American Axle & Manufacturing Holdings Inc (AXL) 2004 Q3 法說會逐字稿

Good morning.

My name is Kristy (ph) and I will be your conference facilitator today.

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

Thank you Kristy.

And good morning everyone.

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

Hopefully all of you should have had a chance to review our third quarter 2004 earnings announcement that we released earlier this morning.

If you have not, you can access it on the AAM.com Web site or through the PR newswire services.

A replay of this call will also be available beginning at noon today through 5 PM Eastern daylight time through November 4, 2004 by calling 1-800-642-1687, reservation number 1162806.

Before I can 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 risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of those operations 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, security analysts, news media representatives, and other interested parties.

I would also like to remind you that during the call, we may refer to certain non-GAAP financial measures.

Information regarding these non-GAAP measures, as well as the reconciliation of these non-GAAP measures to GAAP financial information, is included within the supplemental information on our press release and is also available on the AAM.com Web site.

We're also audio Web-casting this call through our Web site, AAM.com.

This call will be archived in the Investor section of our Web site, and will be there for a minimum of 1 year for later listening.

During the fourth quarter, our senior executives will be presenting at 2 major industry conferences -- the Gabelli Automotive Conference in Las Vegas on November 3, 2004, and the Baird Industrial Conference in Chicago on November 10, 2004.

We also plan to be in San Francisco, Baltimore, Philadelphia, and New York in November and December.

We look forward to seeing many of you at these events.

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

Please do not hesitate 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, AM's co-founder, Chairman and CEO, Dick Dauch.

Thank you Chris.

Good morning everyone.

I would like to thank everybody for joining us today to discuss AAM's financial results for the third quarter of the year 2004.

I'm pleased to be joined today by AAM's Vice Chairman, Joel Robinson; our Executive Vice President of Operations and Planning, Yogendra Rahangdale; our Chief Financial Officer and Vice President of Finance, Tom Martin; along with Mike Simonte, our Vice President and Treasurer.

After I provide a brief overview of our financial results for the quarter, I will give you an update on where AAM is at operationally.

And then we'll finish up with an update on the strategic growth initiatives.

I will then turn things over to Tom Martin to discuss the details of our financial performance.

After that, we will open up the call for any questions or comments you ladies and gentlemen may have.

Let me start by reporting that AAM sales in the quarter were approximately $842 million, with net income totaling $36.4 million -- our third best third quarter performance.

This resulted in diluted earnings per share of 68 cents for the third quarter of 2004.

This was consistent with our revised expectations, as North American light vehicle production was down nearly 1 percent in the quarter;

GM light truck production was down approximately 5 percent in the quarter; and through three-quarters of the year 2004, GM light production of trucks was down 4 percent on year-over-year basis.

It is also important to note that GM truck sales are up 3 percent on the year-to-date basis as compared to 1 year ago.

In the most recently completed sales period of September 2004, GM posted all-time industry record sales of trucks, SUVs, and full-size pickups.

I'm pleased to report that we will continue to experience optimal sales growth with customers other than GM.

Our sales to non-GM customers increased by 5 percent to over $175 million for the third quarter of 2004.

Non-GM sales now represent approximately 21 percent of our total sales.

Through the course of the year, strong demand for the Chrysler Group's Dodge Ram heavy-duty pickup truck and AAM products supporting other Chrysler Group programs have driven our non-GM sales growth.

Gross margin for the quarter was 12.8 percent versus 13.8 percent for the third quarter of 2003.

These margins reflect the impact of lower production volumes and higher costs of purchased metal market commodities.

These trends are affecting the entire automotive industry and related global marketplace.

Let me now provide you with a quick overview of the quarter from an industry perspective.

Metal market commodities and energy prices have significantly risen in costs.

That, coupled with lower production volumes, are (sic) the factors (sic) that resulted in margin pressures in the global automotive supply industry.

Despite these challenging external factors, AAM remains very focused on our internal operations and what we control to deliver value to our customers, and to deliver solid financial performance for our stockholders.

Other areas of focus include the following -- first, AAM is intensely focused on delivering the highest quality.

And we are accomplishing that at a six Sigma level, 3.4 parts per million.

That's in advanced technology products to our customers.

The products are delivered on time every time, with the highest available quality and customer satisfaction level in the industry.

And our customers (technical difficulty) profusely (ph) appreciate that.

AAM continues to perform at world-class levels.

For the first 12 months, our parts per million, as defined by our customers, is exceptional right (technical difficulty) at 6 parts per million.

No one in our industry comes close to that.

These quality and warranty performance records are competitive advantages in terms of our ability to win more new business.

It also reduces our internal structural costs and continues to enhance our margins.

Second point, all AAM associates understand the need for continuous productivity improvements, and we get excellent results from our workforce.

AAM's operating productivity, as measured by the reduction in the number of labor hours we need to generate $1000 of sales, continues to run in excess of 8 percent annual improvement.

This is consistent with our long-term productivity trends as we started our operations back in 1994.

We still have many more opportunities to consider this improvement in the future.

I feel very good about it.

Third, AAM continues continuously manages the cost drivers that have the most significant impact on our business.

In 2004, the rising cost of purchased metal market commodities has been the most important issue in this regard.

AM has agreements with its customers and suppliers to lessen the marketplace fluctuations of these commodities.

To manage these costs, AAM is currently validating new global metallic suppliers for 2004 and beyond.

And this has been a 5-year process to be able to report this to you.

AAM will continue to work with our customers and suppliers to sustain mutually beneficial arrangements to manage this issue.

Fourth point -- AAM continues to invest in the development of new high-technology products to meet the changing needs of the global marketplace and our automotive automobile customers.

Through three-quarters of 2004, AAM's R&D spending has increased over 10 percent on a dollar basis year-over-year in excess of $51.5 million.

In 2004, nearly 88 percent of AAM sales are generated by new advanced technology products that we have brought to the market in the last 5 years.

This continues to be a vital payback on AAM's long-term commitment to new product development.

