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American Axle & Manufacturing Holdings Inc. (NYSE:AXL)

Q4 2007 Earnings Call

February 1, 2008 10:00 am ET

Executives

Jamie Little - Director of IR

Dick Dauch - Chairman and CEO

Mike Simonte - VP and CFO

David Dauch - COO

Analysts

Itay Michaeli - Citi

Brian Johnson - Lehman Brothers

Brett Hoselton - Keybanc Capital

Rich Kwas - Wachovia

Himanshu Patel - J. P. Morgan

Chris Ceraso - Credit Suisse

Rod Lache - Deutsche Bank Securities

David Leiker - Robert W. Baird

Operator

Good morning. My name is [Rebecca] and I'll be your conference operator today. At this time I would like to welcome everyone to the American Axle & Manufacturing Fourth Quarter and Full Year 2007 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session (Operator Instructions)

I will now turn the conference over to Mr. Jamie Little, Director of Investor Relations. Mr. Little, please go ahead.

Jamie Little

Thank you and good morning, everyone. Thank you for joining us today and your interest in American Axle and Manufacturing. This morning, we released our fourth quarter and full year 2007 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 p.m. today through 5 p.m. eastern time February 8 by calling 1-800-642-1687, reservation number 29997749.

Before we begin, I would like to remind everyone that the matters discussed in this conference call may contain comments and forward-looking statements that are within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results or conditions but rather are subject to risks and uncertainties, which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed. For additional information, we ask 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 audio webcasting this call through our website, aam.com. This call can be archived in the investor section of the website and will be available there for one year for later listening.

During the quarter, we are plan on attending the Morgan Stanley Global Automotive Conference on March 19. In addition, we are always happy to host investors at our facilities either here in Detroit or at other locations. Please feel free to contact me to scheduled visit.

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

Dick Dauch

Thank you, Jamie, and good morning everyone. Thank you for joining us today to discuss AAM's financial results for the fourth quarter and full year of 2007. Joining me on the call today are Yogen Rahangdale, our Vice Chairman, David Dauch, our Chief Operating Officer, and Mike Simonte, our Chief Financial Officer.

To begin my presentation today, I'll provide a brief overview of our financial results for the fourth quarter and the full year of 2007. I'll then review highlights of AAM's achievement in 2007, which includes significant progress on our major initiatives that we communicated to you at the beginning of 2007. Finally, I will make a few comments on AAM's 2008 outlook before turning things over to Mike to discuss the details of our financial performance. After that, we will open the call up for questions that you ladies and gentlemen may have.

Let me start off by saying that 2007 was a transformational year for AAM. We made significant advances in customer and geographic diversity along with product portfolio expansion. We also strengthened our balance sheet, returned to profitability and generated significant positive cash flow. AAM's operating performance in 2007 was solid. We maintained and improved upon AAM's world class levels of quality, warranty performance, reliability, delivery, new product launch and overall launch success.

In 2007, AAM executed various restructuring actions in North America quietly, effectively and humanely. These actions included the production idling of our Buffalo Gear, Axle & Linkage facility on December 21 of 2007. Our company executed these restructuring actions, while we launched and prepared to launch new and expanded facilities throughout the world. Those areas include locations in Brazil, China, India, Mexico, Poland and Thailand as well as locally here in Oxford, Michigan.

We are rapidly transforming our company into the truly global enterprise with a firm financial and business foundation. Today, our company is reporting our fourth consecutive quarter of positive operating performance and strong cash flow. This translates into a solid year for AAM that's highlighted by the following two items.

First, AAM's net income for the full year of '07 was $37 million. Our diluted earnings per share was $0.70. This compared to a net loss of $222 plus million or $4.42 in 2006. Our earnings performance in 2007 is another important step in AAM's plan and commitment to restructure, resize and recover. We are certainly doing it.

AAM's earnings in 2007 reflect the impact of special charges and nonrecurring operating cost of $93.9 million or above 18 per share. These special charges were necessary to realign our production capacity and cost structure, the current and projected operational and market needs and requirements. These special charges include the cost of attrition programs including, the BSP or Buffalo Separation Program, asset impairments and cost of redeployed asset.

As we move forward, January 17 at the 2008 Automotive Analyst of New York Detroit Auto Show conference, approximately 85% or 86% of our hourly associates represented by the UAW at our Buffalo Facility did agree to participate in the Buffalo Separation Program. The BSP is just the latest example of the actions of AAM working jointly with the UAW to work toward sustainable market cost competitiveness and cooperatively with our workforce.

The second key metric, I'll highlight today is cash flow. Our free positive cash flow was $149.6 million for the full year of '07 that represent a magnificent swing of $280 million versus 2006. AAM's strong 2007 free positive cash flow performance has allowed us to rapidly restore AAM's net debt to recapitalization ratio at 36.6% and as of December 31, '07 that's a reduction of approximately 8 to 4 percentage points or 800 basis points on a year-over-year comparison. We are pleased with that.

Now, let me turn our attention to the significant progress our company has made on 2007 strategic initiatives. Our first major initiative was to rationalize our US production capacity that included the production idling of our Buffalo Gear, Axle & Linkage facility and that was accomplished very quietly and successfully.

Another important component to this initiative was the redeployment of hundreds of pieces of unrealized equipment to support our new business backlog and to avoid future capital expenditure that was accomplished. The substance reduced our capital expenditure to $186.5 million about 5.7% of sales in '07 approximately 25% lower than our original estimates.

Our second major initiative was to transition AAM's workforce to a lower cost structure. The goal of this activity is to be market cost competitive with the entire domestic market. We must compete first in the United States of America.

In early 2007, AAM administered various attrition programs affecting both ROE and selling than limit. Through these programs, our company has eliminated nearly 2500 hour in salary positions, structural cost reductions associated with this activity will exceed $100 million annually. As a result of those activities and others, approximately 50% of AAM's hourly associates on a worldwide basis are now working subject to market cost [Employee] Labor Agreements today.

This includes nearly all of AAM's hourly associates working outside the U.S. in places such as Brazil, China, India, Mexico, Poland etcetera. We are operating in a highly cost competitive and operationally flexibly manner at all those locations and people come to work. This also includes nearly a thousand UAW represent associate, in the U.S. looking at AAM's wholly-owned Colfor and MSP subsidiary.

