American Axle & Manufacturing Holdings Inc (AXL) 2007 Q2 法說會逐字稿

Good morning.

I will be your conference facilitator today.

At this time, I would like to welcome everyone to the American Axle & Manufacturing second quarter 2007 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 period.

(OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded.

I would now like to turn the call over to Mr.

Jamie Little, Director of Investor Relations.

Please go ahead.

Thank you.

Good morning, everyone.

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

This morning we released our second quarter 2007 earnings announcement, which also includes an update to our new and incremental business backlog.

If you have not had an opportunity to view this announcement, you can access it on the aam.com website, or through the P.R.

newswire services.

The replay of this call will be available beginning at 1:00 P.M.

today through 5:00 P.M.

Eastern Standard time August 3 by calling 1-800-642-1687, reservation number 4301941.

Before we begin, I would like to remind everyone that matters discussed in this conference call may contain comments and forward-looking statements that are within the meaning of the Private Securities Litigation Reform Act of 1985.

Forward-looking statements are not a guarantee of future results or conditions, but rather are subject to risks and uncertainties, which cannot be predicted or quantified, and which may 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 nonGAAP financial measures.

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

We are also webcasting this call through the website of aam.com.

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

During the quarter, we are planning Investor trips to Toronto and New York.

We will be at the JPMorgan Harbor Auto Conference in Dearborn, Michigan on August 6, and at the CSFB Conference in New York on September 6.

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-Founder, Chairman, and CEO, Dick Dauch.

Thank you, Jamie and good morning, everyone.

Thank you for joining us today to discuss AAM's financial results for the second quarter of the year 2007.

Joining me on the call today are Yogen Rahangdale, our President and Chief Operating Officer, David Dauch, Executive Vice President of Commercial and Strategic Business development, along with Mike Simonte, our Chief Financial Officer.

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 for you ladies and gentlemen, for any questions you might have.

Today, AAM is reporting solid operating performance and strong cash flow for the second quarter of 2007.

I will start my comments this morning with three important highlights.

First, AAM's net income in the second quarter of 2007 was $34 million.

Diluted earnings per share were $0.64.

This compares to earnings of $20.4 million, or $0.40 per share in the second quarter of '06.

As we have said previously, 2007 is a transition year for our Company, AAM, a year in which we will continue our restructuring process, the resizing of our Company, and the financial recovery.

AAM's second quarter results demonstrate we are doing exactly that.

Second point, AAM's free cash flow was $184 million in the second quarter of '07.

This is the strongest quarterly cash flow performance in our Company's history.

For the first half of the year 2007, AAM's free cash flow totals $143 million.

This has allowed us to improve AAM's net debt to capitalization ratio to 37.6%.

That is 7 full percentage points lower than 2006 year end, and our Company has a strong liquidity position.

Our third point, we reported today that AAM has increased its new and incremental business backlog by approximately $400 million.

AAM's business backlog now stands at an estimated $1.2 billion for programs launching in the years 2008 to 2012.

I will have more to say about that in a moment.

Let me now provide you with an overview of the quarter starting with the market environment.

North American light vehicle production was down approximately 2% in the quarter on a year-over-year basis.

General Motors light truck production was down nearly 3% in the quarter, and in total AAM's production volumes were down approximately 3% in the quarter on a year-over-year basis.

For the full sized truck and SUV programs we currently support with GM and the Chrysler group, AAM's production volumes were approximately the same as compared to the prior year.

We estimate that customer production volumes for AAM's mid-sized truck and SUV programs were down around 18% on the quarter on the year-over-year basis.

Product mix was favorable in the quarter.

AAM's content per vehicle increased significantly over 8%, to $1,318 per vehicle in the second quarter of '07.

This increase in sales content more than offset the aggregate volume reductions experienced by our customer.

As a result, our sales in the second quarter of 2007 were up more than $40 million to $916 million.

Gross margins for the quarter was around 12.3%, as compared to 10.3% in the second quarter of '06.

The operating margin was about 6.4%, as compared to 4.6% in the previous year period.

AAM's improved margin reflect the following, first, the favorable impact of higher sales content.

Second, profitability flow through of productivity gains.

Third, structural cost reductions resulting from special attrition programs better known as SAP, and other ongoing restructuring actions.

Let me now discuss AAM's R&D efforts.

Our Company continues to invest in the development of new advanced technology products, along with processes and systems to support them, to meet the changing needs of the global automotive marketplace.

Our Company's R&D spending in the first half of '07 was $39.7 million, approximately the same as it was in 2006.

However, we are doing more in 2007 than ever before by leveraging AAM's advanced global technical capability and resource.

Our Rochester Hills Michigan Technical Center continues to serve as the global hub of our product engineering activities, additional global engineering and product development resources are located in the continents of Asia, Australia, Europe, and both North and South America.

These facilities enable AAM associates to provide round the clock design, engineering, testing, and validation capabilities, to meet our customer and consumer and marketplace requirements.

This is an effective and cost efficient approach.

AAM is developing new and innovative products that are targeted for growth segment of the global automotive industry, and needed by the customer base.

AAM is focused on enhancing fuel efficiency through match reduction, axle efficiency, advanced metallurgy, packaging, and other related initiatives.

Our Company also continues to develop drive line and drive train products for all-wheel drive and rear-wheel drive passenger cars, and/or crossover vehicle applications.

