American Axle & Manufacturing Holdings Inc (AXL) 2017 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the AAM Fourth Quarter and Full Year 2017 Earnings Conference Call.

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

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

Please go ahead, Mr. Parsons.

Thank you, Ian, and good morning.

I would like to welcome everyone who is joining us on AAM's fourth quarter earnings call.

Earlier this morning, we released our fourth quarter and full year 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 87956027.

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

today through 11:59 p.m.

Eastern Time, February 23.

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

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

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

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

Over the next couple of months, we will participate in the following conferences: the Citi 2018 Global Industrials Conference on February 22; the JPMorgan 2018 Global High Yield & Leveraged Finance Conference on February 27; and the Bank of America Merrill Lynch New York Auto Summit on March 28.

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

Please feel free to contact me to schedule a visit.

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

Thank you, Jason, and good morning to everyone.

Thank you for joining us today to discuss AAM's financial results for the fourth quarter and full year of 2017.

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

To begin my comments today, I'll review the highlights of our fourth quarter and full year 2017 financial performance.

Next, I will comment on the performance of AAM's business units and provide an update on our synergy attainment and integration activities.

And lastly, I'll review AAM's new business backlogs and our 2018 financial outlook before turning things over to Chris.

After Chris covers the details of our financial results, we will then open it up to -- open up the call to any questions that you all may have.

Let me start by stating that 2017 was a transformational year for AAM.

We achieved another record year of sales and profitability while increasing our scale and accelerating business diversification through the acquisition of MPG.

AAM's fourth quarter 2017 sales were $1.73 billion, significantly higher compared to the $947 million in the fourth quarter of 2016.

Non-GM sales were over $1 billion for the second quarter in a row, representing over 58% of total sales in the fourth quarter of 2017.

For the full year 2017, AAM sales increased to $6.27 billion, easily a new annual record for AAM.

If you add in the first quarter sales of MPG before the acquisition, our pro forma sales would have been over $6.9 billion.

Our non-GM sales in 2017 were over $3.3 billion compared to $1.3 billion in 2016.

The customer diversification benefit of our acquisition of MPG had an immediate and obvious impact on our business, and we expect it to continue over the next few years.

From a profitability perspective, AAM also had a record-breaking year in 2017.

AAM's adjusted EBITDA in the fourth quarter of 2017 was $295.7 million or 17.1% of sales.

This compares to $148.2 million in the fourth quarter 2016 or 15.7% of sales.

For the full year 2017, AAM's adjusted EBITDA was $1,103,000,000.

This is another record for AAM.

AAM's adjusted EBITDA margin was 17.6% for the full year 2017 compared to 15.7% for the full year of 2016.

AAM's adjusted EPS in the fourth quarter 2017 was $0.89 per share compared to $0.78 per share in the fourth quarter of 2016.

For the full year 2017, AAM's adjusted EPS was $3.75 per share compared to $3.30 per share in the full year 2016.

AAM's cash generation power was also on display in 2017 as well.

AAM's adjusted free cash from the fourth quarter of 2017 was $50.9 million, and for the full year 2017, AAM's adjusted free cash flow was $341 million compared to $199 million for the full year in 2016.

As a result of our free cash flow generation and a record EBITDA performance, we made significant progress on our deleveraging plan.

Our net debt leverage ratio at the end of 2017 was 2.9x, slightly ahead of our target for the end of the year this year.

Chris will provide additional information regarding the details of our financial results in a few minutes.

Now let's take a deeper look into the segment results for the fourth quarter.

The driveline business unit recorded sales of just over $1 billion in the fourth quarter 2017, which translated to $178.8 million of segment-adjusted EBITDA.

Our high-performing driveline business unit continues to benefit from strong light truck production and the contribution of significant new business heavily concentrated on crossover vehicles.

The metal forming business unit recorded sales of $355.1 million and segment adjusted EBITDA of $61.8 million in the fourth quarter of 2017, continuing their strong operating performance throughout the year.

The powertrain business unit recorded sales of $272 million and segment adjusted EBITDA of $42.4 million, and in the fourth quarter, powertrain experienced sequential margin improvement from last quarter due to higher sales and lower launch costs.

And the casting business unit recorded sales of $224.2 million and segment adjusted EBITDA of $12.7 million.

We started to see more improvements in the operating performance compared to the third quarter results but still have some significant work to do here.

We expect to continue making progress in the first half of 2018 and to get this business unit performing to our expectations.

Overall, it was a very successful year for AAM.

We have increased our size, scale and global presence, and we continue to focus on delivering quality, technology leadership and operational excellence each and every day at every one of our facilities globally around the world.