And third major initiative was to expand our global footprint. We are rapidly expanding AAM's global manufacturing, engineering and sourcing footprint to support our customer, global vehicle program and development needs, production requirements and the proximity to those markets.

AAM's footprint has grown from our original five troubled U.S. manufacturing plants with some 7500 people to 29 facilities around the world and we currently employ approximately 10,000 associates. Roughly 35% of our workforce is now working outside the U.S. These are very market cost competitive locations with excellent operating flexibility in attendance and extremely well educated men and women.

AAM's growth outside the U.S. will continue to be a key focus for our operations. 95% of the projected automobile growth is expected to occur outside the U.S. over the next five year period. Approximately 75% of AAM's new $1.3 billion new business backlog relates to awards sourced to AAM's non-US location.

In addition the ongoing expansions in Brazil, China, Mexico, and Poland, these awards will also lead to the construction of new AAM facilities in 2008, which include first AAM announcing a joint venture with Sona Koyo Steering Systems Limited of India. This new company, AAM Sona Axel Private Limited will launch in 2008 in a Greenfield facility located in the Northern sphere of India. The joint venture will supply rear axels to the company of Tata Motors for one of those segment vehicles light duty truck program called the Ace.

Second point, AAM will build a wholly-owned manufacturing facility in Southwestern India, hundreds of miles away from the one I just talked about. This facility will launch in 2009 and focus on commercial axel production segment. Our first customer in that facility will be Mahindra International Limited, which I'll refer to as MIL.

Third point, our company will construct a new regional manufacturing facility in Rayong, Thailand to support our largest customers beginning in the 2010 model year, which in the auto industry is like tomorrow.

I'd like to update you on the final major initiatives for '07, that is broadening AAM's product profile and diversifying AAM's customer base and serve the market. Our company continues to invest in these critical design, engineering, expansion and modernization of the product portfolio to meet the changing need of the global automotive marketplace and consumer requirement.

Our focus in on vehicle safety, performance, fuel economy and energy efficiency. We are also achieving these objectives thorough improvements in mass reduction, packaging continued durability, quality and reliability and in support of the objective, our company and our R&D segment spend around $80 million in 2007. We are having exceptionally good results with it.

AAM leverages our R&D investment through advanced global technical capability and resources. As you know, our AAM Rochester Hills Technical Center anchors all our world initiatives on this segment and is supported by 10 other engineering centers located at nine different countries on five different continents throughout the world.

AAM's new line of all-wheel drive systems for passenger cars and crossover vehicles have been designed to meet shifting customer buying habit, We have secured purchase orders of AAM's new products, which includes the following; rear-drive modules, which I refer as to RDMs, independent rear-drive axles, which I refer to as IRDA, independent front-drive axles or IFDA, power transfer unit caller PTUs, torque transfer devices referred to as TTDs as well as multi-piece driveshaft, one, two and three piece, steel aluminum etcetera.

Approximately half of AAM's $1.3 billion new business backlog relates to these new products supporting all-wheel drive passenger cars and crossover utility vehicles. These program awards are rapidly diversifying our company's product portfolio and will soon add more balance to AAM's sales concentrations.

AAM is expanding its product portfolio to add drivetrain products in addition to our traditional focus on driveline products. This product line expansion plays right to AAM's strength in developing very sophisticated high engineered products, advanced technology and systems of great precision and industry leading quality, warranty of reliability with out proven, absolute always on time delivery. This includes our heavy focus on electronic integration and better drive into this componentary.

Our company continues to integrate electronics into our product offerings, such as the TracRite Differentials, transfer cases and the TTDs. In total, approximately 80% of AAM's products include electronic integration as compared to just 5%, when we created the company in 1994. New AAM products in drivetrain include PTUs, power transport units or all-wheel drive but with drive based different application for both pass cars as well SUVs.

Transfer cases and transmission differentials to the four-wheel drive/all-wheel drive/rear- wheel drive based vehicle applications on light trucks and/or SUV and high precision gearing and shafts for six-wheel transmission applications for light truck, SUVs and passenger cars. The expansion of AAM's product portfolio has tripled the size of AAM's primary served market from 8 billion to well over 27 billion through out the world.

This has increased our new business opportunities for our company, is the key reason why AAM's new business backlog has recently increased to the 1.3 billion the programs launching from 2008 to 2012 that's another increase of over a 100 million, which we last talked to you on October 30 of 2007.

AAM's expanded product portfolio is creating new business opportunities. Today, our company is quoting on approximately 800 million of potential new business. Substantially all of AAM's current new business quotes are with customers other then the General Motors Corporation. This includes opportunities with several major, global OEMs and bodes very well for the continued diversification of our company's customer base.

Before I turn it over to Mike, let me wrap up by making a few closing comments to you. 2007 represent a transformational year, in which our company made excellent progress improving our operating flexibility, cost competitiveness, rationalization capacity, business diversification, following the warranty performance, financial return and balance sheet strengthening. The year '08 is sure to be a most difficult, demanding and tough year for all business people, especially the auto sector, and I'm just speaking here of all components, it could be the OEMs, the Tier 1 suppliers as well as dealers.

Our company is well prepared to face all these harsh business realities. We include a strategic emphasis on improving our company's manufacturing capacity utilization, manpower utilization, while jointly developing new innovative labor agreement with our strategic partners. With our future agreements, we'll hope to enhance AAM's operating efficiency, operating flexibility and better utilization of our workforce.

All these are needed for AAM to achieve market cost competitiveness with our primary focus on the United States of America. These actions are enhancing AAM's ability to invest in the continuing diversification of our product portfolio, the expansion of our customer base, the continued profitable growth of AAM's global manufacturing enterprise. I thank each and every one of you for your attention today and for your vital interest in our company AAM.

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

Mike Simonte

Thank you, Dick and good morning everyone. We have a lot to cover today, so I'm going to get right in to it. 2007 has now [reached] in the history books as it was a solid bounce back year for our company. As Dick said AAM posted full year 2007 GAAP earnings of $0.70 per share.