-- our applied R&D efforts and strategic focus on developing innovative new products, enhance current product performance, and expand our driveline systems, chassis systems and module capability.

We also have excellent stability control systems that we're providing to our customers.

These investments have resulted in the development of our family of PTUs, or power transfer units;

IRDAs, independent rear drive axles;

IFDAs, independent front drive axles; a brand new product for our portfolio, transfer cases; electronic locking differentials; advanced driveshafts for all kinds of four-wheel drive or all-wheel drive applications, including passenger cars, crossover vehicles, as well as the truck family.

These efforts in R&D are targeted at higher growth segments of the marketplace throughout the world.

This has successfully positioned AAM to secure additional profitable business with an expanded customer base throughout the world as we expand our portfolio.

As I mentioned last quarter, our patented electronic smart bar technology is now prominently and exclusively featured on the all-new 2005 Dodge Ram Power Wagon.

We were pleased that our significant and consistent focus on R&D is paying off through the launch of these products that support the program and our customers.

The smart bar and AAM's new electronically-controlled front and rear locking differentials provide a powerful combination to improve off-road performance and on-road stability for the vehicle.

Let me now take a moment update you on the progress of our strategic business growth initiatives.

I mentioned our last call that we have secured approximately 70 percent of our current book of business through approximately year 2014.

We also said that we're in the process of finalizing arrangements for a successor program that represents yet an additional 10 percent to be sourced to AAM as well.

I'm happy to say this is now complete.

We now enjoy approximately 80 percent of our top line booked business for 10 straight years.

I should now like to update you on the status of the major future passenger car program sourced to AAM that we first announced on July 23 of this year.

AAM is actively involved in the early engineering stages with an OEM to design and integrate IRDA and IFDAs for this important program that will be sourced in several (technical difficulty).

While we cannot provide further information on this program at this time, we can say this is a multi-year launch and it's a global implication.

The most significant portion of the program is expected to be in the 2008 model year launch.

We hope to update you further as this unfolds.

AAM is currently quoting new business opportunities totaling well over $0.5 billion.

Production launch timing of the programs ranges from 2006 to 2008 model years.

Approximately 55 percent of the quoted business activity is for customers other than General Motors.

Over 50 percent is in the support of foreign and/or transplant vehicle programs.

Much of that relates to our exciting new driveline product, four-wheel drive/all-wheel drive technology, for fast cars as well as crossover vehicles.

During this past quart past quarter, AAM opened a business office in Shanghai, China.

As you know, we previously opened a business in technical ops in Pune, India in the second quarter of this year.

We have our Asian focus and we're now executing it.

These offices continue to expand our global presence as we support business growth throughout the world, and especially in Asia.

We will continue improving our product development capability and reducing our cost structure as we do these things.

AAM has built a world-class financial base that is now in full support of our world-class manufacturing system and engineering capabilities.

We have found a good business balance.

As we look at our long-term growth strategy, acquisitions will play a larger role in our continued profitable growth plan over the next several years.

We're diligently redoing (ph) opportunities that include healthy forces of organic growth and (indiscernible) acquisitions.

While we have nothing to announce today, I'm confident that through the execution of our total business growth strategy, we'll continue to expand our product portfolio, customer base and geographic region diversity.

And my Vice Chairman, Joel Robinson, is helping me personally to expand these issues.

Before I turn the call over to Tom, let me take a few comments about changes to our Board of Directors and add a comment or two about our outlook for the rest of the year.

This past quarter, Jack Reilly resigned from our Board of Directors.

I would like to thank Jack for his Board governance and contributions to AAM.

We wish him the best in his future endeavors.

We also recently announced the appointment of a new Board member during this past quarter.

Her name is Elizabeth "Beth" Chapel (ph).

She is presently President and CEO of the Joint Economic Club (ph) and a past (technical difficulty) specialist (ph) with the AT&T organization.

She has now joined AAM's Board of Directors.

Her extensive business and public company's Board of Directors experience and understanding of current business issues is strong and a welcome addition to AAM Board of Directors.

I would like to thank you, Beth, for joining our AAM team.

I would now like to review our outlook for the remainder of 2004.

On September 9, for the first time in our Company's public history, we revised our earnings guidance downward due to lower production volume and rising costs associated with purchased metal market commodities.

AAM remains confident in our ability to achieve our revised full year 2004 earnings guidance of $3.40 to $3.50 per share.

We also feel confident in what we've planned for the fourth quarter of this year.

That excludes the impact of the onetime debt refinancing costs reported in the first quarter of 2004.

In addition, we remain focused on achieving our remaining objectives that we set out to do in the beginning of 2004.

I will remind you, some of them were -- first, continue AAM's world-class operational and financial performance; second, to continue AAM's very strong positive cash-flow generation; third, to aggressively continue to diversify AAM's customer base while expanding our product portfolio; fourth, to maintain and improve upon AAM's investment-grade credit rating; and fifth and finally, to continue to enhance value to our AAM stockholder through the quarterly cash dividend and stock repurchase program.

I thank you, ladies and gentlemen, for your continued attention and your vital interest in AAM.

Let me now turn this call over to our Vice President of Finance and Chief Financial Officer, Tom Martin.

Tom?

Good morning everyone.

We have a lot to cover today.

So let's get right into the highlights of AAM's financial performance in the third quarter of 2004.

Net earnings were 36.4 million or 68 cents per share.

Sales -- the customers other than GM were up 5 percent, totaling 175 million for the quarter.

Non-GM sales represent 21 percent of our total sales.

Gross margin, 12.8 percent; operating margin was 7.2 percent.

EBITDA margin was 12.3 percent.

Net cash-flow provided by operating activities was 104 million.

After deducting capital expenditures of 63.1 million, our net cash-flow provided by the operation was $40.9 million.

And net debt at the end of the third quarter was 528.5 million.

AAM's net debt to capital ratio was right around our targeted level of 35 percent at 35.6 percent.

Let me address these items and others in more detail.

