American Axle & Manufacturing Holdings Inc (AXL) 2007 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the American Axle & Manufacturing third quarter 2007 earnings 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 session.

(OPERATOR INSTRUCTIONS).

I will now turn the call over to Mr.

Jamie Little.

Please go ahead, sir.

Thank you and good afternoon, everyone.

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

This morning, we released our third quarter 2007 earnings announcement.

If you 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 5 p.m.

today through 5 p.m.

eastern standard time November 6th by calling 800-642-1687, reservation number 17920748.

Before we begin I would like to remind everyone the matters discussed in this conference call 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 our filings with the Securities & Exchange Commission.

This information is also available on the AAM.com website.

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

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

We are audio webcasting this call through our website, AAM.com.

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

During the quarter we're planning an investor trip to the mid-atlantic region and we will also be at the Baird 2007 Industrial conference in Chicago on November 7th.

In addition, we're always happy to host investors at our facilities either here in Detroit or 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 afternoon, everyone.

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

Joining me on the call today is Mike Simonte, our Vice President and 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 up for my questions you men and women may have.

Today, AAM is reporting our third consecutive quarter of solid operating performance and strong positive cash flow.

I will start my comments this afternoon with two important highlights.

First, AAM's net income in the third quarter of 2007 was $13.1 million, and diluted earnings per share were $0.25.

This compares to a net loss of $62.9 million or $1.25 per share in the third quarter of 2006.

Our third quarter results are another important step in AAM's plan and commitment to restructure, resize and profitably recover in the calendar year 2007.

Through nine months, we're exceeding those expectations.

AAM's earnings in the third quarter of 2007 reflect the impact of special charges and nonrecurring operating costs of $7.8 million, equivalent to $0.13 per share.

These special charges relate primarily to the redeployment of machinery and equipment and other actions taken to rationalize underutilized capacity in the United States of America.

Also included in this total were charges of $2.7 million, equivalent to $0.04 per share associated with a voluntary separation program offered to our hourly associates represented by the UAW at AAM's Buffalo Gear Axle and Linkage Facility in Buffalo, New York.

We refer to this as the BSP, meaning Buffalo Separation Program.

I will have more to say approximate about this in a few minutes.

AAM's earnings in the third quarter of 2007 also reflect the impact of a work stoppage experienced by our largest customer, General Motors, from September 24 through September 26 of 2007.

AAM estimates the impact of lost sales and expenses related to this work stoppage was approximately $2.8 million or about $0.04 per share in the third quarter of 2007.

Item two, the second metric, I will highlight is cash flow.

AAM's free positive cash flow was $31.5 million in the third quarter of 2007.

For the first three quarters of the year, AAM's free positive cash flow now totals approximately $175 million.

That represents an improvement of $280 million versus the same period YOY.

AAM's strong year-to-date free positive cash flow performance has allowed to us rapidly restore AAM's net debt to capitalization ratio to approximately 35.7% at September 30, 2007.

That is a reduction of approximately 9 full percentage points or a 900 basis points reduction in a short nine-month period.

Let me now provide you with an overview of the third quarter.

Starting with a market environment, North American light vehicle production was up approximately 3% in the quarter on a year-over-year basis.

General Motors' light truck production was up 6% in the quarter.

In total, AAM's production volumes were up approximately 4% in the quarter on a year-over-year basis.

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

Production volumes for the AAM mid-sized truck and SUV programs were up an estimated 25% in the quarter on a year-over-year basis.

AAM continued to benefit from favorable product mix in the third quarter of 2007 and AAM's content per vehicle increased over 8% to $1,303 in the third quarter of 2007.

As a result of these factors, AAM's sales in the third quarter of 2007 were up more than $73 million to $774 million for the quarter.

Gross margin for the quarter was 10.4% as compared to a negative 8.8% in the third quarter of 2006.

Operating margin was 3.7% as compared to a negative 15.7 in the same period one year ago.

It is important to note that AAM's third quarter 2006 results included a $91.2 million special charge for supplemental unemployment benefits referred to as SUPs.

Setting aside a year-over-year impact of that charge, AAM's profit margins were markedly improved.

This was due primarily to three things, first, the favorable impact of higher sales content, second, increased productivity gains that we're enjoying, and, third, structural cost reductions resulting from attrition programs and other ongoing restructuring actions.

Let me now discuss AAM's R&D efforts and new business quotes.

AAM continues to invest in the development of new advanced technology products, processes and systems in balance to meet the changing needs of a global automotive marketplace.

In support of this objective, AAM's R&D spending for the first three injuries of 2007 were $61.9 million.

That compares to $60.6 million in the first three quarters of 2006.

AAM leverages its R&D investment through advanced global technical capabilities and resources.

Our Rochester Hills, Michigan technical center continues to serve as our global hub for our product engineering activities, supported by eight other locations throughout the world.

Those additional global engineering and product resources are located in Asia, Australia, Europe, North and South America.

These facilities enable AAM associates to y provide round the clock design, engineering, testing and validation capabilities to serve our customers and the market place.

