American Axle & Manufacturing Holdings Inc (AXL) 2005 Q1 法說會逐字稿

Good morning, I am Sarah, and I will be your conference facilitator today.

I would like to welcome everyone to the American Axle and Manufacturing first quarter conference call. [OPERATOR INSTRUCTIONS] I would like to turn the call over to Mr. Chris Son, Director of Investor Relations.

Please go ahead, Chris.

Thank you, Sarah.

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

All of you should have had a chance to review the 2005 earnings announcement that we released this morning.

The press release that was issued this morning contained a typographical error on the balance sheet.

The corrected version is now available on the P.R. news wire services, as well as the 8-K that was filed this morning.

A replay of this call will be ready available at 5:00 p.m. today through 5:00 p.m.

Eastern daylight time, May 6, by calling 800-642-1687, reservation number 518-9382.

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

This call is intended to be in compliance with Reg FC, and is open to institutional investors and period analysts, news media representatives, and other interested parties.

I would like to remind everyone that the matters discussed 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 guaranteed 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 different materially from those discussed.

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

For additional information, we ask that you refer to the Company's filings with the Securities and Exchange Commission and our investor presentation on the www.aam.com under the investor link. ,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 also available on the www.aam.com website.

We are also audio webcasting this call through our website, am.com.

This call will be archived in the investor section of the website and will be available there for one year for later listening.

During the quarter, we are planning investor trips to New York, Boston, and the West Coast.

We will be appearing at the Key West teflon conference in Boston on June 9, and the Wachovia annual conference in Nantucket on June 29.

We look forward to seeing many of you at those conferences and investor trips during the quarter.

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

With that said, let's get to the purpose of today's call.

Let me turn things over to Dick Dauch, AAM's Co-Founder and Chairman and CEO.

Thank you, Chris, and good morning, everyone.

Thank you for joining us today to discuss American Axle's results for the first quarter of the year 2005.

I am pleased to be joined today by Joel Robinson, our Vice-Chairman, Yogendra Rahangdale, our Executive Vice-President of Operations and Planning, our Vice-President, Chief Financial Officer, Tom Martin, and also our Vice-President, Treasurer, Mike Simonte.

After I provide highlights for the quarter, I will turn things over to Tom to discuss the details of our financial performance.

After that, we'll be very happy to open the call for questions you men and women may have.

Let me start by saying the auto industry is tough, challenging in this specific quarter, but especially for the domestic automotive OEM and as well as American Axle and Manufacturing.

Despite the very challenging industry conditions, AAM, however, continues to be differentiated by being profitable.

AAM's sales in the first quarter of 2005 were approximately $819 million.

Our net income was $13.3 million and diluted earnings per share were $0.26 for the first quarter of 2005.

This is consistent with our revised expectations as North American light-vehicle production was down just over 4%, yet General Motors light-truck production was down approximately 18% in the quarter.

Let me provide you with some comments on the quarter.

AAM sales to non-GM customers were up slightly to $169 million in the first quarter of '05.

That represented about 21% of our total sales in the first quarter of '05.

The gross margin for the quarter was 8.8% as compared to 14.3% in the first quarter of '04.

These margins reflect an impact of an estimated 19%, year-over-year decline in AAM's customer production volume for the major North American light-truck programs that we serve.

Another factor that has impacted our cost structure in the first quarter of '05 has been the volatility of production-release scheduling by our customers. 30 down weeks affected AAM in the first quarter without much lead time.

We adjusted appropriately to support these revised production levels.

However, this may be quite challenging to take up costs in order to reduce the production levels.

The revenue ran down quicker.

These lower production volumes, coupled with the rising cost of energy and metal-market commodities, have resulted in significant margin pressures in the global automotive-supply industry.

Despite the challenging external factors, AAM remains focused on our internal operations and what we control.

Our management decisions are crisp, our cost structure in order, so we can enhance value to your customer, and continue to deliver profitable results as we are this quarter for our stockholders.

Include the following -- first, AAM continues to focus on world-class quality and warranty performance.

We deliver advanced technology products to our customers on time, every time with the highest available quality and customer satisfaction levels in the global industry.

Our quality and warranty performance records continue to be a competitive advantage in terms of our ability to reduce structural cost and earn new business.

Second point -- AAM associates understand the need for continuous productivity improvement.

We minimally have 5,000 items working every day, and as some go into implementation, we add new ideas in -- that's part of our profit.

As a management team, we are totally focused on continuing to support these improvements.

Since 1994, as a company, we have posted an 8% annual improvement each year on this metric.

For 2005, we have plans for another year of productivity improvement in line with the long-term trend I have just discussed.

Make no mistake, it is an extremely challenging, operating environment, but as our commitment to focus on the productivity, the cost reduction, the flawless launch of new products.

The third key point -- AAM continuously manages the cost drivers that have the most significant impact on our business.

We have taken a number of steps to protect our supply, and manage the cost of our precious-metal market commodity.

By first co-actively completing the successful renegotiation of our major steel contract with Sessly for 2005.

We are by far the largest buyer of SDQ steel in North America, with annual purchases in excess of 315,000 metric tons.

Second is we have worked with several offshore steel mills in various countries throughout the world to validate new sources of supply.

