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Operator
Good morning.
I will be your conference facilitator today.
At this time I would like to welcome everyone to the American Axle and Manufacturing's first quarter 2006 conference call.
I now like to turn the conference call over to Mr. Chris Son, Director-Investor Relations.
Please go ahead, sir.
- Director - Investor Relations
Thank you 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 first quarter earnings announcement that we released earlier this morning.
If you have not, you can access on the aam.com. website or through the PR newswire services.
A replay of this call will also be available beginning at 5:00 p.m. today through 5:00 p.m.
Eastern daylight time, May 5th, by calling 1-800-642-1687, reservation number 7348620.
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 compliant with Reg FD, and is open to institutional investors and security analysts, news media representatives and to 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 rather, are subject to risks and uncertainty, which cannot be predicted or quantified and which may cause future activities and results of operation to different materially from those discussed.
Historical results achieved are not necessarily indicative of the future prospects for 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're also audio webcasting this call from our website.
This call will be archived in the investor section of the website, and will be available there for one year for later listening.
During the call we are planning investor trips to New York, Boston, Texas, the Midwest, as well as Europe.
We will also be at the KeyBanc Capital Markets conference in Boston on June 8, and the Wachovia annual conference in Nantucket on June 21 and 22.
We look forward to seeing many of you at these conferences and investor trips throughout the quarter..
In addition, we are always happy to host investors at our facilities, either here in Detroit or at our other locations
With that said, let's get to the purpose of today's call.
Let me turn things over to Dick Dauch, AM's co-founder, Chairman and CEO.
- Co-Founder, Chairman & CEO
Thank you, Chris, and good morning, everyone.
Thank you for joining us today to discuss American Axle's results for the first quarter of the year 2006.
I am pleased to be joined today by our President, Yogendra Rahangdale, Mike Simonte, our Chief Financial Officer, and David Dauch, our Executive Vice President of commercial and business development.
After I provide some highlights for the quarter, I will turn thing overs to Mike to discuss the details of our financial performance.
After that, we'll open the call for any questions you men and women may have.
The unprecedented, yet necessary structural transformation of the domestic automotive industry is in high gear.
It dominates the industry and right now, it is a development that we're further working on within our own Company.
AAM remains on track to deliver solid operating performance, while generating profitable results and significant cash flow gains for the year 2006.
Some highlights of our performance for the quarter include the following: AAM's free cash flow generation improved by nearly $35 million as compared to the same quarter in 2005;
AAM further diversified our customer base, For the quarter, our sales to non-GM customers increased by over 20%;
AAM's quality performance continues to be the benchmark of the world in our industry.
During the first quarter we actually better Six Sigma performance in the month of February, at under three parts per million;
AAM also continued its flawless and anonymous launch of our products to support GM's launch of the GM 900 SUV;
And, finally, during the quarter, we continued the expansion of our global manufacturing footprint by breaking ground for our regional manufacturing facility in Changshu, China.
Before I provide additional details on some other items, let me first discuss some points regarding AAM 's financial performance for the quarter.
AAMs sales in the first quarter of 2006 were approximately $835 million, our net income was $8.6 million, and diluted earnings per share was $0.17 for the quarter of '06.
This is the 29th straight quarter AAM has been profitable.
AAM sales to non-GM customers were approximately $204 million in the first quarter of '06.
Our non-GM sales increased 20% from last year, and represent 24% of our total sales in the first quarter of 2006.
Strong demand for AAM's products supporting the Chrysler Group programs, including the Dodge Ram heavy-duty pickup trucks and their derivatives, continues to drive our non-GM sales growth in the first quarter.
AAM's sales in the quarter reflects an estimated 8% increase in customer production volumes for the major full-sized truck and SUV programs that we support.
This was offset by an estimated 11% decrease year-over-year in our customer production volumes for the mid-sized light truck and SUV program.
Gross margin for the quarter was 7.6% as compared to 8.8% in the first quarter of '05.
Our margins reflect any impact of $10.4 million increase of non-cash expense related to the depreciation and amortization, as well as pension and post-retirement benefits and stock-based compensation.
Supplemental unemployment benefits paid to certain of our hourly associates also impacted margins for the quarter.
And the last point, AAM's free cash flow generation improved by nearly $35 million as compared to the first quarter of 2005.
We're on track to improve our free cash flow by $100 million for the year, and Mike will have more to say on that issue later.
As I mentioned earlier, the domestic auto industry continues to undergo a major transformation.
Make no mistake, it's the most challenging environment for all us, but we enjoy it and we 're going to get stronger.
We continue to experience downtime weeks, as our customers change over their assembly lines for want of new vehicle products.
Higher fuel and energy prices continue to pressure margins in the industry, and stimulate a rapidly-changing product mix.
We are also adjusting to these facts, and despite the challenging external factors, AAM remains focused on the internal operations and management decisions that we control.
We will deliver profitable results for our stockholders.
Some of the areas of attention include the following: First, AAM's world-class quality and warranty performance.
We deliver advanced technology products to our customers on time and every time.
It's delivered with the highest available quality and customer satisfaction levels in the industry.
As I told you, we bettered Six Sigma performance in February at three parts per million, and that's unprecedented in our business in this industry.
Our quality and warranty performance.
Records continue to be a competitive advantage when we meet with our OEM's, as they have to also reduce their structural cost and as we continue to earn new business.
Second point.
AAM continually manages our cost drivers that have the most significant impact on our business.
We're employing a variety of strategies to reduce the cost of our purchased materials and services, and they include the following: First, we're consolidating our supply base on a global scale by as much as 30 to 50% by the year 2008; secondly, we're validating many foreign sources of supply and developing a truly global supply chain; thirdly, improving the design and engineering of our products, componentry and manufacturing processes, to reduce the amount of material required to be purchased; and fourth, we're targeting not only the price but also the total landed cost of all of our purchases.
There's a lot of opportun to minimize.
For example, on freight and logistics in the cost componentry in this chain of supply networks.
We expect to achieve net cost reductions in our purchased material and freight activity in 2006, as a result of many actions, some of which I have just shared with you.
Third point, AAM will be launching 12 major product programs in 2006.
The largest and most challenging, obviously, is the GMC 900 program.
The GM 900 is the world's single largest and most complex vehicle program, and we're very proud to be part of it, and there is 15 model variations on that program.
They will be launched over an 18 to 24 month period.
We are the exclusive drive line supplier for this entire vehicle program.
Nearly every AAM facility's involved with the GM 900 program.
