American Axle & Manufacturing Holdings Inc (AXL) 2007 Q1 法說會逐字稿

Good morning. My name is Phyllis, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing first quarter of 2007 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) 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 Phyllis, and good morning, everyone. Thank you for joining us today and for your interest in American Axle & Manufacturing. This morning we released our first quarter 2007 earnings announcement, which also included an update to our 2007 outlook. If you have 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 5:00 p.m. eastern standard time May 4th, by calling 1-800-642-1687, reservation number 2819284.

Before we begin, I would like to remind everyone that the matters discussed in this conference call may contain -- 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 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 website, aam.com. This call will be archived in the investor section of the website and will be there for one year [inaudible]. During the quarter we are also planning investor trips in New York and Boston. We will also be at the KeyBanc Capital Markets conference on June 7th. In addition, we are always happy to host investors at our facilities either here in Detroit or at our other locations. Please feel free to contact me to schedule a visit.

With that, let me turn things over to AAM's co-funder, Chairman & CEO, Dick Dauch.

Thank you, Chris, and good morning, everyone. Thank you for joining us today to discuss American Axle's results for the first quarter of the year 2007. Joining me on the call today are Yogen Rahangdale, our President and Chief Operating Officer, Mike Simonte, our Chief Financial Officer, and David Dauch, our Executive Vice President of Commercial and Strategic 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 any questions you may have.

Let me start off by saying that AAM remains on track to deliver solid operating performance for the year 2007. Our net income was $15.4 million and diluted earnings per share was $0.30 in the first quarter of '07. This compares to earnings of $8.6 million or $0.17 per share in the first quarter of 2006. During the quarter, AAM also successfully conducted its flawless and anonymous launch of our new products to support General Motors launce of the all-new award-winning GMT 900 pickups. The GMT 900 launches are over for AAM. They were most successful. And we continued the expansion of our global manufacturing footprint by successfully launching rear-drive modules for the BBDC, Beijing Benz Daimler Chrysler Corporation, at out regional manufacturing facility in Changshu, China. BBDC represents the second customer already for that young plant in Changshu.

Let me now provide you with a quick overview of the quarter, starting with the market environment. North American light vehicle production was down approximately 8% for the quarter. General Motors light production was down nearly 11% for the quarter. This compares to an estimated 9% year-over-year decline in customer production volumes for the major North American light truck programs that AAM enjoys support on. This includes an estimated 2% decrease for the major full-sized truck and SUV program that AAM supports for GM and the Chrysler group. It also includes a 32% year-over-year decrease for AAM's mid-sized light truck and SUV product range. As a result of these factors, sales in the first quarter of '07 were approximately $802 million. This is down approximately $30 million from last year's quarter, and was consistent with our expectations.

Gross margins for the quarter were at 10.6%, at compares to YOY 7.6% in 2006. Our improved margins reflect the impact of productivity gains, purchased material cost savings, structural cost reductions resulting from our special attrition program, which we refer to as SAP, and other restructuring actions initiated in '06, which we've shared with you in the past. And one last point, AAM's free cash flow generation improved by over $40 million as compared to the first quarter of 2006. We are on track to improve our free cash flow by more than $200 million for the year. Mike will have more to say on that later in the call.

Let me now discuss AAM's R&D efforts. Our Company continues to invest in the development of new advanced technology products to meet the changing needs of the global market place. As a result, AAM's R&D spending on the first quarter of '07 increased some 4% to $20 million, as compared to $19 million and change in 2006. AAM's R&D efforts continue to produce positive results. Our Company is developing new and innovative products that are targeted for growth segments of the global automotive industry and needed by our customer base. These efforts are creating new business quoting opportunities. We are currently quoting on approximately $1 billion of potential new business. Approximately 90% of AAM's quoting activity at this time is with customers other than the General Motors Corporation. This includes opportunities with several major global OEMs. This gives AAM an opportunity to further expand in the continents of Asia, Europe and South America.

Let me now switch and discuss AAM's new business backlog. Our new business backlog remains strong at approximately $1.1 billion. This new business backlog covers the '07 period to 2012 time period. Our backlog includes commitments that will further expand our product portfolio to support several all-wheel drive and rear-wheel drive based vehicle programs. Approximately half of the backlog reflects our successful efforts to expand our product offerings for passenger car and crossover vehicle applications. We are most excited about this. We also have expanded our new business backlog to include approximately two-thirds of a billion dollars of product programs outside the United States. These awards are a key development, as they represent AAM's continued expansion in the fastest growing market in the industry and in the world.

