, and up over 20 times or 22.2 times for the quarter on a stand-alone basis.
Net debt to EBITDA leverage ratio on a trailing 12 months basis was just slightly more than 1 time, or 1.06.
AAM continues to have a strong performance in our first year as an investment-grade credit -- as strong as anybody in our industry.
Now let's turn to our cash flow performance for the quarter.
Cash provided by operating activities in the second quarter of 2004 was 119.7 million, down almost 38 million from the 157.6 million in the second quarter of 2003.
This is a tough comparison for us in 2004 because the second quarter of 2003 was an exceptionally strong quarter from an operating cash flow perspective.
There are four major differences driving the change on a year-over-year basis.
First, as we have said already, we paid 12.5 million in the second quarter of 2004 to nearly 250 hourly associates on a voluntary separation program.
Although our second-quarter 2003 results reflected a 5.1 million charge for the similar lump sum early retirement payments, the 2003 payments were funded out of AAM's pension fund.
Second, the mix of our accounts receivable payments term is longer in 2004 than in 2003.
Although the aging characteristics of our accounts receivable have improved in the past year, the change in payment terms resulted in nearly 15 million of additional working capital tied up in our receivables.
Third, in prior years, AAM was able to take advantage of state investment tax credits that are no longer available.
This results in a 5 million change for the second quarter of 2003.
And fourth, AAM's operating cash flow change in the second quarter of 2004 relates to one of AAM's operating leases.
The payment terms were re-timed from an annual third-quarter payment to a payment that is now due in the first-half of the year.
As a result, AAM's 2004 second-quarter cash flow reflected this $5.5 million payment.
The combined effect is approximately $38 million.
It's important to note that approximately 15 million of that variance are most of the amounts related to the voluntary separation program and the change in timing on the lease payment will flip to a benefit in the second half of 2004 on a comparative basis.
Capital spending was 45 -- 49 (ph) million in the quarter, about flat to the 51 million AAM spent on the fixed capital in the second-quarter of 2003.
AAM's CapEx levels have normalized around 250 million per year.
AAM is on track to spend at or near this level in 2004.
We do expect our spending to pick up in the second half of this year and into 2005 primarily to support capacity changes and other engineering changes necessary for the 2006 and 2007 model year launches of the new GMC 900 full-size pickup trucks and SUVs.
Let's address net cash -- net cash flow from operations.
The net cash flow provided by operating activities less CapEx was almost 71 million in the quarter versus 106.6 million in the second quarter of 2003.
For the first six months of the year, net cash flow from operations is nearly 30 million as compared to 83.5 million in the same period year ago.
In addition to the factors I just explained, that impact of the second-quarter operating cash flow, we made a onetime lump sum ratification bonus payment of 36.3 million to AAM's UAW hourly associates under the four-year master agreement ratified in the first quarter of 2004.
Excluding this onetime ratification bonus payment and the 15 million of second-quarter items that will flip in the second quarter of 2004, 2004 net cash provided by operations is just slightly behind last year's pace of approximately 80 million (ph).
Now let's focus on our capital structure.
AAM's net debt at the end of the second quarter was 514.3 million, a reduction of 122 million versus the 636.7 million outstanding at the end of the second quarter of 2003.
For the year-to-date period, AAM's net debt increased by approximately 77 million.
Here are the primary reasons why.
First, for the first six months of this year, we used 84 million to repurchase approximately 2.2 million shares of common stock.
This connects with the 63 million repurchased in connection with our first quarterly issuance of our 2 percent senior convertible debt, and continued with 21 million of open-market purchases in the second quarter.
Second, in June of this year, we paid our first-ever quarterly cash dividend as a public company of 15 cents per share or 60 cents per share on an annualized basis.
This payout on the dividend in the second quarter was $7.8 million.
And third, as part of our debt refinancing activities in the first quarter, we used 14.6 million to fund a call premium on the redemption of our previously outstanding 9.75 percent notes.
Netting the 28.4 million of net cash flow we generated in operations during the first half of the year with 106 million of financing outflows I just described explains the increase in our net debt since the beginning of year.