The GM 900 SUV is now at full running rate at GM's assembly plant operations in Arlington, Texas, Janesville, Wisconsin, and Silao, Mexico.
To date, AAM's launch performance has been exceptional.
GM's launch performance for the 900 has, I think, been brilliant.
Their sales are very strong, with the Chevrolet Tahoe, GMC Yukon, and Cadillac Escalade as 2007 models.
We will launch the drive line system for the GM 900 pickup truck in the third and fourth quarter of this year, supporting those five vehicle assembly plants.
Other key launches in 2006 represent continuing customer and product diversification efforts by our Company, and they include: First, drive line systems supporting the Chrysler Group's new DC cab chassis program, as well as the first high-volume application of the SmartBar electronic stabilizer system for the 2007 model year Jeep Wrangler Rubicon, as well as the integrated oil pan front axles for Ssangyong, [Thyran], and [Rexon] vehicles in South Korea and Asia, as well as Ford's new machining componentry for machine wheel hubs, axle shafts and transmission components for valued global suppliers [Coil], [Peno] and [Jasco], that are closely affiliated to Nissan and Toyota.
We'll also be launching new facilities to support our business growth initiatives throughout the world, and I'll have more to say on that later.
A fourth major point.
AAM also continues to invest in the development of new advanced technology products to meet the changing needs of the global market place and the customer base throughout the world.
As a result, AAM's R&D spending through the first quarter of '06 is almost 10% up by dollars to $19.3 million as compared to $17.6 million in 2005.
Our R&D efforts have resulted in the development of new products targeted for growth segments of the global automotive industry, especially focused on rear wheel drive and all wheel drive systems for passenger cars, as well as crossover utility vehicles.
This emphasis has contributed to the growth in our new and incremental business backlog to approximately $1.4 billion for programs launching from year 2006 through 2012.
Certain products that support this growth include our family of power transfer units, known as PTU's, independent front drive and independent rear drive axles, known as IFDA's and IRDA's, as well as transfer cases, as we moved into the drive train system of integration.
And we also are in advanced drive shafts for crossover vehicles and all wheel drive vehicle architecture.
These new products have allowed AAM to secure additional profitable business in new markets throughout the world.
These awards are vitally important to AAM as we look ahead.
They also provide a catalyst for a launch of our new regional manufacturing facility in Changshu, China, as well as Awaba, Poland.
Let me now take a moment to update you on the progress on these business growth initiatives.
First, our new and incremental business backlog remains at approximately $1.4 billion for programs through 2012.
Second, it includes future sales in excess of $600 million for seven drive line systems for passenger car and crossover utility vehicles that are being developed on three different global OEM architectures.
The most notable awards include the backlog that represents our efforts to diversify our customer base, to continue to expand our global presence, while we continue our profitability.
These awards represent about $150 million of new business with Asian OEMs and their affiliated suppliers.
AAM's new business backlog also includes future sales of over $200 million for product programs outside of North America in both Europe and Asia.
Second, we're working hard on several additional opportunities to secure new business from existing and perspective customers.
Currently we're actively quoting on new business totally over $1 billion.
Nearly all of this activity is with customers other than General Motors.
The production launch of timing of these programs runs through the year 2010.
A third point, during the quarter, we broke ground for our new Changshu gear and axle facility in Changshu, China.
This will be AAM's first regional manufacturing facility in Asia.
It will offer tremendous opportunity to profitably grow and diversify our business.
In addition to eventually supporting global vehicle programs for General Motors, we will launch programs in the late 2006 for Beijing Benz Daimler Chrysler and Ssangyong Motors.
And, finally, a fourth point.
I mentioned Awaba, Poland will be the site of AAM's regional manufacturing location in eastern Europe, and we'll expect our first launch of that location to be a non-GM program, on a very highly sophisticated product, in the second quarter of 2007.
We expect the facility will further expand our global manufacturing footprint, product portfolio and customer diversity efforts, with profitable business performance.
Before I turn it over the to Mike, let me again state that AM is on track to remain profitable.
We'll also generate significant cash flow gains in the year 2006, while investing in these exciting new business growth initiatives I've discussed with you.
AAM remains focused on its operations to flawlessly execute the launch of our new products for the Chrysler Group, Ssangyong, Peno, Jasco, Coil, Harley-Davidson in 2006, as well as General Motors that I discussed earlier.
These important new relationships are quickly expanding AAM's customer base and products diversity.
We are on track to exceed the $1 billion in non-GM sales by the year 2010.
And ladies and gentlemen, our management team is locked and loaded and they're experienced and they're disciplined.
They're motivated.
And the team work is there to execute our profitable growth strategy over these several years, as we look in the future.
Our focus is definitely now, and in the future, on product, customer, market, and financial performance.
I thank you for your personal attention today, and your interest in our Company.
Let me now turn the call over the AAM's Vice President and Chief Financial Officer, Michael Simonte.
Mike?
- VP & CFO
Thank you, Dick, And good morning, everybody.
Today American Axle reported first quarter 2006 GAAP earnings of $0.17 per share.
This compares to $0.26 per share in the first quarter 2005.
As we discussed with you previously, non-cash expenses related to depreciation and amortization, pension, post-retirement benefits and stock-based compensation will be up approximately $40 million in 2006 as compared to 2005.
This issue due in part to changes in discount rates and the adoption of a new accounting standard will significantly impact any year-over-year comparison of our earnings in 2006.
In the first quarter of 2006, these non-cash expenses were up almost $10.5 million versus the prior year.
Stock-based compensation accounted for $2.2 million on its own.
These cost drivers were partially offset by a favorable tax adjust in the quarter of approximately $3.1 million or $0.06 per share.
We had some audits and other similar activities settle in this first quarter, and we were able to close out these issues with a small positive impact.
Production volume, and especially mix, continues to reflect a favorable trend for us, and we do see that continuing through the year.
Content per vehicle was up more than $20 on a year-over-year basis in this first quarter to $1,205.
Non-GM sales were up 20% and accounted for 24% of our top line in the quarter.
These are very important developments for us, and I'll talk more about that in a few minutes.
One other point before I get into details, in the first quarter of 2006, cash provided by operating activities improved by more than $40 million, that's a GAAP measure, top third of cash flow statement.
That was our best first quarter performance on that metric since 2003.
Now let's get into details, start with sales.
Our sales in the first quarter came in at $835 million.
That's up about $16 million from $819 million a year ago.
First thing you need to understand about that, though, is that we had some differences in metal market pass throughs.
Those were down a little bit in the quarter.
The trended production volumes for the programs we support was mixed.
Dick mentioned this.
