American Axle & Manufacturing Holdings Inc (AXL) 2009 Q3 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • At this time, I would like to welcome everyone to the American Axle and Manufacturing third quarter 2009 earnings conference call.

  • After the speakers' remarks, there will be a question-and-answer session.

  • (Operator Instructions) Mr.

  • Son, you may begin your conference.

  • - IR

  • All right, thank you, Sarah.

  • And good morning, everyone.

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

  • This morning, we announced our third quarter of 2009 financial results.

  • 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.

  • As a reminder, a replay of this call will be available beginning at 5:00 p.m.

  • Eastern Time today through 5:00 p.m Eastern Time November 6, 2009 by calling 1-800-642-1687, use the reservation number 34808987.

  • 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 and 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 the aam.com Website.

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

  • Information regarding these non-GAAP measures, as well as a reconciliation of these non-GAAP measures to GAAP financial information, is available on the aam.com Website.

  • We are also audio Webcasting this call through the Website aam.com.

  • This call will be archived in the investors section of the Website and will be available there for one year for later listening.

  • With that, let me turn things over to AAM's Co-Founder, Chairman and CEO, Dick Dauch.

  • - Co-Founder, Chairman & CEO

  • Thank you, Chris.

  • And good morning, everyone.

  • Thank you for joining us today to discuss AAM's financial results for the third quarter of 2009.

  • Joining me on the call today are David C.

  • Dauch, AAM's President and Chief Operating Officer; Mike Simonte, our Executive Vice President and Finance and Chief Financial Officer; along with John Bellanti, our Executive Vice President of Worldwide Operations.

  • Today, I will provide a brief review of our third quarter of 2009 financial results.

  • I will also comment on the overall business conditions affecting AAM and the near term outlook for our Company.

  • After that, I will return things to Mike Simonte to discuss the details of our financial performance.

  • Following Mike's comments, we will open the call up for any questions you ladies and gentlemen may have.

  • Let me first begin by saying that the third quarter of 2009 marks a positive turning point for AAM.

  • AAM has returned to profitability.

  • First, AAM is reporting net sales in the third quarter of 2009 of $409.6 million.

  • This this is AAM's highest quarterly sales total in the year of 2009.

  • Second, AAM's net income for the third quarter of 2009 was $19.6 million.

  • Diluted earnings per share was $0.35.

  • AAM is very proud to return to profitability for the first time in two years.

  • This has been a hard, tough process.

  • AAM's third quarter of 2009 financial results reflect the favorable impact of pension and post retirement benefit curtailment gain of $42.3 million, equivalent to $0.76 per share.

  • These gains were partially offset by special charges and restructuring costs of $13 million or $0.23 per share equivalent.

  • These special charges and restructuring costs, incurred in the third quarter of 2009, primarily relate to the following.

  • Item one, additional salary and work force reductions.

  • Two, further capacity rationalization activities.

  • Third, is the successful closing of a settlement and commercial agreement with General Motors.

  • And fourth, the amendment of AAM's revolving credit facility and term loan agreements.

  • The year 2009 continues to be the most difficult and challenging year for AAM and the entire global automotive industry.

  • However, the year 2009 is also the year in which AAM is completing our comprehensive multiyear restructuring and resizing of our Company to return us to profitability.

  • These actions now position us to financially recover and stay strong.

  • AAM's third quarter results demonstrate that we are accomplishing this critical objective as we said we would.

  • The third reason why the third quarter of 2009 marks a positive turning point for AAM is the most important.

  • During our most recent investor teleconference, on August 5, 2009, we said it was AAM's primary objective to complete our restructuring outside of the bankruptcy process.

  • We did, through the successful closing of a settlement and commercial agreement with GM on September 16, 2009, as well as amendments to AAM's revolving credit facility and term loan agreement, finalized at the same time we have accomplished five critical objectives.

  • First, AAM has avoided the unnecessary costs, disruptions and value destruction that would have resulted from such a risky course of action.

  • Second AAM has strengthened its liquidity position by gaining access to more than $300 million of new liquidity to meet our ongoing needs.

  • Third, AAM has gained long-term contract clarity with the General Motors Company.

  • Fourth, AAM's management team and Board of Directors retained exclusive autonomous control and responsibilities for AAM.

  • Fifth, the most important, we have reserves a significant value inherent in many of our key stakeholders.

  • The favorable impact of this and other restructuring actions, combined with an anticipated recovery in global light vehicle sales and production levels over the next few years, positions our Company to generate significant free positive cash flow.

  • This will help our strategy of growing into our capital structure over the next few years.

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

  • North American light vehicle production was down approximately 21% in the quarter on a year-over-year basis.

  • AAM's total light truck production volumes, as compared to the third quarter of 2008, were down 18% year-over-year.

  • AAM's third quarter production results reflect the adverse impact of the extended summer production shutdowns by General Motors and Chrysler.

  • We estimate these shutdowns reduced AAM's sales and operating income in the third quarter of 2009 by approximately $100 million in sales and $29 million respectively.

  • This is equivalent to a loss of $0.52 per share on this one important matter in that period.

  • For the three quarters of 2009, AAM estimates a reduction in sales and operating income, resulting from the extended summer production shutdowns by GM and Chrysler, to be approximately $304 million and $95 million respectively.

  • Let me take a moment now to update you on the progress of AAM's critical initiatives in the third quarter of 2009.

  • First, we successfully continued the process of realigning and resizing AAM's global manufacturing capacity and footprint.

