American Axle & Manufacturing Holdings Inc (AXL) 2016 Q4 法說會逐字稿

Good morning. My name is Heidi and I will be your conference facilitator today. At this time, I would like to welcome everyone to the AAM's fourth-quarter and full-year 2016 earnings conference call.

(Operator instructions)

As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Jason Parson, Director of Investor Relations. Please go ahead, Mr. Parson.

Thank you, and good morning, everyone. Thank you for joining us today and for your interest in AAM.

Earlier this morning, we released our fourth quarter and full-year 2016 earnings announcement. You can access this release on our website, www.AAM.com, or through the PR Newswire services. A replay of this call will also be available beginning at 1 PM today through 11:59 PM Eastern Time February 17 by calling 855-859-2056, reservation number 87956021.

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 may refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website.

During today's call, we will make reference to AAM's pending acquisition of Metaldyne Performance Group, or MPG. 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 pending acquisition is addressed in a preliminary registration statement on Form S-4 that is on file with the SEC.

This Form S-4 serves as a pulmonary joint proxy statement. It is not complete and may be changed. The joint proxy statement will be mailed to stockholders of AAM and MPG after the registration statement is declared effective by the SEC. Investors should read this information in its entirety.

Information regarding the participants in the proxy solicitation is contained in each company's annual proxy materials filed with the SEC. Over the next couple months, we expect to participate in the following conferences, the JPMorgan Global High-Yield and Leveraged Finance Conference on February 28, and the Bank of America Merrill Lynch New York Automotive Summit on April 12.

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 CEO, David Dauch.

Thank you, Jason, and good morning to everyone. Thank you for joining us today to discuss AAM's financial results for the fourth quarter and full year of 2016. Joining me on the call today are Mike Simonte, our President, and Chris May, our Vice President and Chief Financial Officer.

To begin my comments today, I'll review the highlights of our fourth quarter and full-year 2016 financial performance. Next, I will comment on AAM's 2017 standalone outlook and our new and incremental business backlog. And lastly, I will provide a quick update on AAM's pending acquisition of MPG before turning things over to Chris. After Chris covers the details of our financial results, we will open up the call for any questions that you all might have.

Let me start by stating that in 2016, AAM achieved another year of record sales and gross profit, strong global operational performance and new business wins that will further diversify our business. A quick summary of our 2016 financial performance is as follows, and let me first start with sales.

AAM's fourth-quarter 2016 sales were $946.5 million. For the full-year 2016, AAM's sales increased to $3.95 billion, a new annual record for AAM. This sales growth was despite year-over-year headwinds related in part to lower metal market pass-throughs and foreign currency translation.

Second, as a relates to EBITDA, AAM's adjusted EBITDA in the fourth quarter of 2016 was $148.2 million or 15.7% of sales. This is compared to $137.5 million in the fourth quarter of 2015 or 14.3% of sales.

For the full year of 2016, AAM's adjusted EBITDA was up to $619.4 million. This is another record year for AAM, and it represents an 8.5% increase compared to full-year 2015. AAM's adjusted EBITDA margin was 15.7% for the full year of 2016, compared to 14.6% for the full year of 2015.

Third, AAM's adjusted EPS in the fourth quarter of 2016 was $0.78 per share, compared to $0.67 per share in the fourth quarter of 2015. For the full year of 2016, AAM's adjusted EPS was $3.30, compared to $2.88 in the full year of 2015.

From a cash perspective, AAM closed our the year with solid cash flow performance. AAM's adjusted free cash flow in the fourth quarter of 2016 was $62.8 million. For the full-year 2016, AAM's adjusted free cash flow was $198.6 million, compared to $189.5 million for the full year of 2015.

Chris will provide additional information regarding the details of our financials in a few minutes here. But before we review our 2017 outlook, let me reiterate again that 2016 was another successful year for AAM. Whereby we set many financial records along the way.

And despite some of the global headwinds and significant launch activity, AAM's worldwide operations continued to perform at extremely high levels. And our record operational profit metrics reflect the ability of our associates to achieve demanding productivity initiatives, and display operational excellence on a day-to-day basis.