You can see by the growth in AAM's new and incremental business backlog that these efforts are paying off handsomely for us.

Our expanded product portfolio is creating new business opportunity, today AAM is quoting on approximately $800 million of potential new business.

Substantially all these quotes are with customers other than the General Motors Corporation.

This includes opportunities with several major global OEMs.

Let me now provide further color on AAM's new business backlog.

As I previously mentioned, AAM's new and incremental business backlog increased significantly to about $1.2 billion for programs launching in the years '08 through 2012.

And the backlog contains excellent business diversification characteristics for our Company.

First, approximately 75% of AAM's new business backlog has been sourced to AAM's non-U.S.

facilities.

These awards will hasten the expansion of AAM's low cost, high quality, and very flexible manufacturing facilities in Guanajuato, Mexico, Changshu, China, Araucaria, Brazil, as well as Olawa, Poland.

These awards may also lead to the construction of additional new facilities in other foreign markets.

Second point, approximately half of the new business backlog relates to awards supporting rear wheel drive and all-wheel drive passenger car and crossover vehicle applications.

In this product segment, AAM is now working with four different customers on ten different vehicle programs.

The third point is AAM will launch approximately two-thirds of the business backlog in the years 2008, '09 and '10 it is front loaded, and the balance of that will be through '11 and '12.

Some of the business launching in '08 will use available U.S.

manufacturing capacity.

The fourth point, AAM has earned its first program award from a major European-based global OEM to supply rear axles for a new global vehicle program.

Our Company has earned its first award from Chery Automotive Company Limited, to produce rear drive modules for a 2009 model year crossover vehicle.

Chery is the third largest Chinese OEM.

We look forward to building upon these first awards to develop long-term and mutually beneficial relationships with these important new customers.

Let me now take a moment to talk about our operating performance.

First point, AAM continues to maintain our world class quality, reliability, warranty, delivery and launch performance.

This is an increasingly important competitive advantage for our Company that we have earned, and we continue to get better and provide value to our customers, and it is recognized by them.

For example, our warranty performance is measured by our customers at CPV, cost per vehicle, as well as IPTV, instant per thousand vehicles.

Our year-to-date performance on these measures has improved from 24 to 40% for the major programs we support for either General Motors, and/or the Chrysler group.

The second point, AAM remains focused on productivity.

It has been a hallmark of our Company from our creation.

In the first half of '07, AAM has experienced net productivity improvement at a level that is consistent with our long-term historical track record of between 6 and 8, or high single digit productivity.

That is a measurement of total hours per thousand dollars of sales.

Third point, our company remains focused on maintaining flawless launch support for our customers' new product programs.

In the first half of '07, our Company successfully completed its launch in the support of the vast and broad and successful GM900 program, an additional key program launches in '07 that would include the following.

Rear drive modules to support Beijing Benz DaimlerChrysler, or BBDC, the introduction of the 300c vehicle in the Asian market, as well as RDM, read drive modules to support Ssangyong Motors in the launch of their Chairman Sedan in the South Korean market.

We are particularly pleased with the launch and performance of AAM's new Changshu, China facility.

The plant is currently running at 0 parts per million, 0 absenteeism, perfect delivery to its customers in China and South Korea, and is simply a flawless execution.

We are very proud of that work team.

Before I turn over to Mike, let me say that AAM is on-track to achieve its annual objectives for sales growth, margin expansion, and free cash flow generation for the year '07.

The continued expansion of our Company's new business is evidence that we are successfully delivering on our long range strategic goals of expanding our product portfolio, to serve markets, the customer base, as well as a global manufacturing footprint.

AAM will continue to focus on these and other initiatives as part of our long-term strategic commitment to achieving sustainable global cost competitiveness.

I thank you all for your attention today and your interest in our Company.

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

Michael?

Thank you, Dick.

Good morning, everybody.

We have got a lot to cover today, so I am going to get right to it.

As Dick said, today we reported second quarter 2007 GAAP earnings of $0.64 per share.

That compares to $0.40 per share in the second quarter of 2006.

Our results in the second quarter of 2007 reflect the impact of special charges and nonrecurring operating costs of approximately $7 million, or $0.11 per share.

Most of this related to incremental attrition program activity.

As we have previously announced, we expect to incur approximately $25 million of such restructuring costs in 2007.

Remember that all of this is in addition to the special charges we incurred in the calendar year 2006, and particularly at the end of the year.

In addition to incremental attrition program activity, this also includes costs related to the redeployment of machinery and equipment, and other steps to rationalize underutilized production capacity.

That is a big focus for our team in the second half of this year.

The $7 million of restructuring costs we incurred in the second quarter of 2007 are part of the $25 million we have estimated for the full year 2007.

Just to be clear, when I refer to the term restructuring costs in my comments this morning, I am referring to this activity.

In addition to the restructuring costs, our second quarter of 2007 results also include a $5.5 million charge, or $0.9 per share, for the write-off of unamortized debt issuance costs, and other costs related to the prepayment of a $250 million term loan we refinanced in June.

In total, we incurred $0.20 of special charges in the second quarter of 2007.

To help you with your apples-and-apples comparisons, let me remind you that our second quarter of 2006 earnings included two items as well.

