American Axle & Manufacturing Holdings Inc (AXL) 2006 Q2 法說會逐字稿

Good morning.

My name is Elizabeth and I will be your conference operator today.

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

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

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

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

Please go ahead, Chris.

Thank you and good morning, everyone.

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

All of you should have had a chance to review our second quarter 2006 earnings announcement that we released early this morning.

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

A replay of this call will be available beginning at 5:00 p.m. today through 5:00 p.m. eastern daylight time, August 4, by calling 1-800-642-1687 reservation number 227-0427.

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'd 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 positions.

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 uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed.

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 AM.com Web site 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 am.com Web site.

We are also audio webcasting this call for our Web site.

This call will be archived in the Investor section of the Web site and will be available there for one year for later listening.

During the third quarter of this year, we will be attending the following conferences; the JP Morgan Harbor Conference in Dearborn, Michigan on August 7 and the CSFB Automotive Conference in New York on September 2.

We look forward to seeing many of you at those conferences.

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.

Thank you, Chris and good morning, everyone.

Thank you for joining us today to discuss American Axle & Manufacturing Holdings's results for the second quarter of the year 2006.

I am pleased to be joined today by Yogendra Rahangdale, our President and Chief Operating Officer;

Michael Simonte, our Vice President of Finance and Chief Financial Officer; and David Dauch, our Executive Vice President for Commercial and Business Development.

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

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

Let me first state that AM continues to generate profitable results and significant cash flow gains for the year 2006.

In the second quarter of 2006, AM benefited from strong demand for GM's fine new full-size SUVs with increased AM content in these outstanding vehicles.

We look forward to supporting the launch of GM's exciting new full-size pick-ups later this year.

Some highlights of the performance of the second quarter include the following.

First, in the second quarter of '06, AM reported GAAP earnings of $20.4 million or $0.40 per share.

Second, we generated approximately $10 million of positive free cash flow in the quarter.

For the first half of '06, AM has improved our free cash flow by approximately $52 million on a year-over-year basis.

Third, we continue to be successful in diversifying our customer base.

For the quarter, sales to non-GM customers have increased by 10.5%.

And finally, AM continued to expand its global manufacturing footprint.

We recently announced that AM has purchased a manufacturing facility in Olawa, Poland.

And we are purchasing land adjacent to that facility for future development of new, highly-efficient regional manufacturing facilities in low-cost, fast-growing regions of the world.

Let me provide additional data on AM's financial performance for this quarter.

AM sales in the second quarter of '06 were approximately $875 million.

Sales to non-GM customers increased 10.5% to over $205 million in the quarter.

Non-GM sales represented 23% of our total sales in the second quarter of '06.

Strong demand for AM products that support the Dodge Ram heavy-duty program, including derivatives, continue to drive our non-GM sales growth in 2006.

Our sales in the quarter reflect an estimated 5% year-over-year increase in customer production volumes for the major full-size truck and SUV programs that we support for both GM and the Chrysler group.

This was offset by an estimated 23% decrease in GM's rear-wheel drive, mid-size pickup truck and SUV programs.

Our net income was approximately $20 million or $0.40 per share in the second quarter of '06.

And this continues AM's track record of recording profitable quarterly results for each and every one of our 30 quarters as an AM public company.

One last point on our financials, AM's free cash flow generation in the quarter improved by approximately $17 million as compared to the second quarter of 2005.

On a year-to-date basis, we're $52 million ahead of our prior year, free cash flow results.

We continue to target a $100 million improvement in free cash flow for the full year compared to 2005.

Mike will have more on say on that later in the call.

Ladies and gentlemen, the U.S. domestic auto industry continues to walk through and work through an unprecedented period of structural and unprecedented change.

During this time of transition, our Company continues to emphasize operational excellence by managing the things that we control.

AM is focused on becoming a stronger, more diverse, more competitive selectively global Tier 1 auto supplier.

Here are some of our key strategic initiatives and I want to discuss them.

First, AM continues to provide world class quality and warranty performance of highly-engineered products.

We delivered to our customers a Six Sigma quality, high advanced technology to all of our customers throughout the world.

We're averaging less than 10 parts per million throughout the first half of '06 and no one in our business, in the world, can compare to that.

It's unparalleled.

Second, AM continues to invest in the development of new, advanced technology products to meet the changing needs of the global marketplace.

Our R&D spending through the first half of '06 increased nearly 10% to about $40 million, as compared to $36.5 million in the previous year period.

AM's investment in R&D expands our current product offerings and supports our business growth initiatives and meets the consumer needs.

AM's R&D efforts have resulted in development of new product, targeted for growth segment of the global auto industry.

This includes rear-wheel drive and all-wheel drive systems for passenger cars and crossover utility vehicles.

The emphasis has contributed on the growth in our new and incremental business backlog to about $1.4 billion for programs launching from 2006 through 2012.

AM's new business backlog includes future sales in excess of $625 million for seven driveline systems for passenger car and crossover vehicle programs.

We're very excited about that.

These are being developed for three different global OEMs.

AM's new business backlog includes future sales of over $200 million for product programs in Europe as well as the continent of Asia.

These awards are very important to our Company as they are catalysts for the construction and launch of the new regional manufacturing facilities and give us the appropriate scale to be in business in those locations.

AM's new business backlog also includes several programs that we are launching right now.

These programs reflect the success of AM's customer and product diversification efforts and include the following.

First, the driveline systems supporting the Chrysler group's new DC cab chassis program and it is going very well.

Second, AM's first high-volume application of the Smart Bar, electronic stabilizer system for the 2007 model year Jeep Wrangler Rubicon.

