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Executives

Christopher M. Son – Director of communications and Investor Relations

Richard E. Dauch - Chairman of the Board & Chief Executive Officer

Yogendra N. Rahangdale -Vice Chairman of the Management Board, Chief Technology Officer

David C. Dauch - President, Chief Operating Officer

Michael K. Simonte - Chief Financial Officer, Group Vice President – Finance

Analysts

Dan [Galveston] - Deutsche Bank Securities

David Leiker - Robert W. Baird & Co., Inc.

Richard Kwas - Wachovia Capital Markets, Llc.

Brett Hoselton - Keybanc Capital Markets

Christopher Ceraso - Credit Suisse

Itay Michaeli - Citigroup

American Axle & Manufacturing Holdings, Inc (AXL) Q4 2008 and Full Year Earnings Call January 30, 2009 10:00 AM ET

Operator

Good morning, my name is Rebecca and I will be your conference facilitator today. At this time I would like to welcome everyone to the American Axle & Manufacturing Fourth Quarter and Full Year 2008 Earnings Conference Call. (Operator Instructions). As a reminder today’s call is being recorded.

I would now like to turn the Call over to Mr. Christopher Son, Director of Investor Relations, and Corporate Communications. Please go ahead Mr. Son.

Christopher Son

Thank you Rebecca and good morning everyone. Thank you for joining us today and for your interest in American Axle & Manufacturing. This morning we released our Fourth Quarter and Full Year 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 pm today through 5:00 pm Eastern time February 6 by calling 1-800-642-1687 reservation number 77289567.

Before we begin I would like to remind everyone that the matters discussed in this conference call may contain comments and forward-looking statements as are within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results or conditions, but rather are subject to risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed.

For additional information we ask that you refer to our filings with the Securities and Exchange Commission. This information is also available on 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 also available on the aam.com website.

We are also audio web casting this call for our website. This call will be archived in the Investors section of the website and will be available there for one year for later listening.

During the quarter we are planning on attending the J.P. Morgan for the High Yield Leverage Finance Conference on February 3 and the Barclay’s Capital Investor Select conference on February 10. In addition we are always happy to host investors at our facilities here in Detroit or at our other locations. Please feel free to contact me to schedule visits.

With that let me turn things over to AAM’s Co-Founder, Chairman, and CEO, Richard Dauch.

Richard Dauch

Thank you, Chris, and good morning everyone. Thank you for joining us today to discuss AAM’s financial results for the fourth quarter and full year of 2008. Joining me on the call today are Yogendra Rahangdale our Vice Chairman and Chief Technology Officer; David Dauch our President, Chief Operating Officer; and Michael Simonte our Group Vice President of Finance and Chief Financial Officer.

To begin my presentation today I will provide a brief overview of our financial results for the fourth quarter and the full year 2008. I will then update you on the progress we have made on achieving AAM’s comprehensive restructuring, resizing and profit recovery plan. Finally I will make a few comments on AAM’s 2009 outlook before turning things over to Mike do discuss the details of our financial performance. After that we will open the call up to you, ladies and gentlemen, for your questions that you may have.

Let me open my discussion today by saying that 2008 proved to be a brutally difficult and demanding year for the domestic automotive industry and certainly American Axle & Manufacturing. While the domestic automotive industry has made its share of mistakes in the past, the current problems have been exacerbated by one of the worst economies since the deep recession of 1979 to 1982, which I refer to as oil shock two times. When you add the housing crisis, the credit crunch, the major spike in commodity pricing for the mix, you have an unprecedented reversal in the business environment that is driving not just the US economy, but the markets throughout the world into a synchronized and patterned downturn.

The combination of plunging consumer confidence, a pervasive shortage of credit available to the would be car buyers, intensifying cost pressures, and increasing global competition is pushing auto sale to their lowest level in decades. These factors have pushed the US automotive industry to the verge of a collapse. For AAM 2008 was a turbulent and transformational year. For the full year our company suffered a $1.2 billion loss. Sales for AAM declined by 35%, as compared to 2007, down to $2.1 billion. This is caused by numerous market and economic forces, including a sudden and major shift in consumer demand to more fuel-efficient passenger cars and crossover vehicles away from body on frame pick up trucks and SUVs.

These new market conditions caused a further excess of installed capacity of AAM; this required us to permanently and structurally transform AAM’s business model and accelerate our plan to restructure, resize and recover which we are very well doing.

Approximately half of AAM’s loss in 2008 is attributable to asset impairments including lease asset impairments and indirect inventories. Another 25% of AAM’s loss in 208 is attributable to the impact of new labor agreements. This includes hourly and salaried attrition programs and benefit reduction. During the year we reduce AAM’s worldwide workforce by almost 3,000 men and women. These actions were very unfortunate, but certainly necessary.

Approximately 7% of AAM’s loss in 0 related to non-cash charges to establish valuation allowances on AAM’s US and UK deferred class assets as required under GAAP. These three issues alone account for approximately $3 million of AAM’s $1.2 billion losses in 2008 our financial performance in 2008 was also severely impacted by a prolonged and unnecessary strike called by the International UAW against AAM. The strike started on February 26, 2008 at our original US locations in the states of Michigan and New York and lasted an ungodly 87 days.

The international UAW strike along with other actions our customers took to realign dealer inventory levels with current market demands in 2008 caused a massive imbalance between our production levels and the selling rate of the major vehicle programs that we have the [inaudible] to support in North America. We estimate this factor reduced AAM’s sales in 2008 by more than $300 million and caused our company more than $100 million of profitability.

For the full year of 2008, a year we simply refer to as the year from hell, and it is over, AAM posted a net loss of $1.2 billion or a $23.73 per share loss. This compares to net earnings the previous year in 2007 of $37 million or $0.70 per share.

In our company we have accepted the new market and economic challenges head on and we are making the hard, necessary and structural changes to return our company to profitability. We are probably one of the first companies into this difficulty and we will certainly be one of the first companies out of it. We have every confidence and the deepest resolve that AAM will emerge from these brutal economic times as a viable, profitable, and sustainable company. That is exactly what we had in mind when we developed our comprehensive restructuring, resizing, and profit recover plan.