Our 25,000-plus associates had an outstanding year, and we commend the AAM family for all their accomplishments in such a transformational year for the company.

Let me now provide a quick update on synergy attainment progress.

As we mentioned at the Deutsche Bank Conference in mid-January, we were running at $73 million annual cost reduction synergy run rate at the end of January.

Based on the progress we have made less than a year into the acquisition of MPG, we are now updating our cost reduction synergy target to the high end of our previously communicated range, $84 million of cost reduction synergies will be realized by the end of Q1 2018 and $120 million by the end of Q1 of 2019.

We feel very confident in our integration and synergy attainment activities so far and continue to identify additional cost reduction opportunities in order for us to meet and possibly exceed our targets.

We will continue to provide update on our progress throughout 2018, so stay tuned.

Before we discuss our 2018 outlook, let me review some highlights of AAM's 3-year new business backlog that we disclosed to you in mid-January and key program watches for 2018.

We expect to realize gross new and incremental business backlog of approximately $1.5 billion in future annual sales, covering the 2018 to 2020 period of time.

The cadence to this backlog is $450 million in 2018, $600 million in 2019 and $450 million in 2020.

As part of this backlog, we now have 2 major programs related to e-AAM electric and hybrid driveline solutions.

This year, we will begin record production on front and rear e-drive units on a fully electric all-wheel drive crossover vehicle that launches in Europe.

We also recently announced newly awarded e-drive business on a high-performance, hybrid passenger car that will launch in the 2020 time frame.

By 2021, we expect our e-AAM business to generate between $100 million to $200 million of revenue for the company, and we expect significant growth beyond that time frame.

The realization of our new business backlog will continue to diversify our business above and beyond what we achieved at the MPG acquisition.

About 40% of our new business backlog is for markets outside of North America, and over 50% relates to crossover vehicles.

And while we continue to win new business with General Motors, about 80% of our new business backlog is with non-GM customers.

As we look specifically at 2018, AAM will support over 50 major product and program launches that will drive -- further drive comparable sales and growth and further gains and business diversification for the company.

Some highlights include, as I previously mentioned, the launch of our first e-AAM program; power transfer units featuring our all-wheel drive disconnecting technology for a third EcoTrac customer on a global crossover vehicle platform; additional crossover vehicle launches for both GM and FCA; an independent rear-drive axle on a high-performance passenger car in Europe; and key replacement business launches, including GM's next-generation, full-size truck and the Ram heavy-duty pickup, our 2 largest platform programs.

And several launches on the components side will take place for high-speed transmissions and downside engines with our powertrain and our metal forming business units.

And before I turn over to Chris, let me provide some quick comments on AAM 2018 full year financial outlook.

Today, we are reaffirming the targets we shared with you at the Deutsche Bank Conference in Detroit on January 17.

Like most analysts, we believe it will be another record year for global light vehicle production.

And for the full year 2018, our plan assumes that total U.S. light vehicle sales will range between 16.8 million and 17 million units, a small decline from the 2017 levels here in the U.S. However, with strong new business backlog, we expect the growth in Asia and Europe as well as commercial vehicle and industrial markets and continued strong consumer demand in the key products we support, we expect sales growth on a pro forma basis from 2017 to 2018.

And based on these industry sales assumptions and the anticipated launch timing of AAM's new business backlog, AAM is targeting full year sales of approximately $7 billion in 2018.

After the full year in 2018, AAM is targeting an adjusted EBITDA margin in the range of 17.5% to 18% of sales.

And AAM is targeting adjusted free cash in the range of 5% of sales for the full year 2018, which contemplates capital spending of approximately 8% of sales to support the significant launch activity we just detailed for you.

As we look ahead to 2018, we expect another year of outstanding financial results, further integration and synergy attainment and exceptional support of our customers and numerous product launches.

That is all for my prepared remarks today.

We look forward to communicating with you throughout the year and appreciate your continued interest in AAM.

Let me now turn the call over to our Vice President and Chief Financial Officer, Chris May.

Chris?

Thank you, David, and good morning to everyone.

I will cover the financial details of our fourth quarter and full year 2017 results with you today.

And I will also refer to new earnings slide deck as part of my prepared comments.

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

In the fourth quarter of 2017, AAM sales increased over 80% on a year-over-year basis to $1.73 billion, primarily as a result of the MPG acquisition.

Slide 12 shows a walk-down of pro forma fourth quarter 2016 sales to fourth quarter 2017 sales.

In addition to the impact of MPG, AAM sales were positively impacted by favorable volume and mix, continued realization of our new business backlog as well as higher metal market customer pass-throughs.