It is highly effective and also cost efficient.

AAM is developing new and innovative products that are targeted for growth segments of the global automotive industry that are needed by our customer base for their consumers.

AAM is focusing on enhancing fuel efficiency through mass reduction and improved actual efficiency.

Advanced metallurgy, creative packaging, as well as other related initiatives.

Our company also continues to develop drive line and drivetrain products for all-wheel drive as well as rear-wheel drive passenger car and cross over vehicle application segments.

AAM's expanded product portfolio is creating new business opportunities.

Today AAM is quote approximately $800 million of potential new business, substantially all of AAM's current new business quotes are with customers other than the General Motors Corporation.

This includes opportunities with several major global OEMs and bodes well for the continued diversification of AAM's customer base.

The over $800 million of quoting activity is in addition to the $1.2 billion of new business backlog that is booked.

That has been awarded to our company and will launch them from year 2008 through '12.

Let me now take a moment to update on you two critical aspects of our operating performance in the year 2007.

First, AAM continues to emphasize the actions necessary to sustain world class quality, reliability, warranty, delivery, and launch performance.

This is an increasingly important competitive advantage for our company throughout the world.

We continue to improve and provide more value to our customer base and they are recognizing it.

AAM's warranty performance is measured by our customers two different ways.

One on cost per vehicle and second on incident per thousand vehicles.

Thus, AAM's year-to-date performance on these measures has improved a minimum of 28%, to nearly 50% for the major programs that we support for General Motors as well as Chrysler LLC.

These are major differentiators for AAM and respected by those respective companies.

Second, AAM remains focused on productivity improvement.

In the first three quarters of 2007, our company has experienced a high single digit net productivity improvement.

This is consistent with our long-term history track record of 6 to 8% annually from 1994 through 2005.

This is allowed AAM to overcome various costs inflation pressures and improved margins, bottom line profitability and cash flow performance.

Before I turn the mic over to Mike, let me wrap up by commenting on the progress that AAM is making on our long term strategic objectives in 2007.

We are on track to deliver significant gains in profitability and positive free cash flow in 2007.

While at the same time reducing debt levels and improving our balance sheet strength and liquidity position.

AAM has also made steady progress on an ongoing structural cost reduction initiatives in the year 2007.

We are right on track where we need to be and will be.

The most recent development in this regard is the Buffalo Separation Program, as I refer to BSP.

In August of 2007, we announced that AAM would offer a voluntary separation program to all 650 men and women hourly associates represented by the UAW at the AAM Buffalo facility.

The BSP is related to our previously announced plans to idle a portion of AAM's U.S.

production capacity dedicated to the mid-sized light truck product range and segment.

The BSP is just the latest example of the actions AAM is taking jointly with the UAW to help achieve sustainable market cost competitiveness in our operation.

This includes a strategic emphasis on improving AAM's manufacturing capacity utilization and jointly developing new innovative labor agreements to enhance AAM's operating efficiency as well as critical operating flexibility.

These actions are enhancing our ability to invest in the continuing diversification of AAM's product portfolio, the expansion of AAM's customer base, and the growth of AAM's global manufacturing footprint.

Today, we are proud to announce another important development for AAM that addresses each of these strategic initiatives.

AAM has formed a joint venture with Sona Koyo Steering Systems Limited of India.

The new company, Sona Koyo AAM Sona Axle Private Limited will manufacture and sell light truck, passenger car and SUV axle assemblies for the fast-growing India market.

The corporate headquarters of our new joint venture will be located in Pune, India, near the site of AAM's rapidly expanding India Business Technical and Engineering Center.

A new green field manufacturing facility will be constructed in northern India.

The facility is expected to launch in 2008 with a production of light vehicle axles for Tata motors.

We're excited about this development because it will accelerate the expansion of AAM's manufacturing and operations presence in India.

The joint venture will provide our current and future customers with drive line systems of the highest quality, technology and delivery that is a hallmark of AAM and Sona Koyo.

We're also pleased to be working with such a respected and accomplished partner in the Sona group of companies, led by Dr.

Surinder Kapur, Sona's Chairman and Managing Director.

This joint venture is further evidence of AAM's commitment to successfully deliver on our long-term strategic goals of expanding our product portfolio, served markets, customer base, and global manufacturing footprint.

In summary, ladies and gentlemen, AAM has the vision, the values, the business focus and the bulldog determination to turn the challenges of global competition into opportunities for AAM, continued profitable growth and our shareholders.

I want to thank each and every one of you for your attention today and your vital interest in AAM.

Let me now turn this call over to you're Vice President of Finance and Chief Financial Officer, Michael Simonte.

Mike?

Thank you, Dick, and good afternoon, everybody.

As Dick said, today AAM reported third quarter 2007 GAAP earnings of $0.25 per share.

That compares to a loss of $1.25 per share in the third quarter of 2006.

As you may recall our results in the third quarter of 2006 included special charges of $93.1 million, related to supplemental unemployment benefits, severance payments and other related benefit costs.