In 2008 we made excellent progress on all of these important initiatives. First of all, we continued to invest in AAM’s advanced product, processing systems technology and global footprint. We have an outstanding product portfolio. We have intensified our focus in the commercial vehicle market and expanded our all wheel drive product portfolio throughout the globe. This is increasing AAM’s total global served market by approximately 30%.

We recently announced a major new customer relationship with Mack Truck; part of the Volvo Powertrain world group and that will be in the United States. We sharpened the focus of our metal-formed products business by exchanging our hub and spindle business for FormTech’s differential gear, hypoid pinion and ring gear forging business. As part of this transaction we acquired new forging process technology, created a newly formed subsidiary called [Actigear Inc.] and this enhance our ability to compete in the transmission, drivetrain forging market segment.

We also recently announced that AAM has entered into an important new agreement to form a 50/50 joint venture with a subsidiary of the JAC group in China. This will further expand our content on passenger car vehicles and that will officially start February 1, 2009.

Second, we developed and implemented plans designed to realign AAM’s global manufacturing footprint and cost structure with current and projected market requirements. These initiatives are designed to increase capacity utilization and accelerate AAM’s participation in the world’s fastest growing automotive market.

We are resizing AAM’s US operation to compete effectively in a US market with total light vehicle sales of approximately a 10 to 12 million unit. We are reducing our installed US [dropsa] capacity by a whopping 70% to align with a lower production level. At the same time we are expanding rapidly AAM’s global installed capacity by approximately 150%.

AAM is also continuing to invest in the United States. We are in the process of successfully launching three new businesses in the US. Oxford Ford’s of Oxford, Michigan; [Ditronic] of Auburn Hills, Michigan and [Actigear] in Fort Wayne, Indiana. Each of these businesses are market cost competitive and provide AAM and its customers with outstanding forging and machining capabilities. These companies have a bright future for our company.

Third, we achieved historic gains in the labor market cross-competitive, and operating flexibility of AAM’s US manufacturing base. Our new labor agreements at their original US location, convert the former fixed legacy labor bloated cost structure to a highly flexible, variable, labor costs structure that is competitive.

Structural and permanent changes to previously uncompetitive OEM’s file healthcare, pension, and old plan designs took effect on January 1, 2009. Theses changes reduced AAM’s pension and OPAB obligations by more than $200 million. AAM took steps to eliminate 350 salaried positions in 2008 and we were successful at doing that, as well as canceling the officer and executive bonus program and trimming other SG&A costs.

AAM took these actions because they were necessary given the circumstances and the hand that we were dealt. If market conditions deteriorate further in 2009 we will continue to realign all of AAM’s costs including hourly labor, salaried labor, material costs, overhead, as well as SG&A to levels that are commensurate with our customer order schedule. This is a highly dynamic situation and we will continue to proactively adjust our plans, as we need to.

Fourth, we continued to provide exceptional value to our customers through AAM’s outstanding daily performance on product development, quality performance, reliability, warranty performance, delivery, and launch support. This helps us enhance customer’s relationships throughout the world. More importantly, this is helping us to grow AAM’s new business backlog to over $1.4 billion for business, launching in 2009 to year 2013.

The main objective of this initiative is to improve the balance of AAM’s revenue stream. AAM’s new business backlog will accelerate the expansion of AAM’s market cost competitive, high quality and highly flexible manufacturing facilities through out the world, specifically, Guanajuato, Mexico; Changshu, China; Araucária, Brasil; as well as Oława, Poland. These awards will support the launch of new facilities in Rayon, Thailand and two new facilities in India at [Tasagar] and Khunaeh.

AAM’s new business backlog will also help us boost our company’s earning power and provide a solid return on our investment in the new products and facilities as we start to rebuild our balance sheet.

Fifth, we have made adjustments to our debt capital structure, working capital position, and investment strategy to ensure that we continue to have the financial resources and flexibility to successfully implant the business plan I have shared with you.

We have cut AAM’s inventory levels by over $80 million in the second half of 2008 and we have reduced AAM’s full year 2008 capital expenditure to approximately $140 million, that is about 6.5% or 6.6% of sales and develop a plan to limit future capital spending to a lower level of sales approximately 4% to 6%. Our Executive Vice President, John Bellanti, is leading that program and doing an excellent job. This will be accomplished by aggressively redeploying existing under utilized capacity to support the new business backlog and avoid future investment.

Effective November 7, 2008, some two months ago, we successfully amended and extended AAM’s revolving credit facility. This amendment extends the maturity of a portion of the facility through the year 2011 and provides additional financial covenant flexibility.

All of these actions position our company, AAM, to successfully manage through this most difficult period and emerge as a stronger, more balanced and flexible company for the future.

Ladies and gentlemen let now address AAM’s 2009 outlook.

Starting with our dividend policy, today we are announcing that AAM is suspending the quarterly cash dividend program in 2009. In the current environment we believe that our liquidity is best used to support AAM’s comprehensive restructuring, resizing, and profit recovery plan. The dividend policy will be reevaluated as business conditions improve quarterly.

For the full year 2009 we are planning on US light vehicle sales to approximate around 10.5 million to 11 million vehicle units. We see 10 million units as a downside scenario and up side would be very limited in our view. We are encouraged by signs that demand for our critical vehicle programs are not only stabilizing, but for American Axle in fact slightly improving. We expect the industry to show some signs of life in the spring and summer this year and this should be enhanced in a significant way by the massive government stimulus and support that is going through Legislation in Washington DC right now.

We expect 2009 to be a most difficult year for all in the auto industry, not only here in the US but globally as well. The radical restructuring and transformation of the domestic automotive industry will continue well into 2010. AAM’s new, highly flexible, and transforming variable labor cost structure will incredibly help our company and our work force to rapidly transition through the difficult conditions that are inherent in the volatile domestic and global industry that we are presently in.

Our company AAM is expanding global manufacturing, sourcing, and engineering footprint as we open up many new revenue opportunities for our company. The entire AAM management team is driven, competitive, and dedicated and unified, to keep our company’s business plan on track and ahead of schedule. The current strategy positions AAM to survive this brutal market downturn and thrive when the market eventually and inevitably recovers.

