American Axle & Manufacturing Holdings Inc (AXL) 2017 Q3 法說會逐字稿

Good morning.

My name is Crista, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the American Axle & Manufacturing Third Quarter 2017 Earnings Conference Call.

(Operator Instructions) And as a reminder, today's call is being recorded.

I would now like to turn the call over to Mr. Jason Parsons, Director of Investor Relations.

Please go ahead, Mr. Parsons.

Thank you, and good morning.

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

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

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

You can also find supplemental slides for this conference call on the investor page of our website as well.

To listen to a replay of this call, you can dial 1 (855) 859-2056, reservation number 87956026.

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

today through 11:59 p.m.

Eastern Time, November 10.

Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risks and uncertainties, which cannot be predicted or quantified, and which may cause future activities and results of operations to differ materially from those discussed.

For additional information, we ask that you refer to our filings with the Securities and Exchange Commission.

Also during this call, we will refer to certain non-GAAP financial measures.

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

Over the next few months, we will participate in the following conferences: The Barclays Global Automotive Conference on November 16; the Bank of America Merrill Lynch 2017 Leverage Finance Conference on November 29; and the 2018 Deutsche Bank Auto Industry Conference on January 17.

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

Please feel free to contact me to schedule a visit.

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

Thank you, Jason, and good morning, everyone.

Joining me on the call today are Mike Simonte, AAM's President; and Chris May, AAM's Vice President and Chief Financial Officer.

To begin my comments today, I'll provide some financial highlights from AAM's third quarter, including continued sales growth, business diversification, cash flow generation and the realization of our new and incremental business backlog.

AAM sales for the third quarter of 2017 were $1.72 billion, significantly higher compared to $1.01 billion in the third quarter of 2016, and this is mainly attributable to the results of the MPG acquisition.

Our non-GM sales for the third quarter 2017 were a record for AAM, over $1 billion for the first time in our company history.

Non-GM sales were nearly 59% of our total sales for the third quarter of 2017.

This compared to $307.7 million or just over 30% of total sales in the third quarter of 2016.

The third quarter also represented another strong performance for AAM as it relates to profitability despite lower production of GM's full-size truck program during the quarter.

Adjusted EBITDA for the third quarter of 2017 was $297.7 million or 17.3% of sales.

This compares to an adjusted EBITDA of $156.7 million or 15.6% of sales in the third quarter of 2016.

Adjusted earnings per share for the third quarter of 2017 was $0.86 as compared to $0.83 in the third quarter of 2016.

AAM's profitability in the third quarter of 2017 shows the power of our increasing diversification and our ability to deliver strong performance despite planned customer downtime for key programs as they prepare for the future model changeover activity.

From a cash flow perspective, AAM generated $87.9 million of adjusted free cash flow in the third quarter of 2017 compared to $54.6 million in the third quarter of 2016.

On a year-to-date basis, AAM has generated nearly $300 million of adjusted free cash flow.

AAM has displayed substantial free cash flow generation power even while investing significant capital to support both organic growth and replacement business launches.

As a result of delivering strong EBITDA performance and free cash flow generation, AAM has now reduced its net leverage ratio since the closing of the MPG acquisition to below 3x, a quarter ahead of schedule.

Let's talk a little bit about our segment results for the third quarter of 2017, which you can find summarized on Page 4 of the earnings call deck.

The driveline business unit recorded sales of just over $1 billion in the first quarter of 2017, which translated to $181.4 million of segment adjusted EBITDA.

AAM's driveline business unit benefited from the continued realization of a strong new business backlog, heavily concentrated on customer crossover vehicle launches, which also offset the impact of lower GM full-size truck volumes resulting from planned customer downtime and changeover.

The metal forming business unit recorded sales of $368.2 million in the third quarter of 2017 and $70.7 million of segment-adjusted EBITDA.

The results of AAM's metal forming business unit were consistent with those in the second quarter, and the business unit continues to perform very well.

AAM's powertrain business unit recorded $260.9 million of sales and segment-adjusted EBITDA of $36.8 million.

These results reflect lower sequential production times especially as it relates to passenger cars due to changing customer preferences, seasonality, customer program changeover and launch activities.

AAM's casting business unit recorded sales of $226.6 million and segment-adjusted EBITDA of $8.8 million.

The casting business unit experienced higher costs to meet increasing volumes in both the commercial vehicle and industrial markets.