Our mid-sized products were down an estimated 11% and that reflects the impact of GM's decision to close Oklahoma City, and significantly reduce the size of its rear wheel drive mid-size SUV program.
The full-sized programs we support for GM and the Chrysler Group were up 8% in the quarter.
In total, we were up about 2% over a very slow first quarter in 2005.
Sequentially, our volumes were down about 4% or approximately 25,000 units, as compared to the fourth quarter of 2006.
As I just mentioned, sales mix was favorable for us in the first quarter of 2006.
We're supporting overtime schedules on the GMC 900 SUV and the heavy-duty pickups, for both GM and the Dodge Ram program.
Production mix shift in the mid-sized product range are favoring the four-wheel drive Hummer 3 and that's favorably impacting content per vehicle in that product range.
As a result, contents up by 2% and, again, I mention, $1,205 in the first quarter of 2006.
That compares to $1,183 last year.
We do expect these content gains to stick and increase as the year developments, primarily due to the impact of new content that we have on the GMC 900 program.
As Dick just mentioned, we're the exclusive supplier in this program.
We've got some variable -- or vehicle stability enhancement system content of the pickups coming, and some other engineering changes.
We also see the strong performance of the Dodge Ram heavy-duty series pickup trucks aiding our content as we work through the year.
As you know, diversifying our customer base and sales concentration is an important area of emphasize for our Company.
Non-GM sales in the quarter were up almost $40 million or 20% on a year-over-year basis.
This marks the first time we've exceeded $200 million of non-GM sales in a single quarter.
The percentage of non-GM sales in the quarter, or 24%, is also a high mark for us.
Especially because we've continued to grow and diversify our relationship with GM -- and here I'm referring to our work with GM on several global passenger car and crossover vehicle application -- we're very pleased with our progress in this area.
We look forward to customer diversification in the quarters and years ahead, as we launch new products in our backlog with the Chrysler Group, Nissan, Audi, Ssangyong, Peno, Jasco, Coil, Harley-Davidson and others.
Gross margin in our first quarter of 2006 was 7.6%, that compares to 8.8% a year ago.
EBITDA margin for the quarter was a little less than 8%; again, that compares to 8.5% last year.
The growth in non-cash expense, as I mentioned earlier, G&A, pension, [OPEB], and stock-based compensation were the primary reason for the decline in those margins.
In fact, those items account for about 120 basis points of margin decline.
It's important to note that these non-cash cost drivers were partially offset by improvements in other cash-funded operating costs, including material cost reduction.
That's why our cash flow statement is improving.
Further points are worth mentioning here.
Layoff costs were up approximately $3 million in the first quarter of 2006, as compared to last year.
Layoffs associated with our support of GM's mid-sized product change range -- of course, impacted by the closure of Oklahoma City -- were the primary cause of this increase.
2006 continues to be a year dominated by new product launches.
Second point I would like to mention here is that, including the GMC 900, we're supporting 12 major new product launches this year.
Costs associated with the early stages of these launches, including project expense, is a non-capitalizable portion of our projects, continued to impact our financial performance.
In the first quarter of 2006 this was a head wind.
As we work our way through the year, this pressure will moderate and eventually turn around for us.
In the first quarter of 2006, SG&A expense increased by about $2 million to $48.4 million as compared to $46.6 a year ago.
R&D spending increased almost 10% to $19.3 million in the quarter.
That accounts for most of the increase.
But the devil's always in the details.
Increases in pension, OPEB, and stock-based compensation increased our SG&A cost the same as it impacted our operating cost.
The cost of running and expanding our foreign business, sales and technical offices also increased significantly in the quarter, as we told you they would for the entire year.
What I'm trying to say is that there are many SG&A costs that are down this year, on a year-over-year basis, so that we can shift resources to R&D and other overseas growth.
It's an important productivity initiative for us in 2006 and we're doing a good job there.
Let me comment on interest and tax, before we move on to the cash flow statement.
Net interest expense in the first quarter was $7.4 million.
That's up from just about $6.1 million a year ago.
The weighted average interest rate on our borrowings in the quarter is about the same as last year, so the increase is due, primarily, to changes in outstandings.
As the year develops, we see our weighted avenue interest rate increasing, but only a little bit, as we benefit from having $400 million of our debt capital structure locked in at less than 4.5% all in.
For the quarter, we had a nominal tax -- income tax benefit.
As I mentioned earlier, we settled some federal and state tax liabilities from prior years in this first quarter.
We had some similar activity on the state side in the fourth quarter of 2005.
The $0.06 gain we recognized in the quarter on these adjustments helped us to mitigate the impact of some of the accounting issue, increase in non-cash expense, as I mentioned earlier.
Excluding the impact of the one-time adjustments in our tax provision, our effective income tax rate was approximately 34% the first quarter of 2006.
Actually came in about 33.7.
That's reasonably similar to the prior year.
We expect a similar run rate in the second quarter of 2006, and after that, we should have some opportunities to reduce our effective income tax rate, because all of our foreign manufacturing facilities, including our new facilities under construction in Changshu, China, and Awaba, Poland, operate in lower tax jurisdictions as compared to the U.S.
So the bottom line for us in the first quarter, GAAP earnings of $8.6 million or $0.17 per share.
Let's talk about cash flow.
GAAP cash from operating activities was $7 million in the first quarter of 2006, as compared to a use of $34 million last year.
That's a $40 million improvement year-over-year.
After deducting CapEx of $81 million, and dividends of almost eight, our free cash flow was a use of $81.5 million in the quarter.
Now it's tough to get too excited about cash out quarter, but it's typical in our industry, and certainly for our Company, to use cash in the first quarter due to the seasonality of our working capital flows.
In 2006 our capital spending is also heavily frontloaded to the first half of the year, so that contributes further to the situation.
Despite all that, our cash flow performance in the first quarter was ahead of our expectations and substantially improved over the first quarter of 2005.
We're on track to achieve a $100 million improvement in free cash flow this year, and believe our improving cash flow fundamentals will be a very important good news story for AAM in 2006 and beyond.
Three key factors dominate the comparison of our free cash flow performance with the prior year.
Again, although our GAAP earnings are lower, after we adjust for the non-cash impact of G&A, pensions, OPEB and stock-based compensation and a couple there similar items, our cash earnings were about $14 million higher on a year-over-year basis.
Secondly, we were favorable on working capital flows in the first quarter of 2006 as compared to the prior year by approximately $30 million.
A lower profit sharing payment in 2006 is a key element in that comparison.