I would like to thank each and every one of you men and women for your attention today and your vital interest in our company. We appreciate it.

I will now turn the call over to our group Vice President of Finance, our Chief Financial Officer Michael Simonte.

Michael Simonte

Thank you, Dick, and good morning everybody. My job this morning is to review our fourth quarter 2008 and full year 2008 financial results, so let’s get right to it.

Let me start with a few summary highlights.

First, as Dick mentioned, today we recorded a net loss of $112.1 million or $2.17 per share in the fourth quarter of 2008. That is higher than what many of you were expecting and let me explain that. This loss included approximately $60 million in non-cash charges to establish and adjust valuation allowances on AAM’s UK and US deferred tax assets in accordance with FASB statement #109 accounting for income taxes. I will explain these tax adjustments in further detail later in the call.

Also included in the fourth quarter was a $26 million post retirement health care curtailment gain. This gain is related to the UAW representative associates who left the company in the fourth quarter through the special separation program. This gain is recognized in accumulated other comprehensive income in the third quarter, but ran through the income statement in the fourth quarter. This was appropriate because the gain relates to associates who actually left the company in the fourth quarter.

Offsetting the curtailment gain was an approximately equal amount of special charges and other non-operating costs associated with plant closures and asset redeployments. What I am saying is that the impact of special items, other than the tax adjustment, was approximately nil in the quarter.

In the fourth quarter approximately 2/3 of the expense related special charges were adjustments on asset impairments. As industry conditions deteriorated in the fourth quarter, we updated our asset impairment models and adjusted our estimates as appropriate.

Excluding the impact of the tax charges, and remember that the other special charges offset each other, AAM’s fourth quarter of 2008 results look a lot like our third quarter of 2008 results on a volume adjusted basis. Net revenue for our company was $25 million less in the fourth quarter than the third quarter, that’s what I am referring to.

The second of our highlights points here is that our free cash flow in the fourth quarter of 2008 was the use of approximately $110 million. This reflects the funding impact of approximately $110 million of special charges, primarily buy offs, paid to hourly and salaried associates in the US. Also remember that the $100 million payment we received from General Motors, financial assistance payment that was due on or before October 1, 2008, that was received in the third quarter and therefore was not an element of our fourth quarter results.

We define free cash flow as GAAP cash from operating activities, and by this I mean the top 1/3 of the cash flow statement, less CapEx and dividends paid. We also net the positive proceeds from the sale of PPD in free cash flow if they are made in the normal course of business. If GAAP permitted us to report free cash flow figures’ excluding the special charges we would be talking about a break even quarter from running the business.

Third, at December 31, 2008 AAM had approximately $400 million of [inaudible] liquidity, which we define as the sum of available cash, short-term investments, and additional committed borrowing capacity under the revolving credit facility.

Our fourth summary point and this is similar to what we reported to you two weeks ago, at the Detroit Auto Show Conference, we are on compliance with the financial covenants specified in the revolving credit facility. You may be surprised by that. We are not. In fact, our adjusted EBITDA for the year was slightly ahead of the projections that we provided to our bank group in the fall when we successfully amended and extended the revolving credit facility. So we are in good shape there.

Before I get into further details about our full year report, let me comment on the fourth quarter of 2008 results.

In the fourth quarter AAM generated sales of $503 million down $252 million or 33% versus the fourth quarter of 2007. Our major program production volumes, which are comprised of the various light truck and SUV programs that we currently support for GM Chrysler in North America, were down 43% on a year-over-year basis. On a sequential basis volumes in these same these programs in the fourth quarter were reasonably flat versus the third quarter, down only 1%. The weakness we saw in our fourth quarter sales was concentrated in Europe through our LB&I boating subsidiary in Brazil and in the metalform products activities of our companies.

Favorable mix helped to partially offset the impact of our weaker customer orders. In the fourth quarter of 2008 content per vehicle was up nearly 15% year-over-year to $1,493.00. This was a new quarterly record for our company.

For the full year 2008 AAM’s content per vehicle was up 8% to $1,391.00. This was a new annual record for our company. Two significant drivers are affecting this increase. Number one, we had new content that was introduced in the GMC 900 light duty truck application in the second half of 2008 and that is where you saw our content per vehicle increase.

Number two, we had much higher pricing pass throughs in 2008, we have discussed that at length, in the third quarter.

In the fourth quarter our four-wheel drive penetration was 65%. That is approximately the same as it was in 2007 and also for the full year 2008. That is somewhat coincidental, but reflects trends that are impacting our business. The four-wheel drive penetration is right at 65%, also approximately the same as the year earlier period. There is very consistent four-wheel drive performance and penetration rates in these programs.

Let me also update you on another significant factor affecting our financial results in 2008. This is what we refer to as our GM inventory correction. What I mean by that is the significant imbalance between our production schedules in 2008 and the selling rates of the major product programs that we support for GM and Chrysler in North America. I am really focused on GM in these comments.

During the calendar year f 2008 we estimate that GM reduced its dealer inventories for the programs we support by approximately 235,000 vehicles. Said another way, our daily production rate in 2008 calendar year was 21% lower than the rate at which GM sold these same vehicles. For the year in total, we estimate that this inventory correction accounted for approximately $325 million of our year-over-year sales decline. At a contribution margin of up to 35% on these products, we estimate that this issue cost us at least $100 million in earnings and cash flow in the calendar year 2008.

The good news, and we had to look hard to find the good news, but the good news here is that GM’s inventory position in these programs was substantially normalized by year-end 2008. While many other OEM’s and suppliers are now scrambling to do the same thing, especially with popular passenger car and cross over vehicle programs, we are pleased to have most if not all of this necessary but painful headwind behind us. As Dick mentioned, we are seeing signs of stabilization in the demand level for our products. Although sales are still at relatively depressed levels, being able to match our production schedule to our customers selling rates will be a big improvement for us in 2009. I might even get to use the word tailwind to describe this dynamic as the year progresses.

Non-GM sales were $109 million in the fourth quarter of 2008. For the full year of 2008 AAM’s non-GM sales represented 26% of our total sales, that is up from 22% a year ago and 26% is the new annual high for our company, if you are keeping score at home.