AAM's sales for the quarter of 841.6 million were about 3 percent lower than the third quarter of 2003.

As Dick said, total North American light vehicle production was down 1 percent for the quarter as compared to the prior year.

GM's North American light truck production was down approximately 5 percent.

This was the primary reason for our lower sales.

Sales to customers other than GM grew by 5 percent to 175 million for the quarter.

The three quarters of this year, AAM's non-GM sales have grown by more than 55 million or 10 percent on a year-over-year basis.

Continued strong demand for the Chrysler Group's Dodge Ram heavy-duty pickup truck and other AAM product supporting Chrysler Group programs are primary drivers of this growth.

As a percentage of total sales, non-GM sales were 21 percent of total sales for the third quarter of 2004.

The four-wheel drive/all-wheel drive penetration rate was approximately 61 percent for the third quarter of 2004.

This was slightly higher than in the second quarter of 2004 and almost exactly the same as the third quarter of 2003.

For 2004 as a whole, we expect to be at 63 percent.

For the first three quarters of 2004, sales were 2.72 billion as compared 2.76 billion for the same period of 2003.

On a year-to-date basis, North American light vehicle builds were about flat.

GM light truck builds are down about 4 percent so far this year.

Gross margin for the quarter was 12.8 percent versus 13.8 percent for the third quarter of 2003.

For the first three quarters of 2004, gross margin was just under 14 percent or approximately 13.9 percent.

Our margins continued to benefit from gains in operating productivity generated by AAM manufacturing systems (ph) (technical difficulty).

As Dick mentioned earlier, the number of labor hours required to generate $1000 of sales has continued to improve at an annual rate of about 8 percent.

AAM is also realizing a benefit from the voluntary separation program, which was offered to our hourly associates earlier this year.

These improvements have been more than offset by the impact of lower production volumes and the increased costs of purchased metal market commodities.

SG&A expenses were 47 million in the quarter or 5.6 percent of sales.

This compares to 49.7 million or 5.7 percent of sales in the third quarter of 2003.

In the first three quarters of 2004, SG&A costs are running at about 5.2 percent of sales in 2004, compared to 5.3 percent of sales in 2003.

Research and development spending in the quarter was up more than 10 percent to 17.7 million.

On a year-to-date basis, R&D spending has exceeded $50 million.

This is in line with our plan to increase R&D spending in 2004 while maintaining AAM's overall SG&A spending at a relatively flat level.

Operating income was 60.9 million or 7.2 percent of sales in the third quarter of 2004, compared to 69.7 million or 8 percent of sales in the third quarter of 2003.

For the first three-quarters of 2004, operating income was 237 million or 8.7 percent of sales.

This compares to 254.8 million or 9.2 percent of sales for the same period of 2003.

EBITDA was 103.4 million or 12.3 percent of sales in the third quarter of 2004, compared to 111.4 million or 12.8 percent of sales for the third quarter of 2003.

For the first three quarters of 2004, EBITDA was 340.2 million or 12.5 percent of sales.

Excluding the impact of a 23.5 million debt refinancing charge that we took in the first quarter, EBITDA would have been 363.7 million or 13.4 percent of sales for the first three quarters of 2004.

That is down marginally from our 2003 performance of 13.7.

But it is very competitive with our peers in the automotive supply industry.

Before the (technical difficulty) line (ph), net interest expense was about half of our prior year run rate at 5.9 million for the quarter versus 11.2 million in the third quarter of 2003.

As we discussed in the second quarter, AAM's borrowing costs now reflect the benefit of the 1 billion of debt refinancing we completed in the first quarter of 2004.

AAM's average interest rates on outstanding borrowings for the third quarter of 2004 was 4.5 percent.

We now estimate AAM's overall effective tax rate for 2004 to be approximately 34 percent.

We have previously estimated our tax rate to be 34.5 percent for 2004 because we did not presuppose the extension of R&D tax credit and other recently enacted tax legislation.

AAM's tax provision of 32.7 percent in the third quarter of 2004 reflects the impact of an adjustment to bring in line our year-to-date provision to 34 percent.

Our tax provision rate was approximately 35 percent in 2003.

Net earnings for the quarter was 36.4 million or 68 cents per share.

For the first 9 months of 2004, net income was 128.2 million or 4.7 percent of sales.

Excluding the impact of debt refinancing charge, net income was 143.7 million or 5.3 percent of sales for the first three quarters of 2004.

That is almost exactly the same as the 143.7 million or 5.2 percent of sales that AAM earned in the first three quarters of 2003.

Diluted earnings per share were $2.37 for the first three quarters of 2004 versus $2.71 for the same period of 2003.

Excluding the impact of the debt refinancing charge, diluted earnings per share would've been $2.65 per share on a year-to-date basis for 2004.

Moving on to AAM's credit statistics, net interest coverage or EBITDA to net interest expense ratio is up to 18 times on year-to-date basis in 2004.

AAM's gross debt EBITDA leverage ratio on a trailing 12-months basis was just slightly more than one time at 1.1.

AAM continues to have very strong performance in our first year as an investment-grade credit.

Now let's turn to our cash-flow performance for the quarter.

Net cash flow provided by the operating activity was 104 million in the third quarter of 2004.

After deducting capital expenditures of 63.1 million, AAM's net cash flow provided by operating was 40.9 million.

For the first three quarters of 2004, net cash flow provided by operating activities was 228.1 million.

After deducting capital expenditures of 158.8 million, AAM's net cash flow provided by operations was 69.3 million.

Let's focus on our capital structure.

AAM's net debt at the end of the third quarter was 528.5 million.

AAM's net debt to capital ratio was 35.6 percent at September 30, 2004.

AAM's gross debt to capital ratio was only slightly higher, at 35.8.

On a year-to-date basis, AAM's net debt has increased by approximately 91 million.

Here are the primary reasons why.

First, through the first three quarters of 2004, AAM has repurchased approximately 3.6 million shares of common stock for $131 million.