As we have discussed during the previous calls, this result include the impact of special charges and non-operating cost primarily relating to attrition programs, and remember this company has got hourly and salary programs, and a redeployment of machinery equipment and other actions to rationalize underutilized capacity. In the fourth quarter of 2007, we also incurred $11.6 million of asset impairments.

The total impact of these special items with $88.4 million, a $1.11 per share in the full year 2007. AAM's 2007 results also reflect the impact of an additional charge of $5.5 million or $0.07 per share for the write-off of unamortized debt issuance cost and other cost related to the prepayment of $250 million term loan, we made in the second quarter. This loan is otherwise due in 2010.

We refer to this activity, as debt refinancing cost, again $0.07 in attrition for the $1.11 of restructuring items. No matter how you look at it excluding item, the including items with tax rate adjustments or without somewhere between AAM's financial results were much improved in 2007 as compared to a loss of $4.42 per share in 2006.

Our improvement is even more pronounced in cash flow. We define free cash flow as GAAP cash from operating activities, but yes, I mean the top third of the cash flow statement less CapEx and dividends paid. In 2007 AAM generated $368 million of GAAP cash from operating activities that's more than 11% of sales and nearly doubled the prior year.

CapEx was down $100 million year-over-year. After dividends paid of $32 million, AAM generated a $150 million of free cash flow in 2007 that compares to a use of cash of $132 million in 2006. In Glendale, this weekend, let's say that we just had a big change in momentum.

We believe the quality of AAM's free cash flow results are very high in 2007 not only did we reduce capital spending to less than 6% of sales, but we absorbed a $130 million of payments for restructuring activity. Although more than 60% of this total or $80 million related to the various attrition programs that we ran for both hourly and salary restructure.

The rest of these restructuring related payments related to the redeployment of underutilized capacity literally, hundreds of pieces of machinery and equipment to support new programs and AAM's global expansion. This is a positive trend for AAM. This is helping us to reduce capital investment. This is also helping us to accelerate new program launches.

The manufacturing processes and systems that we are transitioning have proven capabilities the launch complexity is reduced. If GAAP permit us to report cash flow figures excluding restructuring payments, we will be talking about a much larger amount of free cash flow being generated from "running the business in 2007". This is what I mean by the quality of AAM's free cash flow results.

Before I get into further details about our full year report, let me comment on our fourth quarter 2007 results. In the fourth quarter of 2007, AAM generated sales of $755.3 million, that's down approximately $26 million or 3.3% from the fourth quarter of 2006. Our major program production volumes, which are comprised of the various light truck and SUV programs, we currently support for GM and Chrysler in North America. These programs are down 4.5% on a year-over-year basis.

Favorable mix helped to offset the impact of weaker volumes. In the fourth quarter of 2007, content-per-vehicle was up 2% from $1,300 round. For the year, AAM's content per-vehicle was $1293 right in line with our guidance for a 5% increase as compared to 2006.

We are projecting another 1% to 2% increase in content-per-vehicle in 2008, which will probably be the first full year, which we eclipse the $1300 mark for a full calendar year that will be the first time in our history. This metric is important to us because it demonstrates that our customers recognize the value in our products and services. It is very difficult for auto suppliers' especially domestic auto suppliers these days to earn such net pricing increases. This tells me our strategy is working.

Gross margin was approximately breakeven in the fourth quarter of 2007. This compares to a negative 28% in the fourth quarter of 2006. AAM's fourth quarter of 2007 gross profit results included $70.6 million or approximately $0.92 per share of the special charges, I mentioned just a few minutes ago. Approximately $0.26 of additional such charges were incurred in previous quarters in 2007.

The biggest piece of these special charges in 2007 relates to the Buffalo Separation Program or BSP. BSP is a voluntary separation program that was offered to approximately 650 UAW represented associates and our Buffalo Gear Axle & Linkage facility in Buffalo New York. Production at this facility was ideal in December of 2007. Under the BSP, AAM offered a range of retirement incentives and buyouts to all eligible associates beginning in September 2007, a total of 558 associates would really participate in the program.

Back in August of 2007, we estimated that we will incur special charges as much as $85 million for the BSP including pension and other postretirement healthcare benefit curtailments and special termination benefits. The actual cost for the BSP was $56.2 million; $53.5 million of this total was incurred in the fourth quarter.

The remaining portion of $2.7 million was recorded in the third quarter of 2007. The actual cost for the BSP was less than our original estimates and there are two reasons why that is true? Number one, just short of 100 associates eligible for the program or approximately 15% of the total population chose not to participate.

Number two, some of the associates used by our asset were, if you calculate the pension and OPEB charge associated with the BSP in the fourth quarter were more favorable than originally estimated. This was especially true for the discount rate, which was approximately 50 basis point higher than the rate assumed in the original estimate.

You know as well or better than we do our volatility in the credit markets are affecting interest rates and credit spreads and its course affected that discount rate. So, again the BSP cost is $56.2 million in total. Also included in the fourth quarter were asset impairment of $11.6 million and an additional $5.5 million of nonrecurring operating cost related to the redeployment of machinery and equipment and other actions to rationalize underutilized capacity.

Another item in the fourth quarter was approximately $5 million of non-cash asset disposals distinguished from our asset impairment. For the year, in total we had $8.5 million of this activity that's about consistent with what we have seen over the past many years. But in the fourth quarter, while, we are back loaded with this activity about $5 million.

In comparison to the prior year, AAM reported $285 million in special charges in the fourth quarter of 2006 primarily were asset impairments and the special attrition program of what we have referred to as the SAP. The year-over-year impact of these charges AAM's profitability was markedly improved in the calendar year 2007 and also the fourth quarter of 2007.

This improvement was due primarily to four things, first AAM achieved high single digit productivity gains and other structural cost reductions, resulting from, and enhanced by the various attrition programs that we administered this year. We met and in many cases exceeded our internal targets for productivity gains in 2007 due to our daily focus on first time quality, overall equipment effectiveness, re-manufacturing principles, and controlling all elements of our cost structure.

Second, AAM ended the year of 2007, with just little less then of $15 million of savings from material cost reduction. 2007 was the second consecutive year of achieving savings of this magnitude for our company. I might also add that we accomplish such result while quietly managing through the bankruptcy of at least 20 direct material suppliers during the year. Quietly, is the word I would emphasize in that terms.