Now let me take a moment to talk about our operations. First point, AAM continues to maintain world-class quality and warranty performance. We deliver advanced technology products to all of our customers on time and every time. It is delivered with the highest available quality and customer satisfaction levels in the industry. Our quality and warning performance continue to be a competitive advantage and a benchmark for the world in our business. Second point, AAM remains focused on maintaining flawless launch support of our customers' new product programs. In 2007, AAM will be launching several products in North America, Europe and Asia. As I mentioned a bit ago, AAM just completed the highly-successful launch of the all-new award-winning GMT 900 pickup. Nearly every AAM facility was involved in some aspect of the production and support of these vehicles, and they all did an outstanding job.

Other key AAM program launches in 2007 include the following. First, rear-drive modules to support BBDC on the introduction of a 300c vehicle in the Asian market, along with the rear-drive modules to support Ssangyong Motors of South Korea with their vehicle, the Chairman sedan. Products for these programs are being produced in our new Changshu manufacturing facility in CHina. Another key program for AAM in '07 is the launch is the TracRite transmission differentials for the Audi division -- that's the premier division of Volkswagen [inaudible]. Here we will support several Audi Quattro series vehicles that will be launching later this year. For the launch of these new product programs and others in our new business backlog, our Company will increase its third market with new customers with advanced product technology throughout.

Before I turn this over to Mike, let me state that we expect 2007 to be a transitional year for our Company, a year in which we will balance the restructuring, the resizing and recovery, which we're already mentioning to you on the first step today. In 2007, AAM will benefit from the structural cost reductions associated with the special attrition programs that we did jointly with our stakeholder, the United Auto Workers, and other related structuring actions that we initiated in 2006. As a result, we have announced today that we have updated AAM's 2007 earnings outlook to a range of $1.30 to $1.55 per share. In addition, we are also reconfirming AAM's plans to generate more than $100 million of free positive cash flow in 2007. This will enhance our ability to invest in the continuing diversification of our product portfolio, our customer base, and our global and supplier manufacturing footprint. With the addition of our new low-cost, high-quality and flexible regional manufacturing facility in Changshu, China, as well as continuing development of new products supporting passenger cars and crossover vehicle applications, our Company is extremely well-positioned and growing at the right pace for profitable growth and continued diversification in the exciting auto industry of 2007. I thank you for your attention today, and your interest in our Company of AAM.

Let me now turn this call over to, and listen to Vice President of Finance and Chief Financial Officer, Mike Simonte. Michael?

Thank you, Dick and good morning, everyone. As Dick already said, today AAM reported first quarter 2007 GAAP earnings of $0.30 per share. This compares to $0.17 per share in the first quarter of 2006. Our results for the first quarter of 2007 includes $2.9 million, or just about $0.04 per share of special charges and other nonrecurring operating costs, primarily for incremental attrition program activity during the quarter. For the year of 2007 in total, we expect to incur approximately $25 million of such restructuring costs, which in addition to attrition program activity also includes costs related to the redeployment of machinery and equipment and other steps to rationalize underutilized production capacity. These restructuring costs we incurred in the first quarter of 2007 are part of that $25 million estimated total for the year. And just to be clear, when I use the term "restructuring costs" in my comments this morning, I'm referring to this activity.

Let me also remind you that our first quarter 2006 earnings included a favorable tax adjustment of $0.06 per share. This related to the settlement of federal and state tax liabilities from prior years. These items, both the $0.04 of restructuring in the first quarter of this year and the $0.06 of tax adjustments in the prior year, affect that year-over-year comparison of our results. Sales in the first quarter of 2006 were $802.2 million, that's about $32 million less than our sales total the first quarter of 2006. On an overall basis, our major program production volumes were down approximately 9% versus the prior year. That's a little better than GM's reported overall light truck production rate, but the down trend, year over year reflects the fact that our customer's assembly facility took 23 down weeks of production in the quarter and that was particularly evident in January. Sequentially, our volumes in the first quarter of 2007 were up 4%, or just short of 25,000 units as compared to the fourth quarter of 2006.

Digging a little further into the details, we estimate customer production volumes in our mid-sized light-truck program, particularly the mid-sized rear-wheel drive SUVs, or the GMC 360 program, were down 32% on a year-over-year basis. On an over-all basis, our volumes were down 2% on the full-sized light truck program that we support for GM and the Chrysler Group, and, of course, that's dominated by the GMT 900 program and the Dodge Ram heavy-duty program. The GMT 900 program by itself was up almost 5%. The relative strength of the GMT 900 program is a positive development for our Company.