Sales related to these markets have increased over 40% when compared to third quarter of 2016.

These additional expenses include infrastructure upgrades, capacity increase and program changeover-related costs.

We expect to see improved performance in this segment over the next several quarters.

Let me switch gears and provide a brief update on our synergy attainment progress.

What you can see on Slide 5 is the earnings call presentation.

As you may recall, we are targeting an annual cost reduction synergy run rate of $100 million to $120 million by the end of the second full year of the acquisition.

We are also targeting to achieve 70% of this annual run rate by the end of the first full year of the acquisition call at the end of the first quarter of 2018.

When we ended the month of October, we attained synergies that on an annualized run-rate basis amount to approximately $54 million, up from the $38 million that we are running when we last updated you at the end of July.

In just over 6 months, AAM is well on its way to hitting our targeted synergy attainment for the first full year of integration.

We continue to make steady progress on our cost reduction synergy initiatives, are running according to plan and are on track to deliver on our previously communicated targets.

Let me now review our 2017 financial outlook.

With another solid and successful quarter behind us, we have updated our financial target as follows: we increased our targeted full year sales from $6.1 billion to a range of $6.2 billion to $6.25 billion.

We are now targeting adjusted EBITDA of $1.1 billion, and our target for adjusted free cash flow remains the same at approximately 5% of sales.

These updates reflect an increase in production forecast for specific programs we support, continued strength in the commercial and industrial volumes and elevated metal market prices that have continued to increase gradually during the year.

We are in line for another outstanding and record-breaking financial performance year here in 2017.

One of the many favorable highlights from this transformational year.

In fact, our recent strong cash flow generation has allowed AAM to accelerate our debt-reduction paydown plan.

As we communicated this morning, we have provided notice to our holders of our 5.125% notes due in 2019 that we will be redeeming the $200 million currently outstanding in December of 2017.

I'm very pleased to provide you with this update as we will continue to be proactive in looking for the appropriate opportunities to strengthen our balance sheet and derisk the business.

Before I hand it over to Chris, I'd be remiss if I didn't mention that it was exactly a year ago today that we announced our decision to acquire MPG.

We told you during the announcement that this acquisition was going to increase our size, our scale and our financial profile, and it has.

We also told you that it will accelerate our customer, product portfolio and end-market diversification, and it has.

We told you that it will provide significant value capture and cost reduction synergy opportunities, and it has.

We also told you that we are committed to an aggressive deleveraging plan on both the gross and net debt basis, and we have begun to deliver on our commitments to that plan.

Looking back a year later, we have experienced many tangible benefits of the transaction.

While there's still much work to be done on the integration synergy attainment front, I can confidently say that AAM is set up well to maximize shareholder value in the future.

We will continue to profitably grow the business while reducing our debt leverage on the strength of our global operational excellence, technology leadership and world-class quality.

This concludes my prepared remarks for this morning.

I thank everyone for your time and attention today and for your continued interest and support of AAM.

I will now turn the call over to Chris May.

Chris?

Thank you, David, and good morning, everyone.

Today, I will cover the financial results of our third quarter 2017 with you, and I'll also refer to the earnings slide deck as part of my prepared comments.

So let's go ahead and get started with sales.

As David mentioned, sales increased over $717 million on a year-over-year basis, primarily as a result of the MPG acquisition.

Slide 9 shows a walk-down of pro forma third quarter 2016 sales to the third quarter of 2017 sales.

In addition to the impact of MPG, AAM sales were positively impacted by our new business backlog, higher heavy-duty rent truck production and higher middle market pass-throughs.

These factors more than offset the impact of lower production of the GM full-size truck due to planned downtime as part of their readiness actions for the next-generation truck launch that begins next year.

Despite this headwind, AAM experienced over 3% net organic growth in the third quarter of 2017 on a pro forma year-over-year basis.

AAM's content per vehicle, which is measured at the dollar value of our driveline business unit product sales supporting our customers' North American light truck and SUV programs, was $1,684 in the third quarter of 2017.

This compares to the $1,612 in the third quarter of 2016.

The increase relates primarily to increased metal market customer pass-throughs and stronger product mix including slightly higher four-wheel-drive penetration.

Now let's move on to profitability.

In the quarter in which we experienced lower GM full-size truck production, AAM continue to deliver strong operating profit metrics.

