American Axle & Manufacturing Holdings Inc (AXL) 2008 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the American Axle and Manufacturing first quarter 2008 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).

Thank you.

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

Jamie Little, Director of Investor Relations.

Sir, you may begin.

Thank you, and good morning, everyone.

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

This morning we released our first quarter 2008 earnings announcement.

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

A replay will be available beginning at 5 pm today through 5 pm eastern time May 2nd, 2008, by calling 1-800-642-1687, reservation number, 39482270.

Before we begin, I would like to remind everyone that the 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 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 and Exchange Commission.

This information is also available on 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, 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 investors section of this website, and will be available there for one year for later listening.

During the quarter, we are planning on attending the 2008 Keybanc Capital Markets Industrial Automotive and Transportation conference in Boston on June 5th, and a 2008 Wachovia Securities Nantucket conference on June 23rd and 24th.

In addition, we're always happy to host investors at our facilities here in detroit, or at other locations.

Please feel free to contact me to schedule a visit.

With that, let me turn things over to AAMs Co-founder, Chairman and CEO, Dick Dauch.

Thank you for joining us today to discuss AAMs financial results for the first quarter of 2008.

Joining me on the call today are Yogendra Rahangdale, our Vice Chairman Chief Technology Officer, David Dauch, Executive Vice President and Chief Operating Officer, and Michael Simonte, our Group Vice President and Chief Financial Officer.

I would like to start the call this morning by providing an update on our ongoing contract negotiations with the international UAW.

Then I'll move on to our first quarter0008 financial results, before turning things over to Mike to discuss the details of our financial performance.

After that, we'll open the call up for any questions that you men and women may have.

Today, Friday, April 25, 2008 marks the 60th day of the strike called by the International UAW against our company AAM.

AAM's primary objective in these negotiations with the International UAW has been and continues to be to achieve a U.S.

market competitive labor cost structure for AAM's original locations in the United States of America.

We also require operating flexibility for efficiency and competitiveness.

AAM needs a U.S.

market competitive labor agreement for these facilities.

It is necessary because the international UAW previously negotiated in the past year market competitive labor agreements with many of AAM's U.S.

competitors both in the supply group as well as within Chrysler LLC and Ford Motor Company.

This includes the Dana corporation, FormTech, Chinese Neapco in the State of Michigan, and Indian based Bharat Forgein Lansing, Michigan.

It also includes the in house axle making operations of the Ford Motor Company and Chrysler LLC, the all in wage and benefit package granted by the International UAW to these companies averages approximately $30 an hour, down to $20 an hour.

Under the previous collective bargaining agreement, AAM's all-in fully loaded labor cost was $73.48 per hour, going up.

These domestic locations are totally uncompetitive and cannot earn new work or replacement work under present conditions.

As compared to the benchmark of approximately 20 to $30 per hour all-in costs for the U.S.

automotive supply industry, AAM's labor cost structure at the original U.S.

locations was at least 245% higher than market rate of our competition in the U.S.

that has been done in joint with the UAW.

It is simply not sustainable in the future for our company.

AAM is not and never has been an OEM.

We're a supplier.

We're a Tier 1 supplier, a Tier 2 and tier 3 supplier in the auto industry.

Yet, 14 years after the company was founded, our company has continued to work under an uncompetitive OEM style labor agreement with the international UAW at the original U.S.

location.

During formal and informal discussions that have occurred for more than two and-a-half years, AAM has consistently and repeatedly communicated to the international UAW that the original U.S.

locations must transition to a U.S.

market competitive labor cost structure and operating flexibility or face the consideration of closure.

AM has shared voluminous detail in numerous meetings with the international UAW and our UAW representative associates to support this economic and market reality.

Any suggestion to the contrary is misleading and absolutely false.

As a group, AAM's original U.S.

locations are not profitable and have not been profitable for a minimum of three years.

They have been and they continue to hemorrhage red ink.

Without the structural and permanent changes that are necessary to match the economic and operating flexibility of our competitors in the United States that have already received what we are requesting from the international UAW, these original facilities are simply not viable.

These facilities are not profitable.

AAM's ability to operate the facilities under these conditions is certainly not sustainable.

Let me be clear.

AAM has no desire to close any of the original U.S.

locations.

That is why we have invested so heavily in them over the last 14 years and support our associates absolutely appropriately.

AM's preferred approach is to reach an agreement with the international UAW on a new U.S.

market competitive labor cost structure for these facilities and workforce and we need their leaders to show up daily to negotiate.

If such a market competitive agreement is accomplished, these facilities will be able to bid competitively for new and or replacement business.

AAM will then be able to continue investing in these operations that support present workforce.

AAM is prepared to invest up to 250 to $300 million in this next four-year period to support new and expanded program sourcing at these facilities if a U.S.

market competitive labor cost structure with operating flexibility is achieved and ratified.

The international UAW has established a benchmark for U.S.

labor costs in the U.S.

drive line segment with AAM's direct competitors; such as the Dana corporation and the in-house making axle making operations of the Ford Motor Company and Chrysler LLC.

The international UAW has also granted a market competitive labor cost structure and operating flexibility to a new firm called Neapco, that is based, headquartered in China but located in Van Buren township, Michigan, as well as forge, a company based headquartered in India with plant locations in Lansing, Michigan.

To date the international UAW has not been willing to consider a U.S.

market trade labor agreement for AAM.

