American Axle & Manufacturing Holdings Inc (AXL) 2017 Q1 法說會逐字稿

Good morning.

My name is Lisa, and I will be your conference operator today.

At this time, I'd like to welcome everyone to the Q1 quarterly earnings conference call.

(Operator Instructions) At this time, I'd like to turn the conference over to Mr. Jason Parsons, the Director of Investor Relations.

Sir, you may begin.

Thank you, Lisa, and good morning, everyone.

I would like to welcome everyone who's joining us on AAM's First Quarter of 2017 Earnings Call.

Earlier this morning, we released our first quarter of 2017 earnings announcement.

You can access this announcement on the Investor page of our website, www.aam.com, or through the PR Newswire services.

To listen to a replay of this call, you can dial 1 (855) 859-2056, reservation #87956022.

This replay will be available beginning at 1:00 p.m.

today through 11:59 p.m.

Eastern Time, May 12.

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 to refer to our filings with the Securities and Exchange Commission.

Also during the call, we'll 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.

Over the next few months, we will participate in the following conferences: The 2017 Keybanc Capital Markets Industrial Automotive and Transportation Conference in Boston, on May 31; The Susquehanna Financial Group's 2017 Auto Conference in New York, on June 5; the Barclays 2017 High-yield and Syndicated Loan Conference in Colorado Springs, on June 8; and the Citi 2017 Industrials Conference in Boston, on June 13.

In addition, we are always happy to host investors at any of our facilities.

Please feel free to contact me to schedule a visit.

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

Thank you, Jason, and good morning everyone.

Thank you for joining us today.

We have a lot of exciting news and exciting topics to discuss with you today, so let's get right to it.

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 provide some highlights of AAM's record first quarter 2017 financial performance.

I will also provide an update on our recent strategic activities, including the completion of 2 acquisitions and we'll discuss AAM's updated 2017 financial outlook, which contemplates the estimated financial performance of the MPG acquisition, from the closing date of April 6, 2017, through the end of the year.

After Chris covers the details of our financial results, we'll open up the call for any question that you may have.

Let me briefly discuss some of our first quarter financial highlights.

First, AAM's first quarter 2017 sales increased $80 million to $1.05 billion, which marks a quarterly sales record for AAM.

This compares to approximately $970 million in the first quarter of 2016.

We also achieved record non-GM sales of $347.1 million in the first quarter of 2017 as compared to $323.2 million in the first quarter of 2016.

While this was a quarterly record for us, non-GM sales will get much larger for AAM the second quarter as we begin to see the impact of our acquisition of MPG.

Second, AAM delivered record quarterly gross profit and EBITDA performance in the first quarter of 2017.

Gross profit increased by nearly $37 million to $210.7 million or an impressive 20.1% of sales in the first quarter of 2017.

This compares to a gross profit of $174 million or 18% of sales in the first quarter of 2016, a 200-plus basis point increase year-over-year.

Adjusted EBITDA increased nearly $34 million to $183.6 million in the first quarter of 2017.

EBITDA margin was a quarterly record of 17.5% of sales compared to 15.5% of sales in the first quarter of 2016, another 200 basis point increase.

And third, AAM's adjusted EPS in the first quarter of 2017 was $1.03 per share.

This compares to $0.78 per share in the first quarter of 2016, a 32% increase.

And finally, AAM delivered strong free cash flow generation.

In the first quarter of 2017, AAM generated $60.5 million of adjusted free cash flow compared to a use of free cash flow of $23.8 million in the first quarter of 2016.

AAM's profitability in the first quarter of 2017 benefited once again from continued robust production volume and mix as it relates to North American full-size trucks and SUVs and a strong operational performance from our manufacturing teams around the globe.

AAM's record financial performance in the first quarter of 2017 sets the stage for the next chapter in our future.

Chris will cover more details of our first quarter 2017 financial results later in the call, so let me now shift gears and cover some highlights of some of our recent strategic activities.

First, on March 1 we completed the acquisition of the Mexican operations of U.S. Manufacturing Corporation, or USM.

Prior to the acquisition, AAM made up nearly all of the sales coming from this facility.

The acquisition of this operation which sits adjacent to our Guanajuato manufacturing complex, allows us to further vertically integrate our axle tube and shaft manufacturing capabilities, streamline operations and capture the current downstream value along with potential synergies.

It also protects continuity of supply of critical components and provides us with key lightweighting technology as we move forward.

