American Axle & Manufacturing Holdings Inc (AXL) 2018 Q4 法說會逐字稿

Good morning.

My name is Sia, and I will be the conference facilitator today.

At this time, I would like to welcome everyone to the American Axle & Manufacturing Fourth Quarter 2018 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, 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 2018 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 3389085.

This replay will be available beginning at 3:00 p.m.

today through 11:59 Eastern Time February 21.

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 risk and uncertainties, which cannot be predicted or quantified, and which may cause future activities and results of operations to differ materially from those discussed.

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

Also during 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 months, we expect to participate in the following conferences: The Citi Global Industrials Conference on February 20, the J.P. Morgan Global High Yield & Leveraged Finance Conference on February 26 and the Bank of America Merrill Lynch New York Auto Summit on April 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 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 2018.

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 will review the highlights of our fourth quarter and full year 2018 financial performance.

Next, I'll comment on the performance of AAM's business units.

And lastly, I'll review our 2019 financial outlook before turning things over to Chris.

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

Let me start by stating that AAM's full year 2018 financial results reflect record sales, gross profit and operating cash flow despite some launch and operating-related challenges during the second half of the year.

AAM's fourth quarter 2018 sales were $1.69 billion compared to $1.73 billion in the fourth quarter of 2017.

For the full year 2018, AAM's sales increased to $7.27 billion, $1 billion higher than our full year 2017 and the new annual record for AAM.

The primary reasons for this increase are related to operating for a full year as an integrated company, a solid new business backlog, strong light truck, SUV and crossover vehicle production volumes and higher customer pass-throughs related to metal market.

From a profitability perspective, AAM made progress in the fourth quarter on the launch and operational issues that we faced in the third quarter 2018 and continues to expect resolution of the matters by the second quarter of this year.

AAM's adjusted EBITDA in the fourth quarter of 2018 was $244 million or 14.4% of sales.

This compared to $295.7 million in the fourth quarter 2017 or 17.1% of sales.

For the full year 2018, AAM's adjusted EBITDA was $1,184,000,000.

This is another record for AAM, but it did not meet the expectations that we set forth for ourselves at the beginning of the year.

AAM's adjusted EBITDA margin was 16.3% for the full year of 2018 compared to 17.6% for the full year of 2017.

AAM's adjusted EPS in the fourth quarter 2018 was $0.45 per share compared to $0.89 per share in the fourth quarter of 2017.

For the full year of 2018, AAM's adjusted EPS was $3.28 per share compared to $3.75 per share in the full year of 2017.

It is important to highlight, and as we noted in our press release this morning, that we recorded a noncash goodwill impairment of $485.5 million in the fourth quarter of 2018 related to our casting and powertrain business units, the impact of which has been excluded from our adjusted EBITDA and adjusted EPS calculations.

This impairment is the result of our annual goodwill impairment cap and reflects changing market dynamics and recent underperformance in these business units.

We've been very transparent about these matters in recent discussions with the investor community.

It does not change our overall view of our long-term goals and objectives for AAM in any way, shape or form.

AAM continued to deliver strong free cash flow generation in 2018.

AAM's adjusted free cash flow in the fourth quarter of 2018 was $142.4 million.

For the full year 2018, AAM's adjusted free cash flow was $322.3 million compared to $341 million for the full year 2017.

Our net debt leverage ratio at the end of 2018 was 2.8x, and we continued to make prepayments on our gross debt with a $100 million payment in the fourth quarter of 2018.

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

Let's now turn to our business units and segment performance for the fourth quarter of 2018.

The driveline business unit recorded sales of $996 million in the fourth quarter 2018 and delivered $146.5 million of segment adjusted EBITDA.

Sales in this business unit were down versus the third quarter due to lower production days as a result of normal seasonality as well as additional downtime due to customer program changeovers.

AAM did see improvement in the operating and the launch performance in this business unit, especially as it relates to the build-out of the current Ram heavy-duty truck and the launch of the next-generation vehicle.

We also made meaningful progress on most of the supplier delivery issues that we faced back in the third quarter.

As it relates to our current production, the only remaining issue we have is with a core product metal supplier that we are in the process of resourcing and insourcing.

As it relates to our electric driveline supply issues, one of the issues had been resolved, and we are moving forward with the resource supplier.

The other issue, which relates to an aluminum casting supplier, continues to drive excess cost, including labor and material and premium freight, and we are working hard to get this critical issue corrected, but do expect to incur premium cost at least into the first quarter of 2019, no different than what we told you before.

The metal forming business unit recorded sales of $339 million and segment adjusted EBITDA of $54.6 million in the fourth quarter of 2018.

