American Axle & Manufacturing Holdings Inc (AXL) 2006 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the American Axle & Manufacturing fourth quarter and full year 2006 conference call.

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

After the speaker's remarks, there will be a question-and-answer session. [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, sir.

Thank you, Kelly.

And good morning, everyone.

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

This morning we released our fourth quarter and full year 2006 earnings announcement, which also includes our 2007 outlook.

If you had not had an opportunity to review this announcement, you can access it on the AAM.com website or through the PR Newswire services.

A replay of this call will also be available beginning at noon today through 5 pm Eastern Standard time, February 9th, by dialing 1-800-642-1687, reservation number, 5211203.

Before we begin, I would like to remind everyone that the matters discussed in this conference call today may contain comments and forward-looking statements that are 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.

For additional information, we ask that you refer to the Company's filings with the Securities and Exchange Commission and on the AAM.com website.

During the call, we may refer to certain non-GAAP financial measures.

Information regarding these non-GAAP measures, as well as a reconciliation of these non-GAAP measures to GAAP financial information, is also available on the AAM.com website.

We are also audio webcasting this call through our AAM website.

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

Over the next several months, we will be conducting investor trips to New York and the west coast.

We will also be attending the Lehman Brothers Industrial Select Conference on February 7th, the Citigroup Investor Conference on March 7th, the Citigroup Small Cap Conference on March 13th, and the Morgan Stanley Automotive Conference on April 4th and 5th.

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

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

Please feel free to contact [inaudible].

With that said, let me turn things over to AAM's Co-founder, Chairman and CEO, Dick Dauch.

Thank you, Chris.

And good morning, everyone.

And thank you for joining us to discuss American Axle's financial results for the fourth quarter and full year of year 2006.

Joining me on the call today are Yogendra Rahangdale, our President and Chief Operating Officer, Mike Simonte, our Chief Financial Officer, and David Dauch, our Executive Vice President, Commercial and Business Development.

After I provide a brief overview of our financial results for the quarter and year, I will review highlights of AAM's achievements for 2006.

I will then finish up with comments on the 2007 outlook.

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

After that, we'll open the call for any questions you ladies and gentlemen may have.

Let me start off by saying that 2006 was a challenging year for AAM.

We initiated adjustments in North America to meet the unprecedented structural change that continues to impact the US domestic automotive industry.

We did this while successfully launching new facilities and products throughout the world.

The structural changes were compounded by a 9% decline in customer production volumes for the major North American light-truck programs that we serve.

This impacted AAM's operational performance for the year.

This included an estimated 30% decrease in production volumes for the mid-size pick-up truck and SUV programs that our company supports.

Production for the full-size truck and SUV programs that AAM supports for both GM and the Chrysler Group were relatively unchanged when compared to 2005.

AAM's full year 2006 sales of approximately $3.2 billion reflect these lower production volumes I just discussed.

As we reported on January 11th at the 2007 Auto Analysts of New York conference, during the North American International Auto Show, we have initiated difficult but neccessary actions to adjust our workforce and the US production capacity.

These were to better meet the realities of the new global automotive market competitive requirements.

And the actions include the following; first, we offered a special attrition program, which I'll refer to as SAP to UAW representative associates at AAM's master agreement facility.

Second, we initiated salary workforce reduction and other related restructuring activities.

Third, we recorded a special charge for supplemental unemployment benefits, or SUB.

And fourth, we recorded asset impairment charges, primarily associated with plans to idle AAM's production capacity in the US dedicated to the mid-size light truck product range.

The cumulative effect of the rapidly changing North American automotive market and the appropriate actions that AAM is taking, will return AAM to profitability.

Mike will have more to say on our financial results for the fourth quarter and full year '06 later on this call.

Let me know provide you with some highlights of AAM's significant developments in 2006.

AAM completed and signed a supplemental new hire agreement with the UAW.

The agreement represents a critical element of AAM's labor cost restructuring and transformation that provides AAM with the ability to hire production workers at a full-loaded labor all-in cost of $27 per production associate.

The supplemental new hire agreement is an essential component in AAM's joint efforts, working cooperatively with the UAW to restructure our labor cost issues.

And AAM's operations in '06 were highlighted by our global expansion efforts.

Our footprint has grown from our original five US manufacturing plants, with some 7,500 associates, to 27 total facilities throughout the world, employing over 10,000 men and women.

We broke ground in March of 2006 at our new regional manufacturing facility in Changshu, China.

This marks AAM's first major venture in China and an important step into the fastest growing automotive market in the world.

The facility is in production and doing extremely well.

The new regional manufacturing facility will produce AAM's latest product technologies for rear-wheel drive and all-wheel drive systems for crossover vehicles and passenger cars.

We are producing this for three different OEMs;

Bejing Benz Daimler-Chrysler, a subsidiary of DTX, Ssangyong Motors out of Korea, as well as the General Motors corporation.

In 2006, our Company expanded our presence in Europe by opening an all new manufacturing facility in Olawa, Poland.

That new regional facility will provide our Company geographic access to numerous vehicle manufacturers throughout Europe and will begin producing AAM's TracRite transmission differentials for Audi AG in April of 2007.

In addition to our global expansion initiatives, we are continuing to maintain outstanding performance in areas of quality, warranty performance, on-time delivery, launch support for our customers and advanced product technology.

We also continue to expand AAM's product portfolio to advance AAM's product, process and systems technology, which we are famous for.

Our investment in R & D in '06 increased by 13% from the previous year of 2005.

AAM's R&D efforts continue to produce positive results for our Company, as we develop these new and innovative products that are targeted for growth segments of the global auto industry and needed by our customer base throughout the world.

These efforts are creating new business quoting opportunities.

In total, we are quoting on approximately $1 billion of potential new business and have already secured $1.1 billion of booked business.

Approximately 90% of AAM's quoting activity is with customers other than the General Motors Corporation.

This includes opportunities with several major global OEM's.

This gives our Company an opportunity to further expand in Asia, Europe, and South America, where these growths of the auto industry are occurring.

Let me now discuss AAM's new business backlog.

Our new business backlog remains strong, and is approximately, as I told you, $1.1 billion.

