American Axle & Manufacturing Holdings Inc (AXL) 2008 Q3 法說會逐字稿

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  • Operator

  • I will be your conference operator today.

  • At this time I would like to welcome everyone to the third quarter 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.

  • Mr.

  • Little, Director of Investor Relations, you may begin your conference.

  • Jamie Little - Director, IR

  • Thank you and good morning.

  • Thank you for joining us today.

  • And your ongoing interest in American Axle & Manufacturing.

  • This morning we released our third 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 through the PR Newswire services.

  • A replay of this call will also be available beginning at 5:00 p.m.

  • today through 5:00 p.m.

  • Eastern time November 7, 2008, by calling 1-800-642-1687, reservation number 65769084.

  • Before we begin, I would like to remind everyone that the matters discussed in this conference call may contain comments and ford look statements that are within the meaning of the Private Securities Litigation Reform Act of 1995.

  • The 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 Exchanges 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 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 this website and will be available there for one year for later listening.

  • During the quarter AAM will be presenting at the following conferences.

  • Baird's 2008 industrial conference in Chicago, on November 12, 2008.

  • In addition we are always happy to host investors at any of our global facilities.

  • 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.

  • Dick Dauch - Chairman, CEO

  • Thank you, Jamie, and good morning, everyone.

  • Thank you for joining us today to discuss AAM's financial results for the third quarter of 2008.

  • Joining me on the call today with you are Yogendra Rahangdale, our Vice Chairman and Chief Technology Officer; David Dauch, our President and Chief Operating Officer; along with Michael Simonte, our group Vice President Finance and Chief Financial Officer.

  • As a country the United States is experiencing the most turbulent financial crisis in over half a century, certainly in my lifetime.

  • Our economy and those around the world that we interconnect with are quickly descending into a global recession.

  • Rapidly deteriorating credit market conditions and historically low consumer confidence have compounded these challenges for AAM and the entire domestic automotive industry.

  • The domestic automotive companies and their supply base are experiencing a sudden and almost unprecedented contraction of sales in the US market.

  • At 12.5 million vehicle units the July 2008 and September 2008 US SAR representing the lowest monthly selling rate in well over 16 years.

  • It looks like October will be even lower.

  • We all to have adjust to these realities.

  • These are the times that test the mettle of our country, our leaders, our organization and our people.

  • In four days the US citizens will have their say about who we will choose to steer the country through these most difficult times ahead and lead us back into prosperity, we will support them.

  • Today, tomorrow, and into the future we at AAM will focus on managing what we control and we'll do it very well because that's our team's outstanding performance credo.

  • Let me assure you right now that we have a plan not only to survive but to emerge from this economic roller coaster and long term have our viable, profitable, and sustainable business as an automotive leader in the global drive line and drivetrain segment of the industry.

  • Let me summarize the most important points for you.

  • Number one, we have a solid plan.

  • Number two, we have the financial resources to execute this plan.

  • We expect to continue to have the financial flexibility to see it through to a successful conclusion.

  • Third point, we have new market competitive labor agreements with international Union UAW at our continuing US locations.

  • We're working through the final elements of the financial impact on that right now.

  • These historic and transformational agreements will help AAM achieve more than $300 million of annual structural cost reductions with significantly improved operating flexibility.

  • The fourth point is our Company has $1.4 billion of new business backlog that will help us quickly diversify and expand our customer base, product portfolio and serve market to the needs and realities of the consumer today.

  • As we launch these new orders, we will significantly enhance our cost competitive position, our operational flexibility, globally as well as with our sourcing footprint globally.

  • We have the management expertise, the dedication, the leadership, the teamwork and the workforce required to successfully execute the restructuring plan to make our Company a stronger and more successful Company in the future, and I mean the near future.

  • Our goal and objective is to return AAM to profitability in the year 2009.

  • This is not an earnings guidance, just a simple, honest, direct statement of our commitment to achieve a rapid turnaround in our business, and that's why we're moving very aggressive on our restructuring, resizing, and recovery plan.

  • Today I will provide a brief update on AAM's third quarter 2008 financial results.

  • Then I will shift focus to update you on our progress and acceleration of the 3R program that I talked about.

  • We announced that first of all to you July 25, three or four months ago.

  • After that I will turn things over to Mike to discuss the details of our financial performance in this third quarter of '08 that has just been finished.

  • Following Mike's comments we will open the call up for a few questions that you may have.

  • Today, AAM is reporting a net loss in the third quarter of 2008 of $440.9 million, or $8.54 per share.

  • This compares to a net income just 12 months ago of $13.5 million, or $0.25 per share in the third quarter of '07.

  • Wow, what a change in one year.

  • Guess what next year will turn around the other way.

  • AAM's results in the third quarter '08 were adversely impact by customer decision to restrict production and reduce inventories of unsold vehicles and we think they made the absolute right decision.

  • This created a significant imbalance, however, between our production schedules for this third quarter and the selling rates of the major product program that AAM currently supports for both General Motors and Chrysler LLC in the North American market.

  • The harsh economic realities that we're all facing resulted in AAM recording $398 million in this quarter of special charges for about an equivalent of $7.71 per share.

  • The majority of these charges were noncash and the special charges relate to the following.

  • First, the attrition programs for both hourly and salary men and women and the most significant of those activities relate to AAM's new labor agreement with the international UAW at the original US location.

  • We recorded a total of $85.2 million of such attrition program charges in the third quarter of 2008.

  • That includes pension, as well as other post retirement benefit curtailment and special and contractual termination benefits.

  • The second point on the BDP, which is the buydown program, a total of 1,527 associates participated in the BDP, which is an involuntary program.

  • Under the BDP our Company will make three annual lump sum payments to the associate in exchange for, among other things, a major base wage decrease, in the third quarter '08 our Company recognized $51.9 million of expense relating to the BDP payment to those men and women that are expected to permanently be idled throughout the term of the new labor agreement.

  • Third is the asset impairment.

  • In the third quarter of 2008 our Company recorded $255.9 million of asset impairments.

  • The fourth is our Company recorded a charge of $5 million in the third quarter, including costs incurred in relation to plant closings.

  • If plants can't compete and make money, plants aren't needed.

  • With this includes cost to redeploy machinery and equipment to support the launch of new business and avoid unneeded future capital expenditures.

  • Before I turn this over to Mike, let me now address the restructuring plan.

  • AAM has a comprehensive plan which we told you in July of this year and now we're accelerating that restructuring, resizing, and recovery plan so we'll be profitable gain in 2009.