Secondly, on April 6, with the strong support of our shareholders, we closed the acquisition of the Metaldyne Performance Group, or MPG.

As we have discussed with you many times since November, this is a transformational acquisition for us.

And it combines 2 complementary businesses into a global premier Tier 1 automotive supplier; it accelerates significant diversification for AAM on a customer base, product portfolio, global footprint, vehicle segment, and end-market basis; it brings together product process and systems technology and engineering capabilities focused on lightweighting, fuel efficiency, vehicle safety and driving performance; and it delivers powerful industrial logic and significant value capture and provides AAM with enhanced size, scale and a financial profile.

As we announced at closing, we will run the business under 4 distinct business units.

Our driveline business unit, which consist primarily of AAM's current driveline operations, will largely be unaffected by the integration activities.

Our metalforming business unit will combine 2 business units from MPG into AAM's current metal form products division to create a high-performing global metal forging and forming operation.

Our powertrain business unit will combine 4 business units of MPG into one operating business unit to service our many OEM and Tier 1 supplier customers in the areas of highly engineered engine and transmission components.

And our casting business unit will represent MPG's legacy Grede business and will also largely be unaffected by the acquisition.

Now that we are a combined company, we are laser-focused on effectively managing the integration plan, leading change management and culture integration activities, driving synergy attaintment, while also protecting customer launches and future programs.

As we discussed in November, when we announced the acquisition, we are targeting $100 million to $120 million of annual synergies.

We expect to gain $45 million to $50 million in the reduction of overhead costs, including optimizing our operation structure and eliminating redundant public company costs.

These activities have already begun and we are able to take several actions on day 1 to get off to a great start on these savings.

We expect to gain another $45 million to $50 million related to purchasing savings.

This includes leveraging our largest scale to take advantage of both direct and indirect savings opportunities, while also implementing in-sourcing and vertical integration initiatives.

And lastly, we expect to achieve $10 million to $20 million in other cost savings such as manufacturing best practices, plant and product loading initiatives as well as capacity optimization.

We were confident in hitting our cost-reduction synergy targets when we announced the deal in November and we are even more confident hitting these targets as it stands today.

Remember, that we expect to hit a 70% run rate of these cost reductions by the end of the first full year -- let's call it the end of the first quarter 2018, and then we expect to be at 100% run rate by the end of the second full year.

Furthermore, we continue to expect the cost of obtaining these synergies to be about 1 years’ worth of synergies.

There are also some cash-related opportunities that will not impact the bottom line but will definitely help us to generate additional free cash flow and reduce our debt leverage.

These include the potential for cash tax savings, future capital expenditure reductions and working capital improvement opportunities.

We look forward to providing you an update on our progress as we integrate our businesses and implement our synergy attainment plan.

And as a result of our acquisition of MPG, we have updated our 2017 financial guidance to reflect the expected financial performance of the acquired entity from April 6, 2017 to December 31, 2017.

AAM is now targeted sales of approximately $6.1 billion in 2017.

This represents a full year pro forma estimate of $6.8 billion for the combined companies, which includes approximately $700 million of pre-acquisition 2017 MPG sales.

This sales projection is based on the assumed launch of AAM's new and incremental business backlog and the assumption that the U.S. [SAAR] is approximately 17.5 million units for the full year of 2017.

AAM is targeting an adjusted EBITDA margin in the range of 17% to 18% of sales in 2017.

We're targeting adjusted free cash flow of approximately 5% of sales in 2017, and AAM is targeting capital spending of 8% of sales in 2017 to support our combined new and incremental business backlog as well as upcoming replacement business launches.

Let me provide an update on our new business wins and pro forma backlog.

First, on a standalone basis, AAM continue to register significant new business wins and awards, including a large driveshaft program here in North America and a rear-axle program for a high-performance passenger car in Europe.

We have now fully covered the remaining estimated sales impact from GM's next-generation full-size truck sourcing decision that we have previously disclosed to you, and we have done so in less than 2 years since we first announced this back in July of 2015.

Clearly, this is an outstanding job by the AAM team to overcome the sourcing decision by GM earlier.

With our new business wins, along with the impact of the acquisition of MPG, we now believe this issue is truly behind us.

However, we will continue to focus heavily on organic growth and will not slow down just because this business has been replaced.

In addition, we were honored to be recognized in March as one of the Supplier of The Year award recipients from General Motors.