Okay, let me cover a few other summary points regarding our first quarter results and how they compared to the prior year before we get into the details. Content per vehicle in the first quarter of 2007 was $1,252. That's up nearly $50 per unit on a year-over-year basis. This increase is due primarily to new AAM content appearing on G.M.'s all-new award-winning full-sized pickup truck. This production mix gain was very important to us, because it helped to offset a decline in production volume. This is an important trend that should favorably impact our operations all year in 2007.

Moving down the income statement, gross profit improved to $84.8 million, or 10.6% of sales in the first quarter of 2007, and that compares to $64 million in the first quarter of 2006. Operating income more than doubled in the quarter to $35.9 million or 4.5% of sales and that compared to $15.1 million or just 1.8% of sales in the first quarter of 2006. EBITDA was $93 million in the quarter, or 11.6% of sales. In terms of our long-term profit objectives, we're not satisfied with these results, but they do mark a solid turn around from the second half of 2006 and we're pleased about that. I'll have more to say about this later in the call. As to cash flow, we expected to realize an immediate improvement as a result of our ongoing restructuring activities and we did. In the first quarter of 2007, free cash flow, which we define as GAAP cash from operating activities, less CapEx and dividends paid, our free cash flow improved by more than $40 million year over year. That's in line with our full- year expectations and, of course, with our guidance to you.

Now, let's get to other important details. I already mentioned that AAM's gross margin in the quarter was 10.6% and that our EBITDA margin was running at 11.6%. There are several important factors driving this improvement; I want to touch on those now. The first is productivity gains. We had a very solid quarter in this area, as a number of productivity initiatives designed into our products, processes and systems for the GMT 900 launch took root. This had a positive impact on the manufacturing costs. The second item here is purchase material cost savings. We are expecting net year-over-year material cost savings of at least $15 million in 2007. In the first quarter of 2007, we accomplished roughly 25% of that task through a continued focus on reducing total landed costs of our purchased material and components, and we're building momentum there.

The third item is structural cost reduction, of course, resulting from the special attritions program or SAP, and other restructuring actions we initiated in 2006. As expected, AAM's operating results are benefiting from this tough, but necessary actions we took in 2006 and continue to take to reduce our U.S. cost structure. This is an ongoing task for the next several quarters. The favorable impact of these three items was vitally important because they helped us overcome the decline in production volumes and a couple other significant headwinds. On a year-over-year basis, depreciation and amortization was up $7 million in the quarter. As we have publicly disclosed, we see D&A up approximately $20 million for the full year of 2007. That increase should be more pronounced in the first half of the year, primarily due to the timing of the GMT 900 launch. The other significant noncash headwind was the fact that we recorded higher profit sharing and stock-based compensation accruals in the first quarter of 2007 as compared to the first quarter of 2006.

SG&A spending in the first quarter of 2007 was $48.9 million, and that's up just about 1% versus $48.4 million in the first quarter of 2006. R&D spending was up about $800,000 year over year, and in addition, a portion of the increase in profit sharing and stock-based compensation is also picked up in SG&A. The favorable impact of ongoing efforts to trim our U.S. salaried work force partially offset and almost all -- all offset these cost drivers. Although smaller in absolute terms, the percentage reduction in our U.S. salaried work force is about the same. It may actually be a little bit higher in 2007 than the percentage impact of the SAP and other hourly attrition programs.

Let me comment on the interest and taxes before we move to the cash flow statement. Net interest expense in the first quarter of 2007 was $14 million. That's nearly double the $7.4 million of interest expense we incurred just one year ago in the first quarter. This increase relates to both higher interest rates and higher average outstanding borrowings, although the interest rates are the bigger factor. For your reference, the weighed average interest rate in our borrowings in the first quarter of 2007 was approximately 8%. One important development in the quarter that affected our run rate of interest expense was the public issuance of a new ten-year $300 million senior unsecured note offering. We closed that transaction at the end of February. We are pleased to have the opportunity to complete this financing and that's how I characterize this as opportunistic. Combined with our 2014 series, AAM now has $550 million of debt capital with investment grade covenants locked up for the next seven to ten years at an all-in cost of less than 7%. That's a very solid foundation for us.