Which is a Michigan based company that is invested well over $3 billion in plant facilities, machinery and equipment, process and systems technology and the training, skill set enhancement and development of our workforce which we so proudly have.

All this has been done proactively to create a safe, modern environmentally open friendly, efficient and productive work environment at AAM's original U.S.

location.

It's time for labor to come to the pump.

In order tore AAM to compete successfully for new and replacement business and provide employment at the original U.S.

locations, the international UAW must offer AAM economic terms and conditions that are comparable to those that they have already granted to our direct competitors in the United States of America.

While AAM and the international UAW have made considerable progress on a wide variety of economic and operating issues, a lot of work still must be done to achieve an agreement through the collective bargaining process.

I personally and my entire team have always been available and continue to be available right now to do this collective bargaining process.

The international UAW's latest economic proposal to AAM dated April 23, 2008 included an all-in wage benefit and package that is well over 80% higher than the market rate established by International UAW with our direct competitors all within the last 12 months.

I do not understand why the international UAW is profiling our company in this way and therefore indirectly our workforce.

The International UAW's refusal to address the inequity and competitive disadvantage it has created in our industry, recklessly places the future of our employees, the membership, the families, the communities in harm's way.

The International UAW's claim that our competitors were in bankruptcy conveys a puzzling mind set that failure should be rewarded and success should be penalized.

We do not want to leave Detroit, Michigan.

We do not also want to have anything other than a competitive operation so we can preserve and grow the business and be thoughtful to our working associates.

AAM has been and continues to be totally committed to ensuring that all of AAM's manufacturing operations are viable, profitable and sustainable.

As a group, the original U.S.

locations are severely in error of making money.

AAM's negotiating team has never left the bargaining table.

Our negotiating team will continue to work in good faith to achieve a market competitive labor agreement that will allow the original U.S.

location to compete on a level playing field in this U.S.

market.

I sincerely hope that the International UAW will join us at the bargaining table as early as this afternoon or yes this weekend.

Let me turn our attention to AAM's financial results for the first quarter 2008.

AAM's first quarter of '088 results were severely impacted by the International UAW strike against our company AAM.

In addition, a macroeconomic headwind has contributed to a significant reduction in demand for light vehicles in the U.S., as well as a dramatic change in vehicle mix.

These headwinds include the ongoing credit and financial crunch, the housing downturn, record high fuel prices, and deteriorating consumer confidence.

Today, AAM is reporting a net loss in the first quarter of '08 of $27 million, or about $0.52 per share.

This compares to a net income a year ago of $15.7 million or $0.30 per share in the first quarter of 2007.

Our company estimates that the international UAW's strike resulted in lost sales of approximately $133 million in the first quarter of 2008.

We estimate the negative impact on operating profitability associated with the International UAW's strike to be $46 million or $0.56 per share.

Without that strike we would have been a profitable company again.

We need cooperation, not confrontation.

We need reality of marketplace economics.

AAM's first quarter '08 results also include $3.5 million or or $0.04 per share of special charges and non recurring operating costs.

These costs are primarily related to the redeployment of machinery and equipment.

These costs were a continuation of actions we initiated in the calendar year 2007 to re-align our production capacity and cost structure to current and projected operational and market requirements.

We would foresee more of that in the future.

While the first quarter of 2008 was most difficult, AAM continued to make steady progress on several critical initiatives for our future profitable growth and diversification objectives.

First, on April 11th of 2008, we announced the ratification of new labor agreements with professional unions representing our AAM hourly associates in the countries of Mexico, England and Scotland.

It's good to work with open minded competitive people.

These agreements support a market competitive labor cost structure for the regions that these facilities are located and supply their customers to be market competitive.

These agreements were done quietly, professionally, responsibly and effectively with no production disruption.

Point two, in the past 90 days we have successfully increased the daily axle production rates of AAM's Guanajuato, Mexico manufacturing facility by nearly 100%.

This is a vital development and a significant accomplishment for our company, our customers and we thank the excellent cooperation of our workforce and supply base.

Third point, AAM's international expansion into the countries of Brazil, India Thailand is moving ahead at a rapid speed.

AAM do Brazil will launch full axle assembly operation in 2008 and convert to a full drive line and drive train assembly facility in 2009.

With this expansion, AAM do Brazil revenue generation is expected to triple in the next five years.

AAM do Brazil will also serve new customers such as Volkswagen AG along with their other nine customer base.

In the country of India, and that market construction is under way on our new joint venture facility in Pantnagar India.

This joint venture, AAM Sona Axle Private Limited will produce light truck axles for Tata Motors.

Production at this facility is on track for launch in the second half of 2008 and Tata is an important new customer for AAM's portfolio.

Also in India, AAM is making final preparations to contract a new site in Pune, that's a second different location in India, and the facility India gear and axle private limited will produce driving heads for commercial vehicles to be produced by Mahindra International Limited called MIL.

AAM anticipates ground breaking for this facility in July 2008 with a start of production scheduled for the first half of 2009.

MIL is yet another important new customer for AAM's world portfolio.

In the country of Thailand, AM is preparing for the ground breaking of a new wholly owned manufacturing facility in Rayong, Thailand.

Here we'll produce a full range of highly engineered drive line products for major new global product programs at this facility.

The start of production for that facility is expected to be in the first half of the year 2010.

Before I turn over to Mike, let me wrap by making a few closing comments.