AAM experienced nearly 9% net organic growth in the fourth quarter of 2017 on a pro forma year-over-year basis.

For the full year 2017, AAM sales increased nearly 60% to $6.27 billion as compared to $3.95 billion for the full year 2016.

In addition to the impact of the MPG acquisition, this sales increase reflected the realization of a solid new business backlog, strong production volumes in the core vehicle segments we support of light trucks, SUVs, the crossover vehicles and higher metal market pass-throughs.

The increase in sales we experienced in 2017 was both a result of our strategic actions as well as significant organic growth.

Just as a quick reminder, the full year of 2017 financial results do not include the preacquisition financial results of MPG from January 1 through April 5.

Now let's move on to profitability.

In both the fourth quarter and full year 2017, AAM continued to deliver strong operating profit metrics.

Gross profit was $294.3 million or 17% of sales in the fourth quarter 2017.

This compares to $176.1 million or 18.6% in the fourth quarter 2016.

For the full year of 2017, AAM achieved record gross profit of $1,119,000,000 or 17.9% of sales.

Adjusted EBITDA, or earnings before interest expense, income taxes and depreciation and amortization, excluding the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs and nonrecurring items, was $295.7 million in the fourth quarter 2017 or 17.1% of sales.

This compares to $148.2 million or 15.7% of sales in the fourth quarter 2016.

You can see a year-over-year walk-down of adjusted EBITDA on Slide 13.

Again, we calculated the fourth quarter 2016 pro forma EBITDA by combining AAM's and MPG's EBITDA from last year and eliminating the significant FX remeasurement gain of $23 million recorded by MPG that was primarily associated with their euro-denominated term loan.

This is not an element of AAM's capital structure and has no relevance on a year-over-year comparison.

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

Volume and mix, including the realization of our backlog, contributed favorably to EBITDA in the fourth quarter of 2017 by over $40 million.

The benefit from the synergies of MPG acquisition represented a $15 million benefit, and the USM acquisition contributed yet another $11 million.

We did experience metal market headwinds in the fourth quarter of about $5 million, and normal price-down activities had also represented approximately $5 million of unfavorable impact.

And lastly, as we've been talking about in recent quarters, our project expense activity has ramped up as we prepare for significant new programs and replacement business launches over the next several months.

This expense was up about $8 million on a year-over-year basis.

Project expense relates to noncapitalizable launch preparation costs such as one-off parts, equipment relocation, training, customer certification processes, et cetera.

In the fourth quarter of 2017, we incurred $20.2 million of restructuring and acquisition-related costs, which are shown in more detail on Slide 14.

Most of the spending in the quarter as well as in 2018 is focused on investments and integration and synergy attainment, which is in line with our previous commentary.

These investments are important for us to reach our full synergy potential.

For the full year 2017, AAM's adjusted EBITDA increased 78% to $1,103,000,000.

Adjusted EBITDA margin for the full year of 2017 was 17.6% of sales compared to 15.7% in the full year 2016 and 16.6% when calculating on a pro forma basis for the combined companies in 2016.

This is a meaningful year-over-year improvement.

AAM continues to capitalize on strong global production and capacity utilization trends, lower net manufacturing costs resulting from productivity improvement and synergy attainment, viable vertical integration and value-capture activities and operational excellence across our global facilities.

Let me now cover SG&A.

SG&A expense, including R&D, in the fourth quarter of 2017 was $100 million -- $101 million or 5.8% of sales.

This compares to $83 million in the fourth quarter 2016 or 8.8% of sales.

AAM's R&D spending in the fourth quarter 2017 was $38.5 million compared to $37.5 million in the fourth quarter 2016.

For the full year 2017, SG&A expense was $390.1 million or 6.2% of sales.

This compares to $314.2 million for the full year of 2016 or 8% of sales.

AAM's R&D spending for the full year of 2017 was up to $161.5 million compared to $139.8 million in the full year 2016.

Lower SG&A expense as a percent of sales in 2017 reflects the benefits of synergy attainment from our acquisition as well as the favorable impact of a separate global restructuring program we began in the fourth quarter 2016.

However, it is important to note that we continue to fund critical research and development activities focused on electrification, light weighting, fuel efficiency and vehicle safety and performance.

R&D spending was up over 15% year-over-year in 2017, and we expect to continue to invest meaningfully in advanced mobility solutions that will drive profitable growth and business diversification for years to come.

With our productivity and synergy attainment initiatives, we expect SG&A cost as a percent of sales to run approximately 6% of sales on an annual basis in the near term.