  • It includes the following initiatives.

  • First, we will expand AAM's product development focus to increase total global served market by over 25%.

  • The key aspect of this initiative is the heightened focus we have placed on the commercial vehicle market, and we're having very early and good success.

  • In this market AAM is leveraging the legacy knowledge base and axle making expertise of our wholly owned Albion automotive subsidiary, it is located in the United Kingdom.

  • Our Company is also benefiting from engineering talent provided by our Fort Wayne, Indiana, engineering office.

  • On September 15, of 2008, our Company announced it will produce a carrier assembly for a major US commercial truck program and that carrier assembly will be used on a tandem double reduction rear axle for heavy-duty vocational, commercial and line hall application beginning in 2009.

  • This new business is AAM's first major venture into commercial trucks in the US market.

  • Second, we will realign our Company's global manufacturing footprint to increase exposure to growth markets, support our customers global product development initiatives and needs and establish regional cost competitiveness.

  • Our Company sin the process of resizing its operations to operate effectively and profitably in the US market with a SAR of between 12 and 13 million vehicle units.

  • This will necessitate the reduction of installed US production capacity by some 70%.

  • At the same time, our Company will increase global production capacity in excess of 150%.

  • These initiatives are intended to increase capacity utilization to approximately 90% by year 2010 year end.

  • In the third quarter of 2008, our Company has made excellent progress on all these initiatives I have just discussed with you.

  • The most important result is that AAM closed on the sale of the previously idled manufacturing facility in Buffalo, New York, on October 3, 2008.

  • We're also on track to close the Tonawanda and Detroit forging facilities faster than our original estimate of 6 to 12 months that we had previously discussed with you.

  • We'll have more to say about the specific timing and impact of these plant closings in January of 2009.

  • The third point is we'll achieve annual structural labor cost reductions in excess of $350 million.

  • We're on track to achieve a full transition of the UAW represented the legacy labor at the original US location by 2008 year end.

  • Good-bye legacy labor.

  • A total of 1824 associates have been released to date on the special separation program.

  • We expect to release the remaining 301 men and women who elected to participate in this voluntary separation program by December 31, 2008.

  • We're also on track to eliminate 350 salaried positions in 2008, and that's why you have the 350 million instead of 300 on reduction.

  • In total, AAM is targeting $500 million of annual cost reduction including the structural labor cost reductions I have just discussed, increased capacity utilization, and other fixed cost reductions.

  • This self-help, self-imposed program will allow our Company to internally generate capital in future years to support AAM's continuing business growth and diversification initiatives.

  • The fourth point is to continue targeting sales and customer relationships and the development to enhance the diversification of our Company's customer base, product portfolio, as well as global footprint, and that's working very nicely.

  • AAM continues to provide exceptional value to our customers, through an outstanding daily track record on product development, quality enhancement, warranty reliability, delivery, advanced technology, and launch performance.

  • These critical measures of customer satisfaction and our 15 years life are incredibly well respected by our customer base.

  • We're very operationally effective and those are cornerstones of our commercial success.

  • AAM's new and incremental business backlogs for programs launching the years 2009 through 2013 currently stand at $1.4 billion.

  • Of this total almost 60% relate to passenger car and crossover vehicle applications.

  • This represents more than $800 million of awards from five different customers on 12 different platforms produced in four different continents.

  • Approximately $800 million of the new business backlog is scheduled to launch in the 2009 to 2011 time period.

  • Approximately 25% of the new business backlog relates to customers other than General Motors and substantially all of the 600 million of new business AAM is currently quoting on is for customers other than the General Motors Corporation.

  • These dynamics will balance our AAM customer concentration in the near future.

  • The fifth major point is to rebuild AAM's balance sheet strength.

  • Less than 10 months ago we had a very strong balance sheet.

  • Today we have weakened our balance sheet to remove this legacy labor, do the adjustments required for capacity reduction, close the plants, do the attrition, and do the impairment, and we've done that very effectively and quickly.

  • We're focusing as a management team on improving AAM's liquidity position to achieve the objective we're aggressively reducing inventory and are on track to meet and exceed our total inventory reduction target of $80 million by year end 2008.

  • In the third quarter of 2008 we reduced inventory by approximately $45 million exclusive of indirect inventory write-downs.

  • Our Company is focused on raising cash by selling underperforming or noncore assets and redeploying underutilized capital.

  • AAM expects 2008 capital spending to approximate $150 million.

  • We expect to further reduce the annual run rate of capital spending trending down to range of [7.654%] beginning in year 2010.

  • Mike will have more to say about AAM's liquidity and capital structure in just a few minutes.

  • I would like to personally thank each and every one of you men and women for your attention today and your vital interest in AAM.

  • We deeply appreciate it.

  • Let me now turn this call over to our Group Vice President Finance, Chief Financial Officer, Michael Simonte.

  • Mike?

  • Michael Simonte - VP-Fin., CFO

  • Thanks, Dick.

  • Good morning, everybody.

  • We have a number vicious to discuss today about our third quarter 2008 financial results so I'm going get right to it.

  • As Dick has already mentioned AAM reported a net loss today of $441 million in the third quarter of 2008.

  • This included $398 million in special charges, and these related primarily to hourly and salaried attrition programs, the buydown program we negotiated with the international UAW at the original US location, and additional asset impairment.

  • Dick has already described the general nature of these charges.

  • Let me provide a little bit more color on the asset impairments.

  • In the third quarter of 2008, AAM reported approximately $256 million of asset impairment charges, including approximately $9 million of indirect inventory write-down.

  • These are spare parts and related equipment, related to the equipment.

  • These charges are in addition to the $329 million of asset impairments we recorded in the second quarter of 2008.

  • Collectively, that amounts to nearly $600 million on a year-to-date basis.

  • Most of these impairment charges result from the impact of recent customer decisions and sudden shifts in the market that are negatively affecting our future production requirements, and what I mean by that is most of the third quarter of 2008 impairment charges relate to these matters.

  • Monthly selling rates in the US have deteriorated to the point that many of you are now calling for a SAR in the fourth quarter of 2008 of just 10 to 12 million vehicle units.

  • Forward projections for the 2009 and 2010 SAR have also been significantly lowered as a result of the many adverse developments and the macro economic environment, credit markets and related consumer spending trends.

  • Widely reported accelerations in plant closing announcements made by General Motors in the third quarter as well as further structural reductions in the level of market demand for the major programs AAM currently supports in our Detroit, Michigan driveline assembly facility drove the majority of the additional impairment in Detroit.