  • As a result of the GM and Chrysler production shutdown and other related customer capacity reduction announcements, we further accelerated and expanded AAM's fixed cost reduction activities.

  • This has helped AAM to quickly transition to new lower projected customer and market requirements.

  • I am pleased to report to you that we have nearly completed the comprehensive operational restructuring and resizing of our Company.

  • It is working very well.

  • We can now refocus on the continued profit recovery of our business.

  • We are reducing our operating break even levels to approximately 6,000 axles per day.

  • Through our planned actions during the fourth quarter, AAM is on track to complete this critical initiative by year end 2009.

  • AAM's targeted operating break even level is approximately equivalent to a US SAR of 10 million vehicle units.

  • Second, during the third quarter of 2009, we continue to make difficult but necessary adjustments to our work force.

  • Since 2008, we have reduced our hourly work force by around 3,500 men and women and the salaries work force by approximately 1,000 positions.

  • AAM's work force is now aligned to the new business conditions and market demand.

  • Third, we are continuing to enhance the diversification of AAM's customer base, product portfolio, global manufacturing, as well as sourcing and engineering footprint.

  • This includes the flawless and anonymous launch of all of our new product programs throughout the world.

  • During the fourth quarter of ' 09, AAM will be launching the following; Driveline products supporting new global light truck programs for Volkswagen, [Auchtengazelshaft] and AAM will support this program from our Araucaria, Brazilian operations.

  • The ultimate use of that product is in the country of Argentina for VW.

  • Driveline products for our new light truck to the Indian market, manufactured by Tata Motors, called the Tata Ace, from AAM's facility in Pantnagar India.

  • Transmission differentials for Audi AG, the premiere, premium division of VW AG, AAM is manufacturing these products in our new plant in [Stanika] Poland, no longer in Olawa.

  • This is for ultimate use in the markets of Germany.

  • Today, we are announcing the first time AAM's $1 billion new and incremental business backlog for the years 2010 to 2014.

  • Nearly 50% of this new business backlog is for passenger cars and crossover vehicles with our exciting new product technology.

  • Approximately 70% of AAM's new business backlog is for end market outside of the United States.

  • Over the past 15 years our Company at AAM has steadily expanded our world class product portfolio.

  • And it now includes a full array of driveline and drivetrain product applications for passenger cars, crossover vehicles, light trucks, SUV's as well as commercial vehicles all the way up to class six, seven and eight.

  • This continues to create many new business opportunities throughout the world for our Company.

  • AAM is currently quoting approximately $700 million of potential new business.

  • Substantially all of these opportunities are scheduled to launch from 2010 through 2013.

  • Nearly all these new business quotes are with customers other than the General Motors Company.

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

  • Before I turn it over to Mike, let me comment on another important announcement we are making today and wrap up by making a few closing remarks.

  • Today, we announced that we have amended and restated AAM's stockholder rights agreement.

  • This is designed to preserve the long-term value and availability of AAM's net operating loss carry-forwards, know as NOL's, and related tax benefits by reducing the likelihood of unintended ownership changes through actions involving AAM's stock.

  • Additional information regarding the amended and restated rights plan will be contained in a Form 8-K that AAM plans to file with the Securities and Exchange Commission later today.

  • By finalizing new business agreements with General Motors and amending our senior credit agreements, we have successfully resolved the short-term liquidity concerns that were facing AAM.

  • With these important objectives successfully accomplished, we can focus on delivering outstanding value to our customers on a daily basis, which we are known for.

  • We will continue to strive to profitably grow AAM's global businesses and continue to diversity AAM's customer base, product portfolio and global manufacturing and sourcing footprint.

  • As I previously said, AAM's third quarter of 2009 results marks our first quarterly profit in two years.

  • We are delighted to return our Company to profitability.

  • This is a huge turnaround for our Company, even without the significant curtailment gains benefiting our third quarter of 2009 financial results; In total, AAM was profitable in the month of August, as well as the month of September of 2009 on a stand alone basis.

  • This gives us genuine hope and confidence that a return to consistent and sustainable profitability is attainable at AAM.

  • We expect AAM sales to double from a range of $1.4 billion to $1.5 billion in 2009, to approximately $3 billion by 2013.

  • This sales projection is based on the anticipated launch schedule for AAM's new and incremental business backlog.

  • This also assumes a very conservative US SAR of around 10 million units in 2009 and '10 and a range of 13 million to 14 million by the year 2013.

  • We continue to be focused on doing what is necessary to improve AAM's overall market cost competitiveness and making the hard, tough and appropriate decisions for our business.

  • As a result of the aggressive restructuring actions we have taken, AAM expects to generate EBITDA, as a percentage of sales, in the range of 12% to 15% for the years 2010 through 2013.

  • Ladies and gentlemen, I'm delighted you are interested in AAM.

  • We're delighted to be back reporting on a profitable quarter and getting back to the normalized business with our exceedingly excellent operating results.

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

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

  • Michael?

  • - VP of Finance & CFO

  • Thank you, Dick.

  • And good morning, everybody.

  • We had a busy third quarter and I have a lot to cover today.

  • So, I'm going to get right to it, starting with sales.

  • AAM's sales in the third quarter of 2009 were $409.6 million.

  • On a sequential basis, our sales were up 67% versus the second quarter of 2009.

  • This was our highest quarterly sales total so far this year in 2009.

  • When we're done with the year, it should be our second highest quarterly sales total.

