American Axle & Manufacturing Holdings Inc (AXL) 2005 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the American Axle and Manufacturing Third Quarter Conference Call. [OPERATOR INSTRUCTIONS.]

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

Please go ahead, Chris.

Thank you, Nicole, and good morning everyone.

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

All of you should have had a chance to review our third quarter 2005 earnings announcement that we released early this morning.

If you have not, you can access it on the aam.com website or through the PR Newswire Services.

A replay of this call will also be available beginning at noon today through 5 PM Eastern Daylight Time, November 5, by calling 1-800-642-1687, reservation number 9905977.

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

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 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 are planning investor trips to the East Coast.

We will also be appearing at the Baird Industrial conference in Chicago on November 9, the Banc of America Q&A Conference in New York on December 7, and in January at the Auto Analysts of New York meeting in Detroit in conjunction with the Auto Show.

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 other locations.

Please feel free to contact me to schedule a visit.

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

Thank you, Chris, and good morning everyone.

I should like to thank the men and women for joining us today to discuss AAM’s financial results for the third quarter of the year 2005.

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

David Dauch, EVP, Commercial and Development;

Tom Martin, our VP Finance, CFO; and Mike Simonte, our VP and Treasurer.

After I provide a brief overview of our financial results for the quarter, I will provide an update on the status of our strategic growth initiatives and then close with some comments on our outlook for the remainder of 2005.

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

After that, we will open the calls up for you men and women for questions.

Let me start by stating that a challenging operating environment for the domestic automotive industry and the Tier I automotive supply chain, AAM continues to be solidly profitable.

For the third quarter, AAM’s customer production volumes for the major North American light truck program that we serve were down approximately 4%.

Higher metal market commodity costs increase continued to negatively impact the industry.

Although these lower production levels and increased steel and metallic material prices continue to pressure sales and inflate costs, AAM remains focused on its mid- and long-term strategic goals of the following - further developing and growing our product offering, increasing customer diversity, and expanding our global manufacturing footprint.

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

AAM sales in the quarter were approximately $848 million, with net income totaling some $19.3 million.

This resulted in diluted earnings per share of $0.38 for the third quarter of 2005.

For the quarter, our sales to non-GM customers increased 18% to over $207 million.

Non-GM sales now represent approximately 24% of our total sales for the quarter.

Sales of AAM’s products [inaudible] Chrysler groups, Dodge Ram heavy duty pick-up truck and their derivatives contributed to this increase in non-GM sales for third quarter of ’05.

We continue to be encourage by the progress we’re making to increase sales nets of our customer base while reducing the concentricity of GM sales.

Gross margin for the quarter was 9.8% versus 12.8% the third quarter of ’04.

These margins were a result of the lower light truck production of our largest customers and higher cost of purchased metal market commodities that continue to impact the entire industry and global marketplace.

Our third quarter results demonstrate AAM’s operational and financial resiliency in what continues to be a demanding automotive and industrial environment.

This resiliency is a direct result of the intense commitment on an operational level to deliver value to our customers, and we have an extremely good workforce helping in every way.

They also have helped us improve our financial performance to deliver value to our stockholders.

Let me cover some key areas of focus, including the following.

First, AAM’s continued commitment to provide world-class quality and warranty performance of heavy engineered products.

We continue to target on delivering 6-figure quality, advanced technology products to our customers, and we continue to average less than 10 parts per million throughout the world and achieved 5 parts per million or less in 6 of the 9 months of ’05.

This quality record is a competitive advantage for our Company in terms of our ability to earn awarded new business.

It’s a key differentiator for AAM that provides our customers with exceptional quality, warranty performance, and value.

Second key point, AAM’s focus on cost drivers of the business.

The rising cost of steel and other raw materials and metallics continue to impact our operations and financial results, as it does our peer groups.

We’ve also been subjected to increased pressures from our Tier 2 and 3 suppliers for higher pricing and metal market reimbursement as they go through their economic and business needs.

While we have granted higher prices to some, we maintain a continuity of supply, we’ve successfully achieved metal market reimbursement agreements with our key customers to establish a level of metal market protection for our Company, AAM.

We are also continuing to work with our customer base and suppliers to address their issues for near- and mid-term planning.

The third point I want share with you is our Company continues to identify areas of opportunity to improve productivity in this challenging operating environment.

These improvements enable our Company to achieve cost reductions and flawlessly and anonymously launch new and very sophisticated products.

Third point, AAM’s commitment to meeting marketplace needs.

This begins with our efforts in the areas of R&D, and AAM’s R&D spending to date was up over 6% in dollars to some $54.7 million.

Our Company invests heavily in the development of new, advanced technology products to meet the changing needs of our customer base and the global marketplace.

This investment has led to the development and validation of products, such as rear-wheel drive and all-wheel drive systems for passenger cars and crossover vehicles.

In addition, our R&D focuses on enhancing current product performance with specific emphasis on much more electronic control and concept integrated into our products in a very sophisticated fashion.

Our R&D efforts also target the reduction of MBH and enhances the improved fuel economy so needed in today’s market in North America.

AAM’s long-term commitment to applied R&D and product line diversification is a primary catalyst for the growth as to why we have this new business backlog of over $1.3 billion in future annual sales through the year 2010.

It’s also positioned our Company to secure additional profitable business with an expanded customer base and new markets throughout the world.

Let me take a moment to update you on the progress of our strategic business growth initiatives which continue to evolve.