  • In total the impairment in Detroit represented approximately 75% of the total impairment charge in the third quarter 2008.

  • GM and Chrysler each made some additional not so widely reported announcements in the third quarter 2008 that relate to future sourcing or product planning that also created an additional impairment indicator, a new impairment indicator for the third quarter at our core floor manufacturing subsidiary.

  • To make a long story short industry conditions worsened in the third quarter of 2008, and as a result, we needed to reconsider many of the plant loadings decisions and revenue and profit projections underlying the asset impairment analysis that we reported to you just 90 days ago.

  • We will continue to study, monitor, and evaluate the potential for additional future asset impairments as required under GAAP.

  • However, from a practical standpoint, based on what has now been accomplished in 2008, we believe that we are nearing the end of this phase of our restructuring plan.

  • Let me now talk about sales and the income statement detail.

  • In addition to the special charges, there were two other unusual items this quarter that impacted our results.

  • The first is, included in the line item investment income and loss on our income statement, $5.4 million write-down in the value of our short-term investment.

  • I will update you on this matter in further detail in a couple minutes.

  • Number two included in other expense is approximately $2 million of FASB 52 expense associated with a marked to market on US dollar denominated loan drawn by our AAM Brazil subsidiary.

  • This is a low-interest cost escort financing loan designed to be paid back with incoming US dollar export receipts.

  • Economically it's an effective hedge.

  • It is not unusual for remeasurement gains and losses of this type of activity to run through our P&L what is unusual about this situation is that in the last several days of September the local currency exchange rate versus the dollar dropped by approximately 25%.

  • This resulted in an unusually high mark to market on the loan and there was no offsetting receivables adjustment.

  • So to summarize this part of my comments, even if GAAP permitted the exclusion of special charges in these one-time items, and it does not, AAM still would have posted operating losses in the third quarter of 2008.

  • We understand that.

  • We also understand that the hourly wage and benefit cost savings that we will generate in our new labor agreement, the salary headcount reduction these we are affecting in 2008, the significant fixed cost reductions we are rapidly implementing this year and other profit improvement and productivity initiatives that we are executing including some favorable customer pricing adjustments and new business launches, all these items position AAM to correct that and return to profitability.

  • We know what we need to do and we are doing it just as fast as we can.

  • AAM's sales in the third quarter 2008 were $528.1 million, that's down approximately 30% from the $774.3 million we reported in the third quarter of 2007.

  • The short story here is that volumes were down but mix was up.

  • In total, customer production volumes for AAM's major light truck product programs were down approximately 44% in the quarter versus the prior year.

  • On a sequential basis, volumes in these same programs were actually down a little bit, about 3%, from the strike impacted second quarter 2008.

  • Content per vehicle for AAM's major light truck programs in the third quarter 2008 rose to $1,453.

  • That's approximately 12% higher than the third quarter of 2007 and approximately 11% higher on a sequential basis versus the second quarter of 2008.

  • This was expected, and it is representing a new quarterly record for the Company.

  • For the first nine months of this year, AAM's content per vehicle was approximately $1,360, up a little bit more than 5% versus 2007, and that's in line or slightly ahead of our previously discussed expectations for the year.

  • There's two significant drivers of this increase in content per vehicle.

  • First of all, we have new AAM content, recently introduced speaking of model year 2009, on the GMT-900 light duty truck application.

  • This is driving a nice increase in our content per vehicle.

  • Secondly, there are higher pricing pass-throughs in 2008, for example, metal market price adjustments.

  • Some of the indices that drive that pricing adjustment spiked to new highs that affected our sales in the third quarter.

  • This dynamic on pricing pass-throughs also includes the GM financial assistance that supports the transition of legacy labor at the original US location.

  • Let me also highlight one other factor affecting our financial results in 2008 before we move on to other matters, and this add very significant impact on the third quarter of 2008.

  • In fact, a very huge impact.

  • There was a significant imbalance between our production schedules and the selling rates of the major programs that we support for GM and Chrysler North America.

  • In the third quarter alone we estimate that General Motors reduced its dealer inventories for the programs we support by approximately 115,000 units.

  • Said another way, AAM produced and shipped products to General Motors at the rate of only 8,000 axles a day in the third quarter of 2008 while at the same time GM sold product in these programs at the much higher rate of approximately 11,000 axles per day.

  • In this time period, the rate of sales was 34% higher, and I'm speaking of General Motors' sales, they were 34% higher than the corresponding production levels that we and other suppliers had to support them in this quarter.

  • While necessary, and as Dick mentioned we applaud GM for taking this action so quickly and effectively, this inventory correction is a very painful reality, not just for GM, but also for AAM and other suppliers that support these programs.

  • For the year in total we estimate that this issue will account for 300 million to $400 million of our year-over-year sales decline.

  • We estimate that approximately half of that is attributable to the third quarter of 2008, at a contribution margin up of to 35% on these projects, or these products, this issue is a major earnings and cash flow headwind for us in the short term that thankfully should not recur in 2009.

  • The good news in all this is that GM's inventories and our major product programs are now at or near targeted levels.

  • The worst is behind us on this issue, and as early as the fourth quarter, of 2008, we will be able to return to a much tighter correlation between sales and production in our major product program.

  • This will be a positive factor in your sequential comparison of our fourth quarter financial results as compared to the third quarter of 2008.

  • We are also hopeful that three trends will help to stabilize the rates and mix of full-size pickup and SUV sales at or near current levels.

  • The first is, moderating fuel prices.

  • The second is the relatively inelastic nature of demand for pickup trucks which is by far and away the biggest single driver of our sales trends now.

  • And thirdly, the increasing probability of government stimulus, for example, in the form of roads, bridge, and other public works spending that will help to support and maybe even increase demand for certain light truck products.

  • From a forward planning perspective, we're building our restructuring plant to operate in a market with a US SAR of 12 million vehicle units.

  • If we need to do more we can and we will but that's our base planning assumption.

  • We are also assuming in our plans that full-size pickup sales drop to only 10 to 11% of the US SAR and that compares to a current run rate of 13%.

  • We're also assuming that full-size SUVs make up only 2.25 to 2.5% of the US SAR in the future and that compares to a 3.4% penetration rate in 2008.

  • We are not necessarily predicting these levels of sales and mix for 2009 or any other future period.

  • In fact, we are cautiously optimistic that we are overreaching a bit with these assumptions, particularly given the three items I just discussed.