That backlog covers the years 2007 through 2012 time period.

More than half that backlog reflects our successful efforts to expand our product ranges for passenger cars and crossover vehicle needs.

Approximately another $140 million of the backlog relates to our new business wins with Asian OEM's and their affiliated suppliers.

We have also expanded our new business backlog to include approximately $300 million of product programs outside of North America.

These awards are a key development for our Company, as they represent the continued comparable expansion in the fastest growing segment of our industry.

Now let me turn our attention to 2007. 2007 will be another challenging year for the domestic automotive industry, both for our customers as well as for our company, AAM.

We will lead change in this challenging environment by managing the things that we control.

This includes our program management, our launch capability and readiness, operational efficiencies, as well as our ability to achieve structural cost reductions.

We will be launching several new products in North America, Europe, and Asia in the year 2007.

We are the exclusive drive-line supplier for the award-winning GM 900 vehicle program.

Nearly every AAM facility is is involved in some aspect in this very successful production by GM of these critical vehicles.

Other key program launches in '07 for AAM include; rear-drive modules or RDM's to support BBDC, introduction of the 300-C sedan in the Asian market, as well as rear-drive modules to support Ssangyong Motors launch of their Chairman sedan in the Korean market.

Both of these new programs will be launched in our new Changshu manufacturing facility.

Another new key program for AAM in '07 is the launch of the TracRite differentials for the Audi Corporation.

And they will support several Audi Quattro series vehicles.

With the launch of these new product programs and others in our new business backlog, we will increase our served market with new customers as we advance product technology in these varying areas of the world.

To build on the progress AAM has made in '06, we are focused on five major initiatives for '07.

First, the rationalization of our U.S. production capacity in both the metal-formed products division as well as the drive-line division.

We are taking the necessary actions to rationalize our production capacity and have the appropriate fit in the U.S.

Second, we will continue to transition our workforce to a lower cost structure.

This special attrition program we initiated in '06 is a major step in improving AAM's ability to globally be cost competitive.

The SAP also accelerates our ability to achieve annual structural cost reductions.

It will also help us realign our hourly and salary workforce needs with our current and projected production and market requirements.

Third, we will continue the expansion of our global footprint.

The pace of the auto industry growth in developing countries has accelerated dramatically.

As a result, our Company will continue to expand our global footprint, which we have a solid base already in Mexico, Brazil, India, Japan, China, South Korea, Germany, the United Kingdom, as well as Poland.

Fourth, we'll continue broadening our product portfolio.

We provide this 24 hour day engineering support and service throughout our global network of engineering centers.

Through our continued investments and focus on applied product, process and systems technology, our Company will continue to add exciting new products for passenger cars, crossover vehicles, trucks segments, as well as other vehicle programs.

Fifth, we will continue the diversification of our customer base, our served markets and our supplier footprint expansion. 2006 was a solid year of sales growth for AAM, with key non-GM customers such as Ssangyong, Hino, Koyo, Jatco and Harley-Davidson.

In '07, we expect to further develop these relationships with launching new business for BBDC and Audi.

Before I wrap up my comments, let me provide initial outlooks for AAM's 2007 operations.

We expect 2007 to be a transition year for AAM.

This will be a year in which we will restructure, resize and recover.

We expect to strengthen our positions in terms of sales growth, margin expansion, while generating profitable results as a Company and positive free cash flow.

In 2007, our Company will benefit from the structural cost reductions associated with the SAP program and other related actions that I've discussed with you.

We estimate that these annual cost savings could be approximately $100 million, recurring, and this will positively impact both earnings and cash flow.

Ladies and gentlemen, our Company has a strong liquidity position as we enter 2007.

We have a solid new business backlog.

We have a plan to generate more than $100 million of free cash flow in 2007, and this will allow us to reduce debt levels in 2007.

This will enhance our ability to invest in the continuing diversification and expansion of our product portfolio, our served market, our customer base, our global manufacturing footprint, and our expanding supplier footprint.

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

Let me now turn the call over to our Vice President and Chief Financial Officer, Mike Simonte.

Mike?

Thank you, Dick.

And good morning, everyone.

As Dick said, today we reported full year 2006 results of $3.2 billion in sales and a GAAP loss of of $222 million, or roughly $4.42 per share.

For the full year 2006, AAM incurred special charges and asset impairments totaling $378 million.

That's just a little less than $5 per share.

For the fourth quarter 2006 on a stand alone basis, AAM's results were sales of of $781 million and a GAAP loss of $1 -- or $188 million or $3.73 per share -- $3.74 actually.

In the quarter, AAM recorded $285 million in special charges and asset impairments, that's roughly $3.75 per share.

The special charges and asset impairments dominate the story of 2006, so let's start there this morning.

The special charges that we recorded in 2006 amounted to to $181 million.

These charges relate primarily to actions we are taking to reduce our workforce.

And as we reported to you at the end of the third quarter, we took took $93 million of that charge in the third quarter to the the balance of the fourth.

By far and away, the cost of the special attrition program is the largest driver of these special charges.

The SAP cost to AAM about $141 million, that's 80% of the total.

This includes approximately $10 million for pension and post- retirement benefit curtailments and that includes special termination benefits, as well.

Approximately 1,500 UAW representative associates elected to participate in the program and terminate their employee with AAM.

That represents a 25% take rate of the 6,000 associates in our master agreement facilities who were eligible for one of the offers.

More than 1,300 of these associates left the Company before year end 2006, and another 100 or so here in January.

Although we still expect to have a few hundred associates on layoff in 2007, this joint effort with the UAW will have an immediate positive impact on our cost will have an structure and cash flow.

I'll have more to say about that when we cover our 2007 guidance.

The second largest piece of the special charges relates to our accrual for SUB, our supplemental unemployment benefit.

In the third quarter 2006, we recorded a a $91.2 million charge to accrue the SUB that we estimated to be payable to UAW representative associates, expected to be permanently idle through the end of the current collective bargaining agreement , and that expires in February of 2008.

In the fourth quarter of 2006, we adjusted the SUB accrual to reflect the impact of the special attrition program.

From a practical standpoint, the special attrition program monetized most of the SUB accrual we booked in the third quarter of 2006.