On this measure, first I want to mention our business backlog again on the $1.3 billion of future annual sales through 2010, and as I look to 2012, it’s over 1.5 billion.

This new business backlog, combined with current book of business, is a rock solid foundation for us to build upon as we go ahead.

Our new business backlog also represents our ability to develop new, advanced, sophisticated, needed technology products that will help us diversify globally.

Our new business backlog includes not 1, but 6 different programs, totaling nearly $400 million that incorporate our latest, newest technology for passenger cars, as well as crossover vehicles on things such as power transfer units, multi-piece drive shafts, rear-drive modules, and these are important breakthroughs for AAM.

Our backlog also includes awards for Asian OEMs and their affiliated Tier 1 suppliers for product programs in Europe, Asia, as well as South America.

These awards are another key development for AAM.

These programs will be the foundation for continued profitable expansion of our global presence and expanded footprint.

Second point on this issue is that we’ve been encouraged by the opportunities that now include our quoted business backlog.

We’re currently quoting on new business opportunities totaling around $1 billion.

Production launched timing of these programs range from 2006 to 2010.

Nearly all of this quoted business activity is with customers other than General Motors Corporation.

Approximately 65% is in support of foreign and/or transplant vehicle programs.

The third point is our new business backlog and quoted opportunities are the key drivers behind the continued expansion of our global presence.

In support of our strategic growth initiatives, we have relocated our European headquarters to [Bad Nauheim] [ph], just northwest of Frankfurt, Germany.

The main purpose is the facility is to centralize our European operations related to manufacturing, product engineering, purchasing, strategic planning, quality, as well as other technical functions.

AAM’s European headquarters will further demonstrate our technical capability and provide the infrastructure to support the program management engineering need for the European OEM’s requirement, another unfolding development for our Company.

We’re in the final stages of site selection for an all new regional manufacture location in Central Europe.

We’re also in the final stages of site selection for a manufacturing location in the important market of China.

We expect to launch both locations with 100% non-GM customers, and we will be very confident through the execution of our business strategy and growth that we will do it quickly, aggressively, effectively, and efficiently in these new regions for our market thrust.

This will further expand our geographic region, product portfolio, and customer diversity with profitable business measures.

Our plans for expanding our global presence are moving at a very aggressive pace.

Over the last year we have established new international business and technical offices in Pune, India;

Shanghai, China;

Sole, South Korea; and we’re also completing the construction of another expansion for our manufacturing facility in Araucaria, Brazil, plus a wonderful new expansion that we’re finishing in Guanajuato, Mexico.

Fourth, our expansion efforts include our vital operations in North America.

Technical Center in Rochester Hills, expansion of our Three Rivers, Michigan Drive Line Facility, and the one that I mentioned in Guanajuato, Mexico in that fast manufacturing complex.

In addition, AAM has recently announced plans to expand AAM’s Colfor Manufacturing operations in Minerva, Ohio.

This expansion will create another 175 new jobs, while retaining the present employment.

It also will help us in the next 24 months significantly and profitably grow that subsidiary.

The Minerva facility will transition from batch production practices to high-volume, precision manufacturing needs.

Ladies and gentlemen, March 1 of 1994, this Company developed a set of strategic initiatives that would lead AAM to be a profitable and future supplier with global presence.

I’m proud to say this is the 12th straight year of AAM being a profitable Company.

Those initiatives are as appropriate today as they were back in 1994.

We are profitable.

We are selectively global.

We are the best in the world on quality and warranty and launch performance.

We are intensively engineering driven and focused on value-added for our customers, and we’re rapidly adapting to the changing global dynamic of the restructuring automotive industry, which is quite dynamic.

Let me now look ahead and discuss the outlook for the remainder of 2005.

In our press release today, we reconfirmed our earnings outlook for a full year 2005.

We expect the full 2005 earnings to be in the range of $1.40 to $1.45 per share.

This outlook includes a $0.12 per share charge related to voluntary lump sum separation payments accepted by 162 hourly associates in the second quarter of 2005.

Tom will discuss more of the ’05 outlook and other details later on the call.

Our objective in AAM for the remainder of 2005 and ‘06 is to stay focused and concentrate on our work.

AAM’s management team is experienced, focused, disciplined, motivated, and very ingenious.

As a result, AAM’s team is determined to deliver profitable financial performance while diligently pursuing our long-term strategic goals of further developing our product offerings, our customer diversity, our global manufacturing presence, and delivering long-term value to our shareholders.

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

At this time, I would like to have our VP, CFO of Finance, Tom Martin.

Tom.

Thank you Dick.

Good morning everyone.

We have a lot to cover today, so let’s get started.

Today AAM reported third quarter 2005 earnings of $19.3 million, or $0.38 per share.

As noted in our press release, our results for the quarter reflect the impact of retroactive metal market cost recovery agreement with one of our major OEM customers.

Under this agreement, AAM was reimbursed for certain metal market costs incurred in the first half of 2005.

This retroactive cost recovery was partly offset by costs related to other provisions of the agreement and other retroactive purchases and material adjustments that we incurred in the third quarter.

The net favorable impact of these agreements was $6.2 million in the quarter or $0.08 per share.

This metal market cost recovery agreement is consistent with AAM’s focus in addressing the cost factors that affected our business.

As Dick mentioned, we have been working diligently to develop these agreements and are pleased to have secured agreements with several of our key customers.

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

First, starting with sales.

AAM sales were $848 million for the quarter, as compared to $842 million in the third quarter of 2004.

Our non-GM sales were up 18% to $207 million.