The first was a one-time noncash charge of $2.4 million, or approximately $0.03 per share, to write-off unamortized debt issuance costs, related to the cash conversion of approximately $128 million of our senior convertible notes.

The second item was an unfavorable tax adjustment of $2.6 million, or $0.05 per share, related to the settlement of foreign jurisdiction tax liabilities.

If you recall, we had two audit settlements in 2006.

A favorable outcome in the U.S.

in the first quarter of 2006, and an unfavorable adjustment in Mexico in the second quarter.

The net impact of these two adjustments was immaterial, but they affected our tax provision in two different quarters.

That is why we need to remind you about that.

These special items obviously effect the year-over-year comparison of our results.

No matter how you look at it, versus prior year, versus prior quarter, with charges, without charges, whatever, our earnings were up significantly in the second quarter 2007.

Sales in the second quarter 2007 were $916.5 million, that is an increase of approximately $42 million, in comparison to the second quarter last year.

On a sequential basis, that is a $100 million increase versus the first quarter of 2007.

On an overall basis, our major program production volumes were down approximately 3% versus the prior year.

That is a little bit better than GM's overall truck production rate.

Sequentially, our second quarter volumes were up 9%, or approximately 50,000 units, as compared to the first quarter of 2007.

That volume increase and of course our continuing content gains, explain why our sales are so much higher the second quarter versus the first quarter.

Let me cover a few other summary points regarding our second results, and how they compare to the prior year, before we get into other details.

I mentioned sales content.

Sales content per vehicle was up 8% on a year-over-year basis, more than $100 per unit to $1,318 in the second quarter of 2007.

As we said before, this increase is due primarily to new content that appears on GM's new full sized pickup trucks.

New AAM content, new technology, good sales wins for our Company.

This favorable trend in our product mix was very important to us.

It more than offset the decline in production volumes I just mentioned.

This is a trend that should continue to impact our operations favorably for the remainder of 2007, and into future years as well.

Moving down the income statement, gross profit improved to $113 million, or 12.3% of sales.

That compares to 89.9 million, or just about 10% of sales in the second quarter 2006.

Operating income increased to $58.9 million, that is 6.4% of sales.

That compares compares to $40.5 million, or 4.6% of sales in the second quarter of 2006.

Similarly, EBITDA was up, it was $114 million in this second quarter, or 12.4% of sales.

One quarter doesn't make a trend, but we are pleased with our progress in this area and the first half of 2007.

A couple hundred basis point increase in profit margins is a solid improvement from where we were just one year ago.

The main drivers of our improved margin performance are the same as we discussed in the first quarter.

The first point, very important point for our Company as Dick mentioned, productivity gains.

We had another good quarterly performance in this area.

Remember we had to make substantial investment in our product, process, and systems technology to prepare for the GM900 launch.

Productivity gains were the only way for us to earn a payback on those investments.

Dick explained this in further detail, so I am going to leave it at that.

Second point, material cost savings.

During the first half of 2007, we are on-track to achieve our annual cost savings objective of at least $15 million for material purchases.

Localization, globalization, consolidation, optimization, all of these sourcing engineering and supply chain management initiatives, are helping us to reduce the total added costs of our purchased material components.

Third item, and this is the biggie for 2007, structural cost reductions resulting from attrition programs and other ongoing restructuring actions.

We are certainly not done in this area, but we are on our way to accomplishing a structural cost reduction in excess of $100 million in our U.S.

operations this year.

This is critically important because we are not yet globally cost competitive here in the U.S., especially as it relates to our master agreement facilities.

Obviously, this improvement puts us on the right track.

SG&A expense which includes R&D expense was $54 million in the second quarter of 2007.

That compares to 49.4 million in the second quarter of last year.

This increase is primarily attributable to higher profit sharing accruals, and higher stock-based compensation expense, due of course to our higher profitability and stock price appreciation.

For the first half of 2007, SG&A is running at 6% of sales.

That is right in-line with our plan to control SG&A spending to approximately 6% of sales for the full year of 2007.

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

Net interest expense was $15.3 million in the second quarter of 2007.

That is almost twice the $7.9 million of interest expense we incurred a year ago in the second quarter.

This increase relates to both higher interest rates and higher average borrowings, but interest rates are the bigger factor.

For your reference, the weighted average interest rates in our borrowings for the second quarter 2007 was approximately 8.4%.

The good news for us is that we should see our composite average interest rate come down to approximately 7.5% in the second half of 2007.

That is because we issue a new $250 million five-year unsecured term loan at the end of the second quarter, and paid off a much more expensive loan.

The new term loan reduces costs by more than $4 million annually, extends maturity by more than two years, and approves our operating flexibility as compared to the previous loan.

I know it is a tough market at this point in time, but we got our deals done earlier this year, and we are not affected in any significant way by the current credit market turbulence.

None of our primary debt agreements expire before 2010, and most not until 2012, '14 and '17.

Let's talk about tax for a minute.

Our effective income tax rate the second quarter of 2007 was approximately 13.5%.

I noticed that some of the analyst community has been commenting on that this morning.

Hopefully I can explain what is going on here.

It should be very clear for the first half of 2007, AAM's effective income tax rate was approximately 19.4%.

That is down from an all-in tax provision of approximately 26% in the first half of 2006.

As we have explained on many previous occasions, we are in the process of significantly changing AAM's global footprint.

