American Axle & Manufacturing Holdings Inc (AXL) 2005 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the American Axle & Manufacturing second-quarter conference call.

All lines have been placed on mute to prevent any background voice.

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded.

I would now like to turn the call over to Mr. Chris Son, Director of Investor Relations.

Please go ahead, Chris.

Good morning, everyone.

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

If you have not had a chance to review our second-quarter 2005 earnings announcement that we released earlier this morning, you can access it on the aam.com website or the PR Newswire services.

A replay of this call will also be available beginning at noon today through 5 PM Eastern Daylight Time, August 5, by calling 1-800-642-1687, reservation number 732-6619.

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

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

I would 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 they're subject to risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed today.

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

For additional information we would ask that you refer to the Company's filings with the Securities and Exchange Commission and our investor presentation on the aam.com website 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 a reconciliation of these non-GAAP measures to GAAP financial information, is also available on the aam.com website.

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

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

During the quarter we're planning investor trips to New York, the Midwest, the mid-Atlantic region, as well as London and Frankfurt.

We will also be appearing at the J.P.

Morgan hardware conference in Detroit on August 1 and at the CSFB annual conference in New York on September 8.

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

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

Please feel free to contact me to schedule a visit.

With that said, I would now like to turn things over to Dick Dauch, AAM's co-founder, Chairman, and CEO.

Thank you, Chris.

Good morning, everyone.

I would like to thank you for taking your time to discuss American Axle & Manufacturing's financial results for the second quarter of the year 2005 with our management.

I am pleased to be joined today by Joel Robinson, our Vice Chairman;

Yogendra Rahangdale, our Executive Vice President of Operations and Planning;

Tom Martin, our VP Finance and Chief Financial Officer; as well as Mike Simonte, our Vice President and Treasurer.

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

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

Let me start by saying this continues to be a tough and challenging for the domestic automotive industry.

North American light vehicle production was down just over 1%.

AAM's customer production volumes for the major North American light truck programs that we serve were down approximately 10% in the quarter.

In addition, (inaudible) market commodity price increases continue to have a negative impact for our industry.

AAM continues to be comfortable, while focusing heavily on our mid and long-term strategic goals of further developing our product offering and product profile, increasing customer diversity, and expanding our global manufacturing presence and footprint.

The continued expansion of AAM's new business backlog during the quarter is strong evidence that we're successfully delivering on these key initiatives.

We are especially pleased with the growth in our backlog for our newest driveline technology that will support the all-wheel-drive applications we have been discussing with you for both passenger cars and crossover vehicles.

I will have more to say on this later, but let me first provide you with some comments on the quarter.

AAM sales in the second quarter of 2005 were approximately $868 million.

Our reported earnings were approximately $19 million.

Our diluted earnings per share were approximately $0.37 for the second quarter '05, and these results include a nearly $9 million charge or $0.12 a share related to the VSA (ph) or voluntary separation incentive program we worked jointly with our partner, the UAW. 162 men and women as associates participated in this voluntary program, and they were terminated from employment with AAM in the second quarter.

Our sales to non-GM customers represented approximately 21% of our total sales in the second quarter of 2005.

Gross margins for the quarter were 9.8% as compared to 14.4% in the second quarter of 2004.

The margins reflect the impact of the expected year-over-year decline in production volume, as well as the impact of both the VSA charge as discussed with you and the increase in material costs.

Recent reports have noted that the metal market pricing environment has begun to moderate.

While this is encouraging, specialty steel prices, such as special bar quality special SBQ steel that we buy, continue to remain high.

This is driven by increases in the cost of moly, nickel, vanadium, and other alloys, as well as the ongoing consolidation of the steel supply chain globally.

We've also been subject to increased pressures from our Tier 2 and Tier 3 suppliers for higher prices and metal market reimbursement.

Tom will provide more detail on this subject later in the call.

We believe that AAM has unique strengths that will allow us to overcome many of these industry issues I have discussed with you people.

These strengths will allow us to emerge from this period as a stronger, more diverse, more competitive, Tier 1 automotive supplier.

Some of our key strengths include the following.

First, AAM's continued focus on providing world-class quality and warranty performance far superior to our competitors in this heavy engineered productline that we produce in.

We continue to deliver Six Sigma, less than 3.4 parts per million, high-quality advanced technology products to our customers.

We are averaging less than 10 parts per million in the entire global performance of our Company, and less than 5 parts per million in six months of the first half year of 2005.

It's unparalleled in our industry.

Our quality and warranty performance continue to be a major competitive advantage in reducing structural costs.

These results are most helpful in allowing AAM to earn more new business.