Gross margin in the fourth quarter of 2008 was 5.6%.

SG&A was relatively flat year-over-year at approximately $48 million; however, R&D was up $3 million on a year-over-year basis. Our backlog is real, the orders are launching this year, and we have got a full court press on to ensure that is successful.

We also incurred costs and expenses, including professional fees, related to the [Actigear] forging acquisition, the AAM JV in China, and other corporate activities that are associated with the worsening industry condition. These types of activities and costs simply did not exist in the fourth quarter of 2007.

From a cost performance standpoint there are a couple other things I’d point out. We do have a relationship, as many of you know, with San Yung in Korea and while we do not anticipate any significant receivables write down associated with their receivership situation, because we sell subject to lenders of credit, we do have some inventory on hand. It is unclear what will happen to that inventory and we took a charge in the fourth quarter for this inventory and some related activity of about $3.5 million. So that is another item that wasn’t in our press release that helps you to understand our fourth quarter cost performance.

Another item I would point out, and this is available in the press release if you look at our tax loss statement, we had about $5 million in non-cash losses associated with the retirement of assets that are not considered asset impairments. This is ordinary course activity for our company and we had to incur that expense. So, this is a little bit of extra color for you in terms of our margin performance in the fourth quarter of 2008.

For the full year of 2008 our net interest expense was $52.4 million as compared to $52.3 million in 2007. Most of the increase relates to higher average borrowings in 2007 and of course that is correlated to our free cash flow use in 2008.

Interest rates were lower for us in 2008, approximately 7.2% on a weighted average basis, down about 90 basis points on a year-over-year basis; of course reflecting the reduction in dates rates during the year.

For the fourth quarter of 2008 net interest expense was $19.9 million and really net interest expense is what you have to look at, given that we and many other companies now are holding higher levels of cash and short-term investments. That level of run rate should be in the ballpark in terms of a quarterly run rate for us in 2009, maybe a little higher, but in the ballpark.

Other expense in the fourth quarter of 2008 was $3 million. This line item was unusually high in the quarter due to the significant devaluation of certain currencies, in which our foreign subsidiaries operate, for example in Poland and Brazil. This drove some larger than ordinary re-measurement losses for us under the provisions of FASB statement #52. By and large, at least in the current period, these were non-cash events.

The last income statement comment I have relates to our cash provision of $69.5 million in the fourth quarter of 2008. As I said a few minutes ago, our fourth quarter results include approximately $60 million in non-cash charges to establish and adjust valuation allowances in AAM’s UK and US deferred tax assets in accordance with FASB statement # 109. This GAAP standard requires our company and all other companies to assess whether the recoverability’s of deferred tax assets is more likely than not, based on forecasted taxable income on a quarterly basis, or whenever events indicate that a review is required. The impairment indicators that we have addressed during 2008 caused us to make an updated analysis of our US deferred tax assets in the second quarter of 2008, which we discussed, and the UK deferred tax assets in the fourth quarter of 2008.

Based on these updated announcements and with emphasis on the past three years of operating results and the primary evidence required under GAAP, AAM concluded that it was appropriate to write off the net US and UK deferred tax asset position.

It is important to note that this valuation allowance is a non-cash charge and has no affect on our ability to utilize the underlying positive tax attributes in our future tax filing. We believe that we have options available to us to modify these assets in the future and continue to view these tax attributes as an important asset for the company; however it was necessary and appropriate to record the valuation allowance at this time. When you have a full valuation allowance on your tax assets the accounting from quarter-to-quarter can be very volatile.

In the fourth quarter of 2008 we adjusted and increased the valuation allowance related to the US deferred tax assets and this resulted from the year-end actuary valuation of our pension and OPAP obligation. As of year end2008 AAM’s under funded pension liability stands at approximately $250 million. This compares to $89.00 at the beginning of the year. This increase in the under funded pension liability was primarily caused by two factors: one and the first that I will speak of affected nearly every pension plan in America. First we suffered an investment loss of approximately $140 million in 2008. This loss represents approximately 27% of our pension asset values at 2007 year-end. The second factor is that we paid approximately $30 million of asset P or special separation program buy-outs from the domestic pension trust for associates over the age of 55 in 2008. We did not make any contributions to the trust in 2008 to cover these benefit payments. This is a big issue for our company and, as I said, for many others.

A recovery in the financial markets will improve our funded status over the next few years. That is our assumption and our belief. Unlike some pension funds that have large current benefit payment obligations, most of our assets in invested positions will remain invested over the next few years. This gives us a chance to earn back some of the losses, if not all of the losses, we incurred in 2008.

We will also be required to make contributions to the trust and this will help improve our funded status. In 2009 we estimate that our minimum pension-funding requirement will be approximately $16 million in the US and in total, on a global basis, $20 million.

We have the ability to make discretionary contributions above these minimum requirements and we will consider doing so as business conditions improve and our situation dictates. Our goal, as it has been for many years, is to increase the funded status of our plan. We made excellent progress on this in recent years and we will get right back to it now.

So, the bottom line on the fourth quarter of 2008 was the loss of $112.1 million. For the full year 2008, reflecting approximately $1 billion of special charges and another $100 million or so relating to the GM inventory correction, AAM posted a $1.2 billion loss.

Let us turn our attention now to cash flow.

Cash used in operating activities of 2008 was the use of $163 million. CapEx was less than 7% of sales as we are making progress moving towards our goal, our objective, and our plan of 4% to 6% range for capital spending. Dividends paid in 2008 were $18.3 million. Incorporating these details, free cash flow was a use of approximately $325 million in calendar year 2008.

For the full year of 2008 we paid out approximately $264 million for buy outs and other restructuring costs, which includes the special separation program, the Buffalo separation program, the special attrition program for 2006 we are still paying out to grow into retirement payments, it also includes lump sum signing bonuses and plant closure costs.

We paid out another $51 million, which is in addition to the $264 to UAW representative associates in August 2008 for the BDP or buy down program. If you add the impact of the GM financial assistance, which was a good guy, and the inventory correction, which as a bad guy, to this mix, it is easy to understand the drivers of our free cash flow performance in 2008 as compared to a much stronger 2007.