As a percentage of total revenues, sales to customers, other than GM, were approximately 24% of AAM’s total sales in the third quarter and 22% year-to-date.

The growth in sales to Chrysler group and sales to Ssangyong Motors aided this increase.

Sales for the quarter reflect a 4% year-over-year decrease in the production lines for the major North American light truck programs that we support.

This compares to North American light vehicle production, which was up over 2%, and GM light truck production, which was down nearly 5% for the quarter.

Some other items that affected our reported sales results are four-wheel drive and all-wheel drive penetration rate was 65.9% for the quarter.

This is a sizable increase from the 61.8% reported in the second quarter of 2005 and 61.4% in the third quarter of 2004.

AAM sales content per vehicle increased to $1,240 for the quarter, as compared to $1,185 reported in the second quarter of 2005.

This is a $55 increase as a result of mix shift favoring four-wheel drive, all-wheel drive versus a full-size and mid-size light truck programs.

For the first three quarters of 2005, sales were $2.5 billion as compared to $2.7 billion for the same period 2004.

On a year-to-date basis, North American light vehicle builds are down just over 1%, and GM light truck builds are down about 11% so far this year.

AAM’s gross margin for the quarter was 9.8% versus 12.8% for the third quarter 2004.

For the first three quarters of 2005, gross margin was 9.5%.

Consistent with the first half of this year, lower production volumes scheduled by our customers and the high cost of energy, purchased material, market commodities continue to pressure AAM’s operation.

In addition, non-capitalized project expense associated with the launch of new equipment for new programs affected our gross margin.

SG&A expense for the third quarter was $48.4 million.

This compares to $47 million in last year’s third quarter.

For the third quarter of 2005, SG&A expense was approximately 5.7% of sales, which is relatively consistent with 2004.

For the first three quarters of 2005, SG&A costs are running at about 5.7% of sales, as compared to 5.2% of sales in 2004.

This increase is primarily related to the following.

We have incurred higher corporate SG&A costs related to our strategic global growth initiative as a result of new overseas business and technical offices, including India;

Seoul, South Korea; and Shanghai, China.

Also included with SG&A is our R&D spending.

On a year-to-date basis, our R&D is nearly $55 million.

This represents approximately 40% of our total SG&A costs and its peak increase of over 6% on a dollar basis when compared with the same period of 2004.

This increase in spending is in line with our R&D initiatives.

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

Despite a challenging operating environment, AAM is committed to be a technology and innovation leader.

We continue to make significant investments in product, process, system technology to advance our growth initiatives in expanding our product offerings, expanding our global manufacturing presence, and diversifying our customer concentration.

Our new business wins that have increased over our new business backlog from $1.3 billion is proof that these investments are paying off.

In addition, Dick mentioned that relocation of our European headquarters in [Bad Nauheim] [ph], Germany, just outside of Frankfurt, AAM’s European Headquarters further supports our global growth initiatives, as well as indicates our commitment to R&D, as it now allows AAM the ability to demonstrate its technical capability and supports the engineering requirements of European OEMs.

AAM’s third quarter of 2005 operating income was $34.9 million, or 4.1% of sales, as compared to $60.9 million, or 7.2% of sales, in the third quarter of 2004.

For the first three quarters of 2005, operating income was $97 million, or 3.8% of sales.

For the quarter, EBITDA was $82.6 million, or 9.7% of sales, as compared to $103.4 million, 12.3% of sales, in the third quarter of 2005.

For the first three quarters of 2005, EBITDA was $232.3 million, or 9.2% of sales.

Further down the income statement, AAM’s net interest expense for the quarter was $7.3 million versus $5.9 million in 2004.

The weighted average interest rate on AAM’s outstanding borrowings in the third quarter of 2005 was 4.7%.

This is in line with our expectations.

AAM’s overall effective tax rate was approximately 33% in the third quarter of 2005, versus 32.7% in 2004.

And as I mentioned earlier, earnings for the quarter were $19.3 million, or $0.38 per share.

Earnings per share were $1.01 for three quarters 2005, as compared to $2.37 per share for the same period of 2004.

Moving on to AAM’s credit statistic, net interest coverage, or the EBITDA to net interest expense ratio, was 12.8 times on a trailing 12-month basis.

Net-debt-to-EBITDA leverage ratio, on a trailing 12-month basis, remains below 2 times at 1.7 times.

Now let’s talk about our cash flow performance for the quarter.

Net cash flow provided by the operating activity was $91 million in the third quarter of 2005.

After deducting capital expenditures of $82.4 million, AAM’s net operating cash flow was a source of $8.6 million.

This compares to a source of $40.9 million in the third quarter of 2004.

For the first three quarters of 2005, net cash flow provided by operating activity was $143.4 million.

After deducting capital expenditures of $243.6 million, AAM’s net operating cash flow was a use of $100.2 million.

This compares to a source of $69.3 million in the third quarter of 2004.

Some of the differences driving the change in net operating cash flow on a year-over-year basis are as follows.

First, our earnings result contributed to these lower levels; second, we are deferring less of our tax bill, and this what we expected; third, our working capital continues to be higher, due to higher accounts receivable balances associated with customers other than GM when compared to 2004, as well as slightly higher levels of inventory; fourth, we continue to incur higher levels of CapEx to support the launch of the GM T900 and other new product launches included within our $1.3 billion new business backlog.

For the first 9 months of 2005, we have incurred approximately $244 million in capital expenditures, as compared to $159 million in 2004.