Second, our Company continues to invest heavily in the development of new advanced technology products to meet the changing need of the global automotive marketplace.

As a result, AAM's R&D spending through the first half of '05 increased -- by design -- over 8%, about $36.5 million, as compared to about 33.8 in 2004.

We continue to increase our investment R&D to expand our current product portfolio and offerings to support our business growth initiatives.

We simply do not mortgage our future.

AAM is investing heavily in R&D in order to technically enhance current product performance, with a specific emphasis on integrating more electronic controls in our products.

This also helps reduce NDH, noise vibration harshness, and improving -- very critical -- fuel economy for CAFE compliance.

The most significant areas of investment include the following.

First, rear-wheel-drive, along with four-wheel-drive and all-wheel-drive driveline systems architecture for passenger cars and crossover vehicles.

It also includes our independent front drive access, IFDAs; our power transfer units, PTUs; and our RDMs, rear drive modules.

The second point on this issue is full driveline system modules, especially with the I-Ride independent rear suspension module, with great packageability for passenger car and SUV applications.

Third, we have now expanded our torque transfer device capabilities with the design and development of transfer cases for light trucks and SUVs, putting us heavily into the drivetrain segment.

That is another critical and important development for AAM.

Fourth, the integration of electronics that I earlier discussed in our product portfolio is heavily focused in our R&D programs.

Retrospectively, in 1994 only 4% of our product portfolio utilized electronics.

Early in our history we recognized the growing evolution to electronics in vehicle driveline and drivetrain systems.

We have focused that on integrating electronics into our core products.

The result is today we have catapulted to over 70% of AAM's products utilization electronics and sensors.

Included in these statistics is the electronic SmartBar technology, electronic locking differentials for both front and rear axles, currently featured on such vehicles as the all (inaudible) Dodge brand Power Wagon.

The technology provides a powerful combination to improve off-road performance and on-road stability to the vehicle.

I will comment in a minute how to focus (ph) R&D translating into our new business development.

AAM's third strength involves a disciplined approach towards our strategic growth initiatives.

Global expansion through new capital investments or acquisitions will play a much larger role in our profitable growth plan for the next many years.

While we have nothing to announce today, we are diligently pursuing opportunities to expand our global manufacturing presence and feel good about this process.

Let me now take a moment to update you on the progress of new business development.

Our new business development backlog currently stands in excess of $1.3 billion in future annual sales.

That represents an increase of approximately $300 million related to new business awarded since our last discussion 90 days ago.

This continued expansion of AAM's new business backlog is strong evidence that our R&D efforts and focus are paying off handsomely.

Our backlog is in line with our long-term strategic goals of, first, diversifying our customer base; second, adding to our global presence; and third, expanding our product offering and portfolio capability.

Let me provide you with some highlights of this backlog, starting with our new business commitments earned in the second quarter.

First point, we earned additional commitments for all-new all-wheel-drive and rear-wheel-drive passenger car and crossover vehicle programs.

We have also expanded our content on several programs that are currently in our new business backlog.

The content on these programs includes AAM's power transfer units, multipiece driveshafts, and rear-drive modules.

As a result of these new awards, ladies and gentlemen, we have six new product programs, in excess of $400 million of new business backlog incorporating our newest technology for passenger car and crossover vehicles.

This is a wonderful breakthrough for AAM, and it all occurred in the last 90 days.

We're extremely pleased to have secured these awards as it is further evidence an expansion of our product portfolio is hitting the market requirement (ph) .

It is also continuing to demonstrate our strength in the development of new advanced technology products and helping us diversify globally.

The second point is our backlog now includes a warranty in excess of $150 million from Asian OEMs and their affiliated Tier 1 suppliers.

The most significant award represents AAM's first opportunity to provide front and rear-access modules to a key foreign customer for a major North American product platform.

In addition to the SsangYong rear drive module program that we marked (ph) success with this past quarter, we have secured three additional awards that include critical drivetrain components with Asian-based Tier 1 suppliers.

Third point, approximately $180 million of AAM's new business backlog relates to product programs outside of North America.

This includes countries and continents such as Europe, Asia, and South America.

The growth of these awards is an important development for AAM as these programs will be the foundation for continued profitable expansion for our global presence and footprint.

The fourth point is we have secured our first award to supply transfer cases for a vehicle program in production.

This application of AAM's latest product technology represents another major milestone in our efforts to diversify our product offering.

It also further validates our investment in advanced driveline systems and drivetrain development.

The fifth point is a new award integrating AAM's SmartBar, an electronically activated stabilizer bar, into a current production vehicle other than the Dodge Ram Power Wagon has been secured.

It is a model 2007 launch, another example of our successful electronics integration to the marketplace.

