American Axle & Manufacturing Holdings Inc (AXL) 0 Q0 法說會逐字稿

Good morning. My name is Jack and I will be your conference facilitator today. At this time, I would like to welcome everyone to the conference call. (Operator Instructions). Thank you. As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Jason Parsons, AAM's Director of Investor Relations. Please go ahead, Mr. Parsons.

Thank you, and good morning, everyone. Thank you for joining the call on such short notice to discuss AAM's acquisition of Metaldyne Performance Group, MPG, as well as an overview of third quarter 2016 earnings and other business developments in the quarter for both companies.

With me on the call today are AAM's Chairman and CEO, David Dauch, AAM's President Mike Simonte, AAM's Vice President and Chief Financial Officer Chris May, MPG's Chief Executive Officer, George Thanopoulos, and MPG's Chief Financial Officer, Mark Blaufuss.

Earlier this morning we issued a joint press release announcing that AAM has entered into a definitive agreement to purchase MPG. You can access this release on the website of each Company at www.aam.com or www.mpgdriven.com or through the PRNewswire services.

The investor presentation related to this transaction and referenced on this call can be found in the investor relations section of the AAM website. In addition, each company issued separate press releases today announcing financial results for the third quarter of 2016. You can also find these releases and related third quarter 2016 investor presentations on the Investor Relations section of the respective websites of each company. To listen to a replay of this call, dial 1-855-859-2056, reservation number 12791647. This replay will be available beginning at 1:00 PM today through 11:59 PM Eastern Time on Thursday, November 10th.

Before we begin, I would like remind everyone that the matters discussed in this call may contain comments and forward-looking statements that 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, please reference slide 2 of our investor presentation on the acquisition of MPG or the joint press release that was filed with the Securities & Exchange Commission related to this transaction.

Also, during this call we may refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures, as well as a reconciliation of the non-GAAP measures to GAAP financial information is available in the presentation and on our website.

Today's call is not intended and does not constitute an offer to sell or the solicitation of an offer to subscribe for or buy securities of AAM or MPG. The subject matter of today's call will be addressed in a joint proxy statement and prospectus that will be filed with the SEC. Investors should read this information in its entirety when it becomes available. Information regarding the participants and the proxy solicitation is contained in each company's annual proxy materials filed with the SEC.

With that, let me turn things over to AAM's Chairman and CEO, David Dauch.

Thank you, Jason, and good morning to everyone. Today I'm excited to announce that AAM and MPG have entered into a definitive agreement under which AAM will acquire all outstanding shares of MPG. We have highlighted several of the most compelling reasons for this strategic acquisition on page 3 of the slide deck that Jason referred to.

AAM and MPG have worked together for years in a positive customer supply relationship with a common commitment to quality, operational excellence and technology leadership. As a combined entity, we are bringing together two complementary tier one organizations to create a premier, global manufacturer of world class components, modules and subsystems across multiple engine, transmission and driveline applications.

We will become a stronger, well diversified leader in advanced powertrain, drivetrain and driveline technologies that will span over 90 locations worldwide. From an AAM perspective, this combination accelerates our profitable growth and diversification objectives while significantly reducing product, customer and end market concentrations existing in our business today.

More specifically, the combined entity will be less reliant on General Motors as a customer in the North American light truck and SUV segment as a key end market while increasing our global footprint, most notably in Europe. While we highly value our customer relationships and program awards that we enjoy today, it cannot be denied that improving AAM's business diversification is good for all of our key stakeholders.

The addition of MPG's expertise in powertrain technologies meaningfully expands our product portfolio into critical engine and transmission applications that are key to advancing power density and light-weighting initiatives, increase in fuel efficiency, and improving safety and driving performance.

This transaction also increases AAM's participation in the commercial vehicle and industrial markets. An important aspect of this transaction is how it improves AAM's ability to serve our customers. As one entity benefitting from complementary product, process and systems technology expertise, we will be strongly positioned to benefit from trends that will drive growth opportunities in our industry.

For example, power density and light-weighting initiatives, high efficiency axles and differentials, demand for higher speed transmissions, downsized engines to improve fuel economy, and also hybridization and electrification. We'll have a powerful array of product applications and process capabilities in steel, aluminum, sintered iron and various other high strength power dense materials. We'll be able to deliver highly engineered products, modules and systems as well as precision formed forging, casting and sintered products, all with or without the machining value added concept.

And we will do all this by operating best in class, highly flexible, global manufacturing, engineering and sourcing footprint with high quality and cost competitive capabilities in all our major manufacturing centers of the world. This is truly an exciting day for us and all of our key stakeholders.

Through this acquisition, we will achieve a stronger financial profile with attractive margin performance and a powerful cash flow generation potential. The new company will start with close to $7 billion of annual sales. Factoring in the implementation of achievable synergies, the combined entity will have the potential to generate more than $1.2 billion of EBITDA and over $400 million of positive free cash flow.

Reflecting significant improvements in business diversification and other benefits of the combination including enhanced vertical integration opportunities, a transformed AAM will continue to thrive in periods marked by strong sales and production volumes.

Just as important, the combined business, which will be a leaner enterprise once we implement all of our synergy opportunities, will be even better positioned that either of the two predecessor companies to weather the cyclicality nature of the global automotive industry.

With respect to the powerful industrial logic and transaction synergies, let me simply sat that we will be very busy managing numerous value drivers and cost reduction opportunities as we close the deal. First of all, AAM is looking forward to the opportunity to combine forces with MPG's talented management team and associates. We are respectful of their accomplishments and impressed by our shared commitment to quality, operational excellence, and technology leadership.

Together, we will form a strong, integrated team to create value for our mutual stakeholders. We believe the combined entity will be more attractive to supplier partners to global OEMs which will drive growth and long term value for both AAM and MPG stakeholders.