Third, the forged and machining components for Koyo, Hino and Jatco.

These important companies are closely affiliated with Nissan and Toyota.

These awards provide an excellent opportunity to demonstrate AM's technical expertise and operational capabilities to important target customers.

Third, we are currently quoting on new business opportunities approaching $1 billion.

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

Included in this opportunity are opportunities are several major global OEMs that could further accelerate our global expansion in Asia, Europe and South America.

We expect to have favorable sourcing decisions on some of these opportunities yet this year.

Fourth, our Company will continue to expand its global manufacturing footprint.

We are expanding operations in locations such as Mexico, Brazil, China and Poland in key parts of our profitable growth plan as we go forth in the future.

We will be leveraging our product, process and systems, engineering skill and capability and we're positioning our Company to continue the support of our existing OEM customers, as well as new customers developing on a global basis.

Before I turn it over to Mike, let me again say at AM is on track to remain profitable.

We will also generate significant cash flow gains in the year 2006 while investing in exciting new business growth initiatives that assist in our customer diversification, product diversification and global reach.

Our Company continues to be focused on the flawless and anonymous launch of the entire GMT-900 program.

Other new product programs of equal focus include the Chrysler group's, Beijing BenzDaimlerChrysler in China;

SsangYong Motors for the Korean market;

Hino, Koyo and Jatco to support Nissan and Toyota in [transplant]; and business that's rapidly growing for us and successfully with Harley Davidson.

AM's management team has the experience, the discipline, the motivation, the teamwork, the harmony and the installed capacity to launch these programs flawlessly and efficiently.

You can count on it.

AM is also looking forward to the launches of our new regional manufacturing facilities in Changshu, China and Olawa, Poland.

With the addition of these new low-cost, flexible manufacturing facilities, our Company is very well positioned for product growth and product diversification in the years 2007 and beyond.

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

Let me now turn the call over to AM's Vice President of Finance and Chief Financial Officer, Mike Simonte.

Mike?

Thank you, Dick.

And good morning, everyone.

As Dick said, today we reported second quarter 2006 GAAP earnings of $0.40 per share.

This compares to $0.37 per share in the second quarter of 2005.

Our sales in the second quarter of 2006 were $874.6 million, at slightly higher than $867.7 we posted in the same period a year ago.

On an overall basis, our major program production volume was down approximately 2% versus the prior year.

That's about the same as the trend of GM's overall light truck production.

Sequentially, our volumes were up 3% or almost 20,000 units as compared to the first quarter of 2006.

As we expected, the reduction in our mid-size light truck programs, particularly the GMC 360-370 program was a primary driver of this trend.

To be more specific, the mid-size programs were down 23% year-over-year.

Also as we expected, strength in our full-size light truck programs, especially the GMT-900 SUVs and the Dodge Ram program, partially offset the weakness in the mid-size programs.

In the quarter, these full-size production volumes were up almost 5%.

Two other factors impacted our sales trend in the quarter.

That was our continued growth of non-GM sales and content gains, and I will make more detailed comments on these issues in a few minutes.

Our financial results in the second quarter of 2006 include a non-cash charge of $2.4 million or just a little bit more than $0.03 per share, to write-off unamortized and issuance costs related to the conversion of $128.4 million our Senior Convertible notes due 2024.

An additional $21.6 million of these convertible notes remain outstanding at the end of the second quarter.

Assuming these notes are also converted for cash later this year, we will have another smaller charge taken in the second half of year.

Our second quarter results also reflect the impact of an unfavorable tax adjustment of $2.6 million or $0.05 per share.

Just as we had in the first quarter, we settled a tax audit in the second quarter, this time in a foreign jurisdiction.

On an overall basis, we came out slightly ahead in the settlement of the audits, approximately $500,000 positive.

One other comment on this tax adjustment, 90 days ago I heard and read a lot about how our first quarter earnings were helped by a favorable tax adjustment.

In the coming days and weeks, I hope to hear we just as much about how this unfavorable impacted our second quarter earnings.

Okay, let me cover a few other summary points on our second quarter results and how they compare to the prior year before we get into all the details.

First, as we discussed with you previously, non-cash expenses related to depreciation, amortization, pension, post-retirement benefits and stock-based compensation will be much higher for the full year 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 in a year-over-year comparison of our earnings in 2006.

In the second quarter of 2006, these cash -- or non-cash expenses, I should say, were up approximately $9 million versus the prior year.

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

That was one year ago.

There was no similar activity in the second quarter of 2006.

However, layoff costs related to our associates, sometimes referred to as sub or supplemental unemployment benefits, these costs were up $4 million in the second quarter of '06 as compared to the prior year.

This was mostly due to additional layoffs at our facilities supporting the mid-size product range.

Remember that when you compare the quarter to the prior year, this cost driver offsets about half the impact of the voluntary separation charge we took last year.

Finally, as Dick mentioned, we are pleased with our cash flow performance in the second quarter.

We're ahead of our prior year free cash flow results by about $52 million at mid-year, and that's right in line with our guidance.

Now, let's get to the details.

I will start with the income statement.

Our sales in the second quarter of 2006, I mentioned, came in at $874.6 million, that's about $7 million higher than last year.

As I mentioned, the trend in production volumes for the programs we support were mixed.

Mid-size pick-up and SUV products were down23%, reflecting weakness in that segment and GM's decision to close Oklahoma City and significantly reduce the size of it's rear-wheel drive mid-size SUV program.

On the other hand, the full-size programs we support for GM and Chrysler were up about 5% when compared to the same period last year.

The combination of these factors, lower mid-size production and higher full-size production, resulted in a favorable sales mix for us in the second quarter.