This will continue to be a major area of focus for us in 2008, as we both globalize and localize our supply chains to support our rapidly expanding and cost competitive global manufacturing footprint.

The third item on highlight here is the favorable impact of higher sales content. That should be evident in our higher content for vehicle and supports. We had a lower overall effective income tax rate and we have more to say about that in just couple of minute.

To summarize, we posted a net loss of $25.5 million or $0.50 per share in the fourth quarter. Special charges in the quarter were $70.6 million or $0.92 per share. Of course this was the restructuring cost that I described here earlier. And just to be clear, when I use the work restructuring cost or restructuring activities, or restructuring payments, I am referring to this activity.

Alright, let me briefly recap the full year sales trends and couple of other matters, before we turn our attention to cash flow in the balance sheet. For the full year 2007 AAM sales were approximately $3.25 billion, that's actually an increase of 1.8% versus $3.19 billion in 2006. For the year our major program production volumes were down approximately 3.3%, our full-size programs were down approximately 1.5%, our mid-size programs were down 11%.

As I've already said, favorable mix helped us offset the production volume declines. Content for vehicle was up 5% in 2007. We also saw increases in revenues from our wholly owned Colfor and MSP subsidiaries, these forging and machining operations are cost competitive and they are growing. Example of this growth includes our six-speed transmission components and other new programs and customers. We are working with Harley Davidson, Jatco and Koyo at these locations. Not in all cases, but in many cases the sales of these locations are not captured in our major program production volumes.

Alright lets cover interest and taxes, before we move on to cash flow. For the full year 2007 net interest expense was $52.3million, that’s quite a bit higher than any AAM's net interest expense of $33.8 million in 2006. Most of this increase relates to higher average borrowings, said in another this is the cost we’re incurring to firm up on liquidity position at a time when rates, terms and conditions were very favorable; we’re glad we did that. Interest rates were also a little higher for us in 2007, approximately 8% on a weighted average basis and that’s about 30 basis points higher than 2006.

For the full year 2007 AAM's effective income tax rate was a benefit of approximately 110%, this compares to a benefit provision of 37.4% last year. We've covered these issues on every recent earnings teleconference, so I might try to be a little brief on this topic today, I suspect we might have some Q&A on this as well.

Most of these special charges we are incurring are in the US. From a tax accounting perspective we are recognizing deferred tax assets on many of these charges, this is what drives the benefit tax rate that's what we've been saying all along. This is also a financial volume in mix stores. The fact that much of our operating income is currently being generated in foreign locations with relatively low effective tax rates compound's these misanalysis.

And I think this is going to help color what a normal tax rate is for our company for many years to come. I am not sure what you think is normal, but normal for us is going to be a little bit lower than our historical run rates and that's the positive development for our company. And is not and never has been in the tax/net operating loss position in the US. In fact at the year end 2007 we were in access foreign tax credit position, and this position is much different than some other highly publicized situations in our industry and gives us comfort on our deferred tax accounting.

With respect to the fourth quarter on a standalone basis, some of you are writing about some of the discreet adjustments that hit our P&L. These are one time favorable adjustments. They approximated $4 million or $0.08 per share in the fourth quarter. This is above and beyond the impact associated with special charges. These adjustments relate principally to routine, it was favorable this time around, provisions to return adjustments and currency translation. Again these are favorable developments for our company.

The bottom line for 2007 is our GAAP earnings were $37 million or $0.70 per share in 2007. This reflects the impact of charges amounting to $88.4 million or $1.11 per share. These are all the special items I talked about earlier, including the pension of postretirement, benefit curtailments and special termination benefits associated with the BSP.

AAM's full year 2007 earnings also reflect the impact of additional $5.5 million charge or $0.07 for the debt refinancing costs. And our 2007 earnings, excluding the impact of all these special charges, reflects the tax rate around 11% for 2007. Again reflecting the positive changes we've made to expand our global operations, take advantage of low tax rates available to us in some of these foreign jurisdictions and recognizing the future cash tax savings we are going to see in the US on these deferred tax assets. No matter how you look at it. This is the much improved result over the prior year.

Now let's talk about cash flow. AAM's fourth quarter free cash flow was use of $25.2 million, this compares to use of $26.8 million in the fourth quarter of 2006. Excluding payments for restructuring activities of $70.4 million, AAM generated approximately $45 million in free cash flow from "run the business" in the fourth quarter of 2007. This capped off a year in which our free cash flow aggregated $150 million in total as we've already told you.

Our cash flow performance improved in 2007. The two major reasons they are going to continue in 2008, first is structural cost reductions and the second our cyclical advantages, primarily relating to product life cycle. Structurally we are reducing costs and improving capacity utilization. CapEx requirements are being cut, because we have the ability to redeploy underutilized capacity to support our new programs in our global expansion.

Cyclically, we benefiting from lower maintenance CapEx in the US on the GMT 900 program in particular. On itself this program accounts for more than half of our top-line today. We've incurred higher CapEx spending on this program in 2005 and 2006 and now we are in the sweet spot of the product life cycle from the cash flow perspective, which should continue for at least next two or three years. These dynamics, both structural and cyclical, as I've said, will continue to positively impact our cash flow performance in 2008.

Our free cash flow results had a positive impact on our capital structure in 2007. Net debt outstanding at the end of 2007 was approximately $515 million, that’s down about a $144 million from the prior yearend. This is primarily explained by our year-to-date free cash flow results. AAM's liquidity position is strong and stable. At yearend 2007, we had a $344 million of cash on the balance sheet, and total available liquidity, by this I mean cash and borrowing capacity under existing credit facility of $1.1 billion, No significant portion of our debt capital structure expires before 2010. Most do not expire until 2012, '14 or '17.

Net debt to capital was 36.6% at the end of 2007. We were up in the mid-40s on this leverage ratio at yearend 2006, but now, we are pretty much back to our target level. At December 31, 2007 net debt to EBITDA was approximately 1.7 times. It’s very healthy.

Stockholders equity finished up at $891 million at the end of the calendar year 2007. Net income and stock compensation programs (inaudible). In the fourth quarter of 2007, we also had a favorable increase associated with the yearend valuation of our pension and postretirement healthcare obligations. If you need more information about this, just ask a question and we’ll give you the further details.