Before I turn it over to George for his comments, let me briefly walk you through the details of our transaction which is summarized on page 4 of the slide deck. AAM has agreed to purchase all outstanding shares of MPG in a cash and stock transaction valued at approximately $1.6 billion. For each share of MPG, shareholders will receive $13.50 per share of cash and 0.5 share of AAM equity. This implies a 6.8 times EBITDA multiple based on estimated 2016 EBITDA and a 5.5 times EBITDA multiple considering achievable synergies of between $100 million to $120 million. We estimate that MPG shareholders will own approximately 30% of AAM's common stock after the closing of this transaction. Of this total ownership by MPG shareholders, MPG's controlling shareholder, American Securities, will own approximately 23% of AAM's common stock. We expect the purchase transaction to be accretive to AAM's EPS and cash flow in the first full year of ownership.

AAM has fully committed debt financing in place to fund the cash portion of the purchase price and to support the liquidity needs of the new entity. We also plan to issue approximately 34 million shares of new AAM equity to MPG shareholders in connection with this transaction. We expect AAM's net debt to adjusted EBITDA leverage ratio to increase to approximately 3.5 times at closing. As a result of profitable growth and positive free cash flow we expect to generate as a combined entity, we are targeting to reduce AAM's net leverage profile to approximately two times by the end of calendar year 2019.

Subject to regulatory and shareholder approval and other customary closing conditions, we anticipate closing the transaction and beginning operations of the combined entity in the first half of 2017. In connection with the closing, AAM will expand its board of directors to 11, with the addition of 3 American Securities designees including George Thanopoulos.

I'm excited to work closely with these new AAM board members and all of our existing AAM board members to create value for our shareholders, our associates, our customers and suppliers, and all of our other key stakeholders. This transformational combination is a unique opportunity to form a premier, global tier one automotive supplier with a well-diversified product portfolio, customer base and served markets, a stronger financial profile, and an awesome capability to deliver power through high quality, cost competitive engine, transmission, and driveline technology solutions.

This is truly a proud data for both AAM and MPG. We look forward to harnessing the power of this combination to serve our customers and our industry in new and exciting ways for many years to come.

And with that, I'd like to pass it over to George for his perspective on this transformational combination. George?

Thank you, David. And good morning to all. I'm also very excited to be here today and to be part of this compelling transaction. Combining forces with AAM offers MPG shareholders an immediate premium as well as the opportunity to participate in the profitable growth potential of the combined organization. MPG and AAM share similar culture and values. Both companies are people focused and leadership oriented with extremely talented associates. And both companies are laser focused on quality, operational excellence and technology leadership. This creates a natural fit as a combined entity and a clear path to value creation for stakeholders of both companies.

Let me provide you with a quick overview of MPG that starts on page 5 of the slide deck. Today MPG is a leading provider of highly engineered components for the global light vehicle, commercial vehicle, and industrial markets. Our technology is focused on light-weighting and performance solutions for our customers. MPG's global footprint is capable of supporting OEM powertrain applications globally. As evidenced by our recent financial performance and growing new business backlog, MPG is a powerful cash generator with strong margins poised for long term growth.

On page 6 of the slide deck, you can see our value proposition. As measured by our sales, 73% of MPG's product portfolio is powertrain focused, a segment of the market which is growing faster than the overall global automotive production. MPG currently benefits from and expects to continue to benefit from engine, transmissions, and driveline conversions designed to meet more stringent government regulations and consumer preference.

For example, customer demand for fuel efficiency gains is driving conversion to higher speed transmissions. This is creating higher content per vehicle opportunities for MPG because we have the product and process capabilities needed to effectuate these conversions.

When we evaluated the opportunity to combine these two great companies, we saw the potential to unlock significant value from complementary products, process and systems technologies. As a combined entity, we will have content on approximately 90% of light vehicles produced in North America, all of the top ten North American programs, and many other top performing global platforms. We will count among our largest customers General Motors, Ford, and FCA as well as BMW, Mercedes, Volkswagen, Jaguar, Land Rover, Honda, Nissan, Hyundai and many other global OEMs and global tier one suppliers.

We will have solutions oriented design, engineering, test and validation capabilities that complement cost competitive forging, casting, sintered metal, machining, assembly and systems integration capabilities that support all types of current and alternative propulsion architectures. We will be able to utilize steel, aluminum, ductal iron, gray iron, powder metal, and a wide variety of high strength, lightweight materials.

Importantly, we will have the size, scale and expertise to serve a broad range of customers and applications on a global basis. And the financial strength to invest in support of our customers to withstand the cyclical nature of our end markets. This combination creates a valuable supplier partner capable of delivering value added solutions to the global automotive, commercial vehicle and industrial markets. The combined entity will be well positioned to generate profitable growth due to well diversified product portfolio, customer base and expanded served market. This is truly a landmark day for MPG and AAM stakeholders.

With that, let me turn it back to David for some more details on this exciting transaction. David?

Thanks, George. Let me now cover additional details about the transaction and the many opportunities we see to unlock value for our stakeholders. Pages 7 and 8 of the slide deck put into context the scale of the revenue, profitability and cash flow generation potential of the new company. This combination significantly expands AAM's total served market. As George said, we will own content on approximately 90% of the light vehicles produced in North America and all of the top ten North American programs.

The proforma financial performance of the combined entity will have the potential to generate industry leading profit metrics and over $400 million in annual free cash flow after the successful implementation of our cost reduction synergy plan. As you can see, we are creating a premier global tier one supplier with strong market capabilities and presence.

On page 9 of the slide deck, we describe how we plan to organize the new company into four global business units. The largest of the four business units will be driveline, consisting primarily of AAM's current driveline operations. This business unit will represent about half of our total revenues.