The sixth is our backlog includes products that we're launching this year which are featured on the SsangYong Motors Rexton and Musso vehicles; the Hummer H3, which is of to a great start; and the Dodge Ram Power Wagon and the Dodge Ram Mega Cab vehicle.

Finally, seventh, we continue to be successful in winning new business with our metal form products technology.

These metal form product awards impact our backlog in the near term and represent both an international and market segment expansion of our customer base.

This new business includes raw forging (ph), machine forging, transmission componentry, as well as closed die flashless forging.

It also further demonstrates the diversity and competitiveness of our metal form products technology capability globally.

AAM is actively quoting on new business opportunities totaling in excess of $600 million.

Approximately three-fourths or 75% of that activity is outside of General Motors, and approximately one-half or 50% represents opportunities with foreign and/or transplant OEMs.

They will continue to play a huge role in expanding our global presence.

In addition approximately 35% is for potential all-wheel-drive or passenger car applications.

This falls right in line with our strategy we have been communicating to you.

Before I turn it over to Tom, let me take a few comments about what lies ahead for AAM.

We're pleased that General Motors is making good progress in normalizing their inventory levels with their successful marketing program of June and July.

This is a positive development for both AAM and the industry as well as General Motors.

We are watching this closely, and we believe that this may clear the way for stronger production volume in the second half of 2005 as well as 2006.

Ladies and gentlemen, we continue through our very important transition year and our Company remains steely (ph) focused on its operations to reduce our cost structure, flawlessly executing our product launches for our customers, and achieving performances that we have given guidance on.

We will do this while continuing to optimize our financial performance.

AAM's technical and commercial success has created a very strong backlog of new business for AAM.

We have an experienced and deep management team in place.

They are focused, disciplined, and motivated to execute the mid and long-term strategic goals that I have discussed generically with you.

As a result we have strong confidence in our future to deliver profitable growth and long-term value for our shareholders.

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

Let me now turn it over to my good colleague, Vice President Finance and Chief Financial Officer, Tom Martin, to discuss our financials.

Tom?

Thank you, Dick.

Today AAM reported second-quarter 2005 earnings of $0.37 per share.

These results include a charge related to a voluntary separation program or VSA with the UAW.

This impacted our quarterly results by 8.9 million or $0.12 per share.

These results compare to $1.02, which also included a charge of 12.5 million or $0.15 per share for a similar program that the UAW reported in the second quarter of 2004.

Lower production volumes scheduled by our customers and higher costs of energy and purchased metal market commodities continue to pressure our operations.

Let's review our financial results for the quarter in further detail.

First, starting with sales, AAM's sales were 867.7 million for the quarter, as compared to 939 (sic) in the second quarter of 2004.

Non-GM sales represented approximately 21% of AAM's total sales in the second quarter, totaling $185 million.

Sales for the second quarter reflect a 10% year-by-year decrease in the production volumes for major North American light truck programs that we support.

Some other items that affected our reported sales results are our four-wheel-drive and all-wheel-drive penetration rate was 61.8% for the quarter.

This is a slight increase from the 60.4% reported in the second quarter of 2004.

AAM's sales content per vehicle increased to $1,185 for the quarter as compared to $1,162 reported in the corresponding period in 2004.

The increase is a result of mix shifts favoring four-wheel-drive and all-wheel-drive versions of midsize, light truck products, including the all-new 2006 Hummer H3, and higher production volumes of our largest axle supporting heavy-duty versions of the full-size pickup truck programs.

This is consistent with our expectations, and we expect this trend to continue through the remainder of this year.

AAM's gross margin for the quarter was 9.8% versus 14.4% for the second quarter of 2004.

The lower production volume and higher cost for purchased metal market commodities negatively impacted AAM's gross margin and overall results for the quarter.

As mentioned earlier, our net metal market cost that we cannot pass through to our customers, as well as our higher material costs, affected our results by approximately $10 million for the quarter.

Our second-quarter results also conclude the impact of an 8.9 million charge related to the voluntary separation program.

Excluding the impact of this charge our gross margin would have been approximately 100 basis points higher.

Similar to the other programs we have offered in the past, we will see the benefits of this program in our operations near the end of the year and beyond.

Selling and general and administrative expenses for the second quarter were 49 million.

This compares to 44.2 million in the last year's second quarter.

For the second quarter of 2005 SG&A expense was approximate 5.6% of sales.

This increase is primarily related to the bottom (ph).

We have incurred higher corporate SG&A cost related to our strategic growths initiative of our new overseas businesses and technical offices in Pune, India, Seoul, South Korea, and Shanghai, China.