Second, in June and September of this year, we paid our first 2 quarterly cash dividends as a public Company of 15 cents per share or 60 cents per share on an annualized basis.

That payout on these dividends was 15.5 (ph) million.

Third, as part of our debt refinancing activities in the first quarter, we paid a 14.6 million call premium to redeem our previously outstanding 9.75 percent notes and incurred almost 10 million of debt issuance costs to secure 1 billion of long-term investment-grade financing.

Netting (ph) the cash-flow used in these financing activities with 69 million of net cash flow provided by the operations, approximately 12 million we have raised through the exercise of stock options this year results in net financing growth of approximately 90 million, and explains the increase in our net debt since the beginning of the year.

Stockholders' equity was 956 million at September 30, 2004.

This is about flat since the end of 2003, due principally to the impact of stock repurchase program.

At quarter end, AAM had a total available borrowing capacity in excess of $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 investment capital, or ROIC, was 14.8 percent or approximately equal to our 15 percent target level of return.

Even if we don't adjust for the impact of debt refinancing charges, our trailing 12-month ROIC of 13.8 still compares very favorably with most if not all of our peers in the automotive supply industry.

Looking at the remainder of 2004, as Dick already said, we're re-confirming our 2004 earnings guidance of $3.40 to $3.50 per share.

Again, this excludes the impact of debt refinancing charges, or 28 cents per share, reported in the first quarter.

From a financial perspective, AAM is clearly focused on creating long-term stockholder value while at the same time providing strong credit protection for our lenders and bondholders.

We're committed to balance these objectives and believe that our financial strength will be key to achieving the strategic objectives that Dick described earlier in the call.

Thank you for your time and attention this morning.

I would like to turn the call back to Chris Son for the question-and-answer period.

Thank you Tom and thank you Dick.

We now have time for some questions.

So at this time, I would like to turn the call back over Kristy to begin the Q&A session.

(Operator Instructions).

John Casesa, Merrill Lynch.

Good morning.

I have 2 financial questions and 2 strategic questions.

First, perhaps for Tom, the financial question is -- Tom, what about your full year cash-flow goal?

It looks like you're a long way from achieving $200 million in operating cash-flow.

And I was wondering what you can tell us about your expectations for the fourth quarter CapEx, working capital, D&A.

And then secondly, can you just recap the buyback authorization?

How many shares do you have left to purchase?

What are your intentions in the near-term?

John, this is Dick Dauch.

I am going to have Mike Simonte handle those first two questions you have got related to finance.

Okay, great.

Good morning John.

Let's deal with the second question first, because it's a pretty quick answer.

Through the end of the third quarter, we've repurchased about 3.6 million shares of stock.

And that compares to an authorization of 5.5 million shares.

We've got about 1.9 million shares to go.

We're looking at that every day, John.

And really, market conditions are going to dictate what makes sense for us.

But I can confirm, just as we have before, that we asked for authorization because we thought it was a particularly good time to be opportunistic on that front.

Okay.

Let's get back to the first question, which is a very important question.

We've targeted all along about $200 million or free cash-flow for this year.

And that continues to be our plan and our target.

There are a couple of things that I think you know are very seasonal about our cash-flow.

And the fourth quarter is always a great, very strong quarter.

Last year -- last 2 years it was over $100 million.

We're looking at somewhere around $130 million this year.

That will get us up to about $200 million.

A couple of things to point out as to why our three-quarters cash-flow performance is running a little bit behind last year.

First of all, we've been building up some metal market pass-through receivables with our primary customer, General Motors, that we simply didn't have (multiple speakers).

So that's accounting for a big chunk of the difference.

In addition, in the first quarter of this year, we settled the UAW contract.

And in the second quarter we settled the IAM contract.

And that required us to make up-front payments at $5000 per head, a total of about $37.5 million between the two.

And that, again, was something that simply didn't exist last year.

Additionally, and I talked about this at the end of the second quarter, we had $10 million of tax credits collected in the first 6 months of '03.

These were state investment tax credits that are no longer available to us.

And we had a flip on the lease payment that we used to pay in the fourth quarter.

It's an annual payment, and now we pay it in the second quarter.

Net, all in, John, that's about $90 million of activity that is different on a year-over-year basis.

And a good portion of that -- the metal market pass-through receivables that we will collect -- in fact, we've already collected $10 million in the month of October.

And we have a purchase order on the second quarter billing.

That's going to flip around -- we're going to have a very strong quarter in the fourth quarter from a cash-flow perspective.

That's very helpful Mike, thank you.

Then just 2 strategic questions Dick.

First, with the consolidation that is occurring in the steel industry, do you think that that is -- does that give your suppliers even more power going forward?

And how would you deal with that?

And then secondly, I saw this morning that SAIC acquired control of SsangYong.

How do you think that relates to opportunities for you, given your relationship with SsangYong?

Well, let's take the second piece first.

We feel very good about the SAIC/SsangYong.

We know about that.

We had no surprises there.

We also have over a 5-year clause of total protection there, no matter who the ownership was.

So we are an excellent shape on that.

We actually think we will have expanded business opportunities in the near future.

And I'm just bashing executives in the next 48 hours over there to expand that business.

So that's the answer the first question.

The second question, I think, if I interpreted your question right, was on the continued consolidation base of OEMs throughout the world.

Does that give more leverage to suppliers?

I don't know whether I would say that macro.

But I would say for American Axle specifically, there is certainly more opportunity because there's more sourcing going out in net.

And it's coming into the heavy issues of heavy engineering such as us -- engine transmission, driveline, drivetrain, and powertrain.

We feel very good about it, especially when we have high technology and stability systems such as we have.

So we feel very good about what's going on in the consolidation of the auto sector at the OEM level.

And also the Tier 1 supplier level, we feel like we're in excellent shape and focused properly on it at this time.

Dick, I apologize.

I was actually referring to the consolidation in the steel industry. (multiple speakers)

Okay, sorry.

On the steel industry, I will start and I will ask Joel to focus on some of the steel.