Stockholders' equity was 969 million at the end of the second quarter, up approximately 14 million from the year-end 2003.
Net earnings and stock option proceeds increased equity, but the stock repurchases and dividend payout nearly offset those items on a year-to-date basis.
AAM expects to cross over 1 billion in equity in the third quarter of 2004.
Our net debt to capital ratio on a book basis was 34.7 percent at the end of the second quarter of 2004, down 300 basis points in the quarter, and substantially lower than the 43.3 percent position we had just one year ago -- at quarter end -- AAM had a total availability and borrowing capacity of nearly 600 million.
On a trailing 12 month basis, and adjusting only for the impact of the debt refinancing charge of 23.5 million we booked in the first quarter of 2004, our after-tax return on invested capital or ROIC was approximately equal to our 15 percent target level of return.
Now let's look ahead to the rest of 2004.
As Dick said, our outlook is based on an assumption of approximately 16.3 million North American light vehicle builds.
We still remain consistent in our outlook for the second half of the year, but are continuing to watch our customers schedules.
AAM remains confident in our ability to achieve our guidance of $4 per share in 2004.
Again, this excludes the impact of the debt refinancing charge of 23.5 million or 28 cents per share reported in the first quarter.
Moving from earnings guidance to cash flow guidance, AAM is on track to generate 200 million of free cash flow from operations in 2004.
AAM has almost 30 million in the bank year-to-date, and needs an additional 170 million in the second half of the year to meet this objective.
We generated over 180 million of net cash flow from operations in the second half of 2003, and expect a similar results in the second half of 2004.
Factoring in the cash that we used to repurchase shares in the second quarter and the payout on the quarterly dividend, AAM expects our net debt to capital ratio to be under 30 (ph) percent by year-end.
That will leave plenty of dry powder to support our business growth objectives in the back half of this year and into 2005.
Thank you for your time and attention this afternoon.
I would like to turn the call back over to Chris Son for the question-and-answer period.
Chris Son - Director, IR
We now have time for some questions.
So at this time, I would like to turn the call back over Tracy to begin the Q&A session.
Operator
(OPERATOR INSTRUCTIONS).
Jackie Weiss, Merrill Lynch
Jackie Weiss - Analyst
I wanted to ask about the contract that you announced this morning.
Can you tell us a little something about the scope of it and what we should consider to be the important facets of it, what model year it's for, that kind of thing?
Dick Dauch - Co-Founder, Chairman, & CEO
We cannot give you all of that information, Jackie.
But what we can tell you is as we have been talking through some months and the end (ph) of the year, we have been doing a lot of research and development on the all-wheel-drive programs, especially for crossover vehicles and passenger cars, because we want to expand our service to that market.
And we are kind of excited that we have now finally landed a contract.
We are into a simultaneous engineering mode with the customer, and we are asked not to divulge any information concerning that launch, when it's going to be.
And we really have not totally defined the program yet, because it is in the advanced engineering stage.
Jackie Weiss - Analyst
Would you consider it important from a revenue standpoint -- that is, just in terms of size?
Or is it more important because now you have won a contract in this new area?
Unidentified Company Representative
Three things -- number one, we consider this very vital.
It's big, it's major, it's high revenue, and it is absolutely an expansion of our product portfolio.
As I said earlier, it helps balance our mix on pass-cars and trucks.
And also gets our latest technology into product applications.
Jackie Weiss - Analyst
Okay;
I'm glad to hear that.
Let me ask you about production volumes.
How do volumes look to you on your key product programs, like the GMT-800, relative to your expectations at the beginning of the year when you first established your guidance for the year?
Dick Dauch - Co-Founder, Chairman, & CEO
I think we said before that we have a reasonably conservative budget buildup -- 16.3 (ph) million.
And things are tracking reasonably, consistent with what we had planned.
Therefore, we have no change in our expected guidance for the full year of $4 EPS.
Jackie Weiss - Analyst
Finally, I just wanted -- since you've mentioned bolt-on acquisitions, I just wanted to see how you would characterize the acquisition environment right now?
Dick Dauch - Co-Founder, Chairman, & CEO
The acquisition environment is always open.