After a $7.7 million third quarter dividend payment, free cash flow for the quarter was slightly above breakeven.

For the first 9 months of the year, after paying nearly $23 million in quarterly dividends, we are at a free cash flow deficit of $123 million.

This compares to $53.8 million of positive free cash flow for the same period of 2004.

I have more to say on our free cash flow outlook for 2005 in a few minutes.

For now, let’s focus on our capital structure.

AAM’s net debt at the end of the third quarter was $553.6 million versus $528.5 million outstanding at the end of the third quarter of 2004.

For the year-to-date period, AAM’s net debt increased by approximately $120 million as a result of the cash use in operation that I just mentioned.

Our stockholders equity crossed over $1 billion during the quarter.

AAM’s net-debt-to-cap ratio on a book basis was 35.5% at the end of the third quarter of 2005.

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

At quarter-end, AAM had approximately $600 million of available borrowing capacity.

Now let me take a moment and talk about our outlook for the remainder of 2005.

Today, in our earnings release, we have reconfirmed our earnings guidance of 2005.

We have tightened the range of our guidance to $1.40 to $1.45 per share from our previous guidance of $1.40 to $1.55 per share.

This also includes a charge of $8.9 million, or $0.12 per share, related to our voluntary lump sum separation payments accepted by 162 hourly associates in the second quarter of 2005.

Our full-year earnings guidance also assumes production volumes from the programs that we support will be down approximately 8% to 9% when compared to 2004.

Our expectations for the fourth quarter also assumes GM produces 827,000 trucks, as indicated in their publicly released production schedules.

In addition to reconfirming our earnings guidance for 2005, we now expect CapEx to be around $300 million for 2005.

Our CapEx expectations for 2005 have increased due to several factors.

First, a portion of the increased CapEx will support the accelerated launch of the GM T900 program in the 2007 model year.

It also includes increased capacity for Chrysler group’s heavy duty Dodge Ram program and derivatives.

Second, AAM expects to incur additional CapEx in 2005 to expand its international footprint with new manufacturing capacities outside of the U.S. in support of its $1.3 billion of new business backlog.

And third, our engineering teams continually assess the timing requirements of the programs in our $1.3 billion new business backlog.

As a result of accelerated timing requirements by our customers, we have made revisions to our CapEx to support this future launch activity.

As a result of these factors, AAM’s CapEx for 2005 is expected to be $60 million higher than our 2004 reported results.

Reflecting this increase in capital expenditures, as well as higher working capital investment in accounts receivable and inventories than we have previously communicated to you, we now expect our free cash flow for 2005 to be approximately a use of $60 million.

Based on this earnings and cash flow guidance, AAM expects its net-debt-to-cap ratio to approximately 33% on December 31, 2005.

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

AAM’s task is to keep focused during this very important transition period.

We have a very strong $1.3 billion new business backlog that compliments the existing book of business that we have secured through 2014.

We are also encouraged by the book of business that we are currently quoting.

From a financial perspective, AAM is clearly focused on creating a long-term stockholder value and in choosing our mid- to long-term strategic objectives.

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 now have time for some questions, so I’d like to turn the call back over to Nicole to begin the Q&A session.

[OPERATIONS INSTRUCTIONS.] Jon Rogers, Citigroup.

I’d like to just ask about the steel exposure and the benefit that you received this quarter.

I’ll have Mike Simonte give you a little response.

Yes, Jon, I’m not sure.

Let me start off by just stating a couple basic facts, and then you can target us a little bit more.

We had a retroactive recovery from one of our major customers that really related to cost we incurred the first half of the year.

In addition, we had some discussions with suppliers who were seeking similar types of recoveries, and we’re not in the business of passing those along without some offset.

So we definitely tied those two things together, and that’s why there was a net impact of something less than the total amount recovered from our customer.

So is this, Mike, a permanent shift in the way that you’re doing business with your customers?

I mean, did you get a new agreement on coverage and pass-throughs where you didn’t have them before, or was this just a temporary shift based on negotiations?

Jon, this is Dick.

Let me just say this, that there were some issues that had to be worked out, so we’d be in proper balance with appropriate customers on this very critical issue.

Those have been done thoughtfully, positively.

It should make the process much easier to go from third quarter to fourth quarter on this year on into next year.

Okay, great.

And then, I guess Dick, one more question.

As you look at the current GM UAW Health Care deal, is there opportunity for American Axle in the near term to potentially adjust your own health care costs sort of in line with the new GM levels?

Well, I think the broader question, I think your question’s appropriate, but I think it’s a much broader question, and that could apply to anyone in the domestic automotive arena that has contracts with a common stakeholder in the UAW.

And certainly we fall into that arena.

So, we’ll be reviewing that and dynamically discussing that in times in the near future when it’s appropriate.

Darren Kimball, Lehman Brothers.

I just wanted to clarify on the raw material, on the steel.

What was the, sort of, normal cost that you incurred during the third quarter?

That’s not tied up in some of your earlier comments, is it?

No, Darren, it’s not.

The previous comments we made simply related to one of several new metal market agreements we put in place this year.

The base steel cost, we’re not going to get into too many specifics, but we did have material -- base price material price increases in the quarter that approximated $10 million, so, across our entire material buys.

And that $10 million is separate from this other issue.

And can you also give us the Tier 2 cost?

You’ve typically talked about them separately.

Well that’s what I just mentioned.

As you recall, we had the step up in our metal market price adjustments begin in the third quarter of last year.