As it relates to 2017, AAM is reaffirming the standalone targets we shared with you at the Deutsche Bank conference in Detroit on January 11. We expect it to be another record year for AAM sales and profitability. We believe the trend in global automotive market conditions will continue to be very strong and positive over the next couple of years.

For the full year of 2017, we expect the US light vehicle sales to be approximately 17.5 million units. While this represents a flat SAAR year over year, these historically high sales levels combined with continued favorable mix in the truck, SUV and crossover vehicle product segments, coupled with AAM's new and incremental business backlog, provides great opportunity for AAM to continue our streak of record sales and record profits.

Based on these industry sales assumptions and the anticipated launch timing of AAM's new business backlog, we are targeting full-year sales in the range of $4.1 billion to $4.2 billion in 2017. In 2017, AAM will support 23 major product and program launches that will drive profitable sales growth and further gains in our business diversification.

Some of these launches include power transfer units and rear drive modules with our EcoTrac disconnected all-wheel drive technology for GM's Chevy Equinox and GMC Terrain, both here in North America as well as equivalent models in China. Power transfer units for a Ford crossover vehicle in China. Rear axle and driveshafts for an MAN light vehicle commercial program in Brazil, expanded capacity and volumes for our EcoTrac all-wheel drive systems for crossover vehicles with Fiat Chrysler in China. And front-wheel-drive units for SUVs for Jaguar Land Rover in Europe.

For the full-year 2017, AAM is targeting adjusted EBITDA margins in the range of 15.5 % to 16% of sales. AAM is targeting adjusted free cash flow in the range of $175 million to $200 million for the full year of 2017, and AAM is targeting capital spending of 6.5% to 7% of sales for 2017. This increased level of capital spending in 2017 will support our new and incremental business backlog, as well as future replacement programs that you are aware of.

As far as future business goes, we have communicated AAM's new and incremental business backlog of $875 million covering the years of 2017 through 2019. And the cadence supporting that is $375 million in 2017, $250 million in 2018, and $250 million in 2019. And we continue to work on approximately $1 billion of quoted and emerging business opportunities that will run across our entire product portfolio and are geographically and customer diverse.

Before I turn things over to Chris, let me provide you a quick update on our proposed acquisition of MPG. Presently, we're currently on track to close the transaction in the first half of 2017 which we initially communicated back to you in the November period of time. As we look forward to satisfying the remaining closing conditions, we are busy planning for the integration process of these two companies and are committed to be ready on day one.

We have mobilized our integration management office, or IMO office, to support and coordinate both pre- and post-close activities. And the IMO office will report directly to a Steering Committee made up of myself, and AAM's President Mike Simonte, along with MPG's Chairman, George Thanopoulus and their President and CEO, Doug Grimm.

The goal of the IMO office is to drive synergy capture of at least $100 million to $120 million in identified annual savings. Prepare for the flawless anonymous launch of combined entities and operations so that we are seamless and anonymous to our customers. Lead change-management activities in the cultural integration of these two companies, and design and launch simple clear integration process for all of our stakeholders.

And clearly the IMO will benefit from AAM's rigorous program management discipline, along with MPG's extensive M&A and integration experience. And while we continue to operate as two separate companies until the transaction is closed, we're excited to begin the integration and synergy attainment process. At the same time, as we look towards what we expect to be a transformational year for AAM in 2017, we will be very laser focused on our commitment to provide our customers with world-class quality, operational excellence and technology leadership.

That concludes my comments for this morning. I'd like to thank each and every one of you for your attention today. Let me now turn the call over to our Vice President and Chief Financial Officer, Chris May. Chris?

Thank you, David, and morning to everyone. Today, I will cover the financial details of our fourth quarter and full-year 2016 results. So let's go ahead and get started with sales.

As David mentioned, AAM's sales in the fourth quarter of 2016 were $946.5 million compared to $958.4 million in the fourth quarter of 2015. AAM's non-GM sales for the quarter were flat at approximately $323 million.

For the full-year 2016, AAM's sales increased to $3.95 billion as compared to $3.9 billion in the full year of 2015. This sales increase was despite an approximately $40 million headwind related to lower metal market pass-throughs to our customers, and foreign currency translation. And a year-over-year reduction of approximately $50 million related to a North American commercial vehicle program that we exited in the second half of 2015.