The second of the four business units is metal forming. This business unit will combine the predecessor forging operations of AAM and MPG to create a best in class metal forming supplier with deep expertise in cold, warm and hot forging operations and a product portfolio featuring all types of gears, shafts, and other form components for engine, transmission and driveline applications.

Adding MPG's global reach and customer relationship to AAM's portfolio as well as reading across the best practices from each company's process technologies, will improve our market cost competitiveness and should lead to significant and tangible benefits for our customers, for this business unit and the company as a whole.

The third of the four business units is powertrain which we believe will be a significant growth driver for the combined entity. Our powertrain business unit will provide highly engineered and complex products for engines and transmissions with a special focus on assisting our customers to achieve gains in power density, light-weighting, fuel efficiency, safety, and driving performance. The addition to MPG's powertrain expertise to AAM's existing drivetrain and driveline capabilities is a major value driver in this transaction.

The final business unit is casting, which is MPG's existing Grede business unit. This business unit will leverage MPG's strong North American presence with the capability to provide ductal and gray iron solutions to the light vehicle, commercial vehicle, and industrial markets.

Pages 10, 11, and 12 demonstrate the power and positive impact in the combination of our product portfolio and technologies. Slide 10 highlights in red the key AAM product offerings and then highlights in blue the significant components provided by MPG. You can see the power of integrating the two product portfolios and key technologies. Not only does this combination provide opportunity to increase content per vehicle, but it increases AAM's served market by providing content for vehicles and architectures that we currently do not serve today.

Page 11 shows how the combination expands AAM's product portfolio. Currently driveline products, including AAM's support of GM's full size truck and SUV program, make up nearly 90% of AAM's sales. And on a proforma basis, AAM's driveline concentration is reduced to a little more than half the business with significant new contributions from engine and transmission products representing around 20%, forged products 18%, and castings at 13%. We're especially excited about increasing AAM's participation in the dynamic and growing powertrain segment of the market.

It's important to note that AAM will also gain increased exposure to the commercial vehicle and industrial markets primarily through MPG's metal forming and casting business. As you can see on this slide, we also see great benefit in combining the complementary technical expertise of AAM and MPG to jointly address the most critical global automotive trends impacting engine, transmission and driveline applications.

From passenger cars to heavy duty pickup trucks, from traditional internal combustion engines to fully electric driveline systems, from ultra-high strength ductal iron castings to lightweight precision machine transmission components, the new entity will be able to provide a wide range of advanced technology solutions to meet the most stringent customer requirements for all types of vehicle architectures.

As we integrate, we'll seek to enhance product offerings through joint engineering initiatives which in turn should strengthen customer and supplier relationships by accelerating the development of innovations designed to advance power density and light-weighted initiatives, increased fuel efficiency, and improved safety and driving performance.

Page 13 shows how the combination accelerates the diversification of AAM's customer base. As a result of the combination, AAM's reliance on GM and FCA as measured by annual sales is reduced by 38% and 25% respectively. We estimate that GM will make up approximately 41% of the combined entity sales on a proforma basis with further reductions to 32% by 2020, reflecting the impact of future business launches and GM sourcing actions.

While we boast MPG's strong portfolio and AAM's recent commercial successes, Ford will grow from 1% of AAM's sales in 2015 to 8% on a proforma basis and to 16% by 2020. Maintaining strong and mutually beneficial relationships with GM and FCA and all of our current customers is a high priority for AAM. However, achieving better balance in our customer concentration is key to our long-term strength and stability as a tier one supplier. You can see on page 13 how important this transaction is to helping us achieve an immediate step function improvement of our customer diversification. This is positive for all key stakeholders.

Page 14 covers how the combination strengthens AAM's global manufacturing, engineering and sourcing footprint. The combined company will have over 90 locations operating in 17 different countries. And building on the legacy strengths of both predecessors, the combined entity will continue to have a strong position in North America. It is important to note that both AAM and MPG contribute growing businesses into other regions of the world though this combination, especially in Europe and Asia.

For example, MPG's presence in Europe will nearly quadruple AAM's sales in the region. This will deepen our technical capabilities in the region, facilitate additional vertical integration initiatives, and increase our profile with target customers. In addition, we expect the combined entity to benefit from joining forces in Asia by increasing our product line and operating scale in the region and enhancing our cost competitiveness, all of which will create new opportunities to achieve profitable growth in these important markets.

On a combined basis, AAM will be well positioned to support our customers on global engine, transmission and driveline programs anywhere in the world with a wide variety of high quality, cost competitive components, assemblies, subsystems and modules.

The next slide, page 15 of the slide deck, simply demonstrates how we think about the revenue growth potential of this entity. While AAM grows from $4 billion to nearly $7 billion in sales as a result of this transaction, we are even more excited about the organic growth potential that the combined entity will have in the future. Both companies have robust new business backlogs and substantial quoting in emerging business opportunities.

With the benefit of a more diversified portfolio based on complementary products, processes and systems technologies that targets the most important global powertrain trend, the sky is the limit for what we can achieve together in terms of organic growth.

The next slide is important as we think about what it will take to make the difference, to make this business combination very successful. We see in MGP many similarities when we think about our own core competencies, competitive advantages and overall culture. Each company is committed to quality, operational excellence and technology leadership in order to create long term value to our stakeholders. These shared values will help us quickly align ourselves as a combined entity. We are excited about the opportunity to take the best practices of both entities and create a new world class organization that leads its peers in these objectives.

At this point, I think it's a good time to discuss some specifics about the synergy plan we foresee on this transaction. After all, our ability to fully achieve the synergies on a timely basis is the key to unlocking superior value creation in this combination.