AAM's effective income tax rate the first quarter of 2007 was approximately 30%. That's a little higher than the ongoing provision rate right now, due to a tax law change in one of our major foreign jurisdictions that caused us to write down some deferred tax assets. However, in total, this same tax law change is actually favorable for us in total, and we continue to expect our tax provision to trend lower than 30% for the full year of 2007. In other words, or thoughts about tax are unchanged from our previous guidance. So the bottom line for the first quarter of 2007 is that our GAAP earnings were $15.4 million or $0.30 per share. Again this includes restructuring costs of $2.9 million, or $0.04 per share and that's primarily the incremental attrition program activity we saw in the first quarter.

Now, let's talk about cash flow. GAAP cash from operating activities was approximately $10 million in the first quarter of 2007. That compares to $7 million in the first quarter of 2006. Not much change in total, but the devil is always in the details. In the first quarter of 2007, we paid out approximately $20 million of the attrition program accruals we recorded in the fourth quarter of 2006. This is part of the $100 million total cash obligation we project in 2007 that relates to restructuring costs. Of course, that includes CapEx requirements associated with the redeployment of machinery and equipment and other steps to rationalize underutilized production capacity. This $100 million is comprised of three primary factors: Payouts on last year's attrition program accruals; the additional $25 million of new expense we see this year; and this CapEx requirement associated with redeploying underutilized production capacity. Another factor affecting our first-quarter 2007 operating cash flow I just mentioned was higher interest payments and also a higher profit-sharing payout in the first quarter of this year versus a year ago. When you [blow] together, though, our perspective is that AAM's underlying operating cash flow fundamentals improved nicely in the first quarter of 2007 versus the first quarter of 2006.

As to investing activity, CapEx in the quarter was just about half of our prior-year spend. In the first quarter, CapEx was $42.5 million and that compares to about $81 million a year ago. Although we expect the quarterly run rate of our capital spending to be a little higher through the rest of the year, we have lowered our full-year CapEx guidance to a range of $225 million to $230 million in total for the full year of 2007. As we have discussed publicly many times, this -- this reflects a structural and cyclical reduction in AAM's CapEx requirements and I refer you to the time period 2002 to 2004 for a similar cyclical trend. This trend is particularly applicable to our U.S. operations.

After deducting our CapEx and dividends paid of almost $8 million from our operating cash flow this quarter, free cash flow was a use of $41 million in the first quarter of 2007 versus the use of $82 million in the first quarter of 2006, and this is that $40 million improvement that both Dick and I mentioned already on the call. It's typical in our industry to incur a use of cash in the first quarter due to the seasonality of our operations. That's mostly due to an extended holiday period in December. So that we are clear about this, our result in the first quarter was expected and is in line with our game plan to generate more than $100 million of free cash flow for the full year of 2007. In fact, we're a little ahead of where we thought we would be at the end of the first quarter at this point in time.

Let's focus on our capital structure. Net debt outstanding at the first quarter was approximately $700 million. That's about $42 million higher than year end, and of course, that reflects our free cash flow use for the five quarter. Stockholders equity finished up at $820 million at the end of the first quarter. Our net debt to capital ratio was 46.1%. That's slightly higher as compared to year-end 2006, but in line with our seasonal expectations. At quarter end we had nearly $880 million of available cash and borrowing capacity under our existing credit facilities. Liquidity is not a major concern for us at this time.

Now let's turn to our expectations for 2007. As Dick had said, we expect 2007 to be a transitional year for our Company, a year in which AAM will restructure, resize and recover. Today we are updating our GAAP earnings guidance for 2007 to $1.30 per share to $1.55 per share. That's an increase of $0.05 on both sides of our range. From our perspective, we gained some field position in the first quarter of 2007 that we're not give up. We're also reconfirming our plan to generate more than $100 million of free cash flow. Our 2007 outlook is based on what we know today, of course, about our customer's build plan and the timing of new product launches. Overall, we're planning production volumes for the major programs we support to be down approximately 2% in 2007 as compared to the prior year. I think that trend will be more evident in the second half of the year than the first half of the year.

As we said earlier, we are expecting production mix to be favorable, driving content per vehicle up 5% on a year-over-year basis. We also expect to see top-line contributions from our new facility in China, as well as our growth in our component-based awards with new customers, such as [Heano], [Jadko], [Koeyo] and Harley Davidson and the six-speed transmission components to GM's power train operation. As I mentioned earlier, AAM's 2007 earnings outlook also continues to reflect our plans to incur approximately $25 million of additional restructuring costs and a total cash obligation relating to the same restructure activities of about $100 million. Overall, we believe we're following through on our commitment to restructure and resize the business in 2007. We're in the early stages of this process with a lot more to do, but we feel AAM is building positive momentum. The key to our success is to manage what we can control and to continue to work with all of our stakeholders to improve the people, product, process, and systems infrastructure that we need to insure a viable, sustainable, and profitable business in our U.S. operation and throughout the world. We believe we very well positioned to do just that.