While a key objective of our acquisition of MGP was to accelerate our business diversification, including our customer base, we continue to greatly value our strategic relationship and partnership with our largest customer, and look forward to continuing to support them across the globe and throughout their product portfolio, including recently launching our new EcoTrac disconnecting all-wheel drive system for their newly designed Chevy Equinox and GMC Terrain crossovers.

Now turning to our new business backlog.

AAM estimates our updated pro forma gross new and incremental business backlog to be approximately $1.5 billion covering the time period of 2017 through 2019.

We expect the cadence of our gross new business backlog to be $500 million in 2017, $450 million in 2018, and $550 million in 2019.

Before I hand it over to Chris, let me wrap things up by giving you a little bit more color about how I see AAM moving toward.

First, AAM is a transformed company.

Our core competencies and competitive advantages are now enhanced and much stronger.

We will continue to differentiate ourselves by offering a compelling value proposition to our customers and we will leverage our fundamental core of world-class quality and warranty, operational excellence and technology leadership.

We expect to be an industry leader in all the markets that we serve and we will stay on the forefront of innovation to support both current and future advanced propulsion and vehicle mobility requirements.

Our job is ultimately to deliver efficient, safe and smart mobility solutions and we'll do this -- just that.

We'll continue to demonstrate a disciplined and balanced approach to capital allocation; clearly organic growth and debt management become our top priorities.

And furthermore, our strong new business backlog and margin performance, combined with an outlook for a healthy production environment, will allow us to decrease our net debt quickly and meaningfully down to an estimated 2x adjusted EBITDA by the end of 2019.

So in closing, I feel extremely confident about AAM's future.

Our business is running very, very well today and will only get better.

As a team, we just recently delivered on record sales and significant sales growth and diversification, including record quarterly sales in the first quarter of 2017.

Record operational profitability, including record gross profit and adjusted EBITDA performance in the first quarter of 2017.

We delivered $0.5 billion of free cash flow generation over the last 3 periods and our new business wins support a $1.5 billion gross new and incremental business backlog, and we've developed and designed innovative products that are clearly right in the sweet spot of meeting the customer and the market demands and requirements; and we've expanded our global manufacturing engineering capability to support our customers around the world.

As we implement our integration plans to achieve our synergy targets, we look forward to driving profitable growth, strong free cash flow generation and long-term shareholder value as a larger, more diverse company.

It's clearly an exciting and busy time at AAM, and we look forward to delivering on our commitments to our various stakeholders.

This concludes my prepared comments for this morning.

I thank everyone for your attention today and your interest in AAM.

Now I'll turn it over to Chris.

Chris?

Thank you, David, and good morning, everyone.

Today, I will cover the financial details of our first quarter of 2017 results with you.

Let's go ahead and get started with sales.

On a year-over-year basis, sales grew over 8% and increased $80 million to $1.05 billion in the first quarter of 2017 compared to $969.2 million in the first quarter of 2016.

This increase primarily reflects strong production volumes for the North America (sic) [American] light truck and SUV programs and the global luxury passenger cars that we currently support.

AAM's content per vehicle, which is measured as a dollar value of product sales supporting our customers North American light truck and SUV programs, was $1,630 in the first quarter of 2017.

This compares to the $1,611 in the first quarter of 2016.

So now let's move on to profitability.

AAM continued to deliver strong operating profit metrics.

Gross profit was $210.7 million or 20.1% of sales in the first quarter of 2017.

This compares to $174 million or 18% in the first quarter of 2016.

Adjusted EBITDA, which we define as earnings before interest expense, income taxes, depreciation and amortization excluding the impact of restructuring and acquisition-related costs, was $183.6 million in the first quarter of 2017, or 17.5% of sales.

This compares to $149.8 million in the first quarter of 2016 or 15.5% of sales.

In the first quarter of 2017, we incurred $16 million of restructuring and acquisition-related costs.

These costs related to our 2 acquisitions as well as ongoing restructuring activities that we discussed on our last earnings call.

AAM continues to take advantage of strong capacity utilization on our North American light truck and SUV production as well as favorable sales mix.

But our performance was not only favorable in North America; we improved our profit margins across the globe, in particular, in our Asia operations.

This quarter's financial performance was a total team effort driven by operational excellence worldwide.

On the cost side, we benefited from lower net manufacturing costs resulting from productivity improvements and favorable foreign exchange on a year-over-year basis, primarily related to the Mexican peso.

Now let me cover SG&A and interest.