The first synergy opportunity to review is the optimization of our operating structure. This includes eliminating redundant public company costs, and two, taking a clean sheet approach to creating the combined entities' operating organizational structure. By taking this clean sheet approach while also integrating to streamline our business processes and systems, we believe we can improve our annual profits by $45 million to $50 million. We also see great opportunities for cost reduction within the combined purchasing operations of the new entity. We see potential for the combined entity to realize another $45 million to $50 million on annual savings by utilizing the larger scale of both direct and indirect material purchases and improving the cost efficiencies of our value streams.

We will also optimize capacity utilization across our respective manufacturing processes and facilities while pursuing vertical integration opportunities to improve our market cost competitiveness. We believe we can achieve $10 million to $20 million of cost improvements from these initiatives. All in, we are targeting $100 million to $120 million of annual profit improvement from these synergy initiatives by the end of 2018 calendar year. We are targeting 70% of this annual run rate savings by the end of the first full year.

One last note on the synergy plan, we expect to incur costs and expenses of approximately one year's worth of savings in order to achieve these synergies. We will look for ways to offset all or a significant portion of these costs and expenses through the avoidance of capital expenditures, improvements in networking capital positions, and reductions in cash tax payments in certain jurisdictions. We are already working out plans to implement these synergy initiatives and look forward to providing you with regular updates on our progress and successes after we close the transaction and take this challenge head on.

Key success factors for us in this effort include the following. First of all, AAM's rigorous management discipline will translate well to this task. We will dedicate senior resources to the integration management team on a fulltime basis and will closely monitor the team's progress every step of the way.

Second, our partners in this transaction from MPG have been very successful at executing strategic growth initiatives and M&A integration. We will involve senior managers of their team in the integration management team and will leverage the lessons learned from their previous experiences.

And third, we have hired a prominent management consulting firm to assist us in the integration process and synergy implementation plan. The expertise they possess in these areas will be very, very valuable to us. We feel very well positioned to deliver the synergy plans on a timely basis.

So that covers my prepared remarks about this exciting transformational announcement. I looking forward to answering any detailed questions you may have in just a few minutes. But before we open it up to Q&A, we will cover the third quarter results and business development activities for both companies, starting with MPG. So I'd now like to turn it over to George.

George Thanopoulos Thank you, David. Earlier this morning, MPG issued a press release announcing our third quarter 2016 results. We also posted investor presentation slides that can be found on our website, mpgdriven.com under the investor relations tab events and presentations section.

I will take the next few moments and summarize our quarter. Let me first highlight our financial results. Net sales of $676 million for the quarter and over $2.1 billion year to date. We delivered adjusted EBITDA of $114 million for the third quarter and $386 million year to date. These solid results were realized despite the planned attrition of non-core wheel-bearings and significant macro headwinds in the industrial and the Class 8 truck market. Additionally, we experienced unfavorable light vehicle mix with two of our largest customers, Ford and FCA.

Despite these top line challenges, our margins reflect our relentless focus on cost reductions. This is highlighted in all of our numbers and especially in our adjusted EBITDA margins where we continue to expand our margins from just under 17% in 2013 to 18% year to date in 2016.

For free cash flow, defined as cash flow from operations less capital expenditures, the quarter came in at $18 million and $51 million year to date. Moving to adjusted free cash flow, MPG had $71 million or over 10% of net sales in the quarter. Our fully diluted EPS was $0.28 and $1.15 for the third quarter and year to date respectively, and adjusted EPS, taking out the effects of certain non-recurring items and foreign currency gains and losses was $0.33 and $1.37 for the third quarter and year to date respectively.

So in summary, we had a solid quarter despite the macro headwinds I mentioned. I would now like to comment on the tremendous progress with our new business awards. As we have previously stated, each year we evaluate the engine and transmission program cadence to develop an annual new business goal. For 2016 we originally set our target to $400 million based on known opportunities. We are very pleased to report that the 2016 pipeline has been more robust than originally expected, driven by the race for fuel economy.

As a result, our new business wins to date have surpassed the original goal with $589 million booked through the third quarter and tracking towards approximately $700 million for all of 2016. With this exciting news, MPG is on pace to book over $2 billion of new business awards in just three years.

I also wanted to give everyone some details about an exciting acquisition we made during the quarter. In early September we completed the acquisition of Brillion Ironworks, a business segment of Acuride Corporation. Brillion, like our Grede segment, specializes in ductal and gray iron cast products. This acquisition complements MPG's existing casting business and capacity.

Additionally, Brillion recently invested in new equipment which we plan to transfer along with a book of business to other MPG facilities by the end of the year thus eliminating redundant fixed costs. Once the business is fully transferred, we would expect it to contribute about $10 million of EBITDA in 2017 at current depressed industrial and commercial truck volumes.

Lastly, I would like to provide some commentary on how we see the rest of the year shaping up. As I stated earlier, we are seeing continued volume headwinds from the Class 8 and industrial markets. We are also experiencing some unfavorable light vehicle mix with two of our largest customers, FCA and Ford. Given these factors, we see our metrics generally tracking to the lower end of the guidance that we previously provided excluding any impact from our acquisition of Brillion.

So in summary, Q3 was a solid overall quarter highlighted by our strong adjusted EBITDA margins and cash flow. Additionally, we continue to build our future with our acquisition of Brillion and new business wins supporting our long-term growth targets. And now let me turn it back to David for a few comments on AAM's third quarter earnings and business activities.

Thanks, George. As Jason mentioned at the beginning of the call this morning, today we issued our third quarter 2016 earnings release. We had previously planned to review that with you in a call tomorrow. However, we are cancelling tomorrow's call and will summarize our quarterly results for you right now.