Thank you for your time this morning. I'm going to turn the call over now to Chris Son so that we can start the Q&A.

Thank you, Mike, and thank you, Dick. We have reserved some time to take your questions. I'd ask that you try to limit your questions to no more than two, so please at this feel free to queue any questions that you have.

(OPERATOR INSTRUCTIONS) Your first question comes from Himanshu Patel from JPMorgan.

Hi, good morning. This is [inaudible] for Himanshu Patel.

Good morning.

My first question is that the union has indicated recently that the Buffalo plant might be closing down. Could you please comment on that and provide us with some sort of a time frame, if so?

I'd be very happy to. First of all, let me clarify that any commentary from AAM about closing Buffalo has not been stated from our Company. That has been from other sources. Secondly, I'll just say that Buffalo is primarily a Company asset that provides products that support our key customer, GM, with mid-sized, light-truck product range, and because of the weakening consumer demand for those particular products, production of those vehicles are substantially less this year than they have been in the past. The third thing I would say on Buffalo, as a result of lower production levels in the mid-sized light-truck product range, our Company has already recorded, as you know, an impaired charge primarily associated with idling production capacity for those kinds of products, and of the four plants involved of AAM's, the hardest hit would be Buffalo. That's basically where we have to say right now on Buffalo.

Okay. Thanks. My second question would be that we noted the Dodge Ram heavy duty production has been down sharply, so do you think that most of the production on -- the production on that platform, is it over or do you still expect it in the rest of the year?

First of all, the Dodge Ram is a wonderful product. It's been very well received by the market. There had been a softening earlier this year and our short operating view that we have in the near future, it looks solid and we certainly think that product has a lot of life in it.

Okay, and just a small follow-up question. We've been hearing from some other suppliers, like [inaudible], they've been talking more cautious about GMT 900 production in the second half of the year, so how do you feel about that?

You'd have to ask them what they think. What we think is that GMT 900 is absolutely a remarkable vehicle, all segments of it, SUV, pickup. We have strong production scheduled in the next 20 operating weeks. We look very, very positive as far it relates to the GMT 900 and its contribution in the market place.

Okay, thanks, guys.

You're welcome. Have a great day.

Thank you, you too.

Your next question comes from Rob Hinchcliffe with UBS.

Morning.

Morning, Rob.

Morning, Rob.

Dick, last quarter on the call, you said that you kind of thought American Axle as a lead consolidator in the industry. Can you give some fresh thoughts there? And one of the things I'm thinking about, too, is DaimlerChrysler's announcement of putting up a new axle plant.

Well, Rob, as we have said, we are very actively reviewing different things that potentially would fall into that category of M&A. We have nothing specifically to announce to you today. But we did say and we'll continue to participate in the consolidation of the North American drive line market and that's exactly what we expect to do. As it relates to DaimlerChrysler Corporation announcing a new axle facility, we're delighted for them. I think that's probably no surprise to anyone. They announced back on February 14th that they're going to put about $3 billion into power train developments throughout the world, and the last time I looked, the three members of power train are engine, transmission and axle. The first member, second member and third member, so I think that's a good decision by them. We respect that.

I think the important thing that we have to put in perspective to you and others is that we proudly provide that corporation, Chrysler Group, drive line systems for the heavy-duty Dodge Ram, our very sophisticated and patented electronically-controlled SmartBar, stabilizer bar system I'm talking about, on their Jeep Rubicon vehicle, as well as Dodge Ram drive line systems, including SmartBars on them. We're also, as we just announced, providing IRDAs for the Chrysler 300 over in [inaudible] China, and the products we provide, as they, the Chrysler Group know, have exceedingly good quality, warranty performance and technology and packagability, and we'll continue to work with our excellent relationship that we've enjoyed since 1999 with Chrysler Corporation.

Okay, thank you. I think capacity utilization last year was, what, 75% or so, if I recall. Can you comment on what it was in the first quarter.

Well, as we told you, it was around 75% last year. As we told you with our structuring, Yogen and myself have it planned to go back up to around 90% by 2010, and the specific application for the first quarter, do one of you colleagues want to discuss? Yogen?

Yes, it's about same 70% level [inaudible] because of Dodge Ram's --

Remember, we told you January was very weak because the entire month of January we didn't have any axles taken by the Chrysler Group for Dodge. That was one-third of the quarter. Things are normalizing now in the February and March period, and going forward, so that was an anomaly and we'll move ahead, so let's say it was about the same.