This is one of AAM's lowest run rates of SG&A as a percent of sales in the last decade.

Amortization of intangible assets for the fourth quarter of 2017 was $24.5 million as compared to $1.4 million in the fourth quarter 2016.

For the full year, intangible asset amortization was $75.3 million in 2017 compared to $5 million in 2016.

The increase relates to the significant amount of intangible assets recorded to our balance sheet in 2017 as part of purchase accounting for our acquisition activity.

From there, let's move on to interest and taxes.

Net interest expense was $55 million in the fourth quarter 2017 compared to $23 million in the fourth quarter 2016.

For the full year 2017, net interest expense was $192.7 million as compared to $90.5 million in 2016.

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

In the fourth quarter of 2017, we recorded an income tax benefit of $13.1 million compared to income tax expense of $4.5 million in the fourth quarter of 2016.

The main driver of this benefit was tax adjustments related to the Tax Cuts and Jobs Act, better known as U.S. tax reform, that was enacted in the U.S. in December of 2017.

We recorded approximately a $20 million net tax gain to the income statement in the fourth quarter of 2017 for U.S. tax reform.

This primarily represented the net impact of adjusting the valuation of our U.S. deferred tax assets and liabilities for the change in corporate tax rate from 35% to 21%.

You may remember that as of the third quarter of 2017, we were in the net deferred tax liability position of nearly $200 million.

This change in corporate tax reduced this net liability, therefore driving the gain.

We also recorded an income tax expense for a onetime transition tax on certain foreign earnings for which U.S. income tax previously deferred and the reversal of previously reported deferred tax liabilities for unremitted foreign earnings that were not permanently reinvested.

It's important to note that we have recorded the adjustments related to the 2017 Tax Cuts and Jobs Act based on information currently available and in accordance with SEC guidance specific to the accounting for the 2017 act.

These amounts are provisional and subject to adjustment in future periods as we obtain additional information and complete our analysis.

We also continue to incur significant restructuring and acquisition-related costs in the U.S., causing more than normal income tax in the U.S., which was still a high tax rate jurisdiction for the 2017 tax year.

The effective rate for the fourth quarter of 2017 when adjusted for these items would have been 11%, and our adjusted effective tax rate for the full year of 2017 was approximately 18%.

We expect our effective tax rate for 2018 on an adjusted basis will be between 15% and 20%.

Taking all these sales and cost drivers into account, GAAP net income was $106.3 million or $0.93 per share in the fourth quarter of 2017 compared to $46.9 million or $0.59 per share in the fourth quarter of 2016.

For the full year of 2017, AAM's GAAP net income was $337.1 million or $3.21 per share compared to $240.7 million or $3.06 per share for the full year of 2016.

Adjusted earnings per share excludes the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs and nonrecurring items discussed on this call and noted in our earnings press release.

It also excludes the gain related to tax reform.

Adjusted EPS for the fourth quarter of 2017 was $0.89 per share compared to $0.78 per share for the fourth quarter of 2016.

For the full year 2017, adjusted EPS was $3.75 compared to $3.30 for the full year 2016.

So 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 CapEx net of proceeds from the sale of property, plant, 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 settlements of preexisting accounts payable balances with an interest expense payable for acquired entities.

Net cash provided by operating activities for the fourth quarter of 2017 was $226.3 million.

Capital expenditures net of proceeds from the sale of PP&E and equipment and government grants for the fourth quarter was $198.2 million, and cash payments for restructuring and acquisition-related activity for the fourth quarter of 2017 were $22.8 million.

Reflecting the impact of this activity, AAM generated adjusted free cash flow of $50.9 million in the fourth quarter 2017.

For the full year of 2017, AAM generated adjusted free cash flow of $341 million compared to $199 million for the full year of 2016.

This represents over a 70% increase year-over-year and an adjusted free cash flow yield that is well over 15%.

From a debt leverage perspective, we ended the year with a net debt to LTM pro forma adjusted EBITDA, or net leverage ratio, of 2.9x at December 31.

This calculation takes our total debt minus our available cash balances divided by our pro forma adjusted EBITDA.

We are right on track with our plan to be at approximately 2x by the end of 2019.

In the fourth quarter of 2017, we also prepaid $200 million on our senior note that was due in 2019.

We were pleased to utilize the free cash flow generating power of AAM to do exactly what we said we would do: reduce our leverage and future interest expense.

AAM ended 2017 with total available liquidity of approximately $1.4 billion, consisting of available cash and borrowing capacity on AAM's global credit facility.

So before we move on to the Q&A, let me close my comments with a quick note on our 2018 guidance.