Let me close on some comments in 2008. We are not going to provide any earnings or cash flow guidance today for 2008. This is due primarily to the timing of our ongoing negotiations with the UAW. We don't know what the financial impact of that process is going to be, and neither does anybody else. We are not going to speculate on that outcome. As Dick said, 2008 is shaping up to be a tough year for us and the rest of the domestic automotive industry. We are basing our plans for 2008 on an assumption that 15.4 million units [are] and North American light vehicle builds of 14.3 million units.

We currently expect our major program production volumes to be down 8% to 9% for the full year of 2008. In the first half of the year, we expect volume in these programs to be down more than that probably around 15%. The second half should be improving on a relative basis and become positive on a year-over-year comparison probably in the fourth quarter of 2008.

Some of you commented in recent days if that means we will see a recovery in the second half of 2008. I don't think that's an accurate way to describe our view. We do believe that our sales trends will improve in the second of the year. So, we will see a recovery in our company into fourth quarter but the general economy I do not say we'll see a recovery. I think that should be evident in our solid North American light vehicle build. Let me explain, why we are going to see a recovery in our business.

There are a couple of more production days in the back half of the year in 2008, simply a calendar issue but it's going to affect any year-over-year comparison. The second point is we believe some of the weakness in the first half that we are seeing; remember we see volumes down in our programs as much as 15%. We see some of these been related to our customers effort to wide size dealer inventory. This is especially true for the full size pick-up programs we support. We think this could be accomplished in the first half of the year.

We should also benefit from favorable launch activity in the second half of the year. So, when I do my comment and this should be, we do seeing a recovery in 2008 then there should be some upside for American Axle. As always, we'll focus on managing what we control in 2008. We made excellent progress in 2007 in our efforts to improve our market cost competitiveness in nearly all of the major geographic regions in the world. And we still some work to do in this area of 2008.

A major area of our cost structure, really the only major area of our cost structure, it is not currently market cost competitive as our domestic labor cost structure specifically at the master agreement facilities. We are working jointly and effectively with all of our stakeholders to find the appropriate solution for this issue.

In 2006 and '07, we have made some difficult but necessary decisions about how to improve capacity utilization, operating efficiency and cost competitiveness. We have restructured some operations and we drive those, re-ideal our Buffalo operation. We are prepared to take further actions, if necessary to create a sustainable future in a viable market competitive and profitable business model for each and every operation in our AAM family.

Thank you for your time and attention, this morning. I'm going to stop here and turn the call back over to Jamie. So, we can start the Q&A.

Jamie Little

Thank you, Mike and Dick. We have very reserved some time to take questions. I would ask you please limit your questions to no more than two. So, at this time, please feel free to proceed with any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Itay Michaeli with Citi.

Itay Michaeli - Citi

Remind us, where your capacity utilization is today and how you see that progressing over the next two years towards your 90% goal in 2010?

Dick Daunch

The capacity utilization today on average is about 75%. With the initiatives, we have taken we are moving towards -- by 2009, 10 times same to 90% capacity utilization.

Itay Michaeli - Citi

Right, that's helpful. And just moving on quickly, what is your implied assumption for sales of large full size pick-up trucks and SUVs in 2008 just beyond the actual production. What you are looking for sales in particular?

Mike Simonte

Itay, this is Mike. I think our working assumptions for 2008 that they are going to be reasonably correlated with our production volumes. We see our production volumes down about 8% to 9% in total on the full size programs. We will probably up a little bit higher than that particularly, the GMT 900 program mostly due to that inventory situation and we see result in itself early in calendar year 2008.

Itay Michaeli - Citi

Great. And then just finally, I know, you are not talking about EPS and free cash flow guidance, specifically today. But do you plan to provide some guidance later on once the -- your mean contract visibility improves?

Mike Simonte

Well, we certainly Itay, we will be in a better position to analyze that in just a few weeks and we will reconsider doing that in our next earnings conference probably in April.

Itay Michaeli - Citi

Terrific, thank you.

Dick Daunch

Thank you, Itay.

Operator

Your next question comes from Brian Johnson with Lehman Brothers.

Brian Johnson - Lehman Brothers

How are you looking your operating margin performance in 4Q, it looks like when you back out special items it's about 3%, which should be the lowest operating margin of year. I mean A, is that the right way to look at it? And B, are there operational things beyond the contract, we should be aware of?

Mike Simonte

Yeah Brian, good morning. Couple of things I'd point out. Our volumes in the fourth quarter were down about 4.5% on an overall basis, a little weaker than the full year and had the impact on our margins, no question. Specific to one program, I haven't mentioned year today the Dodge Ram heavy-duty program was down about 50% on a year-over-year basis. So, in certain parts of our business we did have some challenges relative to volume volatility.

We also as you know, we are winding down our operations and we will now idle Buffalo Gear & Axle facility. We are not complaining. We are simply explaining that we ran at a low-level of capacity utilization and efficiency of that operation into fourth quarter and that is now behind us.

The other item I mentioned in my comments that had an impact on operating margin, I am not [preparedly] concerned about it quite frankly was the $5 million of non-cash asset disposals we had that were above and beyond the asset impairments. So, appropriate actions to take and reasonably well consistent with our prior experience.

We had about $8.5 million with this activity of this year. If you go back and look at our history, we are somewhere between five and ten most of years. That was back weighted this year based on the nature of activity, we had and not really indicative of the run rate of our operations.

I think, we felt pretty good about the progress, we made in the fourth quarter. From a margin perspective, we had a bunch of messy things impacting our press release and 10-Q and all that stuff this quarter. But when you step back and see the progress, we are making on productivity, material cost reductions, the improvement we've made on our market cost competitive positions particularly outside the U.S. and a variety of other things that Dick mentioned today. We feel we've got big moment on our side and feel very good about it Brian.

Brian Johnson - Lehman Brothers

And so that $5 million asset impairment was in part of the special charge?

Mike Simonte

No, technically it's not impairment.

Brian Johnson - Lehman Brothers

Okay.

Mike Simonte

I mean, these are relatively normal course of business activities. We didn't feel as appropriate despite the matter is the impairment or special charge. And I'm not trying to do that right now, just trying to explain that activity was back weighted in the fourth quarter.