Non-GM sales for the full year of 2015 were approximately $1.3 billion and the same amount in 2016. AAM's content per vehicle is measured as the dollar value of our product sales supporting our customers North American, light truck and SUV programs.

In the fourth quarter of 2016, AAM's content per vehicle was $1,634, compared to $1,645 in the fourth quarter of 2015. The reduction is primarily the result of annual price-downs from our customers.

On a sequential basis, AAM's content per vehicle in the fourth quarter of 2016 was up $22 as compared to the third quarter of 2016. The primary driver of the sequential increase in content per vehicle was favorable mix and seasonally higher four-wheel-drive penetration. In the fourth quarter of 2016, four-wheel-drive penetration reached approximately 74%, up from 71% in the third quarter.

Now, let's move on to profitability. In both the fourth quarter and full-year 2016, AAM continued to deliver strong, operating profit metrics.

Gross profit was $176.1 million or 18.6% of sales in the fourth quarter of 2016. This compares to $159.8 million or 16.7% in the fourth quarter of 2015. For the full year of 2016, AAM achieved record gross profit of $726.1 million or 18.4% of sales.

Adjusted EBITDA, or earnings before interest, taxes and depreciation and amortization, was $148.2 million in the fourth quarter of 2016 or 15.7% of sales. Adjusted EBITDA in the fourth quarter of 2016 excludes the impact of $22.2 million of restructuring and acquisition-related costs.

These costs reflect professional fees and other transaction expenses related to pre-merger integration activities as part of our pending acquisition of MPG. It also reflects restructuring charges and expenses related to a plant closure in India, and a global restructuring program that was initiated in the fourth quarter of 2016. This program is focused on creating a more streamlined organization, in addition to reducing our cost structure and preparing for upcoming acquisition integration activities.

Adjusted EBITDA in the fourth quarter of 2015 was $137.5 million or 14.3%. Adjusted EBITDA in the fourth quarter of 2015 excludes the impact of $0.8 million of debt refinancing and redemption costs. So for the full year of 2016, AAM's adjusted EBITDA increased nearly $50 million to $619.4 million.

Adjusted EBITDA margin for the full year of 2016 was 15.7% of sales compared to 14.6% in the full year of 2015. Adjusted EBITDA in the full year of 2016 excludes the impact of $26.2 million of restructuring and acquisition-related costs, and a $1 million non-recurring investment gain that we previously disclosed. AAM continues to capitalize on strong capacity utilization trends in North America, lower net manufacturing costs resulting from productivity improvements, operational excellence across our global facilities and a favorable environment as it relates to certain commodity costs, including the impact of foreign exchange.

Now, let me cover SG&A and interest. SG&A expense, including R&D, in the fourth quarter of 2016 was $84.4 million or 8.9% of sales. This compares to $72.7 million in the fourth quarter of 2015 or 7.6% of sales.

AAM's R&D spending in the fourth quarter of 2016 was $37.5 million compared to $31.3 million in the fourth quarter of 2015. The R&D trend in the quarter is consistent with the full year that I will discuss next.

For the full-year 2016, SG&A expense was $319.2 million or 8.1% of sales. This compares to $277.3 million for the full year of 2015 or 7.1% of sales. A significant driver of increased SG&A spending in 2016 compared to 2015 was R&D spending.

AAM's R&D spending for the full year of 2016 was approximately $140 million compared to approximately $114 million for the full year of 2015. This increase in R&D spending is primarily related to investments in advanced technologies such as our quantum light axles and drive units, next-generation EcoTrac disconnecting all-wheel drive systems, our EAM hybrid and fully electric drive lines and our developing Mechatronics and electronic control system technologies and capabilities. SG&A in 2016 also reflected wage and benefit inflation and higher incentive compensation accruals.

Net interest expense was $22.9 million in the fourth quarter of 2016 compared to $23.9 million in the fourth quarter of 2015. For the full year of 2016, net interest expense was $90.5 million as compared to $96.6 million in 2015. This decrease mainly reflects the favorable impacts of prepaying our term loan in December of 2015.