Despite lower sales due to seasonality and program changeovers, this business unit performed at over 16% EBITDA margin level for the quarter.

On a full year basis, this business unit performed very well with an adjusted EBITDA margin of nearly 19%.

The powertrain business unit recorded sales of $263 million and segment adjusted EBITDA of $32.3 million.

As you remember from the third quarter, we experienced significant excess project and launch related expense and expense-related costs from this business unit in the third quarter of 2018.

We did, however, make improvements in launch-related expenses such as premium labor, scrap and indirect materials during the fourth quarter.

While we were able to increase EBITDA margin sequentially by 30 basis points, we continue to be negatively impacted by excess launch cost and operating performance issues.

However, the powertrain business unit is on track with its performance improvement plan, and we expect to see continued progress in these areas through the first half of 2019.

And the casting business unit recorded sales of $218.5 million and segment adjusted EBITDA of $10.6 million.

We continue to be impacted by labor and operational inefficiency and input cost inflation in this business unit.

As part of our improvement initiatives, we've been able to negotiate some price increase with our commercial, industry customers.

This price impact started in the fourth quarter of 2018, but the majority of these actions will begin to favorably impact the business in the first quarter of 2019.

We expect this to help improve the performance of this business unit as we go forward.

As we announced back in January at the Detroit auto show, we are consolidating our powertrain business unit into both our driveline and metal forming business units.

We are moving 12 facilities that make up $600 million in sales, focused on highly engineered products, into our driveline segment.

These products include differential assembly and vibration control systems.

The remaining 12 facilities representing about $500 million in sales and focused on forming and sintered operations are being integrated into our metal forming business unit.

This business restructuring will assist us in accelerating and finalizing the integration process, which we are working to complete here by the end of 2019.

Furthermore, it will enhance the alignment of AAM's product and process technologies and will help us accelerate the implementation of AAM's operating system, including important program management and launch readiness discipline, which we are lacking.

We will also achieve greater efficiencies within our corporate and business unit support teams and expect an annual cost savings of $10 million to $20 million.

Keep in mind that these savings are in addition to the integration synergies associated with the MPG acquisition.

As you know, our objective was to secure $120 million in annual run rate cost savings by April 1, 2019.

We achieved this in January of 2019, a few months earlier.

Let me wrap up 2018 with a look back at some of the overall highlights.

Despite the challenges that we faced in the second half of the year, it was still a great year for AAM in many regards.

We hit record sales of over $7 billion in revenues for the first time as a company.

We were also recognized as a Fortune 500 company.

In addition, we also hit the highest adjusted EBITDA dollar mark and second-highest adjusted EBITDA margin in our company's history.

From a technology perspective, we were awarded our fifth Global EcoTrac program, won 2 Lightweighting Awards for our advanced QUANTUM technology and launched our first e-AAM electric drive system on the Jaguar I-PACE vehicle.

Strategically, we sold the aftermarket division of our powertrain BU, formed an important joint venture with Wuling Motors in China and met key integration and synergy attainment milestones.

We also achieved 14 performance and quality awards from our customers, including our second consecutive supplier of the year award from General Motors.

And we continued to generate strong free cash flow and made over $200 million in senior debt payments.

Needless to say, 2018 was a pivotal and busy year for AAM.

Before I turn over to Chris, let me provide some quick comments on AAM's 2019 full year financial outlook.

Today, we are reaffirming the targets we shared with you at the auto show conference in Detroit back in January.

AAM is targeting full year sales between $7.3 billion and $7.4 billion in 2019.

We are also targeting adjusted EBITDA for 2019 in the range of $1.2 billion to $1.25 billion, an increase over 2018.

And AAM is targeting adjusted free cash flow in the range of $350 million to $400 million, which contemplates capital spending of approximately 7% of sales.

As we look towards 2019, we expect to profitably grow, further diversify our business and continue our trend of delivering strong free cash flow metrics.

Make no mistake, 2019 will be another exciting year for AAM, especially considering the strength of light truck, SUV and crossover vehicles in the marketplace, coupled with a strong economy.

Critical to our success in 2019 will be our ability to launch flawlessly and to restore operational excellence and discipline to our production operations, especially the legacy MPG facilities.

We have approximately 50 product and program launches in 2019, including significant Ram HD and GM full-size truck launches.

Many of these launches as well as our performance improvement plans will be completed by the first half of the year.

The benefits from our business unit realignment, along with further synergy attainment activities should help drive improved performance for the year, especially the second half of the year.

That concludes my prepared remarks.