Okay. And then just the last one, all-wheel drive penetration, what was it in the quarter?

Yes, Rob, I will get that. It's just about 64% in the first quarter of 2007.

And is that -- how do you expect that'll play out for the year?

That is pretty consistent with where we're expecting that to trend through the course of the year.

Okay, thanks, Mike. Thanks, everybody.

Have a great day, Rob.

You too.

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

Good morning, gentlemen.

Morning, Brett.

Morning, Brett.

Let's see here, first I want to follow up on the Chrysler business. Two questions there. First of all, do you think in your opinion we should rule out the possibility that axle may get Chrysler business in the future or do you think it's still a good opportunity for you?

Oh, we absolutely will work to get more business with Daimler Chrysler in general and the Chrysler Group specifically in the future.

Okay. The -- with the discussion of Magna potentially buying Chrysler, I guess my question there is, do you think that that potentially -- well, how do you think Magna's going to view axles? Do you think they want to be in the axle business? Do you think they'd want to keep the axle business? Do you think they might want to expand the axle business? And if so, is there the possibility that they may look to potentially resource the Ram heavy duty business from American Axle or is there something that you have that really gives you an advantage that may prevent that.

Well, first of all, I have known Magna for a long, long time, almost 30 years. They're an excellent company and if you look at the scenario, which you men and women love to enjoy speculating on, they're one of the many different scenarios that might occur with the Chrysler Group, point one. Point two, there is nothing in the auto industry that Magna can't do successfully. They're very good. They're very effective anywhere -- all the way up through contract assembly. As it relates to what they would want to do with axles or those specifics, you'd have to ask them.

Okay. And then, Mike, can you talk just a little bit more about -- as we think about the first quarter earnings and then moving it sequentially in the second and third quarter, and so forth, how should we think about the hourly and salary attrition programs affecting your earnings going forward? In other words, have we already seen the bulk of the savings associated with the hourly business -- or hourly restructuring in the first quarter or should that ramp up again as we move sequentially into the third quarter and the fourth quarter? And then the salary, obviously, you're working through that as you go through the year? How do we think about the savings as we progress forward?

Yes, Brett, a couple things. On the hourly side, of course, we had a little bit more than 1,300 of the 1,500 associates or so who accepted our SAP -- had left our Company, is what I'm trying to say, at the end of the year, so most of the benefit associated with the SAP was -- was included in our first quarter results. Now, there's a small portion that trickles into the second quarter, but there's not going to be any materially different cost structure impact associated with that, after the first quarter. There is some incremental attrition program activity that we incurred in the first quarter. and we expect to incur additional activity in the second quarter, primarily associated with the International Association of Machinists represented associates, and so that will be a modest positive item for us moving forward.

And then the salary side?

The salary side, there's, again, a similar situation, although a little bit more developing as we work through the year. We had a number of the positions we expect to eliminate. Remember, we're targeting 300 total salaried positions to be eliminated in the U.S. by the end of 2007. There was a good portion of that --a good down payment, if you will, taken out in the fourth quarter of last year through some attrition program activity and then we'll see a lot more of that activity, particularly in the second half of this year, as we complete the idling of some of that mid-sized capacity that Dick commented on earlier today.

Thank you very much, gentlemen.

Have a great day.

Your next question comes from Rich Kwas with Wachovia.

Hi, good morning, guys.

Morning, Rich.

Mike, on the free cash flow, the $100+ million, you did lower the CapEx guidance by $15 million to $20 million for the year. What are the factors that could potentially offset the $15 million to $20 million in savings from CapEx, given that you didn't really change the free cash flow. I realize you left it open ended, saying $100+ million, but are there any factors that could offset that $15 million to $20 million?

None that I'm aware of right at this time.

Okay. And then on -- just the cash balance, as we move forward here, should we assume that the cash balance stays pretty healthy?

Absolutely, Rich. You know that we see more than $100 million up for the year. We were out $40 million for the first quarter, so you're going to see that cash balance build substantially through the course of the year. Of course, at this time of the year, what it represents is the working capital differences. We collect most of our receivables at the end of the month. We pay our suppliers at the beginning of the month. That will become more pronounced as we work through the year and actually start accumulating cash on a net base.

Okay, great. And then, Dick, could you -- what are your comments regarding GM's -- GM's comments last week regarding the Zeta program. It looks like they will go forward with the Camaro, but in terms some of other vehicles they may not be moving forward and that may be delayed indefinitely. Does that affect you materially as you look out over the next few years?