Before I address tax expense let me review other income. The two primary components of other income for AAM are: foreign exchange gains and losses; and earnings from Hefei joint venture in China.

Other income was $4.8 million in the fourth quarter of 2016 compared to $1.1 million in the fourth quarter of 2015. The increase in the fourth quarter of 2016 mainly relates to the net favorable impact of foreign exchange remeasurements gains primarily related to the Mexican peso. For the full year of 2016, other income was $8.8 million compared to $12 million for the full year of 2015.

In both 2016 and 2015, AAM benefited from the net favorable impact of foreign exchange gains, again, primarily related to the remeasurement of the Mexican peso denominated assets and liabilities. As we discussed previously, these quarterly financial exchange remeasurements can increase or decrease other income every period based on the quarter-end exchange rate and we are subject to the uncertainty of currency movements each quarter.

With that, I'm going to move onto taxes. AAM's income tax expense in the fourth quarter of 2016 was $4.5 million. AAM's income tax expense for the full year of 2016 was $58.3 million compared to $37.1 million in 2015.

For the full year of 2016, AAM's effective tax rate was 19.5% compared to approximately 14% for the full year of 2015. As we had anticipated and communicated in previous earnings calls, we ended up at the high end of our range of 15% to 20% for the full year of 2016. Also keep in mind when comparing 2016 to 2015, that in 2015 we had a favorable adjustment to income tax expense of $11.5 million related to the resolution of our transfer price audits in Mexico.

Taking all of these sales and cost drivers into account, GAAP net income was $46.9 million or $0.59 per share in the fourth quarter of 2016 compared to $62.9 million or $0.81 per share in the fourth quarter of 2015. For the full year of 2016, AAM's GAAP net income was $240.7 million or $3.06 per share compared to $235.6 million or $3.02 per share for the full year of 2015.

GAAP net income and earnings per share include the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs and non-reocurring items discussed on this call and noted in our earnings press release. EPS, adjusted to exclude these items, was $0.78 per share for the fourth quarter of 2016 and $3.30 for the full year of 2016.

Now, let me address cash flow and the balance sheet. AAM defines free cash flow to be net cash provided by operating activities, less capital expenditures net of proceeds from the sale of property, plant and equipment and government grants. AAM defines adjusted free cash flow to be free cash flow excluding the impact of cash payments for restructuring and acquisition-related costs.

Net cash provided by operating activities for the full year of 2016 was $407.6 million. Capital expenditures net of proceeds from the sale of property, plant and equipment and government grants for the full year of 2016 was $218.5 million, which represents 5.5% of sales. Cash payments for restructuring and acquisition-related activity for the full year of 2016 were $9.5 million.

Reflecting the impact of this activity, AAM generated adjusted free cash flow of $198.6 million for the full year of 2016 compared to $189.5 million for the full year of 2015. As previously discussed, adjusted free cash flow in 2016 includes the impact of approximately $30 million of payments related to Mexican transfer pricing issues, and a $20 million customer collection related to an upcoming capacity increase requirement.

All in all, it was another very strong cash flow generating year for AAM. Over the last three years, AAM has generated over $0.5 billion in free cash flow. AAM is certainly hitting its stride on the free cash flow delivery, and is looking forward to continuing that trend in 2017.

Now let me address some key credit metrics and our year-end liquidity position. AAM's net leverage ratio, or the ratio of net-debt-to-adjusted EBITDA, was approximately 1.5 times at 2016 year end.

Since the end of 2012, AAM has averaged an annual net leverage reduction over half a turn and has reduced net leverage by 2.5 times during this total this four-year period. AAM's interest coverage, or the ratio of adjusted EBIT to net interest, was 4.6 times at 2016 year end.

AAM ended 2016 with total available liquidity of over $1 billion, consisting of available cash and borrowing capacity on AAM's global credit facilities. In 2016, we continued to strengthen the balance sheet and provide the Company with the flexibility to consider significant strategic actions. We are well positioned financially heading into 2017, and towards our transformational acquisition of MPG.