In 2007, we are generating a high percentage of our consolidated profit, nearly all in fact, in our foreign operations.

In each of our major foreign operations, remember that is Mexico, Brazil, the U.K., and now China, and soon Poland.

We have the opportunity to benefit from effective tax rates that are much lower than here in the U.S.

In all these locations, we are talking 15 to 20%, the high for Mexico is at 28%, but they are much lower than what we have here in the U.S.

In some of those locations, we are benefiting from tax holidays, credits, carry forwards, and other deferred tax assets that reduced our overall tax burden.

This is why our effective income tax rate is so much lower than the U.S.

statutory rates.

By the way, our run-in rate in the first quarter of 2007 and we talked about this on our last call, was about 19%.

The GAAP rate was 30% but that included a deferred tax adjustment that impacted the first quarter.

You strip that deferred tax adjustment out, we are running at about 19%.

In the second quarter, a couple things are new and different, right?

The debt refinancing costs are a U.S.-based charge, and some other increased profitability that we are experiencing in terms of productivity and other changes are occurring offshore.

That is just changing the mix of where our income is earned and where our taxes are paid.

For that reason, our effective income tax rate is a lot lower than it has been in the last few years, certainly lower than the U.S.

statutory rate.

If you have got other questions on that, I will be happy to handle them later.

Bottom line for the second quarter 2007 is that our GAAP earnings were $34 million, were $0.64 a share in the second quarter.

Again, that includes $0.20 of special items, restructuring costs of 7 million, or $0.11 per share, and a debt refinancing charge of $5.5 million, or $0.09 a share.

All right.

Let's talk about cash flow.

Our cash flow in the second quarter of 2007 was very strong.

GAAP cash from operating activities was $224.8 million in the second quarter 2007, versus 92.7 million in the second quarter of 2006.

As Dick mentioned this is a new quarterly benchmark for our Company.

CapEx in the quarter was $33 million, after deducting our CapEx and dividends paid of $8 million from our operating cash flow, free cash flow was $183.8 million in the second quarter of 2007.

For the first half of 2007, our free cash flow was $143 million, that is up $215 million versus the first half of 2006.

Let me explain why.

First of all, net income was up $20 million year-over-year.

CapEx was down about $80 million.

So those two items account for nearly half of the improvement.

The rest is attributable to a series of favorable working capital movements, each of which accounted for approximately 15 to $20 million of improvement year-over-year.

Let me run you through those.

Number one, we had lower cash taxes paid the first half of 2007 versus 2006.

Most of this relates to the fact that we had two prior period audit settlements in the first half of 2006, as I just mentioned.

Second point, the billing process improvements on metal market pricing adjustments were finalized in the second quarter of 2007.

As a result, we are billing and collecting these amounts now on a monthly basis.

These used to be quarterly.

That is a working capital gain.

Number three, collections on rebillable fueling and other customer capacity programs were higher in the 2007.

These arrangements tend to build up on the balance sheet until launch.

With the launch of the GM T900 program now behind us, we have less working capital tied up in this activity at the end of the second quarter.

Fourth, on a similar but a different and separate note, nontrade receivables are significantly lower at June 30 compared to 2006 year end.

A good example of the type of activity covered here is the reimbursement of post retirement healthcare payments for retirees with AAM and GM experience.

We are current on these matters, and that is a favorable item in the first half of the year.

Fifth item, over the past year or so, we have refinanced several debt agreements and operating leases.

Not only are we paying less interest than we were under the previous agreements, but the timing is favorable because we are paying more of these on the interest and lease payments on quarterly and six-month intervals.

Finally, the last point, the rest is related to timing differences primarily affecting payables and receivables.

Sales in the month of May which we collected in June were very strong this year.

But there was one less production day in June.

These types of working capital flows tend to even out over the year that can result in quarterly changes.

This quarter it was favorable.

Let's focus on our capital structure.

Net debt outstanding at the end of the second quarter was approximately $515 million.

That is down almost $144 million versus 2006 year end.

Obviously that is explained by our year-to-date free cash flow result.

Stockholders equity finished up at $856.5 million at June 30, 2007.

Net income and currency translation worked to drive it up in the second quarter, adjustments relating to the adoption of the measurement day provision, FASB statement number 158 were working against us.

If you need information, just ask a question and we can get into any other details you would like.

Net debt to capital was 37.6% at June 30.

We were up in the mid-40s on the leverage ratio at the end of the year 2006.

But now we are already pretty much back to our targeted levels of net debt leverage.

At June 30 net debt to EBITDA is running at less than 1.5 times.

At quarter end, we had more than $900 million of available cash, and committed borrowing capacity under the revolving credit facility.

On top of that, we had more than $100 million of additional availability under Ford Credit facilities, and money market lines of credit.

Liquidity is not a concern for us at this time.

Let me finish with some comments on our 2007 outlook.

We are not revising our earnings guidance today.

That is the first point.

We originally issued our guidance at $1.25 to $1.50 per share, and increased that outlook at the end of the first quarter by $0.05 on either side of the range, to $1.30 to $1.55 per share.

Volumes are shaping up to be solve softer than we had thought at the beginning of the year, down approximately 3 to 4% on a year-over-year basis.

Content was up nicely, just as we thought it would be, and that is driving our growth and our top line in 2007.