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

Chris?

Thank you, David, and good morning, everyone.

I will cover the financial details of our fourth quarter and full year 2018 results with you today.

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

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

In the fourth quarter 2018, AAM sales were $1.69 billion compared to $1.73 billion in the fourth quarter of 2017.

Slide 12 shows a walk down of fourth quarter 2017 sales to the fourth quarter 2018 sales.

The year-over-year decrease relates mainly to the impact of the transition to the next-generation GM full-size truck platform, partially offset by continued realization of our new business backlog.

Higher metal market pass-throughs also contributed slightly to the higher sales of about $8 million.

For the full year 2018, AAM's sales increased over 15% to $7.27 billion as compared to $6.27 billion in the full year 2017.

Having a full year impact of the MPG acquisition added over $700 million to the top line in 2018 as compared to 2017.

But AAM also grew organically, mainly on the strength of our new business backlog.

This increase also reflected higher customer metal market pass-throughs, which increased sales, but had a detrimental impact on our margin in 2018 of about 20 to 30 basis points.

Now let's move on to profitability.

As David covered earlier, we made progress on some of the launch and operational challenges that we faced last quarter.

Gross profit was $225.3 million or 13.3% of sales in the fourth quarter of 2018.

For the full year 2018, AAM achieved record gross profit of $1,140,000,000.

This equates to 15.7% of sales.

Adjusted EBITDA was $244 million in the fourth quarter 2018 or 14.4% of sales as compared to $295.7 million or 17.1% of sales in the fourth quarter of 2017.

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

Lower volume and mix impacted EBITDA by $26 million as we saw lower sales in some of our more profitable programs within the quarter.

In addition, the timing of year-over-year customer pricing updates also impacted the quarter, along with a slight impact from metal market and FX.

Consistent with recent quarters, we continued to see inflationary pressures on material and freight.

On a year-over-year basis, this impacted EBITDA in the amount of $14 million, of which approximately $3 million related to tariffs.

While we believe that these inflationary pressures have started to level off some, we have factored some additional inflation pressures in our 2019 financial targets, mostly to reflect a full year impact of these issues that emerged in 2018.

On a year-over-year basis, we also experienced higher launch and project-related costs in the fourth quarter 2018 of about $10 million.

As you may recall, this year-over-year headwind was $30 million in the third quarter, and we've seen some improvement in areas such as scrap, premium labor and outside processing costs.

We do expect to make continued progress on these costs in the first half of 2019, and anticipate seeing significant year-over-year decreases in these costs by the second half of 2019.

We also continued to experience run rate inflation on labor and utility costs similar to what we experienced in the third quarter.

As for supply disruptions, we are still working on a few key issues to resolve, but many of these issues were resolved in the fourth quarter.

Our castings business unit continued with some operational cost increases with indirect input and additional maintenance costs in the fourth quarter of 2018.

We continue to realize benefit from our synergy attainment activities with a year-over-year increase of $10 million in the fourth quarter of 2018 and in line with our overall run rate achievement and goals.

When you look at the sequential EBITDA changes in EBITDA from the third quarter of 2018 to the fourth quarter, which is detailed on Page 14, the largest impact we had was related to volume, mix and pricing.

Sales were down nearly $125 million, which caused a $46 million reduction to EBITDA on a quarter-to-quarter comparison.

We did see a small benefit related to metal market and FX, mainly reflecting an FX remeasurement loss that occurred in the third quarter, but did not recur in the fourth quarter.

And lastly, and most importantly, we did see an $11 million improvement related to launch and operational improvements from the third quarter to the fourth quarter.

This is in line with the improvements we expected to achieve.

A couple of other things to know on the fourth quarter 2018 as it relates to adjustments to EBITDA.

In the fourth quarter 2018, we incurred $12.1 million of restructuring and acquisition-related costs.

These costs have been excluded from adjusted EBITDA and adjusted EPS.

We also recorded a noncash goodwill and timing impairment charge in the fourth quarter of 2018 of $485.5 million.

$405 million relates to our casting business unit and $80 million to our powertrain business unit.

As you know, we are required by U.S. GAAP to perform an annual goodwill impairment test, which we perform in the fourth quarter of every year on a reporting unit basis.

Due in part to recent performance and lower-than-anticipated passenger car volumes in our casting and powertrain business units as well as a general contraction of market valuation multiples relating to similar businesses, the process we used for this accounting impairment test under ASC 350 resulted in a fair market valuation lower than the carrying value of these business units.

Accordingly, we impaired all of the goodwill that was recorded on the balance sheet of the casting business unit and a small portion of the powertrain goodwill.