So there’s a small variance there, a small increase, but nothing significant.

So, the material price increases that we’re dealing with here are really our own suppliers.

Okay.

And can you -- now that your measurement dates have passed for the pension and the OPEB, can you give us some sense of what your expectation is for the pension and OPEB expense increases next year?

Yes, Darren, you’re right on.

September 30 is our valuation date.

We’re still finalizing some things with our actuaries, but the discount rate should be 40 to 45 basis points lower than it was a year ago.

And if you happened to notice in our previous SEC filings, we’ve disclosed previously that the impact of a 50 basis point decline would be about $6.5 million of expense.

There is also a reduction in our assumed return on assets, and when you add all that up, just those two factors alone, we should see our pension and OPEB costs increase somewhere between $8 and $9 million next year.

And then there’ll be an additional increase due to service cost and amortization of prior actuarial losses.

Okay.

And lastly, I don’t know if this is the right forum to comment on this, but there have been reports recently that the Zeta platform might be making a comeback.

Are you guys encouraged by the activity that you’re seeing at GM in the backlog?

I mean, could we see some further strength there?

Darren, this is Dick Dauch.

Any auto company is run by a long-range product plan.

General Motors is about as aggressive as any auto company in the world on reviewing where they need to ship to new market segmentation.

I’m very encouraged with my strategic partner, GM, as to things they’re looking at, but when they’re prepared to make an announcement, they will.

In the meantime, we’ve got great discussions going with them on these issues.

You know what?

I got to ask you one more question.

Obviously this [DELFI] situation is taking center stage here.

How concerned are you guys about a potential strike situation that will impact GM’s truck volumes?

Well, I think anyone will always be sensitive that labor is a critical issue in contribution, and we’re going through unprecedented structural issues that impact economics, and therefore, [DELFI] is on the leading cusp of that, along with Stakeholder UAW.

We, as well as GM, have to be concerned, but we don’t control that process.

We’ll have to react to it if things do occur that are negative.

Let’s hope they don’t.

Let’s have some confidence that maybe between now and December 15th that good minds will work out something that is needed, fair, and reasonable, and I’m going to have to be patient, just like you, as the process unfolds.

Michael Bruynesteyn, Prudential.

Looking at your guidance for the fourth quarter, I guess, we see it as a little bit low.

And maybe there’s some costs that I might not be anticipating going into the fourth quarter, but it looks like we would have sequentially a higher GM production and non-GM sales, and I would think we would see some higher numbers there.

Is there something that I’m missing?

Michael, let me start, and then I’ll have Michael give a little response to this.

First of all, we had to take into effect a very recent assignment from our customer, GM.

Several thousand units were taken out the fourth quarter, and that probably impacted us negatively about $0.05 or $0.06 EPS, so that’s just a hard fact.

A couple other issues we had to look at, if you have any down weeks that weren’t planned, that puts us into some layoff weeks, and it also puts us into weeks for timing that our good workforce can’t accomplish certain productivity things.

Mike, anything you want to add to that, please go right ahead.

Yes, Mike, just a couple things.

You’re right; we do see sequential increase in production.

Of course, we’re also guiding to higher earnings in that fourth quarter.

I guess that thing that I would like to point out here is that our third quarter results, really our first 9 months results, were a little bit stronger, maybe, than what we had been anticipating, certainly what the street had thought, and so in this fourth quarter, it’s a little bit of timing.

Dick mentioned some of the softness that may be in the offing relative to schedules.

And so we are going to see stronger earnings in the fourth quarter, and I think maybe all we’re really talking about is the timing issue here relative to the volume that we’re going to see for the year.

Is there some fundamental difference between the fourth and say the second quarter where we had a margin of about, I think it was 10.9% after adjusting for the separation costs, why we’d see something like that in the fourth quarter on similar kind of revenue numbers which are maybe even up a little bit?

Yes, Mike, I think the primary differences in the second quarter, you’re not going to be faced with the kind of shutdown weeks and normal seasonal activity as we are in December.

We’re going to be dealing with a lot more holidays.

We’ve got launch activity much more intense in the fourth quarter of this year.

And the launch starts, there’s a variety of different types of launch starts that we would incur, but one is specific, it’s different fourth quarter versus second quarter, is what we refer to as project expense.

These are expenses that we incur as part of a project that are not capitalizable, and those are a little bit higher in the fourth quarter than they were in the second quarter.

Okay, great.

And then finally, is your win rate on quotes, what is your typical win rate, and is that changing at all?

Yes, Michael, Joel Robinson.

Typically, we have a hit rate of around 20% to 30%, and it’s been increasing lately.

And a lot of that due to our intensive R&D program on the crossover vehicles, which are a big part of our new business backlog.

John Casesa, Merrill Lynch.

I was wondering if you can give us some color on these overseas investments.

Can you tell us where the capacity is going, how much capacity, the timing of the new business that’ll come on, and the categories in passenger cars, crossovers, that kind of thing.

What can you tell us at this point?

John, good morning, Dick Dauch here.

How are you?

Good Dick.

How are you?

I’ll try to give you some flavor on this.

We’re very excited for our Company and for our overall stakeholders that we have secured rock solid business that gives us the kind of scale to go ahead and build our first key regional manufacturing operation in the country of China.

It will start with 100% exportation to another excellent Asian customer.

We are in great shape for that.

It’ll be late 2007, first quarter 2008, as far as timeframe.