A total of $13 million is left on our balance sheet now from the original accrual.

The other major element of the special charges is the cost of the salary attrition programs.

During 2007, we will eliminate 300 salaried positions.

The accruals we made in 2006 cover payments due to approximately 200 of these salaried associates pursuant to the attrition programs.

So again, the special charges, about about $181 million in 2006, and that's part of the nearly $5 in total special charges and asset impairments we took.

In total, as Dick mentioned, and we've mentioned before, we expect these workforce reduction initiatives to yield more than than $100 million in annual structure cost reductions.

That's sub-avoidance and other costs -- other permanent structural cost reductions.

In addition to the workforce reduction initiative, AAM also recorded asset impairment charges of of $196.5 million in 2006, and all of that charge came in the fourth quarter.

These impairment charges were primarily related to plans to idle a portion of AAM's production capacity in the U.S. dedicated to mid-sized, light truck products.

Simply stated, this charge is the cost of taking the right action at the right time, to restructure and resize our U.S. production capacity.

Now let's get to the details.

AAM sales in the fourth quarter of 2006 came in at at $781 million and that compares to to $852 million in the fourth quarter of 2005.

That's a reduction of approximately 8% year-over-year.

For the quarter, production volumes were up 16% versus the fourth quarter of 2005.

Mid-sized production volumes were down over 40% as compared to the prior year, and that's a continuation of the trend we saw in the third quarter.

Full size production lines were down approximately 7%.

Sequentially, sales in the fourth quarter 2006 were up 11% versus the third quarter of 2006.

For the quarter, production volumes were up 7% versus that third quarter of 2006 and of course the momentum on the GMT 900 pick-up launch is helping us in the fourth quarter and it will help us more here in 2007.

For the full year of 2006, AAM sales were approximately $3.2 billion as compared to $3.4 billion in 2005.

That's a reduction of approximately 6%.

For the year, our production volumes are down approximately 9% versus 2005.

This includes an estimated 30% full year decrease in mid-size production.

Full year 2006 full-size production was relatively unchanged when compared to 2005.

Offsetting these production volume declines for the fourth quarter as well for the full year was favorable mix.

For the year, content per vehicle was up 2% versus 2005.

More importantly, particularly in relation to what we expect in 2007, AAM's content per vehicle in the fourth quarter of 2006 was up to $1277, that's an increase of more than 6% versus the prior year.

As I said, it's important because the fourth quarter of 2006 marked the start of the GMT 900 pick-up launch and increased content on that GMT 900 program is the primary driver of the increase in content per vehicle now and that we expect in 2007.

For the full year 2006, four wheel drive, all wheel drive penetration in our major production programs was approximately 62%.

While that was down a little bit from 64% in 2005, in the same quarter, it was up versus the third quarter.

And we expect that favorable trend to continue in 2007.

2006 marked the fifth consecutive year that AAM grew it's non-GM sales.

In that time period, our non-GM sales have nearly doubled to $759 million and now represent approximately 24% of our total sales.

Diversifying our customer base and growing our portfolio of non-GM business continues to be a key strategic priority for our Company.

In 2006, the growth that we experienced in these non-GM sales was primarily attributable to the launch of new products for Ssangyong Motors, Kino, Jatco, Koyo and Harley-Davidson.

On the cost side of the business, the special charges and asset impairment charges drove a significant increase in operating costs in 2006.

Let me update you on a few other cost drivers.

We experienced a large increase in costs in 2006 versus 2005 for non-cash expenses related to depreciation, amortization, pension, post retirement benefits and stock-based compensation.

We've talked about this all year.

This issue, which is due in part to changes in year end 2005 discount rates, as well as the adoption of a new accounting standard, significantly impacted the year-over-year comparison of our earnings in 2006, excluding all of the impacts of the special charges.

We ended 2006 with an increase in these non-cash expenses of approximately $36 million versus the prior year.

That's pretty close to what we originally expected.

For the full year 2006, AAM's SG&A spending was about $197 million.

That's a reduction of $3 million year-over-year.

AAM's R&D spending was up 13% in 2006 and remember, that's included in our SG&A.

We spent spent $83 million on research and development in 2006.

This increase was more than offset by reductions in other general and administrative expenses.

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

For the full year of 2006, our interest expense was nearly $39 million.

That's approximately $12 million higher than in 2005.

Our average borrowings were up in 2006, however most of that increase related to higher interest rates.

For the full year 2006, AAM's effective tax rate was a benefit of almost 38%.

That compares to expense of 30% in 2005.

Let me try to reconcile that for you.

The losses that we incurred in the U.S. had a significant influence in the rate.

We also continue to benefit from lower foreign tax rates on the foreign source income that we earned offshore.

And that's different, obviously, than the losses we had here in the U.S., primarily related to the special charges and asset impairments.

Another item to note in our tax provision, particularly as it relates to the fourth quarter in comparison to the first three quarters of this year, is that the extension of the U.S.

R&D tax credit was made in December.

Because of that, we recognize the impact of the credit for the full year of 2006 in the fourth quarter.

These items drove our consolidated tax benefit higher than the U.S. statutory rate of 35% in 2006, just the same as it would have driven the rate lower than 35% if we were profitable in the U.S.

So the bottom line for 2006 is that our GAAP results were a loss of of $222 million or $4.42 per share.

Recall that's about $3.74 per share in the fourth quarter.

Now let's talk about cash flow in 2006.

In the fourth quarter of 2006, free cash flow was a use of approximately $27 million.

Excluding payments for the SAP and the salaried attrition programs of of $105 million, AAM generated approximately $80 million in free cash flow from continuing operations.

For the full year 2006, net cash flow provided by operating activities was approximately $186 million.

After deducting CapEx of approximately $287 and dividends of $31 million, AAM's free cash flow was a use of of $132 million in 2006.

Let's touch on some of the balance sheet items, with a special focus on working capital.

Accounts receivable is relatively unchanged as compared to the prior year, so there's really not much talk about there.

Inventories ended the year at $198 million.

Of course, this is down a lot from where we were the second and third quarter of 2006.