Most of our other major assumptions remain intact, for example, productivity improvements, material cost reductions, and savings associated with the attrition program.

If anything, we are ahead of schedule on some of these areas.

Another major issue to consider in our earnings guidance is the debt refinancing charge we incurred in the second quarter 2007.

Although we are seeing an immediate improvement in interest expense as a result of that activity, we still have to absorb at least a nickel of additional expense this year, we didn't contemplate when we initially set our guidance.

All right.

As to cash flow, I want to point out a couple things.

We have modified our cash flow guidance a little bit to clarify that we expect our free cash flow to exceed $143 million in 2007.

Said another way, we expect to be breakeven or better in the second half of 2007.

We expect GAAP cash from operations to be strong in the back half of the year, just like it was in the first half, but we need to cover two significant cash obligations in the second half of 2007, that are different from our first half and different from the normal cyclical trends we tend to see.

Seasonality is when I am talking about.

First point, CapEx in the second half of 2007 should be double the $75 million we have spent so far this year.

That is simply related to the timing of our customers' program requirements.

Second item is that the amount of cash required to fund restructuring costs in the second half of this year, will also be a lot higher than what we spent in the first half.

On a year-to-date basis, we have funded approximately $30 million to the special attrition program, and other attrition program payments, and related restructuring costs.

Remember for the year, our total guidance is 90 to $100 million of cash payments for these items.

That includes payments this year for the SAP that we initiated last year.

It includes the $25 million of expense we are going to incur this year, and it includes CapEx relating to moving and redeploying machine and equipment from a capacity management standpoint.

The second half of 2007, we see those payments in a range of 60 to $70 million.

That is double, maybe a little more than double than what we spent the first half.

The character of these payments are going to change.

I mentioned that.

The activity is dominated by attrition programs in the first half.

In the second half, we will be focused on redeploying machine and equipment capacity.

To wrap up, let me say that we are pleased with our earnings and cash flow performance so far 2007, especially as it relates to the ability we have had to restrengthen our balance sheet.

Our mentality is to manage what we can control.

That is exactly what we are going to do in the second half by focusing on the key quality, warranty, delivery, launch, productivity, sourcing, and restructuring initiatives, that drove our performance in the first half of 2007.

We still have a lot of work to do as it relates to improving our U.S.

cost structure.

The commentary I shared with you today shows we are currently making our profits in our fast-growing foreign operations.

Although this is great news, particularly as it relates to our long-term strategic objectives to diversify our customer base, product portfolio, and our global manufacturing footprint, we must address the structural cost issues in our core U.S.

operations to sustain our progress.

We are looking forward to continuing that work with all of our relevant stakeholders to make the necessary improvements in this area, The growth in our new business backlog and the continued progress we have made in 2007, on attrition programs, and capacity redeployments are important steps in that direction.

Thank you for your time and attention this morning.

I am going to stop here and turn the call back over the Jamie Little, so that we can start the Q&A.

Thank you Mike, and thank you Dick.

We have reserved some time to take questions.

We ask that you please limit your questions to no more than two.

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

At this time, (OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of John Murphy with Merrill Lynch.

Good morning, guys.

Good morning, John.

Good morning, John.

Dick, when we think about capacity utilization in the first half of the year, and then what it'll be in the second half of the year, and maybe what it'll be in 2008, I wonder if you could give us what you saw and what you expect, recognizing that there is going to be moving parts in the numerator and the denominator of the equation.

But just trying to get an idea of operating leverage moving forward.

As we told you the last time, capacity utilization has dropped from about 90% in our better year, 2003/2004, to around 75% in the last year or so.

We are starting to pick that up as Mike has indicated, we are doing some redeployment capacity, and we expect the second half of this year, let's just focus right now on the third quarter which we are in right now, to be significantly strong like the second quarter has been.

If we step forward to 2008, it sounds like you are able to put some of these new program into existing facilities in the U.S.

How much do you expect that to help?

I will let Yogen have a little response right here, on the capacity utilization.

This is Yogen Rahangdale.

We expect by the 2009 timeframe to get back to 90% capacity utilization.

We wi'll be slowly going from the 70 to 75%, to 90% in those two years.

Then second question on quoting activity, it sounds like you have got a big market that you are quoting on, 800 million.

Do you see the competition as being more aggressive on pricing in that quoting activity?

Given some of the investments, particularly from Chrysler and axle facilities, is there more insourcing, and that potential market shrinking as we go forward?

This is David Dauch.

We compete in a very competitive market to begin with.

So I don't see any changes in the competitive pricing structure that is out there.

We feel we have a lot to offer from a technology standpoint and the overall performance standpoint.

To get to your question in regards to insourcing, yes.

Chrysler has made a decision to build an axle facility.

You need to understand the details of that axle facility that they are looking at doing axle assembly and gear production only, so there is opportunities for companies like American Axle and others, to quote on some additional component business for that facility.

That is all I can add at this time.

Thank you very much.

Thank you, John.

Your next question comes from the line of David Leiker with Robert W.

Baird and Company.

Good morning, everybody.

Mike, is there a way you can run through, I don't think I heard you say it, what the savings are from, you know, the buyout last year, what you are actually realizing in the quarter?

Hold on just a minute.

Let me grab that for you.

Of course the savings manifest itself in the form of reduced supplemental unemployment benefit costs.