As expected, the year 2008 is proving to be most difficult, a demanding and tough year for the auto industry in general.

Specifically hard on AAM.

I'm referring to the entire domestic auto industry in this category including the OEMs, the auto suppliers at all tiers and their dealer body.

For AAM specifically, this is highlighted by our current labor negotiation and unfortunate strike caused by and called by the International UAW.

Through the completion of the UAW negotiations and every other aspect of our global operations, we at AAM will remain labor focused and continue to improve the following things.

Cost competitiveness, operating flexibility, workforce utilization, capacity utilization, business diversification, quality and warranty performance improvement, product portfolio expansion, financial returns and balance sheet strength.

AAM's continued success on these initiatives will enhance our ability to invest in the continuing diversification and expansion of the product portfolio, and the growth of our customer base and the continued profitable growth of our global manufacturing enterprise.

Each and every plant must be profitable.

There will be no exceptions.

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

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

Michael?

Thank you and good morning everybody.

My job today is to review AAM's financial performance for the first quarter of 2008.

I want to get right to it.

Our sales in the first quarter of 2008 were $588 million, that's down approximately $214 million from 802 million in the first quarter of 2007.

As Dick noted, the single largest driver of this reduction in sales was the strike called by the International UAW against AAM's original U.S.

locations.

This International UAW strike, which as Dick mentioned is now in its 60th day, has shut most production at our Detroit Gear and Axle, Three Rivers, Tonawanda Forge and Cheektowaga Machining Operations.

Based on the production schedules that were effective when the International UAW called the strike against our company on February 25th, 2008, we estimated that the strike reduced sales by $133 million in the first quarter of 2008, reduced operating income by approximately $46 million, and resulted approximately $0.56 per share of lost earnings in total.

Recall that we had expected a year-over-year reduction in sales of approximately 15% in the first half of 2008.

We discussed that on our most recent teleconference at the end of January.

Excluding the impact of the strike, first quarter volumes were reasonably consistent with our expectations and our plans.

Let me expand on that a little bit.

Excluding the impact of the strike, our sales were down approximately 10% year-over-year.

Obviously, rising energy prices, weakening economic conditions, credit market instability, and market shifts favoring past cars and crossover vehicles are negatively affecting sales in our light truck business in the United States.

There were two additional matters that exacerbated this comparison in the first quarter of 2007.

In the first quarter of 2007, we were supporting the launch of the GMC900 pickups.

Inventories for that product line were lean at that time and production was strong.

The second of these issues was that the Easter holiday fell into the first quarter this year in 2008.

In 2007, Easter was a second quarter holiday.

That caused us two production days in the first quarter of 2008.

Of course, that will be made up in the second quarter.

Our Guanajuato Gear and Axle Facility had a very strong quarter from a sales perspective.

Really from every perspective.

And helped mitigate the impact of the international UAW's strike.

As Dick mentioned, the daily axle production rate at this facility has nearly doubled in the past 60 days.

This facility will play an even bigger role in our company in the future.

Mix was favorable in the first quarter of 2008 and this helped to mitigate the impact of reduced sales.

AAM's content per vehicle was up to $1,326 in the first quarter of 2008, and that's compared to $1,252 in the first quarter of 2007.

Content per vehicle continues to be a bright spot for us.

Remember, our content per vehicle is up about 5% in 2007 for the full year.

Our continuing and successful R&D program is the driver of these gains.

In terms of customer mix, our non GM sales were $152 million in the first quarter of 2008 or 26% of our total sales.

International UAW's strike affected this percentage on an apples and apples basis, excluding the impact of the strike, GM sales would have been higher, probably just a little bit short of 80% of our total sales.

Moving on to P&L, cost of goods sold was $13 million less than our sales this quarter.

That equates to a gross margin of just 2.2%.

Again, the strike had a severe impact on this metric and every other measure of profitability in the quarter.

Operating margin was a negative 6.2% in the quarter.

In total we incurred a net loss of $27 million or $0.52 per share.

In the first quarter of 2008, we incurred approximately $3.5 million of special charges and non recurring operating costs.

These related primarily to the redeployment of equipment.

These costs trailed into the first quarter of 2008 but are related to and very similar to the restructuring activity that initiated in 2007 that we discussed with you all last year.

In the first quarter of 2007, we incurred approximately $3 million of similar costs.

In 2007, these are more heavily weighted to attrition program activity.

While there is a reasonable possibility we may incur significant additional special charges and non recurring operating costs in the balance of calendar year 2008, including the potential for asset impairments, we need to complete our negotiation with the International UAW before we can finalize our future business and operational structuring plans that may occur.

Based on the status of our negotiations, and the nature of active proposals on the table, it is quite likely that we will incur significant expenses related to buyouts, retirement incentives and buydowns once we eventually bring this strike to resolution.

We may also be forced to consider closing one or more of the original U.S.

locations the international UAW is ultimately unwilling to consider a U.S.

market competitive labor agreement for these facilities.

We must create the business conditions that facilitate a viable, profitable and sustainable business model at all of our facilities.

If we cannot, we will exit.

It's that simple.

Before I move on to cash flow and the balance sheet.

Let me clearly state that we are unable to estimate the impact of any possible restructuring costs ,special charges, non recurring operating costs, one-time items, impairments, et cetera, that we may incur in the coming months and quarters.

What I can say and what I want you to know is that the impact of these items could be material from an accounting perspective.