The decrease year-over-year, though, had more to do with a portion of the asset impairment charges that related to repair parts, or impaired assets.

So those need to be written off along with the actual asset base itself.

Our accounts payable balances are down about $52 million at year end 2006.

And of all the working capital moves, this is probably the one you want to understand.

Here are two reasons why.

First of all, our CapEx in the fourth quarter of 2006 was down $20 million year-over-year versus the fourth quarter of 2005.

And of course, this reflects now the -- closer, anyway, to the run rate of expense we see on CapEx going forward; $40, $50, $60 million a quarter.

This reduced the amount of payables at year end related to CapEx.

The second item also relates to CapEx.

We typically hold back a portion of the total PO value from machine vendors until the asset passes run-away testing and is launched properly.

Because our CapEx slowed down significantly in the second half of '06, we paid more of these hold backs than we set up, so that also had an impact here.

Lower production rates, seasonally, had a significant reduction in inventories in November and in December, that's really when we saw the big decrease in inventory, were also key factors in the reduction of payables at year end.

Moving down the balance sheet; other accrued expenses increased over $40 million in 2006.

That increase is primarily attributable to the unpaid portion of the special charges incurred in 2006.

So we'll pay most of that in 2007 and portions of the offers that extend out in 2008 and 2009, relatively smaller portions, will be paid at that time.

Long term debt increased in 2006 by more than $180 million and stood at $672 million at the end of the year.

Payments for the SAP and other attrition programs, lease buy-outs and our free cash flow use by operations were the primary reason for this increase in long term debt.

Our net reduction in stockholders equity in 2006 was approximately $181 million.

Stockholders equity ended the year at approximately $814 million.

A couple things to note here.

Obviously, the net loss of of $222 million and the the $31 million in dividends paid in '06 were the primary reasons for that decline.

However, offsetting these issues was a favorable year end pension and other post-retirement benefit accounting adjustment that increased equity by $50 million.

This adjustment was made in conjunction with AAM's adoption of the balance sheet provisions of the new accounting standard, FASB Statement number 158.

Regardless of whether we followed FASB 158 or the previous provisions of FASB 87 or 106, however, we would have had a favorable adjustment to equity on these points and here is why.

First of all, the favorable impact of the SAP and other attrition programs reduced our future pension and OPEB obligation.

Second, we made changes to our salary retirement programs in 2006 that had a similar but smaller impact.

And finally, we had strong pension asset growth in 2006.

And of course the equity charge is really the difference between your liabilities and your assets.

And so this is what led to a favorable adjustment.

Another important thing I'd like to mention about our pension is our funded status, that improved in 2006 by $50 million and now stands at 83%.

And that's a 15 percentage point improvement from year end 2003.

That's pretty good in just three years, especially when you consider that the trend in discount rates was working against us in that time period.

We believe this positive favorable activity relating to reducing our pension and OPEB liabilities is another confirmation that we're doing the right things to reduce cost and strengthen our balance sheet.

AAM's net debt-to-capital ratio at the end of the year 2006 was up to 45%, and that compares to about 33% in the prior year.

Obviously, the increase in that metric is due in large part to the cash payments incurred for the SAP, or special attrition program.

And by the way, with the cash flow and debt reduction plan we have for 2007, we do expect this to improve markedly next year.

Cash and available borrowing capacity approximated $630 million at the end of the year.

And remember, that's after we paid about about $100 million for the SAP -- actually $105 to be exact -- for the SAP and other attrition programs.

One other thing before I move on to our expectations for 2007.

Other than the money market lines and foreign credit facilities that are renewed on an annual basis, we have no significant maturities of long term debt scheduled until April of 2010.

Now let's turn our expectations -- or turn to our expectations, I should say, to 2007.

Today, we announced that we expect 2007 earnings to range from $1.25 to $1.50 per share for the full year of 2007.

We also expect to generate over over $100 million in free positive cash flow in 2007.

The first thing you need to understand about these estimates is that our financial results in 2007 will continue to be impacted by non-recurring operating costs associated with the restructuring plans that we initiated in 2006.

Our 2006 P&L, as you know, included almost almost $400 million of special charges and asset impairments.

We could not and did not expense everything we anticipate doing as a result of these plans.

Our earnings guidance of $1.25 to $1.50 per share for the full year of 2007 includes approximately $25 million of these non-recurring operating costs.

Primarily, these are related to redeploying under utilized capacity to support new programs and avoid future CapEx.

For example, we told you that we will incur expense to move equipment in 2007, that's what I mean by redeploying.

It would not have been appropriate to expense this cost in 2006 because we had no liability with that action.

So that's why we have to expense that in 2007.

There are also aspects of the various attrition programs that will hit us in 2007, although that's a much smaller portion of the $25 million.

From a cash flow perspective, the impact of the non-recurring cost is much greater.

We currently estimate we'll incur approximately $100 million of additional cash obligations in 2007 for this activity.That includes, first of all, the $25 million I just mentioned, approximately $30 million of payments due under the special attrition program and other attrition programs.

And thirdly, CapEx that we have included in our 2007 plan, and that plan is about $240 to $250 million, that is required to redeploy equipment and to move and consolidate certain operations to support our goal of increasing capacity utilization to 90% plus by 2010.

So that's why the cash flow impact will be much greater than the P&L impact.

We believe this is very important for you to understand.

From a production volume standpoint, our 2007 earnings outlook is based on what we know today about our customers' [build] plan and the timing of new product launches.

Overall, we're expecting production volumes for the programs we support to be up about -- or I'm sorry, to be down about 2% as compared to 2006.

Similar to 2006, we expect mid-size volumes to be relatively soft and full-size volumes to be relatively stronger.

The launch of the GMT 900 pick-up is the key factor in this situation.

When I say relatively stronger, I mean the full size will be stronger than the mid size.

I'm not sure what you saw in the GM January 2007 sales report, but I was encouraged by the fact that pick-up sales were up 7% year-over-year.

That's a very important factor for us and for GM.

The cadence of volume and our earnings in 2007 will be affected by a relatively slow start to the year.

You're probably already aware that many of the plants we support took extensive down time in January.