We think it's a good time to look throughout the world.
And on our radar screen, there are several things, and they would have to fit into our philosophy of accretiveness, technology expansion, market expansion, and things that would be bolt-on from the driveline to the drivetrain to the powertrain and into our areas of expertise.
And we see several of those.
And when we have something to announce it, we will share it with you.
Operator
Christopher Ceraso, Credit Suisse First Boston.
Christopher Ceraso - Analyst
A few questions -- first, just a follow-up to Jackie's question on the new program.
Did you also win the PTU for that, or did that go to someone else?
Dick Dauch - Co-Founder, Chairman, & CEO
Right now, we're still in advanced development on the program.
And it isn't totally defined in terms of the product content.
Tom Martin - VP, Finance & CFO
Once you go from long-range product plan, then you go to product definition -- it's in that phase.
And as Joel said, this is something that we cannot tell you right now who the OEM is.
They are major, they are big, there are global, they are (indiscernible) and they are damn good.
That's why we want to work with them as we unfold this product jointly with them.
Christopher Ceraso - Analyst
Okay, so maybe that is still up for grabs -- okay.
How about -- what are you looking at in terms of rear-wheel-drive passenger car business?
That's starting to make a bit of a comeback here.
How much of that business are you bidding on?
Are you close to winning some programs in that area?
Dick Dauch - Co-Founder, Chairman, & CEO
We are bidding on rear-wheel-drive, all-wheel-drive, front-wheel-drive conversion with power takeoff units like you mentioned, and we are expecting some decisions yet this year on those programs, which would range somewhere in the 2006 to 8 time period.
Christopher Ceraso - Analyst
Okay -- two more quick ones.
Where does your current net new business backlog stand?
I think as of the last call, it was in sort of the 300, maybe 340 million range.
Is it still --
Tom Martin - VP, Finance & CFO
(multiple speakers) about there (multiple speakers) about 350, I believe -- is that right, Mike?
Mike Simonte - VP, Treasurer
Exactly right, Chris -- about 350.
Christopher Ceraso - Analyst
Okay.
And then is this the -- I know it was just marginally, but I noticed that the four-wheel-drive, all-wheel-drive penetration slipped a little bit.
Is it the first time that you have seen that happen?
Dick Dauch - Co-Founder, Chairman, & CEO
Well, when you drop from 61 percent to 60.4 percent -- I mean, you are starting to (indiscernible) pepper.
Tom Martin - VP, Finance & CFO
It's common for the second quarter to dip a little bit from first quarter levels due to seasonal changes in production.
So the fact that it dipped was not a surprise.
The fact that it's close to last year's levels are right on our budget expectations.
Christopher Ceraso - Analyst
So that 60.4 versus 61 -- was that a year-to-year or a sequential comparison?
Tom Martin - VP, Finance & CFO
Year-to-year, just about 65 percent in the first quarter of this year.
Christopher Ceraso - Analyst
All right, great.
Thanks very much.
Operator
Darren Kimball, Lehman Brothers.
Darren Kimball - Analyst
I am wondering if you would be able to put some parameters out for the third quarter?
Mike Simonte - VP, Treasurer
For the third quarter of this year, we still expect some earnings growth.
But we're still more focused as we look at the next six months and watching the schedules on the entire back half of the year.
And we're still feeling good about enough volume being in those schedules to support the guidance that we have on the Street.
Darren Kimball - Analyst
It seems like there's probably more uncertainty about the fourth quarter than the third quarter.
Would you agree from a volume standpoint?
Mike Simonte - VP, Treasurer
Based on what we see right now, the schedule -- as I think you know, we have 16-week schedules that are delivered to us each week.
And at this time, those extend into the early parts of the fourth quarter.
So I think your comment would be accurate in that the 16-week schedule tend to be the customers' near-final view on production levels.
Unidentified Company Representative
And I think the other thing, Darren, is remember -- we are right now launching the 2005 model year.
So they have got to get out to the dealership, and therefore there has to be a review of data which takes four, eight, ten weeks after they're actually going over the curve.
So obviously that will snowplow into the fourth quarter in some period.