Now under the surface there were other things that happened here that were positive. Dick mentioned to you that we were able to reduce our inventory balances on a cash basis by approximately $80 million. Now the balance sheet impact that you see is more than $80 million. That also reflects some impairment charges associated with indirect inventories and the fact that as we monitored and carefully scrutinized the indirect inventory that we have remaining after we significantly culled this activity, we moved some of it to a non-current asset classification other than inventories, because we think it will take a little bit longer to burn through this activity than a year. When you take all that into consideration, the bottom line is $80 million cash flow improvement in the second half of 2008 on track with our goals and inventory.

Trading accounts receivable at year-end stood at $187 million as compared to $264 million at December 31, 2007. The year-over-year decline in accounts receivable is almost entirely explained by the reduction in selling levels year-over-year. It is important to note that we state these receivables on the assumption that GM Chrysler continues to make timely payments to AAM. That is not a crazy assumption, because as I speak to you today we have already collected damn near ¾ of these receivables in the month of January. As it relates to GM Chrysler it is business as usual for this process. No delays and no surprises at this time.

We have seen a slight deterioration in the aging of other receivables, particularly in Europe, Brazil and our metalform fives customer base here in the US. But this is not a material issue and by that I mean an impact of less than $5 million. We are working to clean that up as quickly as we can and our balance sheet reflects that.

Stockholders equity finished up at a deficit of $42 million at the end of 2008. This compares to the third quarter of 2008. Two items account for most of the activity in the fourth quarter: number one, our net loss of $112 million and number two, the increase in our unfunded pension liability. A third important, but lesser significant item, was the effect of currency translation. If you need more information about all of this, just ask the question and we can get it in further detail.

Let me close with some comments on 2009.

We are not going to provide any detailed earnings or cash flow guidance today for 2009. There are too many material uncertainties surrounding the economy, our industry, our customers restructuring plan, and the government’s role in the process of assisting our customers, to do so at this time. We don’t know what is going to happen and neither does anybody else. We are not going to speculate on these outcomes. What we can say is that we understand the risks we take. We have quantified the issue. We have sought prudent counsel from our advisors. We are monitoring developments on a daily basis and we are constantly adjusting our plans. We are managing what we control.

AAM has a plan to return to profitability this year. Let me repeat what we said before: this is not earnings guidance for 2009 or any other time period, but is a simple, honest statement of our commitment to achieving rapid turn around in our business. You may think we are crazy. That is okay. We are not going to be distracted by sensational headlines or uninformed opinions. We are making massive adjustments to our cost structure. Many of these cost reductions, for example the benefit reduction negotiated with the UN government in 2008 and the cost reductions associated with the incredible exodus of associates from our company, rather unfortunate, but necessary exodus of associates from our company in 2008. Those items are just now taking affect on January 1, 2009 from a cost reduction standpoint.

Other issues that we have not discussed publicly are also going to be helpful as we work through 2009. We are launching many new programs in 2009. Our backlog of new business this year is robust. We are very busy meeting with our existing customer base and new customers to discuss new business quotes and inquiries about both packages that should arrive imminently. We are grateful for the confidence our customers are displaying about AAM reconstruction and the cold, hard PL’s that have been left. It is not just talk it is real stuff.

We also appreciate the outstanding support we received from our suppliers on a daily basis. It is important that all of you understand we expect to have the financial resources and flexibility to continue meeting our obligations to these and other stakeholders and also to successfully implement our restructuring plan. Our success is not assured, but we are focused on it. The bottom line is this, Dick and David and I Yogendra and Chris and everybody else here, we work with a very determined and greedy global team of automotive savvy engineers’ managers and other very important role players. We are optimistic, we are positive; we are focused on what we can do to improve our situation. I guess you could say this is our game of the century and we are ready to play.

I thank you for your time and attention this morning. I am going to stop here and turn the call back over to Chris Son so that we can start the Q&A.

Let me make a quick comment here about Chris. Many of you know Chris. Chris served in our Director of Investor Relations role for a few years, up until about two years ago. He has returned to this role in a new and expanded capacity. Chris is now Director of Investor Relations and Corporate Communications. We welcome Chris back and I hope you will all engage with Chris, as you need information about our company.

Chris that is it for me right now.

Chris Son

Great, thank you Mike and thank you Dick. We have reserved some time to take some 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 that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Rod Lache from Deutsche Bank. Securities

Dan Galveston- Deutsche Bank Securities

This is actually Dan Galveston in for Rod. I had some questions around the cadence of the cost savings. Can you talk to approximately what level of savings dropped to the bottom line from the buy down program and the attrition program during this quarter?

Also, can you confirm that the savings from the Buffalo program is incremental to the $350 million restructuring savings you have been talking about?

Michael Simonte

First of all Dan, that Buffalo program is actually a few thousand and six and seven activity. It is part of the $350 million total cost reduction. My comment this morning was simply that there was a relatively small portion of the cash burden associated with buyouts in 2008 that related to that program.

The incremental cost savings, we have discussed many times that the $300 million of cost reductions that relate to the UAW agreements we negotiated in 2008, that these would start to kick in, in the third and fourth quarter of 2008. Our estimates are that we saw approximately $15 million of the savings associated with that. I am talking about net bottom line savings associated with that agreement come into our P&L base in the second half of 2008. The balance of the net bottom line savings, and probably on the order of $60 to $70 million of additional savings, will kick in almost immediately here in the first quarter of 2009.

Now the biggest driver of that, aside from the fact that many of the associates who left our company through the special separation program, in fact left our company during the third quarter; aside from that the benefit reductions, the elimination of post retirement healthcare at Three Rivers, the capped on post retirement health care at Detroit and Chief [Duvada] the elimination of defined benefit pension plan and of course the new defined contribution plan for our pension, all of these benefit changes, including contributory amounts on healthcare from our associates, these became effective on January 1 of 2009 and that is why it did not affect our business in 2008.

Dan Galveston- Deutsche Bank Securities

Thanks Mike, so you said that the benefit in the second half of ’08 was $15 million?