The first quarter of 2007 should also be the last quarter in which we see launch curves holding back GMT 900 pick-up volumes from full rate.

By the end of the first quarter 2007, this program should be fully launched.

And we're looking forward to that because our schedules show significant increases in daily production volumes beginning in the second quarter of 2007 and running through the entire year.

This is the award winning new pick-up, it's the hottest truck in the market.

And they're going to build inventory and sell trucks this year and that's good news for American Axle.

So based on our production volume assumption, the anticipated timing of new program launches and higher content on the GMT 900, we expect 2007 sales to increase to approximately $3.3 billion.

And that's despite the fact that our volumes will decrease a little bit.

Remember that this reflects a substantial increase in sales of machine forging for the GM 6V transmission and other customers such as Hino, Jatco, Koyo and Harley-Davidson, this part of our business is becoming much more important to understand.

D&A will increase by about $20 million in 2007.

There are some things that I need to explain here, some puts and takes, so let me walk through that.

As you might expect, the asset impairments we took in 2006 reduced the annual rate of depreciation for the plants and activities affected by the impairments.

However, the very same asset utilization reviews that we used in our assessment of impairment also resulted in the acceleration of useful life estimates for other assets remaining in service.

A big chunk of this increased D&A will be for one year only, as we scale back and idle a portion of our U.S. production capacity related to the mid-size product range in 2007.

The impact of these first two issues in 2007 basically offset.

So what we're left with in the year-over-year comparison to 2006 for depreciation is the fact that our depreciable asset base increased by approximately $300 million or so of CapEx that we incurred in 2006.

That's how you get to about a $20 million increase in depreciation in 2006 -- i'm sorry, 2007.

Two other points about 2007 earnings expectations.

First of all, in 2007 we expect interest expense to increase another $15 million or so versus 2006.

Second, we expect EBITDA to show a much stronger year-over-year improvement than net income or EPS, due to the favorable impact of the structural cost reductions associated with the SAP, of course that's driving both net income and EBITDA, but EBITDA excludes the impact of higher interest expense and depreciation.

So EBITDA should move a little bit more strongly than net income and EPS.

Let's talk about cash flow before we wrap up here.

As I said, we expect a strong year in terms of free cash flow in 2007.

Higher earnings, lower SUB cost, lower CapEx, all driving this.

CapEx should be approximately $240 to $250 million in 2007.

That's a significant reduction versus 2005 and 2006 spending levels.

With the GMT 900 spending behind us, and because of our ability to redeploy under utilized capacity to support new programs, we expect a further reduction in full year capital spending in 2008 as compared to 2007.

We're now in the sweet spot in the GMT 900 product life cycle.

CapEx required to support this massive program will be modest for the next few years.

We will also benefit from the elimination of complexity in our operation associated with running the GMT 800 at the same time as the GMT 900.

And of course, that's been affecting our results now for five or six quarters.

If you need to remind yourself of how important that is, just go back and take a look at the improvements in our operating results and cash flow after we launched the GMT 800.

The absolute value of this trend might be different this time, but the structural and cyclical nature of this improvement is immediate and significant.

I might also note that 2007 will mark the first year in AAM's history that foreign investment will exceed our CapEx in the U.S.

As Dick has said, we expect 2007 to be a transition year for AAM, a year in which we will restructure, resize, and recover.

I'm not sure what the groundhog did this morning, but we are not waiting to call to turn for AAM.

Let me conclude by saying that we are pleased with the way 2007 is shaping up for us.

On a year-over-year basis, we're calling for at least a $230 million turnaround in our free cash flow.

That sounds like a big number and it is.

This improvement -- strength we'll see in 2007 will help us deal with the other challenges Dick mentioned earlier today.

The month of January is in the history books.

I can report to you we're on plan with respect to the improvement in our cash flow target.

This cash flow we generate from operations in 2007 will help us reduce debt levels, while at the same time continuing to invest in the diversification of our customer base, product portfolio and global manufacturing footprint.

We're not taking the foot off the gas with with respect to R&D, training, all the things that make this Company very special.

The relative modest level of leverage we've carry for the last several years has positioned us very well.

We've weathered the storm and now we're poised to take advantage of the opportunities available to a strong, stable , operations focused, quality driven, technology enhanced global automotive supplier in a rapidly growing worldwide automotive market.

That's all I have to say today.

Chris, turn the call back over to you and we can take some questions.

Thank you, Mike, and thank you, Dick.

We've now reserved some time to take some questions.

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

With that said, please feel free to proceed with any questions you may have.

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

Yes, good morning.

Good morning, Jon.

I guess that -- one of the things that you had said was that capacity utilization can go to 90% by 2010.

Can you tell us where you think you are today on capacity utilization, given the facilities you've taken down, plus the international facilities you've added?

Yes, Jon.

That's a good question and I'll comment on that for you.

If we take the year we just finished, we utilize anywhere from a low of 40% of our capacity up to a little bit more than 85%, depending on what month and what quarter.

And we averaged somewhere around 75% of our installed capacity for '06.

And it will probably be very equivalent to that in 2007 as we're going through this rationalization process and redeployment, as we then are better guided by the customers that we serve on their long range product plans, their immediate take of production, and as we see this extraordinarily good performance by GM on the launches of their different segments of GM 900.

So we feel very, very strongly that we can get to where we want to be by 2010.

Great.

And then Mike, on the cash flow statement, can you give us some details on your expectations for working capital and other -- maybe cash taxes and OPEB benefits in order to reconcile below net income and depreciation in CapEx?

Yes, John, are you speaking about 2007 or -- ?

Yes, 2007.

Okay well, in 2007, we do see some opportunities for working capital.

There are some seasonal increases in activity -- receivables activity, that type of thing that come on board at the end of every quarter.

And that, of course, will be paid out to us in 2007.

Payables -- we took this reduction in payables in 2006.

We did not see that recurring in 2007.

So on a year-over-year basis, that will be relatively more stable and will show improvement relative to 2006.

So I would say that the payables issue is a more significant year-over-year issue, and the receivables and inventory efforts are relatively more modest.

Okay, thank you very much.

Thank you, Jon.

Your next question comes from Rich Kwas with Wachovia.