Before we move onto the Q&A, let me close my comments with a quick note on our 2017 standalone guidance. The key guidance targets for the full-year 2017 remained unchanged from our January disclosures, and they are as follows.

We're targeting full-year sales in the range of $4.1 billion to $4.2 billion. We are targeting EBITDA margin the range of 15.5% to 16% of sales. We're targeting adjusted free cash flow in the range of $175 million to $200 million, and lastly we estimate capital spending of approximately 6.5% to 7% of sales.

At the appropriate time after the closing of the MPG acquisition, we expect to provide 2017 targets for the post-close combined company. So stay tuned.

I will close my prepared remarks today by simply stating that 2017 is sure to be an exciting year for AAM. With continued sales and earnings growth that will drive additional value to our shareholders, it's certainly a great time to be part of the AAM Team.

Thank you for your time and participation on the call today. I'm going to stop here and turn the call back over to Jason so we can start the Q&A. Jason?

Thank you, Chris and David. 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)

Rod Lache, Deutsche Bank.

Good morning, everybody. I had a couple things. I was hoping maybe you could walk us through this gross profit increase on lower revenue.

What some of the drivers were, whether we should extrapolate from this level of SG&A? And I don't know if you've said this before, but the $20 million receipt which you pointed out in Detroit a couple weeks ago for this capacity increase, what product is that for?

Okay. Rob, so let's talk with your gross profit walk first in terms of a sequential 2015 to 2016. It's certainly correct, we had GP of $160 million last year in 2015, ended up $176 million here in Q4 of 2016. Volume off just a slight bit, so a slight decline for volume and mix.

We certainly have seen some benefits as it relates to our material and freight. In particular, freight related with lower fuel surcharges, but also we had lower consumption of freight through some productivity initiatives. So we saw some pure productivity as a relates to that element of our cost structure.

We did have some benefits as it related to FX on a year-over-year basis, primarily related to the peso. Roughly call it 40 to 60 basis point improvement in terms of that measurement, and quite frankly year over year we had some good productivity in our facilities. I would call those the major moves of our gross profit.

Rob, this is David. With respect to the SG&A expense, obviously we trended up a little bit year over year, but we're heavily focused on our gen-two EcoTrac disconnected all-wheel-drive systems. We're also focused on our quantum execution as it relates to revolutionary design to some of our beam and independent axle applications. So it's a point time as to where we are, but a continued focus on technology leadership.

And then with respect to your question about the $20 million on CapEx payment for the capacity program. It's on a crossover vehicle program that is a global program in nature. I'm not at liberty to really speak to the customer at hand itself, but you're probably smart enough to figure that out.

I think we -- thanks, I think you gave us enough on that. Lastly, I was hoping can maybe talk a little bit about any thoughts on flexibility in the event of border adjustments or changes in tax policy that could affect your customer's footprint for pickup production? Any thoughts that you might have on how axle may be able to respond, whether you think that would require some kind of response for American Axle?

Let me first say that like many other suppliers right now, we are in the wait-and-see mode at this point in time. The Trump administration needs to clearly articulate and communicate their policies. The OEMs need to digest that, and clearly they've had some discussions with them and they've got to determine their plant loading strategies.

Once they determine their plant loading strategies, then we clearly can determine our plant loading strategies from there. Our desire is to try to manufacture in close proximity to our customer's use locations. However, as you know, we're a strong US manufacturer in addition to strong in Mexico and other continents around the world.

We have a flexible manufacturing footprint that we could relocate some of the work if need be based on the policies and procedures that come out in the future. But at this time, we're not making any adjustments right now until such time as we understand the policies themselves, and we understand how it's going to impact the decisions of the OEMs.

But we do have a manufacturing footprint here in the US that is very strong. In our Three Rivers facility, as well as capability here in Detroit. And with MPG, we picked up 30 US facilities, so we will be able to have flexibility in our workforce going forward and our locations.

Great. Thank you.

Thanks, Rob.

Thanks, Rob.

Brian Johnson, Barclays.

Just want to follow up on that last thing around the BAB, recognizing it's preliminary. But could you give us a sense of where the inputs to your Salou Guanajuato facilities are coming from in terms of steel, cast and forged parts? And a couple things, one, I'm just not clear, is it raw SBQ or is it forged and cast parts coming in?