  • And I'll have a little bit more to say about that in a few minutes.

  • On a year-over-year basis, AAM's sales in the third quarter of 2009 were down 22%, when compared to $528 million in the third quarter of 2008.

  • That's not a favorable comparison year-over-year but it's in line with the 21% reduction in North American light vehicle builds in the quarter and a little better than GM's North American truck builds, which were down 32% year-over-year in the quarter.

  • Two significant factors are driving sales growth for our Company in the second half of 2009 and 2010.

  • The first, is the favorable impact of new business launches.

  • The calendar year 2010 marks the largest single year of sales launch in our $1 billion new and incremental business backlog for the years 2010 to 2014.

  • Many of these new programs are launching in the second half of 2009 and will reach full production rates in 2010.

  • So, it's having a favorable impact right now.

  • In total, we estimate these new business launches will bring up to an additional $300 million of sales to AAM's top line in 2010.

  • AAM sales in the fourth quarter of 2009 will also benefit but to a lesser extent.

  • As you know, we've been working to engineer and launch these programs, in some cases, for two to three years.

  • Now, is the time we start to benefit financially from these important new business diversification initiatives.

  • The second factor driving sales growth for our Company is the end of a deep inventory correction cycle.

  • And unfortunately, we've been talking about this for about two years as well.

  • This has led to a massive unfavorable imbalance between sales and production in our major product programs over the past two years.

  • Through the first three quarters of this year, 2009, we estimate that GM has reduced inventories in our major product programs by approximately 100,000 vehicle units.

  • In the third quarter of 2009, we estimate that our sales were adversely impacted by this to the extent of approximately 35,000 vehicle units.

  • That represents close to $50 million in loss sales and again, this has to do with the inventory correction.

  • On a go forward basis, we expect this to turn around.

  • We will benefit from having our production levels meet and exceed, in some cases, where inventory levels are either too low or need to increase with the rising sales market.

  • Our customers' sales levels, now that inventories are right sized and selling rates are picking up, this should be helpful to our Company.

  • Reducing dealer stock was the right thing for GM to do for sure but it had a hugely negative impact on our sales level and production levels while that occurred.

  • Luckily and fortunately, now, that's in the past.

  • Okay, that covers volume.

  • Let me now talk about mix.

  • Mix was stable in the third quarter of 2009.

  • Four-wheel drive penetration was approximately 65%.

  • This is a little higher than the year-to-date trend rate of 63% and that's due to some seasonal strength in the third quarter.

  • I don't expect that to continue.

  • AAM's content per vehicle was $1,396 in the third quarter of 2009.

  • That's approximately the same as what we saw in the second quarter of this year.

  • On a year-over-year basis, our content per vehicle was down 4%.

  • The largest single factor effecting this trend was the impact of lower metal market pass-throughs.

  • Mix shifts into mid sized product programs, away from the more heavily contented four wheel drive SUV's.

  • Remember, the 360 program is gone in 2009 and the Hummer H3 product is running at very low activity levels this year.

  • So, our mid sized programs are now weighted more heavily on the pickups side, which have lower content per vehicle.

  • So, those are the two factors driving content per vehicle.

  • The bigger one, quite frankly, is the lower metal market.

  • AAM's non-GM sales were approximately $75 million in the third quarter of 2009 and that represents about 18.3% of our total sales.

  • On a year to date basis, non-GM sales accounted for approximately 22% of our total sales.

  • On a percentage basis, the trend rate for non-GM sales in this quarter, the third quarter of 2009, was negatively effected by extensive model year and program changeover downtime at Chrysler's Saltillo assembly facility.

  • We expect our non-GM sales to grow much more quickly, as a percentage of our total sales, through the end of 2010 as we help Chrysler launch the brand new Dodge Ram heavy-duty series pickups at Saltillo.

  • And also, as we launch other new programs with Volkswagen, Audi, Tata, Mac, Nissan and others.

  • For the next 12 to 15 months, our new business backlog is heavily skewed to non-GM business and that's going to help our concentration and balance of customer diversity.

  • So, let's now move on down the income statement.

  • In the third quarter of 2009, all of our key measures of profitability, including gross profit, operating income, net income, earnings per share and EBITDA, were favorably impacted by pension and post retirement curtailment gains.

  • In accordance with generally accepted accounting principles and in consultation with our third party actuaries, we recorded curtailment gains of $42.3 million or $0.76 per share in the quarter.

  • These curtailment gains primarily result from the ongoing hourly work force reduction AAM is incurring at the Detroit manufacturing complex.

  • One other thing about the curtailment gains, we had previously announced that we expected the curtailment gains to range from $30 million to $40 million in the quarter.

  • Once these gains were finally determined by the actuaries, they were slightly higher than what we thought because the discount rates used by the actuaries, which are largely driven by interest rate market conditions at the valuation date, these were lower at September 30 versus when we made the original estimate in August.

  • Now, these curtailment gains were partially offset by special charges and restructuring costs of $13 million or $0.23 per share going the other way in the third quarter of 2009.

  • These special charges and restructuring costs primarily related to salaried work force reductions, capacity rationalization activities and costs associated with the successful closing of the settlement and commercial agreement with GM and the amendment of AAM's revolving credit facility and term loan agreements.

  • The pace of these special charge costs are reducing significantly.

  • In this quarter, it was $13 million.