In the third quarter of 2007, we also incurred some special charges in nonrecurring operating costs.

First, we incurred approximately $5.1 million or $0.09 per share related to the redeployment of machinery and equipment and other actions to rationalize under utilized capacity.

At the beginning of the year, we estimated that we would incur approximately $25 million of such restructuring costs.

For the first nine months of this year we incurred approximately $15 million of that total.

Second, we incurred charged of $2.7 million, or $0.04 per share, related to associates who have already signed up for the Buffalo separation program or BSP.

Dick just described that to you so I won't cover all the background at this time.

What I can tell you is the impact of the BSP will be above and beyond the estimated $25 million of restructuring costs we announced at the beginning of the year.

In total, we have estimated special charges of as much as $85 million for the BSP, and that includes pension and other post retirement benefit curtailments and special termination benefits.

All of these costs are contingent upon our associates in Buffalo electing participation in the plan so we will not be sure of the impact of the BSP until the program is concluded later in the fourth quarter of 2007.

To summarize, our third quarter 2007 results reflect the impact of a total of $7.8 million or $0.13 per share for restructuring costs.

That's $0.09 for the redeployment of machinery and equipment and $0.04 for the BSP, $0.13 total.

Remember that all of this is in addition to the special charges that we incurred in 2006 and just to be clear, when I refer 20 the term restructuring costs, I am referring to this activity.

Okay.

Let me turn our attention to sales and margin performance.

Sales in the third quarter of 2007 were $774.3 million.

That's an increase of approximately $73 million in comparison to the third quarter of 2006.

That increase says more about the relative weakness of the prior year, but we'll take it.

Volume is is our friend in this business.

On an overall basis, our major program production volumes for the quarter were up approximately 4% versus the prior year.

Just as important as volume, however, is mix.

In the third quarter of 2007, AAM sales content per vehicle was up 8% or approximately $100 per unit on a year-over-year basis to $1,303.

As we discussed all year, the primary driver is new AAM content appearing on GM's new full size pickup trucks.

Although we do not expect such dramatic year-over-year comparisons, now that we've completed the launch cycle on the GMT 900, we do expect to continue to grow our content per vehicle in 2008 and perhaps even eclipsing the $1,300 mark for a full calendar year for the the first time in our company's history.

We're pleased with the growth in this metric because it demonstrates maybe more than any other that our customers recognize the value in AAM's products and services and in expanding our role in their most critical product programs.

Moving down the income statement, gross profit improved to $80.7 million or 10.4% of sales in the third quarter of 2007.

That compares to a loss of $62 million or a negative 8.8% of sales in the third quarter of 2006.

Operating income was $28.7 million or 3.7% of sales, versus an operating loss of $110 million or a negative 15.7% of sales in the same period a year ago.

EBITDA was approximately $88 million in the third quarter of 2007, and that represented about 11.4% of our sales.

For the first nine months of 2007, we've now posted nearly $300 million of EBITDA, $295.1 million to be exact or 11.8% of sales.

We believe these results, especially because they're strongly supported on our cash flow statement, demonstrate that our efforts to restructure and resize the business are on the right track.

The main drivers of our improved margin performance are substantially the same as we discussed in the first half of 2007.

The first issue is operating productivity.

Plain and simple, productivity is the key to improving margin performance in the automotive supply industry.

We're on track to meet and exceed our internal targets for productivity gains in 2007 due to a daily focus on first-time quality and overall equipment effectiveness or OEE.

We're also continuously challenging how we run our operations to become more lean and controlling all cost drivers even the pennies, nickels and dimes.

Dick already commented on this in further detail, so I'll leave it at that.

Material cost savings is the second issue.

Through the first three quarters of 2007, AAM is on track to achieve annual cost savings of approximately $15 million for material purchases.

This continues to be a major area of focus for our supply chain management team as we both globalize and localize our key sources of supply to support our rapidly expanding global manufacturing footprint.

The third issue from a margin performance standpoint and this is the biggest of the three items is our structural cost reductions resulting from attrition programs and other ongoing restructuring actions.

We still have a lot to do in this area, but we're well on our way to accomplishing a structural cost reduction in excess of $100 million at our U.S.

operations this year.

This is critically important, because AAM is not yet globally cost competitive in these U.S.

operations.

More importantly, AAM's fully loaded hourly labor costs, or as we refer to it, FLLH, is not market cost competitive here in the U.S.

as it relates to our master agreement facilities.

This will continue to be our top priority in the fourth quarter of 2007 and 2008 as we build upon the progress we made this year and work to establish a sustainable U.S.

cost structure to support our future operations.

SG&A expense, which includes R&D spending, was $52 million in the third quarter of 2007.

This compares to $48 million one year ago.

R&D was up about $1.7 million in the quarter.

The other driver in SG&A, and again this is the same as we discussed all year, is higher profit sharing accruals and stock-based compensation expense due to the increased profitability and stock price appreciation.

The first three quarters of 2007, SG&A is running at 6.2% of sales.