As soon as we are able to estimate these items we will make all appropriate accounting adjustments, disclosures and public announcements.

Let me address another accounting housekeeping issue.

In the first quarter of 2008 we changed our accounting policy for direct inventory costing in the original U.S.

locations from LIFO, or the last in, first out basis, to FIFO, or first in, first out.

This was preferable for many reasons.

Including that it allows us to have one consistent inventory costing policy on a worldwide basis.

AAM's use of LIFO for inventory costing, dates back to the founding of the company in 1994.

Our circumstances are very much different today.

Switching gears to a related topic, let me anticipate some questions relating to our tax provision.

In the first quarter our tax provision was a benefit of $22 million.

Our effective tax rate was a benefit of 44.8%.

While I very much look forward to a time in the future when we can spend less time talking about FASB statement 109, and just focus on more conventional business issues, I think it's important to spend a couple minutes addressing this topic.

Our effective tax rate is the result of two very different circumstances in our global business.

In the U.S., which is dominated by the original U.S.

locations that are currently being severely impacted by the international UAW strike, we lost money in the first quarter of 2008.

Because we expect to turn that around in the future as a result of achieving a U.S.

market competitive labor cost structure at all of our U.S.

facilities and hopefully we can make that happen soon, we continue to recognize a benefit related to the first half chapter.

It is important to note that we are not in a tax NOL position or net operating loss position in the U.S.

and never have been.

As a result of that, and many other factors pertinent to the accounting standards governing this issue, we are and we should be recognizing these deferred tax assets.

In our non-U.S.

operations we have a much different situation.

Outside the U.S.

in total, AAM's business is profitable.

Not surprisingly, we have market competitive labor cost structures in all of these other businesses.

Outside the U.S.

the respective statutory tax rates are lower and in the case of Mexico, much lower than the U.S.

tax rate.

So when we combine the U.S.

loss I should say, subject to a 35% tax rate, together with foreign profits subject to a much lower than 35% tax rate, we end up with a net effective tax rate of 44.8% in the first quarter of 2008.

It's just the math.

Just to further complicate matters, in the first quarter of 2008 we did incur $0.07 of unfavorable tax adjustments.

The larger of these items is a technical matter relating to a tax law change in Mexico.

As a result of this tax law change, we were required to write-down certain deferred tax assets in Mexico.

The assets still exist.

Just need to be valued at a lower basis.

Also in the first quarter of 2008, we were able to close out the field work in our current IRS audit cycle, this audit cycle relates to the U.S.

tax years 2004 and 2005.

In the process we agreed to certain adjustments proposed by the IRS.

The combined impact of these two items, and remember, the bigger of the two was the tax law change in Mexico, was an additional expense of $3.5 million or $0.07 per share in the first quarter of 2008.

Both of those items are one-time items and I point that out because it is not part of our ongoing run rate of tax expense.

Now let's turn our attention to cash flow and the balance sheet.

GAAP cash from operations was approximately $8 million.

The first quarter of 2008, down just a little bit from $10 million in the first quarter of 2007.

CapEx was lower in the first quarter of 2008, $9 million, lower by $9 million to $33 million in total for the quarter.

Dividends were $8 million in the quarter.

We define our free cash flow to be net cash provided by operating activities less CapEx and dividends paid.

The first quarter 2008 free cash flow was the use of $33 million, versus a use of $41 million in the first quarter of 2007.

At the end of the first quarter of 2008 cash on hand was $315 million.

The net debt to capitalization ratio for our company at that date was 38.5%.

We continue to be in a strong and stable financial condition.

Let me be clear.

The strike is not a positive development from a liquidity perspective.

However, the impact of the strike will not really affect our liquidity position all that much until after the strike is over and we return to work.

This is true primarily because we had collected our receivables, I'm speaking about sales prior to the strike called by the International UAW, and we continue to collect our receivables on all sales made since that point in time.

We are not firmly incurring hourly payrolls at our original U.S.

locations.

We will not be paid by GM for approximately 45 days after we begin shipping.

So once we begin paying the payrolls again, after we get started, we'll be outcast during that period and that's when we'll see a more significant liquidity impact as a result of the international UAW strike.

Remember that the seasonality of our working capital movements are favorable in the second quarter and also in the fourth quarter and those seasonality adjustments will help mitigate the issue because we've already weathered the negative working capital movements in the first quarter of this year.

I'm talking about seasonal working capital movements in the first quarter.

In addition, AAM's Mexican operations are having a record year in terms of financial performance including cash flow.

Together with the cyclical reduction in CapEx that we've been talking about for many quarters now.

And the structural benefit we enjoy as a result of our previous restructuring actions, and further that we expect to incur more activity in 2008, we should be in pretty good shape from a free cash flow perspective this year in 2008 before the impact of any buyouts and buydowns that I mentioned before.

Let me close by making a few comments about the International UAW strike from a financial perspective.

In the morning newspapers these days we read a lot of emotional jibber-jabber about one way streets in these negotiations.

Sometimes we also hear about free trade and globalization of the automotive industry.

Many of these comments are shockingly inaccurate and even misleading as they relate to AAM and our bargaining.

In finance and accounting we must deal with the cold, hard reality of economics and the bottom line.

Here is the bottom line on the international UAW strike and AAM's labor cost structure.

AAM's economic proposals in this negotiation have been fair, reasonable and yes even compassionate.