Content per vehicle in the second quarter of 2006 was $1,216 and that compares to $1,185 in the second quarter of 2005, that's an increase of approximately 3%.

The increase is principally related to higher metal market pass-throughs and importantly, new AAM content on the GMT-900 program.

We expect our content per vehicle to continue to trend higher in the second half of 2006.

As you know, diversifying our customer base and sales concentration is an important area of emphasis for AAM.

Non-GM sales in the second quarter were up 10.5% to approximately $205 million or 23% of our total sales.

We look forward to further customer diversification in the quarters and the years ahead as we launch the new products from our backlog for Chrysler, Nissan, Audi, SsangYong, Hino, Jatco, Koyo, Harley Davidson and others.

Gross margin in the second quarter of 2006 was 10.3%, that compares to 9.8% in the same period a year ago.

EBITDA margin for the quarter was 10.3%, as well.

That compares to 9.2% last year.

The growth in our non-cash expense, as I mentioned earlier, will affect the year-over-year comparison of these profitability metrics all year.

However, it's important to note that these non-cash cost drivers were partially offset by improvements in other cash-funded operating costs, including labor and material costs reductions and that's a big reason -- the major reason why our cash flow statement is improving.

In the second quarter of 2006, SG&A expense was $49.4 million as compared to $49 million in the prior year.

Let me comment on interest and taxes before I move to the cash flow statement.

Net interest expense was $7.9 million in the second quarter of 2006.

That's up from $6.6 million a year ago.

Our average borrowings were up a little bit year-over-year, but most of the increase was driven by higher interest rates, mostly due to increases in the base rate.

On June 28, we closed on our new $200 million unsecured term loan and we're pleased to have completed this financing on an unsecured basis and with substantial pre-payment flexibility.

We hope and expect that this loan is a relatively short-term financing that will bridge us until we can return to the capital markets for a longer-term facility that more closely resembles the [inaudible] financings we were able to previously access.

Although this term loan had minimal impact on interest expense in the second quarter, we do expect the weighted average interest rate on our borrowings to increase to a little bit less than 8% in the second half of 2006.

For the quarter, we had an effective income tax rate of approximately 34%.

That's slightly higher than the second quarter of 2005.

As I mentioned earlier, we settled a foreign audit in the second quarter and that cost us about $2.6 million or roughly $0.05 per share.

As we've explained on many previous occasions, we're in the processes of significantly changing our global footprint.

Of course, that means that a higher percentage of our profits are now earned in our foreign operations.

This is having a positive impact on our overall effective income tax rate.

In each of our major foreign operations, currently Mexico, Brazil and the U.K. and soon also China and Poland, we have the opportunity to benefit from effective rates that are lower than here in the U.S.

In all of these locations, the statutory rate is lower.

In some of the locations, we have tax holidays.

In the U.K., for example, we also have capital lounge carry-forwards that effectively shield our current process from taxation altogether.

Over the past three years, we've seen our consolidated effective tax rate decline from 35% in 2003, where most of our profits were made here in the U.S., to 32% in 2004 and 30% in 2005.

Trying to predict the long-term effective tax rate for a global entity is not easy.

Foreign exchange fluctuations effect that calculation.

Changes in tax regulations, both here and abroad, obviously, also effect it.

For example, we're not sure if we're going to get the benefit of an R&D tax credit this year here in the U.S.

Having said all of that, we saw our tax rate below 30% for the next several quarters for the reasons I've just described.

The bottom line for 2006 in the second quarter is that our GAAP earnings were $20.4 million or $0.40 per share.

And for the first half of 2006, our GAAP earnings amounted to $0.57 per share and $29 million.

Let's talk about cash flow.

We generated $9.7 million in free cash flow in the second quarter of 2006.

That's approximately $17 million better than the second quarter of 2005.

For the first half of the year, GAAP cash from operating activities was $99.7 million, as compared to $52.4 million in the second quarter of 2005.

After deducting CapEx of $156 million and dividends of $15.5 million, our free cash flow was a use of $72 million in the first half of 2006.

Again, that's $52 million better than a year ago.

It's typical in our industry to use cash in the first half of the year.

That's mainly due to the seasonality of our working capital flows.

In 2005 and 2006, our capital spending is also heavily front-loaded so that contributes further to the situation.

Despite all of that, our cash flow performance in the first half of 2006 was in line with our expectations and substantially improved over the last year.

There are really three key factors that dominate the comparison of our free cash flow with the prior year.

Our earnings are up a little bit and after we adjust for the non-cash impact of G&A, pensions, [OpEx], stock-based comp and other similar items, our cash earnings are $35 million higher.

Secondly, we were favorable on working capital flows in the first half of 2006 as compared to the prior year by approximately $10 million.

A lower profit sharing payout in 2006 is the key element in this comparison.

Receivables, payables and inventories are all up as compared to year-end 2005 and that primarily reflects normal, seasonal variances.

One thing to note is that our sales in the quarter were much higher in May and June than in April.

In fact, our sales in May and June of 2006 were $50 million higher than in May and June of 2005 and approximately $125 million higher than in November and December of 2005.

That should help you understand the variances in receivables, payables and inventories.

There is no other significant changes going on there.

Finally, CapEx in the first half of 2006 was $5 million less than the prior year.

So, those three items account for the change and the variance in our cash flow.

Now let's focus on capital structure.

Net debt outstanding at the end of the second quarter was approximately $581 million.

And that's up approximately $95 million versus the end of last year.

This increase primarily reflects the impact of our operating cash flows and also the elective buy-out of leased assets that we exercised on April 3rd of this year.

Stock holder's equity finished up just over $1 billion.