David reaffirmed our full year financial targets that we previously communicated to you, so I'm not going to repeat them.

I do think it's important to note, however, that planning customer downtime and preparation for our program launches, along with our own program and launch activities, will likely cause an unevenness of our quarterly financial results.

We do not provide quarterly financial guidance; however, as we mentioned during the Deutsche Bank Conference in mid-January, we expect the first quarter of 2018 to have a lower margin profile due to significant customer downtime for our full-size truck platforms at both GM and FCA production facilities as they continue to prepare for some exciting key launches.

We also expect that project expense for 2018 to be front-loaded and have the most impact in the first quarter as we also prepare for these critical launches.

We also continue to make great progress in our synergy attainment throughout the year and expect that benefit to grow each quarter in 2018.

And lastly, we continue to make improvements in our casting business unit and expect to be back to an acceptable margin performance for that segment as the year progresses as well.

That being said, let me reiterate that all these factors were contemplated in the full year 2018 guidance we provided in mid-January.

Nothing has changed.

We have reaffirmed this guidance with you today.

As I said, we do not provide specific quarterly guidance, but we want to be transparent as we can about the quarterly cadence of our sales and earnings and how they may differ from previous periods.

Let me wrap up by saying, all in all, 2017 was a great year for AAM.

We completed meaningful strategic acquisitions that increased our size, scale and financial profile, accelerated our diversification and capitalized on value capture and synergy attainment opportunities.

We realized organic sales growth on the strength of our new business backlog, continued international growth and improvements in the commercial vehicle and industrial markets.

And we met or exceeded every financial commitment we made for the year.

The AAM team has grown significantly this year, and all our associates have a lot to be proud of.

2018 can be even better.

With the launches of our electric driveline solutions, further business diversification and expected strong financial results, we believe our plan will lead to long-term shareholder value creation.

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

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

Jason?

Thank you, Chris and David.

We have reserved some time to take questions.

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

(Operator Instructions) Your first question comes from Brian Johnson of Barclays.

I wanted to ask a little bit over on the e-axle side, sort of beyond the puts and takes around this guidance.

It seems like plans for the medium-duty truck and the smaller end of the LCV market are going to go electrified first.

We've seen a competitor show up on medium-duty trucks.

And I know you're not generally in commercial vehicles, but if you think about things like the Transit, the Econoline van, the Safari over here, those seem like prime markets to go electrified due to city-specific emissions controls.

What are you doing?

Do you have a pipeline in that marketplace?

Could you take some of the things you're currently kind of pushing in the CUV, SUV world and bring them into that market?

Brian, this is David.

With respect to your question on electrification, our primary focus initially has been on the passenger car and the CUV side as we see those markets and segments being ones that accept and adopt the technology first.

As we just communicated again here today, we're launching a CUV program this year and that we've won a passenger car, a P3 solution going forward here, and we expect our electric drive to be somewhere between $100 million to $200 million by the 2021 calendar period of time.

A lot of what we're developing for the passenger car and CUV applications can be applicable to light truck and even medium commercial truck.

Obviously, there's different configurations and different battery sizes and motor sizes and axle size that will need to be integrated, but we are clearly keeping that in front of us and looking at that as an opportunity for us in the future.

Okay.

And would that include the potential -- the light pickup truck market?

We know from (inaudible) in Chicago Auto Show that Ford is bringing out a hybrid electric pickup truck around 2020, and I assume if they do it, the other 2 players won't be far behind.

Yes.

So I mean, right now, we still feel that most of the pickup truck will stay at traditional IC-based engine.

But even with hybrid, our products are still relevant in that environment.

But at the same time, we're positioning ourselves.

If the customers have demands and needs for hybrid electric applications for trucks in the future, then we'll make sure we're positioned to support that.

Okay.

Second question.

A lot of volatility around -- worries about commodity.

It's driven, we think, by worries about commodity prices and between the general upswing due to stronger global economy and then, of course, the Twitter and Sheets.

Could you give us a sense of where you might be exposed on the sales side?

Just a couple of quick recaps.

One, overall pass-through North America, the U.S. in particular.

Two, what is your sourcing, domestic, Mexican or coming in from the Pacific?

And then three, given that, how would you be affected by a change in tariffs or price levels around the state?

Our pass-through is around 90%, as we've communicated to you guys earlier.

With respect to our sourcing, most of our sourcing supporting our North American operations is supported here in the U.S., both for the U.S. consumption as well as Mexico consumption.

We've got long-term contracts in place with multiple suppliers.

We've negotiated many of those here just this past year.