Well, the own thing I know to respond to your specific question is they have committed to continue on with the rear-wheel drive G8 program. They've also committed to continue on with the rear-wheel drive Camaro program, which has a major impact on us. And Thursday they said that they are under review for the rest of their long-range product plan that is in the portfolio that involves rear-wheel drive on the passenger car side. We respect that, and I would respect that probably soon they would have another announcement and you'd have to let them make that announcement, but we feel very good about them having selected us for the Camaro rear-wheel drive program. So that impacts us and we're very happy that it's already a green light [inaudible] program.

Okay, great. Thank you.

You're welcome.

Your next question comes from Jon Rogers with Citigroup.

Hi, good morning, guys.

Morning, Jon.

Morning, Jon.

Mike, can you give us the benefit of the SAP program in the quarter on a year-over-year basis?

Yes, we saw layoff costs down, Jon, about $12.5 million.

Okay, but --

That's the primary -- the primary driver of that cost savings.

Okay. Great. And then, Mike, if you can just give us -- I guess I'm a -- obviously, content per vehicle is up 5%. Can you give us just a little bit of color there, because I know that your content on the 900 is higher than -- is better than 5% more and it seems to me that with some of the other programs down, CPV as the 900 blended in might have been better. I mean, is it some of the Ssangyong and the BBDC things moving in that drive the CPV number lower?

No, Jon, you're right, the content gain on the 900 was higher than 5%, but remember that our highest content vehicles are the full-sized heavy-duty pickup trucks that we produce for both GM and DaimlerChrysler -- the Chrysler Group here in the U.S. -- and as Dick mentioned, we didn't ship a full-sized Dodge Ram HD axle until January 29th. So it's really just a mix and timing issue associated with the production volume we had in this quarter. As you work our way through the full year, you'll see the content per vehicle on an absolute basis increase nicely, and a lot of that will have to do with normalizing Dodge Ram volumes.

Okay. Thank you.

You're welcome, sir.

Your next question comes from Brian Johnson with Lehman Brothers.

Good morning.

Good morning, Brian.

Can you clarify the heavy-duty Ram program that you're on right now with the content you listed earlier? What plant are you primarily producing that out of and what plant at Dodge does it go to?

Well, we specifically build it out of our Wanawato, Mexico operations, and we also send it to a couple of different facilities. I think it's Castillo, Mexico, as well as St. Louis, Missouri in the United States of America, sir.

Okay, thank you. Second question is how much of the margin improvement could you quan -- was due to the SAP and how did that break down between the -- the jobs bank write-off you took versus the additional savings once the people actually took the packages?

Brian, Jon Rogers asked a similar question. There's about a $12.5 million reduction in our layoff costs in the quarter that is -- if not entirely largely due to the SAP.

Okay.

That's -- that's first and the most important element of this cost savings. Of course, the opportunity that we had to reduce our layoffs in some plants by more than the number of people we actually had on layoff -- in other words, reduce our head count -- gave us an opportunity to really get after some productivity initiatives and [inaudible] from operations in our plant. I don't think there's any question that was a facilitator for additional productivity in our operations that we enjoyed in the first quarter. So I didn't specifically ascribe a number to that as it relates to the SAP, but certainly that was a positive force in our team's ability to have a very good, solid quarter in terms of [inaudible].

Okay. Thanks.

Thank you, sir.

Your next question comes from [Ronald Padroth] with Banc of America Securities.

Good morning, guys.

Morning, Ron.

Morning, Ron.

Just on the -- this cost thing quickly and then another question. The pension and healthcare expense, I assume, was lower, I don't know if you have it. But is that lower pension and healthcare expense in the lower subcosts or -- or are they two different items?

That's an excellent question, Ron. First of all, let me say that our pension and retiree healthcare expense in 2007 is expected to be about -- around $40 million lower on a year-over-year basis from 2006. When we talk about subcosts, what we mean is the supplemental unemployment benefit that we pay to our UAW master agreement representative associates. When we say sub, it typically excludes the pension and [OPAB]. However, when we talk about layoff costs more generally, it clearly includes pension, OPAB and other items of benefits that these individuals are entitled to that are separate and distinct from sub. For example, if they work a good portion of the year, they're going to be entitled to vacation expense and these types of benefits.

Okay. And --

And other issues.

Thanks. And just on the productivity, is it possible your productivity could be even in the 4% range on -- on a new program like the T900.

4% of what?