That's about the same as 6.1% a year ago.

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

Net interest expense was $11.5 million in the third quarter of 2007 as compared to $11.7 million in the third quarter of 2006.

For your reference, the weighted average interest rate on our borrowings in the third quarter of 2007 was approximately 7.8%.

That's down about 50 bps from the first half of this year.

This reflects the favorable impact of bond and term loan financing we completed earlier this year.

Our liquidity position is now strong and stable and just to remind you, none of our primary debt agreements expire between 2010 and most do not expire until 2012, 2014, and '17.

AAM's effective income tax rate in the third quarter of 2007 was approximately 18%.

For the first three quarters of 2007, the effective income tax rate was approximately 19%.

As we discussed in some detail on our last teleconference in July, we're currently generating a high percentage of our consolidated profits outside the U.S.

Because of the effective tax rates applicable to our foreign locations are much lower than here in the U.S., our overall consolidated effective income tax rate is also much lower than the U.S.

statutory rate of 35%.

The bottom line for the third quarter of 2007 is that our GAAP earnings were $13.1 million or $0.25 per share.

Again, this includes approximately $0.13 of special items, $0.09 per share for restructuring costs related to the redeployment of machinery and equipment, and remember this is part of the $25 million of restructuring costs we estimated at the beginning of the year, and then $0.04 in this third quarter for the BSP which will be above and beyond the $25 million.

As Dick mentioned, we also note that AAM's third quarter 2007 results were impacted by lost sales and expenses related to the UAW GM work stoppage which occurred from September 24th through September 26th of 2007.

We estimate this to have impacted our third quarter results by approximately $2.8 million or $0.04 per share.

No matter how you look at it, a much improved result in this third quarter versus the prior year.

Let's talk about cash flow.

Our cash flow in the third quarter of 2007 was again strong.

GAAP cash from operating activities was $97 million, and that compares to $62 million in the third quarter of 2006.

CapEx in the quarter was $57.5 million.

After deducting CapEx and dividends paid of $8 million from our operating cash flow, free cash flow was $31.5 million in the third quarter of 2007.

As Dick mentioned, for the first three quarters of 2007, AAM's free positive cash flow totaled approximately $175 million.

That's a big turn around from the $105 million use of cash we incurred in the first nine months of 2006.

Let me explain why.

Our improved cash flow performance in 2007 benefits from both structural changes and cyclical trends.

The impact of the structural cost reductions we are implementing this year, approximately $100 million for the full year 2007, is a major positive contributor on the cash flow statement.

This is what I mean by structural.

In terms of cyclical, what I mean is that we have significantly reduced CapEx requirements in our U.S.

operations due to the launch of our products supporting the GMT 900.

This is behind us now, and this reduction will positively affect our cash flow run rate for at least the next few years.

Our maintenance capital spending requirements will be lower.

Let's dig into further detail on the reasons why cash flow was so much improved on a year-over-year basis.

First, net income and for this purpose it is appropriate to adjust net income for the noncash items such as depreciation the subaccrual, and deferred taxes and income was up in CapEx was down.

These two items alone accounted for approximately two-thirds of the year-over-year improvement in our free cash flow.

The rest of the improvements were approximately $100 million in total is attributable to a series of favorable working capital movements, and we covered these issues in greater detail on the last teleconference, so I am not going to do all of that again, but I will list these issues today.

If you have any questions about any one of these items, you have a chance to ask on this call when we're donor you can always give us a call later.

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

Some of this relates to the fact that we had two prior-year audit settlements in the first half of 2006.

Second item is accounts receivable are down, moving our billing process on metal market pricing adjustment to say a monthly cycle and other improvements on non-trade receivables helped us to accelerate our collections and reduce our investment and receivables.

The third item is that that we refinanced several debt agreements and operating leases and not only are we paying less interest overall, but the timing is favorable because we're paying more of our interest on quarterly and six-month intervals.

These are the key items that drove our working capital improvements and aided our net income improvements and also the CapEx reductions in terms of cash flow performance in 2007.

Let's focus on capital structure for a minute.

Net debt outstanding at the end of the third quarter was approximately $484 million, and that's down about $175 million versus year end 2006.

Obviously, that's explained by our year-to-date free cash flow results.

Stock holders equity finished up at $872.4 million at September 30, 2007.

Just like the second quarter, net income and currency translation drove it up, if you need more information just ask a question and we can get into any of the details you would like.

Net debt to capital was 35.7% at September 30th.

We were up in the mid-40s on this leverage ratio at the end of 2006 as you recall and now we're pretty much back to our targeted level of net debt leverage.

At September 30th, net debt to EBITDA on a last twelve months basis or LTM basis is running at less than 1.5 times.

At quarter end, we had more than $960 million of available cash and committed borrowing capacity under the revolving credit facility.

In addition, we had another $175 million of availability under foreign credit facilities and money market lines and credit.

As we said before, liquidity is not a concern for us at this time.

Let me finish with a couple comments on our 2007 outlook for the fourth quarter.