Michael Simonte

Yes, about $15, it was around $5 million or so in the third quarter and another $5 to $10, closer to $10 in the fourth quarter.

Dan Galveston- Deutsche Bank Securities

On the salaried separation side, were there any lump sum payments to the people who took that program and when did those people exit the company?

Michael Simonte

The answer to your question is yes, there were lump sum payments made through our salaried retirement incentive program, through our lay offs severance program. Those payments were included in the $110 million that I mentioned was out the door in the fourth quarter for these items. Those associates were leaving our company at various times during the second half of the year, including right up until the end of the year.

Dan Galveston- Deutsche Bank Securities

Do you have any estimate for the savings from that in terms of whether that will be mostly in the SG&A line?

Michael Simonte

It will be both in the cost of goods sold activity as well as our SG&A activity. Salaried associates ranging from all of our corporate departments to our plant environments that are shrinking their operations, consolidating activities, these types of things; so it is across the board.

Dan Galveston- Deutsche Bank Securities

You guys didn’t repeat expectations of profit in 2009. Has that expectation changed?

Michael Simonte

We certainly did. We stated several times, Dick and I both [interposing].

Richard Dauch

We said AAM is targeting a return to profitability in 2009.

Dan Galveston- Deutsche Bank Securities

I apologize for missing that, thanks.

Operator

Your next question comes from David Leiker from Robert W. Baird & Co., Inc.

David Leiker - Robert W. Baird & Co., Inc.

Mike if we look on the revenue side of the equation, we go from Q4 to Q1 in their production rates on your primary vehicles. Do you expect those to be comparable in the first quarter versus the fourth quarter?

Michael Simonte

No.

David Leiker - Robert W. Baird & Co., Inc.

Up or down?

Michael Simonte

No, down. The first quarter of 2009, as I know you understand, is going to be very difficult for everybody in this industry. In our situation we are facing approximately 35 down weeks at the nature customer facilities that we ship to. It would be very much more if I included some of the other facilities to which we ship lesser significant content. But, it in terms of the major North American light truck programs we support, we are looking at about 35 down weeks. That is as many as is concentrated in one quarter than I can ever remember.

So the first quarter is getting off to a pretty slow start. Things are stabilizing. As we look at the schedules today, as Dick mentioned, and it is simply an honest statement, the schedules we have today are stronger than the schedules we had on the first of January, but they are certainly less than what we saw in the fourth quarter.

David Leiker - Robert W. Baird & Co., Inc.

And how many down weeks would you have had in the fourth quarter>

Michael Simonte

It would have been in the neighborhood of half. I don’t have that specific number, but it would have been much less.

David Leiker - Robert W. Baird & Co., Inc.

Do you think it would be about half of that number?

Michael Simonte

Yes, probably about half something like that. Maybe a little less than that, but it would be right around that level.

David Leiker - Robert W. Baird & Co., Inc.

Then on the savings side, the $60 to $70 million you are talking about, that is headcount reduction?

Michael Simonte

Yes, this is the same activity we talked about now since we negotiated our year that we contracted, it is the net bottom line savings associated with taking our fully loaded all in labor costs from roughly $73.48 prior to the negotiation of the new labor contract to a blended all in rate of approximately $34.00 an hour for all of the portfolio of work that was conducted in those facilities at that time. It includes wage and benefit reductions. It includes the impact of headcount reductions and I believe consolidating, it’s the whole shooting match as it relates to the new UAW labor contract.

David Leiker - Robert W. Baird & Co., Inc.

That does not include the salaries does it?

Michael Simonte

It does not. The $300 million number is specific to the UAW agreements. We have added another $10 million, roughly, from our new IAM labor agreement and another $40 million, roughly, associated with the salary, headcount, and workforce reduction and that is how we get to the total structural labor cost reductions of $350 million that we are working toward in our plan.

David Leiker - Robert W. Baird & Co., Inc.

And of that $350 how much of it was running through the P&L in Q4? The annualized.

Michael Simonte

There would be a substantial portion of that. Again, as we talked about, this $60 to $70 million that doesn’t even take effect in 2009 obviously would have been excluded from that run rate. But the balance of the cost reduction, most of which dealing in the fourth quarter David, as I have said, with the volume and capacity reductions required to adjust for the market, that was all run through our cost structure in the fourth quarter.

David Leiker - Robert W. Baird & Co., Inc.

And the salary was that in there in the fourth quarter?

Michael Simonte

A portion was. A more significant portion will be impacting us favorably beginning in the first quarter.

David Leiker - Robert W. Baird & Co., Inc.

Okay and then anything on the material side here that we should be thinking about?

Michael Simonte

Well that is a pretty broad question. You know obviously the commodity markets have recovered a little bit. That is providing a little bit of an easing to some of the cost pressures that we face in this area, but I don’t think there is anything significantly different from comments we have made in recent weeks including at the Detroit Auto Show Conference.

Operator

Your next question comes from Richard Kwas from Wachovia Capital Markets.

Richard Kwas - Wachovia Capital Markets, Llc.

Mike on the covenants looking out a few quarters, a couple of weeks ago I think Dick mentioned $800 to $900,000 as the gmt-900 build expectation that you are looking at for 2009. Should we think about the covenants as assuming that type of level for 2009 and if that is the case what kind of downside or commission have you built in?

The question is really just what kind of cushion, if those builds don’t play out, say it is less than $800,000 is there a lot of cushion under the covenants as you look out over the next few quarters

Michael Simonte

Rich, you know, when we negotiated these covenants we didn’t simply look out to our plan, assume no variations or contingencies and negotiate from there. We did build some cushion in. I am not going to make comments about how much it is. I have already told you that we are not providing guidance going forward.

What I have said and I will continue to say, that we do expect to have the financial resources and flexibility to manage through this situation. There are a number of moving parts. You are right to point out the assumption of the gmt-900 as an important one, but there are many other levers including our own cost structure that we are evaluating and we will take it day by day.

What I will say about the gmt-900 is we have seen nothing to dissuade us from that level of volume expectation. The inventories were right sized by the end of the year. The production plans are solid with respect to our assumption and we feel pretty good about that part of our plan.