  • Time will tell, but we believe it's prudent to plan for the worst and hope for the best in this situation.

  • There would be significant upside to our future earnings and cash flow prospects if these assumptions prove to be conservative.

  • And we're going watch that carefully.

  • So let's finish up on some other income statement details.

  • Non GM sales were $138 million in the third quarter of 2008.

  • On a year-to-date basis AAM's non-GM sales represented 27% of our total sales.

  • We're making slow and steady progress on this key measure of balancing diversification.

  • Let's turn now to cash flow.

  • GAAP cash used in operating activities in the third quarter of 2008 was $21.4 million.

  • CapEx ran at approximately 7% of sales at 35.9 million.

  • Not exactly 4 to 6%, but a good healthy improvement over the rates of 8 to 10, even 12% that we've had in prior years.

  • Reflecting our 87% cut in the dividend payout, dividends paid were $1.1 million, down approximately $7 million in the quarter from our previous rate of payout.

  • Incorporating these details, free cash flow was a use of $58.4 million in the third quarter of 2008.

  • Now, included in this free cash flow result was approximately $150 million of cash funding, of attrition program payments and other special charges.

  • This includes the first installment payment on the BDP program, or buydown program, we made in August 2008.

  • Netting against these special charge outflows was collection of $115 million from General Motors, all of which was due on or before October 1, of 2008 and, of course, was paid before October 1, of 2008.

  • Another bright spot in our cash flow results was a year to date $59 million reduction in inventory, approximately $50 million of which represents good old-fashioned cash flow gain, the remaining portion of the total decline in inventory on the balance sheet versus the prior quarter related to the impairment of indirect inventories.

  • So that was about $9 million of write-down versus about $50 million of reduction in calendar year 2008 that relates to the reduction of the required inventory levels, and that will benefit and is benefiting our cash flow.

  • Let me now comment on AAM's liquidity position and covenant compliance.

  • This is a topic that has generated a lot of attention in recent weeks.

  • Unfortunately not much of it has been rooted in fact or knowledge, but rather rumor and speculation.

  • At September 30, of 2008, AAM held $454.2 million of cash and cash equivalents and another $117.2 million of short-term investment.

  • These cash and short-term investment holdings reflect a total $450 million draw on our revolving credit facility.

  • After deducting the value of outstanding standby letters of credit, we had another $105 million of committed available borrowing capacity available to us under the revolving credit facility on that same date, September 30, 2008.

  • We made the decision in the middle of September, just before things got a little hairy, to hold higher levels of cash as compared to our historical norms.

  • This was prudent in our judgment to protect our Company's access to sufficient liquidity and what has devolved into an historically unprecedented period of weakness and concern about the safety and security of our nation's banking and financial services industry.

  • It's been a long time, maybe 100 years since the concerns that market participants have right now about the health of our banking system have existed in such a stark manner.

  • Although we have incurred higher net interest cost as a result of this more conservative liquidity posture we sleep well knowing that we have the liquidity we need to execute our restructuring plan.

  • As it relates to the covenants I would say the following.

  • Our covenant calculations are not a matter of public disclosure.

  • The people who have access and need access to the covenant calculations don't talk about it publicly.

  • That should tell you what you need to know about those who do.

  • I will simply say that we are currently in compliance with the terms and conditions of our debt agreements, and that includes the covenants.

  • Our policy and practice is to manage within all of our agreements.

  • That's true with our customers, our suppliers, and, of course, our banks and our creditors.

  • When we anticipated that we may need additional flexibility to manage through our labor transition, and accelerate the implementation of our restructuring plan we started a private discussion with our bank group about an amendment to the revolving credit facility.

  • We are currently in the process of renegotiating such an amendment.

  • As soon as this negotiation is completed we will make all appropriate and required public disclosures.

  • Most likely on a current report on Form 8-K filed with the SEC with the executed amendment attached as an exhibit may also be part of our Form 10-Q.

  • We appreciate our relationships with our banking partners and look forward to many more years of mutually beneficial cooperation.

  • It is not appropriate for me to make any other comments on this matter today, and I will not.

  • Before I wrap up today, let me also explain why we're holding this short-term investment.

  • As many other companies have done, we have invested available cash with the reserve from time to time for many years.

  • This is a historically very well regarded money market fund manager.

  • Although we were and continue to be very careful to select only the most highly rated daily liquid funds to invest our available cash balances, we have unfortunately experienced a delay in redemptions from three such funds managed by the reserve in the third quarter of 2008.

  • This has been widely reported.

  • In fact, a business page front page article in the New York Times yesterday featured this very issue.

  • Not as it relates to our Company, but in a general sense.

  • In September of 2008, redemptions from these funds were suspended, so that an orderly liquidation may be affected for the protection of the funds investors.

  • Two of these funds broke the buck in September of 2008.

  • Accordingly, and unfortunately, AAM recorded a $5.4 million loss in the third quarter 2008 to mark these investment holdings to the estimated net asset value of the funds on September 30, of 2008.

  • This was the unusual item I mentioned at the beginning of my comments.

  • Because the fund is no longer guaranteed daily liquidity and because we cannot predict with certainty when we will receive our redemption proceeds we have class classified these holdings from cash and cash equivalents to short-term investments on the balance sheet in the third quarter of 2008.

  • We're monitoring the situation very closely.

  • In fact, the reserve made a public announcement just last evening about their intention to distribute 50% of the primary fund.

  • That does not happen to be one of the three funds that we participated in.

  • But the relevance of that statement is that the reserve has said consistently that they expect to release funds in at least one of the three funds we participate in, in a short period of time after they resolve the primary fund distribution.

  • So we have every reason to believe that we'll receive some of that cash in just a short period of time.

  • To close my comments today, I will leave with you the answers to three tough questions that we have been encountering in recent weeks.

  • Number one, yes, we are still making and our customers are still selling great products that are needed in the global automotive marketplace.

  • Number two, no, we don't obsess about the Chicken Little or Nostradamus view of many headline seeking analysts, or other so called industry experts who have never seen a "deep global depression" in their lifetime or other similar forecasted apocalyptic scenarios, but are absolutely sure that it's going to happen right now, we just simply don't subscribe to that.

  • Yes, it is quite possible and preferable to maintain a positive, proactive, confident, and optimistic attitude about what we are doing to fight through these challenges and provide responsible leadership to help AAM get ready for the eventual recovery of our Company, our customers, our industry, our city, our state, and our great country.

  • Doom and gloom is overrated, even today on Halloween.