So we feel like we're in a solid position in that respect.

We have seen some material increases in regards to the European market with the acquisition of MPG and the forging applications that we have in Europe.

So clearly, we'll have to work on the pass-through of some of those commercial increases with respect to those items, but overall, we feel very good about where we are in materials at this time.

Your next question comes from the line of Rod Lache of Deutsche Bank.

I had a couple of questions.

One is, it's interesting that you had 31% conversion on your backlog volume and mix, even with the castings margins presumably down year-over-year.

Could you just give us a little bit more color on -- I think you said that some of the issues there were self-inflicted and just MPG having moved a bunch of product into a single plant and increasing the complexity.

So maybe just talk a little bit about what you are doing to fix that, what you think the margins can get to and by when.

Okay, Rod, this is David.

You touched on some of the key issues that we had highlighted earlier.

We took over some challenges with respect to the casting program when we acquired MPG.

There is a lack of maintenance in certain areas and a lack of infrastructure support or neglect that we've had to step up to some of that.

We also dealt with the manpower shortage issue.

Volumes were trending down before the sale of MPG's assets to American Axle.

So therefore, manpower has taken a -- or taken out only for the volume, especially in industrial ag and commercial to bounce back, so we had to work through a manpower shortage issue.

And then as you also commented on, they had announced a closure of a plant that was being integrated into other plants.

Plan on paper was one thing, the execution was something different.

And they had also, recently or prior to our acquisition, had acquired the Brillion assets and announced the plant closing, and all that had to be integrated into the business.

So we've gone back and we've looked at all the install capacities.

We looked at the capability.

We've now got the [manning] directionally in line with where it needs to be, and we see improvements taking place.

We expect first half of the year to trend towards that 10% to 12% margin or EBITDA-type range and then, hopefully, higher than that in the second half of the year.

But we clearly see it turning in a favorable direction but not to our expectations at this time.

Okay.

Great.

And then secondly, can you comment on any update on the discussions with Fiat Chrysler regarding their decision to move truck production from Mexico to Warren in 2020.

Are you still anticipating that you would produce axles for the [metal] Guanajuato?

And if that changes, is that all kind of achievable within the context of your 6% CapEx forecast?

Yes.

Right now, we've been given a direction from FCA to continue with our launch out of our Mexican operations, so that's what we'll be doing to support the next-generation MAN heavy-duty program.

Yes, they did announce the movement of that product up to Michigan here in the 2020 calendar year period of time, and we're in discussions with FCA as to what the longer-term implications are associated with that decision from a plant loading standpoint.

Nothing more that we can announce at this point in time, but we are in discussions with them.

Your next question comes from the line of Joe Spak of RBC.

The first question is on some of the color around the guidance.

So the changeover stiffness in first quarter, I think IHS has the pickups down about 35k and GM sort of stating something similar.

So does that mean, I know this is what you're planning for within that, a pretty steady unit volume decline over the remaining 3 quarters to sort of get in line with what GM has indicated the trucks will be down year-over-year?

Yes, Joe.

As we cadence out through 2018 -- this is Chris.

As we cadence out through 2018, we will anticipate, obviously, as we mentioned, a weaker first quarter and we typically have stronger quarters from there based on production data.

Right.

So the synergy target at the high end of the prior range, correct me if I'm wrong, but it sounded mostly like that's just some greater visibility into the initial opportunity identified.

But, David, it also sounded like maybe you are alluding to some additional opportunities beyond that.

I was wondering if you could talk a little bit more about -- maybe not sort of quantifying them yet, but where such opportunities may lie.

Sure.

Again, you're right.

We moved to the high end of the target that we had put out there.

Remember, we had identified $45 million to $50 million in overhead, $45 million, $50 million in purchasing and supply chain management and another $10 million to $20 million in regards to manufacturing and other.

So we feel highly confident that we'll meet the first quarter of '18 target at $84 million, which is 70% of the original target.

At the same time, you will now guide industry that $120 million for the first quarter of '19.

We do feel that there may be some additional opportunity in the manufacturing and other category.

That tends to take a little bit longer, as you know, from a product validation standpoint, plant loading, product loading initiative.

Some of that will be realized in '19, others will be realized beyond that.

But we feel highly confident that we'll meet the $120 million and are hopeful with confidence that we can even beat that.

But nothing further to announce at this time.

Okay.

And then last one for me.

You talked about the casting improvement margin in the first half of '18?

And then beyond that, I mean, just so we could sort of frame the opportunity even if we are a little bit more vague on time line, if we look back at sort of old MPG, is that still like an 800 basis point plus sort of opportunity from the fourth quarter levels?