Also included within the SG&A is our R&D spending.

For the second quarter of 2005 nearly 40% of our SG&A spending was for R&D, with the emphasis on development.

This is an increase of approximately 12% on a dollar basis when compared to the second quarter of 2004.

This increase is in line with our plan to continue to increase our R&D spending.

As Dick mentioned, we continue to develop new products targeted at key growth segments of the driveline systems market.

Despite the challenging operating environment AAM is committed to being a technology and innovative leader.

We continue to make significant investments in product, process, and system technologies to advance our growth initiative in (ph) expending our product offerings, expanding our global manufacturing presence, and diversifying our customer concentration.

Our new business wins that we have increased our new business backlog to 1.3 billion is proof that these investments are paying off.

As a result, our second-quarter 2005 operating income was 36.4 million or 4.2% of sales, as compared to 89.2 million or 9.6% of sales in the second quarter of 2004.

For the quarter, EBITDA was 80.1 million or 9.2% of sales, as compared to 131.2 million or 14.1% of sales in second-quarter 2004.

Excluding the impact for the charge for the volunteer separation program in 2005, EBITDA would also have been approximately 100 basis points higher for the second quarter of 2005.

Further down the income statement, AAM's net interest expense for the quarter was 6.6 million versus 5.9 million in 2004.

The weighted average interest rate at AAM's outstanding borrowings in the second quarter of 2005 was 4.7%.

This is in line with our expectations.

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

We expect to incur this rate through the remainder of 2005.

For the second quarter of 2005 net income was 18.9 million or 2.2% of sales, as compared to 55.3 million or 5.9% of sales in 2004.

As a result our earnings for the quarter were $0.37 per share.

As I mentioned earlier, these results included a charge of $0.12 per share for VSA we offered during the quarter.

This charge and an industry (ph) environment were the drivers behind our performance for the quarter.

Moving on to AAM's credit, the net interest coverage, or EBITDA to net interest expense ratio, was 14.5 times on trailing 12 month basis.

Net debt to EBITDA leverage ratio on a trailing 12-months basis remains below 2 times at 1.6.

AAM continues to maintain solid financial performance as an investment grade credit.

Let's talk about our cash flow performance for the quarter.

Cash provided by the operating activities in the second quarter of 2005 was 86.5 million, down almost 34 million from 119.7 million in the second quarter of 2004.

Some of the differences driving the change in cash provided by the operating activities on a year-over-year basis are as follows.

First, our earnings (ph) results contributed to these lower levels.

Second, we are deferring less of our tax bill, and we expected this.

Third, our working capital is higher due to higher accounts receivable balances associated with metal market pass through billing with our customers when compared to the second quarter of 2004.

We continue to work diligently to collect these amounts and expect to collect them in the near term.

Capital spending was 86 million in the quarter.

This compares to 49 million AAM spent in fixed capital in the second quarter of 2004.

For the first six months of 2005, we have incurred approximately 160 million in capital expenditures.

As we have previously communicated to you, we expect our CapEx to be around 260 to $280 million for the year.

AAM is on track to spend at or near this level for 2005.

AAM's capital spending levels are expected to increase in 2005 to support the launch of the GMT900, other new product launches, and other programs, and aim at (ph) 1.3 billion new business backlog.

As a result, net cash flow from operations or net cash flow provided by operating activities less CapEx was approximately breakeven for the quarter.

Our free cash flow for the quarter was a deficit of 7.5 million.

This was primarily the result of a second-quarter dividend payment.

For the first six months of the year, we are at a free cash flow deficit of 124 million.

This compares to 21 million of positive free cash flow through the same period 2004.

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

While we anticipated a use of cash during the first half of the year, primarily as a result of lower (inaudible) expectation, CapEx spending -- we are focused on improving our free cash flow in order to meet our target of breakeven for the year.

Now let's focus on our capital structure.

AAM's net debt at the end of the second quarter was 555 million, versus 514.4 million outstanding at the end of the second quarter of 2004.

For the year-to-date period AAM's net debt increased by approximately 121 million as a result of the cash used in operations that I have just mentioned.

Stockholders equity was 987.7 million at the end of the first quarter.

AAM's net debt to capitalization ratio on a book basis was 36% at the end of the second quarter of 2005.

This is approximately the same as last quarter and is right on line on our targeted levels.

At quarter end AAM has more than $600 million of available borrowing capacity.

Let me take a moment and talk about the rest of 2005.

As Dick had said, 2005 has been a challenging year for the domestic automotive industry.

The down weeks that our OEM customers has incurred has contributed to this rough period.

For the first six months of this year, there were over 60 down weeks at various OEM production assembly facilities.