SG&A expense, including R&D in the first quarter of 2017 was $82.8 million or 7.9% of sales.

This compares to $75.6 million or 7.8% of sales in the first quarter 2016.

R&D spending for the first quarter of 2017 was $41 million compared to $30.9 million in the first quarter of 2016.

This increase in R&D was partially offset by the initial savings impact from the restructuring actions that we began in the fourth quarter of 2016.

We're off to a great start in that regard.

Net interest expense in the first quarter of 2017 was $24.9 million as compared to $23 million in the first quarter of 2016.

The increase in interest expense is related to the fact that we closed on our senior unsecured notes used to fund the MPG acquisition on March 23, and recorded the related interest expense of $1.5 million from then until March 31 in the first quarter of 2017.

So in essence, we carried extra interest expense while we held this debt until the final close date of the MPG acquisition in early April.

Now onto taxes.

Income tax expense was $7.5 million in the first quarter of 2017 as compared to $15.3 million in the first quarter of 2016.

The effective income tax rate was 8.7% in the first quarter of 2017 as compared to 20% in the first quarter of 2016.

This year-over-year decrease primarily relates to the technical tax accounting treatment of the additional debt we incurred in the last part of March in preparation to fund the MPG acquisition.

Let me explain this a little further.

Since we closed on the senior notes prior to March 31, 2017, the accounting rules require us to factor in the estimated full year impact on interest expense and related tax benefits to determine the effective U.S. tax rate for the full year, which is then used to record our quarterly U.S. tax expense.

However, since the acquisition of MPG did not occur until April 6, after March 31, the accounting rules did not allow us to factor in the estimated U.S. income expected to be generated by the newly acquired MPG U.S. entities.

Therefore, you have a timing nuance that resulted in a reduction of income tax expense in the first quarter of 2017 of approximately $8.5 million.

Without this timing impact, our effective tax rate would have been approximately 18.5%.

When it's all said and done, we expect a full year GAAP effective income tax rate for AAM, including the MPG acquisition impact and our associated restructuring and acquisition charges, to be approximately 15% for 2017.

Over time, we would expect this to increase to 25% as we reduce the amount of restructuring and acquisition-related expenses.

We would also expect our cash tax rate to be approximately 20%.

Taking all these sales and cost drivers into account, GAAP net income was $78.4 million or $0.99 per share in the first quarter of 2017 compared to $61.1 million or $0.78 per share in the first quarter of 2016.

Adjusted earnings per share, which excludes the impact of restructuring and acquisition-related costs, net of tax as well as the nonrecurring items we mentioned above related to additional interest expense for the debt drawdown period prior to the acquisition funding requirements and a discreet first quarter tax impact of the additional interest expense timing, was $1.03 per share in the first quarter 2017.

So now let's move on to cash flow and the balance sheet.

We define free cash flow to be net cash provided by operating activities less capital expenditures, net of proceeds received from the sale of property, plant and equipment.

AAM define adjusted free cash flow to be free cash flow excluding the impact of cash payments for restructuring and acquisition-related costs and settlements of pre-existing accounts payable balances with acquired entities.

Net cash generated by operating activities in the first quarter of 2017 was $62.3 million.

Capital spending, net of proceeds from the sale of property, plant and equipment was $34.1 million in the first quarter of 2017.

Cash payments for restructuring and acquisition-related costs for the first quarter of 2017 was $9.5 million.

The cash payment for the settlement of pre-existing accounts payable balances with acquired entities was $22.8 million.

This relates to a purchase price accounting adjustment that required AAM to treat a portion of the price we paid for USM Mexico operations to be classified as a reduction of our cash flow from operations, resulting from the settlement of pre-existing balances we had with the U.S. and Mexico entity immediately before the acquisition.

Reflecting these activities, AAM's adjusted free cash flow in the first quarter of 2017 was $60.5 million compared to a use of $23.8 million in the first quarter of 2016.

Improvements in the first quarter of 2017 relate to a higher adjusted EBITDA, lower capital expenditures and a one-time $26 million tax settlement payment made to the Mexican government in the first quarter of last year 2016 that did not recur in the first quarter of 2017.

Let me review the updated financial targets for 2017 that incorporate the expected financial results from the acquired MPG entity, starting on April 6, 2017, through year-end December 31, 2013 (sic) [2017].

AAM is now targeting sales of approximately $6.1 billion in 2017.

And remember, this excludes $0.7 billion of pre-acquisition MPG 2017 sales from January 1 through April 5. There is a helpful walk down of our 2017 sales in our press release.