  • Thanks for your time this morning, and let me now turn the call back to Jamie for the Q&A.

  • Jamie Little - Director, IR

  • 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.

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

  • Operator

  • (OPERATOR INSTRUCTIONS) Sir, your first question comes from Chris Ceraso with Credit Suisse.

  • Dick Dauch - Chairman, CEO

  • Good morning, Chris.

  • Chris Ceraso - Analyst

  • Couple items.

  • First, on the cost structure, maybe you can tell us how representative Q3 is relative to the expected eventual run rate of $350 million of savings.

  • Were you at that rate yet or will you not be there until Q4?

  • Michael Simonte - VP-Fin., CFO

  • Okay, Chris, excellent question.

  • Gives me the opportunity to describe this in a little bit more detail.

  • We are nowhere near the future cost structure that we expect to have and will quickly transition to in the fourth quarter and first quarter.

  • What I mean by that is we were nowhere near to that in the third quarter of 2008.

  • While there was an important development relative to the labor cost situation in the third quarter, and that was the execution of the buydown program, transitioning our UAW representative associates at the original location, US location, to their new lower wage rates that applied only to the continuing associates.

  • Associates who were still with us in the third quarter who are going to be transitioned and released from the Company through the special separation program continue to make their pre-new contract wages.

  • So the labor cost savings that we anticipate, while we are on track to achieve the total $300 million of structural cost reductions, in calendar year 2009, not very many of the bottom line P&L savings flowed to the bottom line in the third quarter.

  • We see in the neighborhood of $15 million of bottom line labor cost savings in calendar year 2008 related to these matters, and another significant chunk coming on line in 2009.

  • It was close a one-third/two-thirds split of the portion that we see in 2008 impacting our third quarter.

  • Relative to other cost structure elements, there are many others that don't take full effect until the fourth quarter or the first quarter of next year.

  • Let me highlight some of those.

  • First of all, we were able to sell the previously idled Buffalo facility effective roughly the 1st of October, so we carried that facility and the costs associated with it in the third quarter.

  • That cost is no longer with us in the fourth quarter.

  • And, of course, next year.

  • We have been accelerating the release of our associates who participated in the special separation program, particularly in the months of August and September, and so those associates will be leaving our Company, and we will therefore be able to migrate to a more full implementation of our new lower labor cost savings, partially in the fourth quarter, and as Dick mentioned, fully in the first quarter of 2009.

  • There are other fixed costs adjustments that we are making just as fast as we can.

  • We mentioned the fact that we, unfortunately, are closing the Tonawanda and Detroit forging facilities.

  • Those events will be occurring.

  • Dick mentioned we're on track to do that faster than the original 6 to 12 month time line that we highlighted for that.

  • At least one of those facilities will be closed in the fourth quarter, maybe both.

  • So that will help us as we move into calendar year 2009.

  • And the other major issue, of course, and again, unfortunately, we're idling portions of our Detroit driveline assembly operation, and that will begin to take place near the end of the fourth quarter and into the early part of next year.

  • So there are many factors that are going to be coming together, many at the end of 2008, some developing and continuing into 2009, that will help us reduce our cost structure, return our Company to profitability.

  • We plan and expect and, of course, improve our margin.

  • Chris Ceraso - Analyst

  • Just to back up, Mike, sorry, did you say 15, 1-5, or 50, 5-0?

  • Michael Simonte - VP-Fin., CFO

  • 15, 1-5.

  • Chris Ceraso - Analyst

  • And that's on the scale of the 350, right.

  • Michael Simonte - VP-Fin., CFO

  • Well, no, it's 15 on the scale -- the portion of the 350 that we expect to fall through is bottom line savings.

  • Remember that we've been careful to say that the 300 as it relates to UAW represent associates in the 350 as it relates to the total structural labor cost reduction is just that.

  • It's a labor cost reduction.

  • A big portion of that is necessary to adjust to a lower volume level of production.

  • So this, is it a necessary fixed cost reduction?

  • One, quite frankly, that wouldn't have been entirely possible without the new labor agreements and the flexibility that we've had to accomplish these fixed cost reductions.

  • But unfortunately, Chris, the 350 does not entirely fall to the bottom line because we are losing the sales and the opportunity to make profit on those sales so the net of the total savings is closer to 25%, maybe 30% of that number, and so the 15 relates to a much smaller number, not 300 or not 350.

  • Chris Ceraso - Analyst

  • That's really helpful.

  • Do you have to take out more people to get down to your 12 million run rate assumption, or are you sized for that now.

  • Michael Simonte - VP-Fin., CFO

  • Not sure I understand what you mean by 12 million run rate assumption.

  • Are you talking about the SAR?

  • Chris Ceraso - Analyst

  • Yes, you said you were going to size the business for a 12 million industry.

  • To get there do you needed to remove more associates?

  • Michael Simonte - VP-Fin., CFO

  • Not really more, I needed -- depends on what day you compare it to.

  • We are on track to adjust to that, and that is encompassed in every comment I just made to you.

  • So, no, there's not an additional set of reductions that's going to be necessary at this point based on what we know, but we're making very deep and significant cuts, unfortunately, and that is what is necessary to adjust to that environment.

  • Chris Ceraso - Analyst

  • Last question.

  • You mentioned something about a sourcing decision.

  • Did you lose some business, future business that you thought you had been awarded?

  • Michael Simonte - VP-Fin., CFO

  • That's not what I was referring to but I will clear that up for you.

  • There was a couple situations, one that involved an early cancellation of a four-speed transmission program that we participated on.

  • So we knew eventually that program was going to phase out.

  • It just happened much faster than we had anticipated.

  • There's also -- there was a decision made, a much smaller issue, but a decision made where we were a tier 2 supplier from one of our forging operations, and the tier 1 supplier to which we supplied product lost some business with one of our customers, and so unfortunately, so did we.

  • The other issue that affected that situation, Chris, was the general market condition on the six-speed transmission.

  • We're, at least for the time being, producing at a lower rain.

  • We continue to have all the business that we were awarded relative to that situation, but the amount of business to have is running at a lower rate.

  • Chris Ceraso - Analyst

  • Thanks a lot, Mike.

  • Operator

  • Your next question comes from Rod Lache with Deutsche Bank.

  • Rod Lache - Analyst

  • Couple questions.

  • There's a reclassification of assets on the cash flow statement.

  • Is that related to the reserve fund, this $117 million?

  • Michael Simonte - VP-Fin., CFO

  • Yes, good morning, Rod, that's exactly what it is.