For the remainder of 2005, there are 15 to 20 more OEM downtime weeks scheduled.

AAM's task is to keep focused during the very important transition period.

We know that change is constant in this business, so our task is to manage what we can control, our internal operations and the cost drivers that affect our business.

We will keep focused on our 2005 targets as well as our mid and long-term strategic goals.

We are continuing to further develop our product offerings, customer diversification initiatives, and global manufacturing presence as we prepare for significant future (inaudible).

We are very strong, 1.3 billion new business backlog that complements the existing book of business that we have secured through 2014.

These programs are the foundation of our future profitable growth.

We also have a rock solid financial profile.

That means we are ready with the financial flexibility to take advantage of future commercial 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.

Thank you, Tom, and thank you, Dick.

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

(OPERATOR INSTRUCTIONS) Jon Rogers with Smith Barney Citigroup.

Tom, you had said that you are focused on your 2005 targets; and your previous guidance was, I believe, $1.40 to $1.55.

Is that included in the targets?

Yes, it is.

Okay.

$1.40 to $1.55; we are continuing to maintain that guidance (inaudible).

Okay, good.

Then kind of a strategic question.

Going forward, I think you guys did a very good job converting new business in the quarter.

Can you give us just a better sense of what happened there?

Was there some -- it sounds like you got some production contracts in the quarter.

Did that surprise you, or was your conversion rate just better than you thought it would be?

This is Dick.

Good morning.

First of all, thank you very kindly.

Our strategy has been right, is right, and we are implementing these strategies into purchase orders.

I will have Joel Robinson give you a little bit of a generic thought on this; it might help you.

In fact, our R&D spending that we have been talking about for a couple years here, especially on all-wheel-drive systems, is really kicking in for us.

We have had six or seven different properties in the hands of different OEMs around the globe.

They seemed to all comes together at the right time here.

That added to our backlog.

In fact, almost $350 million of the backlog now are brand-new products that we have never sold in the market before.

Those include that electronics in our differentials, what we call torque transfer devices; power takeoff (ph) units, which is a conversion unit for an all-wheel-drive systems; independent rear drive axles we call RDMs, rear drive modules; and in fact the new transfer case order that Dick mentioned.

So those all came together and that was the biggest part of the backlog.

It is really putting us heavy-duty back into the passenger car business again.

The other thing I would say, Jon, is these are long-term contracts.

Great, thank you.

Darren Kimball with Lehman Brothers.

On the backlog, could you just talk a little bit about the 2005 to 2007 piece?

It looked like that goes from 650 to 715; is that right?

On a gross basis that is correct.

This is Mike here (ph).

Okay.

What is the net basis?

Also could you comment on what the non-GM portion of that is?

Also the 1.3;

I don't know if you said sort of an aggregate non-GM?

The non-GM portion is right around -- Darren, this is Joel -- it is right around 30% non-GM.

To address your question about 2005 and 2007, of course you know that the significant pieces of that portion of the backlog remains the GMC900 incremental activity.

Some of the content drivers, the driveshaft that we have not have had on the 800, also the Mexican volumes. (ph) So that is a key piece of it.

The pieces (ph) volume, again, a GM item, is another significant portion of the backlog.

That is now 100% standard option on all the SUVs that we support for General Motors.

Of course the midsize 100% standard feature element is to kick in with the 2006 model year.

The other critical pieces of the backlog in this time period are the extension of the Dodge Ram heavy-duty program.

There are two variances, I believe you well know.

The Dodge Ram Mega Cab kicks in later this year.

The Power Wagon of course launched early this year.

We have some SsangYong business in that time period that we talked about before.

As you can see a lot of this, most of this in the very near-term continues to be GM and DaimlerChrysler.

One important element that Dick mentioned in his talk today is that in the metal form products area, where the lead times to get up and running with production can be 6 to 18 months, so a little bit less than what we see on the driveline assembly portion of our business -- we've got a lot of new orders launching there including some of these orders with the Asian affiliate suppliers.

So on the whole, you're going to see the mix away from GM kick in '07, '08, '09.

That is really where we see more customer diversification in our top line in this backlog.

Okay, so most of the revisions of the three-year backlog is what, '07?

And it is the forging staff or what?

You are right on target.

A big chunk of it are these orders we have gotten with the affiliate suppliers in the (indiscernible) supply chain.

That is a big chunk of it.

There are some slight revisions here are there to some of the volume expectations that we have on these items.

My second question if I could is just on your view of the GM production situation.

You have been very specific about your full-year volume expectations.

I am just wondering if you can talk broadly about what you think June and July mean, against what your official production guidance is.

How much could come back into the schedules in the balance of the year?