That means the net debt to capital was approximately 36% at the end of the quarter, it's about the same as last year and in line with our guidance targets and seasonal expectations.

At quarter-end, we had nearly $600 million in available borrowing capacity that, of course, includes a new term loan.

Given that we expect to generate more than $100 million of positive free cash flow in the second half of the year, this liquidity position and our credit metrics should further improve as the year plays out.

Now let's turn to our expectations for 2006.

On June 8th of 2006, we updated our GAAP earnings guidance for the full year at $1.00 to $1.10 per share.

We also reconfirmed that we're targeting approximately $40 million of positive free cash flow in 2006.

Now, this 2006 outlook is based on what we know now about our customer's build plan and the timing of new product launches.

Overall, we based our guidance on the assumption that production volumes for the major programs we support will be down approximately 5% as compared to the prior year.

In the second half of 2006, we currently estimate these volumes to be down approximately 10%.

We're encouraged by the sales performance of the new GMT-900 SUVs and expect the launch of the new pick-ups to boost our full-size production rates nicely beginning in the fourth quarter of this year.

However, as we have said for many months, we expect our production volumes to be relatively soft in the third quarter of 2006.

Right from the start of the year, we said the first quarter and third quarter would be soft, second quarter and fourth quarter would be relatively stronger.

One of the primary drivers of this trend is that GM is taking extended downtime in [Osawa], the first of its truck plants, due to the launch of the new full-size pick-ups in the fourth quarter -- fourth quarter is what I meant to say -- of this year.

General Motors and DaimlerChrysler have also scheduled downtime in six other facilities we support and we would characterize as necessary to manage dealer inventories.

These factors combine to indicate a 10 to 15% year-over-year decline in our production volumes in the third quarter.

That's as much as 50% down on the mid-size products alone.

That's going to make it very difficult for to us generate much profit in the third quarter, although we would expect a production environment to improve, beginning in the fourth quarter and especially into the first half of 2007.

Overall, we're pleased with our operating performance in 2006.

As Dick said, most importantly, we're profitable.

In addition, we're able to continue to invest in new product process and systems technologies and we continue to outperform the industry as it relates to quality, warranty, delivery and launch performance.

That's opening doors for us with new customers.

In the context of the long lead business cycle we deal with in the global automotive industry, we're rapidly diversifying our business profile.

Our non-GM sales are up 15% this year.

Our new business quote backlog, which currently stands at nearly $1 billion of new quotes, most of all with customers other than GM, is full of potential orders to support leading Asian and European OEMs that are not currently a significant part of our business.

If we win our fair share of these orders, or maybe even a little bit more than that, we should be able to continue to reduce the concentration of our GM business at a good clip for the next several years.

Don't forget that we have a lot of new business launching with GM for passenger car and crossover vehicle application over the next several years in Europe, North America and Asia.

That will more significantly diversify our book-of-business with GM.

We're making good progress on controllable cost drivers.

For example, the material cost reductions we benefited from in the second quarter of 2006.

We will continue to focus on these issues and expect to make more progress yet this year to improve our cost structure, especially in our U.S. operations.

And finally, our cash flow fundamentals continue to improve.

Our leverage is relatively low and our access to liquidity is good.

It's very strong.

We believe that AM is well-positioned to take advantage of new opportunities that will emerge as the industry continues to work through this period of structural change.

Thank you for your time and attention this morning.

I'm going to stop here and turn the call back over to Chris so that we can start the Q&A.

Thank you, Mike and thank you, Dick.

We have reserved some time to take some questions.

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

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

[ OPERATOR INSTRUCTIONS ] Your first question comes from Jon Rogers with Citigroup.

Good morning.

Good morning, Jon.

Dick, I have a bigger picture question.

As we look at the new facilities that you have in China and Poland; is it correct that you're going to start, basically, with component manufacturing manner?

And do you have the room to expand to a full driveline facility with forged facilities in those areas?

Well, three responses, is Jon, to your question.

Number one, we're very excited to have the new regional facilities going up rapidly, ahead of schedule and will launch right on schedule.

And we will be producing very sophisticated components that our Company has developed and they'll be for three different OEMs.

For example, in China, we will start with the DaimlerChrysler Corporation with BBDC, the electronic differentials, then we move right on into the Ssangyong and General Motors products.

We have a very good focus and a good expansion program and that will develop profitability rapidly in that section of the world.

In Poland, we also have very sophisticated products going into the Audi group of Volkswagen, to start with, coming right behind that with General Motors.

As we've indicated this morning, we were successful with Yogendra Rahangdale's leadership to get a new plant that's already built.

All we have to do is retrofit it, get it going and then we have the expansion capabilities.

And I would probably look at other things that would be going in there, strategically, but we do not have a plan to announce that at this time.

Okay.

Dick, if we were talking maybe a year or 18 months ago, it seems like the focus might have been acquisitions in -- overseas.

Is it fair to say that -- that that's maybe not the case now that you have Greenfield facilities -- ?

That's not accurate.

We will do both.

We continue to have an excellent focus on strategic fits for us appropriately throughout the world -- M&A activity.

We do not have something specific to announce today.

But things may be developing.

And we will continue, also, expanding our manufacturing footprint as well as our supplier sourcing world footprint.

So, all of these things are working well for us.

They're falling in line with what we want to do strategically; going through this world restructuring the auto sector and also expanding selectively our Company's footprint.

Great, thank you.

Thank you, Jon.

Your next question comes from John Murphy with Merrill Lynch.

Good morning, guys.

Good morning, John.

Good morning, John.

Dick, I was just wondering, after GM's run these fairly successful buy-outs, it seems like Lever and General is becoming a little bit more accommodating.