Orders are secured, and we already have, as Joel just talked about, a good success rate of follow-on orders that will be loaded into that plant with our latest state of technology, 3 or 4 different products, 2 minimum OEMs, all Asian.

And that’s the time frame, that’s where we’re at with that one.

If I move into the Central Eastern European quarter, which is another one of our priorities, I want to also say we’re very encouraged that we have the type of scale of hard PO and LOI with, again, foreign OEMs that are based in back [inaudible], and we will have another operation produced, and both of these will be wholly owned by us, no joint ventures involved, and we will start again with non-GM customer launches there, again with very sophisticated, latest state-of-the-art technology of our new product portfolio, a time frame that is reasonably similar within 90 days of the one that I just talked about in Asia.

Dick, does that mean you envision long-term that your manufacturing bases outside of North America will be in Eastern Europe and China?

I mean, this is the beginning of probably a multi -- many year plan?

I think you can watch our growth over the last 12 years.

The first thing we did for 5 years was stabilize the operations we purchased in the asset purchase sale.

Secondly, we started a selective international expansion with extremely good results with Mexico, Brazil, et cetera.

Now we’re moving into other quarters to get our selective global footprint that we talked about, heavily concentrated into Asia and the Central Eastern areas of Europe.

That gives us an excellent balance, global footprint with rock solid purchase orders, excellent new products with good margins that should take care of our business cases as we go forward, and give us the ability to source close to where the OEMs need it and where the markets are growing globally.

Rob Hinchliffe, UBS.

Piggyback on that last question, your new plants in China and Eastern Europe.

No, I didn’t say Eastern Europe, I said Central or Eastern.

It’s one of those locations.

Oh, I apologize.

It’s all right.

Of your billings free backlog, how much of that backlog is accounted for with these expansions in those two areas?

I would say several hundred million.

Okay.

Looking through your plans in North America, I guess the U.S., certainly you have a lot of free capacity or floor space.

Could you do that, do you have the potential to do the business here, or is it just a cost issue, or just build where you sell kind of issue to open plants overseas?

It’s a multiplicity of things, Rob.

First of all, you have to be very close to where the market is going to utilize the final vehicle, so we are being -- adjusting to the customer requirements and being close to their market.

Secondly, we needed, as we told you, strategically have a supplier footprint globally.

These were the final two areas of the world that we wanted to get this breath for our Company into.

Third, we’ll certainly adopt to the lower cost structure of those particular regions of the world, just like we have in Mexico in the past or Brazil in the past.

And fourth, we are taking a look at where the future of the market growth is for the overall automobile population in the world.

Okay.

Coming back to the U.S., I guess GM is talking about likely reducing some capacity.

Is there anything that you envision needing to do with your own capacity as a result of what GM might do?

Let me put it in a different perspective.

First of all, I think what is happening in the U.S. is that new efficient flexible capacity is obsoleting old inefficient capacity, in the broad perspective on the issue of capacity.

Secondly, each company, GM, Ford, or whomever else, is going to have to evaluate what capacities they need, what capacities are most flexible and most efficient.

Certainly, our Company is not immune to that.

We also are reviewing those things.

We’re extremely encouraged with the massive improvements we’ve done with our core operations in the U.S. over the last 10, 12 years.

We’re probably about as efficient, effective as anywhere in the world right here at Detroit here in our main manufacturing complex.

Our massively expanding Three Rivers facility in Michigan also has excellent global capability, and we’re working probably most focused on our New York operations to review what we have to do there going in the future.

That’s great.

And I guess just one last question.

You mentioned crossovers earlier.

In light of what’s going on with traditional SUV sales, I guess some of the quoting hadn’t been done yet on the Landa platform coming up.

Any update there?

How much, if any, business do you have on that?

What I can tell you, not specific programs, but the backlog that we have, about 26% of that is passenger car and crossover vehicles, and a substantial part of that is actually the crossover.

And that’s where we pointed our R&D efforts over the last several years.

So about 20% of that is crossover sales.

But you can’t say whether it’s on the Landa or not?

We can’t be that specific.

We would like to sir, but I think we give it a good macro feeling on that.

Rich Kwas, Wachovia Securities.

Just want to follow up.

The four-wheel drive, all-wheel drive penetration was high this quarter.

How do you look forward into the fourth quarter where that penetration goes?

Was there just greater mix?

Did GM build a richer mix of vehicles this quarter in anticipation of the sell-down for the 800, and will there be some deterioration on a year-over-year basis in four-wheel drive penetration in Q4?

What are your expectations?

Hey Rich, good morning.

It’s Mike.

Hey Mike.

Listen, our four-wheel drive penetration is on an uptrend.

It’s not nearly as significant as it was, say, in the late-80’s -- or late-90’s coming in to the GM T800 program.

But we are trending up.

We ran at a good pace higher than we were a year ago.

I think most of that reflects change in mix for the products that are the best sellers right now in these classes.

We’ve got the introduction of the Hummer 3, for example, that’s pretty much all -- or it is all four-wheel drive.

We’ve got the heavy-duty platforms and lead support, both the Dodge Ram programs and the GM programs that are high four-wheel drive penetration vehicles.

And so what you’re seeing here is a little bit of seasonality and a little bit of mix.

We do expect the mix portion of that to continue, and we do expect our overall four-wheel drive penetration in the fourth quarter to be up slightly to the prior year, and we’ll probably see that same trend continue into next year.

Okay.

And then, thanks Mike.

On the quotable business here, the billion, at least according to my notes, that’s up pretty substantially relative to what you reported last time.