And what your thoughts are initially about '06?

First of all, we feel that things are stabilizing and starting to have a slight upside.

We are off to an incredibly good launch with 2006, and I think you have heard one of the people talk earlier of the down weeks the first half in GM alone. 52 of the 60 down weeks we had were with GM in the first half.

We are only looking at 14 down weeks in the whole second half with GM.

So it is one-third of the down weeks proportionally compared to the first half as it relates to just the GM customer.

Secondly, you know as well as I do the blowout they have had in June and July; and therefore the inventory is actually small right now in light.

They need product and our pen (ph) schedules look strong.

There is overtime being added at selected plants and different product lines right now.

So that is sort of a generic (inaudible).

Thanks very much.

Joseph Amaturo, Calyon Securities.

Could you just get into more specifics regarding your GMT800 production volume expectations for the third quarter that are incorporated with your guidance?

This is Mike.

As we talked previously. the first half of the year we were down about 15% across all of our product lines.

We haven't been so specific to talk about each individual productline.

The second half of the year should improve off that percentage decline.

Although it's important to point out we are still expecting declines in production in the second half of the year, as compared to where we were in 2004.

Where we were down about 15% on a composite basis in the first half of the year, we're still looking at probably 8 to maybe 5-10 (ph) in the second half of the year.

So it's still going to be reasonably difficult.

The good news is within the mix the 800 program is pretty strong, (ph) particularly on the pickup side.

We actually had increases in production for the full-size heavy-duty version of the 800 in the first half of this year.

So the mix is pretty good.

The pickups are a lot stronger than the SUVs, and we all know why that is.

So I expect the 800 to do at least as well as our average and probably a little better.

Secondly, with respect to the gross profit margin, I think there was a sequential improvement from the first quarter.

Going forward into the second half should we expect continued improvement at the gross profit margin level, or --?

The key issue for us is going to be volume.

So if the volume expectations are consistent with what I just said, then we should see some improvement in our margin performance.

If you compare that first quarter to our second quarter, we did have more volume in the second quarter, obviously, and that helped a lot.

Because we are able to cover our fix (ph) in a much more efficient manner.

Okay, so production volumes at GM down 8 to 10% should result in some gross margin improvement for the second (multiple speakers) ?

Certainly as compared to the first quarter.

The thing to keep in mind about the third and fourth quarter is that there's about 13 fewer production days in the second half of the year versus the first half of the year.

So there are only so many days and so many units that can be produced.

So we're feeling optimistic about the daily run rates.

We think those will be up substantially, but in total it can only go so high (ph).

Okay, thank you.

Jonathan Steinmetz with Morgan Stanley.

A few questions.

Dick, when you mentioned that they are beginning to add a little bit to schedules here and there and that you're seeing some overtime and that sort of thing, is it at any sort of level that it would actually constrain your variable margin on the upside?

Or is it sort of more normal course?

This is not going to have any constraint.

We're delighted with it.

We're ready for it.

Matter-of-fact this Saturday and Sunday we're running several -- they are running several vehicle assembly plants; we will be in full support, and we are prepared for it.

Second is a balance sheet question.

Do you feel as if you need to get through the 900 launch and sort of see the operating income move upward before you would think about taking on more leverage?

Or if the right opportunity came along you would be open to the idea?

I think it is more the second part of your point than the first.

We have got some flexibility; and certainly the cash flow profile that we're going to run in the second half of this year is going to be much much stronger than the first half.

We do expect to really bring back most of the outflow we saw in the first quarter.

Probably all it.

So we're going to end the year with well over $600 million of available committed capacity; lots of flexibility; and if the right deal is here, I don't think, as Tom mentioned, it is (inaudible) and we feel like we're ready from a patchit inspectus (ph).

Anything out of -- now that the Visteon Ford deal has come together and you have seen what has happened regarding axles there, any opportunity regarding componentry or anything from that whole transaction that could benefit you?

We have no comment on that right now.

Okay, thank you very much.

Chris Ceraso with CSFB.

A few items here.

First, were Ram sales up or down year-over-year in the quarter?

They would have been down.

We will have to let Mike see if he can get you the specific numbers.

He already gave you the GM; and Dodge Ram was down but not as severe as the GM800.

You guys got the specifics?

We are down.

Production volumes for the quarter were down about 10%.

The Ram was down just a little bit less than that.

But that is not materiality different.

Dick, based on some of the comments on the prior call and subsequent meetings, you had mentioned that it looked like, because of changeovers and so forth, that '06 may still be kind of a lean year.

Has anything changed that has made you think differently about '06?

Or is '06 still going to be somewhat of a difficult year for American Axle?