Good morning, guys.

Good morning, Rich.

Mike, could you just characterize launch costs in '07 versus 06?

How much will it be down -- will they be down?

Rich, the launch costs associated with the GMT 900 program would be down a fair amount because, of course, the launch will be over in the first quarter and we'll eliminate this complexity and inefficiency associated with running the 800 at the same time as the 900.

I mean, how to quantify that?

As you know, every time we talk about this, it's difficult to assign a specific dollar value to how much that is.

The margins that Detroit Gear and Axle, which is the home base for GMT 900 production, will be much improved in 2007.

And I would characterize this as several million dollars, upwards of $10 million.

But it's difficult to discern between what's a launch cost, what's the reduction and complexity, what's the improvement of operating efficiency once you've run this product for several quarters.

There's a number of different factors that come into this.

So rather than put out a big number and confuse you, I'm going to stop there.

Okay.

And then just a clarification on the four wheel drive penetration.

Did I hear you right?

You started talking about full year and then it sounds like you referenced fourth quarter and it sound -- in the 62% for 2006.

Was that the fourth quarter only versus 64% in fourth quarter '05?

Yes, let me clarify that.

I believe that's accurate but let me be very specific.

In the fourth quarter 2006, the four wheel drive penetration was a little bit higher.

It was about 65% in the quarter on a stand alone basis.

For the full year, it was 62% in 2006.

Remember, we saw a unusual and significant reduction in four wheel drive penetration in the third quarter.

That was a lot -- very much inconsistent with run rates we saw in every other quarter.

It was down to 58% in that quarter.

I think that had a lot to do with the GMT 900 downtime.

So we're at 62% for the year, 65% in the fourth quarter.

We'll be a little bit less than 65% for the full year of 2007 but improved over 2006.

Okay.

And then finally, on the backlog, Dick, with the $600 million on the all wheel drive and rear wheel drive pass cars and CUV's and the $140 million with the Asian OEM's and the affiliated suppliers; what's the cadence of that, as you look out toward 2012?

Is there any one year -- is it pretty lumpy or is it fairly smooth?

I'll have David Dauch start the answer on that and then I'll help you.

Go ahead.

This is David here.

When you look at the backlog of our new business of $1.1 billion, about 55% of that is going to launch over the next three years, 2007 to 2009, and then the balance will happen between 2010 and 2012.

Okay.

And then does it -- in terms of the mix, does it get -- is there all wheel drive, the pass car CUV stuff, is that hit , I assume later on a 2010 to 2012?

It will begin in late 2008 through the 2012 time frame.

Okay.

Great.

Thank you.

Thank you, sir.

Your next question comes from Ronald Tadross with Banc of America.

Good morning, guys, can you hear me?

Good morning.

We can hear you very well.

Okay.

I hope there was no significant [inaudible] reporting [inaudible] Groundhog Day by the way.

But just on the context of the GMT 900, were you able to reprice that contract for higher commodity costs at all?

Ron, I think your question is were we able to reprice for commodity cost?

You're breaking up a little bit.

Yes, that's the question.

Okay, well, I'll make a quick comment and maybe David will talk about it.

He's the guy, of course, in our Company, primarily responsible for negotiating these agreements.

But we do engage in repricing discussions for every major program.

All elements to our cost structure are considered in that situation.

I'm not sure that any one is more important than another.

The contract provisions that relate to metal market pass through are unchanged in the 900 versus the 800.

Okay.

Okay.

This is David Dauch.

As Mike indicated, last year and the previous year, because of the situation with metal market and the industry, we went forward and dealt with all of our customers in regards to metal market.

At the same time, we dealt with our supply base in regards to metal market as well.

And we continued to see some favorable results in respect to that.

In regards to the GMT 900 program, there was some engineering changes on that program that, obviously, we priced for those changes accordingly.

And you're starting to see some of that, based on the numbers that Mike reflected earlier.

Okay.

Is there opportunity, though, down the road to recover commodity costs and contract repricing?

I'm sorry, you broke up.

I couldn't understand you.

Okay.

I'll call in then, thanks.

Okay.

Thank you, sir.

He's on his cell phone.

Your next question comes from Joe Amaturo with Calyon Securities.

Good morning, guys.

Good morning, Joe.

Mike, given the successful buy-out program, could you give us an updated detrimental contribution margin estimate that you're thinking about, if sales were to decline or increase?

Yes, Joe.

As I think I mentioned, we're going to continue to have some people on lay-off in 2007.

While the take rate was up at 1,500, it wasn't perfectly matched where -- the locations where we had people on lay-off.

So if we have a significant reductions in volumes, we would continue to see a loss margin that encompasses not just the contribution margin ,but also putting some people back on lay-off.

So the relationship shouldn't be dissimilar in 2007 from what it has been the last several quarters.

Yes, but if I'm correct, I think that peaked in 2006, right?

Shouldn't it be a little lower?

Yes, there is a point that I didn't mention, I should have.

We have accrued a portion, and it's roughly half of what we expect to incur in 2007, of the supplemental unemployment benefits.

So you're right.

That portion has already been expensed in 2006.

But that's based on estimates, Joe, of what we expect through the course of 2007.

And if we miss that estimate of lay-offs low, and we had more people on lay-off, then none of that is accrued.

And no, it wouldn't be any different than what it was in 2006.

Okay.

And then the next one, could you just comment on where the capacity utilization is, at plants that sourced the 360 programs?

Well, basically on that, Joe, our Company has around four locations that are involved in that segment of the business that you're focusing on.

And they are as follows;

Our Buffalo Gear, Axle and Linkage plant, our segment of our Detroit Gear and Axle complex, a piece of our Guanajuato Gear and Axle Facility, as well as our Three Rivers Drive-line Facility.

So all four of those are involved in that segment.

We're analyzing each piece and looking at what we need to redeploy as we do the rationalization.

Okay, thank you, guys.

Take care.

Thank you, Joe.

Have a great day.

Your next question comes from Brett Hoselton with KeyBanc Capital Markets.

Good morning, gentlemen.

Good morning, Brett.

You've taken a lot of restructuring actions in the past several quarters here.