This has allowed us to diversify our supply base and further leverage our existing suppliers.

The third point is we are talking with our customers that do not currently provide metal market protection, about adding such for the future.

Finally, we continue to invest in products, process, and system engineering to identify ways to use less steel in our products.

The efficient design of our powernet gears, as an example, as well as expanded use of aluminum and other alloys in the our power-light carriers and cases help AAM to reduce waste, mass, and cost, and help our customers on fuel efficiency.

AAM also continues to develop in the new, advanced technology product to say meet the changing need of the global market place and the customer base.

As a result, AAM, R&D spending to the first quarter of 2005 increased to $17.6 million as compared to 16.9 million in 2004.

AAM invests heavily in this area for in order to technically enhance current product performance.

We do this with the specific emphasis on integrating more electronic controls in our products and reducing the "NVH", better known as noise vibration hashness, while improving fuel economy.

We are also expanding the drive line systems, chassis systems, and module to light trucks to the growing crossover vehicles in the segment.

Products that support this growth segment are family of power traverse units, which I will refer to "PTU", independent front drive axles ("IFDA"), and rear drive modules ("RDM"), along with transfer cases and advanced drive shafts for the crossover vehicle's needs and all-wheel drive vehicle population.

These new products have allowed AAM to secure additional profitable business in new markets throughout the world.

Our R&D has led to the development of new products to support the 2005 calendar year launches of the following new vehicles -- First, the Dodge Ram Power Wagon -- featuring AAM's heavy-duty front and rear axles, and this new vehicle includes our patented electronic SmartBar technology and electronic locking differentials for both front and rear axles.

The REMs for the Ssangyong Motors, Rexton, and D100 sport utility vehicles, which we have successfully launched, and this marks the penetration into the Asian market particularly in the country of Korea, and demonstrates our ability to compete globally and earn new business in Asia with new customers because of our quality, our manufacturing, our technology, our product, and our delivery capability as an overall value anywhere in the world.

We are manufacturing these in Detroit and deliver ing them flawlessly more than 10,000-miles away.

The all new exciting Hummer H3 featuring AAM's entire drive line system is designing for free off-road capability.

This exciting new vehicle is the right size, priced properly and competitively for the consumer today.

We are pleased to play a significant role in the growth and increased sophistication of the Hummer brand as it extends it's style and superior off-road performance into the mid-sized market place.

The Dodge Ram Mega Cab is coming which is another derivative of the Dodge Ram heavy-duty drive program, and it's got our drive line too.

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

On January 13 of this year, we announced an increase to our backlog of new business by nearly $500 million, to more than $1 billion in future annual sales.

Let me provide some highlights and updates to our backlog.

First of all, the backlog remains at over $1 billion.

In addition to the programs that I just mentioned that we are launching this year, our backlog includes commitments that will further expand our product portfolio to support several all-wheel drive and rear-wheel drive based vehicles.

Almost 25% of AAM's new business backlog incorporates our newest technology for passenger cars and crossover vehicles.

We are extremely pleased with this.

The programs that are under these commitments have evolved as a result of changes in customer programs design direction and program launch timing.

This often occurs as our customers are constantly reviewing their long-range plan and the markets they serve.

The second point is nearly 10% of AAM's business backlog relates to product programs outside of North America in both Europe and Asia.

Third point -- the most notable awards within the backlog, represent our efforts to first diversify the customer base, second, to continue to expand our global presence, and third, continue our profitability.

Remember this company has been profitable for eleven straight years.

These awards represent five new contracts from Asian OEMs and their affiliated tier-one suppliers.

One of these awards represents AAM's first opportunity to provide front and rear axle modules to a foreign customer for a major North American product platform.

The second award represents our current RDM launch with Ssangyong and the future launch of the IFDA.

The remaining three awards include critical drive line componentry with Asian-based, tier-one suppliers.

The awards from these Asian OEMs further further demonstrates our cost competitiveness, our commitment to further diversify our customer base.

The fourth point is our backlog also includes new incremental business of the GM 900 and all derivatives, and there are many derivatives.

This new business includes conquested drive shaft business and additional AAM content.

Fifth and final point on this issue is we've been awarded several new, metal core products launching over several years.

These awards represent both an international and market-segment expansion of the customer base.

These new awards continue to demonstrate the diversity and competitiveness of our meta-formed product technology and capability.

We currently expect to launch nearly two thirds of this new business backlog in the period of 2005, 2006 and 2007 business years.

The balance of business will be launched between 2008, 2009, and 2010.

AAM is working hard on several additional opportunities to say secure additional new business.

These are North American and global opportunities that will play in large role in expanding further our expansion globally.

We are actively quoting our new business totaling $825 million with approximately 25% of that activity outside of the General Motors corporation.

Approximately 30% represents opportunities with foreign and/or transplant OEMs.

In addition, approximately 65% is for potential all-wheel and passenger car applications.

Production launch timing of the programs ranges from the year 2006 up to the year 2012.

We have also identified several emerging opportunities in the market place and expect to submit quotes on these opportunities in the upcoming months.

Before I turn it over to Tom, let me make a couple of comments to you about our newest board member and what lies ahead for AAM.