We were running between 15 and $20 million on that reduction in the second quarter.

We look at it net of the EFIP charges that we incurred, but on a gross basis just for that one item, it is between 15 to $20 million improved year-over-year.

Is that profitability of where you would like to be then right now, you know, given where the utilization is?

Is that falling where you would like to see it at this point?

I'm sorry, did you say profitability?

Yes.

I mean, I think as we said, we are pleased with the level of profitability we have, including the second quarter that capacity utilization initiatives are going to be key to a lot of improvements in that area also.

And then a couple things on the international side I want to talk about.

How large is your business outside North America today?

We have got probably about one-third of our manufacturing activity right now David occurring outside the U.S.

And I think that is a pretty straightforward answer to your question.

And continuing to expand.

And that new business, Dick, you had said 75% was non-U.S.

How much of that is outside Mexico, Canada as well?

Well, I would have to say outside of the --

Outside North America.

I think your question is outside the U.S.

and Mexico?

Outside North America.

I am responding to what North America is, U.S., Mexico and Canada.

Sure.

It is growing in Brazil.

It is steady in U.K.

and Europe will be about a year from now before we get any significant expansion there, and we have told you it is starting to grow significantly over in Asia, China.

So that is the trend and that is what we are going to be doing over the next several years.

And this business you are picking up in the international markets, is that business that is coming from new products that are being developed in those markets, or are you seeing some OEs actually outsource production for existing programs.

It is the majority new products in those markets.

There is certainly some outsourcing being done by OEMs as David indicated, and we will respond to those opportunities as they avail themselves.

Thank you very much.

Thank you, David.

Your next question comes from the line of Chris Ceraso of Credit Suisse.

Thanks, good morning.

Good morning, Chris.

A couple things.

Mike, I appreciate the discussion on the tax rate.

What do you think is normal on a go-forward basis?

Is it 19 to 20% based on where your profits are coming from?

You know, Chris, that is going to be dependent on where our profits are coming from.

It is difficult for us to predict all those details specifically, but we would see the levels that we are running at here in the first half of the year, sustainable certainly through the second half of the year.

Unless and until we are able to make some additional structural, additional structural changes in our U.S.

cost structure, we wouldn't expect the amount of contribution from our U.S.

operations to materially change that tax rate for a while.

As soon as it does, though, you are going to see that impact in our tax rate, because Uncle Sam collects $0.35 on the dollar.

So that will be because your North American ops are getting more profitable, so you have to pay more taxes if you make more money, right?

Chris, that is going to be good news.

Right.

Okay.

I just want to confirm that I am thinking about the math on this correctly, that the backlog that you are quoting, or not quoting but that you have been awarded the 1.2 billion for 2008 to 2012, that compares with your previously reported number of 1.1 billion.

But that was '07 to '12, is it right?

The difference here is that the 900s have rolled off in '07, and you picked up an incremental 400, not that you have lost something else in the backlog?

Chris, this is David Dauch, that is the appropriate way to look at it.

We are looking at 2008 to 2012 timeframe knowing that we are launching business in 2007.

We have over $200-plus million of business that has launched in 2007.

We try to look at it it going forward 2008 to 2012.

So it is an incremental $400 million in incremental business.

But you didn't lose anything that was previously in the 1.1, correct?

No, we did not.

Can you comment about the outlook for GM's full sized truck production?

What do the schedules look like, that you are seeing in the next six to nine weeks?

As I just mentioned to one of the previous questioners, the third quarter continues to look very strong.

Okay.

Then just lastly, quick housekeeping item, what was the four-wheel-drive penetration in the quarter?

In the quarter, it was just about 65%.

How did that compare a year ago?

It was about 62% a year ago.

Okay, great.

Thanks a lot.

Thank you, Chris.

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

The backlog, 1.2 billion, about two-thirds of that, about $800 million coming on-line in the next three years.

My question is as you think about that 800 million, would you split that evenly across the three-year time period, or would you say that there is some peaks and valleys.

And when would those be?

That is a good question.

We will be launching some of that in 2008.

The bigger portions are coming in 2009 and '10.

And then can you talk about how much is going to be rolling off?

I don't believe this is a net new business backlog.

I think the most significant piece is going to be the 300?

Yes.

That is exactly right.

That is about $200 million of topline Fords this year, Brett.

As you think about that additional business that you're quoting on, David, over what timeframe would that potentially impact your revenues?

Most of it is 2009 and beyond.

But there is some that could impact us as early as 2008.

Previously you had been talking about the possibility of announcing some significant wins here.

Would you say that most of the near-term wins have been awarded, or is there a potential during the remainder of the year to be awarded some significant new wins?

I think there is still potential for some significant new wins to be awarded.

But at the same time, our backlog that we have announced here does include obviously a lot of significant new ones.

Thank you very much, gentlemen.

You got it.

Your next question comes from the line of Rich Kwas with Wachovia.

Thank you.

Most of my questions have already been answered.

Appreciate it.

Okay, Rich.

Have a good day.

Thanks.

Your next question comes from the line of Brian Johnson of Lehman Brothers.

The financial questions have been answered, so I would like to throw a strategic one to Dick and the team, which if we look at the new business backlog for RWD and AWD, putting yourself in the customer's shoes, what made them choose axle over some of the more established competitors, if there were any on those bids in those markets?