Gross profit was $297.7 million or 17.3% of sales in the third quarter of 2017.

This compares to $181.2 million or 18% in the third quarter of 2016.

Adjusted EBITDA, earnings before interest expense, income taxes, D&A, excluding the impact of restructuring and acquisition-related costs, debt financing and redemption costs and nonrecurring items was $297.7 million and thus, coincidentally the same number as our gross profit in the third quarter of 2017 or 17.3% of sales.

This compares to $156.7 million in the third quarter of 2016 or 15.6% of sales.

You can see a year-over-year walk-down of adjusted EBITDA on Slide 10.

Key drivers of EBITDA growth continue to be the contribution margin of our new business backlog and other favorable volume and mix factors and the benefits from our acquisition activities.

The benefit from synergies of the MPG acquisition doubled from last quarter, from $6 million to $12 million, while USM acquisition contributed another $10 million of year-over-year improvement.

We did experience some continued headwinds on higher metal market cost and FX of about $8 million, with the primary share related to metal.

Also, as we have previously discussed, we are in preparation for not only new key program launches, but also significant replacement business launches, including the model changeover of our 2 largest driveline programs.

As a result, we have incurred about $5 million of additional project expense related to these customer program activities.

All in all, our adjusted EBITDA margins were up 150 basis points in the third quarter of 2017 when compared to the pro forma adjusted EBITDA margins for the third quarter of 2016 as we realize the benefits of our acquisitions and continued to perform.

In the third quarter of 2017, we incurred $22.8 million of restructuring and acquisition-related costs, which are shown in more detail on Page 11.

The majority of this cost in the third quarter relates to spending and investments in integration and synergy attainment activity.

We also adjusted EBITDA in the third quarter of 2017 for a noncash accounting impact of $2.9 million related to a pension buyout program at one of our foreign subsidiaries.

We expect to incur between $25 million and $30 million of restructuring acquisition-related costs in the last quarter of 2017.

These amounts are right in line with what we have disclosed to you previously and directly supports the successful implementation of our synergies from our recent acquisitions.

SG&A expense, including R&D, in the third quarter of 2017 was $102.3 million or 5.9% of sales.

This compares to $78.6 million or 7.8% of sales in the third quarter of 2016.

R&D spending for the third quarter of 2017 was $41 million compared to $36.2 million in the third quarter of 2016 as we continue to invest in our electrification and other advanced new products.

SG&A as a percent of sales declined due to the benefits of blending the AAM and MPG SG&A expenses for the combined companies, and more importantly, reflects favorable impacts from AAM's global restructuring that was initiated in the fourth quarter of 2016 as well as synergies realized as part of the integration activities of the MPG acquisition.

Amortization of intangible assets for the third quarter of 2017 was $24.4 million as compared to $1.3 million in the third quarter of 2016.

This increase relates to the amortization of intangible assets reported during 2017 as a part of purchase accounting for our acquisitions.

So now let me cover interest and taxes.

Net interest in the third quarter of 2017 was $56.7 million as compared to $22.7 million in the third quarter of 2016.

This increase in interest expense reflects the impact of the additional debt required to fund the MPG acquisition.

Our weighted average interest rate for the third quarter of 2017 was 5.6%.

Income tax was $5.7 million in the third quarter of 2017 as compared to $17.8 million in the third quarter of 2016.

The effective income tax rate was 6.2% in the third quarter 2017 as compared to 22.4% in the third quarter of 2016

The lower income tax and effective tax rate can be explained by 2 primary factors: first, significant restructuring and acquisition-related costs in the U.S., causing lower-than-normal income in the United States, currently a higher rate jurisdiction in 2017; and a discrete favorable tax adjustment in the quarter of $4.8 million resulting from the reduction of valuation allowances in certain state tax jurisdictions.

This is yet another example of synergy benefits with the MPG acquisition as we look to maximize value across all elements of our business.

The effective income tax rate when adjusted for these items would have been approximately 16%, and our year-to-date run rate is about 20% on an adjusted basis, right where we expect to finish this year as well.

Taking all of these sales and cost drivers into account, GAAP net income was $86.2 million or $0.75 per share in the third quarter of 2017 compared to $61.7 million or $0.78 per share in the third quarter of 2016.

Adjusted earnings per share, which excludes the impact of restructuring and acquisition-related costs, debt refinancing and reduction costs and nonrecurring items, including their tax effects, was $0.86 per share in the third quarter of 2017 compared to $0.83 per share in the third quarter of 2016.

