Good morning. My name is Crista, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing Third Quarter 2017 Earnings Conference Call [Operator Instructions]And as a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Jason Parsons, Director of Investor Relations. Please go ahead, Mr. Parsons.

Thank you, and good morning. I would like to welcome everyone who's joining us on AAM's Third Quarter of 2017 Earnings Call. Earlier this morning, we released our third quarter of 2017 earnings announcement. You can access this announcement on the Investor Relations page of our website, www.aam.com, and through the PR Newswire services. You can also find supplemental slides for this conference call on the investor page of our website as well. To listen to a replay of this call, you can dial 1 (855) 859-2056, reservation number 87956026. This replay will be available beginning at 1:00 p.m. today through 11:59 p.m. Eastern Time, November 10. Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements 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. Also during this call, we will 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 our website. Over the next few months, we will participate in the following conferences: The Barclays Global Automotive Conference on November 16; the Bank of America Merrill Lynch 2017 Leverage Finance Conference on November 29; and the 2018 Deutsche Bank Auto Industry Conference on January 17. In addition, we are always happy to host investors at any of our facilities. Please feel free to contact me to schedule a visit. With that, let me turn things over to AAM's Chairman and Chief Executive Officer, David Dauch.

Thank you, Jason, and good morning, everyone. Joining me on the call today are Mike Simonte, AAM's President; and Chris May, AAM's Vice President and Chief Financial Officer. To begin my comments today, I'll provide some financial highlights from AAM's third quarter, including continued sales growth, business diversification, cash flow generation and the realization of our new and incremental business backlog. AAM sales for the third quarter of 2017 were $1.72 billion, significantly higher compared to $1.01 billion in the third quarter of 2016, and this is mainly attributable to the results of the MPG acquisition. Our non-GM sales for the third quarter 2017 were a record for AAM, over $1 billion for the first time in our company history. Non-GM sales were nearly 59% of our total sales for the third quarter of 2017. This compared to $307.7 million or just over 30% of total sales in the third quarter of 2016. The third quarter also represented another strong performance for AAM as it relates to profitability despite lower production of GM's full-size truck program during the quarter. Adjusted EBITDA for the third quarter of 2017 was $297.7 million or 17.3% of sales. This compares to an adjusted EBITDA of $156.7 million or 15.6% of sales in the third quarter of 2016. Adjusted earnings per share for the third quarter of 2017 was $0.86 as compared to $0.83 in the third quarter of 2016. AAM's profitability in the third quarter of 2017 shows the power of our increasing diversification and our ability to deliver strong performance despite planned customer downtime for key programs as they prepare for the future model changeover activity. From a cash flow perspective, AAM generated $87.9 million of adjusted free cash flow in the third quarter of 2017 compared to $54.6 million in the third…

Thank you, David, and good morning, everyone. Today, I will cover the financial results of our third quarter 2017 with you, and I'll also refer to the earnings slide deck as part of my prepared comments. So let's go ahead and get started with sales. As David mentioned, sales increased over $717 million on a year-over-year basis, primarily as a result of the MPG acquisition. Slide 9 shows a walk-down of pro forma third quarter 2016 sales to the third quarter of 2017 sales. In addition to the impact of MPG, AAM sales were positively impacted by our new business backlog, higher heavy-duty rent truck production and higher middle market pass-throughs. These factors more than offset the impact of lower production of the GM full-size truck due to planned downtime as part of their readiness actions for the next-generation truck launch that begins next year. Despite this headwind, AAM experienced over 3% net organic growth in the third quarter of 2017 on a pro forma year-over-year basis. AAM's content per vehicle, which is measured at the dollar value of our driveline business unit product sales supporting our customers' North American light truck and SUV programs, was $1,684 in the third quarter of 2017. This compares to the $1,612 in the third quarter of 2016. The increase relates primarily to increased metal market customer pass-throughs and stronger product mix including slightly higher four-wheel-drive penetration. Now let's move on to profitability. In the quarter in which we experienced lower GM full-size truck production, AAM continue to deliver strong operating profit metrics. Gross profit was $297.7 million or 17.3% of sales in the third quarter of 2017. This compares to $181.2 million or 18% in the third quarter of 2016. Adjusted EBITDA, earnings before interest expense, income taxes, D&A, excluding the impact of…

Thank you, Chris and David. And we have reserved some time to take questions. I would ask that you please limit your questions to no more than two. So at this time, please feel free to proceed with any questions you may have.