I was just wondering if there's anything you were working on now or anything you might be able to discuss that might be similar?

Or if you're working on other deals with labor now, considering the 360/370 capacity is not being that well-utilized right now?

Well, John, that's very, very good point.

I think one of the critical things that we did so successfully in 1994 when we created our Company is built a great respect and relationship with our labor and we have that incredible respect for our working men and women today.

We continue to have discussions with these people that represent our workforce.

But those are, as you know, stake holders that we provide private and confidential discussions with.

I think if you look at the track record over the last 12, 13 years of our Company, we have a long, long history of doing things innovatively with labor -- creatively, cooperatively and it's mutually beneficial.

Let's just say we have discussions going on now and when we're prepared to discuss that with you, we will call you.

Great.

And then the billion dollars of business that you're bidding on, what would be the timing of that rolling on?

Is that business that would be three to four years out at the earliest?

Or is there stuff that has a closer maturity?

John, this is David Dauch.

Most of the business we're quoting on now is 2009 model year type year program -- or calendar year type program and out.

And we expect some of the sourcing decisions -- as much as 25% of that billion dollar backlog could be left sometime here in the third and fourth quarter.

Thanks.

And I just want to sneak one technical question under the wire here.

What is the -- what is the real differential between the SUVs and the pick-ups on your content on the 900, if you could just discuss that briefly?

Yes, John, hi, this is Mike.

Hi, Mike.

In terms of content -- the content is similar.

But what is most important to understand content on these vehicles is whether or not they're two-wheel drive or four-wheel drive configuration.

There is a higher penetration of four-wheel drive on the SUV side side than the pick-up side.

That's one reconciling difference.

Secondly, on the SUVs, GM has now transferred to 100% application on VSES, or vehicle stability enhancement system.

That's going to be an option that comes out strong on the pick-up side, but won't be 100% for a couple three years.

So, there is a slight content advantage on the SUVs in this couple three-year time period until all of that gets squared up.

Great, thank you very much.

Thank you, John.

Your next question comes from Joe Amaturo with Calyon.

Good morning, everyone.

Good morning, Joe.

Good morning, Joe.

Two quick questions.

Given the environment, it looks like your gross margin performance was pretty strong, could you just comment on what was driving that?

And then secondly, since the convert refinance took place in the late June, could you just give us a sense of what interest expense is going to be on a quarterly basis going forward?

Okay, Joe, good morning.

On the margin performance a big -- again, a big part of what happened in the second quarter was with the volume being up relative to the first quarter.

The mix being very favorable.

We are able to bring a lot of that efficiency in our operations through to the bottom line.

The same things that are hurting us when volumes declined are helping us as volumes pick up.

So, the ability to put people back to work, for example, reduces lay-off costs.

And then other factors that are having a nice, positive contribution.

I had been mentioning that material cost reductions will help us and they will help us a little bit higher each quarter as we work through this year.

That was about a $2.5 million good guy in the first quarter and it was nearly double that in the second quarter.

That was a good factor --

How much do you think material costs will benefit the full year?

Joe, for the full year, we see somewhere between $15 and $20 million coming in.

And remember that last year we had a $40 million cost increase for our Tier 2 and Tier 3 suppliers, most of that relating to metal market, but that separate and distinct from the cost increases we've seen to our own steel suppliers.

And we're hoping to get that back over the next couple of years.

And David Dauch and Mike Flynn and others who are heading that effort up for us here are making good progress.

So, we see that $40 million coming back to us over two years, maybe $15 to $20 each year.

Okay.

And in terms of the margin, again, the volume, the ability to put people back to work -- there's a strong contribution on that, material cost reductions, launch costs, a little bit more under control particularly with higher volumes, and good old-fashioned plant productivity and of course metal market recoveries; it will vary quarter-to-quarter and it was a little bit higher of an impact in the second quarter.

And then just the interest going forward on the quarterly basis?

Yes, interest expense is going to take up a little bit, probably to the range of $9 -- you know, maybe $9 million a quarter.

Okay, great.

Thank you, guys.

Take care.

Your next question comes from Michael Bruynesteyn with Prudential Equity Group.

Good morning, gentlemen.

Thanks for taking the call.

Could you talk about -- maybe quantify some of these year-over-year drivers like the cost reductions, VSES, raw material, stock -- I guess you have a stock option expense already, and the metal market pass through difference that can help us understand the year-over-year drivers for the quarter?

Yes, Mike.

I will start ticking them off here.

The VSES activity a year ago was about $9 million.

And in this quarter, of course, we didn't have a VSES, but what we did have was higher lay-off costs associated with having higher numbers of our [Arline] associates on layoff.

And that was about a $4 million cost driver.

So net-net, we had about a $5 million difference there.

Okay?

Yes.

I mentioned on the material side we had about $2.5 million in the first quarter, close to double that in the second quarter; so, between 4 and $5 million of tailwind -- it's nice to say that word -- associated with material cost reductions.

Project expense -- it depends what you're comparing to.

It's relatively level to a year ago, it's a little bit better relative to our first quarter.

And remember, I've been trying to point out that that -- that issue should turn around a little bit for us as we get to the end of the year and should actually be favorable on a year-over-year basis.

Launch costs, these types of things it's getting better every month, Mike.

It's hard for us to quantify specific amounts of contribution from that issue.

Every month we're running our equipment more efficiently.

Our quality performance, particularly our internal quality performance improves and that's having a nice -- a nice pickup and a nice advantage to us.

So, maybe you can be -- hopefully I've answered your question.

If there are more specific details, you can --

The metal market recoveries?

The metal market recoveries are up $7 million, $8 million in the quarter.