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

We define free cash flow to be the net cash provided by operating activities less capital expenditures, net of proceeds we received 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 and the settlements of preexisting accounts payable balances and interest expense payable for acquired entities.

Net cash generated by operating activities in the third quarter of 2017 was $207.5 million.

Capital spending, net of proceeds from the sale of property, plant and equipment, was $139.9 million in the third quarter of 2017.

Cash payments for restructuring and acquisition-related costs for the third quarter of 2017 was $20.3 million.

Reflecting these activities, AAM's adjusted free cash flow in the third quarter of 2017 was $87.9 million compared to $54.6 million in the third quarter of 2016.

For the first 9 months of 2017, AAM generated $290 million in adjusted free cash flow as compared to $136 million in the first 9 months of 2016.

Note that our capital spending was heavy in the third quarter of 2017, and we would expect it to trend the same way in the fourth quarter due to the timing of launches and upcoming replacement programs.

It is also important to note that due to the issuance of debt related to MPG acquisition, we'll have significant increase in interest cash payments in the fourth quarter of 2017.

We estimate approximately $55 million higher than what we paid in the fourth quarter of 2016.

As David mentioned, we expect adjusted free cash flow for the full year of 2017 to be approximately 5% of sales, which represents a free cash flow yield of approximately 15%.

From a debt leverage perspective, we ended the quarter with a net debt to LTM pro forma adjusted EBITDA or net leverage ratio of 2.98x at September 30.

This calculation takes our total debt net minus our available cash balances divided by our pro forma adjusted EBITDA, which includes the pre-acquisition adjusted EBITDA recognized in the last 12 months by our acquired entities.

We initially targeted to be 3x by the end of the year and are pleased to have met that goal a quarter early.

We ended September with a total liquidity of $1.5 billion, which includes nearly $550 million of cash on hand.

As David mentioned, we plan to put the strong cash balances to work in the fourth quarter by prepaying at par $200 million of the full amount outstanding on our 5.125% notes that were otherwise due in early 2019.

This is a perfect opportunity to use our free cash flow generating power to pay down these notes, reduce our gross debt and eliminate future interest payments related to these notes.

The plan we communicated to you last year at this time was to immediately generate free cash flow on the combination of these businesses and quickly begin the path to strengthening the balance sheet, and we have delivered on this commitment in the last 2 quarters.

Our continued confidence in our future ability to perform have allowed AAM to take this important step towards a lower debt level.

David provided you with a favorable update of our 2017 full year financial outlook.

Our 2017 outstanding financial performance will be highlighted by: continued, strong, global production environment, including Asia and North America, especially as it relates to key segments we support in full-size trucks in North America and crossover vehicles on a global basis; recognition of the initial benefits of our synergy attainment and vertical integration of our recent acquisition activity and industry-leading profitability and powerful free cash flow generation; and lastly, critical R&D and capital investments to improve profitable growth and switch post-acquisition deleveraging.

As we look to finish 2017 strong, we'll have a lot of positive momentum heading into 2018.

We expect to operate at stable production environment in the near term and our profitability and free cash flow generation will continue to benefit from further synergy attainment and integration activities.

Meanwhile, we'll be focused on balancing our capital allocation priorities in order to profitably grow the business and reduce our debt.

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 our Q&A.

Thank you, Chris and David.

And we have reserved some time to take questions.

(Operator Instructions)

(Operator Instructions) Your first question comes from the line of Joe Spak from RBC Capital Markets.

The first question is just with regards to prepayment of some of the debt.

I know you hit that 3x target a quarter early.

I think you also have the 2x target by 2019.

Is there any change to the trajectory you see on those initiatives?

Joe, this is David.

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

Okay.

And then the second question would just be, if we look at sort of the implied fourth quarter EBITDA margins, it looks like they're roughly in line with what you did in the third quarter.

But the K2 at least on a year-over-year basis shouldn't be as big a decremental hit.

So a, is there something else we need to consider, maybe some higher project costs or maybe as some of the backlog comes on?

Or is there potentially some conservatism in that guidance?

Good question, Joe.

As we think about -- as we transition to the fourth quarter based on our guidance, we would expect to see continued strengthening a little bit on the K2 production versus the third quarter.