We expect volumes to be soft in the fourth quarter, lower than each of the first three quarters of 2007.

This is still in line with our expectations for the full year 2007 and we discussed back in July.

We now expect to be down 4% approximately on a year-over-year basis in our major program production volumes and as you remember that's on the low end of the range we discussed last month or last quarter.

For the quarter on the stand alone basis speaking of the fourth quarter now, we expect our major program production volumes to be down approximately 5% as compared to the fourth quarter of 2006.

On a sequential basis we expect the same major program production volumes to be down approximately 3% versus the third quarter of 2007.

Not exactly having the wind at our back, but we'll play the hand we're dealt and continue to focus on our long-term strategic objective of diversifying our customer base, expanding our product portfolio and global manufacturing foot print.

As Dick mentioned, our new joint venture in India as well as our new customer relationship with Tata motors is a step in the right direction on those initiatives.

As always in the fourth quarter we'll focus on managing what we control as we finish up this year.

That includes continuing to improve AAM's quality, reliability, warranty, delivery and launch performance, of course productivities, material cost reductions, and most importantly working on the additional structural cost reductions we need to improve AAM's market competitiveness in our U.S.

operations.

The BSP will play a key roll in that process in the fourth quarter of 2007 and in addition to preparations for our upcoming labor negotiations, continuing efforts to redeploy existing capacity to avoid future CapEx.

Thank you for your time and attention this afternoon.

I am going to stop here and turn the call back over to Jamie so that we can answer your questions.

Thank you, Mike, and thank you, Dick.

We have reserved some time to take questions.

I would ask you please limit your questions to no more than two, so at this time, please feel free to proceed with any questions you may have.

(OPERATOR INSTRUCTIONS).

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

Good afternoon, guys.

Good afternoon, John.

Hello, John.

Just a real quick one on the India JV you're announcing announcing now, is that in the current backlog and is there potential for that to be additive to the current backlog that you've announced?

John, that is included in the backlog at least from a rounding perspective.

Of course that JV has the opportunity to grow, and potentially serve other customers.

Certainly we feel it has the opportunity to grow our backlog in the future.

Okay.

And secondly, Dick, the mid-sized truck strength we saw from GM in the third quarter, do you think that was relatively strong.

Do you think that's sustainable or will we just continue to see those volumes fade over time?

I think that you'll see maybe a little bit longer run of that mid-sized segment because it is still an outstanding product, an outstanding value, and we were encouraged with the recent performance of that segment, and we'll have to see as they unfollowed the production schedules and the market demand, but I will be a little bit positive towards that.

And if I can sneak one more in, you've been in this business for a really long time, and you've gone through a lot of these restructuring programs in the past, and you're going through a very aggressive one right now.

I am just wondering what your general view was on your ability to capture or retain savings that you create and what is actually given back to the customer over time or pulled back from the customer over time?

We have had, as you know, a long-term ability to pull through productivity, and with unique initiatives with outstanding workforce cooperation, and we're fortunately having that again in 2007, and very little of that goes to anybody other than AAL.

Thank you very much.

You're welcome, sir.

Your next question will come from the the line of Brett Hoselton with KeyBanc Markets.

Good morning.

Wait.

Good afternoon.

Good afternoon and thanks for your good news the last few days.

You're welcome.

Mike, as you think about the fourth quarter sequentially versus the third quarter of this past quarter, can you talk about any other pluses and minuses that you see, in other words, if you think you might get a little benefit from the Buffalo program, for example, and elsewhere?

Brett, in the fourth quarter, the dominant factor for us is going to be the volume situation as it always is for our company.

In terms of other puts and takes, we're going to continue to work on productivity and maybe to a small extent, we'll see a little bit upside in Buffalo.

Remember that we do intend to run that facility through most of the fourth quarter, so I wouldn't expect any significant issue there, but material cost reductions will continue and of course they will be focused on the ongoing productivity in all of our locations in the fourth quarter.

Let's see here.

With regards to your upcoming UAW negotiations, a couple quick questions here, number of tier 1 wage earners currently employed at UAW or employed at American Axle?

We still have I think what you're referring to is our legacy labor.

Yes.

That would be well in excess of 4,000 men and women in the let's call it very high labor all-in costs per hour, and that's down dramatically from previous years, but we still have a process of the restructuring we're going through and certain other things we simply cannot discuss at this point in time because of going into negotiations with our UAW people, and we're interested in getting an excellent agreement somewhere in the next four months.

Can you talk about the average age of your workforce currently?

It is relatively young, and therefore we would need a totally specific agreement to AAM.

Our hand doesn't fit the glove of anybody else that you've been listening to or reading about.

And do you have any sense of how many are close to early retirement?

I know that there is probably a handful there.

We do not at this stage.

Okay.

Very good.

Thank you very much, gentlemen.

Have a great day.

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

Hi, Rob, how are you?

Doing okay.

A couple things.

First one, also thinking of the UAW contracts, the big three just got, I understand your point, Dick, on you need something different.