We have an excellent supply, first of all, on steel.

And that is a very critical commodity for us.

As I think Tom or Joel mentioned before, we use somewhere around 315 to 320,000 tons of steel.

We are by far the largest special bar quality user in the United States of America and North America.

And I think I mentioned to you before, about 5 years ago I directed my management team to leave North America and look at the entire global for sourcing.

So we are in excellent shape on global sourcing.

We're in, also, excellent shape on the validation process.

And Joel, if there's anything else on the steel you would like to discuss at this time for John and the team, I will be happy to have you share that with them.

Hi John, Joel.

We think, really, we have the competitive advantage on buying steel, even though we've incurred some financial penalties this year.

But we think we're in a lot better shape than most of our peer group.

As Dick mentioned, we are the largest purchaser of SBQ bar stock in North America.

We've got 80 percent of our book of business going forward secured.

So we have some very attractive contracts to offer to our steel mills.

And we've got kind of a 3-point strategy to renegotiate our supply contracts, due that big backlog of business we have going forward, to renegotiate with the customers that we don't have metal market protection with.

And then finally, we're validating many, many offshore supply bases in Spain, Italy, Brazil, Korea, India.

And recently we've been into Russia looking at the mills.

So we have a great opportunity going forward to have some of the best steel pricing to offer to our customers.

So, I think -- John, the summary is 3 things.

One, we have good supply.

Two, we have good cost control leverage.

Three, we have designed it to be an advantage for our customer -- or for our Company in our peer group.

Jon Rogers, Smith Barney CitiGroup.

I just -- just to follow up on John's question on the steel issues.

It seems to me that there's not a really good understanding of the marketplace.

And there's a lot of moving parts in the steel buy with direct and indirect purchases.

Is a fair to assume that if spot prices don't move higher, that your margins -- you can hold your margins here and you can hold your steel prices here?

Or is there some issue with new contracts where prices can go up even if spot prices stay where they are today?

I will take that.

And then Joel, you may want to add something to this.

I think your comment -- can we hold prices -- no, I don't think we can hold prices.

What I think we'll do is have a lesser increase in price per ton than our competition.

Yes, that's the leverage that we think we have, John, in all the business we have booked already going forward.

So we're going to be able to get more favorable steel pricing than our competition.

Okay.

Great.

And then I guess one more question for Mike.

It looks like you've been pretty aggressive in the marketplace over the last quarter -- buying back shares.

How should we think about your capital structure (technical difficulty) year versus your stock price?

Can you -- even though you have the authorization in place, will you get more aggressive in filling that authorization and maybe take your debt to capital to, say, higher than the 40 percent range?

Or is that sort of your cap?

John, a couple of things.

First of all, I want to make clear that our primary use of our operating cash flows is to reinvest in this business, to grow this Company, and to expand our product portfolio and customer base as well as our geographic diversity.

We really view this stock repurchase program as a bit of an interim approach to manage that capital structure.

And we really don't see this program or too many other opportunities that would stray from our pretty long-stated objectives now on capital structure.

That's to stay within 30 to 40 percent on a debt to capital basis over the long-term, and to target 35 percent or so as an optimal level.

Obviously -- well, maybe not obvious to you, but obvious to us, the market at this time is providing us a very opportunistic situation.

So we have been getting after it, so to speak, buying shares in -- at these levels.

But we're going to continue to watch that every day.

But it's going to be just as important for us to watch the pacing on new program wins, M&A opportunities, all these types of things, because that really continues to be the primary purpose for our operating cash flow.

Okay.

And I guess just the last question, the follow up on that -- can you give us an update on the acquisition market and how you're looking at potential acquisitions that might be out there, versus maybe greenfielding something in Asia to support your new business wins?

Well, again, as I said, we are actively looking throughout the world at acquisitions, as well as essential bolt-on acquisitions into our Company.

We feel focused on 2 or 3, let's say 1 in Europe and another in Asia.

But we have nothing else to announce at this time.

Rod Lache, Deutsche Bank.

A couple of things.

Just -- first of all, to clarify what you just said about the steel impact.

I believe that you had said you anticipate a $20 million hit in the second half of this year.

Are you able to give us any kind of guidance on the first half of next year?

Or is it going to be a similar kind of impact year-over-year?

Or do you anticipate that it would be somewhat higher?

Rod, Joel Robinson.

As I said earlier, we're currently negotiating both with the steel mills, based on the long-term book of business we have going forward, and the volumes we would be able to give them.

We're renegotiating with the customers simultaneously, the ones that don't give us metal market protection.

And we're validating all these offshore mills.

So at this time, until all these negotiations are done, it's pretty difficult to give you an outlook on 2005.

But, Mike can comment on the numbers -- first 2 quarters I think were $7 million; third quarter, 9.5; and I expect the fourth quarter looks about the same.

But before we do that, let me just add a couple of things and then we'll come back to Mike on this.

We told you were working with both our customers and our suppliers to manage the steel issue.

We're doing that.

We're in the process, I told you, of globally looking for alternative suppliers.

And we got that done and we're validating.

I told you that.

We're negotiating contracts for a portion of this direct steel that we buy.

And Joel has discussed that with you.

We're overcoming most of the costs.

And we're in better shape than any of our competitors.

That's a very critical point on this issue.

There are other things we're doing that relate to product innovation.

Let me give you a couple of examples.

We're focusing on less steel usage to get to the net use of the final part because of innovating processes, some eliminating up to 15 and 20 percent of the billet that goes into the part before we have the final product coming out -- therefore, a whole lot less of steel going through and other margin enhancement for us.

So we've got a lot of cost advantages here.

Yet there will be some rise in cost of steel tonnage, but less than our competition.

Mike, you can take it from there.

Okay.

Rod, I think the only thing to add is a couple of things.

First of all, you have very accurately recalled that we have estimated the back half of this year the impact of these increased costs to be about $20 million.

Now, in terms of being able to understand what that means for next year, the first half of this year, as you know, we had much lower metal market price fluctuations.