I have it about up 400 million or so, and you said it’s all non-GM business.

Could you provide a little more color on that, whether that growth is mainly Asian, or is there some additional penetration opportunities with European OEs?

Well it’s -- this is Joel Robinson.

It’s kind of a mix of a lot of things.

We have to be a little bit cautionary on the $1 billion because some of it is business that’s been traditionally done within the OEMs own factories, and we’re approaching that rather cautiously because some of these things tend be a make/buy type study.

But, it’s pretty much international, Europe and Asia, and the North American continent.

Okay.

Let me help you a little bit more on that.

If you take this $1 billion and slice that down into major increments, as we said, we’re selectively globally doing our business.

As Joel just indicated, let’s just say the continent of Europe might be 25% of it.

Let’s say 50% of it might be with a global player in 3 different continents for that particular organization, and then Asia might be another 10, and then our metal form products division might be another 10%, 15%.

You put it all together, it’s well over $1 billion.

We’re very encouraged, because what they want is our latest, state-of-the-art product, and they need it for different geographic growth zones throughout the world.

And you’re expecting that -- I guess you’ll hear over the next few quarters on it’ll be kind of fluid in terms of potential contract wins?

Well, I think it’s a dynamic process, and again, we’re very encouraged.

You heard Joel to one of the previous questioners indicate we’re very happy that our trend rate of closure is going up quite significantly because we got the right product, we got the right geographical capability and capacity, we got the right cost structure, and most importantly, as I said before, we have the great technology and the great quality, warranty, and launch performance.

Joseph Amatur, Calyon.

A couple questions.

Do you plan on offering a voluntary separation program in 4Q, and if so, is that part of the guidance?

Joe, we have not made any announcement of such a program.

We always look at that as a way to reduce our costs going forward.

What I can tell you is that that is not part of our guidance.

Okay.

Next one.

Could you just give us a sense of what the 16-week production schedules are looking like?

Yes.

The 16-week schedule is very solid right through December 15th - 20th of 2005, with the exception, as I indicated before, the fourth quarter did have some significant units taken out of the mid-size vehicles from our key customer, GM, and therefore we did make that nickel or $0.06 EPS adjustment that I think I indicated earlier to the listening audience.

Okay.

And then just lastly, a clarifying point --.

One other thing I want to make a comment.

Whenever you’re preparing to launch a massive new product, there has to be selective down weeks done by that customer so they can prepare for whatever their critical need is.

Maybe it might be a body shop renovation or other facility renovation.

So there’s a couple of those going into the fourth quarter of this year with GM, as they get prepared for the exciting new GM 900 program.

Okay.

And then just lastly, could you just clarify whether or not the separation charge for the second quarter, if that was included or excluded from prior guidance?

Joe, it’s Mike.

It was included.

Chris Ceraso, CSFB.

Two questions.

First, are you seeing anymore quoting activity for lightweight products, aluminum products, given the focus on fuel economy?

Do you think this is an opportunity for American Axle?

Yes, this Joel Robinson.

A great deal of what we quote is in aluminum, and the newest substrate that we have new business on is in magnesium.

So a lot of the product, everybody’s looking for fuel efficiency with the oil prices and so forth.

So yes, a lot of what we’re quoting is in the other substrate.

And the great thing about it, Chris, is we have the product portfolio to do that.

It’s packagable, it’s also reliable, and we’ve got it in many different platforms, so their program managers, engineers, and key decision makers can actually ride the vehicles and see the accompanying performance conditions.

So we’re very encouraged where our position is.

And the other issue there is we have great expertise in machining aluminum products.

Is that more a profitable business for you, or does the extra cost of the material pass through?

The important thing is that’s where the market’s going, and we know how to get to where the market’s going in the future, and we’ll be able to plan our basis point margins.

Okay.

Correct me if I’m wrong, but last quarter did you say that the capital spending in ’06 might be even higher than what you were looking for in 2005?

We’ll probably be about $300 million in that general category in ’06.

And was there another question on ’05?

I don’t know.

Well, Chris, I think you’re right.

There was a little bit of pull-ahead into ’05, as we saw some pretty significant timing changes relative to the 900, also, the Dodge Ram capacity that we talked about.

So, we’re a little behind in ’05 than what we had previously though about.

Remember, too, that in ’04 we had a lot of activity right at the end of the year, and so we report, obviously, on CapEx and a cash flow basis, so we paid a lot of that in ’05.

And this year our weighting is more to the front part of the year, certainly through 9 months.

And so that’s a factor as well.

So, we had a little bit more in ’05.

This just gives you a little bit of information about ’06, but not in that -- the activity levels over this 2 year time period are not different from what we expected.

Okay.

Then lastly, just to confirm, the guidance for the year assumes the $0.38 that you did in the third quarter, not the 30 actually [inaudible], correct?

Yes sir.

And what we’re talking about is GAAP earnings guidance.

Michael [Heisler], Deutsche Bank Securities.

I just want to follow up on one of the previous questions on capacity.

If we were to view this year as not an anomaly Dick, and we were to look out into next year and think that production is going to be flat, what could the management team do, just on the core business, to bring margins back to historic levels?

A hell of a lot of things.

We got them all focused.

We got them reviewed.

We’re not sharing any of it with our competition.

Okay.

So, just -- you guys could be looking at further capacity reductions?

I am not going to tell you specifically what we’re going to do.

All I’m telling you is we’re going in with guns locked, loaded, we’re prepared, and we think we’ll do very well.

Okay.