[Operator Instructions] Your first question comes from the line of Joe Spak from RBC Capital Markets. Please go ahead. Your line is open.

Thanks. Good morning, everyone. Congratulations on the quarter.

Good morning, Joe.

Good morning, Joe.

Thank you, Joe.

The first question is just with regards to prepayment of some of the debt. I know you hit that 3x target a quarter early. I think you also have the 2 times target by 2019. Is there any change to the trajectory you see on those initiatives?

Joe, this is David. As we indicated, we're a quarter ahead right now, but as it relates to the end of '19 getting to 2 times, we have no change of those plans at this time.

Okay. And then the second question would just be, if we look at sort of the implied fourth quarter EBITDA margins, it looks like they're roughly in line with what you did in the third quarter. But the K2 at least on a year-over-year basis shouldn't be as big a decremental hit. So a, is there something else we need to consider, maybe some higher project costs or maybe as some of the backlog comes on? Or is there potentially some conservatism in that guidance?

Good question, Joe. As we think about -- as we transition to the fourth quarter based on our guidance, we would expect to see continued strengthening a little bit on the K2 production versus the third quarter. Obviously, we'll continue to benefit from our synergy. Implementations will grow, but we do have a couple of items that would work slightly against that. One of them, which was mentioned very clearly, is our project expense. As we're getting ready to launch the next generations of Ram and the next generation of General Motors' full-size truck. You saw the third quarter take a little bit of that expense, those programs are starting to ramp up here now in the fourth quarter and early into next year, so we will incur costs ahead of those production schedules as you would expect on significant programs of that size. And also, keep in mind, the fourth quarter does have seasonality downtime in November and December as well. I mean, the third quarter has a little bit in July, but you do have some more of that here in the fourth quarter, as we would normally expect. And then lastly, metal has elevated in the third quarter. We would expect that to continue, that also works a little bit on your margins.

Thanks a lot.

Thank you.

Your next question comes from the line of Brian Johnson from Barclays. Please go ahead. Your line is open.

Yes. Hi, good morning. This is actually Steven Hempel on for Brian.

Good morning, Steve.

I just wanted to drill down a little bit on the sales walk-down on the EBITDA bridge here. If I take a look at the sales walk, if we net the backlog volume and mix tailwind with the K2XX sales, headwind it looks like, if you apply the $23 million of EBITDA tailwind, it looks like we're getting to roughly 45% incremental margins. Is there anything we're missing from that bridge?

Well, if you break down that bridge a little bit, you do have, obviously, with the K2 production down, that's one of our higher contribution-margin products, a slight decrement. The backlog coming on strong at the higher end of our range, which we're seeing, which is offsetting a considerable amount of that. And if you think about the underlying mix activity going on in the marketplace, we're seeing stronger full-size truck, stronger C2B and lower pass car. So that mix element plays up to the benefit of our margins as well.

Okay. So if I take that $23 million and net it, it with the, call it the 98 minus 47 net, kind of 40% to 45% incremental margin is roughly what you're doing on the -- kind of your base business outside of K2XX?

No, you have to actually look at the mix elements of that calculation and we'll have to break each one out. But what we are experiencing, we've got to do previously at a 20% to 25% margin range on our new business backlog. You're seeing us come in at the higher end of that range, but we're also -- as I mentioned, discrete within the quarter, right, we're adding higher full-size truck concentration on some of our non-GM business you're seeing strong CUV and you're mixing out some of the lower margin pass-through.

Okay. So it sounds like mix is definitely favorable. I guess, just a larger question here for Dave and Chris here. Just in terms of -- you've had about 6 months to go through the MPG product portfolio and as you kind of think about combining that with AAM's, are there any product lines or end markets or businesses that you've identified as being non-core or something that might not fit strategically or better with another company, I should say? If I specifically look at kind of steering knuckles and control arms within gas casting, for example, it seems to be two product lines that don't really have much in common with your core driveline, drivetrain and powertrain business. So I'm just wondering if there's any areas that you have identified so far.