Receivables, payables, and inventories are all up at the end of the first quarter as compared to year-end 2005, but they pretty much just reflect normal seasonal variances.
We've done a good job managing that.
There's really no significant unusual fluctuations on the balance sheet that warrant much attention, other than what I just said.
Finally, our CapEx in the first quarter of 2006 was just about $6 million higher.
Take all three of those things into consideration and you can understand our $40 million of improvement.
Focus on our capital structure for a minute.
Our net debt outstanding at the of the first quarter was approximately $567 million, up almost $80 million versus the year ended 2005.
That increase simply reflects our operating cash flow from the quarter.
Stockholders equity finished up just over $1 billion at the end of the quarter.
Net debt to cap, taking those two factors into consideration, was about 36.1% at the end of the quarter.
It's almost exactly what it was a year ago at the end of the first quarter, and very much in line with our target and seasonal expectation.
At the quarter end, we had nearly $600 million of available borrowing capacity.
Let's turn to our expectations for 2006.
On April 11th, just a couple of weeks ago, at the Morgan Stanley global automotive conference, we reconfirmed our GAAP earnings guidance for the year, 2006, of $1.20 a share to $1.30 per share.
We also reconfirmed that we're on track to generate approximately $40 million of positive free cash flow in 2006.
And again, that's an improve of $100 million this year.
Our 2000 outlook is based on what we know today about our customer's build plan and the timing of new product launches.
Overall, we're expecting production volumes for the programs we support to be down approximately 5% on a year-over-year basis.
As we said before, essentially all of that reduction is due to the closure of the Oklahoma City plant and the overall reduction in the size of the GM rear wheel drive mid-size SUV programs.
Nearly all of our other programs are operating very strongly, and we see some increases in most of those programs.
While we expect to be impacted by some scheduled downtime on the GMC 800 program -- this would be the pickup's I'm talking about -- in 2006 second quarter and third quarter -- we regard this as unavoidable, by the way, as GM prepares all of its pickup facilities for a good launch in the fall -- we expect to benefit from higher full-sized production schedules in each of the remaining quarters of this year.
We're encouraged by the early sales performance of these 900 SUVs, and we're looking forward to launching the new pickups later this year, as well.
Overall, 2006 is shaping up as another solid operating performance for our Company.
We're profitable.
We continue to outperform the industry, as it relates to quality, warranty, and delivery; while at the same time, by the way, supporting 12 new major product launches with our customers.
The diversity of our business profile's rapidly changing with the addition of new customers, new products, and new manufacturing locations.
We're looking forward to expanding our global footprint in 2006 and '07 with the launch of new regional manufacturing facility in China and Poland..
We're excited to be quoting $1 billion of new business at this time, potentially all of which is non-GM business.
We're making real good progress on controllable cost drivers.
For example, material cost reductions will be a meaningful source of productivity as we work through the year.
Finally, our cash flow fundamentals are improving significantly.
Our leverage is low, our access to liquidity is strong.
We're very well positioned to take advantage of new opportunities here.
That wraps up my comments.
Thanks for you for your time and attention this morning.
We'll stop here and turn the call back over the Chris so we with start the Q&A.
- Director - Investor Relations
Thank you, Mike, and thank you, Dick.
We're reserved some time to take some questions.
I would ask that you please try to limit your questions to no more that two.
So at this time, please feel free to proceed with any questions you may have.
Operator
[OPERATOR INSTRUCTIONS] Your first question comes from the line of Rod Lache with Deutsche Bank.
- Analyst
Good morning, everyone.
- Co-Founder, Chairman & CEO
Good morning, Rod.
- VP & CFO
Morning Rod.
- Analyst
I have got a couple of questions, but first just a housekeeping one.
Are you guys including that tax gain in the $1.20 to $1.30, or the $1.20 to $1.30 excluding one timers?
- VP & CFO
Rod, this is Mike.
Good morning.
The $1.20 to $1.30 is a GAAP earnings estimate, so it does include all of our tax accounting for the year.
- Analyst
Okay.
And as far as the numbers are concerned, is there -- we just tried to reconcile your comments about the production on the year-over-year basis, against what GM has been saying on their website and -- you know, it particularly looks weak, what you guys are talking about versus what they've got in terms of their mid-sized utility production.
Is there any reason why your shipments don't match their production on any given quarters or like a safety stock issue or anything like this?
- VP & CFO
Well, Rod, I think the primary issue that comes up -- and it's been an issue for the last couple or three years as GM has increased their production of front-wheel drive based mid-size utilities -- these utilities are included in the total.
When you just focus on the rear-wheel drive programs that we support, those were down 11% in the quarter.
- Analyst
Okay, we were doing it by platform, but maybe we'll follow up after the call.
Can you talk about your expectation is for Q2 in terms of volume, either sequentially or year-over-year?
And have you guys changed your -- your perspective on sort of the cadence of profitability over the course of the year?
Last year you said it'd strong -- weak in Q1 and stronger in Q2 then weaker and then stronger again.
- VP & CFO
Yes.
No, Rod, I think, basically, the expectations we have for the year are about the same.
There are, as we like to say, goesinsas and goesoutsas, but the second quarter does look to us to be the strongest of the remaining three quarters from a production volume standpoint, and so we would -- we would think that that's going to be continue to be the case.
We do see the 900 program and, of course, the 800 pickup until they launch over, we do see that -- those volumes higher in each of the remaining quarters of the year, as compared to the first quarter.
I think that's an important point.
And then, in terms of the mid-sized vehicles, we would see the main impact there, of course, being the lower run rate on the 360, 370 program.
That cut over, as you know, Rod, in the middle part of the first quarter, and we would see the sort of March run rate continuing on through the rest of the year.
- Analyst
Do you have a percentage change in production for the mid and the large in Q2 that you can share?
- VP & CFO
Well, the mid -- the full-sized production is going to be up anywhere from 10,000 units to 25,000 units a quarter, as we work our way through this year.
The second quarter's near the high end of that range.
The mid-sized program, again, we said earlier this year, on the whole, it's going to be down around 40%.
And as we work through the second, third, and fourth quarter, since the first quarter benefited a little bit from running the 370 the first six weeks of the year we would expect the impact to be on the high end of that range, maybe exceeding 40% slightly on a year-over-year basis.
- Analyst
Okay.
Thank you.
- Co-Founder, Chairman & CEO
Thank you, Rod.
Operator
Your next question comes from the line of John Murphy with Merrill Lynch.
- Analyst
Good morning, guys.
- Co-Founder, Chairman & CEO
Morning, John.