We have also posted a Q1 2017 highlight fact sheet on our website with a chart that shows the significant changes of the combined pro forma sales from 2016 to the expected consolidated sales of AAM in 2017 as well as other highlights from the quarter.

AAM is targeting an adjusted EBITDA margin in the range of 17% to 18% of sales in 2017.

This strong margin target is aligned with our previous post-MPG acquisition estimates and reflects expected continued strong operating performance and synergy attainment.

AAM is targeting adjusted free cash flow of approximately 5% of sales in 2017, including the impact of the CapEx targets that David mentioned earlier.

We also expect to incur significant costs and payments related to restructuring and acquisition-related activities as well as significant purchase price adjustment and related effects on income statement during 2017.

The impact of these have been excluded from our adjusted EBITDA and adjusted free cash flow targets.

Before we open it up for Q&A, let me quickly summarize some points from the quarter.

First, AAM achieved impressive financial results for the first quarter of 2017, breaking several quarterly records along the way.

Second, we have provided full year 2017 targets highlighted by revenue growth, increasing adjusted EBITDA margins and strong adjusted free cash flow generation across our global facilities for the driveline, metal form, powertrain and casting business units.

And lastly and most exciting to AAM's future, we are transforming as a company.

Through our strategic activities, we have enhanced our financial profile with greater size and scale and the potential to generate even higher profit margins and stronger free cash flow.

We are more diverse in many different ways and we believe this positions AAM to ultimately increase our P/E ratio and EBITDA multiples and grow our shareholder returns.

Thank you for your time and participation on the call today.

I'm going to turn the call back over to Jason, so we can start Q&A.

Thank you, Chris and David.

We have reserved some time to take questions.

(Operator Instructions) At this time, please feel free to proceed with any questions you may have.

(Operator Instructions) Our first question comes from the line of Brian Johnson.

Have a few questions really around the -- both the quarter and the combined company.

In terms of your backlog -- joint backlog, it's only been a month since acquisition, but where do you see the revenue synergies coming?

Are any of those in the backlog yet, I don't know to what extent you could do joint marketing before your close?

And do you have a pipeline of those kind of opportunities?

Yes, Brian, this is David.

We did not include any revenue synergies into our synergistic plan.

Clearly, we're evaluating what that is, but we don't have anything to communicate at this time.

What I will say is that, on a combined basis, we're quoting over $1,500,000,000 with respect to new and incremental business opportunities that we hope to convert into our backlog in the future.

Okay.

Second, you had a very strong EBITDA margin in the quarter, just a few questions on that.

Can you -- what are the puts and takes from the Mexican peso, as well as commodity costs and timing perhaps of steel?

GM actually mentioned some things around collars, I don't know if that affects you, around commodities?

And then second, how are you thinking about that K2XX production cadence going forward?

In light of the strong 1Q builds, you have the inventory levels at GM and the downtimes?

Brian, this is Chris May, good morning.

If you look at our year-over-year 2016 to 2017 EBITDA performance from a margin perspective, obviously last year at 15.5%, this year, a strong performance at 17.5%.

So some of the puts and takes of that, I would say, about half of that relates to strong volume and mix associated with our production cadence and as you saw, of course, our sales growth through that period.

About 25% of that, also then, increase in terms of margin relates to, I would call, good solid productivity we are experiencing in our factories and our continued restructuring programs are benefiting the bottom line.

And then the remainder, or the other 25%, is a net element of FX and metal combined.

And we do not really have any collars to speak of, so those -- I'm not sure where that comment came from, but that really doesn't apply to us.

And then Brian, on the production side of things, we built our plan around a 1.25 million unit K2XX.

IHS is around 1.28 million is where their plans were.

Clearly, we saw very, very strong schedules in the first quarter.

We're seeing very good schedules going forward as well, but as you referenced, there is some downtime planned so they can start the conversion for the next generation product.

Is your sense that, perhaps the -- rather than maybe running over time with some -- to offset downtime later on in the year in the plants that aren't down, that perhaps they just pulled ahead some production to take advantage of more regular time later in the year?

Or any kind of evolution in your thinking on sort of the second and third and fourth quarter cadence there?

No.

I mean, I think the market's been very strong for trucks and SUVs, and GM obviously commands a significant market share, so they're going to protect that.

In time, they know that they got some planned downtime as they go forward here, so I'm sure there's some inventory build because of that.