Nothing that we've identified and communicated publicly. I mean, obviously, we'll assess our product portfolio on a regular basis, but at this time, all of our products are considered core.

Okay. And then just a follow-up on that. It's been about 6 months, obviously, since the MPG deal closed. Just wondering where you're seeing the biggest opportunities for revenue synergies right now, whether it be by customer, product region, et cetera? And how long you'd expect it take for those opportunities to be realized?

Well, I mean the first thing we want to make sure that we're doing here is protecting the customer in regards to the current production and then also protecting their launches going forward. So we're very focused on customer satisfaction. When it comes to sales revenue-type synergies, I mean, clearly, we're putting strategies together -- we've met all the global OEMs around the world as well as looking at some of the others -- our customers that we enjoy, as a Tier 2 or Tier 3-type supplier to them. We clearly see opportunities that are out there that we can cross-sell our expanded product portfolio right now. I don't really want to get into the specifics of that today here, but we do see synergies that can be realized and grow.

Okay, great. Thanks for taking the questions.

Thank you.

Your next question comes from the line of Emmanuel Rosner from Guggenheim. Please go ahead. Your line is open.

Hi. Good morning, everybody.

Hey, good morning.

Just first, a quick clarification on the backlog so far this year and expectation for the full year. So I think the backlog expectation for the full year was $500 million, very strong for 2017. If I look at your extremely helpful disclosure in particular, revenue walk for the past 2 quarters, which is when you've broken that out, the backlog only sums up to about $163 million in the last 6 months or so. Are we expecting -- should we expect a very large backlog contribution in the fourth quarter?

Yes, Emmanuel, as you look at that sales walk, that is our net backlog. So as you mentioned, this year, in 2017, we are expected to have about $500 million of backlog, it is a little more heavily weighted towards the third and fourth quarter, but the number we disclosed on the walk is net. And you may recall, we matured out between $100 million to $200 million per year on the business, and this year's a little -- toward the high end of that range.

Okay. So fourth quarter should be a little heavier but not necessarily materially so?

That's a fair way to think about it, yes.

Okay, understood. And then, I guess, could you maybe comment on sort of your early thoughts on what 2018 could look like for you? Not looking for specific guidance, but when you sort of look at a lot of the same factors that we've seen basically this quarter, which is more downtime from K2XX. But then, obviously, some good offsets on the Metaldyne contribution and synergies and obviously excellent execution, could you grow earnings in 2018 and can you maintain margins?

Emmanuel, this is David. First of all, we're not giving guidance here today for 2018, and I appreciate you respecting that, but again, we see another outstanding year in 2018, consumer confidence is strong. There's a strong demand for our products especially we're in the sweet spot of the market, that being trucks and SUVs and crossovers and luxury passenger car business. We're participating in two very strong markets. That being North America and China especially, but obviously, we're a global company there. We're realizing our synergy and cost reduction attainment actions so we're hopeful that we can maybe deliver on that, even further on that as we go forward here. We do have some critical launches beginning next year, so we'll incur some project expenses, some other launch cost to that, but again, we've -- that's always been part of our cost structure and we'll manage that appropriately and accordingly, but just like we had a record year in '16, we had a record year in '17, we expect a very good year in 2018 and going forward.

Okay, that's great to hear. And then just a very final follow up on free cash flow. Your reiterated guidance of 5% of sales, obviously, would represent a pretty large outcome for this year, $300 million plus or so of free cash flow. Is the fourth quarter going to be particularly large in that respect?

Well, we're pretty close to $300 million on a year-to-date basis. There's a couple of elements in the fourth quarter, I would -- you need to keep in mind Emmanuel. First of all, as I mentioned, during some of my prepared remarks, you'll see some continued heavier CapEx as we're preparing for the next-gen truck launches. But also, we have some of our large interest payments for our first bond coupon payments are coming due in the fourth quarter so we could see interest in size almost $50 million higher than we've seen previously -- in the previous quarter. But again, that's just a cycle in terms of when those are paid throughout the whole year. And of course, offsetting some of that will be working capital benefits.