  • For comparison purposes, in the third quarter of 2008, AAM recorded $398 million or $7.71 per share of special charges, asset impairments and other non-recurring operating costs, primarily related to the massive hourly and salaried attrition programs and benefit reductions we saw here.

  • This also includes plant closures and other capacity rationalization activities necessary for us to right size our capacity to the current market and set ourselves up for the type of profitability we expect in the future.

  • These special charges, curtailment gains and restructuring costs, are very important things to consider when you compare our GAAP financial results on a year-over-year basis.

  • There is one other unusual item we recorded in the third quarter of 2009 and that's a $4.8 million cash charge to adjust contingent tax liabilities for what is referred to as uncertain tax positions in the accounting literature.

  • In layman's terms, we adjusted accruals for prior year, so previous period, audit exposures in a number of different jurisdictions, based on new information that was forthcoming from the relevant tax authorities.

  • This tax charge is the primary reason why our effective tax rate in the third quarter of 2009, at 22%, is so much higher than our recent and expected trend rate that we've discussed on previous calls.

  • On a year-to-date basis, this charge represents more than 60% of our total tax expense.

  • So, you can understand what I'm saying here.

  • The next topic I will address is productivity.

  • This is a vital and positive development for AAM in 2009.

  • In the first and second quarter of 2009, we reported to you that we pulled through approximately $124 million of total productivity gains to offset the impact of lower volumes, metal market and foreign exchange volatility, interest expense and taxes.

  • In the third quarter of 2009, our year-over-year productivity gain, on this basis, was approximately $59 million.

  • So, pretty much right in line with what we did the first two quarters of this year.

  • This is real, tangible evidence that our cost reduction efforts are paying off.

  • And again, this is the step function improvement in our operating performance that is resulting from the very difficult but necessary restructuring, that we've basically completed at the end of this third quarter and certainly, as we end the year 2009.

  • Now, let's quickly review SG&A and interest expense before we move onto the cash flow statement.

  • SG&A and that includes research and development spending, for the third quarter of 2009, was $44 million.

  • Now, similar to the second quarter or 2009, we incurred costs in this time period that simply did not exist in 2008.

  • This includes fees paid to financial advisors and legal counsel representing various parties that were necessary to work our way through the commercial agreements and bank amendments that were successfully completed in this quarter.

  • These restructuring costs totaled $6.3 million in the third quarter of 2009 and drove our SG&A expense higher than our normalized run rate for this year.

  • Adjusting for these restructuring costs, our "normalized" or "adjusted" SG&A for the quarter would have been $38 million.

  • This compared to approximately $43 million in the third quarter of 2008.

  • And in our opinion, better reflects the trend rate of spending and more importantly, cost reduction that we've driven into these areas in 2009.

  • Interest expense was approximately $20 million in the third quarter of 2009, as compared to $18 million in the third quarter of 2008.

  • The increase in interest expense primarily reflects the impact of higher borrowings in this year, 2009.

  • Our composite average interest rate is up a little bit but for this quarter, was approximately 7%.

  • As a result of the amendments to our revolving credit facility and term loan agreements, we estimate that our quarterly interest expense run rate will increase to approximately $25 million in the fourth quarter of 2009.

  • That's the cost of the agreements we put in place to preserve hundreds of millions and in fact, over $1 billion of stakeholder value in our business.

  • So, it's a big cost but there was an even bigger pay off.

  • In total, including the impact of the curtailment gains, special charges and restructuring costs; AAM is reporting net income of $19.6 million in the third quarter of 2009.

  • Especially considering the impact of the extended summer production shut down by GM and Chrysler that had a massive impact on our July of 2009 activities, the inventory correction and all the other issues we face in this quarter; We're very pleased with these results.

  • Let us now turn our attention to cash flow.

  • GAAP cash provided by operations, this is the top 1/3 of our cash flow statement, was $6.7 million versus a $21.4 million use of cash in the third quarter of 2008.

  • There were several important transactions that impacted our operating cash flows and generated noise in this part of our financials in this quarter.

  • AAM received a $110 million commercial accommodation payment, this is also referred to as a cure payment, from General Motors in connection with the settlement and commercial agreement we announced on September 17 of this year.

  • AAM has no repayment obligation associated with this payment.

  • Also, in connection with the AAM/GM settlement and commercial agreement and as Dick mentioned earlier on the call, we are transitioning to accelerated payment terms with GM.

  • This favorably impacted our operating cash flow by approximately $35 million in the quarter.

  • We expect this to double by year end as this agreement is more fully implemented.

  • Special charge payments, including those related to the restructuring costs I just mentioned, in the third quarter of 2009, approximated $65 million.

  • And related substantially to hourly and salaried attrition programs, including the buy-down program for BDP's cash-outs.

  • And we incurred another $15 million to $20 million on top of these special charge payments for the regularly scheduled BDP payment in the third quarter of 2009.

  • So, all told, $80 million to $85 million for these types of payments in the third quarter.

  • Those are costs, thankfully, we will not have to endure as we move forward.

  • There's roughly $15 million to $20 million left to pay on the buy-down program.

  • After that, it's business as usual.

  • The fourth item here on the cash flow statement, is we estimate the cash impact of the extended production shutdowns to be in the range of $60 million to $65 million in the third quarter of 2009.

  • As we discussed on our last call, the P&L impact of these shutdowns were more heavily skewed to the second quarter of 2009.

  • The cash flow impact, not the P&L impact but the cash flow impact, was more concentrated in the third quarter.

  • And this has mostly to do with the working capital required to restart operations after those shutdowns were concluded in July.