But as David mentioned, this GAAP accounting charge does not change AAM's views on the long-term success of its business, and you can clearly see the other segments in our business are very strong.

For the full year of 2018, AAM's adjusted EBITDA increased to $1,184,000,000.

Adjusted EBITDA margin for the full year 2018 was 16.3% of sales.

Now let me cover SG&A.

SG&A expense, including R&D, in the fourth quarter 2018 was $97.1 million or 5.7% of sales.

This compares to $101 million in the fourth quarter 2016 (sic) [2017] or 5.8% of sales.

AAM's R&D spending in the fourth quarter 2018 was $35.9 million compared to $38.6 million in the fourth quarter of 2017.

For the full year 2018, SG&A expense was $385.7 million or 5.3% of sales.

This compares to $390.1 million for the full year 2017 or 6.2% of sales.

AAM's R&D spending for the full year 2018 was $146 million compared to $162 million in the full year 2017.

Through all of our year-over-year SG&A comparisons in 2018, you can clearly see the realization of many of AAM's synergy benefits.

Now let's move on to interest and taxes.

Net interest expense was $53.4 million in the fourth quarter 2018 compared to $55 million in the fourth quarter 2017.

For the full year 2018, net interest expense was $214 million as compared to $193 million in 2017.

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

In the fourth quarter 2018, we recorded an income tax benefit of $88.5 million compared to a benefit of $13.1 million in the fourth quarter 2017.

The primary reason for this significant benefit in the fourth quarter relates to the tax effect of certain elements of our goodwill impairment.

For the full year, when adjusting for the tax impact on restructuring and acquisition-related items, goodwill impairment gained and the sale of our business and other recurring items, we were running at an effective tax rate of just over 13%.

This is a little bit lower than we expected to be at the beginning of the year due to the final impact and benefits of U.S. tax reform as well as some additional tax synergies we identified.

As we look towards 2019, we expect our effective tax rate to be around 20%.

The increase in our effective tax rate year-over-year relates to higher projected tax expense in certain foreign subsidiaries.

Taking all of these sales and cost drivers into account, GAAP net loss was $361.8 million or $3.24 per share in the fourth quarter 2018 compared to net income of $106.3 million or $0.93 per share in the fourth quarter 2017.

For the full year 2018, AAM's GAAP net loss was $57.5 million or $0.51 per share compared to $337.1 million or $3.21 per share for the full year of 2017.

Adjusted earnings per share excludes the impact of the items discussed on this call and noting in our earnings press release.

Adjusted EPS for the fourth quarter of 2018 was $0.45 per share compared to $0.89 per share in the fourth quarter 2017.

For the full year 2018, adjusted EPS was $3.28 compared to $3.71 for the full year 2017.

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

Net cash provided by operating activities in the fourth quarter 2018 was $258.3 million.

Capital expenditures, net of proceeds from the sale of property, plant and equipment in the fourth quarter was $131.2 million.

Cash payment for restructuring and acquisition-related activity for the fourth quarter of 2018 were $15.3 million.

Reflecting the impact of this activity, AAM generated adjusted free cash flow of $142.4 million in the fourth quarter of 2018.

For the full year of 2018, AAM generated adjusted free cash flow of $322 million compared to $341 million in the full year 2017.

This represents an adjusted free cash flow yield of approximately 20%.

From a debt leverage perspective, we ended the year with a net debt to LTM adjusted EBITDA or net leverage ratio of 2.8x at December 31.

In the fourth quarter of 2018, we prepaid $100 million on our 7.75% senior notes that are due in 2019.

We are 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.

The balance of these notes, $100 million are now current and will be paid no later than November of this year.

AAM ended 2018 with total available liquidity of over $1.4 billion, consisting of available cash and borrowing capacity on AAM's global credit facilities.

Before we move to the Q&A, let me close my comments with a quick note on our 2019 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 customer downtime in Q1 related to the next-generation Ram HD truck, which is then followed by a ramp-up of production of this vehicle through the balance of the quarter as well as downtime in General Motors full-size truck facilities as they prepare for their upcoming launches will have a significant impact on sales and profits in the first quarter 2019.

Based upon these factors, we expect the first quarter to have the lowest sales per production day of the year.

We have heard several of our customers and peers provide very similar commentary.

While we typically do not provide quarterly guidance, we thought it would be helpful to do so during this period of heavy launch activity.

We included a Slide 16, a sequential bridge from the fourth quarter of 2018 to the first quarter of 2019.