I want to start with an update on our efforts to backfill the impact of the GM sourcing action on the next generation full-size trucks and SUVs. We first announced on July 31, 2015 that AAM would not retain all the next generation full-size truck program. At that time we estimated that AAM would retain approximately 75% of the sales content provided to GM on the current full-size truck program in the next generation program. Based on GM's current design and program direction, we now estimate that AAM will retain approximately 65% of the sales content provided to GM on the current full-size truck program.

However, as a result of our commercial successes in 2016, we are also announcing today that AAM has covered approximately 90% of the sales lost in the next generations sourcing transition with new and incremental business that will launch in 2018, 2019 and 2020 calendar years.

To help you understand the impact of GM's sourcing actions, as well as the offsetting positive impact on our new and incremental business wins, let me remind you of our guidance on the relative profit margins of these programs. We previously disclosed that the contribution margin on our sales in support of the K2X program is approximately 30%, while the rest of AAM's current product portfolio and new business opportunities typically earn a contribution margin in the range of 20% to 25%. The contribution margin profile of many of the programs we are winning to offset the loss of business on the next generation full size truck program is coming in at the high end of the range. This is helping to mitigate the profit impact of the sourcing transition on our projected financial results in 2018, 2019 and 2020 calendar years.

The good news is, we are not only winning new business awards to backfill the gap created by GM's next generation full-size truck sourcing transaction, or transition, we are winning profitable new business awards that will help us quickly redeploy available installed capacity with attractive returns that meet and exceed our investment requirements.

We still have a small gap to close on this sourcing transition, approximately 10% of the total impact. We continue to be very laser focused on closing this gap, but only with the discipline to earn new and incremental business awards with attractive margins and cash flow returns.

With strong quoting and emerging opportunities of approximately $1 billion, the only remaining question is not whether we will close the gap on GM's sourcing transition, but how much we can grow AAM sales in spite of it. We look forward to answering that question with the announcement of additional new and incremental business in the future.

With respect to AAM's third quarter financial results, we are pleased to announce another very strong quarter. AAM sales in the third quarter of 2016 were $1.007 billion, up 3.6% on a year over year basis. Gross profit increased 14.5% on a year over year basis to $181.2 million in the third quarter of 2016. Gross margin was 18% in the third quarter of 2016 as compared to 16.3% in the third quarter of 2015.

SG&A in the third quarter 2016 was $79.9 million or 7.9% of sales as compared to $65.5 million or 6.7% of sales in the third quarter of 2015. An increase in R&D spending was the main driver of increased SG&A in the third quarter of 2016 as compared to the same period a year ago. R&D expense was $36.2 million in the third quarter of 2016 as compared to $25.8 million in the third quarter of 2015.

Adjusted EBITDA, or earnings before interest expense, income, taxes, depreciation and amortization, increased to $156.7 million in the third quarter of 2016. This compares to $149.2 million in the third quarter of 2015.

Adjusted EBITDA margin was 15.6% in the third quarter of 2016 as compared to 15.4% in the third quarter of 2015. Adjusted EBITDA in the third quarter of 2016 excludes the impact of $3.4 million asset impairment charge recorded against gross profit and the impact of $0.7 million of acquisition related expenses recorded to SG&A.

Net income, which includes the impact of the asset impairment charge and acquisition related expenses was $61.7 million or $0.78 per share in the third quarter of 2016. This compares to $60.9 million, also $0.78 per share in the third quarter of 2015.

As to the balance sheet and cash flow statement, AAM continued to make excellent progress moderating leverage primarily as a result of generating $54.6 million of positive free cash flow in the quarter. As a result of AAM's strong free cash flow performance over the past several quarters, AAM's improved net debt to adjusted EBITDA leverage ratio is now 1.6 times at the end of the third quarter.

So before I turn it over to Q&A, let me confirm AAM's updated 2016 full year outlook, also announced in today's earnings release. AAM is now targeting full year 2016 sales of $3.95 billion. AAM is also targeting full year 2016 adjusted EBITDA margin in the range of 15.25% to 15.50% of sales. AAM is targeting free cash flow of approximately $160 million for the full year 2016. This updated free cash flow guidance includes the impact of the Mexican tax payments related to the resolution of transfer pricing issues as discussed on precious calls which we now estimate to be approximately $30 million. And we continue to estimate CapEx spending to be approximately 6% of sales for the full year of 2016.

AAM's third quarter financial results continue to reflect strong production buy-ins and solid performance in our global manufacturing operations. Our year to date financial performance positions AAM to achieve record sales and profits in 2016. So with that, I'll turn it over to Jason so we can begin the Q&A session.

Thank you, David and George. With limited 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). Rod Lash, Deutsche Bank.

Good morning, David, George. Congratulations. Had a couple questions. One is, for MPG, 60% of the revenue is tied to, is to tier ones. And I was wondering if you can tell us how much of the business is intercompany with Axle. Is any of it to Axle's competitors and is there any risk of negative synergies there?

Hey, Rod, it's George. I think it's just about $100 million intercompany into American Axle.

Okay, and is there a risk of negative synergies if you're selling to American Axle's competitors or is that not something that's likely?

I would anticipate that that's probably not likely. We've been supplying many of the global tier ones. There are occasions where we not only supply, but we compete with some of those great customers. So it's not uncommon in today's world. We're all in a small, tight community and we're -- we've had strong relationships for not just years, I would say decades.

Rod, this is David. The one thing I would add to that is, not only is AAM supplying directly to the OEMs, but we're also supplying to some of our competitors as well. So we're just going to build off the relationship that we already have with those customers and then integrate what MPG is doing themselves.

Okay. Then secondly, the commercial and industrial business at MPG obviously has been weak and that's a cyclical issue and you also have the runoff of that legacy GM wheel bearing business. Could you just maybe talk a little bit about what's left to run off in the wheel bearing side and any preliminary thoughts for MPG as you look out to 2018 for revenue and EBITDA?