  • As to investing activities, CapEx, was approximately flat at $34.5 million in the third quarter of 2009 versus $35.9 million in the third quarter of 2008.

  • And remember, our longer term CapEx trend is down.

  • Down to about 4% to 6%.

  • We define free cash flow to be net cash provided by or used in operating activities, less CapEx and dividends paid, if any And right now, there won't be any.

  • Please note, that we consider the entire $110 million cure payment from GM to be a component of our free cash flow.

  • In the third quarter of 2009, on this basis, free positive cash flow was $2.5 million, as compared to a use of $58.4 million in the third quarter of 2008.

  • And I think I have explained the items that help you understand our cash flow for the quarter now.

  • So, let's talk about liquidity, a very important topic.

  • At September 30, 2009, AAM had approximately $370 million of available liquidity, consisting of available cash, short-term invested and committed credit lines.

  • Only committed credit lines count for this purpose.

  • Cash on hand was $173.1 million.

  • As we are completing AAM's comprehensive restructuring, not only have we cut our fixed costs in 1/2 in the last two years but we have also significantly reduced the minimum liquidity levels required to run our business.

  • We presently estimate that AAM's minimum liquidity requirements, remember we just had some experience testing this theory, we expect this to range from $75 million to $100 million at this time.

  • At $370 million of total committed liquidity, we are at a very solid position relative to our requirements.

  • Almost 4 times higher than what we need to run the business.

  • Quite simply, nobody needs to worry about whether we can pay our bills right now.

  • We can.

  • And let me remind you, we always have, without exception.

  • Okay.

  • I have two other matters to address before I wrap it up and move onto the Q&A.

  • First, I want to add some color to Dick's comments about our announcement this morning regarding our amended stockholder rights plan.

  • The tax year 2008 marked the first year in which AAM generated net operating losses in our US tax return.

  • At year end 2008, these NOL's totaled $282 million.

  • While I'm not on the position to speculate on exact figures, mostly because the tax laws are complex and they change all the time, we do expect this US tax NOL to grow in future years.

  • If for no other reason due to the significant timing differences between book and tax recognition of the special charges we have incurred in recent years.

  • The book recognition of many of these charges are faster than the tax recognition.

  • So, that's the issue here.

  • Now, we have great confidence in our future business plan and we view this NOL as a valuable corporate asset.

  • One that could be worth literally hundreds of millions of dollars to our Company and our Company's stockholders.

  • This is why we believe amending the stockholder rights plan is a prudent course of action.

  • It is important to note, that we do plan to review this plan, the amended stockholder rights plan and specifically the 4.99% trigger, on an annual basis, to ensure the plan continues to serve in the best interests of our stockholders.

  • If we conclude that it does not, we'll take action.

  • Second, let me comment on our recent Form S-3 filing.

  • On October 16, 2009, we filed a universal shelf registration statement on Form S-3 with the SEC.

  • Once this is deemed effective by the SEC, and that has not happened yet, this registration statement would enable AAM to sell a variety of registered securities.

  • Here's what you need to know about this filing.

  • We previously had a shelf registration filing that expired.

  • This current shelf registration statement, I'm speaking of the one we filed on October 16, this replaces the expired file.

  • Now, this registration statement does not necessarily signal an imminent action but it does position our Company to be opportunistic if market conditions are right for new financing or refinancing transactions.

  • We will be heavily focused on strengthening our balance sheet over the next few years.

  • This registration statement, again, once it's deemed effective, should provide us with optionality, flexibility and speed to market that we currently do not have.

  • So, that's the reason why we thought it made sense to put that up.

  • Now, let me close my comments with just a quick list of major takeaway points from AAM today.

  • First, our comprehensive multiyear restructuring, as much fun as it's been to talk about the last couple of years, is now nearly complete.

  • This long, painful but necessary chapter in our Company's historic book is substantially over.

  • This is not to say that we don't have additional room to improve because we do.

  • We will continue to focus on driving all of our facilities to achieve market cost competitiveness but the toughest tasks, the biggest tasks are behind us.

  • As a result of the successful restructuring and this is my second, AAM has accomplished massively important, lasting and permanent structural cost reductions.

  • In total, we have cut our fixed costs by more than 50% in the past two years.

  • This includes hourly labor reductions.

  • This includes salary labor adjustments, work force reductions.

  • This includes capacity utilization improvements.

  • This includes localization and globalization of supply.

  • AAM's uncompetitive costs are mostly gone and they're not coming back.

  • My third point here and there's only four, so I'm almost done.

  • We've solidified our liquidity position and we've clarified our long-term contractual relationship with our two largest customers, General Motors and Chrysler.

  • We greatly appreciate the support and consideration we've received from our many key stakeholders this year, and in fact, this quarter, as we've finalized various commercial agreements and financing arrangements that were so important and helped us to avoid bankruptcy.

  • Now, we're focused on strengthening our balance sheet, reducing leverage and most importantly, creating value for those that helped us accomplish these objective and were there for us when we needed them.

  • Number four, perhaps most importantly, AAM has returned to profitability, one of our key goals for 2009.

  • Now, just to be clear, we've been in the end zone before.

  • So, we're not exactly doing the [itchy] shuffle over here just because we reported our first profit in eight quarters.

  • But it's a notable achievement and one we hope and expect marks the start of another long-term phase of stable, consistent and successful performance for our Company.

  • Thank you for your time and attention this morning and we're ready for the Q&A now.