If it's forged and cast parts, are those from Mexico or from the US? And I guess three, as you think through the integration, is there an opportunity to export more value into that Mexican facility by using the MPG/US footprint to send components for final assembly and/or machining down to Mexico?

Brian, excellent point. And as I just said to Rod, is clearly, we have a very diverse manufacturing footprint, especially here in North America with both US and Mexican operations. We are exporting some product from the US today, forging as well as castings as far as being sent down to Mexico. At the same time, we are manufacturing some forgings ourselves in Mexico, but predominantly most of the steel is being consumed out of the US to support that.

And then there is some castings that are produced in the US that's sent down, but also other castings that are made in Mexico. So this is where we will demonstrate the flexibility of our global footprint as to how we load our plants going forward based on the OEM's decisions and the Trump administration policy. Chris, any other comments you might want to make?

And another point to that, Brian, is of course as we get into a lot of these details and I'm sure others will have questions on the call. But at the end of the day when it comes to these rules, details will matter.

You were asking about the content in terms of our production in Mexico, and I would tell you a high component or high value of our production in Mexico is actually sourced on incoming parts from the US in excess of 50% of our content. Right to David's point, we will have the flexibility and we'll have to follow through the details on that.

Yes, that was going to be my follow-on question. I guess a second question, if it were to come some of the come back north to Three Rivers or elsewhere, would it just be one for one machines moving north like they moved south in the past? Or would there need to be some incremental CapEx for either facilities or for a higher level of automation?

In most cases, we would relocate appropriate equipment. But we would also evaluate what we'd need to do through our productivity and automation standpoint as well to maintain our cost competitiveness in the marketplace. So, again, it will be determined on the individual program and the customer themselves and their desires as well as ours, but we've got the flexibility to move our equipment as well as we will focus on the productivity and automation and enhancement of the product going forward.

Okay, thank you.

Thanks, Brian.

Thanks, Brian.

Joe Spak, RBC Capital Markets.

Thanks, good morning. Chris, was wondering if you could walk through some of the puts and takes to the margin guidance for next year? Specifically, if the peso stayed at current levels, how much of a tailwind do you think that would be?

And then similarly, you had pointed to higher, but as David went through, a lot of launches. So is volume actually a margin drag for you given the mix of that volume in 2017?

I will answer your questions in reverse. The first answer would be no, it is not a margin drag. So if we think about where we ended this year, about $620 million, we'll talk on EBITDA basis.

We will get a pickup of some contribution margin and EBITDA margin on that new business. Of course, we will have some takes against that with our continued annual price downs, I think roughly 1% of sales as a rule of thumb.

And then you asked about the peso at current levels, well that would be great to enjoy it at the current levels. We are on a rolling hedge program, so we typically would not reach the spot rate on a weakening basis of the peso.

But that said, we will have some tailwind associated with the peso, I think 20 to 40 basis points over the course of the year based on our hedging programs. And then of course, we had year-over-year productivity. Again some of the other elements I mentioned --.

Great, that's helpful. And then, just as you've been able to spend more time with MPG since the integration teams are up and running, is there anything more you can give in terms of confidence around the synergies? Maybe any surprises that came up or opportunities?

It sounded like one of the things you were thinking about is maybe some opportunities to help deal with some of the tax law changes. But andy more color you can provide there would be helpful.

Joe, this is David. We're highly confident that we can deliver on a synergistic value that we've communicated that $100 million to $120 million. I've had the opportunity to personally travel and view a lot of their facilities globally around the world. I've been very favorably impressed with what I've seen.

There are opportunities for best practices to be shared between our organization and their organization that will drive further productivity, and maybe synergistic opportunities. But I'm very pleased with what I've seen.

The teams are very focused from an operational standpoint, as well as from the corporate standpoint of putting together the optimized organization, looking at the appropriate opportunities when it comes to the procurement side, direct, indirect and insourcing. But we are very confident we can deliver on the synergistic values we've communicated.