Richard Dauch

I would say three things additive. One is the month of December they actually ran an annualized rate of over 1 million units on that, point one. Point two have already heard Mike say, from our early January full schedule from GM to us it actually added units which contributed to added Axles for us to support that segment, point two. Point three; we are simply giving the facts. I hope you want to analyze the facts.

Richard Kwas - Wachovia Capital Markets, Llc.

Okay that is helpful. Then the backlog, I think it is $800 million hitting between now and 2011. What is the cadence of that, could you remind us?

Richard Dauch

It is pretty heavy this year.

Michael Simonte

Yes that is exactly right Rich. In 2009 it is going to be solidly more than $200 million coming online. It could very well be approaching $250 depending on the overall economic environment and the car-buying mood as the year progresses.

There are numerous programs here, there is not just one or two. We are launching the full-size vans for General Motors; the Volkswagen program in Brazil is a significant global program for our company. The [Tasagar] business in India, the Audi transmission differentials which we will support in Poland; the Mack Truck order which we will support in Three Rivers and of course here early in the year with General Motors the [inaudible] program, the Camaro name plate, so we have got a whole lot of activity here. It is a very busy year and that is going to help to counter balance weakness we might see in some other parts of our business.

Richard Dauch

As well as the [paid ups one] which gets into the Cadillac RX and components like that. So we have got a very busy aggressive and all of those programs are on scheduled, they are not being delayed, they are all in good shape. If you have been to the auto show lately they are outstanding looking vehicles.

Richard Kwas - Wachovia Capital Markets, Llc.

Great and then on the bottom line savings that you talked about earlier the$60 to $70 million, I think in the fourth quarter you said you were running about $15 million. Is that just a quarter benefit, should we annualize that to kind of get to a number? I am just trying to get to a total savings that you expect to book up to $350 for 2009.

Michael Simonte

Yes, well Rich, the $15 million number related to the third and fourth quarter, the $60 to $70 relates to the incremental change in 2009, so I don’t know.

Richard Kwas - Wachovia Capital Markets, Llc.

Okay so that is just going to be the number to date through the end of this year then, the expectation?

Michael Simonte

Yes, that is right.

Operator

Your next question comes from Brett Hoselton from Keybanc Capital Markets.

Brett Hoselton - Keybanc Capital Markets

Chris welcome back and hopefully you bottom kick this thing.

My first question is, as you have broadly defined your target to return to profitability is the thought there that possibly by the fourth quarter of 2009 you are targeting profitability or is the thought that you might actually potentially be profitable for the entire year?

Michael Simonte

That is an excellent question and I have already answered it. We are not in a position to provide guidance. I am not going to provide more color. I think I have been very clear. It is our objective, our intent, our plan to return to profitability in 2009. I have told you that the first quarter is going to be rough. You know it is going to be rough and so maybe we need to look past the first 90 days of the year.

Michael Simonte

It is no different than a Super Bowl this week, Brett. They play four quarters. The first quarter doesn’t determine how you end. We said very clearly, very simply, our company is targeting a return to profitability in 2009. That is what we mean.

Brett Hoselton - Keybanc Capital Markets

That is very fair. My second question and I am not sure how you are necessarily going to handle this one here, but obviously there is the potential at some point in time in the future that General Motors may file for Chapter 11 bankruptcy, prepackaged or otherwise. Do you have any sense of how that may affect your business either from a covenant standpoint or otherwise?

Michael Simonte

We are not going to go into speculations. I mean obviously General Motors has a very strong plan. You know as well as we do our government requires them to go back February 17 on viability sustainability. You also know as well as we do the infusion, only the second time in 100 years that the government and the auto industry sector, first crisis was in 1983. Secondly now GM and Chrysler and not only those parent companies, but their affiliate financing arms, so it sounds to me like some people want the auto industry domestically to be here. It sounds like they have got great products, as I have been to the auto shows the finest products down there were the GM group along with Ford, a very powerful group.

So, we think the auto domestic has good products. We think this thing will recover. We have indicated before with this new $800 to $900 billion whatever, if the Obama administration puts it in there will be almost $2 trillion of infusion to get this economy rolling again, sometime in the second quarter of this particular year. We have got the product. We have got the orders. We have got the pricing and we think that they are going to have a good successful run.

As far as speculations, if you want to talk about that with GM, you should call GM.

Brett Hoselton - Keybanc Capital Markets

Very fair and thirdly commercial vehicles, in the past you haven’t talked as aggressively about your commercial vehicle business as you are now and my impression is that there is a pretty significant shift in that direction. My question is, is that a business that you intend to grow organically, or is there at some point of time in the future when your cash flow increases you might actually try to make some acquisitions? The point of my question is simply how aggressively do you intend to try to grow that business?

Richard Dauch

This is Dick Dauch. Eleven years ago in 1998 we made the decision to expand from JDW 1, 2, 3, 4 to JDW 8. We did that with a wholly owned securing of our Albion automotive division. It continues to be an effective operating decision. We have expanded its capability now into the North American and other areas of the world. We have already indicated to you with the excellent engineering and product availability we have secured with Mack Truck product, which I think launches around June of this year at our Three Rivers, Michigan operation, we have several other throughout the world opportunities that we are not prepared to announce them today, but we are definitely going to expand that arena with our CVO group, Commercial Vehicle Operations group. I will have David Dauch give you a little bit more light on that. David?

David Dauch

Yes, Brett obviously we are looking at growing the business initially organically, but at the same time like all of our business it is if the right strategic opportunities present themselves then we will evaluate them based on the strategic direction of our organization.

Operator

Your next question comes from Christopher Ceraso with Credit Suisse.

Christopher Ceraso - Credit Suisse

I think we talked about this in Detroit a little bit, as plants start to come back on line after being down for several weeks here, that will create a bit of a working capital drain. Can you talk about the implications of that for you and for your suppliers and are folks prepared to deal with it?

Michael Simonte

Okay well Chris, I say very clearly, I think we are prepared to deal with it. The first quarter is always a tough quarter from a cash flow perspective. We had anticipated some weakness here in the fourth quarter, at least relative to our expectations back in the fall when we negotiated the covenant. We have got the liquidity to handle what we think is here.