Well first of all I would say, yes, certainly Class 8 and industrial is at presumable a trough. I mean we've been through some tough times in the industrial segment and I think we're kind of in the brunt of the downturn in the Class 8. I would say the good news is that I would hope that that's at bottom or near bottom and that we would be coming out of that in 2017 and into 2018, so just on that point.

Regarding kind of our noncore wheel bearing business, that business was probably at full force back in 2015. It reduced about 50% in 2016 and I think we stated previously that we expect approximately zero revenue in 2017. So that issue is really behind us for all practical terms.

Okay, great. And just lastly, what's happening to management structure in the new combined company? Is the leadership of MPG coming over to Axle, or what is the structure going to look like?

Well, it's too early to say right now, Rod, but what we'll do is, George and I and our senior management teams, we'll get together and look at what we think is appropriate as it relates to running the combined businesses going forward. We indicated to you on the call today that we'll operate with four business units. Clearly we'll assess the overhead and the operating structure, we'll look at managing the synergies that we talked about going forward here. But the way I look at it is, listen, there's a very strong management team and leadership team with great associates at MPG. That reverse holds true here at American Axle and we're going to blend those two teams together and into a very strong integrated team that I think will rival anyone in the business.

Great. Thank you.

Brian Johnson, Barclays.

Yes, good morning and I'd have to say, kind of mention, two management cultures that are so similar in terms of their focus on process excellence. As well as straight talk. So I just want to get to the elephant in the room which is, can you talk us through the combined debt load, especially after acquisition financing? How you see that relative to the proforma EBITDA with the synergies. And then just what the plans are to address that debt load and how you think about that debt load through a cycle?

Yeah, Brian, this is Chris May from American Axle. Good morning. As we close through this deal, we would anticipate a gross leverage of just a little over $4 billion. We'll hold probably approximately $250 million in cash to operate and run the business, so a net debt around $3.9 billion. That would be at the close, consider it let's call it the first quarter, second quarter of 2017. If you look at the combined earnings power of this company, we talked about it earlier, $1.2 billion in EBITDA, it's going to generate over $400 million of free cash flow on an ongoing basis post close. So that powerful cash flow will continue to de-lever that business and we anticipate by the 2019 timeframe to be around two times levered base on the back of that cash flow.

And in terms of coverage through a cycle?

Certainly obviously we have a lot of elements in place. A very highly flexible cost structure. MPG shares a very similar approach and philosophy to managing that side of the business. And of course we can certainly handle through the cycle anything that comes our way. So we have playbook in place as does the other side and we will combine those forces and manage through that.

Okay. And just a sort of follow on question, when you think you're approaching, when you approach the tier ones as a new company, to what extent has forging and casting been a directed purchase, to what extent does this allow the new company as a tier one to quote some systems directly? And does that change at all?

No, I mean forging and castings are typically not directed by type components with the exception if you want to incorporate some of the castings as far as the makeup of some of the brake systems. That would be the only qualifier to that. So I don't see it fundamentally changing the way the business is today in regards to what we're doing directly with the OEMs. What I really see is our ability to not only bring the highly engineered products and the systems and modules that we've been able to bring in the past from an AAM standpoint, but now we can also bring the component capability in a wide array of markets, that being the powertrain market as well as the drivetrain market and the driveline market. So I think this is very complementary as it relates to the combination of these two businesses and should provide a value proposition to all of our stakeholders, especially the OEMs.

And are the OEM purchase points generally the same who are doing the axis and driveshafts and the other engines, transmissions and other forged products?

There are similarities as it related to certain buying functions or decks, but there's also new and expanded buying decks and people that we will have to interact with. But collectively we have those relationships and we've been managing those relationships for several years. So we expect to continue building off the positive relationships that we enjoy with all of our customers whether OEM or some of the other tiers.

Okay, thank you.

John Murphy, Bank of America Merrill Lynch.

Good morning, guys, and congratulations. Just wanted to follow on, on a management question. You guys are each both a big part of the story at these companies, and I'm just curious if you guys can commit to staying on for sort of the long haul and being involved in the companies. Because like I said, you guys are a big part of the story.

I think the critical thing to highlight here is that I'm going to be running the business going forward here, but American Securities is going to play a very important role in regards to being a significant minority shareholder owner in the business. And therefore, they'll have representation on our board of directors and one of those designees will be George. So we'll have continuity in the relationship there. And then in between now and the close, obviously George and I and our collective staffs will work very closely together to make sure we have a seamless performance to our customers from a products launch and overall performance standpoint. But also work on how do we harness the combined entity and the power that it can bring with respect to the value proposition for all of our stakeholders.

I would just add, John, that this is very collaborative. I mean David and I have been working together a long time. I would do my utmost to support the organization. This is great for the 12,000 MPG employees to be part of a bigger, broader, stronger organization. That has the same types of DNA in terms of manufacturing excellence and supporting our customers. And again, I looking forward to working with David on the board and really beyond that as we get into some of the integration issues.

That's helpful. Then just on the 90% representation you have on vehicles in North America, I've got to imagine a lot of these vehicles and platforms are global, yet you're both -- or even on a combined basis still kind of concentrated in North America. What are the opportunities on sales synergies here? You haven't really delineated anything. I know it would be sort of three years out plus that you'd have synergies, but what are the opportunities here on the sales side?

John, this is David. I think there's tremendous opportunities from the sale side. As we try to cross sell to the OEMs, the expanded product portfolio, clearly they have a presence in certain countries or markets that we're not in and vice versa. We're going to leverage those bases to work from. They've got certain relationships that may be a little stronger with certain customer than we have on the other side. And again we're going to leverage that and we're going to bring the full complement of our capabilities to the OEMs and to the other customers. With the intent of trying to grow our business as we go forward. So I think it's a very high opportunity.