Obviously, we'll continue to benefit from our synergy.

Implementations will grow, but we do have a couple of items that would work slightly against that.

One of them, which was mentioned very clearly, is our project expense.

As we're getting ready to launch the next generations of Ram and the next generation of General Motors' full-size truck.

You saw the third quarter take a little bit of that expense, those programs are starting to ramp up here now in the fourth quarter and early into next year, so we will incur costs ahead of those production schedules as you would expect on significant programs of that size.

And also, keep in mind, the fourth quarter does have seasonality downtime in November and December as well.

I mean, the third quarter has a little bit in July, but you do have some more of that here in the fourth quarter, as we would normally expect.

And then lastly, metal has elevated in the third quarter.

We would expect that to continue, that also works a little bit on your margins.

Your next question comes from the line of Brian Johnson from Barclays.

This is actually Steven Hempel on for Brian.

I just wanted to drill down a little bit on the sales walk-down on the EBITDA bridge here.

If I take a look at the sales walk, if we net the backlog volume and mix tailwind with the K2XX sales, headwind it looks like, if you apply the $23 million of EBITDA tailwind, it looks like we're getting to roughly 45% incremental margins.

Is there anything we're missing from that bridge?

Well, if you break down that bridge a little bit, you do have, obviously, with the K2 production down, that's one of our higher contribution-margin products, a slight decrement.

The backlog coming on strong at the higher end of our range, which we're seeing, which is offsetting a considerable amount of that.

And if you think about the underlying mix activity going on in the marketplace, we're seeing stronger full-size truck, stronger C2B and lower pass car.

So that mix element plays up to the benefit of our margins as well.

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

No, you have to actually look at the mix elements of that calculation and we'll have to break each one out.

But what we are experiencing, we've got to do previously at a 20% to 25% margin range on our new business backlog.

You're seeing us come in at the higher end of that range, but we're also -- as I mentioned, discrete within the quarter, right, we're adding higher full-size truck concentration on some of our non-GM business you're seeing strong CUV and you're mixing out some of the lower margin pass-through .

Okay, so it sounds like mix is definitely favorable.

I guess, just a larger question here for Dave and Chris here.

Just in terms of -- you've had about 6 months to go through the MPG product portfolio and as you kind of think about combining that with AAM's, are there any product lines or end markets or businesses that you've identified as being noncore or something that might not fit strategically or better with another company, I should say?

If I specifically look at kind of steering knuckles and control arms within gas casting, for example, it seems to be 2 product lines that don't really have much in common with your core driveline, drivetrain and powertrain business.

So I'm just wondering if there's any areas that you have identified so far.

Nothing that we've identified and communicated publicly.

I mean, obviously, we'll assess our product portfolio on a regular basis, but at this time, all of our products are considered core.

Okay.

And then just a follow-up on that.

It's been about 6 months, obviously, since the MPG deal closed.

Just wondering where you're seeing the biggest opportunities for revenue synergies right now, whether it be by customer, product region, et cetera?

And how long you'd expect it take for those opportunities to be realized?

Well, I mean the first thing we want to make sure that we're doing here is protecting the customer in regards to the current production and then also protecting their launches going forward.

So we're very focused on customer satisfaction.

When it comes to sales revenue-type synergies, I mean, clearly, we're putting strategies together -- we've met all the global OEMs around the world as well as looking at some of the others -- our customers that we enjoy, as a Tier 2 or Tier 3-type supplier to them.

We clearly see opportunities that are out there that we can cross-sell our expanded product portfolio right now.

I don't really want to get into the specifics of that today here, but we do see synergies that can be realized and grow.

Your next question comes from the line of Emmanuel Rosner from Guggenheim.

Just -- first, a quick clarification on the backlog so far this year and expectation for the full year.

So I think the backlog expectation for the full year was $500 million, very strong for 2017.

If I look at your extremely helpful disclosure in particular, revenue walk for the past 2 quarters, which is when you've broken that out, the backlog only sums up to about $163 million in the last 6 months or so.

Are we expecting -- should we expect a very large backlog contribution in the fourth quarter?

Yes, Emmanuel, as you look at that sales walk, that is our net backlog.

So as you mentioned, this year, in 2017, we are expected to have about $500 million of backlog, it is a little more heavily weighted towards the third and fourth quarter, but the number we disclosed on the walk is net.