Richard Dauch

I think the key answer to your question is yes we are prepared to deal with it.

Christopher Ceraso - Credit Suisse

What about your suppliers Dick?

Richard Dauch

We are very comfortable with our supply base. Our team is intimately involved daily in the dynamics of their health, their ability and right now we have nothing significant that would be a negative, and therefore how we are handling it is up to us. But, we have a very good support supply system base and we are totally committed to supporting our customer base; therefore we are ready, locked and loaded and ready to go when this actually recovers.

We told you the first quarter would be very hard and it will be. We also can handle it. In the second quarter things will start to break loose. Obviously in the second half of the year we contemplate improvements and you will know when that happens as quickly as we will.

Christopher Ceraso - Credit Suisse

Just to confirm, I think you covered this last quarter, but in the fourth quarter were there any payments from GM that were part of the wage deal least year or is that all happening in Q3?

Michael Simonte

There were no payments from GM of that nature in the fourth quarter.

Christopher Ceraso - Credit Suisse

Is there anything left on that in 2009 or is that all [interposing].

Richard Dauch

I think there is one more situation and then that will conclude that arrangement and that will be on or before April 1, 2009.

Christopher Ceraso - Credit Suisse

What is the dollar amount on that?

Richard Dauch

It is $60 million.

Christopher Ceraso - Credit Suisse

Okay. Is that the $60 million you keep talking about on the call or is that a cost saving thing?

Michael Simonte

No, those are two different things. This is just the portion of the $175 million in cash that GM will pay to us associated with that agreement and that’s, as Dick said, due on or before April 1.

Christopher Ceraso - Credit Suisse

Mike, have you done the math on the pension, what do you think pension expense does 20009 versus 2008?

Michael Simonte

It is going to be down overall because of the changes that we made in the programs. Of course the significant special charges that we took in 2008, so it looks to me like, you know we will exclude, there is probably about $50 million or so of special termination benefits and other similar charges that we took running through the pension expense line in calendar year 2008. IF you remove those than our pension expense will probably be a little bit less on a year-over-year basis in 2008, $83 5 million low.

Christopher Ceraso - Credit Suisse

Okay, but that would have been called out last year as a charge right?

Michael Simonte

Yes 2008, it was called out in 2008. As we incur debt each quarter. It is part of the total cost of the new labor contract. Remember on the pension side we typically had special termination benefits associated with accelerating certain pension benefits for our hourly associates that might not have otherwise qualified for that in the time that we entered into this agreement.

On the OPAP side it was largely curtailment gains, because associates who were leaving the company left behind some of their OPAP. So we had expense on the pension side, gains on the OPAP side, in total the gains were much more than the expenses as our total pension and OPAP obligations were down by about $200 million for these issues. Of course at the end of the year and subject to the investment losses in unfunded liabilities subject there.

Christopher Ceraso - Credit Suisse

What content do you have one the new SRX?

Michael Simonte

We have significant content on the new SRX. We get into, Yogendra do you want to handle that? I am giving this one to Yogendra here, Chris because he is launching it right now. He is doing an excellent job of launching it.

Yogendra Rahangdale

Yes we have three major components on the SRX. The drive module.

Michael Simonte

SRDM rear drive module.

Yogendra Rahangdale

A multiple piece, three-piece drive shaft and a power transfer unit.

Michael Simonte

If you put that all together that is probably somewhere in the neighborhood of $1,000.00 per unit. Does that help you?

Christopher Ceraso - Credit Suisse

That’s terrific. Okay, thank you very much.

Operator

Your last question comes from Itay Michaeli from Citigroup.

Itay Michaeli – Citigroup

Did you share where the covenants stood at year-end? I don’t know if you mentioned that earlier.

Michael Simonte

First of all we haven’t submitted them yet, because we submit when we file our 10-K, but listen we do not disclose the specific covenant calculation. What I have said and I will say again is that we are in compliance with the financial covenants that are specified in the revolver. In fact, the EBITDA that we will report to the bank as part of that calculation was ahead of the projections that we made back in the fall when we negotiated the amend and extended brief.

Itay Michaeli – Citigroup

That is helpful and then I have a question on the pension. I think you mentioned $20 million in contributions in ’09. Do you have a sense of where that can go in 2010?

Michael Simonte

Yes. What is difficult to say about 2010 and I know you understand this so I will just say it quickly and then give you a little more color. There is this new Pension Relief Act that was signed into law in September. There is still some chatter that there may be an additional move in that area for 2010, but assuming that doesn’t happen and we just live with where we are at now from a regulatory perspective; it could close to double in 2010, assuming that we don’t see a recovery in asset values this year.

I don’t know the extent to which you and I have talked about this before, but that is not too terribly different from the expectations and thoughts we had about this over the last couple of years. We have had very little in the way of pension contributions for our domestic trust over the last couple of years and we always anticipated the need to wrap that up as it work through 2010, 2011. Improving the cash to our profile of our business in that time period will of course be helpful to some of that.

Itay Michaeli – Citigroup

Great and lastly, Mike, can you share for 2008 what the total net cash restructuring was, just so we have the right number? Including the GM payment as well as what you think the specific direct costs of the strike were in terms of ramping things back up?

Michael Simonte

Yes I sure can. In 2008 for the full year we had about $264 million of cash funding on “special charges”. Okay, so that is the buyouts and all of the other things that get encompassed in there. If you add another $51 million on the BDP you are roughly at $350 million. Now we received $115 million from General Motors pursuant to the AM GM assistance agreement, so obviously that was available to offset a portion of the special charges in the BDP.

I am going to answer your question a little bit differently. You mentioned the strike. I think the appropriate way to look at it is the net inventory correction that we experienced in the GM programs and that was about a $100 million EBITDA hit for us in 2008. So if you add up those items you will get to almost all of the total free cash flow use that we referred it for calendar year 2008.

Richard Dauch

The other thing put into perspective with that is that there for AM has substantially completed the transition of all UAW represented legacy labor at these original US locations and that’s behind us and booked.

Chris Son

We thank all of you that 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 concludes today’s conference call.

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Source: American Axle & Manufacturing Holdings, Inc. Q4 2008, Full Year Earnings Call Transcript
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