Perfect. Thank you very much.

Thank you.

Your next question comes from the line of Itay Michaeli from Citi. Please go ahead. Your line is open.

Great. Thank you. Good morning, everyone.

Good morning.

Morning, Itay. So just a follow up, kind of - I think in the past, you said you can run at 17% to 18% margin through 2019. As you've kind of gone through a couple of quarters since the acquisition, any update on any bias, high end, low end, midpoint, as you think about the next couple of years?

No, that was guidance we gave out back in November of last year when we announced the transaction, and that's still, in our view, is a very strong performance for the company. You can see where we're performing this year, and we're still very optimistic on our margin performance going forward.

Great. And then just with the announced debt paydown, Chris, can you share any thoughts on your minimum cash balance, kind of comfortable levels going forward? How should we think about kind of the cash above which you might continue to look to pay down some of the gross debt?

Yes. So our minimum cash balance, we sort of view in the $250 million to $350 million range. And of course, that's global cash. That's typically how we would think about it. There will be periods where we would cycle higher as we're entering, for example, working capital used periods and periods where that would cycle down as we go through those, like you'll see it cycled down a little bit in the first quarter as you go through a typical working capital use, but think $250 million to $350 million range.

That's helpful. And I'll sneak one last one in quickly on the CapEx in the fourth quarter, is the run rate in the fourth quarter good to think about into 2018 given the product launches, or is there anything kind of unusually higher in the fourth quarter?

And so in the fourth quarter, we've guided to 8% for the full year, but, again, we're getting prepared for the significant launches with the General Motors' full-size truck program, the FCA full-size truck program as well as another big year of backlog launches, we'll continue to have strong CapEx as we have told you before.

Great. Thank you.

Your next question comes from the line of Ryan Brinkman from JPMorgan. Please go ahead. Your line is open.

Hi, great. Thanks for taking my question. Firstly, can you just give us an update on how you're thinking about the $100 million to $120 million of cost synergies? It looks like you're about 55% of the way there in terms of the midpoint run rate, with only 6 months under your belt seems a little bit ahead of schedule. So just curious if that experience makes you feel any different about the total number, if you think that could potentially now be larger?

Ryan, this is David. And then Mike can comment after I speak if he chooses to. But as we communicated back after the first quarter in July, we were at $38 million against this $84 million run rate for the first full year. Now we're at $54 million, so like you said, we're ahead of schedule with respect to that. Most of the benefits that we've realized so far has been on the overhead side of things. We're now starting to realize some of the benefits of the purposing and mature on logistics-type savings. Those will continue to grow as we go forward here. As we also indicated, some of the in-sourcing initiatives and some of the manufacturing and other initiatives, that would take a little bit more time to get implemented here. But we feel very confident that we can deliver on the high end of the range that we gave you, the $100 million to $120 million. And clearly, our team has driven to try to achieve more of that if we possibly can.

Yes, I would only add to David's comments to say this. We have $54 million of activity that hit our P&L, so to speak, on a run rate basis by the month of October. There are other things that we have done that we have completed that will begin to hit our P&L in November, December and into the first quarter of next year and even a couple that extend beyond that. So the confidence level is high. We feel very good about being able to meet, deliver. And if you give us a little bit more than 2 years, probably exceed these $120 million targets. So we feel really good about it, Ryan. There's a whole bunch of activity, not just synergy-related, but also making sure that we have common systems, procedures, approaches. The AAM operating system is benefiting from the best practices and really good ideas we're picking up from the legacy MPG side of the house, and so we're going to emerge from this process, not only with a better financial profile, but with a stronger operating profile as well.

That's great to hear. And then the last question for me I thought to ask because several suppliers are experiencing margin compression currently, most notably, Conoco and Adient, from what they're calling out as timing differences between when they need to pay for higher metal prices versus when they get compensated from the automakers. Now I haven't really heard you guys complain about this issue despite I'm guessing one of the biggest deal buys out there, right, so can you just kind of walk us through how your contracts work and if you are somehow less susceptible or taking some other additional actions to avoid being tripped up also by this issue?