If you were to ex out the higher launch costs, the higher raw materials, and you were to look at flat production next year, could you guys bring margins back to historic levels, or would it take a couple of years to get there?

Well, I think historic records wouldn’t be done in 12 months.

The process would take a few years.

But I think next year, as I told you guys a year or so ago, we’re going to go through a saucer about ’05 and ’06. ’05 is all but over, we’re coming out of that saucer already in a very encouraging way, and we see some significant possibilities of improvement in ’06.

But to get to historic records might take 3 years.

Okay.

One other one on the --.

Remember, next year is a massive launch of GM 900 with 15 evolving derivatives.

And that’s not like child’s play.

This is very hard, tough, but it’s also a great, exciting opportunity.

So we should be thinking that launch costs next year are going to remain at these kinds of levels that we’re seeing in ’05?

I’ll let you make your analysis.

Okay.

Also, on the properties that are available in the marketplace right now, you guys have talked about the opportunities in the past, and I was wondering if you can update us on your current thinking.

Is there anything that you see that’s imminently attractive at this point?

There are so many things out there available because of other companies’ poor performances that we’re reviewing a multiplicity of things.

We have nothing to announce at this point.

In terms of the timing, do you think that this is something that we would see within the next 6 months?

I would indicate that probably within the next 24 months there would be some significant structural changes of ownership alliances, of whatever in 2006 and ‘07, and I can’t be more specific than that.

Thanks Mike.

We’ve got time for two more questions.

David Leiker, Baird.

I wanted to talk about working capital here in the fourth quarter.

Last year you generated about $90 million of cash in Q4, end of Q4.

Do you think you could generate something similar to that this year?

Hi David, it’s Mike.

Couple things.

Obviously, we’re giving you guidance that we don’t expect our fourth quarter cash flow to be quite as strong as last year, and the primary reasons why, if you take a look at working capital, we had those metal market receivables.

We were well past due with General Motors at the end of third quarter last year.

We got caught up in the fourth quarter, and that was in excess of $20 million that we brought in that fourth quarter that was a little bit unusual timing.

Okay.

That’s one factor.

Another factor is the sales level -- if you recall, the schedules were thriving pretty strongly in the fourth quarter of last year.

This year the activity’s a little bit different.

We do think that GM will be cautious in their 800 build and advance to their 900 launch.

But having said that, the schedules we’re dealing with for the fourth quarter will be stronger, and therefore we’re adding some receivables and not bringing it back as we were last year.

And that’s also true on a mixed basis.

We’ve got a stronger non-GM mix, and although the difference in payment terms, GM versus non-GM, is just several days, not a significant difference, it does show up in the cash flow statement because we have typically 2 months of sales on the books for our non-GM customers where we have pretty much just 1 month of sales with GM.

Were you on GM’s Fast Pay program at all?

No, sir.

Okay.

The non-GM number of 18%, I presume a lot of that’s the new Korean operation that’s coming through, is that fair?

Yes, it’s a little bit of that.

I think we told you that that will be a slow ramp for us.

We’re currently supporting vehicle program, but what’s more significant there is the Dodge Ram heavy-duty program, the capacity increase that they have now for 3 variants off the original program we launched 3 years ago, and they continue to see additional growth for that in the future.

So this is more of a sustainable level going ahead then for you?

You might have seen a touch higher than normalized run rate in the third quarter, but it’s going to be -- the trend is going in the right way, David.

Okay.

Your fourth quarter, if I look at GM schedule, their truck production is actually up year-over-year from last year and up like 100,000 units in Q3.

Yet your comment was that GM trucks are down 8% to 9% from your guidance.

I’m trying to reconcile that.

Well, the comment about 8% to 9% is for the whole year, David.

Oh, it is.

And as you know, it was down substantially more than that in the first half of the year.

Well, I think the issue here, David, on GM is with mix, such as their crossover vehicles is different than the more conventional full-size truck, body-on-frame type truck.

To put the whole volume in, you have to put that in perspective, sir.

Yes, it looks like -- I’m aware of that.

And then, Dick, you had made the comment that GM’s taken some production out.

You’ve included that in your EPS guidance, but it’s not -- the GM number hasn’t been adjusted yet, right?

The build number 827?

Well, David, there’s no way for us to know if that build number will be different.

It could just be a mix change.

What we know is that a program we support is going to be running at a little bit lower level than what we thought a couple weeks ago.

I’m just wondering if next week GM -- we see GM schedules, and they cut truck production, whether that’s some -- it sounds like that’s already incorporated in your numbers.

All we can tell you, sir, is what we know, we’ve shared with you openly, honestly, directly, whether we have impact on, and if there’s something else on GM, you’d have to call.

I’m looking forward to seeing you over in Chicago, November 9th.

Thank you, David.

I’ll see you in two weeks.

Himanshu Patel, J. P. Morgan.

This is Szeho Ng for Himanshu.

Good morning, Himanshu.

This is Szeho for Himanshu.

Most of my questions have been answered.

Just one last question on steel.

Could you just tell us on Tier 2 supplier-related costs, what did they do sequentially versus Q2?

Did you guys see an increase, or were they pretty flat?

There is no significant change.

We saw most of the price increases in these activities really pick up in the first half of the year.

They’re up slightly in the third quarter versus the second quarter.

And partly because of what we already said on this call, that we had some cost increases that were sort of tied into our ability to recover them from our customers.

Thank you Szeho, and we thank all of you that have participated in this call and appreciate your interest in AAM.

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