Yesterday, we had our annual stockholders' meeting, and the stockholders elected William P. Miller II to our Board of Directors. -- we welcome Bill to the AAM team.

Bill has a extensive financial, engineering, and international background.

He also currently serves on the Board and Audit committees of several organizations including the Chicago Mercantile Exchange.

He is an as an independent board member and excellent addition to our board of directors and the audit committee as another financial expert.

I would like to now review our outlook for the remainder of 2005.

Today, we announced to you an update to our 2005 earnings outlook.

Due to the impact of addition production cuts by our customers, AAM now expects that production volumes will be down 15% in 2005, as compared to the prior year.

Our original plan was 8%, so this is a significant increase in volume reduction.

Based upon this revised production outlook and the assumed continuation of energy and metallic cost increases, we now provide guidance on our 2005 earnings to range between $1.40 to $1.55 per share earning.

Tom will discuss more on the outlook at the end of the call.

Make no mistake, 2005 will be a challenging year for all of the automotive industry and especially the domestic industry.

AAM remains focused to execute 13 major product launches this year.

During this transition period, we will not jeopardize our future by cutting investment in product, processes, systems, technology, or the training or education of our personnel.

These are the foundation of our current and future success.

We are deeply committed to the expansion of our global footprint.

We have identified and currently assessing potential investments in the these global growth areas.

Our next steps include making choices of how to allocate our resources and accelerate our investments in these fast growing markets.

We have a rock solid balance sheet and liquidity to make this happen.

I thank each and every one of you for your support and interest in AAM.

Let me turn the call over to Vice-President of Finance, and Chief Financial Officer, Tom Martin, and he will discuss our financials with you.

Tom.

Thank you, Dick.

We have a lot to talk about from a financial perspective, so let's get right to it.

Today, AAM reported first quarter 2005 earnings of $0.26 per share.

That's in line with our guidance and compares to $0.66 per share, which included the impact of the one time charge of 23.5 million, or $0.28 per share related to debt refinancing and reported in the first quarter of 2004.

Lower production volumes by our customers and higher cost of energy and purchased metal commodities were the primary drivers for the decrease.

Let me review our financial results for the first quarter in further detail.

First, starting with sales, AAM sales were 819 million for the quarter as compared to 953 million in the first quarter of 2004.

Non-GM sales represented 21% of AAM's total sales in the first quarter totaling 169 million.

Sales for the quarter reflect a 19% year-over-year decrease in the production volumes for the major North American and light-truck programs that we support.

AAM sales content per vehicle was $1,183 for the quarter.

That was approximately the same as the $1,182 reported in the corresponding period in 2004.

AAM's gross margin for the quarter was 8.8% versus 14.3% for the first quarter of 2004.

The lower production volumes, coupled with the unstable production release schedule and higher costs for metal commodities, virtually impacted AAM's gross margin and overall results for the quarter.

Selling general and administrative expenses for the fourth quarter were 46.6 million.

This compares to 49.5 million in last year's first quarter.

We have taken action to reduce our cost.

As a result, our SG&A cost increased on a year-over-year basis.

SG&A decreased despite the expansion of our global footprint into China, India, South Korea as well as the increase our R&D expenses by approximately 4%.

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

We continue to develop now products targeted at the key growth segments of the drive line system market.

Despite the challenging operating environment, we continue to make significant investments in products, process, system technology to further expand our product offering, customer diversification, and global manufacturing presence.

Our new business backlog of $1billion is proof that our investments are paying off.

For the first quarter of 2005, operating income was 27.7 million or 3.1% of sales, as compared to 86.9 million or 1.9% of sales in the first quarter of 2004.

EBITDA was 69.6 million in the quarter or 8.5% of sales compared to 105.6 million, or 11.1% of sales in the first quarter of 2004.

Again, this is due to lower production volume and raw material price increases.

Further down the income statement.

AAM's net interest expense was 6.1 million versus 8.1 million in 2004.

The weighted average interest rate on AAM's outstanding borrowings in the first quarter of 2005 was 5.2%.

This is in line with our expectations.

For the first quarter AAM effective tax rate was approximately 33%.

That is the rate we expect to incur through the remainder of 2005 on a run rate basis.

For the first quarter of 2005, net income was 13.3 million or 1.6% of sales as compared to 36.5 million or 3.8% of sales in 2004.

As I mentioned earlier, the driver behind our performance is the industry environment.

Moving on to our credit statistic, our net interest coverage or EBITDA, the net interest expense ratio, was approximately 17.1 on a trailing 12-month basis, and was 11.4 times for the quarter on a stand-alone basis.

Leverage ratio on a traveling 12 month basis was 1.38 times..

This is a solid performance in our first year as an investment grade [inaudible].

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

Net cash flow used in operating activities in the first quarter of 2005 was 34.1 million.

This compares to 4.4 million of cash provided by operating activities in the first quarter of 2004.

This first quarter of each year is traditionally a heavy cash out flow period for automotive suppliers.

That is true because of seasonal increases and the working capital requirements.

This year AAM's working capital is inflated as a result of the higher accounts receivable balance associated with no more pass-through billings with our customer when compared to the first quarter of 2004.