Looking through the Chrysler contract, that looks like the Marysville plant largely will be staffed with tier 2 labor.

Can you comment on that?

Currently your wages are very similar to what Ford and Chrysler are paying for their axle productions.

Is it likely you'll have a dramatically different or more expensive wage structure going forward than Chrysler?

I think three things.

We congratulate Chrysler and UAW on their new agreement and especially their hard-fought for ratification point one.

Point two as it relates to us, we as a company enjoy an excellent relationship working with the Chrysler Corporation, Chrysler LLC, and we are quoting on well over 100, $150 million with them right now, so we see a potential of our expanding our relationship and the other point I indicated is the next four months will resolve our specific labor arrangements between AAM and UAW, and until we do that, we have nothing else to announce on that.

Okay.

And then secondly, can you talk about the -- what's it called, the GMC 3XX program.

How much of that is in your backlog or has the bidding started yet and is there any reason to think you wouldn't get all of it?

The GMC 3XX is the full size truck program for those that are listening that may not know.

I know you know that.

As a successor of the GM 900 program, that would be a replacement business for us, and therefore we would not include that in our new business backlog disclosures.

And if you hadn't -- if you didn't have all of it, would that counted as a negative in your backlog?

Or is there any reason to think you wouldn't get all of it?

In terms of the backlog, the key thing to point out is that any replacement business is completely excluded for the backlog on the upside or the the downside.

Okay?

To the extent that what you just described occurred, obviously it would have an impact, but we would be more focused on retaining our business as we have in every circumstance in our company's history.

Okay.

So then I guess forgetting the backlog, any reason to think are you seeing competition creep in for the C 3XX, then?

We have the best engineered products in the world in drive line systems.

We've gone through the GM 400 program, the GM 800, GM 900, GMC 3XX.

Why would anybody not want to shop for the best product and best value?

Is there potential for this program to be split among various suppliers?

There is potential for anything, and as I just told you, the C 3XX we will win, being market competitive.

Thank you, Dick.

Have a great day.

Your next question will come from the line of Patrick Nolan with Deutsche Bank.

Hi, guys, thanks for taking my call.

How are you today?

Good.

Just one question on the cash and then on the use of cash.

First on the change in the lease payments, that's payables line, that's why we see the improvement there, right?

Some of it runs through the P&L to the extent that it is lower expense and of course the rest of it to the extent it affects the timing of our accruals that run through that line item.

Okay.

Then maybe the next question would be on the -- seems like a lot of these changes you have done in working capital are sustainable, so does this change your thinking of maybe what you look to do with the cash in the terms of whether or not you use this to accelerate your diversification, maybe make an acquisition, something like that, so something particular with $93 a barrel oil that make this move a little quicker?

From a financial perspective I agree with your first comment.

We do believe the changes are sustainable, and that's of course our objective.

I don't think that issue, though, has any impact on our desire or our plan to move forward strategically.

We've got the liquidity both from an operating cash flow standpoint and also from a borrowing capacity standpoint to pursue those strategic objectives, so I wouldn't link the two, but you can be sure we're focused on making the right strategic initiatives to diversify our business.

Let me add to what Mike has indicated, and I fully support what he said.

The trend in rising gas prices driven by the higher crude affects everyone.

We as a company are adjusting to it.

We foresaw this a long time ago, not to this extent, but back in 2000, 2001, we redesigned our entire product portfolio first of all to be what is needed for the customer, for the market, and the new evolving segments, and that's why we've been so successful in receiving new orders and expanding our product portfolio with all the drive systems and the PTUs and IRDAs, and IFDAs and transfer cases and transmission differentials, electronic different applications.

That's what we're really focusing heavy on and then selectively where we need to do a joint venture such as we announced today or other acquisitions, those are still high on our radar screen, and where we have something to announce we'll announce it.

Got it.

Thanks very much, guys.

Thank you, Pat.

Your next question will come from the line of Himanshu Patel with JPMorgan.

Good afternoon, guys.

Good afternoon.

One for Mike, the cash balance obviously is pretty high right now.

You have articulated in the past that you had favorable market conditions to tap the market.

Could you just refresh us on sort of what is the minimum level of cash you think you need to run the business going forward, taking into consideration the expansion plans that you guys have laid out over the next few years?

Yes.

Himanshu, let me use slightly different words, though.

We've run this company historically with very low levels of cash until just the past year, and I think your commentary about the timing in terms of being able to raise money at the right price and on the right terms had more to do with that than any other change in our philosophy, so I think we can run this company with a low level of cash if we have an adequate level of committed credit availability, and I would think that a few hundred million dollars, somewhere between probably 300 and $400 million is the appropriate minimum amount of committed credit availability and/or cash availability for us to run on on an ongoing basis.

To the extent that we expand our business, I would expect that number to grow as well, but that's really the answer to your question.

Could we see the Company assuming the committed credit facilities you have right now stay unchanged, could we see the Company move back into the sort of 50 to $100 million corporate cash balance level down the road?

Yes, yes.