Is that the right way to think about it?

Yes, Joe, this is Chris.

So right now, if you look at our fourth quarter casting performance, it was 5.7% from a segment level, right?

Our objective here is to get that up, as David mentioned, towards the 12% plus range by midyear.

Right, but that would still be, I believe, below sort of what that segment did prior to acquisition.

Or is that not correct?

Well, a couple of perspectives.

One, we would anticipate to continue to perform better than that, so I said plus.

And secondly, you deal with a little bit of difference on segment cost allocations between what you see AAM today and MPG previously.

So there's some subtle differences between that.

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

Just a first question, and I'm not sure if this is a fair question or how much visibility you have into this, but in the -- now that we're heading into sort of the period where GM has the -- business takes resource away from you, about to ramp up, I mean, do you have any visibility or are you seeing anything on that?

And really, the reason I'm asking is, one, would it be the potential for them to maybe resource more away from you?

Or two, could this business eventually maybe come back to you over time?

John, this is David.

We're not hearing anything that would challenge their launch capability, so we expect them to launch on schedule.

As you know, we're going to be supplying them some components, too, to support their axle production moving forward.

Second thing -- second part of your question was, do we expect that they'll in-source any more of this?

No.

The answer is no to that.

We have contractual agreements that are in place, and they have a defined capacity that they put in place for both front and rear axles.

So we don't see any issue with respect to that.

We're just working out the mix between our 2 facilities.

As I said, they've designed and developed a specific product for front axles and rear axles for the single product, and we have the full complement in the range.

So in the event that they have any problem with their launch, we could be there to support them.

So we have a very good relationship with General Motors.

As you said, they made the sourcing decision.

We've offset that sourcing decision and added incremental sales to our overall backlog and new business.

It helps our diversification efforts.

I mean, obviously, we're disappointed to lose that business, but that was a commodity strategy decision by General Motors, and we respect their decision.

And right now, we're just focused on successfully building the K2XX out and successfully launching the T1XX next-generation product with GM.

Okay.

That's helpful.

And then just a second question.

I mean, I'm just curious if you could give us sort of an update on bidding on business outside of the stated backlog.

And also, as you're getting into new components like e-drive and everything, are you seeing sort of the usual suspects that you're going up and against in the bidding process?

Or are there some new (inaudible) of suppliers that are kind of rolling into the bidding process?

Yes, with respect to the new business opportunities, we're calling about $1.5 billion of opportunity in our market basket right now.

Just historically, I'd say 2/3 of that, let's say, AAM legacy and 1/3 of it is MPG legacy.

Our normal hit rate in the past between both organizations was in that 25% to 30% range, and so we expect it to continue to deliver to that and to add to our backlog going forward, especially in that 2020 calendar year period of time and beyond.

With respect to the types of products, I mean, obviously, there's light truck applications.

You know the normal players that we bump up against, whether it's in-house or predominantly being on the light truck and SUV side of things.

On the passenger car, crossover vehicle side, we've run into a number of people in regards to Magna and Linamar and GKN, ZF.

And some of those same people hold true with respect to some of the electric guide applications.

But there are some other emerging competitors, the BorgWarners, the -- what do I say, the Bosches, the Continentals and others with respect to some of the e-drive application as well fighting for space in the future.

So there are -- you say there would be a few incremental players on some of these new e-drive programs that are traditional suppliers, not coming from the outside but are newer to the space.

Is that correct?

The answer would be yes to that.

What we are finding is those people that tend to have the historical knowledge of driveline tend to be the preferred customers -- preferred suppliers that the customer likes to work with.

Your next question comes from Itay Michaeli from Citi.

Just 2 questions on the prior guidance of a 17% to 18% margin through 2020 and want to specifically focus on 2020.

So the 2 questions there are, one, do you need to actually, as related to the prior question, win more backlog to kind of sustain the margin in the range over that incremental?

And then secondly, how should we think about the price-down relative to cost reduction outside of the MPG synergies over the next couple of years?

How much of that are you able to offset, do you think, every year?

Itay, this is Chris.

Two parts to your question.

As we think about that guidance as it relates to margin between here and 2020, obviously, we have our book backlog.

As David mentioned, we're still quoting on some activity over $1.5 billion.

Some of that will hit potentially '19, more of that activity in '20.

So we do have some growth assumed in that, but all within our past historical run rates.

So we should absolutely achieve that.

When you think about in terms of price-downs, in terms of what we historically have seen, call it, 0.5% or 50 basis points plus or minus, we would typically see that offset with core productivity outside of synergy attainment activity.