Of course, that's not all P&L.

A lot of that is just simply an offset to what we incur on the cost side.

But we did -- relative to the index levels and, of course, they reset month-to-month and quarter-to-quarter, we saw probably a little stronger contribution there, maybe a couple $3 million, relative to the first quarter.

Okay, and Mike, did you say that EPS might be negative in the third quarter?

I did not say that.

I simply said it was going to be difficult for us to generate much profit in the third quarter.

Mike, we've got 30 straight quarters, we've been profitable every quarter and expect to be profitable in the future.

Very good, very good.

Okay, and then I guess sort of big picture -- I mean this quarter was actually pretty good.

The mid size was bad, but you had strong SUV production, you had some tailwinds, like you said.

How much better can it get than this?

Let me give you an example to think about.

All the equipment, all the processing that had to be uniquely done from the GM 800 and 900 is already in our factories, installed, ready to rock and roll.

I would presume we'd probably be a lot more efficient as we launch the 900 pickup coming at us, as compared to going through the original 900 with the SUV, which is behind us.

Okay.

Anything else we should think about?

The other thing is -- as [inaudible] relaunch for the pick-up is coming back -- this is Yogendra Rahangdale -- the pick-up launch, in the fourth quarter, is a great asset to us.

Okay, great, thanks very much.

Okay, Mike.

Your next question comes from Rob Hinchliffe with UBS.

Thanks, good morning.

Good morning, Rob.

Good morning, Rob.

Mike, it sounds like if third quarter's going to be tough, fourth quarter -- to hit the guidance, looks like it's got to be quite a bit better than Q4 '05.

What gets you to such a strong result in the fourth quarter?

I know -- it sounds like production will still be down in the fourth quarter, still be tough, right?

Again, the trends that we're seeing, Rob, in the first part of this year are probably continuing to play out.

We expect in that timeframe that mid-size activity will be off year-over-year but the extent of the [crimes] should be less than in the third quarter.

The schedules that they've put on for the products right now are even lower than the low level -- or lower level, I should say, of sales that we're seeing on those products.

In other words, they're trying to work down the inventories.

And it would appear to us, that they will make substantial progress and working down those dealer inventories in the mid-size products during the third quarter.

So, that allows them, we expect -- and so far we're seeing on the schedules, to put back some volume and get it at least constant to the level of sales that they're seeing in the market right now on those products.

That's an example of one of the things that's going to help us in the fourth quarter relative to the third quarter.

Again, I think Dick just mentioned, the GMT-900 pick-ups are such an important part of our business and of course the GM light-truck portfolio, that's launching in that fourth quarter, we expect that to be a strong launch, a very good launch.

And those volumes will help us.

And again, as Dick mentioned, we've already launched the equipment, the process, the methods and so we expect a much more efficient good performance from our plants as we come up on those volumes.

Those are going to be some of the key factors.

I mentioned, also, in response to an earlier question, the material cost reductions -- I don't want to overstate the issue here, but we will see nice material cost contributions relative to the prior year in that fourth quarter.

I would say those are probably the three issues, Rob, that will get behind this.

Get the inventory adjustments behind us in the third quarter, launch the 900, continue with our productivity initiatives, including material cost reductions.

We're busy scratching clawing and looking for any other cost improvement we can find.

So, we've got a number of things under way.

Remember, I also said, Rob, that the DC cab chassis launch is going very, very well.

So, all of those abnormalities will be behind us.

Okay.

It looks like GM is going to launch the crew cab pick-ups first.

Right?

Is that -- from an American Axle perspective, is that a -- I assume that's a good thing with the VSES?

Can you give a little color on that?

As we said, the VSES is going to improve our pricing and ultimately our content on those pickup trucks.

And we're seeing as much as maybe a 70% take rate on that to begin.

So that -- that will be -- that will be important in terms of that 900 launch.

How -- how's the four-wheel drive mix on the crew cab versus the other pick-ups?

It's pretty strong.

I mean this year, particularly in the second quarter, they were down a little bit from expectations, probably because of fuel efficiency.

The four-wheel drive versions of those pick-up trucks will be very popular to begin.

Okay.

And just the last one, what was four-wheel drive penetration in the quarter?

Four-wheel drive in the quarter was about 62.3% across our portfolio.

Okay.

Thanks, everybody --

Rob, that's a little bit ahead of last year, but lower than our expectations for this time period.

Okay.

Thank you.

Thank you, Rob.

Your next question comes from Rich Kwas with Wachovia Securities.

Good morning.

Good morning, Rich.

Good morning, Rich.

Dick, wanted to ask you a bigger picture question on the relationships you set up with the [Keirtsu] suppliers, supporting them.

I want to find out what your thoughts are, given your experience.

How long will it take for you to win significant business with the parent companies?

In your opinion?

Will it be relatively quickly?

Were you thinking you really have opportunities with Toyota and Nissan?

Or will it take an extended period of time?

I think we have very, very close proximity of winning significant business with one of those companies.

Probably -- priority would be Nissan.

I think Toyota is a brilliant company and it takes a bit more time.

But I think they're spending an awful lot of time with us throughout the world and we like what we see of the relationship developing.

That will be a bit more of a moderate period of time in the future.

Okay.

And then, Mike, question on the layoff costs.

As we go through the rest of the year, I guess Q3 you're going to have more of a headwind year-over-year with the layoff costs because of the transition of the pick-ups and maybe that eases in Q4.

If you could comment on that?

And then as you look out in '07, once you get the full -- the benefit of the full launch of the 900, knowing what you know now, how do you think those layoff costs kind of trend next year?

Yes, Rich, I think you've got it straight, relative to the layoff costs cadence here.