  • Rod Lache - Analyst

  • Okay.

  • And to Chris' question, if I understand your description of the 15 million of savings, you're saying that's net of the negative impact of a revenue decline?

  • Just want to make sure that I understood that properly.

  • And if, so what would be the gross benefit that you are anticipating in 2008?

  • Michael Simonte - VP-Fin., CFO

  • Rod, it's a multiple of 5 to 6 times is what we're targeting for those savings.

  • Rod Lache - Analyst

  • 5 to 6 times of the 15.

  • And does that include Buffalo savings, or is that just specifically these actions that you highlighted?

  • Michael Simonte - VP-Fin., CFO

  • Rod this relates primarily to the special separation program and the new UAW labor agreements.

  • Although we were not operating Buffalo we continued to have some associates on roll at Buffalo who did not accept participation in the Buffalo separation program last year.

  • So it does include some but not all of the Buffalo transition.

  • Rod Lache - Analyst

  • Okay.

  • And would you say, then that the decramental margin, just trying to calibrate for what we see on the gross profit line net of these savings, is the decramental margin for savings, you said earlier, something like 35% at this point?

  • Michael Simonte - VP-Fin., CFO

  • It is -- right, it is up to 35%.

  • Depends a little bit, Rod, on which programs we're talking about but the predominant program for us is the G&P 900.

  • And at least at this point in time our contribution margin continues to be in the 30 to 35% on that business.

  • Rod Lache - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Your next question comes from Himanshu Patel.

  • Himanshu Patel - Analyst

  • a question for Dick.

  • There's been, obviously, a lot of talk about GM and Chrysler in the media, I'm just wondering from your perspective, do you envision, if that was to go through, the full-size pickup truck programs of the two car makers, eventually coming together from a platform commonization perspective, or is that just something very hard to do in order to maintain sort of brand identity?

  • And if that was to happen, specifically for the products you guys make on axles and driveline, what do you think -- what level of integration would you envision there?

  • Dick Dauch - Chairman, CEO

  • Good morning, Himanshu.

  • Well, obviously everybody in America is reading a lot of different things.

  • Our policy is not to discuss speculation, so I won't, but we have excellent relationships with both of our customers that you are alluding to General Motors Corporation, Chrysler LLC.

  • We want to work with these guys, whether they are independent like they are today or if there's some different business fashion in the future, but the more broad situation, which I have been discussing for years, is the industry has needed a rationalization.

  • And thus the process of rationalization of OEM capacity, as well as tier 1 capacity is occurring and needed, then decisions, once reality occurs, will be by product segment as the long-range product plans and product portfolios are adjusted to the market being served.

  • Obviously GM has an incredible truck fleet out there right now, the GM 900 and all the different derivatives of brands off of it.

  • And of course, Chrysler is coming out with a stunningly new excellent product receiving rave reviews right now, the Dodge Ram, so we'll just have to wait and see what actually occurs to these respective companies.

  • Himanshu Patel - Analyst

  • Okay.

  • And then question for Mike.

  • You sort of alluded to right-sizing the business to a 12 million SAR.

  • Any early assumptions you could share with us on T-900 production for '09?

  • Michael Simonte - VP-Fin., CFO

  • Himanshu, I don't think we're going to be that specific, but what I tried to do in my comments today was give you some color about what we're thinking.

  • Our planning assumptions, not our predictions, and not even maybe my best estimate, but our planning assumptions to make sure that we make the appropriate and prudent cost reductions is that the full-size pickup penetration could decline to a rate of just 10 to 11% of the SAR.

  • That would be a full 200 basis points lower than where we're running now, maybe as much as 300 basis points.

  • I do think there's some strength and stability that is demonstrated in recent month sales activities.

  • We'll have to wait and see how that plays out.

  • We are going to refrain from making any specific predictions but we wouldn't be surprised if the rate of production of the 900 program exceeds the mathematical calculation of 12 million SAR, 10, 11% pickup penetration, and 40% General Motors market share.

  • Himanshu Patel - Analyst

  • And then last question, Mike, just given all the asset write-downs, you have an initial sense on what happens to depreciation going forward?

  • Michael Simonte - VP-Fin., CFO

  • Himanshu, again, the total impairment charges have been approximately $600 million.

  • The weighted average useful life or -- yes, useful life of our PPA portfolio is around 12 to 13 years.

  • We had significant program investments, 1999 through 2004.

  • Some of these assets that we're impairing do involve some longer dated buildings, but not a big portion.

  • The long story short, if you take all that information, we would be somewhere eight, nine, ten years to go on depreciation lives for some of these assets, and so if you look at $600 million total impairment roughly, divide by eight, nine, or ten, you are going in to neighborhood of what's going to flow through our income statement next year.

  • When we provide guidance for 2009, and we are not doing so today, we will help you at a more specific level make some of those.

  • Himanshu Patel - Analyst

  • Then, Mike, pension discount rate measurements, does that happen at the end of December?

  • Michael Simonte - VP-Fin., CFO

  • Given the situation we're in right now, we've had the chance to value our pension liabilities almost on a monthly basis.

  • We did so at the date of the labor contracts.

  • We did so again at the date of the buy down.

  • Again at the end of the third quarter, to reflect the impact of associates leaving our company and the curtailment gain that was necessary to be calculated, and we will once more, at the end of calendar year 2008, to conform with GAAP, mark our liabilities to the appropriate rate and set our expense for 2009.

  • I know that's a mouthful, but we will be doing it one more time here at the end of the year.

  • Himanshu Patel - Analyst

  • And discount rates have, from your third quarter mark to, I guess, where we are now, your general sense is they would be higher, right?

  • Michael Simonte - VP-Fin., CFO

  • I think so, Himanshu.

  • What we do is we work with our actuaries to calculate a, "hypothetical yield curve" associated with the market rates of the AA-rated Moody's type bond portfolio.

  • I would suspect you're right, but that is something that's more objective and we simply rely on the actuaries to tell us what it is.

  • I think the trading in the market would yield what you are saying, but we'll have to wait and see.

  • Himanshu Patel - Analyst

  • Thank you.

  • Operator

  • Your next question comes from Brian Johnson with Barclays Capital.

  • Brian Johnson - Analyst

  • Good morning, gentlemen.

  • Michael Simonte - VP-Fin., CFO

  • Good morning, Brian.

  • Brian Johnson - Analyst

  • Couple things.

  • Mike, could you recap some of the cash, the cadence of the cash outflow for buyouts and buydowns?