  • Chris?

  • - IR

  • All right, thank you, Mike and thank you, Dick.

  • We've reserved some time to take some 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 that you may have.

  • Operator

  • (Operator Instructions) And your first line from Himanshu Patel from JPMorgan.

  • Your line is open.

  • - Analyst

  • Hi, good morning, guys.

  • A couple of questions.

  • Mike, could you give us some guidance on contribution margins sequentially for the next couple of quarters?

  • - VP of Finance & CFO

  • Yes, Himanshu, there's no substantial change in our expectation for contribution margins going forward.

  • We've been targeting a minimum of 25% contribution margins on new sales, particularly in those facilities such as Mexico or our US facilities such as Three Rivers, that have an established base of fixed costs.

  • In addition, as we launch the Volkswagen business, for example, in Brazil, when we're ready to go in Brazil, we've got our infrastructure in place and we'll see very favorable contribution margins there.

  • On the GMT 900 program, in particular, where we've got such a huge fixed cost investment and the Dodge Ram business as well, the contribution margins tend to be a little bit higher.

  • So, you need to look at each of programs to understand.

  • But in general, Himanshu, we'll comfortable that we'll be returning 25% to 30%, even 35% contribution margins on certain of these programs going forward.

  • - Analyst

  • And then, the commercial relationship with General Motors that got altered as part of the broader financing package, the particular elements that were changed with the GM relationship, can you just at a high level explain the timing of when those changes are implemented.

  • Is it sort of stair stepped in over time or is there sort of one time that happens in the future?

  • - Co-Founder, Chairman & CEO

  • Himanshu, this is David Dauch speaking.

  • Again, we reached a comprehensive commercial and financial settlement with General Motors.

  • To answer your question, we gradually work our way into normalcy as part of that commercial settlement.

  • So, it is stepped into.

  • Again, the negotiation resulted in us receiving contract clarity in our contracts, Obviously, lifetime program contracts were kept intact.

  • And we settled the cure amounts for the $110 million that Mike talked to you about earlier.

  • Also, dealt with the other liquidity issues through the accelerated payment terms and also the second tier loan.

  • And then, there was a number of other agreements that were part of it that we ultimately worked our way through, as it relates to getting our capacity aligned with the new market demand.

  • Dealing with cost reductions and productivity, as far as cost sharing, I should say.

  • And then also, dealing with some of the metal market elements of it.

  • But to answer your question, we gradually work our way into normalized terms over a period of time.

  • - Analyst

  • Could you tell us by what year all of the changes are fully implemented?

  • - Co-Founder, Chairman & CEO

  • Again, it's going to ramp over a five to a seven year period of time.

  • - Analyst

  • Okay.

  • That's useful.

  • And then lastly, Mike, you've got some fairly precise views on sort of long-term revenue potential for the Company, the 2012 number I believe you guys have put out.

  • The EBITDA margin of 12% to 15%, though, is somewhat wide.

  • I'm just wondering, from your perspective, what are the kind of puts and takes that determine whether you're at the low end of that or the high end of that range?

  • - VP of Finance & CFO

  • Okay, Himanshu, thanks for this question.

  • Listen, we' d love to drive our sales to $3 billion by 2012.

  • Right now, we are targeting 2013.

  • So, we're pushing ourselves pretty good there but 2013 is that revenue number that we put out.

  • As it relates to the EBITDA margins, listen, the most important factor for us has always been and will continue to be capacity utilization.

  • And we see spikes during the year due to seasonality.

  • We see spikes due to things like we see in this quarter on the Dodge Ram heavy-duty program, where, on program changeover, volumes are lower.

  • Maybe there are inventory corrections, as we've very well seen in the last couple of years.

  • I would say that by far and away, the factor that's going to effect whether we're at the low end of that range or the high end of the range, is going to be capacity utilization.

  • - Analyst

  • Are commodity costs variability a bigger component in the future given the commercial changes with GM?

  • - VP of Finance & CFO

  • There's -- it's going to be a bigger factor but it's not a material factor, Himanshu.

  • - Analyst

  • Okay, great.

  • And Mike, lastly, any tax rate guidance you could venture us?

  • - VP of Finance & CFO

  • Boy, I tell you, this one is really hard to predict because with the volume levels and our business operating at the lower levels we are, any little activity like what we saw here in the third quarter is going to have a material impact, potentially, on our effective tax rate.

  • But what we've said is that we see our effective tax rate in the range of 10% to 15%.

  • And that's largely driven by the taxes we pay and expect to continue to pay in the Country of Mexico.

  • So, that's about all I can say at this time for the future.

  • - Analyst

  • Great.

  • Thank you.

  • Operator

  • Your next question comes from the line of Joe Amaturo from Buckingham Research.

  • Your line is open.

  • - Analyst

  • Good morning.

  • Two quick ones.

  • I'll keep it to two.

  • I'll follow the rules.

  • The first one is, could you just quantify what the financial impact is from the accelerated payment terms that you came to with General Motors in that agreement?

  • - VP of Finance & CFO

  • Yes, Joe, at the end of the third quarter of 2009, we have about $35 million of additional cash flow associated with that agreement.

  • Now, the agreement was implemented in September, for most but not all, locations that we ship to.

  • And as we more fully implement that over the course of the fourth quarter, we'd expect to double the impact by the end of the year.

  • As selling rates pick up, if they pick up into the future, it could be even more significant.

  • - Analyst

  • Okay.