The third quarter is going to be a little tough year-over-year because of the extent of production declines.

Fourth quarter should be less significant of an increase in that cost driver.

We're forecasting about $75 million of layoff costs or supplemental unemployment benefits this year.

And quite frankly, we would expect that to increase next year for a couple of reasons.

We would expect the level of activity in some of these programs to continue some of the trends; full size stronger, mid-size probably a little bit weaker.

But we get more productive in our own activity and require less people to run our plant, really every year.

So, that -- that factor is going to continue and we would expect that cost revenue to continue to increase as we move into 2007.

Okay, so, productivity is going to offset the benefit of the full volume launch of the new programs?

Yes, I think so.

Because a lot of the CapEx that we've been spending to put in place these new methods and processes -- we've shared some of the details with you on prior occasions -- they're more productive, more efficient activities.

And so that will -- that will be one of the results.

Okay.

Thanks so much.

Thank you, Rich.

Your next question comes from Chris Ceraso with Credit Suisse.

Thank you, good morning.

Good morning, sir.

First, I'm wondering if you can help us understand the cadence for the new truck launch in Q3 and Q4?

It seems clear that the volume will be negative in terms of old trucks coming off versus new ones coming on in Q3.

But in Q4, will it be a net negative or a net positive for you?

Good morning, Chris.

We would see on the full-size products -- we see it being a net positive in the fourth quarter, year-over-year.

At this stage anyways, the SUV production continues to be strong, overtime schedules continuing.

And of course, the pick-up will begin at Olawa, continue through the other plants, including [Fort Wayne] in that fourth quarter.

So, we expect the launch to be quick and effective overall we see a slight increase in the GMT-900 full-size production year-over-year.

Just for the pick-ups, though, will that be negative; still more down than up?

It shouldn't be.

I think it would be pretty across the board.

Okay, good.

That's right.

Okay, second question.

Chrysler yesterday announced a pretty deep cut in the third quarter.

Do you know if any of that is the heavy-duty trucks that you're supporting?

We don't know the detail of what they're thinking when they make those comments.

But I can tell you that both DaimlerChrysler and GM have scheduled downtime in the third quarter.

In fact -- I'm not talking about the normal shutdown, but apart from the normal shut-down, seven facilities -- we will probably see about 15 weeks down and that includes the DaimlerChrysler activity.

So, we have some of that -- what we know about, we have the activity baked into our operating plan right now.

Okay, and just one last one, if I can.

The -- just so I know what to look for as we go forward, just want to check -- has American Axle launched any of the all-wheel drive programs yet that you've been awarded?

Or are they still in the future?

And if so, can you just tell us what -- what vehicles they will be on and when they launch?

Just so we can keep an eye out and gauge the success and the performance of those vehicles when they do hit the road?

First of all, Chris, we have not launched them yet.

I will ask David Dauch to give some expansion of the response to your question on that issue.

Our all-wheel drive programs will begin in the 2008 calendar year timeframe and we will roll-out through the 2011 timeframe.

We're not at liberty at this point in time to identify the specific vehicles, based on our customer direction.

But that's the timeframe that we're involved with.

Okay, thank you very much.

Thank you, sir.

Your next question comes from Ron Tadross with Banc of America Securities.

Good morning, guys.

I just wanted to clarify some numbers on this second half.

I mean, you're saying that your top programs are down 10%, it looks like now, versus the 5%, but you're going to make it up -- in other words, you're not changing your earnings guidance because of -- it sounds like primarily launch costs and materials?

Does that sound right?

Ron, we based our guidance and continue to base guidance on the assumption that overall, our volumes are going to be up about 5%.

Based on what we know about the schedules, that continues to be the range of our expectations.

Material costs, certainly the improvement in our productivity is a big factor, particularly, if you compare our operating performance in the first half of the year through the second half of the year.

We're going to have the bulk of this launch activity in significant, major disruption in our Detroit gear and axle facility behind us.

So, yes, I think,generally, your comments are accurate.

We do face some volume challenges.

We've known about most of that.

And we having to overcome that through productivity, material cost reductions and other cost reduction activities.

But is it 5% or 10% now we're going to be down in the second half?

No, the 5% is for the whole year.

Okay, so, 10% -- so, it's always been 10% in the second half?

Yes, basically.

I mean -- we were up a little bit actually the first half -- or the first quarter, I meant, and the second quarter, down a little bit.

So, for the first half of the year, it's pretty close to flat, in terms of overall production volumes.

Of course, the mid-size down a lot and the full-size up a little.

And that's what -- the balance that we've been dealing with.

In the second half of the year, you will see everything down a little bit, except in the fourth quarter on that GMT-900 program.

Those are the issues.

Two other quick things, then.

The material cost -- you're going to pick up $15 to $20 million for the year?

Is that what you said?

It will be a positive?

Yes, sir.

And do I have my numbers right -- that it was about $5 million in the first half and will be about $10 million in the second half?

Or at least $10 million?

It's a little bit more than $5 million in the first half -- it's probably closer to $7.

And so we're going to be looking at another, call it $10 to $12, in the second half of the year.

Okay.

And just -- for the second half of '05, the launch costs I have are about $10 million.

Does that sound right?

It's in the ball park.

Remember, the project expense is easy for us to quantify and most of that $10 million is probably the project expense.

Some of the other launch costs activities -- tougher for us to distinguish between all the other operating activity.

I would say that -- I'm not sure we're not going to see a -- we're not going to see a $10 million year-over-year improvement in that.

But we are going to see an improvement off where we were in the second quarter.

And lastly, I think you had a $5 millions asset write-off in the fourth quarter of last year.