And, Joe, you had also asked about taxes. And I think we've talked about previously that we saw some cash tax synergies with the combined entity, and of course that's at current tax laws. We would evaluate whatever comes our way in terms of those changes, but big picture if a lower rate comes in that's even better.

Thanks a lot, guys.

Thanks, Joe.

Ryan Brinkman, JPMorgan.

Good morning. This is Samek on behalf of Ryan Brinkman. I did first want to start on the -- in South America, and if you could give us an update on the production volumes on the platforms you support there, I believe GM and Volkswagen.

Are you seeing an improvement in the outlook for production volumes that we're hearing with the market starting to improve or show some signs of a recovery? So what are you probably seeing there on the ground?

As far as our business, we think that we have reached the bottom in regards to Brazil. We are actually seeing some favorable schedules coming back. I wouldn't say anything that's material in nature, so don't read too much into it.

But at the same, time our team has done an outstanding job restructuring and resizing and recovering that business in a very difficult situation as were all faced with in South America right now. But we have no other news really to report, other than the fact that our teams operating as best they can in a very difficult environment. But we see schedules starting to get a little bit stronger than what they historically have been here lately.

Okay. And as a follow up more on the research and development expenses you had. They seemed -- big pick up from 2015 to 2016. How should we think about 2017?

I think in 2016 it was like 3.5% of sales. How should we think about 2017?

And more longer term, as you [help four years] we'll see some of the electrification of vehicles with your advanced technologies. How should we think about longer term where your research and development expenses should be?

I think you should look at 2017 as being similar to 2016. Clearly as I just mentioned to you, we are going through a significant period right now as it relates to preparing for new business launches to support replacement as well as new business. We are also working on some extensive advanced development activity on our gen-two EcoTrac disconnecting all-wheel drive, our quantum work and a number of other technology initiatives that we have going on.

Again, we're committed to be a technology leader in the segments that we serve, and we are putting our money behind our mouth and we will deliver on favorable results that will lead to new business and profitable business. But to answer your question, it should be similar to year over year.

Okay, got it. Great. Thank you.

John Murphy, Bank of America Merrill Lynch.

Good morning, guys. Just a first question on the cadence of GM's truck production through the course of the year. They've highlighted that are going to take some downtime for retooling for the next truck in the second half of the year. Just curious how that is going to impact the flow of your earnings through the course of the year, and what cost you might incur for that process?

In terms of production, we see it very seasonal to where we saw 2016. We see the schedules continue to remain strong and healthy, and I would not spike out any particular product launch costs associated with the transition. We will have a little bit, but we have some of that going on every year.

John, this is Mike. The other thing that's going to happen in the second half of this year, as we certainly believe and hope it will, will be a merged company at that point in time. And this truck program, while still vital and important to our Company, you won't notice the movement, the quarter-by-quarter movements quite as much anymore.

Because we will have a whole host of new powertrain and transmission technology products from MPG side launching and affecting our earnings as well. So our quarterly cadence will start tracking the market much more closely, particularly here in North America

Okay. But specifically you guys are not seeing this volume downtime that they're talking about in the second half of the year in the schedules you're seeing?

There is downtime reflected in the schedules, John, but remember that downtime will be localized at particular facilities. Other facilities will be able to pick up capacity, work weekends, run some overtime.

There's a little bit of additional capacity put it in GM's planning for this program, as you know. So I don't think you'll see the quarter-by-quarter cadence be all that significant.

Okay, that's incredibly helpful.

John, again, we forecasted the K2XX volume is about 1.25 million units this year. So to Mike's point, is we may see some ups and downs based on the different assembly plant, but overall were still seeing a very strong cadence for the K2XX program.

That's helpful. And a second question on Mexico. When you guys locate capacity or have located capacity down ion Salou and Guanajuato, when you make those decisions, what is the driving force behind that decision? Is it purely labor cost or is there co-location with customer facilities? It seems like there's a lot of factors that go on here, and if you could just generally say, if you had to move those plants back north on a like-for-like basis, would it really just be labor costs that would be higher?

Again, John, the predominant thing that helps us make our decision is we want to try to produce our product in the country that the product is consumed in and used in. Clearly we try to do that in concert with our customers there.