Although substantially lower than the uncompetitive OEM style wage and benefit packages that we've had in the past for our UAW representative associates at the original U.S.

locations.

What we've offered to the legacy associates is still considerably higher, and I emphasize considerably higher than the market rate of our competitors.

We have no disagreements with the international UAW on that fact.

We have detailed all in cost per hour calculations on different sides of the table, they differ by a few pennies, even a couple dollars in some circumstances, nobody denies the basic facts in trends.

Our competitors in the United States are in the range of 20 to $30 per hour all-in costs, period.

International UAW has confirmed that fact at the highest level.

Prior to February 25th, 2008, AAM was at $73.48 per hour all-in costs at the original U.S.

locations.

That's approximately three times the market rate of 20 to $30 per hour.

Most recently, the international UAW's economic proposal suggests that we should remain approximately twice as high as the market rate it has established with our competitors.

Keep in mind when we talk about this market rate of labor cost structure in the U.S., International UAW created and reinforced that rate in the 20 to $30 per hour all-in cost range for automotive suppliers in the U.S.

We did not create this market reality.

But we must deal with it.

Many of our competitors have agreed to all-in wage and benefit packages with the International UAW in this range.

This includes the in-house axle making operations at Ford and Chrysler as Dick mentioned.

This includes our long-term competitor, Dana.

Even the Chinese at Neapco and Bharat Forge of India.

When I make these comparisons, I'm not talking about wages in China and India.

I'm talking about Michigan based UAW represented manufacturing facilities owned by companies based in China and India.

All we're asking for is the same or similar deal that they've already agreed to with the International UAW.

In addition to premium wage and benefit packages, our company is prepared to pay literally hundreds of millions of dollars to help our UAW representative associates and their families transition to the reality of a market competitive wage and benefit package.

That's a significant soft landing.

The buyouts we're talking about which were initially proposed by the International UAW by the way, would provide associates who choose not to work for competitive market wages a generous severance package, in many cases this represents two to three years of take-home pay.

If an associate chooses to stay with AAM and work for wages and benefits that average up to 30% higher than the market competitive rate in certain circumstances, and we sincerely hope that many of our associates will stay, the buydowns we're talking about would actually increase take-home pay for many of our associates in the first three years of the agreement.

While being out on strike called by the international UAW many be negatively affecting the family finances of our associates, the buyout and buydown packages offered by AAM certainly will not.

We deeply appreciate our associates and hope that we can quickly resolve the strike called by the international UAW.

Anybody who has ever visited our manufacturing facilities understands the significant financial and institutional commitment AAM has made to the objective of preserving and growing jobs in the United States.

This however does not excuse our managerial and fiduciary responsibility to manage the business and make investments that earn an adequate financial return for our stockholders.

This is necessary to provide stable and secure employment for our hourly and our salaried associates as well.

We have built up the balance sheet strength and financial flexibility to manage through this situation.

We hope that these financial resources can help us transition AAM's original U.S.

location to market competitiveness.

If the international UAW will not deal with the reality we jointly face, and instead continue to spew a bunch of stunningly inaccurate hogwash about the reasons for the, quote, unquote, excruciating slow pace of negotiations, then these same financial resources can be and must be used to restructure the business so that AAM can successfully compete in the United States for new and replacement business.

I thank you for your time this morning.

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

Thank you, Mike and thank you, Dick.

We have reserved some time to take questions.

I would ask that 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).

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Rich Kwas of Wachovia.

Good morning, gentlemen.

Good morning, Rich.

Good morning, Rich.

Mike, could you go into a little bit about the contribution margin that you realized in the first quarter.

It was a little bit higher than I would have expected, given that you weren't paying as much in labor costs and if you could just walk me through that, that would be helpful.

Okay.

No problem, Rich.

Couple things I would point out.

First of all, it is true we were not paying as much to our hourly associates in the original U.S.

locations but we were also not generating sales at those locations.

What we focused on in that analysis is the profit margins of the plants that we're running.

And here's what I would tell you.

We've seen our loss contribution margin in this quarter, whether you compare sequentially to the fourth quarter, or year-over-year to the first quarter, 33 to 34% lost margin on sales.

Now, that's a little bit higher than the 30% range that we would normally expect but in this time period, we've been managing extraordinary events.

I say a couple things.

First of all, at the plants that we're running and particularly as we shifted manufacturing from some of our original U.S.

locations to other locations, we had some logistical issues we had to overcome.

We had some supplier issues, route materials to a different location and incur some premium freight to do that.

We did pay some overtime.

We had increased security and maintenance expenses.

There's a host of things we had to do both at the plants running and not running to manage through this situation.

The other thing I would mention, I would say, though, that what I've already said is the primary reason for that 3 to 4% higher loss margin rate in this quarter, but the other thing I would say is that excluding the impact of the strike, our volumes were down about 15% or so in the quarter.

Our volumes on the Dodge Ram heavy duty program were down more than that, probably 50% more than that and so that also had an impact on this margin comparison in the quarter.

That's helpful.

Thank you.

And then as we think about this for the current quarter, would that contribution margin, negative contribution margin actually come in a little bit relative to 34 in the first quarter or should it be about the same?

Rich, I don't think it's going to be significantly different.

We are seeing a ramp-up in our activity in our Guanajuato Mexico facility.

That's helping to mitigate the impact of the International UAW strike.