And we saw about $7 million of additional costs over what we had planned for this year.

So that was $25 to $27 million for the year.

The first half of next year, while I'm not in a position to predict exactly what happened is going to happen, if things were to hold relatively constant with where we are right now, it should look a lot more like the second half of the year.

And we'll all have to watch the base metal markets.

As Joel so importantly pointed out, we have got some unique negotiations underway.

Also, our volumes our production volumes will drive that.

So, big picture, our margins should continue to be a little bit affected by it.

Can you also comment a little bit about the kind of flexibility you see in terms of adjusting other costs like labor, for example?

As you go out to 2005, obviously it's tough to predict what production levels are going to be.

But under various contingencies, do you have a fair amount of flexibility there?

We have told you that our labor continues to improve by over 8 percent per year (multiple speakers) thousand dollars of sales revenue.

And we've also told you we feel very confident about the future.

So that's the macro as it relates to labor.

We have great labor stability.

We have an excellent workforce.

We have long-term contracts.

We feel very, very good about the labor issue.

Great.

And just one last thing.

Are you anticipating the tax rate would be able to stay at this level?

This is Tom.

In reference to our tax planning process, we're slightly going to improve from our rate that we have today at 34.5 percent.

We should be in a range of around 34 percent for next year.

That's ongoing to existing tax applications that we're looking at on a quarterly basis.

Is that's the kind of assumption we should have for the fourth quarter?

Yes.

Yes.

Chris Ceraso, Credit Suisse First Boston Corporation.

Can you give us an update on your progress with regard to all-wheel drive programs?

You had a couple of development contracts.

Where do those stand?

I will have Joel give you an update on the all-wheel drive applications and potentials.

Yes.

Chris, a couple of things we did announce -- and we can't tell the name of the vehicle or the customer yet.

But we have a global platform all-wheel drive passenger car program, should start launching in '07 and '08.

We're in detailed engineering studies with the customer on that.

We also -- those development contracts I think that you're referring to that we talked about in Europe and South America -- we've done a second property, which is more towards what the production vehicle is going to look like.

We have sent that over to Europe for the customer to evaluate.

There's been a series of ride-and-drives (ph) at the senior management level.

There's going to be an evaluation of that vehicle early in November.

And we expect a decision yet this year or in the first quarter of 2005.

Next question.

Can you touch on the CapEx plans for 2005?

I think you mentioned before you expect a pretty meaningful step up as you prepare for the GMT-900.

Can you frame that, maybe?

Chris, I'm going to ask Yogendra Rahangdale to respond to your question on CapEx, please.

The CapEx -- as we're getting more efficient in going to the CapEx ratios, the number at one time -- when we got started a couple of years ago, our CapEx ratio used to be around 50 percent level.

Now we're getting to somewhere where we'll be between the average -- 25 to 35 percent.

That's where the average will be.

Per dollar of increased sales.

Sales.

Okay.

As it relates to the other issue, I think we had told you that we would probably be north of $300 million for the year 2005.

And we expect to be somewhere, let's say, between 310 and 320 because of the very huge launches we have coming.

We have over 13 major launches coming this year, including of course the big guys -- the GM 900 and many other launches for our products, which means we'll be growing the business significantly as we go into the end of 2005, 2006.

So this is (sic) extremely important and good CapEx expenditures.

So that is a step up of somewhere in the neighborhood of about 100 million year-to-year?

No.

No.

No.

This year, we'll do somewhere between 240, 250.

My math says that is not 100.

Okay, I think you're right.

Can you give us a feel for what you expect or what your internal expectations are for top line growth over the next 3, 4 years?

I would say that this year we'll have a slight reduction for 2004 to 2005.

We have said all along that we'll have a 12 to 18-month period that sort of saucers for a short time before we spike up again.

Then after, that we'll probably in the 5 to 10 percent annual growth rate again.

Okay.

And then one last question if I could.

On the GM truck build you said was down 5 percent, was that your mix of GM trucks?

And the outlook for that the fourth quarter again, your mix of trucks may be a little bit worse than what GM is calling for?

Chris, this is Mike.

In some programs or some of the programs we were off a little bit more than 5.

But there were a couple of others that were off a little less.

On the aggregate, we were off around 5 percent.

There's particular strength at the top end of the product line -- the heavy-duty commercial pickup trucks.

Whether for Dodge Ram or for the General Motors product line, we're doing pretty well.

Darren Kimball, Lehman Brothers.

Can I just follow-up on the CapEx question for '05?

I thought you guys had recently been intimating close to $400 million?

Darren, there was a time that we had looked at may be north of 350 toward 400.

We have found, as our yeoman just said, some excellent efficiencies and some other refocuses of capacities and flexibilities, working with our different stakeholders, unions, etc., that we now have it down somewhere between 300 to 320.

So we're extremely pleased with this and we're reporting the newest set of data.

But you are accurate; there were numbers we looked at before.

We tried to be as credible and honest as we could with what we knew then.

But again, management is dynamic.

And things are happening that are positive.

That's obviously very good news.

Does that mean you still expect to be on the $200 million free cash-flow trajectory?

For 2004, yes; but for 2005, no.

But not as bad as it otherwise would have been?

Obviously, there's a significant improvement from the assumptions that you had thought (ph) (technical difficulty) before having used our previous discussion.

And then you still have to crank your model.

Okay.

And if I could ask a question about the backlog and the quoting activity, I noticed that your quoting activity is down from some of the numbers you were talking about earlier in the year.

And I was wondering if any of that has translated into the backlog.

Can you review the backlog?

And specifically, can you review 2005 now that it's approaching and what the major programs are within that '05 backlog?

Darren, Joel.

There's $340 million worth of backlog.

Some of that is the finalization of the launch of the Chevy Canyon and Colorado.

Then next year, the big thing will be the 345 Hummer 3 program.

In terms of quotations, we are right around $553 million.