We are working diligently to collect these amounts and expect to collect them in the near term.

In addition, our inventories have increased in the first quarter by 2005 versus the first quarter of 2004 due to higher steel and metallic material prices.

We are also maintaining higher amounts of inventory in transit associated with expansion of global-sourcing activities and higher levels of on-hand raw materials to continue our supply.

We also -- Our profit sharing could pay it out in March each year.

This is another seasonal factor we deal with every year that affects our working capital.

Capital spending was 75 million in the quarter as compared to 47 million in the first quarter of 2004.

As we have previously communicated to you, AAM's capital spending levels are expected to increase in 2005 to support the launch of the GM T900 and other programs in AAM's $1 billion backlog.

I will have more to say on our capital spending levels later.

Our free cash flow for the quarter was 116 million.

This includes 7.4 million quarterly dividend payments, which began in the second quarter of 2004.

Our free cash flow deficit for 2005 compares to the deficit of 42 million in the first quarter of 2004.

Our 2004 results includes the one time, lump sum gratification bonus payment of 36.3 million to AAM's AAU associates in connection with ratification of our current, four year master agreement.

Make no mistake, our free cash flow generation is not where we want it to be.

While we anticipated this, used our cash in the first quarter, we are focusing on improving our cash flow to meet our targets for the year.

So now, let's focus on our capital structure.

AAM's total debt at the end of the first quarter was approximately 551 million.

This compares to say 448 million outstanding at the end of 2004.

AAM's total debt increase in the first quarter of 2005 as a result of the cash use and operants that I have just mentioned.

Stockholders' equity was 965.6 million at the end of the first quarter.

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

AAM's net debt to capitalization ratio was 36.2% at the end of the first quarter of 2005.

This is approximately the same as 37.7% just one year ago and right in line with our targeted level.

At quarter end, we had more than $600 million of available borrowing capacity.

Our invested capital, or the sum of net debt and stockholders' equity, was approximately 1.5 billion at quarter end.

On a trailing 12-month basis, our after-tax return on invested capital, or ROIC, was 10.1%.

This still comparing favorably with most of our peers in the automotive-supply industry.

Let's turn to our expectations for 2005.

On January 13, 2005, AAM announced earnings guidance for 2005 based on assumptions that customers' production volume for the major North American light-truck program we support, would be approximately 8% lower than in 2004.

Due to the impact of additional production cuts currently scheduled by our customers, we now estimate that production volumes for the programs will be done approximately 15% in 2005 when compared to the prior year.

Based on this revised production outlook and the assumed continuation of energy, metallic, and material cost increases, We now expect earnings of 2005 to range from $1.40 to $1.55 per share.

Our revised guidance also reflects a delay in the adaptation of FASB Statement of 123R.

On April 14, 2005, the Securities and Exchange Commission adopting a new rule that the management compliance fee for FASB 123R.

As a result, AAM now intends to adopt these accounting standards on January 1st, 2006.

Also in the press release today, we announced revised estimates for our capital spending and free cash flow in 2005.

These are the additional productivity capacity made available by these lower anticipate production schedule, changes in program timing requirements, and the favorable cost impact of our productivity initiative and expect our capital spending to range between 260 million and 280 million in 2005.

As a result of the impact of these revisions to earnings in capital. we now expect free cash flow to be approximately break even in 2005.

As Dick said, 2005 is going to be a challenging year for the automotive industry.

Our task is to keep focused during this transition period by managing our internal operations and the cost drivers that effect our business.

We'll keep our focus and our long-term strategic goals, customer diversification initiatives, and global manufacturing presence to prepare for significant future profitable growth.

We also have a rock solid financial profile, and that means we are ready with financial flexibility to take advantage of the further commercial and strategic opportunities in 2005 and beyond.

Thank you for your time and attention this morning.

Now, I would like to turn the call back over to Chris for a question and answer period.

Thank you, Tom, and thank you, Dick.

We have reserved some time to take some questions.

I would ask that you please limit your questions to no more than two.

At this time, please feel free to proceed with any questions you have.

[OPERATOR INSTRUCTIONS] Your first question come from Jon Rogers with Smith Barney.

Good morning, John.

Dick, can you talk to the -- there is a lot of concern about the state of your customer.

Have you had any discussions about the strength of your long-term contracts, or is that something that concerns you?

I meet personally with key executives of our primary customer, minimally, two to three times monthly.

I have no concerns about our contracts with them.

They are rock solid.

We have an extremely good relationship with them.

I think they are very positively focused on what they have to do.

We are going to be a critical supplier to support them, and we just were a key invitee to their last Saturday annual supplier day meeting.

It was an extraordinarily good event.

We feel good about what we are doing with GM, and we are going forth together with them.

The other question is -- it looks like -- and correct me if I am wrong -- but it looks like Cap Ex guidance has been tweaked down a little bit.

I am going to give Yogendra Rahangdale give a response.

You're absolutely right, and we have a much smarter management team now, and we making some adjustments.

Yogendra please responsible to his comment.

We continually adjust our on-operational to the demand in production requirements.

Whether it is man power or cap.

We are particularly talking about adjustment to the one.

I don't mean that capacity and free up the capitals for other programs.