  • And then, as it relates to this NOL that you're trying to preserve, I have to assume that you don't expect to be a taxpayer for quite some time, if, in fact, you return to profitability in the US?

  • - VP of Finance & CFO

  • Joe, we're a taxpayer in Mexico and we may very well be a taxpayer in other countries, as we ramp up our substantial new business backlog, but it should be some time in the US.

  • Now, what's difficult to predict about this, as I'm sure you know, there are various legislative efforts to change the tax laws, particularly, those relating to foreign earnings and profits.

  • And so, you never know with this type of thing, Joe.

  • But we're, obviously, trying to take full advantage of NOL's to minimize, if not eliminate, tax payments here in the US, at least, for future years in the future.

  • - Analyst

  • Okay, thank you.

  • Good quarter.

  • Operator

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

  • Your line is open.

  • - Analyst

  • Good morning, everybody.

  • Can you just give us a little bit more color on your targets for capital structure and leverage and when you expect to get there?

  • - VP of Finance & CFO

  • Okay.

  • Rod, look, we have a long-term goal, which is much like the way we ran this business for many years, prior to the last couple, of having balance between our debt capital and equity capital.

  • And we'd prefer, on a long-term basis, for our equity capital to represent more than 50%, upwards of 2/3 even, of our total capitalization.

  • Now, that is a long-term objective for our Company.

  • What we want to do are take incremental steps over the next years, and by few, I mean three to five, maybe 7 on the outside, to get us there.

  • And Rod, the obvious sources of cash to help us do this are first and foremost, operating cash flows, now that we've got our business right sized.

  • Secondly, we're going to evaluate the capital markets, we're going to look at equity transactions, if it makes sense.

  • We're going to look at refinancing our debt maturities, as well and doing so in a way that would be more efficient for our longer term capital objectives.

  • So, we've had some longer term, high level approaches here.

  • And what I hope we can do, Rod, is hit a few singles over the course of the next couple years and get ourselves around the base paths here over the next three to five years.

  • - Analyst

  • And my second question is just hoping for a little bit more color on the new commercial arrangement you have with GM.

  • One characteristic of the Company that's been pretty impressive over the past few years is that the price deflation, these productivity changes -- that the price deflation has been pretty benign.

  • Relative to other suppliers, you guys have been able to protect a lot of that -- the pricing that you get for your products.

  • Could you just give us any sense of how much that's changed.

  • What should we be thinking in terms of the head wind going forward from your productivity gains being passed along?

  • - Co-Founder, Chairman & CEO

  • Rod, as you know, typically, our material productivity has been less than market over the years.

  • So, we continue with that type of arrangement.

  • There were some concessions that were made but they weren't material in nature and it's still at market or below market.

  • - Analyst

  • Thank you.

  • Operator

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

  • Your line is open.

  • - Analyst

  • Thank you, good morning.

  • I'll apologize to start.

  • I joined late.

  • So, if I ask something that you've already answered, please forgive me.

  • Was there anything in the quarter that helped your performance that may not repeat?

  • And the reason I ask that is; First, you mentioned the contribution you expected in the 25% to 35% range on incremental revenue.

  • It was much stronger than that, if my math is right, in this quarter.

  • And then also, on the EBITDA margin that you printed, it was also up in a range of something that you expect to see a couple years down the road.

  • And you're already there, here in the third quarter.

  • So, how do I read that relative to the performance that you printed?

  • - VP of Finance & CFO

  • Okay.

  • Well, Chris, first of all, and I'm pretty sure you would know this, so, I'm not exactly sure -- I think I can say this pretty quick.

  • But obviously, the curtailment gain that we booked here in this third quarter was huge.

  • And really drove our operating profitability to levels that are not sustainable.

  • I think, just on a GAAP basis or GAAP derived basis, I should say, our EBITDA margins were in the 18% to 20% range.

  • That's not sustainable.

  • Our perspective is 12% to 15%.

  • And if we adjust for the curtailment gains, we're just a little bit shy of that range here in the third quarter.

  • And that's principally because, remember, in July, we had significant downtime associated with the shutdowns.

  • And in total, for the third quarter, we had about 12 major plant down weeks.

  • That number is going to be much lower going forward, probably only three or four in the fourth quarter, based on what we know right now.

  • So, I would say no, the only substantial non-recurring gain that we had in this quarter had to do with the curtailment.

  • - Analyst

  • Okay.

  • Even X that, it looked pretty strong.

  • But, okay, I hear you.

  • - VP of Finance & CFO

  • The pace of productivity gains this year is pretty steep and we're pointing that out.

  • And it really is a step function.

  • It's not that I think we're going to print $60 million of productivity every quarter ad infinitum.

  • But as a result of these massive changes in our labor cost structure, in particular, we talked about having a $300 million structural labor cost reduction associated with the UAW agreement alone in 2008.

  • And that's exactly what we're seeing come through our financials now on a quarter by quarter basis.

  • So, we'll see some of this pace of productivity on a year-over-year basis slow down a little but it will still be healthy.

  • And that's really what you're seeing, Chris.

  • - Analyst

  • Now, you also had mentioned, I think, the expected new revenue in 2010, about $300 million.

  • Does that include the Ram business?

  • - VP of Finance & CFO

  • No, it does not include the Ram business.

  • The Ram business is an existing program for us, so we do not include that in our new business launch.

  • There is an element of new content that we have on the next generation heavy-duty for GM.