And you may recall, we matured out between $100 million to $200 million per year on the business, and this year's a little -- toward the high end of that range.

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

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

Okay, understood.

And then, I guess, could you maybe comment on sort of your early thoughts on what 2018 could look like for you?

Not looking for specific guidance, but when you sort of look at a lot of the same factors that we've seen basically this quarter, which is more downtime from K2XX, but then, obviously, some good offsets on the Metaldyne contribution and synergies and obviously excellent execution, could you grow earnings in 2018 and can you maintain margins?

Emmanuel, this is David.

First of all, we're not giving guidance here today for 2018, and I appreciate you respecting that, but again, we see another outstanding year in 2018, consumer confidence is strong.

There's a strong demand for our products especially we're in the sweet spot of the market, that being trucks and SUVs and crossovers and luxury passenger car business.

We're participating in 2 very strong markets.

That being North America and China especially, but obviously, we're a global company there.

We're realizing our synergy and cost reduction attainment actions so we're hopeful that we can maybe deliver on that, even further on that as we go forward here.

We do have some critical launches beginning next year, so we'll incur some project expenses, some other launch cost to that, but again, we've -- that's always been part of our cost structure and we'll manage that appropriately and accordingly, but just like we had a record year in '16, we had a record year in '17, we expect a very good year in 2018 and going forward.

Okay, that's great to hear.

And then just a very final follow up on free cash flow.

Your reiterated guidance of 5% of sales, obviously, would represent a pretty large outcome for this year, $300 million plus or so of free cash flow.

Is the fourth quarter going to be particularly large in that respect?

Well, we're pretty close to $300 million on a year-to-date basis.

There's a couple of elements in the fourth quarter, I would -- you need to keep in mind Emmanuel.

First of all, as I mentioned, during some of my prepared remarks, you'll see some continued heavier CapEx as we're preparing for the next-gen truck launches, but also, we have some of our large interest payments for our first bond coupon payments are coming due in the fourth quarter so we could see interest in size almost $50 million higher than we've seen previously -- in the previous quarter.

But again, that's just a cycle in terms of when those are paid throughout the whole year.

And of course, offsetting some of that will be working capital benefits.

Your next question comes from the line of Itay Michaeli from Citi.

So just a follow-up, kind of -- I think in the past, you said you can run at 17% to 18% margin through 2019.

As you've kind of gone through a couple of quarters since the acquisition, any update on any bias, high end, low end, midpoint, as you think about the next couple of years?

No, that was guidance we gave out back in November of last year when we announced the transaction, and that's still, in our view, is a very strong performance for the company.

You can see where we're performing this year, and we're still very optimistic on our margin performance going forward.

Great.

And then just with the announced debt paydown, Chris, can you share any thoughts on your minimum cash balance, kind of comfortable levels going forward?

How should we think about kind of the cash above which you might continue to look to pay down some of the gross debt?

Yes.

So our minimum cash balance, we sort of view in the $250 million to $350 million range.

And of course, that's global cash.

That's typically how we would think about it.

There will be periods where we would cycle higher as we're entering, for example, working capital used periods and periods where that would cycle down as we go through those, like you'll see it cycled down a little bit in the first quarter as you go through a typical working capital use, but think $250 million to $350 million range.

That's helpful.

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

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

Your next question comes from the line of Ryan Brinkman from JPMorgan.

Firstly, can you just give us an update on how you're thinking about the $100 million to $120 million of cost synergies?

It looks like you're about 55% of the way there in terms of the midpoint run rate, with only 6 months under your belt seems a little bit ahead of schedule.

So just curious if that experience makes you feel any different about the total number, if you think that could potentially now be larger?

Ryan, this is David.

And then Mike can comment after I speak if he chooses to.

But as we communicated back after the first quarter in July, we were at $38 million against this $84 million run rate for the first full year.

Now we're at $54 million, so like you said, we're ahead of schedule with respect to that.

Most of the benefits that we've realized so far has been on the overhead side of things.

We're now starting to realize some of the benefits of the purposing and mature on logistics-type savings.

Those will continue to grow as we go forward here.

As we also indicated, some of the in-sourcing initiatives and some of the manufacturing and other initiatives, that would take a little bit more time to get implemented here, but we feel very confident that we can deliver on the high end of the range that we gave you, the $100 million to $120 million.

And clearly, our team has driven to try to achieve more of that if we possibly can.