What I said and what I meant was 2005 and 6 would be a two-year rough patch.

The roughest of the two would be 2005.

The roughest of that would be the first half of 2005.

Momentum is picking up right now slightly in the second half of 2005.

Of course whenever you have a massive launch, you have to be prepared to make major adjustments.

With December of this year, and then through the entire next year, the GM900 and its derivatives start to unfold.

We are very excited about that.

I think there is more upside than there is downside as it relates to opportunity.

We're ready for it.

Matter-of-fact most of our GM900 equipment process is either in place or coming in place and starting up remarkably well.

So we could have a little bit more of an upside than my previous comment on that issue.

Okay.

Lastly, is there a risk that you don't get back some or all of the excess material cost that you have had to bear upfront on certain of your protected programs, which you referenced in the context of your Accounts Receivable increase?

No, we don't believe so.

We have a lot of confidence we're going to collect that.

In fact one thing we haven't said yet is we began the year, really, with one major customer protecting us on metal markets.

We have targeted many others.

We have agreements now with six others in fact, and (technical difficulty)

Okay, thank you.

David Leiker with Robert W. Baird.

Are you expecting to see another VSA here in the fourth quarter like you have in the last several years?

No, we do not.

As you pick up volume in new business, particularly in Asia but also here in Europe at some point, what is your strategy for a footprint in those markets?

We have got it, and we're not prepared to communicate it.

More importantly, we do have the orders now secured to give us the scale and size and do all the things that we strategically have been guiding you and discussing with you and confirming.

When we are prepared to tell you where it will be, we will tell you.

Can you give some sense if you're more likely to do a greenfield versus acquisition?

(inaudible) flexibility.

Okay.

On the transfer case business that you talked about, can you give us any sense of the potential volume on that?

Yes, it is in tens and tens of thousands per year, and it is multi-year, and we are excited to have it.

It is a major breakthrough for us, and we also have it planned on our footprint of where and how we will produce it.

At the right time we will share that with you.

Okay.

What is the timing on launching that?

We're not announcing the timing on that.

It's beyond the 2005 to 2007 time frame.

Okay, great.

Thanks.

One last one.

Dick, you had talked about you are seeing some overtime being put in.

Are you seeing that on anything other than the pickup trucks at GM?

Yes, we are; and also from multi companies.

Great, thank you very much.

Rob Hinchliffe with UBS.

I guess just a couple of quick ones.

Four-wheel-drive penetration on the 900; any reason to think it will be different than what we're seeing on the 800?

Absolutely not.

I would see it being at least the 60, 61% that we have got right now, the guys (ph) been discussing historically.

And it might be a trickle higher.

Okay.

Then CapEx, we know for '05.

Any reason to think it will be much different in '06?

First of all, let's take a perspective.

Our CapEx for the previous year was heavily loaded to the back half of 2004.

Our CapEx for this year, 2005, is heavily loaded to the front half.

So we have already incurred those two heavy periods.

It will be more normalization here and slightly lower as we go through the second half of this year.

Then because of all of this new business that Joel has just indicated, and we have communicated to you folks, obviously Yogen and the team will be scheduling that and timing that.

We will keep you posted as we have guidance on that.

Okay.

Thank you, Dick.

John Casesa with Merrill Lynch.

Thank you.

Dick, could you, or Mike, whoever -- could you break out the $400 million in new business, since the categories are dollar amounts?

Also I saw the backlog increased from 1 billion to 1.3 billion.

A $300 million increase.

Can you just clarify that?

It is 300 million.

I think Joel is going to respond to you.

First of all, good morning, John.

We're delighted to have all this new business.

Joel, can you help John on some of the details he needs?

As I mentioned before, most of the new business backlog increase -- and it was $300 million -- is assisted with the new products on the all-wheel-drive systems that we talked about, as well as some forging contracts.

Okay.

Heavily slanted towards passenger cars.

Does that answer your question, John?

So the bulk of it is this all-wheel-drive stuff, most of it, in passenger cars and --.

I guess there's three exciting things for us.

Number one, it is brand new business.

Number two, it is on pass cars.

Number three, it is on crossover and hybrids.

Number four, it's our new product technology all-wheel-drive; it has all the critical components that go with an all-wheel-drive system.

Okay.

Maybe can I ask in terms of this increasing penetration of all-wheel-drive on passenger cars, is that a domestic phenomenon, a foreign phenomenon?

Where is that business?

It is both.

John, that is what we like.

We're really getting a nice stretched, balanced footprint.

It is very definitely foreign, but also very definitely domestic, and in some continents we have never dealt with in the past.

Dick, the last time I saw you in New York, you did say that at some point soon you would be identifying some of these customers.