  • And so, there is some -- not significant element but an important element of that $300 million that represents new content with GM.

  • But the Dodge Ram program is excluded from that total.

  • - Analyst

  • Okay.

  • Can you give us a number for 2011?

  • - VP of Finance & CFO

  • No, not now.

  • There's too much -- it's too early to talk about that in detail.

  • - Analyst

  • Okay.

  • And then, just a housekeeping one, what should we expect in terms of interest expense and the share count on a go forward basis?

  • - VP of Finance & CFO

  • Okay.

  • The interest expense, Chris, it's going to jump a little bit here.

  • We ran about $20 million pace in the third quarter.

  • That's a quarterly pace.

  • I expect that to increase to about $25 million in the fourth quarter.

  • And that's the price.

  • I think what I said, if you missed it, that's the price of the savings and value preservation that we were able to accomplish in this quarter.

  • It didn't come free.

  • The share total is going to start trending towards $60 million as we move through the next year or so.

  • We did not see the significant increase in the third quarter associated with the warrants that were issued to General Motors but we'll see that creep up, maybe halfway between $55 million to $60 million, into the fourth quarter.

  • And as those warrants come into money, even more than they are today, then you'll see us creep towards 60 over the next year or so.

  • - Analyst

  • Thank you, Mike.

  • - Co-Founder, Chairman & CEO

  • Thanks, Chris.

  • We've got time for one last question.

  • Operator

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

  • Your line is open.

  • - Analyst

  • Good morning, Dick, David, Mike, Chris.

  • Well, since I'm the last person, I might ask three, if you don't mind.

  • - Co-Founder, Chairman & CEO

  • I may have to call back [from the tarmac] too.

  • - Analyst

  • I just want to make sure I got the numbers correct, $3 billion by 2013.

  • Based on the US SAR of 13 to 14 million.

  • EBITDA margins kind of between now and then, running between 12% and 15%.

  • That's kind of what you are thinking?

  • - VP of Finance & CFO

  • That's exactly what we said.

  • - Analyst

  • Okay, perfect.

  • As far as major cash inflows, are we done with GM at this point in time?

  • - VP of Finance & CFO

  • Well, they still represent 75% of our revenue base.

  • - Analyst

  • Well, what I'm wondering is are they going to write you another check for $50 million or something along those lines?

  • I think we're done.

  • - Co-Founder, Chairman & CEO

  • The answer is, no.

  • - VP of Finance & CFO

  • The answer is, no.

  • - Analyst

  • Okay, good.

  • And then, as far as the NOL's, I'm assuming that the majority of that is in the US.

  • And therefore, the ability to utilize those is based on your profitability in the US.

  • And obviously, you've moved a lot of your manufacturing down to Mexico.

  • So, my question is; One, what's the magnitude of the NOL's?

  • And two, as we think about your potential profitability, as you look at that $3 billion by 2013, EBITDA in the 12% to 15% range, how much, in terms of a percentage or something along those lines, is in the NOL's?

  • And I'm trying to grasp how much of those NOL's you have and how much will you be able to utilize?

  • Because that's a big deal, obviously.

  • - VP of Finance & CFO

  • Yes, Brett, listen, the number that we're disclosing today, $282 million at the end of tax year 2008, that's all US.

  • That's specifically what we're referring to.

  • And remember, that's the first year we had an NOL.

  • Now, our profitability, whether we earn it here in the US or we earn it overseas, is eventually going to be repatriated here in the US and taxed in the US.

  • So, we see that as an important vehicle, the NOL that is, to shield taxation or at least cash taxation on some of those profits as they come back.

  • And remember, as you point out, a significant portion of our manufacturing, also, a significant portion of our current cash generation, is occurring offshore.

  • And so, it may very well be appropriate for us to repatriate that cash to pay down some debt.

  • And most of our debt, of course, is right here in the US.

  • So, we want to protect the NOL, both what we have today and what we likely will generate in the future, to be able to offset obligations we might otherwise have on profits when they come back to the US.

  • So, that's going to be a significant, not the only significant, but a significant use of those NOL's.

  • - Analyst

  • Okay.

  • Now, as I think about that $282 million at the end of 2008 and I'm looking at your nine months net loss of, give or take, $300 million.

  • Is that an approximation of what you can add to the $282 million?

  • In other words, do you have $0.5 billion plus in NOL's?

  • - VP of Finance & CFO

  • That's not an unreasonable way to look at it.

  • What complicates this and the reason why I'm not give you an exact estimate of what this would be, is not only the timing of when we may repatriate foreign earnings and profits from our off shore locations, which are very significant, but also the tax law changes that may occur and the book and tax differences.

  • For example, the entirety of the payment we received from General Motors this year at $110 million, That's going to be recognized as taxable income in 2009.

  • There are many differences that are going to effect that.

  • - Analyst

  • Okay.

  • Thank you, Mike.

  • And then, finally, I'm assuming you guys ran at break even or above in August and September.

  • Is that kind of a fair assessment?

  • - VP of Finance & CFO

  • Yes, sir.

  • - Analyst

  • Okay, great.

  • Gentlemen, thank you very much and congratulations.

  • It was a tough road for you guys but it looks like you guys are out the other end.

  • Congratulations.

  • - Co-Founder, Chairman & CEO

  • Thank you, Brett, very much, we appreciate that.

  • - IR

  • Thanks, Brett.

  • And we thank all of you for participating on this call and appreciate your interest in American Axle Manufacturing.

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