And my question is, as we move forward, there appears to be still some opportunities to do some additional actions.

I certainly don't expect you to tell me exactly what those actions are.

But I guess my question would be, how should we think about where you're at, with respect to these actions?

In other words, do you anticipate potentially taking some further actions?

I think you've indicated that you will.

And secondly, what sort of magnitude might we expect those actions to be?

And is it something that you would see taking place in the first half of '07, back half of '07, first half of 08?

That sort of thing.

Well as we indicated earlier, we are in a transitional year.

And we are working with our customers, the real market share.

We've got our forecast.

We feel strong and encouraged by what we've already reviewed with you.

And we're doing the resizing and it's all focused on the U.S. operation in that one major segment that I just discussed with Joe on the previous question.

And we're also taking a look at our manpower that is needed and thrifting through different deployed activities such as SAP, etc.

And we have nothing else to announce at this point, but we're watching it very carefully daily.

And we'll continue resizing and restructuring, but we'll still be recovering.

Okay, well let me -- if you don't mind, let me ask you a little further on that question.

Given the magnitude of the changes that you've made so far in the past half year or so, it seems like you'd need some time to really digest that.

And it would suggest that you probably wouldn't be doing anything significant for the next six months.

Is that an unrealistic expectation on my part?

Well that's what your expectation is.

We had 1,300 of our men and women off payroll of the almost 1,500 that we discussed on SAP prior to the end of 2006.

We have not missed a beat in the way our organization has handled the redeployment of our people, the reuse of our capacity, the redistribution of new modern 900's replacing 800s, the replacement of the complexity of the 800 are now out of our system.

So we think we can handle more quicker if we have to, but we have nothing to announce today.

Excellent.

And then Mike, just on the tax rate for 2007, how should we think about the tax rate for 2007?

Yea, Brett, what I would say is, in a way, very similar to how I've been coaching you for the last year or so.

Obviously, we've got a 35% tax rate on our profitability here in the U.S.

But a very -- more significant portion of our earnings are coming from offshore.

Offshore, we have tax rates much lower than 35%.

And so on a blended basis, our expectation is that the tax rate travels a little bit less than 30% on a consolidated basis.

But in 2006 what happened, obviously, was we had the benefit from a large loss in the U.S., plus the compounded improvement of foreign source income and that led to a higher rate.

But if we achieve what we're planning to do here and make money on an aggregate basis, you'll see that tax rate back under 30%.

Excellent.

Thank you very much, gentlemen.

Thank you.

Your next question comes from Chris Ceraso with Credit Suisse.

Thanks, good morning.

Good morning, Chris.

Couple items.

One, I'll follow-up on the tax question there.

Mike, what was the amount of the R&D catch-up that you had in the fourth quarter?

Chris, that's in the neighborhood of $0.06 to $0.07.

Okay, and --

-- for the year.

That's an annual run rate we've enjoyed.

As you know, we're a very significant R&D house and that's an important element of our U.S. tax provision.

All of that hid in Q4 though; correct?

That is correct.

And then is it safe to assume that the taxes on those charges ran at the U.S. 35% rate?

35% federal, plus a little bit of state and local, so a little bit higher than 35%.

That is correct.

Okay.

Can you go back to the comments that you made earlier on the assumed rate of truck build?

And just give us a little more detail, if you can, on the expected production declines on the 360's, the 900, the 355's and the Ram that's baked into your guidance?

Well we said three things.

Number one, if you take all in programs for our Company for the year, we expect our volumes to be down about 2% '07 compared to '06.

Point one.

Right.

Point two; we said the full-size truck, which includes both the GM full-size as well as the Daimler-Chrysler full-size, should be reasonably equal.

Third, we feel bullishness that on the GM side -- you've already seen the one month sales figures, which were very strong, especially for the GMC Sierra and also slightly up on the Silverado.

So we feel very good about that because, remember, those plants are still in launch mode.

But the launches are going extremely well.

The customers like the product.

And I expect our customer will start ratcheting up even higher volumes soon, and maybe into a straight time or weekend overtime, as it relates to GM.

I think that's the second point.

The third point, we have mentioned a continued reduction in the mid-size segment that we participated in, but maybe a little bit more moderate than what we had previously thought.

Because that's still a very modern product and it's being priced well and still being received well by the marketplace.

Mike, anything you want to add to that?

Please go ahead.

The only thing I'd add, Chris -- I think what you're really asking is that we see the mid-size program down another 10 to 20% based on the guidance we have from our customers.

Down 10% to 20%?

That's right.

And then just to clarify your comment, Dick; on the full-size, you're saying about flat year-to-year, and that's a combination of the pick-ups and SUV's at GM and the full size pick-up at Dodge?

That's correct.

If we put all of those customers together and all of those segments -- but we see it skewed to a positive on the GM side, and we see just a little deterioration on the heavy duty Dodge RAM side.

Okay.

That could change but that's our present understanding.

And then lastly, Mike, if I can just to clarify; you do still have some folks that are left on the SUB that were included in that third quarter charge, so they won't be in the P&L in '07, but you still have to pay these guys?

They are still on the roles in terms of the cash basis?

Yes, cash basis -- that's right.

The extent of that SUB accrual is much, much lower than what we talked about at the end of the third quarter, so keep that in mind.

We've got about $13 left accrued -- $13 million for the entire 14 month period from here to the end of February 2008.

And we only -- we still do not accrue the total cost of lay-off.

We accrue the actual SUB payments that are due under the contract terms, not the additional pension, OPEB and other types of benefits they may be earning if they are working part of the time.

Thanks a lot.

Thank you, Chris.

Your next question comes from Himanshu Patel with JP Morgan.

Hi, guys.

Good morning, Himanshu.

Just two questions.

One, on the backlog, the $1.1 billion, I think that's a gross number.

Do you guys have a rough estimate on what sort of a net backlog number we should be thinking about?

Himanshu -- good morning, it's Mike.

The programs that expire, would be how I would answer that question.

And we probably got somewhere in the order of of $100 million of expiring programs.

From a practical standpoint, the answer to your question is really what the revenue rundown might be in the future on the programs we support.

And I don't have any particular insight to that that's any better than what you would be able to -- you already have access to.