Well, of sales or costs or whatever?

We tend to measure -- we tend to measure our productivity on the cost sector, sure. I don't mean to --

Yes, that's fine. So costs.

We had a track record of achieving -- and our primary productivity metric of the number of hours necessary to generate $1,000 of sales, through 2004, [we had a long-term see good solid productivity going forward here].

So -- so you'd say it's in that range and you think you can sustain in that range going forward?

Our Company has a 14-year track record of focusing on productivity. Mike just gave you the track record. You would probably say leopards don't change their spots. We will have good productivity in the future.

Okay, but, Dick, in the tail end of the T900 program, is it fair to say maybe you were below the low end of that range?

The 900 just started, so let's not get into --

I mean -- no, I don't want to be pushing too far ahead. I meant the T -- yes, the T800. At the tail end of the T800 were you below the low end of that range?

Yes, absolutely.

Okay. And then just one last thing, the margin on the incremental revenues, is that roughly in line with your fixed overhead, would you say? Like any incremental content that you have?

Yes. We're seeing a very nice contribution from the incremental revenue. -- covered all of our overhead and then some.

Okay. Thank you.

Thank you, sir.

Your next question comes from Chris Ceraso with Credit Suisse First Boston.

Thanks, good morning.

Good morning, Chris.

Two things. First, on the $25 million of expected charges, can you give us a feel for how that's going to play out quarter to quarter for the rest of the year and then how much do you think you'll see in 2008?

Yes, good morning, Chris. First of all, we're not going to make any comments about 2008 at this time, but as it relates to the $25 million that we see this year, we had about $3 million in the first quarter. We disclosed in the Form 8-K this morning that we would see somewhere between $5 million, maybe $6 million in the second quarter as it relates to incremental attrition program activity. And for the other remaining costs, which are principally the redeployment of machinery and equipment, that's going to be weighted more heavily towards the second half of the year.

Okay. And then the next question, I'd like to maybe drill down a little bit on the 20% of your revenues that are not with GM, if you can maybe break that down into a few major buckets? How much of it is the Ram or maybe DaimlerChrysler broadly and then maybe other?

I'll just tell you right now, two-thirds of that 20% is DaimlerChrysler broadly and the great majority of that is the Dodge Ram heavy duty, specifically. The other is our other 98 customers throughout the world.

Okay. There's no major buckets within that other one-third, it's spread out?

The next priority is PACCAR, where [inaudible] and things such as that.

Okay. Thanks a lot and have a good weekend.

You're welcome, have a great day. Thanks, Chris.

Thanks, Chris. We've got time for one last question.

Thank you, gentlemen. Your last question comes from Chris Struve with Deutsche Bank.

Hi, gentlemen. Can you hear me?

Hello?

Can you hear me?

We can now, Chris. Thank you, sir.

A quick follow up to -- I think it was Rich Kwas' question on the cash balance, you guys ended the quarter with $140 million of cash, which is arguably the highest you've ended in seven or eight years. What's the plan for the cash balance this year? Is it just a function of when you did the debt deal?

Yes, Chris, it's as simple as our fixed term debt at this time exceeding our requirements. And as I mentioned, we felt we had a good chance to opportunisticly tap the capital markets, put in place something that made sense for the long run, and so we'll put some cash here in the short run, it's as simple as that.

A couple of other quick ones, if I can. You guys have commented in the past that you're looking for raw material coverage from your customers. Can you update you on that? You commented you're expecting $15 million net positive for the quarter -- I mean for the year. Can you update us on where you stand for that?

We're right on track for our plans. If anything, we're slightly ahead of plans in regards to our material reductions from a procurement standpoint.

Yes, Chris, the $15 million that you referred to had to do with our procurement activity. I think your question may have affected a little bit more our customers. There's no significant change at all in our customer relationships as it relates to metal markets.

Okay, and one final question. You guys have said historically that you expected mid-sized to be down at 10% to 20%, if I remember correctly, for the year. It was down 32% in the first quarter. Are you still expecting it to be down 10% to 20% for the year.

Yes, Chris, remember in the first quarter, you had Oklahoma City running for six weeks last year and [Lorainne] had a third shift on. So this should be the last quarter where you see such a massive deterioration year over year. Not that 15% or 20% is insignificant, but it should be more pronounced in the first quarter than the other quarters this year.

Okay, thank you very much. Have a good weekend.

Have a great day.

Thank you, Chris and we thank all of you who have participated on this call and appreciate your interest in American Axle & Manufacturing. We look forward to talking with you in the future.