Yes, this is Chris, Ryan. We experienced very similar in terms of timing related to metal, so it varies anywhere from 30 days to up to a quarter between lags, between when you are reimbursed from your customer or when you pay your supplier. But again, remember, we have about 90% or so of our buy in pass-through protection, and you may recall on the last call, in the second quarter, we talked about that we would experience some rub into the third quarter as metal was trending up. And you'll see that on our year-over-year walk through our quarter. Our year-over-year walk, you can see metal down about $8 million, and that dynamic also applies into that concept as well. So we do have that. Generally, in a rising environment, you do get some lag where a negative piece trails behind it and then the opposite occurs in a declining period.

So it sounds like more of your revenue is probably protected than some of the other suppliers. But what is the part that's not protected? Is it maybe some of the, I don't know, the aftermarket stuff at Metaldyne or something? Or are you not -- are you doing anything to try to get 100%? What is that remaining 10%?

Well, with the 90%, there could be certain commodities that aren't protected when we use that figure for certain products, but by and large, we're protected.

Okay. Thank you.

Your next question comes from the line of Matt Stover from SAG. Please go ahead. Your line is open. Matt, please go ahead. Your line is open.

Thank you very much. I apologize. If I look at any programs which were particularly meaningful or better than you had expected in the third quarter, is there anything that you would identify as being particularly strong or surprisingly strong?

Yes, Matt, this is Chris. We continue to see strength in our non-GM full-size truck platforms. So think FCA, think Nissan in terms of that in North America. We continue to see strength in our luxury passenger car segment in Asia. Those would be a couple…

The second -- I guess, following on to that is as you think about the changeovers at GM and at Ram, is it your expectation -- are you planning for a higher level of annualized output at those programs? I mean, you just think about their run rate volume when they mature?

Yes, I think on the full-size truck platform, it would be similar to what we're realizing today, but at the same time, GM has flex capacity and we have flex capacity, if the market allows for that. On the Ram side of things, I mean, clearly, they've made it known that they want to try to [indiscernible] metal capacity. They're reloading some of their plants, and therefore, expect them to increase some of their volumes as they go forward, assuming that the market will accept it.

Okay. And then I guess the last question is, as we kind of look through the portfolio and you've had a little time to spend with this, how are you folks thinking about just sort of the husbanding of the product portfolio over time. Nothing specific, but what are the sort of key things that you're looking at when you think about this is a business we want to be in or this is a business that may not be the best thing for us on a long-term basis?

Matt, this is David. I mean, clearly, the core business that American Axle was before the acquisition of MPG was driveline and metal form. Those continue to be our core businesses for us today as well as going forward in the future. Obviously, we're looking to consolidate in that space and be the industry leader in the space, and we are already. We want to maintain that position and grow that position on a global basis. When you look at the metal form or the powertrain and the casting side of the business, there's products that we need to evaluate in both of those business units, to say are they core or non-core to us, at this time as I communicated earlier, everything is core. However, we will assess those things moving forward. We're also going to look at the markets and understand where do we have markets that are strong and growing versus where do we have markets in the future that may be at risk. And then we'll just try to make sure that we're putting the appropriate funding towards the businesses that we feel are the growth businesses, while at the same time making sure that we can be relevant with Auto 2.0 going forward.

Thanks very much.

Thank you, Matt.

Your next question comes from the line of John Murphy from Bank of America Merrill Lynch. Please go ahead. Your line is open.

Good morning, guys. This is Aileen Smith on for John. Outside the K2XX downtime that you faced in the quarter, which was pretty well broadcasted and understood by most. Can you talk about how production schedules trended for some of your other major programs? If we were to look at IHS forecast, they'd say that production schedules for North America in aggregate decelerated through the course of the quarter. Can you talk about the sort of variability of your cost structure as production volumes start to come down and how much notice you get or do you need from your customers to appropriately adjust your own production?