But right, as I said to you, we see very strong schedules through the balance of the year and I've given you how we planned our financials based on 1.25 million units for the year.

Okay, just final question.

Now that you have the keys to the plants, are you taking a look at opportunities to improve productivity to perhaps substitute capital for labor.

Some of the Metaldyne plants we've toured over the years have been -- have equipment that's somewhat old.

Now, I'm sure it's great equipment, but now that you own it, are there opportunities and then how would that affect CapEx and productivity going forward?

Clearly, we're bringing together 2 very strong operating companies.

There's strengths on both sides of the business in regards to productivity and automation and throughputs.

The main thing from a CapEx standpoint, we do think there's some opportunities for us to optimize the utilization of our combined equipment.

We're very focused on productivity, both organizations, so therefore we'll take the best practices of both and use them across the combined business where it makes business sense.

Where we need to include some automation, we'll clearly take that into consideration.

We've also -- we've got good working relations with all of our associates in the plant on both sides, so that's a positive thing; we don't have to worry about any morale issues or anything along those lines.

As we've identified in our synergy opportunities, there's at least $10 million to $20 million of productivity opportunities associated with plant loading, product loading and just throughput opportunities and we're highly confident that we can deliver on that going forward.

Our next question will come from the line of Joe Spak with RBC Capital Markets.

I was just wondering if you could help me with this bridge a little bit, just bear with me.

So 2017 pro forma, if we don't back out the quarter, (inaudible) your like $6.8 billion in sales.

And then you mentioned about $1 billion of gross backlog in '18 and '19.

Cumulatively over that time frame, it seems like there's another maybe $300 million in attrition and then $450 million in the GM roll-offs, which gets you to about a $7 billion number.

And if I look at some of the merger docs, it looks like that number was higher originally, maybe closer to $7.5 billion.

So am I missing a part of that?

Or where is my math wrong, or did something change?

Joe, this is Chris May.

A couple of items I would add in terms of that perspective.

You had the underlying base book of business growth that we are seeing and would expect to experience in the commercial and industrial segment, business that will continue to grow, as you know, that's come down to a lower point here through 2016 and we're starting to see growth in that segment yet already now in 2017 and that is expected to grow through that time frame.

In addition, as David mentioned earlier, we're still quoting on another $1.5 billion-plus of new business opportunities that will fall also into that time frame from a growth perspective.

So those are kind of 2 main areas I would point your direction towards to, as you think about putting that roll-forward bridge together.

As you referenced, there's some of the roll-off of some of the next generation full-size truck GM product for us.

There's also the roll-off of the KBI business this year for MPG.

And then we've pretty well already identified what our cadence is on the gross business backlog.

We've also identified that there's an annual runoff for attrition of about $100 million to $200 million on an annualized basis as well.

Right.

So I guess, was that considered in some of the preliminary data in the merger docs?

Or, I guess, put simply, would you say that at a high-level, those figures in the merger documents are still roughly accurate?

All those items, Joe, were included and considered through the merger documents that you're referring to.

Again, you've got to look at some of the underlying business driving that growth through business quoting activity.

And our backlog, we disclosed, is only booked business, so obviously we have opportunities and upside from there.

Okay, great.

And then, I guess, somewhat related, one of the questions we've been getting from investors this morning is the $17.5 million looked aggressive.

And if I go back to one of your, I think, original presentations post the deal at a conference, I think you were saying originally, $17 million to $17.5 million.

I think you officially, $17.25 million.

And those revenue and EBITDA numbers are basically the same that you're saying today.

So is it fair to assume you've done a more bottom-up analysis?

You're less sensitive to SAAR.

I mean, it clearly is standalone axle with the heavy GM and K2 exposure, I always figured you were less sensitive to whatever the SAAR number was.

But is that still a fair assumption, I mean, that the numbers you came up with are a more bottoms-up and less industry-SAAR sensitive?

The answer's, yes.

I mean, we're clearly going to be less dependent on the U.S. SAAR and focus more on the global SAARs as we've expanded our capabilities now with the MPG acquisition, but obviously we'll manage both.

As we've always said on the U.S. SAAR, you have to look at the volume and mix, just don't look at the total, and we're right in the sweet spot of trucks and SUVs and crossover vehicles, so that's a positive for us.

Same time you got to look at production and what's going on in the production environment, not just the sales environment.

We feel that's still going to be a healthy market that's out there.