Brian Johnson - Lehman Brothers

Okay. And was there any new backlog I mean, 4Q or any backlog going to or some backlog specific 4Q was it delayed in terms of where revenues came in?

Mike Simonte

In 2007, Brian.

Brian Johnson - Lehman Brothers

Yeah, 4Q 2007, was there a delayed backlog that should have hit that?

Mike Simonte

No, nothing significant. The revenue that we ended up with this -- in our view simply the result of the volumes and mix that we saw and we've described it you, and there were no changes from our expectation.

Brian Johnson - Lehman Brothers

Okay thanks.

Dick Daunch

Thank you, Brian.

Operator

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

Brett Hoselton - Keybanc Capital

Good morning, gentlemen.

Dick Daunch

Good morning.

Mike Simonte

Good morning Brett.

Brett Hoselton - Keybanc Capital

Dick, I've a couple of strategic questions for you. My questions are twofold. First, how do you view the commercial vehicle business? You are obviously involved in England and I'm wondering do you view this as a really good growth opportunity globally for you or is it more of an ancillary business what you currently have?

Dick Dauch

Well, first of all, the commercial business we've been in since 1998, when we acquired our fully owned subsidiary Albion based over in Glasgow, Scotland. We've been consistently as a management exploring ways over many years on how to leverage their particular expertise of the market especially in the emerging markets.

As we take a look at that for example, we just recently announced to you and the public, an order valued in $30, $40 million bucks on MIL in India. There, we created a joint venture, which involves Mahindra and International Truck and as a result, we continue to expand on these kinds of things. So, that's what we are doing. We are focusing on commercial have been since 1998 and we also established an engineering organization in Portland, Indiana to supplement those things.

Brett Hoselton - Keybanc Capital

Would you have an interest at any point in time in making some sort of an acquisition to really accelerate the growth in that area?

Dick Dauch

If we did, we'll tell you.

Brett Hoselton - Keybanc Capital

Great. Then second question I've for you is and correct me if I'm wrong, Dick. I see your business in two pieces, the forging side of the business and the machining and assembly side maybe that's an incorrect perception. If that's a reasonable way of looking at it, how do you view the forging side versus the machining and assembly side? Do you see yourself continuing to invest and grow, and the forging side, is it a key component, a key asset, is it necessary for what you are doing?

Dick Dauch

Well, first of all forging is a very, very critical piece of the auto industry. Secondly, it's been around since the difficult times. Third it's still going to be around in the future. Fourth, we've one of the finest forging operations in the world [Barnett]. We've put in incredible investments into it over the last 14 to 15 years. It continues to help us and if you look at our track record the best quality, the best warranty, the best engineering, the best reliability on the road of anybody in our business in the world obviously forging has its contribution or we custom it for future business discussions on that potentially.

Brett Hoselton - Keybanc Capital

Okay, very good. Well, thank you very much gentlemen.

Dick Dauch

Thank you.

Operator

Your next question comes from Rich Kwas with Wachovia.

Rich Kwas - Wachovia

Yeah, just -- yeah, can you hear me?

Mike Simonte

Yes, we can hear you Rich. Good morning.

Dick Daunch

Good morning.

Rich Kwas - Wachovia

Good morning, Mike question here on these charges today, I'll hit the top line or is there some in SG&A?

Mike Simonte

Almost substantially all to the point I can say almost all of these charges hit the cost of good sale line.

Rich Kwas - Wachovia

Okay. And then, just remind me on the tax rate on a continuing ops bases you back this out, it seems like you got a tax credit this quarter, is that correct?

Mike Simonte

Well, yeah. What I described in my comments Rich was that I don't call it a tax credit item although R&D tax credits, foreign tax credits obviously they are credits embedded in our tax provision run rates. But in the fourth quarter we had about $4 million or 8 pennies per share upside associated with discreet item adjustments, as they refer to in their accounting whether it's -- these items will basically return to provision adjustments and little bit of currency translation impacted both to our provision and these were unusual items that arguably could be stripped out and viewed as nonrecurring. That's why I pointed them out.

Rich Kwas - Wachovia

Okay, perfect. And then just Dick on the quotable activity here the $800 million when we think about that from a geographic perspective? What are the split between non-North American, North America and then when you look at that business, its mostly non-GM within the North American keys would you be able to share what percentage of that business you're quoting in North America?

David Dauch

Richard, this is David Dauch. The majority of the business that we're quoting right now is non-GM related business the substantial amount is non-GM related. And I'd say based on the distribution between North America and global opportunities, there is probably a 50-50 split right now.

Rich Kwas - Wachovia

But they are sizable opportunity here in North America?

David Dauch

Yes, it is.

Rich Kwas - Wachovia

Okay, thank you.

David Dauch

Thank you, sir.

Operator

Your next question comes from Himanshu Patel with J. P. Morgan.

Himanshu Patel - J. P. Morgan

And Mike --Dick, I'm sorry, as I missed the miss part of this. Can you review the non-restructuring sort of one-time nonrecurring items you mentioned? I think you highlighted three of them, asset impairments, some transitional cost associated with Buffalo and then the non-cash asset disposal items?

Dick Daunch

No problems. First of all, you mentioned three times, I will review them. Asset impairment side, we characterize as restructuring and we've characterized as restructuring in our release. In addition to those asset impairments, we had approximately $5 million of ongoing normal activity in PPD disposals. Our typical run rate, as I said in this area is somewhere between 5 million to 10 million. For 2007, it was about 8.5 in total and in spite of that hitting the fourth quarter. So, little bit disproportionately affecting our results in the fourth quarter. Okay, so differentiate it from asset impairment.

I mentioned really two other factors that impacted our margin performance in the fourth quarter. I mentioned that we had lower volumes in the fourth quarter as compared to other periods that our volumes were down 4.5% overall in that period compares to a 3.5% downside variance for the year. And specifically I pointed out that the Dodge Ram heavy-duty program was up about 50% in the fourth quarter on a year-over-year basis.