So I would expect that trend to continue.

Okay, that continues.

And just a quick follow-up and just a housekeeping.

I think you mentioned the tax rate for 2018, it was about 15% to 20%.

And is that kind of sustainable going forward?

And secondly, can you kind of share what you're thinking roughly the 2018 D&A expense should be?

As it relates to tax, I would expect 15% to 20% '18, as I mentioned.

It will probably drift up closer to 20% as we post 2018.

So a little premature there, but that's what I would expect that to trend towards.

And then D&A, if you think about our D&A perspective this year, we missed in terms of -- we didn't have the first quarter of MPG in there.

It was step-up for amortization, so it will essentially be very similar to this year, plus about half of a quarter or so.

Our last question comes from the line of Ryan Brinkman of JPMorgan.

It would be great if you could provide some sort of an update on the revenue side of the merger-related synergies.

Can you address the opportunity from both sort of the customer introduction side of things, but then also maybe from the vertical integration side of things in terms of maybe doing things more in-house via Metaldyne relative to what components you might have sourced from the outside that went into your axles.

The customer introduction opportunity, I think it was more discussed or speculated upon, at least, at the time of the acquisition but also deemed to be, I guess, relatively further out more akin to the sort of 3- to 5-year development cycle.

Is the vertical integration opportunity something that is more possible over the near term?

How material could that be?

And when might we start to see it?

So Ryan, this is David.

One of the key factors and strategic logic that we have when we did the MPG acquisition was the vertical integration plan.

And clearly, they were a supplier to us already in castings, and we're realizing that benefit today.

At the same time, we've already made strategic sourcing decisions that impact some of our next-generation product through that cadence going forward to in-source some of that work.

So that will further benefit us going forward on the casting side.

We also have the opportunity to do some in-sourcing on some incremental forging.

You know we're a large forger already.

At the same time, we're now the largest forger in the world, so we have that global capability now to support our global operations in Europe and as well as in Asia, and we'll work to do that in the future.

And then also, with their sinter metal or powder metal capability, we've already made some decisions to in-source some of that work in the future, again, as part of some of the synergistic plans that we have.

So we feel very good about the opportunities they are presenting themselves on the vertical integration side.

As it relates to the customer side of things, as we said to you and you commented on, it may take us a little bit longer to realize that, but we clearly have a cross-selling opportunity where we have strong relationships, meaning AAM with some of the customer base, we'll pull the MPG portfolio into those customers, and where the MPG legacy relationships with the customers existed, we'll leverage that to pull the AAM portfolio to those customer discussions and negotiations.

So yes, we feel good about where we are.

We're seeing the opportunities present themselves.

We've already been awarded some business because of that, but some of that business doesn't realize itself in some of the out years.

But again, we definitely think there's opportunity from a sales standpoint with the customers.

Okay.

That's very helpful.

And just as a quick follow-up.

I imagine the customer introduction stuff, that will probably be beyond the backlog window, I'm guessing.

But is the vertical integration -- is some of that already in the 2018 through '20 backlog?

And is there potential because it doesn't have quite as long of a lead time for more to enter into it, thus providing maybe some upside risk to the backlog?

You won't see as much of a sales impact in the vertical integration as much as you're going to see the product performance and financial performance.

And yes, part of that is within the backlog of the programs that we're launching.

And is there still potential for more upside than, I guess, to the margin as opposed to revenue?

Or depending upon how these things get in...

No.

Based on the sourcing decision that we made and based on the launch cadence that we have, yes, we will expect to see some margin expansion based on the in-sourcing decision that we make.

And, Ryan, this is Mike speaking.

When you break out the $20 million other category of synergy attainment, in-sourcing is a big part of what we're doing in that area.

So there's over $100 million, pushing $200 million of vertical integration activity that we see in our internal management reporting because it's internally consumed.

That's what David meant by you won't see sales -- net sales of the company increasing, but you do see our cost structure improving, and that is a significant element of our synergy plan.

The one other thing I want to mention about cross-selling and customer opportunities and where our backlog has great potential, we see outstanding opportunities for growth in China.

And we have relationships there that are from either side, either legacy side of the 2 companies, and we're bringing our sales teams together.

We're bringing our -- in some cases, we're bringing our manufacturing capabilities together where we have a significant campus in Changshu.

MPG was in Suzhou.

They're located reasonably close, as you probably know.

And so we are seeing great opportunity for those revenue synergy activities in China.

Thank you, Ryan.

I want to thank all of you who have participated on the call and appreciate your interest in AAM.

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

This concludes today's conference call.

You may now disconnect.