- Analyst
Dick, I was just wondering on the mid-sized SUV programs and really the future of that segment, what you really believe that's going to be going forward, because it seems like CUV's are gaining a tremendous amount of share there.
Just wondering what your idea or your thoughts were on those two different segments going forward?
- Co-Founder, Chairman & CEO
,Well, I think, as Mike just indicated earlier, obviously our key customer took out a major vehicle production enterprise in February, that being Oklahoma City and it's been announced that the one shift will come off on July 17 of the [Marane] facility.
So my expectation is that they are adjusting for the real market world, and that's a dramatic reduction, and impacts us significantly and negatively on this year at about 40% volume reduction of year-over-year '05 to '06 for us personally.
And as Mike also indicated, we do not have content on the front-wheel drive truck that they have taken up quite highly in volume, that being the sigma and datum platform, so there's simply a mix swing.
The volumes are still there.
The mix is swinging significantly.
We're having to personally adjust to it.
And if you take a look at overall GM light production here, they were up about 7% for the quarter, but we were about 2.5% with GM because of the mix variation of what we are discussing right now.
The largest being the mid-sized truck, which is the second largest generator of revenue for our Company; the largest being the full-sized truck.
- Analyst
When you look three to five years out, do you see a market where the CUV segment is really supplanted to mid-size SUV market and you almost whipped it out?
- Co-Founder, Chairman & CEO
No, no, no.The answer is no.
There's going to be simply a drastic reduction in the present conventional mid-sized vehicle and that's what we're discussing right now.
As you have indicated, accurately, there has been a significant ramp-up of the vehicle that is not body on frame, and therefore, those two will probably together be a slight additive.
But who's ox is getting gored?
The conventional mid-sized is getting gored at the expense of the others that are coming up.
And that's why we've been so involved in creating this new product portfolio and have all of these new programs in the future.
But we missed the sigma and datum platforms; we get the platforms subsequent to that.
- Analyst
Then if we think about the distressed asset base that's out there, that --
- Co-Founder, Chairman & CEO
Before we do that -- before we do that.
- Analyst
Sure.
- Co-Founder, Chairman & CEO
Let me make sure you understand.
It's public, The [Lamda] process is out there and that's our program.
- VP & CFO
No.
No.
Lamda and [Natatar] are the ones that -- Lamda and Natatar programs are the one's that we're not on at this point in time that's impacting us.
- Co-Founder, Chairman & CEO
Okay, what was your other question?
- Analyst
If we look at the distressed asset base out there, there's quite a few distressed axle groups of assets out there.
I was just wondering what kind of an opportunity that presented to you, either as far as maybe making some acquisitions or picking up some take-over business over the next few years?
- Co-Founder, Chairman & CEO
We think in the next 36 months there'll be significant opportunities for AAM to consider, but I think you have to take a look at each company has to make their evaluation of what they're going to do, and then we will evaluate what would be an effective fit for us -- and there's obviously other stakeholders have an incredibly important impact on that process -- but we see that issue you're bringing up as a major opportunity for us.
- Analyst
Great.
Thank you very much.
- Co-Founder, Chairman & CEO
Thank you have.
A grade day.
Operator
Your next question comes from the line of Jon Rogers with Citigroup.
- Analyst
Good morning.
Just to follow-up on that question have.
Have you -- in the marketplace with -- have you already seen the opportunity for some takeover business that could potentially increase the backlog in the next two years because of some the distressed assets?
- Co-Founder, Chairman & CEO
There are issues and it's interesting, Jon -- first of all, good morning -- that sometimes customers are actually coming to us now instead of us going after the customers.
And I can't be more specific on that, but there are nice opportunities coming our way because of different people evaluating what is core to them or what they may want to exit.
And, of course, this is core business to us, the specialty, sophisticated, engineering, drive line, drive train componentry and obviously it's very needed by the customer.
They can't produce products without our type product portfolio.
So, yes, I see some upspike for us, but I have nothing to announce today.
- Analyst
Okay.
And then, Mike, just on the working capital line, I'm wondering if -- was there any change in -- in -- maybe a temporary change in payment terms either with suppliers of yours or with your customer that might have made the swing more than it normally is in the first quarter?
Because it looks like for the entire supplier base -- the ones that have reported so far -- the customer's had an adverse working capital swing and it doesn't seem like anyone benefited from that from the companies that have reported so far, and I'm just wondering within the industry, is there something going on the working capital side?
- VP & CFO
Jon, I don't think so.
In our case, there certainly has not been any changes in the payment terms we have with our customers or our suppliers.
One thing I will point out, as you recall in prior quarters and in prior years, from time-to-time, we've been able to collect our metal market billings with our customers faster or slower.
We are on track -- we're current on all those billings at the end of the first quarter this year.
Last year we had some of it that spilled into April.
So the two major factors, working capital-wise, that impacted us, Jon, are the profit sharing payment that was lower this year, just based on lower levels of profitability in 2005. and the successful collection on a timely basis of all of these amounts we have outstanding with our customers.
At the end of the first quarter, Jon, our past dues are less than 1% of our average monthly sales and less than $3 million.
And when you extend that out to past 60-days past due -- I just gave you a 30-day past due -- it's just insignificant.
So we just did a good job of keeping on top of that this quarter.
- Analyst
Okay, thank you very much, guys.
- Co-Founder, Chairman & CEO
Thank you, John.
Operator
Your next question comes from the line of Darren Kimball with Lehman Brothers.
- Co-Founder, Chairman & CEO
Hello, Darren?
Can you hear us?
Operator
Okay.
I'm showing that that question has been withdrawn.
Your next question comes from the line of Chris Ceraso and that is with Credit Suisse.
- Analyst
Thanks, good morning.
- Co-Founder, Chairman & CEO
Good morning, Chris.
- Analyst
Two questions.
Mike, if I can come back to the mid-sized utilities, I just wanted to see if we can understand better where the disconnect here is, because if I look at numbers on plant-by-plant or product-by-product basis -- whether they're from Wards or Autodata or CSM -- it looks like all of the mid-sized trucks, the Trailblazer and those family, the pickups, the old Blazer and Jimmy, et cetera, all of that stuff combined was up a little bit year-to-year, so is there something different about your content or did you lose something year-to-year in terms of content?
Are there other vehicles outside of GM that I'm missing?
How do we bridge this?
- VP & CFO
Chris -- and I'm glad you asked the question.
I was hoping to come back to it.
I think there's two things that I didn't say earlier that are going to impact it.