It really increases the scale for us in Asia and in Europe really if you look at the combination.

And as we said, John, in the script, is the fact that AAM's sales in Europe are going to quadruple because of the presence of MPG. At the same time, MPG is going to benefit from the well-established opportunities and footprint that we already have in Asia which as you know is a very fast growing market for us and our technology.

And if I could sneak one other one in under the wire, I mean anything on regulatory hurdles and reaction from the customer base?

No. We've had some calls with some of the customers here this morning. We've got other calls to make throughout the day here. They're all very understanding of it. They're very supportive of it. At the same time, we'll sit with each of them and talk about not only our independent businesses, which is how we're going to operate for the next several months, but also talk about the value proposition as we bring these companies together in the future. So I think it's going to be positive for the industry, I think it's going to be positive for each of the customers, and obviously positive for AAM and MPG and the other stakeholders. But most importantly, for all the 25,000 associates that are going to be involved in the business.

And on the regulatory side?

On the regulatory side, again, it's too early for us to tell at this point in time. I mean obviously we have to go through the customary requirements and the regulatory requirements. That will take several months which is why we're announcing today, but the closing won't be probably until the first half of 2017 largely because of those customer and regulatory requirements.

Great. Thank you very much and congratulations again.

Matt Stouffer, SIG.

Thank you very much for taking the question. I want to go back to the idea of just the risk management side of this because strategically this deal seems to make a lot of sense. I want to think about two things. One is just think through the leverage a little bit more. And then two is, talk about how the new product portfolio of the companies can help both of you individually and collectively compete with hybrid powertrains and EVs. So first with leverage, how when you looked at your capital structure did you think about negative leverage from volume as we think about a potential downturn here? I'm not saying it's going to happen, but it would be something that you'd have to scenario plan if you think through your capital structure. So how would you encourage us to think about it?

I would think about this, Matt, this is Chris, obviously it starts with our cost structure and our revenue generation through the downturn and our fixed cost management through that process and the levers we can pull to continue to maintain free cash flow through that time period. I would think about our ability now as a combined entity to leverage our capital expenditures and the flexibility and capacity associated with that which is significant. I would also think about how you can see these EBITDA margins, even through more depressed sales, continue to generate cash flow which will also maximize our ability to manage through this downturn.

I'd also look at some of the other I would call synergies, while we didn't talk about them in the overall synergy element, we would have working capital returns, we would also have the ability to manage our cash taxes which we see as some upside for the combined entity going forward as well. So some of these if you put them in its entirety will allow us to work through the downturn scenarios in a positive manner and of course reemerge at the other end as a stronger company.

If I could just add, I think that was very well said. Together we can bring synergy whereas alone we wouldn't have that opportunity. And that's a really important element.

Yeah and then, Matt, in regards to your comment about the hybridization side of things, I mean first and foremost, internal combustion engine is going to be the power plant for years to come. Hybridization, electrification, there's no doubt there's going to be a role in the future. But I think what we're looking at right now is we're going to leverage the core competency of our driveline capability that supports the strong markets that are there today on trucks and SUVs and crossover vehicles and luxury passenger car. At the same time, when you look at MPG's product portfolio, they're well positioned in regards to the transmission side of the business where you see increasing speeds. 8, 9, 10-speed type transmissions going forward. So we'll benefit from that.

Clearly our combined companies are both aligned when it comes to light-weighting and fuel efficiency and safety and performance related matters. You already know some of the issues that we're working on from a driveline standpoint with Quantum, with EcoTrack, and then last but not least we positioned ourselves from a hybridization and electrification based on our initiatives through EAM. So we think that we're not only serving the current market today, but also positioned to support the future market as that future market evolves. But the cash cow, what's going to pay the bills, is going to be that IC engine based technology and we're well positioned in engine, transmission and driveline.

Thank you. One quick question, thank you for that, one quick question on the end of this. When you look at post 2019, two times EBITDA coverage, is that on the current estimate or is that on the 2019 estimate? I would assume it's the 2019 estimate.

That's 2019.

Joe Spak, RBC Capital Markets.

Thanks. Congrats, everyone. Just to follow-up on that last point on 2019, and I'm sorry, I was doing some quick math, so excuse it, but it would actually seem that like it would have to be maybe $200 million higher in order to get to that two times leverage? Or maybe the cash flow comes in a little bit better. But I guess I just wanted to better understand the trajectory of the combined EBITDA for the company.

Certainly, Joe. This is Chris. If you think about the synergies that we referred to earlier in our presentation, the $100 million to $120 million will come only during that time period. So if you look at the proforma EBITDA today and just simply account just for that, you have a significant lift. In addition, you'll have synergies through our free cash flow not only from the earnings performance of the company but also some of those other items I mentioned such as working capital, cash equity, etc. So your free cash flow will continue to improve.

Yeah, and Joe, this is Mike Simonte. One of the other things that's going to happen during this time period, and David mentioned it in his script and so did George I think very prominently. The two companies have a strong backlog of business that preexists this combination. So those new business awards will be launching in this time period as well. And so the combination of the cash synergies that Chris just mentioned, plus the higher contribution from new business launching in this time period is really the bridge you need to get you to that 2019 level you referenced.

Okay, perfect. So that definitely is the growth side. Then just to be clear, when you said potentially generate 1.2 EBITDA and 400, that's today as is combined plus the synergies? And then on top of that?

Yep.

That's plus growth on top of this as we go forward over the next several years is what Mike is highlighting as well.

Okay. Then just on the synergies, look, MPG just went through a fairly heavy integration and assuming there were some efficiencies gained there, just wanted to know if you still think there is more even in standalone MPG. And then you also went through, MPG came together maybe two years ago, right, so when you came together with a combined go to market strategy, and now there's going to be sort of a new a combined go to market strategy. What lessons were really learned during that initial shift and how long do you think that it's going to take for the total higher content from AAM and MPG like a one plus one equals three, if you will, to really come to fruition?