So, in certain packets of our business, we had some difficult times relative to revenue and margin performance opportunity. The third item that I mentioned Himanshu relating again these items I'd characterize it as explaining not complaining. But as said, the third item was Buffalo Gear Axle & Linkage was idled. This facility was idled in December of 2007. In the fourth quarter, we'll wind it down operation, volumes were low, capacity utilization was low, our operating efficiency was low that's behind us now.

Himanshu Patel - J. P. Morgan

Can you able to quantity the impact of the underutilization at Buffalo this quarter?

Dick Daunch

No, I'm not going to get into all those details Himanshu. But it was worth mentioning significant not to mention and I think you and your comments this morning pointed out little bit lower operating margin performance overall for the quarter and I think these items explain that.

Himanshu Patel - J. P. Morgan

Okay. Couple of other questions. I know the union contract talks, it's a sensitive issue, but can you just refresh us for what happened in the last UAW contract talks in terms of timescale. When did the conversations really accelerate? How long did it take after the contract expired for you guys to set along something?

Mike Simonte

It's more important to take a look at what we are doing today and we started talking informally with the UAW, I think that's the union you are specifically talking about, maybe a couple of years ago and more formally let's say, middle of December of last year and we are now February one. Our contract expiration is February 25, 11:59. So, we've got about 3.5 weeks of intense work to you as a joint team.

Himanshu Patel - J. P. Morgan

Okay. Two separate questions. One, I think, you mentioned something about several sub-suppliers that you guys ended up assisting in 2007. Is that a way to quantify the cost associated with that and I guess my bigger question is, is there something on that front that is concerning you more now than it was at the start of the year?

Mike Simonte

Himanshu, let me tag-team this. I'm going to answer the financial aspect of this question. I also ask David Dauch to provide a little bit more color on the supply chain implications. What I said was the [required] rate handled approximately 25 bankruptcies and that is embedded in our net material cost reductions of approximately $15 million. We've many of these types of issues to manage every year. They are a little bit more acute in the calendar year of 2007, but we were able to overcome those and still achieve our financial goals in this area.

David Dauch

Okay and to continue with that as we mentioned earlier, we managed through about 20 different bankruptcies last year. Obviously it had some financial impact that was contained within the material productivity that we contributed to our overall performance. 2008 can be a difficult year on what we still factor that into our material performance which we expect to be favorable and positive in 2008 also.

Himanshu Patel - J. P. Morgan

I guess, my question is, I mean, given the magnitude of the production cuts in North-America in the first half. Could we've a situation where the fragility of some of these tier two suppliers as kind of retested in the first half? I mean, do you see the situation potentially being kind of at a cusp now where things could get considerably worse over the next six months or you don't have any reason to say that right now?

Dick Dauch

For our AAM, this is Dick Dauch talking. We have a solid supply base and we have nothing to announce today. We just have good stability and we are working coordinated with them. I want to put something in perspective. When we started our company, we only did our sourcing in two countries; U.S and Canada. Today, we source throughout the world 30 countries, five continents. We've more than doubled our cap price and sales. We are significantly reducing and rationalizing our supply base. We've much stronger supply base, much better technology and better financial situation. If we've something else to share, we’ll share with you at the right time.

Himanshu Patel - J. P. Morgan

And lastly, Mike have your provided any tax rate guidance for '08?

Mike Simonte

We provided no earnings or tax rate guidance of any sort for 2008. What I'd point out is that we'll continue to have healthy profitable growing operations outside the U.S. that will be taxed at rates much lower than the statutory rate of 35%. Depending on what happens in the U.S. both with the volume environment as well as our ongoing opportunities to improve our cost structure, is anybody's guess, where we end up on that relative to 2008.

Himanshu Patel - J. P. Morgan

Thank you.

Dick Daunch

Thank you, sir.

Operator

Your next question comes from Chris Ceraso with Credit Suisse.

Chris Ceraso - Credit Suisse

Hi.

Dick Daunch

Good morning Chris.

Chris Ceraso - Credit Suisse

Mike, just one more to follow-up on the tax thing just to make sure I understand where the numbers come from. Is it fair to think about it like okay, in the U.S. you had a loss of let's just pick a number 50 million bucks and that generated favorable tax of 35% on that? Outside the U.S. maybe your profit was 60 million or 61 so that you netted a positive 10 or 11, but the tax rate on that was maybe 15%. So, net you had positive pretax income, but a tax benefit as opposed to a tax provision, am I thinking about that right?

Mike Simonte

You're thinking about that it exactly right. I'm not commenting on the precision of your estimate. But you got exactly the right though process and that's exactly what I've been explaining, that's how, I'll look at it.

Chris Ceraso - Credit Suisse

Okay, thanks. You mentioned the adjustment to your equity because of the favorable discount rate move in the pension and healthcare balances? Do you care to give us a feel for what that might do to the P&L expense of those two items in '08 versus '07?

Mike Simonte

We're not going to say anything about 2008, although you are right to point out that would have an impact. If you look at our previous disclosures about the impact of the 50 basis point movement in our discount rates, I think you'll get a pretty good indication and of course, that's why we require that types of disclosure.

Chris Ceraso - Credit Suisse

Okay, that's helpful. And then on steel cost overall what are you seeing right now and I know you are expecting to achieve savings but is the market for steel and your cost of steel looking more challenging in '08 than it was in '07?

Dick Daunch

We actually see it being fairly stable. We've been in negotiations with several of our large steel suppliers most recently. So, we feel very comfortable where we are with our current contracts and commitments from our supply base.

Chris Ceraso - Credit Suisse

Okay, thank you all very much.

Dick Daunch

Have a great day.

Operator

Your next question comes from Rod Lache of Deutsche Bank Securities.

Rod Lache - Deutsche Bank Securities

Can you provide, just a rough number on the year-over-year savings that you are anticipating from the restructuring. It's just that what you've executed so far? How much benefit would that give you year-over-year in '08? And what exactly are your expectations from material cost changes; I know, you said its favorable '08 versus '07?

Mike Simonte

Yeah, Rod. This is Mike and well I'm sorry to treat this question this way. We probably have more color later date but we are just not in a position to provide earnings guidance right now. I think your basic analysis is right that we do see continuing favorable trends from this area. We've given you some broad indication that the structural cost reductions are well in excess of $100 million in total. And I look forward to answer that question because we think that it's going to be a very positive story for our company once we've more information about where exactly we've in 2008.