But we still have the same conditions at our original U.S.

locations and so we're going to continue to face the same headwinds until the strike is resolved.

Okay.

Then the last quick one on CapEx, as we thing about it with a lot of your business launching in '09 and '10 as part of the five-year backlog.

When does the CapEx get spent on that?

Is that going to be more of an '09 phenomenon?

Are you going to start ramping that up later this year?

We have as previously stated about 180 to $200 million of CapEx this year and a little bit of that in '09.

Okay.

So it shouldn't be a big ramp-up in anticipation of sales.

Thank you.

Thank you.

I would simply add that CapEx in this quarter at $33 million is a run rate lower than the rate that Yogendra just outlined.

So we will see CapEx pick up a little bit on a quarterly run rate as we work through the rest of this year.

Thanks.

Thank you.

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

Good morning, gentlemen.

Good morning, be Brett.

Good morning, Brett.

Can you gentlemen be a little bit more specific in terms of what are the primary differences between yourself and American Axle and the UAW in terms of the all-in labor costs that they are proposing versus what you you are requesting?

Well, let me start with this, Brett.

Our primary objectives here are to continue negotiations with the international UAW and to accomplish a labor market competitive structure in the original locations in the U.S.

And secure operating flexibility.

That's pretty clear.

That's what the objectives are.

That's what the needs are.

We need this because we've got to be able to compete with all competition, most of which are now in the U.S., be they domestic or be they foreign-owned.

We also need it because the international UAW as I said earlier has accomplished negotiations with our direct competitors here, again, Dana, FormTech, Neapco, Bharat Forge, et cetera.

Which leaves us non competitive on labor costs and therefore inability to be able to get and secure new work and/or replacement work.

Our company is absolutely committed to correcting this losses that we've sustained financially in these locations over the last three years.

We need a structural and permanent change.

That's been communicated as we've said for well over 30 months, informally and formally between us and their party and it's left these particular locations.

Wether or not they're not viable, they're not profitable, they're not sustainable.

That's generically where we're at.

Okay.

Let me ask you this question.

Maybe a little bit more specifically.

You've kind of thrown out a 20 to $30 number for your competitors.

You're suggesting that you're above that which kind of suggests that you're maybe in that 30 or 30 above range or something along those lines.

That the UAW is maybe two times that at this point in time at around $60.

That's a pretty significant difference, kind of a $30 differential.

Obviously those are my numbers.

What I'm wondering is what makes up that $30 difference?

Maybe specifically, what are you talking about with the UAW with regards to future retirement benefits, healthcare benefits, and pension benefits?

Brett, let's stop.

We'll collectively negotiate with the UAW, not you.

Okay.

Fair enough.

The second question, with regards to options, there's been some discussion about replacement workers, there's also been some discussion about the possibility of closing your U.S.

facilities.

What would you see as some of the logical options?

Is it possible for you to get replacement workers?

Is it possible for you to close your U.S.

facilities and move them south or wherever you would move them to?

What would your alternatives be.

First of all management has the right and responsibility to run the business.

Nobody else runs the business except ourselves.

We'll work with all stakeholders thoughtfully, collectively.

We'll comply with contracts.

When contracts expire, they've expired.

What we're looking forward to is an appropriate compliance, legality and appropriate process and appropriate way to get ourselves where we can be competitive and operational flexible.

And that's where we're at, sir.

Thank you.

Thank you very much, gentlemen.

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

Hi.

Dick, I just had a question on General Motors' involvement here.

It seems like GM has been on the sidelines in most of these negotiations.

What have you exactly been doing or talking to GM to get them comfortable with the current situation and how long would you expect GM's sort of benign stance on this to last.

First of all, good morning Himanshu.

And secondly as it relates to General Motors, they are our largest and most critical customer and we've obviously been very open, forthright with them that our contract was going to expire in February 25 of '08 and how they handle their of own operations and flexibility and was certainly up to them.

We won't comment on GM other than to say we're working very thoughtfully, daily, effectively with them, because they are our customer.

And that's our first priority we have to do is take care of our customer.

And we want to minimize disruptions that result from our AAM called by the International UAW strike.

And secondly, support GM however we can.

And obviously there are issues and we're working that out with GM and GM has been most professional, most helpful and we're most supportive of them as best we can under this very difficult chapter of our life.

And I'm just wondering, would you care to comment on GM's own labor disputes they're having at some of their facilities right now?

Do you think this is completely independent or do you thing this is the UAW trying to get GM involved in your dispute?

I think that's a better question for you to ask GM.

Okay.

Very good.

That's all I had, thank you.

Thank you, sir.

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

First question on the cost of the UAW plants, if you were able to get them to agree to what you want to, first, your Mexican plant, what would be the cost differential if you got this contract where you want it to be, Mexican plants.

First of all, good morning, John.

Good morning.

As we said, we have been obligated to pay an all-in labor cost per hour, all 14, now 15th operating year as if we were an OEM.

We never have been and we must have this ceased.

Therefore, we're way too high.

Whether it's 245% or whatever of the present 20 to $30 range of where we as a supplier should be, we are negotiating to get that down somewhere close though that competitiveness range.

That has to be done as you know collectively between the two institutions, the AAM and international UAW.

We'll report when we have something to report on that.

Will you Mexican plants and U.S.

plants at that time wins you reach resolution as you would like to, be relatively similar in cost structure?

They're totally different markets, different demographics.

We're talking about U.S.