Joe, this is David, let me start first and then if George wants to add any comments he can. First and foremost, both organizations run a disciplined ship. But at the same time, there's clearly synergistic opportunities between the two companies coming together on our overhead and operating type structure from an organization standpoint, especially when you look as some of the redundant public costs that exist there. We're going to clean sheet both organizations and develop that streamlined structure along with the appropriate processes and systems to support that structure going forward. So I think there's a sizable part that will be done there. But again, picking that strong and integrated management team to lead the joint organization or combined entity moving forward. We're both known for our operational excellence, but any time you go into a factory there's always opportunity. And that's how both of us look at, so we'll continue to build on the success that we've had. But we definitely think there may be other opportunities in that respect. And then we're going to utilize, like I said before, our opportunities both on the indirect and the direct side of the business. And from a purchasing standpoint with the supply base and our supplier partners there.

But listen, they've done a great job integrating three companies into one MPG. I think we have done a very good job in regards to building our business up over the years. And collectively together this senior management team is going to put a formidable organization together that's going to be able to deliver on the synergies. And as we said earlier, we can deliver on those synergies within the two years with a 70% run rate after the first year. So we feel pretty good about where we are on that.

Let me, and David covered this in the prepared remarks, we've been working together here for a while, so it was covered. But public company costs are redundant, so even though MPG had integrated, there are still costs that can come out of the systems. And we spoke about vertical integration opportunities, we've spoken about factory utilization and optimization. And clearly best practices which we shouldn't take lightly. And of course we've got the lessons learned of things going right, things going wrong. Fortunately, I felt our integration of the three legacy $1 billion companies went really well. And so we can extrapolate that here in this situation.

I would say the cross selling takes a little bit of time to get momentum, so it might take just a few quarters to get that going. But you can see the results. We brought together the three legacy companies to create MPG back in 2014, and you can see the programs that we're winning and booking are gaining momentum, they're larger in scale and scope and they're global. And so it totally works. It totally worked as we had set out to do. And I would imagine we'll have some of the same successes here in the coming 12 to 24 months.

Yeah, and as I also indicated to you, we think there's opportunities for CapEx avoidance. When you look at our capacity and also look at our facility utilization, we think there might be some opportunities as relates to the tax structure and what we can do in that respect with certain jurisdictions. And then obviously when you're bringing the size and scale of the company here, we think there is some working capital opportunities on top of that. So -- but again, some that will be used to offset some of the expenses to implement some of the synergies that we mentioned earlier, but as we've communicated, we see a range of $100 million to $120 million from a synergistic standpoint which makes us accretive in the first full year after ownership.

That's helpful. Real quick, you mentioned reduction on full-sized trucks. Do you have any proforma estimate of the mix between passenger cars, crossovers, and full-size trucks?

We haven't really put all that together at this point in time. I mean the big thing that we want to communicate is that where driveline product makes up a significant part of AAM's business today, that reduces to less than half. At the same time, our dependence on the full-size truck business, GM specifically, is very strong today and will go down based on the combined entity coming together here. So we feel very good with respect to the diversification we're going to have not only in our portfolio but the end markets we're going to serve and the customer mix as well. So one of the critical things for us in this whole thing was the diversification aspect of the combined entities.

Thanks. Congrats again.

Justine Fisher, Goldman Sachs.

Hi, good morning. The first question I have is just on the rating agencies. Have you guys heard anything from them on that? I know that Fitz just upgraded you guys a couple of months ago. So any preliminary feedback from them?

We had some preliminary dialogue yesterday and we'll have further dialogue with them today. We'll obviously -- hopefully they'll recognize the benefits of this transaction in terms of the de-risking of the company from a size and scale perspective, the power of our earnings as well as our cash flow. But obviously to put that in context of the debt we will issue. So we will continue those dialogues on an ongoing basis going forward.

Okay, and it may be too early to answer this, but I'm just looking at the Metaldyne capital structure and the bonds have a change of control that obviously the bondholders could exercise. But on the loan side, I would assume that that loan would be refinanced as part of a broader loan deal that would give you guys a lot of repayable debt that you would use to repay and therefore de-lever. So any preliminary thoughts on what you guys would do with the Metaldyne loan?

As it relates to the term loan, yes, we would replace that.

Okay. And then the last question is just following up on some of the ones you guys have already been asked. If we aggregate the estimated free cash flow numbers between now and 2019, it definitely seems that you could repay the $1 billion to $1.5 billion of debt if you need to get leverage to two times. But there isn't a huge amount of room for error. And depending on what happens with SAAR, there's obviously flexibility around those cash flow numbers, so my question is, how committed is to hitting that two times number? And if it turns out that we have some market deterioration that makes that free cash flow elusive, would the company be willing to issue equity or could it take bigger steps to ensure that the leverage goes down to two times. Or would you just say, look, maybe it's going to be 2.5, 3 times because of market leader.

Justine, this is David. Let me just say this. Absolutely we're committed to support in meeting and managing the balance sheet and the debt side of things. If you just go back and look at our track record from 2009 to 2106, we were well over 3 times levered and we had a commitment to get down to 1.5 times by the end of this year and we're clearly on that trajectory to do that. Those that have followed us over the years understand that when we make a commitment to something, that we deliver on those commitments. So I don't expect to do anything different here and if anything, we're going to try to accelerate it.

Great. Thanks so much. Congrats on the transaction.

There are no further questions at this time. I would now like to turn the call back over to Mr. Parsons.

Thank you, Jack. We thank all of you for participating on this call and appreciate your interest in AAM. We certainly look forward to talking with you in the future.

This concludes today's conference call. You may now disconnect.