The first Rod alluded to, and where it's difficult for me to know how much impacted the situation and while I'm more concerned with our shipments than, ultimately, what GM produces every month, when they built out that Oklahoma City plant, there was probably some inventory in the system, either in sequence or, as Rod mentioned, safety stock.
That probably did impact the situation, because it was pure build-out as opposed to a rolling situation.
So I suspect that had some impact.
The second thing that I think is important for you to understand -- and I didn't mention it yet today -- I think we've talked about this when we talk about our gross to net backlog.
One of the only programs that is expiring in this time period are the mid-sized rear-wheel drive compact passenger van; the ML program, which rolled out of production a year ago.
This is going to be, I think, the last quarter-- maybe a small amount in the second quarter of a year-over-year comparison.
There was about 12,000 -- 12 to 15,000 units of production that was in our first quarter of 2005 that's not in our first quarter 2006.
So I suspect, when you adjust for that ML van volume and then take into consideration whenever build out impact might have been at Oklahoma City, you could reconcile back to our information.
What I'm sharing with you today is our production shipment data, so I know this is what is based on our revenue recognition.
- Analyst
Okay.
That's really helpful.
And then, kind of a related question, as we look forward to the rest of the year, I think I remember you saying that on a full-year basis, you expected the mid-sized utilities to be down about 150,000 units.
How much of that have we taken care of in the first quarter or how much is left for the rest of the year because, as we've talked about, the contribution of the downside is so painful, so I want to be able to quantify how much more pain is left for the balance of the year on that program?
- VP & CFO
Well, Chris, most of that reduction is going to be second, third, and fourth quarter.
The Oklahoma City plant was running six -- approximately six, seven weeks in the first quarter.
The third shift is still on at Morane.
There has been some -- some reductions in the [polls], but those are nominal.
So basically, what you are going to see is Oklahoma City impact felt second, third and fourth quarter.
And our best information right now is that Morane takes that third shift off in the middle of July and so you'll see a further reduction in the third and fourth quarter associated with that.
- Analyst
Okay.
Thanks a lot, Mike.
- VP & CFO
Yes.
Operator
Your next question comes from the line of Brett Hoselton with KeyBanc Capital Markets.
- Analyst
Good morning, gentlemen.
- Co-Founder, Chairman & CEO
Morning, Brett.
- VP & CFO
Morning Brett.
- Analyst
Let's see here.
Given you're facing a stiff head wind on the GMC 300, as you just mentioned, can you just identify some of the major factors that will allow you to earn $0.17 in the first quarter but then go on to earn $1.20 to $1.30 in the remaining quarter, given that seasonally you generally see a little bit of weakness towards the back half of the year?
- VP & CFO
Brett, that's a good question and you are right.
Seasonally the first quarter is typically a lot stronger as a percentage of the total.
Let me try to point out three items that I think will make 2006 little bit different for us.
The first is, again, this 900 volume timing.
The launch of the SUV program, a big portion of the early phase of that launch at Janesville and certainly at Silao, was in that first quarter.
So we're going to see some stronger SUV volumes in the second quarter, and we expect for the rest of the year. he pickup volumes we expect will come on strong at the end of the year, as they begin their launch of the 900.
All in, the GM full-sized volume, I mentioned a couple of times already, we expect those to be higher second, third and fourth quarter than what we saw in the first quarter.
When you couple that with the content gains that we have on the 900, that's an important opportunity we have to bring more business and ultimately sales into our -- into our business.
We also have -- the second point is in addition to the content launching on the 900 program, we have other bits of business that launched later in the year.
Okay.
The DC [inaudible] program will launch later this year.
The JK SmartBar program -- that's our first high-volume SmartBar award -- launches later this year. and we've got orders -- we've mentioned it before, component orders -- but the volumes will pick up when you aggregate them with Peno, Jasco, Coil, the 6B transmission work we're doing for GM on the [F6R], there's more additional business coming on later this year that's going to help us.
- Co-Founder, Chairman & CEO
And we mentioned one other one and that's Ssangyong.
- VP & CFO
Absolutely.
- Co-Founder, Chairman & CEO
So there's about seven or eight major programs coming here later this year, and all of those kick in for revenue and offset some of these other ones.
You have to look at the goesinsas and the goesoutsas.
- VP & CFO
That's right, Brett.
I mentioned just a minute ago, but I'll mention again, we see that ML van contribution hurting us on a year-over-year basis in first quarter.
And second quarter, of course, that will be not an issue, going forward.
The third point -- the first being GMC 900 and new business launch -- the third point are productivity improvements.
The things we're doing to improve our operating efficiencies.
Certainly, as we get past the early stage of the launch on the 900 program, we'll enjoy some major operating improvement.
We're seeing that come through already in April, in the second quarter.
And then, also, material cost reductions.
We see a number of good opportunities with localization, globalization, reducing the number of suppliers we're working with, engineering changes that need to be validated, and we're in the process of doing that right now.
We'll see our material cost reductions filled through the year.
- Analyst
Okay.
And then as you -- thank you.
And as you move from '06 to '07, it sounds like you're exiting the year at a much stronger rate.
I'm wondering, as you think about '07, what are some of the major swing factors or primary factors that you see that might cause your earnings to increase or decrease materially?
- Co-Founder, Chairman & CEO
One of the critical things, of course, is by that time, the GM 900 pickup truck will be coming on very strong to support the already at full rate GM 900 SUVs and, of course, the full rate of the Daimler Chrysler DC cab chassis and these other things we just discussed, basically we have all of the dippsy-doodles of launches done and behind us.
And, therefore, as we said before, 2007 looks like the sun starts to shine again.
- Analyst
Any-- anything else pension wise or anything along those lines that you can think of, Michael or is that --
- VP & CFO
Brett, I tell you what, if you've a crystal ball [NOISE] needing to use in our evaluation, I'd appreciate it.
But we would expect one of these days for the discount rate to turn around a little bit, and if it does that, as we disclosed in our annual report, that could a little bit of a tail wind for us.
- Analyst
Well, if we all had a crystal ball, we would retire, so -- But thank you very much for your answers.
I appreciate it.
Operator
Your next question comes from the line of Rob Hinchliffe with UBS.
- Analyst
Thanks, good morning.
- Co-Founder, Chairman & CEO
Morning, Rob.
- Analyst
I think just a couple of relatively easy ones.
Four-while drive for the 900s, can you talk about how the mix has been right out of the gate here?
- Co-Founder, Chairman & CEO
Well, usually if you take full-sized vehicles when you're going through a launch, that will be slightly lower than normal, and we've been around 62, 63% in this first quarter.