We expect that our normal anticipated project expense for 2019 to be front-loaded and have the most impact in the first quarter as compared to the rest of the year as we prepare for the launches in the first half of the year that represent approximately 80% of all of our 2019 launches.

We will also continue to make progress on reducing and eliminating the excess launch-related costs and improving the performance within our operations as we progress through 2019.

That being said, let me reiterate that all of these factors were contemplated in the full year 2019 guidance we provided in mid-January.

Nothing has changed.

We have reaffirmed this guidance with you today.

To wrap things up, despite the challenges we faced in 2018, we still achieved solid financial performance and continued to generate significant cash flow.

We've begun to improve on our launch and operational performance and have gained momentum in the latter part of 2018 and into the first part of this year.

And not to forget, our cash flow generation has been strong.

We have been disciplined in managing our capital spending and elements of our working capital.

I expect these trends to continue into 2019.

We are looking forward to a great year for AAM.

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 could start the Q&A.

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) And the first question will come from Rod Lache with Wolfe Research.

I wanted to ask you about the casting side of the business a little bit more.

Obviously, the business has been very weak.

You had a goodwill impairment.

The business is not being consolidated into the rest of the business.

So it sounds -- it seems like you're signaling something here, that at the very least that, that business is really separate.

And I was wondering if you could just speak to what you're really thinking here?

Could this be a candidate for divestiture?

Could this be more valuable to someone else?

Or are there real synergies at some point to holding it?

Yes, Rod, this is David.

We are not trying to telegraph anything.

I mean, we had 4 business units when we started the year.

Now we made the decision to consolidate to 3 business units by consolidating our powertrain business unit into driveline and metal forming, as I outlined.

We just felt that it was the final stage of the integration in the powertrain.

It was predominantly legacy MPG facilities.

But back to your question on castings.

Our focus right now is fixing the labor issues and the operational stability issues.

We are making improvement there.

At the same time, as I covered, we have addressed some of the price initiatives with the industrial and commercial.

We don't have anything to announce at this time.

As we said to you before and others before, we are always assessing core and noncore assets and at the appropriate time we will communicate that to everybody.

Okay.

And just secondly, on the performance improvement plan.

You talked about $11 million of sequential improvement in the fourth quarter.

Was there anything unusual in that number in terms of recovery from a customer?

Was -- can you just talk to that?

And what are you expecting from Q4 to Q1 in terms of the magnitude of the improvement?

And then just also related to that, it sounded like one of the more challenging problems was at your Bluffton plant, you replaced management there.

Is that still a significant drag?

How does that kind of play out in the numbers?

Hey, Rod, this is Chris.

I will cover some of those financial numbers, and then we'll proceed to the rest of your questions there.

As it relates to the $11 million on the sequential loss from Q3 into Q4, I would tell you that's clearly the net number.

We saw good performance improvements on our driveline side of the house.

We did get some customer recoveries that we did talk about in the fourth quarter, but we also had some premiums associated with that.

So net-net, that is probably neutral in the quarter, but offset any incremental costs, but our driveline performed well in terms of on its path of improvement.

We saw improvement in our powertrain business as well from some of the premium costs that we incurred in the third quarter.

You asked us about castings earlier.

If you look at the segment information for castings, you can actually see they ceded back a little bit.

So their operational improvement was slightly negative in the quarter.

So if you do that math, driveline and powertrain, total was greater than $11 million, casting was down a little, but trending in the areas that we targeted.

Supplier issues getting resolved.

Premium freight, outside processing, labor issues getting resolved and kind of working through that.

So holistically on the plan that we described to you.

You asked about also going into the first quarter of 2019.

We did put a bridge in our earnings deck as well.

We would anticipate on track another $5 million to $15 million in terms of improvements, again, targeting those key areas that we just talked about and improved on in the fourth quarter.

We continue to chip away at those and make progress.

Yes, then, Rod, this is David.

In regards to your comment on Bluffton.

We did change out part of the management team there.

We've got an AAM team settled into that facility now.

We are making marked improvements and starting to address some of the premium costs that we have been incurring there.

But as we indicated, some of those challenges will continue into the first half of 2019, but we're highly confident we can put them behind us by then.

The next question will come from Brian Johnson with Barclays.

Yes.

So news of the day is Amazon investing in Rivian.

There had been rumors, not confirmed one way or the other that GM could be investing it all.

Ford, of course, made noises about an all-electric pickup as is another firm out in Silicon Valley making noises about it.

So just kind of want your thinking on the pickup eDrive opportunity, which you've talked about.

And then, in particular, where your primary customer could be going in that and your involvement, if any?

Hey, Brian, this is David.