Darren Kimball - Analyst
Right, but just given that I think we all agree that volumes in the third quarter are probably not going to change much, and that there probably is risk, and most of it is downside risk in the fourth quarter -- I was just for my own purposes trying to get a little bit more comfortable about what the third quarter looked like, because if you can kind of store a couple of pennies away that might not show up in the fourth quarter, it's going to be easier to be comfortable with the $4.
Tom Martin - VP, Finance & CFO
Yes, that's right, Darren.
And we do see some earnings growth in that third quarter.
Let me help you out a little bit on that.
In the second half of 2003, we reported earnings of about $1.67.
During the first half of this year, if you exclude the charge we took in the first quarter, we're at about $1.96.
So to get the $4, we need 37 cents per share more in the second half of the year.
A couple things I want to point out -- interest cost things are going to be significant.
And that alone should bring about 15 cents per share to the bottom line in the second half of this year on a comparative basis.
So that is going to help us out.
The other thing I want to point out is the voluntary separation program, this charge we took in the second quarter -- most of that -- not all of it, but most of that will have a payback in this calendar year, as well.
And we see another 10 cents a share or so simply on that item.
So there is about 25 cents on a comparative year-over-year basis that we have got structurally in our plans for this year.
And that is a big part of the reason we still feel good about our earnings guidance at this time.
Darren Kimball - Analyst
Can you give us the working capital number in the quarter?
I know you have talked through all the issues there, but I think you have it all kind of lumped into "other."
Tom Martin - VP, Finance & CFO
That is the working capital item.
The sum of all those items are the working capital items.
Darren Kimball - Analyst
Okay.
The other question I had was on the acquisition front.
Can you give us a number similar to what you give us in terms of business that you're quoting on?
If you look at sort of the revenue of all of the acquisitions that you're looking at seriously, can you give us any sense of the magnitude there?
Dick Dauch - Co-Founder, Chairman, & CEO
As you know, Darren, it is not our policy to comment on potential acquisitions.
I have given you a general guidance that we are looking at certain targets.
We're looking at what the fit is and what the potential impact would be to our company, our shareholder value.
And we will review what is best to serve us over the next 10, 15-year needs for our company.
And we will keep our investment grade with what we do -- that's very critical.
And secondly, if we have something to announce, we will make sure that you are in the full loop immediately.
Operator
Jon Rogers, Smith Barney.
Jon Rogers - Analyst
I just have a question.
There has been a good deal of discussion on other conference calls this quarter about the new FASB ruling with respect to convertible bonds.
Tom, is that going to affect you guys if that goes into effect?
And do you know what the dilution might be?
Mike Simonte - VP, Treasurer
I will take that question.
First of all, the dilution will be nil.
There is a couple of reasons that's true.
I think you know we have already purchased 2.2 million shares of stock.
And of course, that takes a big chunk out of any dilutive effect that might be coming in case of the new accounting rule.
But beyond that, we anticipated this type of thing -- not this specific change at this specific time.
But we were prepared for this by having the flexibility to settle our obligation in cash or shares.
If you are familiar with all the accounting rules in this area, you know -- if you have got the flexibility to settle in cash, you can avoid this dilution until the stock price trades above the conversion price, which in our case, is going to be 55.43.
So we don't see any near-term dilution as a result of this change, if in fact that change comes to pass.
Jon Rogers - Analyst
I just have one more question -- Joel, with the independent front-axle system, is that a product -- and I am not talking about the new business, but is that a product that requires a PTU just in the engineering?
Joel Robinson - President & COO
It depends on whether it's a front-wheel-drive architecture that converts to an all-wheel-drive or a rear-wheel.
If it's front-wheel-drive, it needs a PTU.
If it's a rear-wheel-drive, it will use a traditional transfer case (ph) technology.
We are able to deliver either.
The important thing, Jon, is we have got all those products in our stable.
They are all packageable, and things are happening rapidly with good results for our company.
Operator
Dominic Martilotti, Bear Stearns.
Dominic Martilotti - Analyst
Just a couple follow-ups -- you touched on the payback for the UAW agreement being about 10 percent kind of a net positive of in the second half.