Yes, I would only add to David's comments to say this.

We have $54 million of activity that hit our P&L, so to speak, on a run rate basis by the month of October.

There are other things that we have done that we have completed that will begin to hit our P&L in November, December and into the first quarter of next year and even a couple that extend beyond that.

So the confidence level is high.

We feel very good about being able to meet, deliver.

And if you give us a little bit more than 2 years, probably exceed these $120 million targets.

So we feel really good about it, Ryan.

There's a whole bunch of activity, not just synergy-related, but also making sure that we have common systems, procedures, approaches.

The AAM operating system is benefiting from the best practices and really good ideas we're picking up from the legacy MPG side of the house, and so we're going to emerge from this process, not only with a better financial profile, but with a stronger operating profile as well.

That's great to hear.

And then the last question for me I thought to ask because several suppliers are experiencing margin compression currently, most notably, Conoco and Adient, from what they're calling out as timing differences between when they need to pay for higher metal prices versus when they get compensated from the automakers.

Now I haven't really heard you guys complain about this issue despite I'm guessing one of the biggest deal buys out there, right, so can you just kind of walk us through how your contracts work and if you are somehow less susceptible or taking some other additional actions to avoid being tripped up also by this issue?

Yes, this is Chris, Ryan.

We experienced very similar in terms of timing related to metal, so it varies anywhere from 30 days to up to a quarter between lags, between when you are reimbursed from your customer or when you pay your supplier.

But again, remember, we have about 90% or so of our buy in pass-through protection, and you may recall on the last call, in the second quarter, we talked about that we would experience some rub into the third quarter as metal was trending up.

And you'll see that on our year-over-year walk through our quarter.

Our year-over-year walk, you can see metal down about $8 million, and that dynamic also applies into that concept as well.

So we do have that.

Generally, in a rising environment, you do get some lag where a negative piece trails behind it and then the opposite occurs in a declining period.

So it sounds like more of your revenue is probably protected than some of the other suppliers.

But what is the part that's not protected?

Is it maybe some of the, I don't know, the aftermarket stuff at Metaldyne or something?

Or are you not -- are you doing anything to try to get 100%?

What is that remaining 10%?

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

Your next question comes from the line of Matt Stover from SAG.

Look at any programs which were particularly meaningful or better than you had expected in the third quarter, is there anything that you would identify as being particularly strong or surprisingly strong?

Yes, Matt, this is Chris.

We continue to see strength in our non-GM full-size truck platforms.

So think FCA, think Nissan in terms of that in North America.

We continue to see strength in our luxury passenger car segment in Asia.

Those would be a couple.

(inaudible)

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

I mean, you just think about their run rate volume when they mature?

Yes, I think on the full-size truck platform, it would be similar to what we're realizing today, but at the same time, GM has flex capacity and we have flex capacity, if the market allows for that.

On the Ram side of things, I mean, clearly, they've made it known that they want to try to (inaudible) metal capacity.

They're reloading some of their plants, and therefore, expect them to increase some of their volumes as they go forward, assuming that the market will accept it.

Okay.

And then I guess the last question is, as we kind of look through the portfolio and you've had a little time to spend with this, how are you folks thinking about just sort of the husbanding of the product portfolio over time.

Nothing specific, but what are the sort of key things that you're looking at when you think about this is a business we want to be in or this is a business that may not be the best thing for us on a long-term basis?

Matt, this is David.

I mean, clearly, the core business that American Axle was before the acquisition of MPG was driveline and metal form.

Those continue to be our core businesses for us today as well as going forward in the future.

Obviously, we're looking to consolidate in that space and be the industry leader in the space, and we are already.

We want to maintain that position and grow that position on a global basis.

When you look at the metal form or the powertrain and the casting side of the business, there's products that we need to evaluate in both of those business units, to say are they core or noncore to us, at this time as I communicated earlier, everything is core.

However, we will assess those things moving forward.

We're also going to look at the markets and understand where do we have markets that are strong and growing versus where do we have markets in the future that may be at risk.

And then we'll just try to make sure that we're putting the appropriate funding towards the businesses that we feel are the growth businesses, while at the same time making sure that we can be relevant with Auto 2.0 going forward.

Your next question comes from the line of John Murphy from Bank of America Merrill Lynch.

This is Aileen Smith on for John.