  • And then related to that, maybe recap the accounting treatment from cash coming in from GM?

  • Michael Simonte - VP-Fin., CFO

  • Okay.

  • Very good, Brian.

  • We have recognized, or we will recognize, let me get the exact number here, well, let me put in the way from.

  • From a cash flow perspective, in the third quarter of 2008, we are expending approximately $150 million for the special charges.

  • Most of that not all of that deals with the labor transition payments.

  • So we had some portion of that for the asset redeployment costs and other restructuring but most meaning probably more than $140 million related to the buydown program payment in August and the SSP that payments we made third quarter.

  • We have another similar amount, a little bit smaller, maybe 10 million to 15 million, $20 million less, but we have another similar amount scheduled in the fourth quarter.

  • Some of this is going to be dependent on when our associates actually are released from the Company, when we are able to close the Tonawanda and Detroit 14 facilities because most of the associates who remain are working in those locations.

  • When they sign all the releases and we get the legal documentation in place.

  • I can't tell you for sure but I would expect that most of the remaining cash payments on the SSP will go in the fourth quarter and there will be a trail into the first quarter 2009.

  • General Motors we received $115 million in the third quarter so we were able to offset a good portion of the $150 million that we paid out in the third quarter with a receipts from General Motors and of course we appreciate that very much.

  • In the fourth quarter we will have no such offset and so that will simply flow through our cash flow statement by itself.

  • Of course, sometime either late first quarter, first part of the second quarter, we would expect to receive the remaining $60 million from General Motors so I think that, Brian, helps you understand the basic parameters on the timing.

  • Relative to the accounting, maybe two things I would mention.

  • First of all, the buydown program, other than the portion that we were required to write off up-front, and Dick mentioned that relates to the portion of the bought down workforce that's not going to be working for us in the future so GAAP did not allow us to defer that.

  • The remaining buydown program will be amortized as expense over the period of time that those associates are working for us.

  • We expect that to be determined under the labor agreement.

  • We need to monitor that sort of on an associate by associate basis but we've got the appropriate control in place to do that.

  • Relative to the GM financial assistance, GM obviously a major customer of ours, we provide product, GAAP requires us in this situation to record that as revenue, and we are going to be recognizing that over the period of benefit for General Motors which is going to be about same time period as our labor contracts.

  • So roughly four years, 45-month time period beginning in June of 2008.

  • Brian Johnson - Analyst

  • Recognizing as revenue, does that mean would it flow through into EBITDA?

  • Michael Simonte - VP-Fin., CFO

  • Yes, sir.

  • Brian Johnson - Analyst

  • Okay.

  • Michael Simonte - VP-Fin., CFO

  • Just the same as the buydown expenses flowing through to offset it.

  • Brian Johnson - Analyst

  • Okay, right, so that's an offset.

  • And in terms of the comments you made about idling parts of Detroit Gear and Axle, if I heard that correctly, just your overall capacity reduction goal does that imply additional restructuring expense or headcount reductions beyond what the 150, beyond the current program you have outlined?

  • Michael Simonte - VP-Fin., CFO

  • Brian this was fully contemplated in the restructuring plan we announced on July 25.

  • All we're doing is reminding you and everyone else that this activity is still underway and will, in fact, be taking place so it's contemplated in the discussions that we've had with you today.

  • Brian Johnson - Analyst

  • Thanks.

  • Dick Dauch - Chairman, CEO

  • Thank you, Brian.

  • Operator

  • Your next question comes from Rich Kwas with Wachovia.

  • Your line is open.

  • Rich Kwas - Analyst

  • Hi, good morning.

  • Dick Dauch - Chairman, CEO

  • Good morning, Rich.

  • Rich Kwas - Analyst

  • Mike, or Dick, could we just circle back?

  • I think, Dick, you mentioned $500 million in structural savings over a little longer period of time, and could we just kind of reconcile that with the 350?

  • What's the incremental here?

  • Michael Simonte - VP-Fin., CFO

  • Okay, Rich.

  • The incremental primarily deals with the 2006 activity that we had to restructure and unfortunately eliminate the capacity at our Buffalo Gear and Axle facility.

  • It includes the impacts of the fixed cost reductions there.

  • It includes the Buffalo separation program which we executed in 2007.

  • It includes the additional fixed cost reductions associated with new IAM, or International Associates of Machinists labor agreements and all the related activities that we've had in this time period.

  • You might recall back in 2006 we also had had a significant round of salaried headcount reduction.

  • So this restructuring activity that we are engaged in really started in earnest for us late '06.

  • We're hopeful that we will be through all or most of it in the first half of 2009, and this is what we refer to as total fixed cost reduction of $500 million.

  • Rich Kwas - Analyst

  • That's helpful.

  • That clarifies it.

  • And then just on -- when you look at the quoting activity here, $600 million last quarter, I think it was $800 million, what's been going on there?

  • Is some of that related to cancellation of future programs at some of the large customers out there?

  • Or what's that related to?

  • David Dauch - President, COO

  • Yes, this is David Dauch.

  • Typically our quote level is a little higher than it is at the $600 million level.

  • It again, goes back to the customers, we are evaluating their customer [LRTTs] and the opportunities that are available for the supply base to quote on.

  • At the same tame when you look at the $600 million that we're working on there's a distribution of about 50% here in North America and 50% international.

  • We still expect to close on some of that business here yet this year in the fourth quarter, or worst case, in the first quarter of next year.

  • Rich Kwas - Analyst

  • Okay.

  • And, Dick, bigger picture question, with these program cancellations that are going on in the future, where do you think we are in terms of the timing of this?

  • Is there a lot more to come, or do you think we've kind of flowed through a vast majority of it?

  • Dick Dauch - Chairman, CEO

  • If I was setting in an OEM state right now I would say they're having massive and focused reviews on their product portfolio offerings, and it looks to me to be solidifying nicely on full-size truck, especially with GM, and as I have indicated with the new release of the brand-new vehicle just coming on market for Dodge Ram, and, of course, with Ford with their new F Series that looks good.

  • I think the passenger car and the crossovers, the hybrid and all the other evolving vehicles are going to have to be evaluated case by case, because probably there's been overreaction on past car and some of those product depending on the company and the capacity they have and the markets they serve.

  • So I think there's still significant more product trimming, changing to occur, certainly going to be different, though, Company by Company.

  • Rich Kwas - Analyst

  • Very helpful.

  • Thank you.

  • Dick Dauch - Chairman, CEO

  • You are welcome.

  • Operator

  • Your next question comes from Brett Hoselton with KeyBanc.