That's number one.

Number two -- we continually look at various sources to secure the capital equipment.

How can we use the cost of the investment, and that it is second thing we are doing more crucial this year because of what economic conditions we are.

Those are the two are the major reasons why our cap is down.

And therefore, sir, it is down about $50 million from 320 when we originally guided to 270, 260, 280.

That's why it is down, Jon, and accurate assessment by you.

Okay.

Thank you.

Thank you, Jon, have a great day.

You too.

Your next question comes from Steven Girsky with Morgan Stanley.

Hello, Steve?

Good morning, Steve?

Can you hear me?

Hello?

Go ahead.

Good.

I want to follow up on that.

What is the -- should I read anything into the lower Cap Ex in terms of do you think the volumes are not going back to where they originally were, or are you sort of pushing some of this off to a later date, as they come back?

How should I read that?

Just the way he told you.

Number one -- we are doing things smarter.

We think volumes will pick up in the second half of this year.

We think that we are more efficient on the way we are globally shopping to pend our Cap Ex dollars.

Thirdly, we are breaking through incremental capacities to get our true foot without as much Cap Ex dollars.

We simply think we can do it 50 million less and get the same job done for better.

This is not a one year phenomenon, this is sort of an ongoing phenomenon?

This is a process of continued improvement and focus as we globally shop and as we become more efficient as a management team.

It is probable going to be something that perpetuates.

One more question -- There's a lot of distress in the supply base.

We have some suppliers talk about deintegrating and some may have to backward integrate to protect their supply of components.

What is going on with yours?

It is extremely good, and we have made this major structural change over the last 12 to 18 months of going fully global instead of North American.

It is working good for us.

We've got them all together.

They are wired, they're coordinated.

Our people have fanned out on all the continents.

I feel very supportive of our supply base.

We're helping them, and they are working with us very successfully.

No risk there.

No material interest at all and we have 13 major launches coming and we feel we will flawlessly launch them and they are loaded.

thanks a lot.

Have a great day, Steve.

You too.

Your next question come from Rod Lache from Deutsche Bank.

It is Mike Heifler for Rod.

What is giving you the conviction that the volumes are going to pick up in the second half of the year?

Maybe you can share your basis for your production forecast.

You know, thinking that the volumes are going to be down 15% percent for the full year.

First example is we are launching the H3 and obviously you're going from zero, it's going to go up.

I think it's going to be a knockout product in the segment.

Secondly, I think Daimler Chrysler in the Dodge division is going to do an excellent job as they continue to expand their DBW range of that Dodge Ram with the mega cab and others.

For example, not to get you into bony detail, but one of our plans produces 20 products a day for them, and come August, that jumps 400.

So, there is a second significant example.

Third is I watch the sixteen week schedule that comes out monthly, and we are reading the tea leaves.

Fourth, is I think the media and others in the investor community are sprinkling a whole lot more cold water where it doesn't need to be sprinkled.

Thanks.

Just one more.

On the stock options, can you tell us what you are thinking the expense is going to be in '06 and there was a change there where orangey it was contemplated that you guys were going to start expensing in the second half of this year.

Was that incorporated in your previous guidance?

Yeah, Mike.

This is Mike Simonte.

Listen.

On the 123 R delay, we did originally estimate about a 20% impact in 2005, and that included some restructuring we did to the long-term incentive program beginning this year.

We significantly reduced the number of shares that were dedicated to that program, and we did that, among other ways by switching over, not all but most of our activity to restricted shares.

Now, the 123R delay doesn't change the accounting for that, so we are going to pick up about $0.07 of expense.

What I am saying, specifically is approximately seven for the quarter, about two pennies a quarter, of the twenty.

That is going to stay in our cost for 2005.

Okay.

Next year, we are going to continue to expense those restricted shares, and we will also expense according to that standard, beyond that portion of of the existing stock option grants.

Mike, our best estimate now -- and there are so many assumptions playing in here, I'm going to give you a range -- our best estimates for 2006 would be somewhere in the 30 to $0.35 range.

That is going to be again dependent on whether or not we make it in the stock price because the ultimate expensing of the activity is based on the fair value of the stock that is granted.

Okay great.

Thanks guys.

Have a great day.

You too.

Your next question comes from Ron Hinchliffe with UBS.

Good morning everybody.

Good morning, Rob.

Thinking about the GM products again -- What gets better next year, and most of them are looking flattish, 800 or 900 production on down to the 360.

Do you have a different view?

Well, first of all, let's get to the rock solid where the huge volume is.

The GM800 pickup continues to be rock solid and strong.

SUV's can't get any weaker than they have the last 90 days.

The third is they have a new model coming out and have exciting things on the '06's.

So, give them their due.

Fourth, you can take a look at the things I just discussed -- Daimler Chrysler expanding their range -- that we're riding on, so we are happy with that.

And fifth is the exciting new right size and properly priced Hummer that is coming.

So those are my views.

I am repeating what I said before.

I feel much better about things going ahead than a lot of people that write things in the media.

Then you talked in the past about the potential for acquisitions.

Can you talk -- in the past, you have prioritized it looks like your investment-grade credit rating over a near-term acquisition.

Going forward, still the same set of priorities?