This is David. I mean, our schedules for our other programs were very strong and consistent with what the customers had indicated to us. I mean, obviously the only impact that we had, that we had to work our way through was the unfortunate strike that took place at the Camy [ph] location, but that's now settled, and we were back on track with respect to that. As we've said before, we've made a significant part of our cost structure variable so we could flex with the marketplace. We've demonstrated that in the past before. At the same time right now, we have a very strong market for our products again, as I mentioned we're in the sweet spot, and whether it goes up or goes down, the management team is committed to adjust our cost structure accordingly to protect our margins going forward.

Great, that's very helpful. And then with respect to the increased revenue outlook for this year, thanks for the commentary on some of the puts and takes and the components in that. Is there one or another area, meaning production -- your program production volumes, the MPG acquisition or exogenous factors like scrap pricing or FX that are coming in a lot better than expected? Or is it just kind of everything on all fronts is better than your original expectations?

We're certainly seeing continued strength in North America, full-size truck platforms we support as well as the crossover vehicles. Metal is a little higher, which is -- which will drive some top line revenue. We're seeing continued strength in the commercial and industrial sectors of our casting business, which is also supporting and driving that revenue a little higher, but on a global basis, as I mentioned a little bit earlier, we continue to see strong demand on the luxury passenger car side in Asia.

Great. And one final one. Can you remind us of your level of exposure to the commercial and industrial end markets after the MPG acquisition? And how those markets are trending relative to your expectations and what you're kind of thinking about going forward into 2018?

Yes, it represents approximately 10% of our revenues, and I would tell you, they are much stronger than we originally anticipated a year ago, much stronger.

Great. Thank you very much.

Gentlemen, your last question comes from the line of Brett Hoselton from KeyBanc. Please go ahead. Your line open.

Good morning.

Hey. Good morning, Brett.

Just a quick follow-on on that last question. Much stronger than anticipated commercial vehicle and industrial, what regions are you seeing that strength in particular?

We're seeing it in our North America region. We do have low exposure on a global basis to that, but we're seeing it in North America.

Okay. And then broader question, vehicle architecture, electrical vehicles. There's some out there that propose that you can basically use one electrical motor, one motor and route it through an axle or driveline or something along those lines, there's others that propose that you just simply take the motor and you integrate it in with the actual, and there's others that propose that you take the motor, electrical motor and you put it the end by the wheels and drive the wheels out that way. I know this is early stages, but where are you seeing the evolution taking place in your business? And I assume that it's a ways off at this point in time.

This is David, Brett. Well, first of all, I'd say is this, I see the truck and SUV market being in a conventionalized engine for an extended period of time. Clearly, that's our core business today. On the crossover vehicle, everything is moving right now towards disconnecting all-wheel drive. We're the pioneer of that technology and we have a considerable amount in our backlog and new business that we're launching today as well as going forward in the future. Some of that will be impacted by electrification in the future, but I think we're still significant, major, when I say program milestones, away from that. Clearly, you're seeing the evolution of electrification, the adoption of electrification into luxury passenger car, and I think in the future, the small passenger car clearly, is going to hit Europe first, then China, then North America. So I think our revenue and our profits and our cash generation opportunities are very strong in the main markets that we support. As you're fully aware, we're investing in electrification especially the P3 and P4-type solutions, which involve more of the absolute to your points. We've got design configurations that address the 2 or 3 that you mentioned to us. That's in line with what our customers' needs and expectations are. We've got program already in our backlog and new business that launches next year, and then we're putting on new and incremental business for programs that are post 2020 period of time. So I think for an extended period of time, you're going to see the IT engine is going to be very relevant. At the same time, we all have to be prepared for the adoption of electrification on a greater scale especially on the small and midsized passenger car and in the luxury car segment, but I think AAM is very well positioned for the current portfolio needs as well as the future needs going forward. So I like our position, I like the fact that we're positioned to balance our investments on reality today versus what the future may hold as it relates to ultimate propulsion systems.

Excellent. That’s what I was looking for. Thank you, David.

Sure.

Thank you, Brett, and we thank all of you who have participated on this call and appreciate your interest in AAM. We certainly look forward to talking to you in the future.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. And you may now disconnect.