We'll start inching more back up towards 63, 64 and then we'll get more towards 66 or 67, as we progress to the next six to 12 months.
- Analyst
And Dick, that's for the 900 specifically?
- Co-Founder, Chairman & CEO
That's for full-sized production and, obviously, I'm calling that all of it-- I'm talking SUV, as well as pickup truck.
When you into through a launch, normally you bring that particular option up a little bit slower.
It's not a lot, but it its a percent or two less than normal and then it'll start be picking up, and we see it being right on track the way we had expected.
- Analyst
Okay.
Can you -- you mentioned a couple of times so far the added content of the 900 versus the 800.
Can you just refresh our memories?
How much more dollar content do you have?
- VP & CFO
Yes, Rob, a couple things.
The main content drivers are drive shafts that were sourced to a competitor in the past, and also engineering changes, the most significant being the [vie sis] content I mentioned earlier today.
The aggregate opportunity for us is approximately 5% of content gains on this program.
The drive shafts alone are about $80 million.
- Analyst
Okay.
And then lastly, just looking at payables, it looks like was a source of cash in Q1, this year.
Use of cash last year.
Can you go through that?
- VP & CFO
Yes, the primary difference -- and I think we lumped payables and accrued liabilities all together -- the primary difference is on the profit sharing side.
We had lower profitability in 2005, so that reduced that amount of those payments.
That's the key driver.
- Analyst
That's where that flows, okay.
- VP & CFO
Yes.
You know there's some timing on the receipt of CapEx that factors into it, but it's not very significant, and there's no changes in payment terms, as we mentioned earlier.
- Analyst
Okay.
Okay.
Thanks very much.
- Co-Founder, Chairman & CEO
Thank you very kindly.
Operator
Your next question comes from the line of Rich Kwas with Wachovia.
- Analyst
Hi, good morning, guys.
- Co-Founder, Chairman & CEO
Good morning, Rich.
- Analyst
Hey, Mike, quick housekeeping question.
Tax rate, it seems like it's higher than what you were guiding to last quarter.
You know, 34 for the first half and trending down.
That sounds different, can you explain that?
- VP & CFO
Yes, it's slightly higher.
For the year, Rich, we're pretty much similar to what we thought, moving down closer to 30%.
But as you may know, I'm assuming, though, the research and development tax credit has not been extended or properly approved, so we weren't able to recognize any benefit associated with that.
We did expect, and we still expect that we'll ultimately be able to do that.
And so, I would say the primary reason why the run rate's a little bit higher than what I'd expected is because we didn't get any benefit associated with R&D tax credit.
- Analyst
Do you expect to exit the year at 30?
- VP & CFO
Yes, I think -- I mean it's a little -- the timing of some of the changes that we expect to see as it relates to earning offshore is going to be one of the primary factors, but, yes, Rich, we expect to see -- certainly with the $3 million adjustment we took here in the first quarter we would expect to be close to 30%, maybe even slightly -- well, right around 30% for the year.
- Analyst
And then could you quantify launch cost and how the cadence of that is going to work, as we move through the rest of the year?
- VP & CFO
Yes.
Couple of things.
I mean, again, the launch cost for us, we see operating efficiencies, which with difficult to quantify specifically.
We also see project expense, which is much easier to quantify.
On a year-over-year basis, we saw roughly $3 million of cost increase for the stuff we can get our hands on very discreetly.
And I would see, as we get into the second half of the year.
Rich, for that launch cost discussion to turn around for a us a little bit, and we'll talk about the fact that operating efficiencies have allowed us to improve margins in that area.
- Analyst
So it's going to be a little more -- when you get to the second half of the year, it's going to be roughly flat, maybe?
- VP & CFO
Well, we should do better than that, Rich.
We had some pretty significant launch cost activity in the -- particularly in the fourth quarter and again, here in the first quarter, and we would expect our operating efficiencies to get a lot better, as we work through that launch.
- Analyst
Right, right.
That's right.
So it's going to be a tail wind the second half of the year?
- VP & CFO
Yes, sir.
- Analyst
Okay, thanks.
- VP & CFO
We think so at this time.
- Co-Founder, Chairman & CEO
Thank you, Rich.
Unidentified
You next question comes from the line of David Leiker with Robert W. Baird.
- Analyst
Can you hear me all right?
- Co-Founder, Chairman & CEO
Yes, good morning, David.
- VP & CFO
Morning, David.
- Analyst
Couple of things.
Mike, on that -- I just wanted to follow up on an earlier question.
That $1 20, $1.30 GAAP number that you gave, that included the tax benefit here in the first quarter.
Are there any other items like that that you're anticipating that would be included in that number?
- VP & CFO
You know, again, I don't -- I don't know of any significant additional tax adjustments, David, that we would expect do see this year.
We're -- we're through what we can see in front of us right now.
- Analyst
What about like head count reductions or restructuring costs or things like that?
- VP & CFO
Went we initially provided our guidance, David -- I'm glad you asked the question, it allows me to confirm that when we originally provided this guidance, we were clear that it did not include any -- any [inaudible] charges as we have incurred some in the past.
- Analyst
Okay.
Great.
When you look at your -- take a look at your manufacturing footprint here in North America, obviously with the decline in SUV's, your utilization rates have fallen.
I mean you look at GM truck build over all, they are down 400,000 units from where you put close to a 14% EBITDA margin.
Do you have the volume to come through to push the utilization in the existing footprint to be able to get back to that type of profitability some day?
- EVP - Planning & Operations
David, this is Yogendra Rahangdale.
We have the plan to utilize the capacity on a $1.4 billion backlog we have.
We are utilizing that capacity [inaudible] passenger cars and different places, but we have definitely plans.
- Analyst
What -- what is is your utilization today?
- EVP - Planning & Operations
Well, we're at around 80-plus% level.
We were at 90-plus%, 98, 97% two years ago.
But that has dropped down.
We'll bring it back as we launch the new program in our backlog.
- Analyst
There isn't a need to do some plant consolidation or capacity closings or anything like that?
- Co-Founder, Chairman & CEO
We haven't announced any and, therefore, I'll let Mike any other comments he wants on that.
- VP & CFO
Well I think Dave addressed the question you just asked.
The only other comment that I wanted to make is you compare back to 2003, 14% EBITDA margin, the other thing that's significantly different and usually the first part of any discussion we have on this is the metal market environment.
And David, I know you know very intimately that we've seen close to 200 basis points of margin erode on higher metal costs alone.
So when we talk about recovery in the future, we're certainly working hard to get some of that material cost reduction to offset those cost increases, but that's a factor in whether or not we're ultimately successful in getting back to 14%.