They have not changed at all.

We are very eager to find an appropriate acquisition that meets the criteria that we want while still maintaining the grade status for us.

We think that will happen, but I have nothing to announce today.

Thank you, Dick.

You're welcome, sir.

Have a great day.

You too.

Your next question comes from Dan Barcelo with Bank of America Securities.

It seems like, if my math is correct that the lower guidance implies roughly a 30% contribution margin on the down side, and looks like in the first quarter you were running close to 48 and I am just wondering if you can help us bridge what the improvements will be as the year progresses.

Hey, Dan, this is Mike.

I am glad you asked that question because we wanted to talk about it this morning.

The objects on the income statement, it is just as you discussed about 48% margin decline, but what you need to understand, particularly in comparison of our first quarter to last year, is that the metal market pass-throughs we enjoyed ramped up in the second half of last year, and that effects our top line, but doesn't bring home any gross margin.

It is a cost object for us.

We are running at over a $100 million on an annual basis now for that impact, and when you adjust that out, you are closer to 40% variable less margin in the first quarter.

There are two significant components there.

One is the normal run rate of variable margin on the down side.

Dan, we came into this year and we've guiding for this year based on the expectation that it ranges from 30 to 35%, and probably closer to 35%.

That is -- that continue to say be our expectation.

In addition to just purely the mathematical objects of our metal market pass through, recall also that the unreimbursed portion of our metal market cost. -- because metal market price adjustments for which we do not have customer protection and therefore, would not show up in the top line -- that impact was pretty much as we expected -- about $7.5 million of impact in our first quarter.

So we ran at about 35% when adjusted for the two items related to the metal market activity, which should begin to normalize in the second half of the year.

Very helpful.

Thanks a lot.

Second question, Dick, you talked about two-thirds of your backlog coming on between 2005 and 2007.

Given some of the changes going on, can you talk about the comfort of the timing of that?

I am going to have Joel Robinson respond to you on the issue.

We will be happy to, Dan.

As Dick said, there have been some changes from the last announcement of $1 billion that is the customer's adjust their long range product plans, but the ones inside 5, 6 and 7, as Dick mentioned, and some of those are the 900 program and the incremental volume that we have been able to on the 900 as we did before -- Hummer H3, the DR capacity and derivative program, the Ssangyong program.

So those are rock solid in their dates, and those remain things that compromise the two-thirds between 2005 and 2007.

Those platforms are making up 600 million plus over the next couple of years.

They are good and solid, Dan.

Okay.

Thank you.

Have a great day, sir.

You too.

Your next question comes from Michael Bruynesteyn with Prudential.

Morning, guys.

Morning.

With regards to the GM revenue, it seemed a little higher than we expected.

It's down 15%, but we have higher declines in production for the 800 and the other program, and I would have thought there would be price give backs.

Is it more than just a metal market pass-throughs that are affecting revenue here?

It is predominantly that issue.

Dick mentioned a couple of minutes ago, the pick-ups and particularly the heavy-duty pick-up side of the equation, is running very strong, and those vehicles are heavily contented for us, and so there is a relatively minor, but still important increase in content associated with the make-shift.

But year revenue on the pick-up is not higher than on the SUV's is it?

That question is difficult to answer because they come in many different configuration but on the four wheel drive vehicle.

Whether it is a SUV or pick up in the same weight class.

They are going to be comparable.

Difference on the SUV's right at this point in time is the content.

Right.

And then this GM rear-wheel drive car program, the cancellation -- how does that effect your backlog?

Well, we never announced some of the programs that weren't approved by the customer to talk about.

You'll have to ask GM about that.

But we have picked up, since the last time we talked, four passenger car and crossover vehicle platforms that will be launching in the out years passed 2006.

So, we are still in real good shape in terms of passenger car and crossover vehicle.

Mike, our pick up.

What Joel is describing is much bigger than what it had been prior to which we never announced.

Great.

And then, and with the lower level of customer production, should we see an acceleration of the head count reductions, your productivity, or is it going to be consistent with what you saw in the past?

We'll have a consistent setting of head count, be it hourly and/or salary.

Mike, you have anything else you want to comment on that.

Mike, you opened the door to a comment I wanted to make relative to our 2005 assumption.

I think you know, and I hope you understand that in the original guidance for the year, we didn't do any additional voluntary separation incentive program activity, but in our most recent guidance update that we announced today, we do see an additional visa program, and we see that launching soon for us.

If you take a look at the guidance, we did take up a little bit on the delay in the adoption of 123R, and we are expecting that to be offset by additional cost, which here, in the short term will incur a charge, but, which immediately there after, will begin to thin out that cost you just discussed.

That is helpful.

Thanks.

Have a great day.

Your next question comes from Darren Kimball with Lehman Brothers.

Hi, guys.

Hi, Darren.

I don't want to harp on this too much, but with regards to the CapEx revision, you said you freed up capacity -- that you no longer needed additional capacity.

What did you need additional capacity for in the first place?

Did that relate to the launch of the GM T900 or other programs?

Let me start this out, and then I will turn it to Yogendra Rahangdale.

There is a lot of methodologies, Darren, as to how you run production.