We're talking about contracts in the USA, not talking about Mexico, we're talking about UAW contracts that compete with AAM in the USA.

So we'll start with primary, us, AAM, then we'll go to the direct competitors, again in the USA, Dana, or Chrysler, or Ford or FormTech or many other ones, so let's not try and change what the direction is, what the focus is.

Okay.

And then secondly, if you could just sort of elaborate on how many axles you're shipping out of Guanajuato.

Sounds like you've done a great job of doubling the output there in short order.

Is there a potential to increase that even more in the near term down at Guanajuato?

First of all, we had the wisdom to become an international company back in the middle 90s.

One of our top priorities was the country of Mexico.

We have an extraordinary operation there, an outstanding workforce, an excellent union and workforce to work with.

And our AAM Guanajuato Mexican manufacturing complex has the capacity and capability to produce nearly 6,000 axles a day, six days a week, so you can figure that out.

The location has served multiple customers, assembly plants and product programs, shipping to multi-regions of the year, multi locations of the world, customers.

Our two largest customers by far served out of that complex are General Motors and Chrysler Corporation.

Sales generated as Mike said will probably approach $1 billion a year in 2008 there.

And we had had extraordinary performance, extraordinary quality and total operating flexibility, highly competitive, and that's just for the Mexican operation.

All the rest of our international operations are becoming very similar, be they Brazil or India or China or Thailand or Scotland or England.

We just have to fix good old fashioned USA.

Thank you very much.

Next question comes from the line of Chris Ceraso of Credit Swiss.

Thanks, good morning.

Good morning, Chris.

The comment that you just made brings up a question about if you can crank out that kind of capacity for Mexico and generate $1billion of sales.

Once all of this is resolved, do you dial that back down in favor of doing more stuff in the U.S.

or do you then have to scale down your U.S.

ops and keep running as much as you can out of Mexico?

The greatest thing about the auto industry is it's so dynamic.

You know all the data and the variables as well as I do.

Energy is driving the world.

Therefore, gas, diesel, whatever fuel it may be is changing the mix demographic of the product.

You also know that 90, 95% of the auto growth in the five foreseeable years is not in the U.S.

It's outside the U.S.

You've got to be everywhere and I'm sure right now if I was running General Motors, Ford, Chrysler, Toyota, whatever, serving this market, I'd probably be reviewing my long range product plan.

Once they get that done, and we as a supplier understand how that impacts us, we'll have to evaluate our sourcing pattern, our plant loading pattern.

Where that comes out, be it Mexico, U.S.

or something else like that is where we're competitive, where we can best serve our shareholders, do our fiduciary responsibilities and make money.

Mike, I know you brought up the issue of taxes.

I do have one question on that.

You mentioned in the opening remarks that the U.S.

facilities have been unprofitable for at least three years.

That would seem to suggest, you know, the way that this look back functions in terms of taking evaluation allowance that you might have had to do that, can you just explain for me again why, given the chronic unprofitability of the U.S.

ops that you haven't had to write down your U.S.

deferred tax assets.

Couple things I would say.

The primary comment we made about the unprofitability of our U.S.

operations was the original U.S.

locations.

We do have certain U.S.

operations that are profitable.

So all is not lost there.

We do have certain royalties and other situations coming back to the U.S.

Chris, I think the most important comment I made on the call today that you need to know is that we've never been in a tax NOL position in the U.S.

As a result of the foreign profits and other planning strategies that we've been able to and will continue to avail ourselves of, we've never been in an NOL.

While it's true in this short term time period we've had an issue with profitability in the U.S., that has not been a long-term pattern and we are confident that with the additional restructuring actions that we've implemented in 2007, that we expect to initiate yet in 2008, we've got a fork in the road that's either going to be with market competitiveness or the original U.S.

locations or along another path where we achieve the same objectives.

We're going to have a future profitable, competitive business and we will realize those deferred tax assets in the U.S.

That is a dynamic, continuing monitoring process and every quarter we undertake the appropriate accounting analysis to assure ourselves that that continues to be the right answer.

As of March 31st, 2008 that continues to be the right answer.

You've got a lot of ground breakings coming up, new plants going up in different countries.

Is there a risk that you may have to pull back on some of this if the strike endures and you continue to burn cash or perhaps as you suggested, you may have to close U.S.

facilities and relocate to Mexico or somewhere else which would certainly take a lot of cash, is there any risk to these expansion plans?

There's anything we may accelerate them.

Okay.

Thanks, guys.

The other thing I would say is that there's no default assumption that we would move all the work outside the United States.

We want to be competitive in the United States.

We have plants and facilities today that are competitive in the United States.

We are in the process of launching Oxford Forge Inc.

here in the metropolitan Detroit area with a very competitive cost structure.

There are many ways for us to achieve a competitive business model in the U.S.

So please don't assume, we are not saying and I don't want you to assume we're saying that we have to leave the U.S.

to be competitive.

That is not true.

Right.

But I guess the point, Mike, is whether you're talking about Mexico or even within the United States, if it comes to the point where you have to close your original facilities and open new facilities or expand existing facilities, be they in the U.S.

or Mexico, that's going to require a tremendous amount of cash.

The question was does that jeopardize your expansion plans elsewhere.

Because I would think that --

stop.

You asked the question.

I answered it.

What's your next question?

That's it, Dick.

We're good.

Thank you.