And we've also reduced, as you highlighted, our dependence on [given] customers or given platforms through this acquisitions, so that's all been positive.

And as Chris indicated, we've expanded the markets by moving not -- from solely from just being in the automotive to now moving into some of the industrial and the commercial markets.

So we're not nervous about the overall U.S. SAAR.

We'll adjust our business accordingly, whatever that market demand is, but more importantly right now, we feel very confident about where we are, especially with the mix that's out there heavily weighted towards truck, SUVs, crossovers and only growing as we go forward.

Our next question will come from the line of Ryan Brinkman with JP Morgan.

As regards to cash integration costs to help drive the synergies, you've quantified that before as roughly 1x the $100 million to $120 million of savings.

I heard you say that again, today.

But 2 questions along those lines.

Firstly, can you speak to the likely cadence of that spending?

And then secondly, going back to kind of original call to announce the transaction last year.

You'd spoken about some potential offsets relative to maybe working capital improvements or cash tax savings.

Can you talk about sort of how the net amount might track and the cadence of it?

Ryan, this is Chris May and yes, the cadence timing David referred to a little to earlier, we anticipate from cost to implement these synergies; approximately 70% run rate of synergies by the end of year 1. We would expect that cadence of cash cost to mirror that very closely.

You'll see us disclose today in our public filings, we expect around $65 million to $75 million of integration and acquisition-related costs to incur in 2017.

So some of that's integration, a little bit of that is simply fees, et cetera, associated with the acquisition, but still well aligned with our timing consideration that we had mentioned previously, and that's our line of sight here today.

Even more importantly though, in terms of funding some of this activity was the benefits we see from a cash perspective, not just the synergy dollars that we talk about on an EBITDA run rate, but from a cash perspective in terms of working capital, our ability to have our operating systems across now this entire fleet of our global facilities to improve inventory and inventory turns, that will generate cash for us.

We are already seeing immediate cash tax benefits in terms of on a global basis, not only state and local in the U.S., U.S. federal as well as global, so we'll see some of that benefit translate into cash savings for us and then, of course, CapEx, we've identified several opportunities we'll work through the next year or so in terms of being able to better utilize our CapEx and potentially defer, delay or remove some of our CapEx spend we were planning on.

Okay, great.

That's very helpful.

And then obviously, the margin was very strong in the first quarter, a lot higher than analysts were expecting.

But because the guidance now includes MPG whereas before, of course it did not, it's not obvious to the extent to which you're flowing through the 1Q strength to the full year.

So I thought to just ask, how you think the -- and I know you're not going to talk about this ongoing, but how -- maybe this quarter, how the core American Axle business is performing so far in 2017 relative to your expectations when you first introduced guidance in Detroit?

The core business is performing outstandingly well, and we've been working very aggressively on cost-reduction programs internally, within AAM, prior to the acquisition of MPG.

We'll carry that same conviction, that same vigor and same aggressiveness into the combine business and we'll jointly work together and leverage the strengths of the combined businesses to continue to drive cost reductions while at the same time drive margin and expansion.

Okay, very helpful.

And then just lastly for me, of course, American Axle has historically been strongly levered to truck platforms, which is a great benefit for you.

Can you say how the combined company is going to be levered across various different vehicle segment categories.

I know there's still very strong overrepresentation in trucks, but it would be great if you could help to quantify the new exposure for us.

I'm not sure if we've completely broken out truck dependence versus passenger car, but I'll say this, I mean obviously we get a lot more diversification based on bringing MPG into the family as far as exposure to passenger car side of business as well as the industrial and the commercial side of business.

Obviously, we've always been strong in the truck side.

We're seeing continued growth in the crossover vehicle side in the overall business.

And we're -- as you know, we're heavily dependent on one platform, the GM full-size truck platform, was over 50% of our sales before.

And now it's less than 30% of our sales going forward here.

So again, part of the objective here was get the diversification of the customer base, the vehicle platforms, the geographic footprint and the MPG acquisition delivered all that for us.

And our next question will come from the line of Rod Lache with Deutsche Bank.

Had a couple questions.

First, just the EBITDA margin obviously was pretty impressive, the incremental EBITDA was 42% on your revenue growth.

You mentioned that 25% of that margin expansion was FX and metals.

Was that, that last part, the 25%, was that an unusual positive for you that will reverse as you pass along metals and some hedges?

Or how should we be thinking about this?

Yes, Rod, this is Chris.

On that 25% we mentioned, was a net of FX and metals.