Then you hit break-throughs working with your stakeholders, sometimes you get stuck cooperating systems that , therefore, engage the need for the capital expenditures --item one.

Item two, as we are smarter on how we integrate our mix of different componentry or value-added as going out for different production for customers, we have got some nice breakthroughs to determine, which I will not discuss.

Third -- and relates to the other response in the question.

I don't go -- Yogendra, you can go ahead and help.

The flexibility of the equipment so they go program to program.

So we can use it one program goes away, and another program can use the equipment.

As you know, Darren, I traveled with you enough, we have taken captive line out.

We have put in selected automation.

We have reprogrammability; we have software and logic that is very easy for us to have the flexibility; and we've also broken through on certain work patterns that gives us the flexibility of not only equipment and the software, but also into the human involvement, and I think that Joel and Yogendra Rahangdale are making some nice breakthroughs on that, and that's what we are announcing to you today.

I am trying to understand whether it was related to plan 900 volumes.

Has nothing to do with that.

Nothing to do with that.

Okay.

Let me ask you just one other question.

Let's say I am making a motorcycle part, and it goes to the same process envelope as some other part that goes to some other customer, and I can reprogram that thing in multi-seconds and split it right on through.

It gives us flexibility and utilizes the capacity, and doesn't burn more CapEx.

Right, but you didn't say that you freed up space because you're more productive, you said the space was made available by lower anticipated production volumes.

That is your assumption.

No, that's what the press release says -- that the capacity made available by lower anticipated production volumes , and that's the part I am a little confused on.

Well, Darren, this is Mike.

Just from a pure production volume assumption standpoint, you know we are planning to be down about 15% for the entire year as compared to where we were a year ago.

As we become more certain of that, and you know that we started the year thinking about being down 8%, and since we made the assessment, we have had more than 40 additional down weeks scheduled this year, and we do have different assumptions built into our plan going forward.

So yes, a portion of the ability to be flexibility with the equipment that Yogendra and Dick are talking about, is based on lower expectations of 2005 and early 2006 time frame as we transition through this inventory correction.

So, I think it is just there with what we are talking about and also, with our plan.

The question I have on that relates to say your full year guidance.

Your first quarter in relation to your full year guidance, it is still kind of a stretch relative to how much the first quarter has represented of prior years.

I am wondering if you can speak to what is driving the sequential improvement as we go through the year -- whether it is volumes or cost cutting because you are clearly making a statement about volumes?

That's right, Darren.

It is going to get better as compared to the first quarter.

If you are down 18.8% in the first quarter, you're down 15% for the year -- certainly you are getting better for the second, third and fourth quarters.

So there is perspective there that is easily understood.

Secondly, we have indicated generically, we talked about flexibility, and we have got other things, and announced other things and other things we will announce later.

Dick, I hate to differ, but but there is seasonality involved in the volume numbers.

So, the year-over-year comparisons don't necessarily dictate the sequential comparisons.

It is not clear to me if the volumes are better.

They might be comparable to the first quarter, but others, they are going to be down.

So, you expect an acceleration of cost cutting?

We can only do two things -- increase revenue or reduce costs.

We are going to work on both.

Okay.

That's it for now.

Thank you, Darren.

Your next question comes from Chris Ceraso with Credit Suisse First Boston.

Good morning.

First, just kind of a housekeeping item -- what was the four-wheel drive penetration in the first quarter?

About 65%.

And Mike, what was it last year?

It is about the same.

Just less than 65% than the two quarters.

This is also a Cap Ex question, but a different one.

Can you help me understand the difference between the SUV's and the pick-ups?

What you are spending this year to get ready for the SUV launch -- Does a lot of that are carry over, or do you have to spend additional capital to prepare for the pick ups.?

This is what it is.

We had to look at the equipment.

Some equipment is totally and some product is new and we we are putting the among the assembly line for the new equipment.

So, yes, the combination of using the equipment and putting the new equipment.

So the capital budget for next year will be similar, or will it be lower because you have been able to put some stuff in place for the total.

It will be slightly higher for the overall company AAM in 2006, but , remember, with huge backlogs we have all kinds of launches coming, and this is very good news for us.

Right.

You mentioned briefly the acquisition and the importance of the credit rating.

Is there any risk in your view -- I know the statistics remain strong -- any risk in your view to the credit rating at this point given the financials in '05?

May we seem rock solid on that.

Mike, anything you want to comment on that?

No, the conversations that we have with the rating agencies evolve over time obviously , and they have had visibility to a lot of this information.

You know, I guess I just point out, we have a lot of available liquidity at this time.

Even the levels of performance are still well over 10 times.

Our death were up to about 36% at the end of this quarter.

We were at 38% the end of the first quarter a year ago, and then we travelled down to 30%.

Which is exactly what we would expect this year based on the cash flow projection we have.

We don't think at the time being, that that issue is exacerbated by performance.

Thanks everybody.

Thanks, have a great day.

Thanks, you too.

Your next question comes from John Casesa with Merrill Lynch.

Dick, you alluded to the M schedule.

I was just wondering if you were suggesting that maybe you are starting to see some stability in the GM volumes or if you just comfortable with the forecast?

Let me take one at a time.

Good morning.