Next question comes from the line of David Leiker of Robert W.

Baird.

Good morning.

Good morning David.

You keep talking about your competitors here who have better wage costs than what you have.

Dana and these handful of other folks.

Have you seen any business awarded to them that with the different wage structure you think American Axle would have been awarded?

Well, obviously if you take a look at the facts of economics, you're more learned in that area than I am.

If you've got somebody who has an advantage per unit at 70 to 80 to $100 a unit, you're either going to not get business or you're going to have a loss leader.

We have no interest in having loss leaders.

So I don't want to get into specificity as to an individual account that went somewhere.

We've had a great business for the last 14 years.

We'd like to have a great business in the future.

And right now --

I wasn't trying to dig into anything specifically.

Generally whether there's been --

I understand.

I'm answering your question.

You asked the question.

Let me answer it.

Okay.

We must be all-in competitive and at each and all locations, nobody gets a break.

I understand that.

I agree with you on that.

Is there a way you can give us any sense of how much of your loss volume in the U.S.

from these plants that are on strike you've been able to replace in Mexico?

We have simply met the priorities of our customer and I think we answered a little bit earlier to a different person, maybe you weren't listening.

General Motors is our key customers.

They have absolutely prioritized where they need support.

We've tried to give them the greatest support we could.

Mexico has certainly had a powerful influence in doing that.

We're continuing to have a great relationship with GM and support from them and anything else you'd have to ask themselves.

Is it fair for us to assume this volume increase you've seen in your Mexico plant is all replacing volume that would have come out of the U.S.

plants.

Certainly.

Okay.

Great.

Your next question comes from the line of Rod Lache of Deutsche Bank.

Was wondering whether you have a view on the longer term capacity that you need for axle production for the traditional body on frame trucks in a trend year.

In the next few years, are you planning for a cyclical recovery or kind of a structural decline is what I'm asking.

Well, we're certainly looking at a structural decline in that segment and that's why back in year 2000, and I reported that to you before rod, that we changed our priorities of direction of product portfolio and technology application into more of all wheel drive applications, crossover utility and well over half of our new business going forward, over 1.3 billion is in those passenger car applications and it's also diversified, not just in the North American region but throughout the world.

So we saw this coming seven, eight years ago and have secured first of all the new product portfolio in these vehicles, packageable.

Secondly, the orders that support it and here in 2008, 9 and 10 we'll be launching those particular units.

As it relates to the full sized body on frame conventional architecture, it will still be a very significant volume but it will be descending and therefore we'll have to make adjustments as we talked about on capacity rationalization.

Operating flexibility must go along with that.

We'll redeploy how we do our plant loading, where we have the most competitive economic structure to support our shareholders needs and fiduciary responsibilities.

Could you tell us what your daily capacity is at the UAW represented plants?

I could but I won't.

Okay.

Can you maybe Mike, you could just refresh us on sources of liquidity aside from the cash.

Yes,Rod, we've got $350 million cash at the end of the first quarter.

Our revolver is entirely unused, $600 million credit facility.

We have some money market lines of credit available to us here in the U.S.

And we have credit facilities available to help us fund our international expansions as well as some other money market lines in places like Mexico, Brazil.

We're working to establish facility in India and we'll have that on line sometime later this year.

And of course China, we've had a line in place, a significant line, to help us in that market.

So we have multiple sources of liquidity and when you read our 10-Q that we'll likely file with the SEC later today, you'll see that roughly $1.6 billion of total credit availability under these facilities, about $548 million or so of net debt at this point in time, leaving significantly more than a $1 billion of availability under those facilities.

Any significant constraints, covenants, receivable levels or things like that to back that up or is that all available?

No, there are no significant issues there whatsoever.

I would point out that there's really no impact at all from a receivables perspective.

These facilities are generally unsecured.

All the U.S.

facilities are unsecured.

And so there are no restrictions and we're in good shape from a covenants perspective.

Last question, any comments on steel and there's just been a lot of talk in the market about surcharges, that kind of thing.

I know you have quite a bit that's passed through.

Can you just refresh us on the exposure there.

This is David Dauch.

As you know, we've got metal market agreements in place with our customers where we have the ability to pass through some but not all metal market increases there.

At the same time, most importantly we've got long-term contracts in place with the majority of our steel purchases.

So we think we're in good shape there.

There is some exposure in regards to some of the other metal products.

We still expect that we'll have a net savings when it comes to material for the year, what we communicated earlier.

Just may not be as great as what we had originally communicated due to some of the changes in the marketplace.

Great.

Thank you.

Yep.

We have time for one last question.

Your last question comes from the line of Jonathan Steinmetz of Morgan Stanley.

Can you hear me?

Yes, good morning, Jonathan.

Good morning, Jonathan.

I guess my question revolves around the timing and specifically when you might begin to get a little bit more concerned about the collateral impact here both on customers and some other suppliers and when that factors into your cost benefit analysis.

It seems as if a lot of the invein that's come out already is stuff that would have come out and some point in the year, but you have a lot of suppliers who aren't going to get as much cash on May 2nd or June 2nd as they otherwise would have.

Maybe you could talk about, is there a point in time, Dick, when you begin to get more concerned about collateral impact?

That would be months and months away.

Meaning like end of summer?

Months and months.

You can count.

Okay.

All right.

Thank you.

Thank you, Jonathan.

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

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

This does conclude today's conference call.

You may now disconnect.