Again our goal is not to horde cash.

Our goal is to have an appropriate amount of liquidity to support our business, and again if we have the appropriate committed credit facilities we would be comfortable at cash balances even less than 50 to $100 million, just depends on our circumstances.

So that brings up the other question which seems to imply that you've got about 250 to $300 million of let's call it spare liquidity on hand right now, spare cash on hand right now.

I know labor restructuring is part of that, potential acquisitions is part of that investment in new facility sincerely part that far.

Is there any way to give us broad direction on how we think that cash is going to be used over the next few years?

Well, I think you mentioned the most important issue.

We've got the BSP ongoing right now.

We made our commitment to the associates in our Buffalo facility if they choose to participate in that program.

We're going to support that with our cash.

That's first and foremost.

We also are expecting and prepared to fund some additional labor restructuring in the first quarter of next year.

I would suggest, Himanshu, those are the two issues that are first and foremost in our mind as we think about uses for that cash balance.

Okay.

And then I know you guys don't want to get too much into the February talks, but maybe on a very high level if it is possible to answer this, is it realistic to believe that you can achieve your labor restructuring savings goals with the master contract UAW facilities, purely through changes in benefits and wage related costs rather than say attacking direct wages?

I think the critical thing, Paul, is when you have outstanding relationship like AAM does with UAW is we keep our negotiations private.

As I indicated earlier, they will be company-specific, solutions that we'll need, so we can get market competitive, especially for the U.S.

operations, and in the next four months you and I will learn what that is.

One last question.

Mike, if you care, any sort of directional guidance on '08 revenue outlook, if you're assuming a low 16 million U.S.

vehicle market?

Himanshu, we're not ready to talk too much about 2008.

The one thing that I would comment on is we feel that at least at this stage of 2007 the volumes particularly in the GMP 900 program were a little higher than we expect on an ongoing basis due to inventory building this year, so we are looking ahead and planning in 2008 as if we'll have some volume reductions in that area, and as we firm up those expectations and plans we'll make further comments on that at a later date.

Great.

Thank you.

Thank you, sir.

Your next question will come from the line of Chris Ceraso with Credit Suisse.

Thanks.

Good afternoon.

Hi, Chris.

A couple of things.

Some of the other folks that have been reporting results in the last couple of days have been grumbling about material prices starting to pop up again as an issue.

Is this something that the folks at AAM are seeing as well?

Well, material costs continue to be a burden for all of us in the auto industry.

However, we feel this year we're making a dent in that.

We're improving our situation on that, and it is a dynamic issue where many forces are driving that, and we simply have to be cognizant.

It has been brutal the last two years.

It is not as brutal now, but it could change, and we're prepared to handle that, but we also have some outstanding agreements that give us protection on that.

And how much protection does that afford you into '08, Dick, or do you have to renegotiate again for prices next year?

Chris, you know, in terms of that protection it is really on both sides, the customer side and the supplier side.

On a customer perspective we don't expect any change in our metal market pricing adjustment agreements, so we expect that to be consistent into 2008, and on the supply side, although the duration of each individual agreement is different, I would characterize our agreements in general as being reasonably consistent in 2008 versus 2007, no major changes as a result of just the duration of a contract.

Okay.

Mike, you mentioned in your commentary about the tax rate that you're benefiting from losses in the U.S.

relative to income elsewhere.

Is there any risk to your deferred tax asset to the extent that that condition persists?

Chris, it is a good question.

We don't believe so.

We are improving the structural cost situation for our company here in the U.S.

Although not all of the deferred tax assets that we are recording relate to our U.S.

operations, certainly a significant portion of it does.

We're confident in our stability to realize those deferred tax assets.

Okay.

Thank you very much.

Thank you, sir.

Your next question will come from the line of Brian Johnson with Lehman Brothers.

Yes.

With regard to the Buffalo plant, with the tick down of employment there, what's your sense of net add in other facilities to continue to production that survives from that plant?

Well, first of all, we have a responsibility to our customer base and the market that the products that have been produced there that will cease production on or before December 23 of '07 will still be produced in AAM locations in one of four areas, either in our Detroit south or our Detroit Main or our Three Rivers or our Guanajuato, Mexico, so the stream of revenue is not changed.

It is a stream of resource are reallocation and therefore expenses occurred, and, Mike, if you want to decide how to split up that particular apple, the apple is still the same size.

Brian, hello.

Relative to your question, I think we're probably looking somewhere 75 to 80% of the associates that we currently have on roll if Buffalo we'll need somewhere in that neighborhood in our other facilities to support that same level of work.

It will not be a one for one add and we will become more efficient in the process of replacing that work in other locations.

And to the extent the programs they support continue to ramp down, would you expect that 75 to 10% to go down -- 80% to go down.

Of course.

And roughly a split amongst the plants amongst that, North America or U.S.

versus Mexico?

As Dick mentioned, there are three facilities going to be supporting that work and we're not going to get into any further detail at this time.