How are you going to get more wins like that coming forward?

I think what we discussed before, Brian is we bring an entire comprehensive value package.

We bring the best technology.

We bring the best delivery.

We bring the best quality.

We bring the best durability, the best warranty, the best launch support, and we have got a global footprint, so therefore we can do just-in-time delivery, and respond to the unique market as they are doing their real world gateline production, therefore the overall value package of us has been well received, well respected, and it has given us a very nice momentum.

And in terms of the North American market, are there any growth opportunities, maybe an update on how you are looking at the Dana, the Ford, the kind of more traditional business that is out there?

There are certainly opportunities here in the most vital market in the world, North American.

Obviously, we have an extremely good situation with General Motors.

We have a strong and growing relationship and opportunity with the Chrysler group, and we certainly have opportunities with the Ford Motor Company to look at in the future, as well as other potential resourcing by OEMs, as they go through some of their strategic re-analysis of relocating and sourcing, and issues as it relates to Dana, I don't want to respond right now, as they are going through a very difficult process right now.

Okay, thanks.

You are welcome.

Your next question comes from the line of Rob Hinchliffe with UBS.

Hi, Rob.

I think earlier you had talked about getting back to a 90% utilization rate in the U.S.

a couple of years from now.

What are the big drivers to getting there?

Is the idling of Buffalo the primary factor, or is it another assumption of another attrition plan, new revenue?

What is the right way to think about that?

We didn't say it the way you asked it, we said we are going to get back to a corporate utilization of approximately 90%.

Obviously, item one would be the restructuring of capacity deployment.

Item two would be the continued launching of the new programs that we have communicated to you and your colleagues.

Item three is simply a whole lot better processing, as far as utilization of the capacity we have, and redeployment of certain items that needed to be done.

Buffalo being one that is planned to be idle.

So sticking with that Dick, earlier you said a third of the manufacturing is outside of the U.S.

What is the right way to think about that number, you know, two, three years out?

Well, I think you will see continue with a sourcing of our business disproportionately outside the U.S., because the growth of the industry and the market is disproportionately outside of the U.S.

So we simply have to be where the business is, where the customer needs us, and where the market is.

So it is more growth outside of the U.S.

rather than reducing your current capacity within the U.S.?

With the exception of Buffalo?

That is exactly right.

Okay.

Then just a quick one on CapEx, thinking about cash flow, looking forward, how does the CapEx budget look if you had to tag it somewhere in '08?

Right now, assessing for our 2000 budget on the new programs we just provided we have evaluated every one of them, it is premature for me to give any guidance on Cap Ex.

You know our 2007 guidance already.

That is right.

Even just directionally up or down, still too early?

I think it would be too premature at this time.

Thanks very much.

I would like to know, also.

Your next question comes from the line of Ronald Tadross of Banc of America Securities.

One question on the cost reduction, Mike.

I think you said $100 million before structural for '07, which I think you have said before, but I just want to clarify does that include pension and wages?

Yes.

So is that part of I think over the two-year period this is 170 to 200, something in that range?

It is more than 100, right?

I am not sure I understand the 170 to 200.

I think this is all related to the charges you took in late '06, and I think you over a two-year period, you were going to do somewhere in the range of 150 to 200 of cost reductions?

I don't know that we have been any more specific than saying we are going to have 100 this year.

What that 100 is, Rob, remember is the cost avoidance associated with not paying subs to associates who would otherwise be on layoff.

It is also contribution from reducing our salary overhead structure.

Of course, the costs associated with both hourly and salaried associates would include both pay and benefits.

We have got other restructuring activity relating to the redeployment of capital and equipment, and these types of things, that will help us drive cost as well.

So we are certainly targeting more than $100 million in structural cost reductions, but we have not put a quantification on anything more than that at this point in time.

Okay.

So is it fair to say you did about 25 million in the second quarter?

You said you are on-pace for that 100?

Yes.

We are definitely on pace for that 100.

There is no question about it.

Just one other thing that may be a little more strategic on the backlog.

You did say about I think 50% of the backlog is rear-wheel-drive and all-wheel-drive.

Why shouldn't we be worried about that given fuel prices?

Is it possible that those numbers might need to get revised down at some point?

Are you guys being conservative in the backlog?

I think that we have to relate to the market just like you do.

And the application of the long-range product plans going forward can't be changed overnight.

The consumer will make his or her changes.

We are adjusting through that, as we are going through the structural change right now.

For speculation there is no reason to speculate.

We think what we have reported is exactly what we think is occurring.

Are you being, haircutting the numbers at all, maybe just to take into account higher fuel price scenarios?

We don't simply take what our customer quotes to us during the bidding process as the number.

We do make our own assessments of what we believe is going to happen, and that is what we are reporting to you on that.

Thanks a lot.

Thank you, sir.

Your next question comes from the line of Rod Lache, Deutsche Banc Securities.

Good morning.

Just on this CapEx question, just directionally it looks like the backlog is a little bit lower next year versus this year, probably even with the new business wins.

Is that correct?

Why wouldn't CapEx come down as that occurs.

Could there be a significant restructuring component to next year, similar to what you are doing this year?

First of all, we are not going to be making specific comments about the backlog and how much launch is in 2008.