They prefer a greater level of localization as well because it mitigates risk in the supply chain. So that's a key element in regards to our sourcing decisions. Clearly we have to look at productivity and throughput and overall cost, but we can balance that no matter where we operate from a geographic standpoint.

So clearly, there's a difference between the Mexican labor rate and the US labor rate. So if we were able to or required to bring certain things back to the US, then we will look at what we need to from automation and productivity standpoint and balance things accordingly.

And also we look at it from a full-cost basis, John. So things like logistics and energy costs also come into play, and are not always the lowest cost in Mexico. So we have to balance those out.

So the key driving force is localizing with your customer as opposed to cost for you?

Yes. Absolutely.

Okay, thank you very much.

Thanks, John.

Brett Hoselton, KeyBanc.

Good morning, gentlemen. I wanted to ask you about your backlog, and two things here. One, you've talked about margins being a little bit lower on your replacement business versus the K2XX business. Can you possibly give us some indication of what the order of magnitude is on the margin front?

Brett, this is David. What we've communicated in the past is that contribution margins on our full-size truck program operate around that 30% level. And we said as we brought new business on, passenger car, crossover vehicle or other type of work, it would probably be in that 20%, 25% range.

But as we also communicated in the last call and at the Deutsche conference, we're trending at the higher end of that range. So therefore the material impact is not that great from a margin standpoint. And then we are working on a number of cost reduction initiatives within the organization in order to address any gap that might exist. But we are trending at the high end of the range that we communicated.

Thank you, David. And as we look at beyond 2019, I know we are early. You don't necessarily have your business necessarily booked up beyond that timeframe.

But I know that you are also probably looking at some businesses at this point in time, and have a feel for how much you might likely win. As we think about the $375 million, $250 million, $250 million, is that a reasonable range or run rate to expect out in that 2020 timeframe and beyond, or is that likely to go up or down? Any general sense you have at this point?

We are quoting on over $1 billion in new and incremental opportunity. Our hit rate is in that 25% to 30% area.

Most of what we are quoting out right now would favorably impact 2019, 2020, 2021 period time, a little bit maybe in 2018 but more 2019 through 2021. I would actually expect the outer numbers to grow over time. And obviously with the acquisition of MPG going forward, we will have to factor that into our backlog and factor that into our quoting opportunities. But overall, I'd expect things to grow in the future.

Okay. Thank you very much, gentlemen.

Thanks, Brett.

Itay Michaeli, Citi.

Great, thanks. Good morning, everyone.

Just a couple questions on the 2017 outlook. Hoping you can frame the impact of commodity costs on the P&L, as well as any cost savings on from some of the restructuring you've done in the fourth quarter?

As it relates to the commodity, as I mentioned earlier, about probably 20 to 40 basis points of tailwind improvement as it relates to the FX side of the house. Most of that driven by the peso, but we also have offsets in other currencies that work against that a little bit.

I would frame that in terms from an FX standpoint, I don't see a lot more tailwind as it relates to fuel surcharges and freight related. So we should be relatively flat year over year in terms of that input.

Great. And the cost savings from the restructuring?

We began that program in earnest in the fourth quarter of 2016. And you saw, for example, our SG&A was a little bit elevated in 2016. I would expect that to start to trim down to moderate into that mid 7% range versus where it's run rate was in 2016, and that's probably going to be one of the key drivers to that.

And we should see some enhance productivity through our plants in terms of some of its other indirect inputs as part of that process. And that's all been included in our guidance that we've shared with you.

That's very couple, Chris. And two quick follow ups. First, do you have the year-end pension number in terms of the underfunding for the Company? As well as anything to think about in terms of the cadence of your incoming backlog in 2017?

Yes, as relates to the pension, we're about $100 million liability, and you'll see all the details today, we will file the K at the end of the business day. But it's about $100 million, it increased slightly due to lower discount rate.

Okay, great. And just on the backlog? Anything to think about in terms of the cadence of the new business coming this year or is it fairly balanced?

Fairly balanced, relatively flat.

Great, that's very helpful. Thanks so much, guys.

Okay, thank you.

Itay, thank you.

Thank you, Itay, and we thank all of you who have participated 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.