Finally, on the replacement for the GMT platform, is that part of the potential future for the Detroit plant should it come in with a competitive wage package in February and March?

Plant loading is an issue that you're asking about, and there will be no more discussion on it at this stage.

Okay.

Thanks.

You're welcome.

Your next question will come from the line of Jonathan Steinmetz with Morgan Stanley.

Good afternoon.

Hi, Jonathan.

How are you today?

Doing well.

A couple questions.

Just on the [walk], year over year, Mike, I think you mentioned material costs you're on track for a $15 million annual benefit.

If you can confirm that, and what was the quarterly benefit year-over-year?

Jonathan, you're right on track, $15 million roughly year-over-year and in our third quarter as was the case for each of the first two quarters, roughly 25% of that came through in the quarter.

When I think about a year-over-year walk, was there a significant change in either warranty or accrual or when you were going through some of the launch type items on some of the 900 pickups last year is there absence of that a significant component this year?

First of all, warranty expense, we're very pleased and want to remind you, very small expense in either of the two years and not effect during the walk, and second point you made is relevant.

We talked a lot about launch expense in 2006.

You notice, we have not really talked too much about it because we've been able to eliminate a good chunk of it.

Launch expense, project expense, as we spent a lot of time talking about it last year, the non-capitalizable portion of our projects to capitalize new activities, these costs are down year-over-year and that's captured in our overall productivity gains this year, Jonathan.

And just to remind us what do you think the number was in terms of year-over-year benefit from that?

Well, we didn't -- we never really quantified it.

In terms of an annual situation, it is probably a couple of million dollars a quarter, not necessarily hitting every quarter equally, but it is between 5 and $10 million for the year.

Okay.

Thank you.

Thank you, Jonathan.

Your next question will come from the line of David Lim with Wachovia.

Hi, gentlemen.

Just had a quick question about the India JV.

Can you just sort of give us more color on that as in the strategy of why JV and not doing it yourself?

Well, first of all, we have been since November of 2003 entering into the country and the market of India.

We as a company.

We're having very good success, but most of it up until now has been more in the engineering design, sourcing and program management.

Now we have a reason to get into the heavy lifting of manufacturing, and we have secured purchase orders.

We have found a very excellent firm to work with, and they have accepted the minority role, the majority role, so we want to be in the fast-growing India market, item 1.

Item 2 we want to do it with somebody who we think has a similar philosophy to us, outstanding engineering application, quality, product technology, systems and knows the market and the customer base much better than we do.

We think it is a very good fit.

Would you characterize it as being more difficult to crack into the Indian market without a partner or how would you -- can you comment about that?

I simply think it is a smarter way for us going forward to do it jointly with a very mature seasoned proven track record India-based company that has similar values to us for added value on sophisticated engineering products, knowing the customer base, the market base, the overall geography is better than we do, and yet have flexibility for what might occur in future years.

Great.

Thank you very much.

You're welcome, sir.

Thanks.

We have time for one last question.

Today's final question will come from the line of Jairam Nathan with Banc of America Securities.

Hi, guys.

Can you tell us what was the benefit in the quarter from lower sub charges and lower OpEx pension expense?

Yes.

Jairam, first of all, the sub costs in the third quarter 2006 had risen to just a little bit more than $20 million.

I think it was $22 million roughly.

This third quarter as much as it has been for each of the first two quarters and as we expect in the fourth quarter, we're looking at something much more like 4 to $5 million per quarter, so very significant year-over-year reduction in that supplemental unemployment benefit cost.

That's the first point.

Your second point was pension and OPEB.

For the year in total we expect our pension and OPEB expense exclusive of the BSP, okay, to be down roughly $35 million, so again in the third quarter of 2007 we would see a substantial reduction pretty much on a pro rata basis of the pension and OPEB expense that we expect this year.

Okay.

Thanks.

One final question on the plans where you are tier 2 wages you can hire people at tier 2 wages.

What has been the biggest impediment to increasing the head count of tier 2?

Are you asking the AAM plants that have equivalent of a tier 2 wage structure?

Yes.

What is the specific question about them?

Like what has been the biggest impediment to hiring more people on the tier 2 or moving from people from tier 1 to tier 2?

I don't see an impediment.

We had first of all in 1999 purchased division which fits well into our charter, that being co-4 and MSP for example.

The great majority of their work would be tier 2 type application, and they are globally competitive, and we are growing them, profitably in a thoughtful, and therefore, those plants in Ohio and those plants here in Michigan within the MSPD division are doing fine.

And having a nice growth for the future.

Other locations, as I just indicated, must become market competitive, focus on the U.S., and that process will be working over the next four months, and we'll see where that goes.

The rest of the locations of course are offshore, so we're now approaching 50% of our factories tha are globally competitive in the world where as when we started in 1994 100% were not competitive.

It is a slow, hard process.

All right.

Thanks.

You're welcome, sir.

Thank you, Jarem.

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

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

Ladies and gentlemen, this does conclude the American Axle and Manufacturing third quarter 2007 earnings conference call.

You may now disconnect.