And a lot of that, or a big portion now of that, is coming out of our metal foreign products division where we're getting a lot of quotations because of our steel buying power and everything on forgings and value-added machine components, especially around the 6-speed automatic transmissions.

But we don't just look at the quotes.

We look at what we call emerging quotes.

Those are OEMs that we have good relationships with and we're on their regular bid list.

On the driveline division, for instance, on those quotes we've got $1.1 billion worth of emerging quotes.

In North America it's 749 million;

South America, 101 million;

European markets, 621 million; and Asia and Australia, about 118 million.

About 55 percent of that is non-GM.

So the big program next year is the transmission program and 345 launch.

As we mentioned earlier, we can't disclose the customers yet.

But we do have a global all-wheel drive passenger car program that's in the engineering phase.

We have a letter of intent, a nomination letter on a transfer case.

And we're launching our Power Wagon this fall with our smart bar and our electronic differentials.

I think the significant things we have out there on (technical difficulty) transportations (ph) are our all-wheel drive crossover vehicles in Europe and South America; more transmission components; a lot of differentials, both in Europe and Asia; non-GM North American truck; a non-GM North American sport utility; and another smart bar program. (technical difficulty)

So we've got a lot of stuff going out based on all the product technology that we've put in to our portfolio over the last several years.

And with all these different architectures changing on these platforms and these different OEMs, the great thing there is that we've got (technical difficulty) each one covered and are being given a lot of respect by these OEMs.

Therefore, that's building a much broader base for our portfolio.

We're growing potential business.

Okay.

Do you guys have to catch that train or no?

(laughter) Well, I tell you one thing, the best thing in the world is when you hear men and women working, or you hear trains moving the goods.

That's great news.

Just on the backlog.

If I heard what you said correctly, I'm not 100 percent sure I did.

You've got the H3.

You've got sort of the anniversarying of the Colorado/Canyon, although not sure how much of that is an increase in the content in the Power Wagon.

I had been using a number of like 150 million for your '05 backlog.

And I don't know;

I would probably struggle to get there unless I'm missing something.

Darren, I will have Mike Simonte give you a call after this call is over and we'll help you on issues that we can.

Okay.

And then on the steel, can you just talk a little bit about how that worked through the P&L and cash-flow may be?

Your revenues were about 5 percent better than at least we thought they were going to be, given what the production and the production mix looked like at GM.

Is some of that related to steel pass-throughs?

Can you talk a little bit about that?

I will say one thing.

Remember, we have very, very good metal market protection on the majority of our sales that we have discussed with our largest customer.

We've got clauses in our contracts enabling us to be to price neutral in the case of steel with many other contracts.

And we're working with our OEMs -- GM, DaimlerChrysler, our other key customers that might be the Tier 1 level, Delphi, etc.

So we feel, as far as metal market pass-through and surcharges, we are in fine shape.

But that's a dynamic process.

How that totally impacts them into the financials, I will let Tom and Mike respond.

And of course we've also, as Joel told you, interfaced directly with our Tier 2 and Tier 3 people so that we could work out what will be absorbed by them or us or pass-through or surcharge.

Darren, this is Mike.

You've got it figured out.

The agreements we have with our customers do adjust the price for these adjustments in metal market.

So we have reported those pass-throughs as sales.

And those come through, obviously, with no margin.

So they do cause the margin and of course the top line sales amounts to be adjusted slightly.

And you're accurately figuring that out.

Rob Hinchliffe, UBS Warburg.

Going back to the CapEx question, can you walk us through or remind us, on the GMT 900, what are your opportunities there?

How much more content are you going to have on this vehicle?

How is it going to be different for you from the 800?

Well, it's going to have significantly more content.

We'll start with that.

And then, the vehicle is going to have a lot of changes in the suspension and driveline from the 800 to the 900, especially as it relates more toward the four-wheel drive/all-wheel drive application.

But the unique things on the rear componentry of the driveline -- and we already talked about the V-sys (ph) and the stability that we're putting in the products.

So Yogen, do you have anything else you want to add to that?

Go right ahead.

No, the key thing is the stability systems we added to (indiscernible) 800 to 900 so that's enhancement in our offerings to GM on that 900 platform.

The front axles are a brand-new design -- brand-new processing.

So there are some brand-new products.

And we're going to bigger sized axles on major seller (ph) 8.6 points (ph) to 9.5 (technical difficulty) starting percentage (ph) so -- because of a big, big enhancement in our cab (ph) shafts by some we got from other suppliers.

So we've got a sales increase there; quite a bit.

Okay.

And then I'm going to take a guess, but I would bet your pricing with some of these new content or new products may be different than the 800.

Have you already settled how the pricing is going to work with GM for the new platform?

Yes.

We've negotiated our pricing.

We're really pleased with it and obviously they are.

And it's been agreed-upon by both parties.

And the contract with GM for a lot of your business today is quite favorable perhaps.

How about on the 900?

Are there any major differences?

As far as I'm concerned, we have an excellent pricing structure with them.

You've already heard about the very significant product enhancements -- totally new front axle four-wheel drive/all-wheel drive system from 800 to 900, the enhancements on the stability control, and also the upgrade on the hybrid -- that being the 9.5 inch axle that Yogen was talking about.

So we feel extremely good about the product integrity, the product availability, and very critical is all programs are on time.

For your (technical difficulty) pricing model on averaging (ph) basis we've got a good -- GM has a good value for what they get.

That's all I can say.

One more question I guess -- you were talking about your productivity and how it's quite good.

If revenues are going to be down in '05 -- you keep driving that kind of productivity.

What can we expect by way of margins?

What do you do with these workers, so to speak?

If (multiple speakers)

Darren, let me answer 3 questions that you're driving to, so it will be real clear.

Number one, we will expect to have very high single-digit, maybe even double-digit -- depends on which division has raised (ph) (technical difficulty) productivity in 2005, point one.

Point two, we expect our people to continually be getting more productive.

I've already told you their attitude and their reaction and performance says that that will occur.

Point three -- we are growing our businesses, both in metal foreign product division as well as in our driveline divisions.