Can you give us a better idea of what that would be on an annual basis?
Mike Simonte - VP, Treasurer
I'm sorry; what was the question, Dominic?
Dominic Martilotti - Analyst
You touched on the UAW agreement in terms of the payback on that, and probably seeing 10 cents a share positive net effect in the second half.
Is that -- safe to say it's a 20-cent return on an annual basis, or is it different from that?
Mike Simonte - VP, Treasurer
It's close to that.
The payback on the entire program is within a year.
So really, what we are saying is that the flip -- the effect of 15 cents per share flips within a year.
Dominic Martilotti - Analyst
Okay.
And going back to --
Mike Simonte - VP, Treasurer
If you look at more than 15 (ph) for a whole year basis, Dominic.
Dominic Martilotti - Analyst
Going back to the Coco (ph) dilution, and you say that there will be no dilution for you guys in particular.
But does that mean that there's going to be some sort of a cash outlay to avoid that dilution?
And will that be basically in the form of buying back shares?
Mike Simonte - VP, Treasurer
Okay -- what I said was that we have already bought back 2.2 million shares, which would mitigate dilution.
And that was kind of put into the structure of the financing.
But no, that's not really the punchline.
The big (ph) issue is that if an issuer of convertible debt securities has the flexibility to settle with obligation in cash, and agrees to do that, then it is issued -- this converted (ph) method of accounting does not apply to that debt securities.
And so we are looking at that -- and will there be an outlay of cash?
Well, the answer is yes.
But it would coincide with when you have to settle the debt obligation, which in our case would likely be around seven years from now at the timing of the first put and call.
Dominic Martilotti - Analyst
Okay.
And going back to the SG&A decrease in the quarter, with some of those changes that you went through before -- is that a permanent adjustment downward going forward?
Mike Simonte - VP, Treasurer
The structural changes we made to those plans, as Tom described, are permanent. (multiple speakers) Yes, they are permanent.
Dominic Martilotti - Analyst
And then looking at raw material costs -- I mean, you guys did a pretty good job at the gross margin level.
Can you give us a little more color what's going on there?
I think we have heard some dissenting views from some other suppliers in the group about what's going on with raw material.
Can you just give a little update there?
Joel Robinson - President & COO
I think you are referring to the steel pricing for the most part.
Is that right, Dominic?
Dominic Martilotti - Analyst
Well, for you guys in particular, yes.
Joel Robinson - President & COO
Well, we had protection on the majority of our steel buy -- we had metal market production.
There are some (technical difficulty) areas that we are not fully protected.
But we have been able to overcome the metal market charges we can't give back to the customer through some productivity initiatives that we have been able to pull through.
So it has not been very large for us.
Dominic Martilotti - Analyst
Are you seeing any further pressure in the second half in that area?
Joel Robinson - President & COO
There has been pressure all along.
I am sure you are aware -- you know, the scrap prices have jumped up again, so it's a day-to-day thing with us.
But thankfully, we have major protection with our major customer.
Dominic Martilotti - Analyst
Okay, and lastly, looking at the contract you guys have announced here, was this with one of the customers that you had already signed an agreement that if they would go forward, they would go with you?
And also, where do you guys stand with some of the other customers --
Dick Dauch - Co-Founder, Chairman, & CEO
This is a separated contract.
Those development contracts are still out there.
We're hoping for a decision on them in the third quarter -- a totally different thing.
Dominic Martilotti - Analyst
Okay, so --
Dick Dauch - Co-Founder, Chairman, & CEO
Where we've talked to you in the past (multiple speakers) development contract.
This has nothing to do with that.
Dominic Martilotti - Analyst
Okay.
So with those in-development contracts, we should hear something probably at least in third quarter, perhaps second half of the year?
Dick Dauch - Co-Founder, Chairman, & CEO
(multiple speakers) In the next 90 days, we will probably hear something, and we will share it with you.
Operator
Rob Hinchliffe, UBS Warburg.
Rob Hinchliffe - Analyst
Circling back to Darren's question on the third quarter, maybe it's just semantics, but did you say some earnings growth in the third quarter?
And then I'm just -- I think you made 71 cents last year.