Do you foresee anything like that this year?

Or will that help you out, too?

We've got asset disposals occurring all the time.

I think here in the second quarter we had a couple million.

There will be activity in that second quarter.

It isn't likely to be as high as it was last year --

You mean the fourth quarter?

Yes.

Sorry, that's what I meant.

Thanks a lot.

Thank you, sir.

Your next question comes from Himanshu Patel with JP Morgan.

Hi, good morning, guys.

Good morning, Himanshu.

Good morning, Himanshu.

Most of my questions have been answered.

Just one last thing, in the last sort of couple of weeks or so, have you seen any changes in forward production schedules out of GM or Chrysler that are -- I'm sorry, mainly out of General Motors --?

We're basically stable with both OEMs.

Okay, so, the Chrysler cuts that were recently announced, you guys had fairly decent visibility into that?

We're still analyzing that with them.

So, you may know more information than we do right now.

We're still working on that one with Chrysler.

We just announced it yesterday, we're working on it.

Okay, great.

Thank you.

You're welcome, sir.

Thanks so much.

We've got time for a couple more questions.

Your next question comes from Jonathan Steinmetz with Morgan Stanley.

Thanks, good morning, everyone.

Hello, Jonathan.

Good morning.

Just a question on the -- on the supplemental unemployment.

I think you said it would go up by $10 million next year, if nothing else changes.

I know you can't get into the details on this, Dick, but how optimistic are you that something can be accomplished next year?

I'm always respectfully optimistic working with my stakeholders because, as I said earlier, we've got a long track record of working out issues.

And right now, there's discussions occurring.

And I have nothing else to comment on.

Okay.

And on the R&D expense, I noticed you said it went up $3.6 million for the first half, year-on-year.

I think I remember the first quarter it was up significantly.

What was the Q2 comparison year-on-year?

Second quarter was up about $1.8, $1.9 million -- just short of $2 million. -- about $20 -- just a little bit more than $20 million in the second quarter.

And that compares to $18.7 or something -- $18.9 in the second quarter a year ago.

Okay.

And the run rate for the balance of the year continues to be upward?

It'll definitely be up.

It'll definitely be up.

Okay.

So, this isn't a portion of any of the expense savings or anything we will see in the second half?

No, no.

I mean, our R&D efforts continue to increase as we look at these activities relative to all-wheel drive, passenger car applications, these types of things.

And we're going to see -- continue to increase next year.

Jonathan, let me give you the exact numbers.

In the second quarter of 2006, we had a $20.8 million research and development spend.

That compares to $18.9 million in the second quarter of last year.

Okay.

Thanks, guys.

Thank you, Jonathan.

Your last question comes from Brett Hoselton with KeyBanc Capital.

Good morning, gentlemen.

Good morning, Brett.

Two quick questions.

First of all, I want to be clear on the GMT-900 production expectations for the fourth quarter.

Can you give me a sense, again, of what do you think the sports utilities are going to be doing in the fourth quarter?

What you think the pick-up trucks are going to be doing on a year-over-year basis?

Yes, Brett, we expect that the full-size production will be up a little bit year-over-year.

As you recall, the SUV production was down to lower levels in that fourth quarter last year, getting ready for the launch.

So, we do see some growth there.

And then the pick-up side of the house, we would expect that GMT-900 pick-up to launch strong and be up year-over-year.

We will have to see what they do at the other facilities as we get through that.

In total, we expect the 900 to be up a little bit.

So, the combination of the pick-up trucks and the sport utilities up a little bit year-over-year.

And the sport utilities, obviously, a fairly easy comp.

That would-- I guess that implies that you think the pick-up trucks are going to be down in total, year-over-year?

Is that a fair assessment?

Brett, there's a lot of moving parts here.

We would expect the pick-up -- particularly the new pick-ups, to strength into Olawa and probably into Fort Wayne as they launch.

And the math may work out that it's slightly down on the pick-up side, but it could also work out that it's slightly up.

It just depends on how quick the plants come up, how much overtime they put into the schedules and how the system responds to the early days of launch.

And the Dick, just more of a question --

We're looking for it to be up.

I apologize, what was that, Mike?

In total, we expect the program to be up.

Thank you.

That's how we forecasted.

And Dick, just kind of a 30,000-foot question; as we think about driving revenue diversification at the Company, do you think about organic -- driving it organically through business wins, as you've been doing, as well as -- versus acquisitions?

How -- how big a role do you see acquisitions playing over the next, let's say two, three years, in terms of driving that revenue diversification?

I think you will see some activities with our Company on the acquisition front in the next six to 18 months that is significant.

That's all I want to say on that.

Okay.

Thank you very much, gentlemen.

Okay, have a great day.

Okay, thank you, Brett.

I will turn it over to Mike for any closing comments.

Yes, I just had one point I wanted to clarify.

A question that Joe Amaturo asked a little bit earlier on this call, relative to interest expense.

And I mentioned -- the question was, what do we expect our interest expense run rate to be on a quarterly basis going forward?

And I answered approximately $9 million.

And I think that's the low end of a range.

The range will be probably be somewhere between $9 and $10 or $10.5 million.

In the second half of the year, our debt levels worked themselves down a little bit, seasonally.

In the first quarter, second quarter every year, our cash flows reflect higher activities -- higher borrowing activities.

So, maybe in the first half of '07, we'd see those borrowing levels tick up to $10, maybe even $11 million.

But maybe closer to $9, $10 million as we work through the second half of the year.

Thanks, Mike.

We thank all of you who participate on this call and appreciate your interest in American Axle Manufacturing.

We look forward to talking to you in the future.

Thank you for participating in today's conference call.

You may now disconnect.