  • Brett Hoselton - Analyst

  • Let's see here.

  • Starting with the $500 million in cost reduction, is my assumption that that's an annualized run rate correct?

  • Michael Simonte - VP-Fin., CFO

  • Correct.

  • Brett Hoselton - Analyst

  • If I were to take a 30,000-foot view, and I understand there's a lot of pieces here, but if you were to say, look, I'm going achieve that by such and such time frame, and it's going to be a steady ramp-up or a stair step over that time frame in terms of when I'm going to achieve it and how I am going to achieve it, can you kind of give me a 30,000-foot perspective?

  • Michael Simonte - VP-Fin., CFO

  • Yes, that's fine, Brett.

  • It's really the same appears that we talked about with Chris Ceraso.

  • This $500 million number, we're not trying to confuse anybody, it represents the total structural annual cost reduction that we are achieving as a result of our restructuring action.

  • So the currently active piece that we're spending the most time on right now, and quite frankly, that hasn't already been achieved is the $350 million that we're dealing with in respect to the current round of labor adjustments, hourly and salaried UAW and IAM that is related to the closure of the Tonawanda and Detroit 14 facilities, the idling and consolidation of portions of its Detroit Gear and Axle facility which should be accomplished by the middle or so of calendar year 2009, some of it much sooner than that, all of it by the middle of '09.

  • So these are the principal actions that we're taking, and the only reason we talk about in the context of $500 million is to understand the magnitude and scope of what we're dealing with.

  • Our sales in this same time period, as you all well know, have declined by well in excess of $1 billion.

  • So this structural cost reduction was necessary not only to avoid the costs associated with that higher level of sales that we were supporting, as recently as 2005, and early '06, but also to allow us the opportunity to return to profitability and generate cash, right-size, if you will our cash flow with our current situation.

  • Brett Hoselton - Analyst

  • So is it safe to assume that you are going to reach that run rate, then, if the bulk of the work has been done by, let's say, the middle of '09?

  • Michael Simonte - VP-Fin., CFO

  • That's right.

  • Brett Hoselton - Analyst

  • You are going to hit that run rate in the middle of '09?

  • I'm just talking from a 30,000-foot perspective.

  • Michael Simonte - VP-Fin., CFO

  • That's right, Brett.

  • And again, that will offset the lost contribution margin on the sales decline that we see during that same time period.

  • And from peak to trough, we're talking about $1.4 billion or so, and so that's what's necessary for us to adjust to this new environment.

  • Brett Hoselton - Analyst

  • Okay.

  • And then, Dick, maybe a more direct question on the Chrysler business.

  • Have you had any recent discussions with Chrysler regarding the remaining Dodge Ram business?

  • Dick Dauch - Chairman, CEO

  • Yes, I have, and we'll keep that between myself, our Company, and Chrysler.

  • Brett Hoselton - Analyst

  • Fair enough.

  • Mike, I understand that you don't want to talk about your amendments so feel free to pass on this.

  • I'm wondering, do you have any sense as to the timing when you might or when we might be able to see an announcement here?

  • Secondly, and again, feel free to pass on this because I know you said you didn't want to talk on it, what gives you the confidence that you will be able to successfully complete these discussions?

  • Michael Simonte - VP-Fin., CFO

  • Okay, Brett, I'm not going to be specific about timing.

  • There are good and valid reasons why we have decided to work on this.

  • I mentioned in my comments earlier that when we determined that we needed to move faster on our restructuring action and that we needed some additional flexibility under the covenants we decided to engage in that discussion.

  • So we're underway, we're having discussion.

  • As soon as we can, trust me, I want to resolve that question for you and many others as soon as we can and when it's appropriate we'll make that announcement.

  • Brett Hoselton - Analyst

  • Fair enough.

  • Thank you very much, Mike.

  • Gentlemen, thank you.

  • Dick Dauch - Chairman, CEO

  • Thank you, Brett.

  • Jamie Little - Director, IR

  • Thanks.

  • We have time for one last question.

  • Operator

  • All right, sir, your last question comes from Itay Michaeli with Citi.

  • Itay Michaeli - Analyst

  • Just want to drill down a little bit more on the fourth quarter cash flow.

  • I think you might have mentioned it, but what was the remaining sell-down of inventory, i.e.

  • the amount of you expect to generate in the fourth quarter from the inventory sell?

  • Michael Simonte - VP-Fin., CFO

  • Itay, good morning, we would see a a minimum of $30 million of additional opportunity there.

  • We may be able to exceed it.

  • Of course, if we can, we will.

  • Itay Michaeli - Analyst

  • Great.

  • Just on the 2009 outlook, I know there's no guidance yet, but you do expect to get back to profitability, where do you stand, and what's your sense of confidence on the 12% EBITDA margin as a near-term goal?

  • Michael Simonte - VP-Fin., CFO

  • Itay, we continue to see that as a reasonable goal for us on a run rate basis.

  • Again, the critical elements of accomplishing that objective are the full implementation of our new UAW and IAM labor agreements, including the wage and more importantly the benefit reduction initiative that don't take place or become effective until January 1, of 2009.

  • So there's a nice pickup there of a roughly 1% run rate of EBITDA that's not available to us until first quarter of 2009.

  • The additional labor cost savings that we talked about earlier on the call, and that I discussed when Rod Lache asked the question about how much it is going to be, the answer to how much it's going to be is relatively easy to figure out.

  • We have widely reported a roughly $40 aggregate reduction in the all-in, fully loaded labor cost of these UAW representative associates, and based on having 1,525 of those associates in the buydown program continuing to work for us, probably having some portion of that not working for us in the future, you simply look at the number of hours available in the year, the number of associates are going to be able to replicate the math that I discussed with Rod.

  • So that's going to help us.

  • Then the additional fixed cost reduction, obviously with respect to EBITDA not including any noncash depreciation activity, but the hard cash savings associated with operating with a much higher capacity utilization, we feel that 12% is still a very reasonable goal fours.

  • We continue to move toward that goal.

  • Nothing has changed our assessment of our ability to accomplish that.

  • Itay Michaeli - Analyst

  • That's helpful.

  • Thank you so much.

  • Dick Dauch - Chairman, CEO

  • Thank you, Itay.

  • Jamie Little - Director, IR

  • Thank you, Itay, and we thank all of you who have participated on this call and appreciate your interest in American Axle Manufacturing.

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

  • Operator

  • This will conclude today's conference call.

  • You may now disconnect your lines.