At what point will you be able to identify some of the customers?

As soon as those customers allow me to tell you.

Right now they have not given me that latitude, or I would be delighted to tell you all these details.

Are we waiting -- is it months, is it years, is -- who knows?

I think it will be yet this year.

So I can't again answer that.

They are very guarded with their long-range product plan; they're very guarded with their priority of rollout of launches.

And I can respect that.

Therefore I can only tell you what I am allowed to.

Okay, well thank you very much, everybody.

Himanshu Patel with J.P. Morgan.

You had commented earlier that the assistance to Tier 2 suppliers was weighing down on margins.

I am just wondering, has that situation peaked in the second quarter?

Or when you look into the second half could that foreseeably still get worse?

It's peaked.

It's peaked.

But we have to deal with things daily, and I think our system and our people are working, first of all, with Paris (ph); and secondly there is nothing of any extreme that I don't think -- any major additives (ph).

Joel, if you want to add in.

No, I think that is quite right.

It has peaked.

Most of the requests and the hard hits were to just (ph) a couple months in this year.

It is settling down (inaudible).

Okay.

Now that there is an argument maybe, at least on the GMT800, the production numbers are stabilizing or bottoming.

What sort of contribution margins should we be thinking about up on the way up for existing platforms, like the T800, if production starts being revised up?

I am happy to answer that question.

The contribution margin that we get on a new sale is in the range of 20 to 25%.

So we hold our operations accountable to achieve that through incremental volume.

The other factor though that is going to impact our operations over the course of the next six to maybe 12, 18 months as we see production volume come back up, in the aftermath of all this inventory correction, is the lay-off cost deals.

We pay our laid off associates supplemental unemployment benefits.

That has been driving down our margins on the way down to 40% or so on the way down.

We're going to be able to recover some of that delta, between 25 and 40.

Not in all cases will we bring back the same number of people.

But basically we should be expecting 30, 35% and if we're really busy (ph) it may get a little bit better.

Right.

Okay.

Is that dramatically different between let's say a brand new contract that you would have coming on versus sort of a ramping up an existing platform that you're already running?

Yes.

The answer to that question is yes, and particularly because we have got all the overhead and logistics and everything else in place from an operating standpoint.

So we can turn on the profit margin much quicker on an existing program.

Okay.

I guess two more questions.

One, sort of what are you thinking for a year end on working capital, or specifically on receivables?

Receivables should be down quite a bit by the end of the year.

We are up from the end of last year about $45 million or so just due to the increase in business activity in June versus December.

Then metal market recoveries that were billed to our customers are up.

We talked about at the end of the first quarter being out about two quarters with GM.

That continues at June 30.

We did collect a full quarter of activity, but we billed another, so that continues; and we expect to get that cleaned up by the end of the year.

Then the fact that we are billing other customers also has a little bit of a build (ph) impact.

Last question.

Could you give us an update on the exact launch timing that you're thinking of for the T900 pickups next year?

There is an unfolding of the 15 GM900 vehicles that has been announced publicly.

The SUVs would be the first priority, and the pickups obviously are the second priority.

That is something you should discuss with General Motors.

Okay.

Thank you.

We have got time for one last question.

Rick Kwas with Wachovia.

I just wanted to ask the backlog.

Since '05 to '07 seems to be weighted towards GM, would you venture a number on the '08 to '10 backlog and what percent is non-GM?

I will ask Joel to give you a response there.

It is going to be in the 30% range.

But that is for '05?

I thought that was for '05 to '10 overall.

But my question was geared towards '08 to '10.

It seems like it would be higher than that.

That is correct, that is exactly right.

It is going to be a little bit higher in '08 to '10 as we launch some new business with other customers.

Would you say it would be substantially higher than '05 to '07?

How would you characterize that?

(multiple speakers) Higher significantly (indiscernible) he said 30 plus percent range I don't have the exact number.

Just a housekeeping question on revenue contribution from the metal market recoveries, this quarter was it similar to the first quarter?

I think it was 25 million or thereabouts?

Mike will give you a response on that.

Just give us a second to get our details.

I think the aggregate amount is a little bit higher than 20.

I think it was closer to 30 million; hold on just a second.

It is about -- it's right around 25 million.

That is right.

So 25 million Q1, Q2, so 50 year to date?

Q1 was a little bit higher, essentially flip flop them (ph).

That is what I was thinking.

Q1 was around 30;

Q2 is about 25.

Great, all right.

Thanks so much.

We thank all of you for participating in this call and appreciate your interest in American Axle & Manufacturing.

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

Thanks again.

Thank you.

This concludes today's conference call.

You may now disconnect.