So what were you referring to there?
Unidentified Company Representative
Yes, that's exactly right.
We look at the third quarter, that we will show earnings growth over the 71 cents that we reported to you last year.
And that's exactly what I intended to say.
Rob Hinchliffe - Analyst
Okay, so somewhere above 71 cents.
Unidentified Company Representative
Exactly.
Rob Hinchliffe - Analyst
And you said the build schedule -- you see out 16 weeks, and generally you think those are pretty firm right now --?
Unidentified Company Representative
16-week schedules are meant to be firm schedules.
Of course, you know the customer is going to react to the market conditions.
So right now, they are given to us as firm schedules.
Rob Hinchliffe - Analyst
Okay.
GM trucks have been so strong, you have not necessarily had to worry about it, but if they're cut -- you know, inventories are obviously high.
What sort of planning have you done, or what can you do to sort of manage through a downturn in GM truck builds?
Unidentified Company Representative
We have been through this many years -- in our existence for 10 years.
We have got a very good industrial engineering department, a good productivity program, and we try to look out in the future and say "what if"s.
And we try to figure out exactly what we'd do in the case of a certain plant downtime, for instance.
GM took Moraine down for a week in this quarter, and we were able to respond quickly, because our operations people know where they need to go to cut their costs through these downturns.
Rob Hinchliffe - Analyst
Of the 350 in new business that you've talked about, how much of that comes on in 2005?
Mike Simonte - VP, Treasurer
A little less than half.
Rob Hinchliffe - Analyst
Which products are that for?
Mike Simonte - VP, Treasurer
There are couple of key products launching in the second half of this year that run into next year.
The third Hummer product is one of them -- (multiple speakers)
Unidentified Company Representative
345 (ph);
Hummer 3, which is what Mike is talking about, the SsangYong products in that timeframe, and several of those (multiple speakers) Dodge Power Wagon -- I think we mentioned that one earlier.
We have given you three specifics, but there are several of them.
Rob Hinchliffe - Analyst
Okay -- and then lastly, you were talking about CapEx spending for the GMC 900.
What on that vehicle from an axle standpoint is different, and what specifically do you have to invest new capacity in?
Yogendra Rahangdale - EVP, Operations & Planning
CapEx is my responsibility.
The front axle is the big -- change in the front axle.
The rear axles are minor changes, so communicate (ph) equipment at a product (ph) details -- mostly just front axle.
Rob Hinchliffe - Analyst
Okay, and the difference is in the differential, or --?
Yogendra Rahangdale - EVP, Operations & Planning
The difference is in the mounting and how you --to get better handling and better ride comfort -- the mounting is different.
Unidentified Company Representative
We don't want to go into the proprietary stuff for a vehicle that is yet not launched.
We're trying to share with you engineering.
It is in the front axle application that has significant structure or differences that relate to CapEx requirements.
The rear is a much lesser level of change, and there is related componentry to the overall driveline system, driveshafts, yokes, differentials, whatever.
But we do not want to go into those details.
Rob Hinchliffe - Analyst
Fair enough.
The content, though -- the revenue content per vehicle is similar to the 800, or do these changes add revenue opportunity for you?
Yogendra Rahangdale - EVP, Operations & Planning
Very similar, but a little bit up (ph) -- that kind of level.
Unidentified Company Representative
A little bit improved.
Operator
Rod Lache, Deutsche Bank.
Mike Heisler - Analyst
It's Mike Heisler (ph) for Rod.
Just a couple of questions -- firstly, I was hoping maybe you could clarify looking at the operating margins in the second quarter versus a year ago -- just kind of looking at it apples-to-apples, and excluding the separation charges and some other onetime charges -- could we kind of walk-through that?
Are you guys actually showing a 30 basis point margin improvement on an apples-to-apples basis?
Tom Martin - VP, Finance & CFO
That's exactly right, Mike.
That's exactly right.
Mike Heisler - Analyst
(multiple speakers) So then that would imply a 30 percent contribution margin -- is that fair?
Tom Martin - VP, Finance & CFO
It's in that area, yes.