Okay, and then maybe --

But you're right about that being a gross backlog, I want that clear.

Okay.

Question on -- getting back to one of the earlier questions, in terms of what is potentially available for restructuring.

You're unique in the sense that you've got some relatively expensive wages and healthcare benefits relative to the rest of the supply base right now.

Dick, any thought to doing a Good Year style of healthcare deal where you'd simply buy-out the liabilities?

We do not want to comment on the major actions that we have developing right now.

Just put it this way, our [inaudible] are unique to our Company.

And we've got some innovative things but nothing to announced today, Himanshu.

Okay, thank you.

You're welcome, sir.

Your next question comes from John Murphy with Merrill Lynch.

Good morning, guys.

Good morning, John.

Question -- as you're redeploying your excess capacity and your tooling -- as you're doing that, is there any focus or opportunity to win take-over business from some of your weaker competitors or really distressed competitors, currently?

Well, we have announced many times, John, to you personally and others, that we expect our Company will be a lead consolidator in North America in the things that we feel we're as good as anybody in the world on; axles, drive-line systems and related bolt-on type accessories.

So we're reviewing situations that are dynamic, and three or four other companies that produce somewhat in our peer group.

And we have nothing to announce today, but we'll be prepared if there's an opportunity.

Dick, do you think it's necessary to work down -- sort of your installed capacity or do you need to work down your manned capacity?

Well, we need to do two things.

We need to ratchet up our capacity outside the U.S., which we've announced we're doing.

We also need to resize our capacity in the U.S., which we've also announced we're doing.

Then there's certain segments need more attention than others, because the market is the boss.

We react to the market and our customers needs.

We're doing both and we feel we're right on cue as to what our game plan is.

And we're also redeploying, as we've discussed several times this morning.

So it's a very complicated issue, capacity utilization.

And we have a very good game plan, we told you, on the macro and in a short time, three years, we'll be back up around 90% capacity utilization, on balance, throughout the world.

And then just one point of clarification, Mike.

The $1.25 to $1.50 that you're guiding for for 2007, does that include the $25 million charge you're talking about or exclude?

No, it includes, John.

I'm sorry?

What I'm saying to you is that our operating cost in 2006 includes these costs to move equipment around and will have some trailing charges associated with attrition programs.

That's included in our cost base and we're giving you, to the best of our ability today, a GAAP earnings estimate.

John, to answer your question; yes, it includes it.

So that $25 million is in your COGS in this estimate?

Correct.

Thank you very much, guys.

Thank you, sir.

Thanks, John.

We've got time for a couple of participant questions.

Your next question comes from Rod Lache with Deutsche Bank.

Good morning, everybody.

Good morning, Rod.

Just a couple things.

Dick, I know you don't want to get into the details of these external opportunities, but is it your general view that one or more OE's is going to likely get out of the axle manufacturing business this year?

Well, the way I look at it, it goes back to 1992 and 1993 when I analyzed this same issue you're asking now.

And obviously, the decision then was that GM decided to get out of this segment.

So we purchased the asset, restructured a new Company, and therefore, that was one OEM that chose to get out of this business.

Obviously, a few years after that, Ford Motor Company prepared to also do the same thing when they prepared for the transference of that to the Visteon Corporation.

Of course, we all know that has boomeranged back into Ford.

So I would presume that Ford is making judgments on that decision again, maybe somewhat similar to what they did in the middle to late 90s.

But you'll have to ask them, I don't know that.

So I think there's opportunities there.

Third, Daimler-Chrysler; when they merged between Daimler-Benz and Chrysler in 1998, obviously, it took a long time before they got down to the husking of the corn to the axle as a business.

And probably they're reviewing that with the dynamics of their Company right now, so I can't answer.

Those answers have to be made by those specific companies.

And of course, we've got one of our key peer groups, the Dana Corporation, that is going through some difficult times right now.

All these things are dynamic.

Their Boards and those Managements have to make their priorities.

I've indicated before, we are prepared to help where there is need.

We're prepared to also lead on the consolidation in North America in this segment.

Okay, thank you for that.

And can can you just give us what your fully-loaded UAW master agreement cost is per hour?

Or what is the average cost right now?

And are you hiring at this supplemental agreement rate that you negotiated?

Three things.

Number one, our average in those master agreement plans is approximately $66 all in.

It ranges, however, from lower than that to higher than that.

Remember, that's an average.

Secondly, we are not hiring right now.

Third, we do have this signed signature, which we've announced it on the supplemental agreement, which gives us a dramatic drop from the $66 or $67 down to $27 all in, per production.

So these restructureal changes that we've been needing for a period of time, we now have them.

We started the implementation of the follow-up on that being SAP, which you are aware of.

And we have other dynamic actions that will be developing.

And we have nothing to announce on that today.

So we feel all the different avenues of the recovery are now planted and we have to give them a chance to germinate and grow in the right way.

Just one last one if I could sneak it in.

Your OPEB liability at year-end; is it still around $500?

Give me just a second, Rod, I will tell you exactly.

The OPEB liability at the end of 2006 is not $500.

I think maybe you were thinking about the pension and OPEB liability together.

The OPEB liability is about about $412 million at the end of '06.

Great.

Thank you.

Thank you, Rod.

Thank you, gentlemen.

Your last question comes from Emmanuel Rothner with Lehman Brothers.

Hi, it's Brian Johnson for Emmanuel.

A couple questions.

Just on housekeeping; do you have an EPS number for this quarter, stripped of special items?

No, we really don't, Brian.

The special items stuff -- I guess if you want to figure that out, we had about $3.75 of charges and -- yes, charges, and about $3.74 net.

So I know you can figure that out.

Okay.

And second, when we think about these dynamic actions and the cost base in 2007 and 2008, do we need to wait for the 2008 contract in February to see some additional savings?

Or are there likely to be some changes between now and then?

That's a dynamic process.

We don't discuss what we're having private discussions with those stakeholders.

And you know our track record, leopards don't change their spots.

Okay, thanks.

Thank you, sir.

Thanks, Brian and thanks all of those who have participated in this call.

We look forward to talking with you in the future.