Clearly, we are finding our future for electrification, but we are also a strong believer that the IC engine, especially on pickup trucks, is going to be around for a longer period of time than planned.

We recognize and appreciate what Rivian is doing and selling a potential niche that is there, more from an off-road and maybe a fun vehicle type application versus the heavy use of pickups for construction, agriculture and other types of needs.

But clearly GM and Amazon have made commitments that they want to get into this business, GM from an electrification standpoint would like to see zero emissions over time.

That needs to include trucks as well.

And we're going to be part of that solution.

We're already developing and testing electric axle applications for truck applications.

And as you know, we already have electric axles in crossover vehicles and then also in the future performance passenger cars.

So we're prepared, we're working with our customers.

At the same time, our customers are going to dictate the integration of electrification along with the market with respect to pickup trucks.

Okay.

And in terms of what percent of the market you think could go electric for pickup and when?

Do you have any -- so you mentioned off-road, high torque, luxury.

And so should we be thinking sort of Raptor-ish kind of applications versus crew cabs and commercial use?

Yes, Brian, as I said, I think it's niche applications.

You can put whatever percentage you want to put on there, but it would be very low compared to what I think IC engines and powertrains will continue to support the product portfolio that's there today.

Okay.

Second question, there has been some press around labor unrest and strikes and lobbing for higher wage in Mexico.

Do you expect any kind of wage and salary inflation in Mexico?

And does your guidance assume that?

Well, we always have labor and wage inflation in Mexico each and every year.

We negotiate those every year, benefits every other year, and we've been able to offset that with productivity.

We're obviously have a couple -- we obviously keep a watchful eye with respect to the marketplace.

But we feel we're in solid shape at this time in Mexico.

The next question will come from Joe Spak with RBC Capital Markets.

Just want to turn back to castings for a second.

I know it's been a difficult year.

I think way back when, though, you indicated you thought this could eventually be a 15% EBITDA margin business.

I mean, given what you've experienced this year, is that still the view?

And do the pricing actions and some of the other operational actions get you there?

Or does something else need to occur?

And any sort of updated time frame for when you think that might be achievable, would be helpful?

Yes, Joe, this is David.

You're spot on.

Again, our initial goal was to get this business back over 10%, which we did back in the second quarter of '18.

Unfortunately, we've slid here in the third quarter and fourth quarter of '18.

As I indicated, we did take some commercial actions with the industrial and commercial vehicle customers, which will help us in regards to some of the profitability.

But the biggest issue that we're still working to resolve right now is, we had a labor shortage.

That creates instability in the operations.

That labor shortage is getting better for us now.

And therefore, we expect to see improvements in our operations as we go forward.

So resetting ourselves, we're just trying to get ourselves back to a 10%, but ultimately getting back to that 12% to 15%, our longer-term goal.

We have plans to do that.

Okay.

Second, just on SG&A.

I think in the middle of this past year, you sort of talk about that being -- coming in around 6% of sales.

It came in lower.

How much of that was sort of maybe some tightening of the belt versus -- given some of the issues in some of the businesses?

And how should we think about that going forward?

Yes, Joe, this is Chris.

Yes, certainly that was our thought process early in the year.

Couple things, as we went through the year, occurred.

Our sales came in a little bit higher, which, just on a percentage basis, spins that up a little bit, not a lot, but a little bit.

We've been managing very closely, very diligently our R&D expenditures.

Those were down a little bit.

Still investing where we need to, to continue to grow this business but investing in tools to optimize our ability to engineer new products in a more cost-efficient manner, you're seeing that play out.

Of course, our synergies continue to kind of build through that momentum.

But managing cost on the SG&A line is critical, one of the key elements to our success, and we thought we were pretty successful in 2018.

Looking forward, I would tell you, we would think more closely, we're guiding a little bit towards 6% in '18, I think for '19, a bit closer to 5.5% to 6%.

So we'll drop down below the 6%, closer to where we were in '18.

Okay.

Last one, the fifth EcoTrac award.

Can you just remind us sort of the size of that EcoTrac business today in totality?

And then how large does it get once all those 5 awards are launched?

Yes.

That business will grow by 2020 in our backlog, well over $800 million.

It's actually $550 million, $600 million today.

At the same time, we expect it to grow beyond that 2020 calendar year period of time as well.

The next question will come from John Murphy with Bank of America.

If we look at Slide 5, and the issues that you've had with the MPG assets.

You seem to have gotten a pretty good strangle hold on this pretty quickly.

But if so, I mean, from a customer standpoint, I got to imagine they're reasonably happy.