Mike Heisler - Analyst
And given the mix of business that you are seeing right now, is that a good number to kind of be thinking about going forward?
Tom Martin - VP, Finance & CFO
Well, you know, the contribution margin does not change or has not changed much for us.
The relative levels of profitability are consistent or reasonably consistent throughout our product lines, and it just doesn't change much from quarter to quarter, Mike.
Mike Heisler - Analyst
And Tom, you had mentioned that there's more cap spending on the GMT 900 beginning in the second half of the year.
What about other preproduction costs -- what about costs that might flow through the P&L?
When would you start to see that?
Yogendra Rahangdale - EVP, Operations & Planning
Mostly, the costs will start next year.
Mike Heisler - Analyst
Would it be closer to the second half of the year or would it be in the first half?
Dick Dauch - Co-Founder, Chairman, & CEO
The launch of the 345 program happens in February next year, so that's when we will be in the launch mode.
We will be doing the final peek at (ph) of the programs this fall.
Unidentified Company Representative
Tom, if you have any other point you want to make on that -- Tom Martin, go ahead.
Tom Martin - VP, Finance & CFO
Part of the CapEx that we have for spending initiatives -- we have over $300 million that we associated over the period, of which we have got some heavy spending in 2004 and 5 -- relatively about $125 million, that includes most of our programs.
The GMT -- the 900 and 345 are the two biggies, and both of those are basically going to be heavy hitters in 2004 and 2005.
Operator
Richard Hilgert, Oppenheimer.
Richard Hilgert - Analyst
Just under the wire.
Good job on the quarter. (multiple speakers) What's that?
Dick Dauch - Co-Founder, Chairman, & CEO
We were very pleased with it.
Richard Hilgert - Analyst
Given comments earlier in the year about getting near 15 percent EBITDA margins on an annualized run rate -- and then you compare that to where we wound up at for the second quarter -- you know, it seems like you guys really hustled on the basic blocking and tackling that goes on on a daily basis to battle the costs and keep your efficiency up to still be able to produce the numbers.
Would you characterize your efforts in that way?
Dick Dauch - Co-Founder, Chairman, & CEO
I think you are reading it absolutely right.
Our company was very focused.
Every associate on the team contributed, and the second quarter was one that we just felt was an outstanding quarter for our company.
And it went back to the blocking and tackling.
It went back to productivity -- cost effectivity, as Joe indicated.
Good, wise handling of the steel and the surcharge issue, and great throughput, and the quality thing, obviously, helped us immensely, because we did not have redundancies or waste.
Richard Hilgert - Analyst
All right.
I'm coming up with about a 15.3 percent EBITDA margin for the quarter excluding the 12.5 million pretax.
Is that about right?
Tom Martin - VP, Finance & CFO
Yes, Rich, we said it was just over 15 percent.
That's about right.
Richard Hilgert - Analyst
Given the aggressiveness on the cost-cutting in the quarter, where you wound up with the EBITDA margin -- would it be fair to say that then we should see in addition to the 15 cents and the 10 cents that you already mentioned in the second half from interest expense and early separation program some additional operating leverage because you have pulled forward some of that cost-cutting effort?
Tom Martin - VP, Finance & CFO
I think you know, but last year, we performed at about the 14 percent level for the whole year.
And we certainly expect to improve upon that here in 2004.
Based on the seasonality and issues that affect our business in the second half of the year, there's no question that we need to have some good operating leverage to get to where we want to be and expect to be by the end of this year.
Richard Hilgert - Analyst
Okay.
And would we now be able to drop the "near" out of the phrase "near 15 percent EBITDA margins on an annualized basis"?
Tom Martin - VP, Finance & CFO
Come on, Rich -- no. (laughter) We are doing a great job at the levels that we are at, and we are going to keep fighting every day to get there.
But no, we are not ready to back off "near" quite yet.
Thank you, everybody.
Unidentified Company Representative
Thanks, Rich, and we thank all of those who have participated on the call, and appreciate your interest in AAM.
We certainly look forward to talking with you in the future.
Thank you.
Operator
Thank you.
That concludes the American Axle & Manufacturing second-quarter conference call.
You may now disconnect.