John.

Good morning.

We have seen extra production being added.

Most recently, I won'tl announce which plans or which product because that is up to the customer to do, and we are starting to see a trickle going in instead of a trickle going out.

That's a important thing on the short-term scenario.

Obviously, when you are in launches on the other products like the Hummer three or the different Dodge product, the power wagon for example, you got to let the market and the customer dictate if their going to continue to have more additives.

I think it is in August when we go a huge jump in St. Louis for the Dodge outfit, for us in the 2400.

The operation for GM up in Canada is adding some Saturdays etc.

So, we see on the M schedule, some things going in.

That is the response to the first question, John.

Perfect.

Secondly -- what do you expect your R&D spending to be this year?

What kind of percent change or dollar?

Normally, as you know, we are up anywhere 5 to 10% in dollars, it will probably be in that same catagory again -- R&D -- because that's why we have such incredible technology to offer, and that's why we get good premium pricing, and that's also why we are getting this incredible breakthrough on this globalization to meet with these other customers -- because they want our technology.

Just to clarify, do you expect to take a charge for the early retirement program, or is that embedded in the new guidance?

That's right., John.

We were taking charge at the time that the associates except the agreement and take the buyout , and so the cash will go out -- the expense charge will be at that time.

That won't be an incremental charge to your guidance, that is in your expectations?

If you heard him say before, John, maybe you missed it.

Correct me if I am wrong, Mike.

Where we had assumed a hit -- August through December -- on the potential expensing of options, that doesn't happen now, and therefore, we would offset that hit with this one, so there is really no net add.

Got it.

Okay.

Thank you, very.

Have a great day.

Your next question comes from Himanshu Patel with JP Morgan.

Mike, you mentioned contribution margins on the way down of about 30 to 35%.

I was wondering if you could comment on what we expect on the way back up, on the T900 or in general, just for you guys in '06.

You know, we have historically had the ability to diverge between 20 and 25% of those increment sales up, and the key difference between the way up and way down, is the fact that when we lay off our own associates, we continue to pay unemployment benefits, so all the costs -- some of that variable costs is on the way down, and not an issue on the way up.

Okay.

Then, how does the P&L behave next year with -- obviously the T900 kind of in a transition next year with the SUV's coming up and pick-ups going down -- We talk about Cap Ex.

When you put it together, is there reason to think that a lot of those issues are '05-concentrated, or do we see a repeat of a lot of the SUV issues, whether it is launch or ramp up in 2006 as well?

Well, Himanshu, the answer, I think your question is -- we are not really prepared yet to talk about '06 -- with the amount of volume that we see this year, that GM should be able to get the inventory under good control, and they can sell through at the rate that we expect and they expect based on the production scheduled we see, We should expect some improvement for us and for them in '06, but it is too early to get into too many details, way too many variables at this time.

Not to harp too much on the Cap Ex but coming back to that.

If you guys are sort of operating at let's say high 200 million level at the start of a major product launch, once both the SUV's and the pick-ups are behind you -- let's say in the '07 time frame -- do we go back into the mid-200 area for Cap Ex, or does the incremental backlog that's coming on at that point sort of offset that and should we think of this as a run rate of Cap Ex. even going forward?

No, it is like an average rate, but incremental, and that will come as we go to the backlog and production plan for those things.

On average, 250, that is a good assumption.

Okay.

Thank you very much.

Have a good day.

We have time for two more questions.

Your next question comes from [Rich Qua]s with Wachovia Securities.

On the materials front, are you on the third of the cost that you have to absorb, are you any headway on that front on trying to either recoup from your suppliers or just working to lower costs?.

Is there any change to the quarter?

We are making some headway with some of the OEMs, and we are taking care of some of our suppliers as the requirements come up, but I guess the overall answer is yes.

We are softening the impact a bit.

I won't get into specifics, but let's say we have eight major categories of where we negotiate agreement on metal market and surcharges, and price throughs, and seven of the eight we have resolved, and we are supposed to have the eight resolved.

Joel's already indicated that we do item by item as it relates to tier-two.

So, we think we are making good progress on that.

Okay.

Then, on the customer front , you mentioned that prospects for pass throughs -- I think you mentioned that -- and how confident are you that you will be able to do that in the future given with the industry right now.

Very confident.

Thank you.

All right.

Thanks.

Thank you, gentlemen.

Your last question comes from David Leiker with Robert W. Baird.

Good morning.

I don't believe I heard -- you didn't give guidance for the second quarter, did you?

I didn't hear you question.

You didn't give guidance for the second quarter.

You get guidance for the first quarter and the year.

That's what you get.

Second quarter?

I answered your question.

Okay.

If we look -- we look out in the '06, and you are going to see the plans for the SUVs and the pick-ups all going through model changes.

You're going to lose volume on that, and you have this incremental volume expense.

It is hard to see how '06 is different than what we will see in '05.

It is probably a reasonable assumption, and as Mike said earlier, it is too early to get into total '06, '05 and 06 is sort of blended together because of timing circumstances and overall market and global shake up.

That's all I needed.

Have a great day.

Thank you, David, and we thank all of you who have participated in the call, and appreciate your interest in American Axle and Manufacturing.

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