I'm just curious, as you look at the competitive set out there and everything that's going on in casting and metal forming and all sorts of metal launches in the industry, it doesn't sound like you're really in a unique position of having some of these launch issues.

So I'm just curious, when you think -- a lot of folks look at this as maybe a potential to dispose of assets and raise cash and fix the balance sheet.

But as you look at this and the customer receptivity to what you've done and what you've identified, is there maybe a greater potential for you to kind of consolidate some of these other underperforming assets into this business?

I mean, I guess, so the first question is really competitive landscape or other folks running into the same issues?

And two, maybe is this a more of an opportunity than an issue?

Yes, John, this is David.

As you know, our company is an engineering and manufacturing based company that's heavily focused on operational excellence.

We stumbled in the third quarter based on some launch issues and some operational challenges.

As I've covered with you on the driveline side, we've for the most part got those operational issues behind us.

We're still working on one launch issue with the JLR side of things.

Our metal forming group has done an exceptional job in regards to integrating and consolidating the marketplace and the MPG acquisition, so that's been very positive for us in both those areas, and we would continue to look to be a consolidator there.

The powertrain business unit, clearly we took that over from MPG and we've announced now that we're going to integrate that into our core driveline and metal forming businesses.

And then on the castings side, that business was really a roll-up under American Securities and the Grede organization.

And so we'll continue to evaluate what needs to be done in that respect.

But as we've said as along, I mean, we've got to fix our balance sheet first.

We'll balance our priorities as it relates to the capital uses.

But at the same time, longer term -- mid term and longer term, we want to continue to consolidate, roll-up our core businesses.

Okay, that's helpful.

And then maybe just lastly on Trade 301 and 232.

Just curious what your thoughts are there?

Are you seeing any sort of customer inventory building in front of any risk around either one of those?

And how you sort of think about how to manage that as they manage it as well?

Yes, hey, John, this is Chris.

We told you from a dollar perspective for us, impact here in 2018 close to $5 million.

We are anticipating closer towards $15 million impact from those tariffs in 2019.

We've been working some ways to mitigate that.

And sort of the crux to you question, we're monitoring, we're watching behaviors.

We don't see anything abnormal at this point.

But as you know, there are some announcements coming out here in the next short period of time, which we'll pay very close attention to and then we'll act appropriately.

The next question will come from Ryan Brinkman with JP Morgan.

Now that it seems we're about more than halfway through the GM light-duty, full-size pickup truck launch.

Can you give us an update both on this program and your involvement in it, specifically?

And I know IHS hasn't had the best track record forecasting this program, but it looks like they materially increased their outlook this morning for the T1.

What are you seeing in terms of demand from the customer?

And then also, I think importantly, how have your decremental margins tracking relative to your expectations, I think, on the roughly sort of 35% lower content per vehicle on those trucks?

Ryan, this is David.

Let me start with the first part of the question, and I'll have Chris cover the second part.

But as we communicated earlier from the current K2XX program to the T1, we had 100% of the business on the K2 program, and we are maintaining about 65% of that business on the T1 program, where GM insourced some work and then there's some other activity there in addition to vehicle architecture-type items.

So everything is directionally in line with what we've communicated to you in regards to what our share of the business was going to be going forward.

The launches at Fort Wayne have gone very smooth.

The launches in Silao have gone very smooth.

We're very pleased with the performance of our team with respect to the launch and production performance.

And then clearly, we've got the heavy-duty and the SUVs that we'll deal with over the next 1.5 years period of time, as they work through their launch cadence.

With respect to volumes, we're pretty well aligned with General Motors in regards to about 1.25 million vehicles.

And IHS, the last time I had seen it, I didn't see today's announcement, was around 1.24 million.

I believe we're the #1.

So -- but I think we feel good about that, and then, Chris, on the decremental margins, I'll let you speak to that.

Yes, Ryan, this Chris.

From the decremental margin standpoint, we have historically talked about that platform closer on the 30% contribution margin basis and that is continuing to track both up and down on that platform.

Nothing [since] that assessment.

Yes, that's helpful.

And then just the last question from me.

Just wanted to probe a little bit more around this Section 232, if I can.

If these tariffs are extended from steel and aluminum to also cover autos and auto parts, is it your understanding that Mexico would be exempt as part of last year's new USMCA?

If so, I would think that the core historical American Axle business should not really see any impact.

But I thought to ask about the former Metaldyne side.

Whether you import much product into the U.S. from outside Canada or Mexico, I don't think so, but was curious?

Yes, Ryan, this is Chris, again.

In terms of holistically as a company, we do import a little bit outside of the North America, and that's the amounts I mentioned earlier in terms of our impact.