Rod Lache - Deutsche Bank Securities

Did some of the 100 million flow into 2007.

Mike Simonte

Absolutely.

Rod Lache - Deutsche Bank Securities

So, okay but you are not giving any color then on -- this is not an incremental savings from BSP and so forth.

Mike Simonte

Well, we've said, I'm not sure I totally understand your question Rod. You are saying is the $100 million incremental to 2007?

Rod Lache - Deutsche Bank Securities

Right. Well, it's not incremental to 2007 but you've executed certain things over the fourth quarter including that BSP?

Mike Simonte

Exactly right. The SAP that was put in place largely in the fourth quarter of 2006. The first quarter of 2007 had a major positive impact in allowing our company to generate cost reduction in excess of $100 million. During the course of 2007, we had various salary attrition program activities. We of course have these rationalization activities relating to capacity utilization and other things that we are actively working on, you know exactly what that is. So, we're going to be well in excess of $100 million and there is going to be incremental opportunities for us in 2008 and we are working on that right now.

Rod Lache - Deutsche Bank Securities

Okay, and on the raw materials

Mike Simonte

On the raw material side, I think David answered that question. We saw about $15 million of savings now two years in a row. We would expect to have similar and consistent opportunities in 2008 and that's our working assumption as we go forward.

Rod Lache - Deutsche Bank Securities

Right. And can you quantify the amount of backlog that you are launching this year?

Mike Simonte

Rod, what we've said about our backlog as we've got about $800 million launch within the next three years. Substantial portion of that we are launching in 2009 and 2010, although we'll see some up pickup force in the fourth quarter, it's going to be reasonably small percentage 10% to 15% probably of about $800 million.

Rod Lache - Deutsche Bank Securities

Okay, thank you.

Dick Daunch

Have a great day.

Jamie Little

Thanks. We have time for one last question.

Operator

Your final question comes from the line of David Leiker with Robert W. Baird.

David Leiker - Robert W. Baird

Can you hear me alright?

Dick Dauch

Yes. Good morning, David.

Mike Simonte

Hi, David.

David Leiker - Robert W. Baird

Thanks. I've a couple of housekeeping items and then a bigger picture question. Your non-GM revenue base, I mean that's predominantly the Ram truck. How much of that is the Ram?

Mike Simonte

The

Dick Dauch

I think the different way to say is Chrysler is…

Mike Simonte

Yeah.

Dick Dauch

Around 10% to 12%

Mike Simonte

Exactly

Dick Dauch

Of our total revenue, multiplicity of components and you know how much of that is Ram.

David Leiker - Robert W. Baird

I can figure that one out. Thank you. As you look at your footprint changes that you have been going through here? How far through that cycle are you or what percentage of that you've completed today?

Dick Dauch

Well, we're certainly happy with where our progress is today and as we've indicated we have gone from five troubled locations to around 30 at the end of this year. And we are extremely comfortable with where we are at especially with the way the world demographics are going and we got a couple of more that we'll announce at the right time.

David Leiker - Robert W. Baird

Okay. So, I mean, they are everywhere that if you can't get North America kind of moving assets around how much of that is completed?

Dick Dauch

I did not understand your question at all.

David Leiker - Robert W. Baird

You are moving your assets from the idle facility in Buffalo to other location. How much of that work is completed?

Dick Dauch

We've already announced what we are doing on that.

David Leiker - Robert W. Baird

Okay. I mean, in terms of the [moves are down] and the costs are behind you?

Mike Simonte

David there is yeah there is not very much in the way of cost to be incurred on that. We still have some opportunities to redeploy some assets that are currently not being used. We told you that that would occur over roughly a three year time period in 2007, 2008, 2009, so that by 2010, we are going to be at 90% better capacity utilization. That's our plans and we are on track. We've incurred a fair amount of that cost in 2007 and when we provide guidance for 2008, if there is anything significant we'll include that in our guidance.

David Leiker - Robert W. Baird

So, when you hit that 90% utilization do you have the margins you reached in the past?

Mike Simonte

David as we talked about before our margin performance as compared to where we were in the past and I think you are referring to the golden days of 2003, when we said there is really two major factors that have caused our margins to decrease. Three, I guess in one sense, one is the increased cost of materials and although we've a good success in the last couple of years, achieving material cost reductions we still have the elevated levels of metal market cost that may or may not go away.

So, I'm not sure because we just can't control that part of the commodity market. I'm not sure whether that's going to be the case. But we would need that metal market cost to moderate back to levels that we saw that and we get all the way back to that sort of 14%, 15% levels is what we see right now.

David Leiker - Robert W. Baird

Okay. And then just lastly here and I understand and appreciate the difficulty on providing guidance. But just see if you can put some things in some buckets. If you take your revenue line and you get your normal priced out and you got the volumes and you got the new business coming through. In 2008, would you expect your revenues to be up or down from what you are using in your macro assumptions right now?

Mike Simonte

David in our Form-8k filing this morning and I think also at the auto show conference we said that we would expect our volumes to be down 8% to 9% in total maybe 15% in the first half of the year and today we clarified that means with a range of $3 billion to $3.1 billion of sales in 2008.

David Leiker - Robert W. Baird

Okay. And then -- again and the contracts that you got this labor negotiation and no one really knows how that's going to transpire, if you excluded that do you think your profitability is up or down on an operating basis in '08 versus '07?

Mike Simonte

David, you and everyone else is trying to take me down on that. We are simply not going to provide any guidance today. We look forward to providing that guidance as soon as we can get a better handle on the total picture. I think it's dangerous and just not prudent to speculate on all of these pieces until we understand the whole picture.

David Leiker - Robert W. Baird

That 'I'll try another way.

Mike Simonte

Fair enough.

Dick Daunch

Thank you, David.

David Leiker - Robert W. Baird

Thank you.

Jamie Little

Thank you, David. And we thank all of you, who have participated on this call and appreciate your interest in American Axle & Manufacturing. We certainly look forward to talking with you in the future.

Operator

This concludes today's American Axle & Manufacturing conference call. You may now disconnect.

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Source: American Axle & Manufacturing Holdings Q4 2007 Earnings Call Transcript
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