Outside the K2XX downtime that you faced in the quarter, which was pretty well broadcasted and understood by most, can you talk about how production schedules trended for some of your other major programs?

If we were to look at IHS forecast, they'd say that production schedules for North America in aggregate decelerated through the course of the quarter.

Can you talk about the sort of variability of your cost structure as production volumes start to come down and how much notice you get or do you need from your customers to appropriately adjust your own production?

This is David.

I mean, our schedules for our other programs were very strong and consistent with what the customers had indicated to us.

I mean, obviously the only impact that we had, that we had to work our way through was the unfortunate strike that took place at the (inaudible) location, but that's now settled, and we were back on track with respect to that.

As we've said before, we've made a significant part of our cost structure variable so we could flex with the marketplace.

We've demonstrated that in the past before.

At the same time right now, we have a very strong market for our products again, as I mentioned we're in the sweet spot, and whether it goes up or goes down, the management team is committed to adjust our cost structure accordingly to protect our margins going forward.

Great, that's very helpful.

And then with respect to the increased revenue outlook for this year, thanks for the commentary on some of the puts and takes and the components in that.

Is there one or another area, meaning production -- your program production volumes, the MPG acquisition or exogenous factors like scrap pricing or FX that are coming in a lot better than expected?

Or is it just kind of everything on all fronts is better than your original expectations?

We're certainly seeing continued strength in North America, full-size truck platforms we support as well as the crossover vehicles.

Metal is a little higher, which is -- which will drive some top line revenue.

We're seeing continued strength in the commercial and industrial sectors of our casting business, which is also supporting and driving that revenue a little higher, but on a global basis, as I mentioned a little bit earlier, we continue to see strong demand on the luxury passenger car side in Asia.

Great.

And one final one.

Can you remind us of your level of exposure to the commercial and industrial end markets after the MPG acquisition?

And how those markets are trending relative to your expectations and what you're kind of thinking about going forward into 2018?

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

Gentlemen, your last question comes from the line of Brett Hoselton from KeyBanc.

Just a quick follow-on on that last question.

Much stronger than anticipated commercial vehicle and industrial, what regions are you seeing that strength in particular?

We're seeing it in our North America region.

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

Okay.

And then broader question, vehicle architecture, electrical vehicles.

There's some out there that propose that you can basically use one electrical motor, one motor and route it through an axle or driveline or something along those lines, there's others that propose that you just simply take the motor and you integrate it in with the actual, and there's others that propose that you take the motor, electrical motor and you put it the end by the wheels and drive the wheels out that way.

I know this is early stages, but where are you seeing the evolution taking place in your business?

And I assume that it's a ways off at this point in time.

This is David, Brett.

Well, first of all, I'd say is this, I see the truck and SUV market being in a conventionalized engine for an extended period of time.

Clearly, that's our core business today.

On the crossover vehicle, everything is moving right now towards disconnecting all-wheel drive.

We're the pioneer of that technology and we have a considerable amount in our backlog and new business that we're launching today as well as going forward in the future.

Some of that will be impacted by electrification in the future, but I think we're still significant, major, when I say program milestones, away from that.

Clearly, you're seeing the evolution of electrification, the adoption of electrification into luxury passenger car, and I think in the future, the small passenger car clearly, is going to hit Europe first, then China, then North America.

So I think our revenue and our profits and our cash generation opportunities are very strong in the main markets that we support.

As you're fully aware, we're investing in electrification especially the P3 and P4-type solutions, which involve more of the absolute to your points.

We've got design configurations that address the 2 or 3 that you mentioned to us.

That's in line with what our customers' needs and expectations are.

We've got program already in our backlog and new business that launches next year, and then we're putting on new and incremental business for programs that are post 2020 period of time.

So I think for an extended period of time, you're going to see the IT engine is going to be very relevant.

At the same time, we all have to be prepared for the adoption of electrification on a greater scale especially on the small and midsized passenger car and in the luxury car segment, but I think AAM is very well positioned for the current portfolio needs as well as the future needs going forward.

So I like our position -- I like the fact that we're positioned to balance our investments on reality today versus what the future may hold as it relates to ultimate propulsion systems.

Thank you, Brett, and we thank all of you who have participated on this call and appreciate your interest in AAM.

We certainly look forward to talking to you in the future.

Ladies and gentlemen, this concludes today's conference call.

Thank you for your participation, and you may now disconnect.