We are obviously in the process of adjusting our 2008 budget as we discussed, and we will be providing more commentary on that as we reach the end of the year.

What I can say is that the, obviously there is a portion of that backlog launching next year.

Our CapEx requirements should not be any higher than what we are seeing here in 2007, next year, based on what we know right now, but of course we have to assess the restructuring opportunities.

We are still getting into the details of the programs as Yogen said.

It is premature for us to make any more specific commentary about 2008.

You know that there is a lot of things that might develop.

As and if they develop, we will update you.

Okay.

We have got data on the overall Ram production from the quarter year-over-year.

Could you comment on the heavy duty, what did you see on that version?

Does that moderate at all into the back half based on what you see today?

In the second quarter Rod, we were roughly flat on our products for the Dodge Ram program.

In the second half of the year, remember last year, they slowed things down substantially.

Particularly in that third quarter, that was true for the Dodge Ram program, that was also true for the GM programs.

So we would expect to see some strength in the third quarter, and then you know, the fourth quarter at this point in time, looks like it's, you know, it is going to be at or near, maybe a little lower than what we saw last year.

Two really quick ones.

The tax rate you applied to the 7 million and 5.5 million charges, and how many people do you have in sub at the moment?

We had estimated for the year that we would see an average of between 200 and 300 people in the layoff pool during the course of the year.

That is going to fluctuate up and down.

It was higher than that in the first part of the year, when our customer production schedules were weak.

And it was lower than that in the second quarter, and lower right now.

Okay.

Is it a 30% tax rate you applied to the 7 million and the $5.5 million charges?

No, it is not.

We would have used our composite quarter average.

Okay.

Simply from a keep it simple standpoint.

But these were U.S.

charges?

In fact, if you want to be that precise, Rob, that is exactly right.

Okay.

They relate to the U.S.

and most or all those do.

It would be appropriate to think about it at a 35% tax rate.

Okay, thank you.

Thank you, sir.

Your next question comes from the line of Himanshu Patel, JPMorgan.

Hi this is Ranjeet Unnithan for Himanshu.

Good morning.

Did you say earlier that you make most of your profits from your non-U.S.

operations, or did I mishear that?

At this point in time that is true, Ranjeet.

Does that mean that you make your operating profit margins in those regions, are in the sort of 15 to 16% range roughly?

We are not going to be disclosing a lot of details like that.

But, I guess my question then is, so I guess you probably see normalized margins if you have competitive wages in U.S.

clearly north of double digits, I suppose if you are seeing those kind of margins in non-U.S.

facilities.

Is that a fair way to see it?

Well I think the fair way to see it, is that we are interested and focused on improving the profitability of our U.S.

operations, and if we can do that you will see our margins increase, yes.

On the backlog, can you disclose how much of the backlog, or the new backlog is from GM, or from the Detroit OEMs?

It substantially has a majority of it is General Motors related.

What we are doing is expanding our strategic partnership with General Motors.

It will be more of a global type partnership, and also includes expansion from truck and SUV, in to passenger car and crossover vehicle applications.

So to answer your questions, there is a significant part of the new business backlog that is General Motors related, but there is also some other key strategic wins from non-GM customers.

Are these programs substantially aimed at the North American market or, you know, I am speaking specifically to the GM programs.

Are they mostly aimed at the North American market, or is there some South American, and non--?

As I mentioned, they are global in reach.

Okay.

Just one last question if I may.

Your guidance for the year, I am assuming that resumes your tax rate of about whatever you are seeing in the first half, about 20%.

Is that right?

It definitely takes into consideration what we think the rate is going to be for the year.

And it is going to be as I indicated in that range, maybe a little bit better by the time we work with it.

That is it.

Thank you very much.

Thank you, sir.

Great.

Thanks.

We have time for one last question.

Thank you.

Gentlemen, your last question comes from the line of Frank Jarman with Goldman Sachs.

Thanks, guys.

A quick question on the capital structure.

You guys have done a great job of cleaning it up.

Specifically regarding the cash, you are running with about a little bit more than $300 million of cash on hand, you have great liquidity.

Can you just refresh me on what the priorities for cash use are going forward, and what the appropriate level of cash to run with is going forward?

Okay.

Yes.

Listen, you know, we have a situation that is a little bit unusual, in comparison to our recent history to carry this much cash, and what it principally relates to is, we had a good opportunity and it seems even more so now, to raise capital, unsecured capital.

Good terms and conditions.

Basically investment grade covenant packages.

And so we did it.

We bifurcated the raising cash decision, from the when and how we are going to deploy that cash.

So the priorities are simple.

We need to continue to fund the restructuring of our U.S.

operations.

We saw a substantial cash outlay for that activity a year ago.

We need to be prepared should the need or opportunity arise again in the future.

We are also very focused as Dick has said, as all of us have said, on continuing to diversify our business.

That includes our product portfolio.

So we want to be able to fund additional research and development activity, we want to expand our global manufacturing footprint, and our new business backlog is certainly fueling that opportunity for our Company.

And we also are focused on increasing the diversity of our customer base.

Organic growth and potentially some strategic initiatives would be available, and obviously all of those are going to require some capital.

So I think that is really what is appropriate to think about in this regard.

Okay.

That is all I had.

Thanks.

Thank you, Frank.

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

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

This concludes today's call.

You may now disconnect.