Even beyond cap utilization.
- Analyst
Okay.
And then one last item here.
Dick, I think you were talking about it, Dick, maybe it was Mike.
But you're talking second quarter numbers here will be the best of the year.
Q2 and Q3 with the launches being more difficult.
Does imply that the fourth quarter is your-- your trough in margins or does that carry over to '07 at the first quarter or second quarter of though?
- Co-Founder, Chairman & CEO
As we said earlier, we would have a tough time in the first quarter and you've got our results today.
- Analyst
Right.
- Co-Founder, Chairman & CEO
The second quarter we feel will be quite strong, and then, of course, we hit, always the weak third quarter for the auto industry. in general.
And it's complicated because of the launches starting for the pickup trucks and not for a plant but for five plants.
And then, by the fourth quarter, we get reasonably strong again and next year we think we'll be able to have a good solid, strong financial performance.
- Analyst
On a relative performance, you would expect your first quarter of '07 to be better than the fourth quarter of '06?
- Co-Founder, Chairman & CEO
Absolutely.
- VP & CFO
Yes.
- Analyst
Okay.
Great.
Thanks you.
- Co-Founder, Chairman & CEO
Thank you, sir.
Operator
Your next question comes from the line of Himanshu Patel with JPMorgan.
- Analyst
Hi, good morning, guys.
- Co-Founder, Chairman & CEO
Good morning.
- Director - Investor Relations
How are you.
- Analyst
Good.
Most of my questions have been answered, but just one follow-up on the T 800 outgoing pickup trucks, have you seen production schedules from GM change at all in light of where some of the inventory data is now?
- VP & CFO
Himanshu, this is Mike.
I don't know that the changes we've seen have anything to do with inventory.
We probably need to ask GM that question.
What we have seen are the -- the scheduling now of down weeks, as Dick mentioned earlier, to get plants ready for launch, and so we're seeing some of that.
We expect a fair amount, in fact, in the second and third quarter.
We've already seen some of that.
- Co-Founder, Chairman & CEO
And they stagger those strategically and intelligently, so they can do the more critical conversions in body shops and/or paint systems or whatever unique system they need more time on.
But we think they've done it very smartly, very thoughtfully, and we're well prepared for it.
- Analyst
Do you sense that those down weeks were pulled forward a little bit?
- Co-Founder, Chairman & CEO
I think that are were pulled forward so they can accelerate the launch of the GM 900 pickup, and I encourage them to do that.
- Analyst
Mike, one follow-up question.
On the Oklahoma City issue in Q1, I mean, there's the issue of having only half a quarter's worth of production, but there's also the sort of friction costs associated with such a rapid wind down of that plant.
I'm just wondering, any way to quantify how much that was?
Because presumably that doesn't carry through in the flowing quarters?
- VP & CFO
Well, Himanshu, I think our friction costs in that regard are probably a little bit less than what you might see in other circumstances, because the Buffalo plant's still running, still supporting the 360 program.
We're just running at lower volumes.
And although there are some variations in products between what we shipped Morane and Oklahoma City, substantially they're the same.
So I think other than the fact that we've got less volume and higher layoff costs as a result, I don't know that there's any significant additional costs to note.
- Analyst
Okay.
Great.
Thank you very much, guys.
- Director - Investor Relations
Thanks, Himanshu.
We've got time for a few more questions so, Elizabeth, if you could get those in queue.
Operator
Your next question comes from the line of Michael Bruynesteyn with Prudential Equity Group.
- Analyst
Good morning, folks.
- Co-Founder, Chairman & CEO
Good morning, Michael.
- Analyst
Hi, could you talk about the stock option expense timing and also, with regard to, I guess, negotiated price down versus commodity price increases, you know, we saw a couple of quarters recently where that was negative.
What was it in the quarter we just had and how do you think about it going forward?
- VP & CFO
Okay, two questions.
First was stock-based compensation and Mike, I'm glad you brought it up.
I wanted to address this a little bit.
Stock-based compensation for the year we anticipate being up about $6, $6.5 million year-over-year.
I mentioned earlier we still see this basket of non-cash expense up 40, and it looks like, with some of the launch activity timing changing a little bit on our CapEx, we'll see our depreciation pick up the slack.
So I see D&A up about 25, stock comp up about six, 6.5, and pension up to about ten.
That still adds up to 40.
As it relates to the stock compensation expense, we saw the largest of the year-over-year increases we'll see any first quarter at about $2.5 million of expense, that's about $2.2 million higher than what we saw in the second quarter.
The second and third quarter should be around $1.5 million higher, on average, year-over-year and then the fourth quarter will be down -- or I'm sorry, it will still be up, but it'll be up only about $1.2 million on a year-over-year basis.
- Analyst
Great.
That's helpful.
Thanks.
- Co-Founder, Chairman & CEO
Thank you, sir.
- Analyst
Oh, and the purchasing cost, raw materials?
- VP & CFO
On the purchasing cost, we did see a net material cost reduction.
The metal market pass throughs, as I mentioned briefly in my talk earlier, we did see some reduction in the metal market pass throughs we sent on to our customers, and that's good news for us.
Generally that help to recover costs on the other side.
And we did see some material cost reduction, but we should see that build and we'll see a better contribution on that issue, as we work through the second, third, and fourth quarter.
- Analyst
Was that favorable or unfavorable in the question, the net impact of the negotiated price downs versus commodities?
- Co-Founder, Chairman & CEO
It was favorable.
They were both favorable.
- Analyst
Thank you.
- Co-Founder, Chairman & CEO
Thank you, sir.
Operator
Your last question comes from the line of Darren Kimball with Lehman Brothers.
- Analyst
Oh, hey, thank you.
I wanted to ask about your sub-costs.
You mentioned layoff costs were up about $3 million year-over-year and I'm just wondering if you could quantify the run rate of this penalty you're experiencing?
- VP & CFO
Darren, we see the layoff costs for the year around $75 million, and that's-- that's up from the prior year.
Last year our layoff cost portion was somewhere in the range of $53, $54 million and then we saw another close to 20 on the [vesip] charges.
We look at those together, that's about $71 million roughly, so we're up $4 or $5 million on a year-over-year basis.
- Analyst
Thanks, much.
- Co-Founder, Chairman & CEO
Thank you, Darren.
- Director - Investor Relations
Thank you, Darren, and we thank all of you who have participated on this call and appreciate your interest in American Axle & Manufacturing.
Operator
Thank you.
This concludes today's conference call.
You may now disconnect.