We will be using our people very effectively that way.

And we are reviewing different ways of handling attrition or replacement and negotiations with our stakeholders as far as future programs.

So is there any attrition program we can look forward to in '05?

When we have something to announce to you, we will tell you.

Dominic Martilotti, Bear Stearns.

Just want to follow up on the steel thing, just one little more point.

Where are you in those negotiations with your customers as well as her suppliers?

And also, are you seeing any push back to this point from GM?

And given their current situation, I've got to believe it's going to be a little tough for them to fully absorb the pass-through.

Could you give us any color on that?

We will try to give you the last husk of the peel on steel this morning.

Number one, we have well over half of our steel needs for next year already negotiated.

That's a great position for me to announce to you.

Well over 50 percent of our steel is already negotiated, and we told you, at we feel extremely competitive rates.

We're in the process of negotiating our other 40, 45 percent that has to be done.

And we're obviously in the state of that negotiation.

We've already discussed that we have our agreements with GM.

And GM and us (sic) are very honorable to each other, and therefore it's fair for each other.

I think that's where were at on steel as it relates to GM, ourselves, our present supply.

Our present content of negotiations in 2005 -- well over half done; the other half already in negotiation.

Okay.

And on the all-wheel drive, just are you guys at this point a bit frustrated in terms of the development of that and the customers I guess (multiple speakers)

First of all, you have to understand the motivation of this Company.

We don't get frustrated.

We get re-motivated.

The best all-wheel drive system in the world -- it applies to passenger cars, crossovers, four-wheel-drive, all-wheel drive upgrade applications.

We've got, as Joel told you, not one but 3 development contracts, one already in the engineering stage.

And they are going multinational.

Would you be frustrated?

We are damn happy with them.

Okay.

Let me go another way.

Are you -- have you picked up any more development contracts?

And where do you see the opportunity to kind of move that forward at this point?

Yes.

Dominic, the big thing is -- one of them is in the development contracts as you have heard.

It's an order that we're going to start launching in 2007, 2008.

We've talked about it.

I can't tell you the vehicle.

And it's global.

The other one is -- and you talk about all-wheel drive.

Most of what we do is all-wheel drive.

Our SsangYong contract is all-wheel drive, based on rear wheel drive platforms.

And the front wheel drive, we still have the 2 different customers that are evaluating the platform as I mentioned earlier that we just redid in more of a production-intense version of the vehicle.

They switched from one platform to another.

There are very high on the vehicle.

They are driving it as we speak.

There's a very high level review of that vehicle the first week in November.

And we're anxious to hear back from them.

So you are saying on that particular program, it's more the customer trying to figure out where they want to put the application, then so (multiple speakers)

Absolutely.

And you know everybody is looking at globalizing certain vehicles.

That's part of the issue, you know, getting them come to a consensus of what they want to in South America, what they went to do in Europe and so forth.

And what's great is that our Company product portfolio as planned and evolved and in -- and drivable as vehicles went with one ax, two ax -- 1, 2 and 3 axes okay?

So we've got the entire thing covered.

We don't really care how they want to change it.

We have the product on the shelf (technical difficulty) suitable (ph) and place-able in their chassis.

So we are in excellent shape on this.

Lastly, just looking out to the first quarter in terms of production, it looks like GM is taking several of their truck plants down for 1, 2 or 3 weeks.

What are you guys seeing in your lead schedules?

Let's take it with what we know and what we can therefore respond to.

We've already indicated on the present quarter, fourth quarter of this year, we have strong schedules.

And we have restated our guidance for the fourth quarter and this year.

As it relates to 2005, we will discuss that when we have the facts.

GM has indicated that somewhere in December they will make their public statement of what their production plans are for 2005.

We will not comment on speculation.

Thanks Dominic.

We have time for one last question.

Himanshu Patel, J.P. Morgan.

This is actually Shaz Kidwai for Himanshu.

Good morning.

And thank you for picking up coverage on our Company, Himanshu.

No worries.

This is actually Shaz Kidwai for Himanshu Patel.

I just had 2 quick questions.

First on preproduction costs for the GMT 900, when should we think about those starting to run through the P&L?

Is that mainly a second half 2005 issue?

Or should we think about those beginning to run through the P&L in the first half?

And then secondly, could you just run us quickly through, in terms of non-GM sales in 2005, kind of the major puts and takes you see on that side for the year?

Let's take these one at a time, Shaz.

I will ask Mike to respond on the preproduction costs.

Shaz, this is Mike.

On the preproduction costs for the 900 program, I think you are familiar with the fact that our customer will keep that (ph) equipment up to one year ahead of the time it is actually required.

So there are some costs that will be incurred all throughout 2005; in fact, some in 2004 as we prepare for those t-paths (ph).

We don't really talk much about these types of costs, because every year we launch a number of major programs.

I think this year it is a handful, may be 5 or 6; next year 13 or 14; 2 years ago it was 14.

This is a normal part of our business.

And it is just part of our base cost structure to incur these costs.

So we just don't expect any significant impact on our '04, or for that matter '05 or '06 or '07 results as a result of these types of costs.

Okay.

And then on the non-GM --?

On the non-GM Shaz, let me -- as Dick mentioned, we're not in a position to talk much about '05 quite yet.

We need to know a lot more about what our customers' plans are going to be for the year.

But at this point in time, the drivers that are improving that are going to be the SsangYong contract and some of the other programs that we sourced in recent years to other customers.

We're obviously chasing after a number of non-GM sales in our quote backlog.

And as that sorts itself out, we'll have a much better understanding of what that's going to be.

We do see incremental improvement, but probably not major improvements until we win some of this new business.

Okay.

Are you bidding on additional business with SsangYong, in addition to what you have already announced?

The answer is an absolute yes, and significant.

(technical difficulty)

Thank you Shaz.

And thank you all for participating in our call.

We appreciate your interest in AAM.

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

Thank you.

Thank you.

This concludes your conference.

You may now disconnect.