As you know, our philosophy is to try to source -- historically, it's been our philosophy to try and source in the region for which we produce as well as our vertical integration strategies, continue to mitigate a little bit of any of these type of actions.

Our operational thought right now is, watching this sort of transpire over the last year or so, Mexico has typically been exempt when there has been some activity in this area.

We would be hopeful that, that continues.

Yes, Ryan, this is David.

Our policy from an AAM standpoint from a production and sourcing standpoint is to predominantly produce and source products in the markets that our customers are going to consume those products.

That's why from an historical AAM standpoint, we haven't been impacted as much with respect to the tariff side of things.

Some of the legacy MPG side, we did get some of the impact, which is what Chris has outlined.

And we're in the process, as we said, of mitigating some of those issues, including some resourcing and following the historical AAM policy as it relates to flat loading and sourcing.

The next question will come from Armintas Sinkevicius with Morgan Stanley.

Can you talk about the landscape of the eDrive awards?

How the bidding is going?

Just an update there that would be helpful.

Yes, you understand, Armintas, in regards to the 2 book programs that we have, one being a P4 solution that's on the Jaguar I-PACE.

And that business continues to ramp up from a volume standpoint.

So we had a couple challenges, as I mentioned to you in the presentation.

But we will work our way through that here in the first quarter.

We're on schedule to deliver our P3 solution in that 2020 calendar year period of time.

And then right now, we're working on, I'd say, 8 to 10 electrification initiatives that have global implications.

Nothing to announce at this time.

But we're quoting various levels, from components to subassemblies to gearboxes to full assemblies.

And we're hopeful that we can secure some of that as we move forward.

Okay.

And to the question around Rivian earlier.

What is your understanding of the architecture?

Does that include an eDrive?

Does that include just electric motors?

How would you fit into a truck architecture?

We've got to understand a little bit more about that.

I'm not the expert on Rivian.

But I think it's more of skate design that still has a knee axle application, not so much a corner module or corner wheel-in application.

But that's about all I really know at this time, but clearly we'll investigate that further.

The final question is from James Picariello with KeyBanc Capital.

Just to your free cash flow targets.

I mean, you clearly have high confidence in achieving the $1.5 billion through 2020.

This does include a material ramp down in CapEx toward 6% of the sales.

Can you speak to what drives the rationalization in CapEx?

What are some of the key examples of the opportunity that you've identified here?

Because you are reducing the investment run rate by roughly $100 million give or take by next year.

You'll, obviously, still be investing for growth.

So any color here would be helpful.

Yes, no, great question.

And 6% is laid out for that time period, as we mentioned and you just pointed out.

But if you think about what was driving some of our elevated CapEx, a little bit in '18, and you saw us achieve a little better than we thought as well in prior years, it was not only our new book of business, which is very high in 2018, also in 2019 with the launches that we've been discussing, but also significant replacement business on the General Motors full-size truck, also on the Ram HD, both of those programs drove significant capital expenditures into those next-generation platforms.

And those really start to, from an investment standpoint, phase down here through 2019 where we'll see that benefit in 2020.

Got it.

And maybe you already quantified this.

But with respect to the $35 million-or-so that you identified as addressable inefficiencies as of last quarter, could you provide -- you've obviously provided the helpful status updates through the quarters in one of those slides, but can you quantify what was captured in the fourth quarter and what that cadence looks like through the year?

When you say cadence, you mean into 2019?

Yes, right.

You had that status update through 2Q '19.

You had the $35 million that you've identified.

Just wondering if you could quantify that cadence in terms of recapturing?

Correct.

We'll recapture in the first quarter of 2019 another $5 million to $15 million sequential run rate savings, and then $5 million to $10 million in the second quarter.

And then hopefully these are all put behind us.

But again, it will target areas of premium freight, which we've been reducing sequentially.

It will target reductions in inefficient labor, inefficient scrap output, things of those nature as well as some outside premium costs associated with material.

So those are the areas we're targeting.

And that sequence of improvement, I'd expect to be very similar to what we dialogued in the last quarter, and we're on track to deliver that.

Okay.

And just lastly on the electrification questions have already been asked.

But can you just provide context on the regional breakout, generally, within that $500 million in new business opportunity that is currently being quoted out there?

Just wondering from a regional perspective.

It touches all 3 of the major regions, it relates to North America, Europe and China.

I'd say Europe and China, it's weighted more heavily in those areas than it is in North America.

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

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

This concludes today's call.

Ladies and gentlemen, thank you for participating in today's conference call.

You may now disconnect.