FX was actually a little stronger; metals was a very slight negative [towards this] in the quarter.

As you know, the indices have been traveling upwards a little bit here in terms of the fourth quarter and first quarter of 2017, and if that goes up, our revenue goes up a little bit associated with it and we have a little bit of margin declination or dollars, but that was very minor.

Most of it was FX-related, most of it was related to the peso, and we are growing into some of our hedges now that we placed on a rolling basis over the last 12 to 36 months.

Okay, great.

And I was hoping maybe we can just kind of bridge the free cash flow -- hope we could do this kind of at a high-level.

But at a high level, last year, the free cash flow American Axle was about $190 million and that included some Mexico tax impacts, so maybe $220 million ex that.

MPG did $125 million.

So that's combined $345 million.

The S4 had MPG's EBITDA up $11 million.

You guys, on a standalone basis for American Axle, you had EBITDA up $35 million.

So that's maybe a $45 million improvement.

You're talking about maybe $40 million or $50 million of synergies in year 1, and you've got $300 million of net new business, which I would assume that would convert at 20% to 25%.

I think that part of the offset obviously is the CapEx being $75 million higher, but what else brings that down to around $300 million?

Yes, so what I would tell you, Rod, if you take the 2 combined companies last year, the numbers you said was right, it's a little over $300 million.

Tax benefits -- of course, you mentioned the Mexico tax piece, but we'll also incur some other tax benefits of the combined entities, probably in excess of $50 million, is a combined cash tax there.

We were over $100 million last year.

We'll be half of that this year.

The increase CapEx is significant for us in terms of taking this up to 8% as we're launching these significant backlogs.

Coming online, that's probably the #1 item that we would have in terms of cash flow down and, of course, we continue to grow, we're going to have working capital consumption to grow this business.

Even on a net basis, it's over $200 million, right, on a pro forma basis.

That will consume it's normal working capital, think payables, receivables, inventory on a net basis but also, as we're launching some of our key big underlying platforms such as T1 for example, our next generation General Motors full-size truck, we have some tooling requirements that, I would call it, kind of a supersize working capital element of that as well.

But all those puts and takes gets us to around the $300 million.

Okay.

So it's a big working capital, I guess, is the plug basically, to get down to that number?

Working capital and CapEx.

[Are you referring to]?

Right, the CapEx you guys have quantified.

And then of course, interest will be somewhat neutral to a little bit (inaudible).

Our last question comes from the line of John Murphy of Bank of America Merrill Lynch.

Just a first question on the balance sheet.

I mean, I think if we look at this, there's about $2.7 billion of net debt on a pro forma combined basis, and it looks like the EBITDA is coming in about $1.1 billion to $1.2 billion, so, I mean, that'll put the net debt-to-EBITDA somewhere in the 2.4x, 2.5x range.

You guys are talking about 3.5x.

Is there something that I'm missing there?

Or has something changed?

Yes.

No, nothing's changed.

We gave guidance -- John, this is Chris.

We gave guidance that we would expect to close the deal around 3.5x.

We beat that a little bit.

We're a little bit better than that in terms of closing that first week of April, but if you look at our closing balance sheet on March 31, you had about half the debt in there.

We didn't draw down another $1.6 billion in debt until the close at April, and then you would need to factor that in and that would get you just under your 3.5x.

Got you.

So there's another draw still to go on the...

Right, we didn't draw the Term Loan A and B until April 6.

Got you.

That's incredibly helpful.

And then just a second question, as we think about sort of your review of the MPG businesses, top to bottom, it was interesting to hear that Grede would be off on its own in a casting business line.

Is there any thought that you might monetize Grede and sell it as a non-core business?

And also, as you're going through things here, there's a bunch of CNC machines over in KBI, in Sandusky, that can be repurposed.

Just curious what you're going to be doing with those assets and if you can move them quickly?

Yes, John, all the businesses are core businesses to AAM and obviously, as we always do, we'll evaluate our portfolios as we go forward, but all the businesses at this point in time are core businesses, including the casting business.

With respect to the assets, not only KBI, but we'll look across the entire enterprise, we'll evaluate what we can do again to drive capacity utilization, facility utilization, associate utilization.

But with respect to the specific assets at KBI, we'll look at redeploying a portion of those, and at the same time there's been an active program under MPG that we're continuing right now to sell some of those assets as well.

Thank you, John, 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 does conclude today's conference call.

You may now disconnect.