American Axle & Manufacturing Holdings Inc (AXL) 2019 Q4 法說會逐字稿

Good morning, everyone. And my name is Jamie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, today's call is being recorded.

At this time, I'd like to turn the conference call over to Mr. Jason Parsons, Director of Investor Relations. Please go ahead, Mr. Parsons.

Thank you, Jamie, 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 2019 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(877) 344-7529, replay access code 10138226. This replay will be available an hour after this call ends through 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 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 expect to participate in the following conferences: the Citi Global Industrials Conference on February 20, the Wolfe Research Automotive Conference on February 25, 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 8.

In addition, we are always happy to host investors at any of our facilities. Please feel free to contact me to schedule a visit.

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

Thank you, Jason, and good morning, everyone. Thank you for joining us today to discuss AAM's financial results for the fourth quarter and full year of 2019. Joining me on the call today are Mike Simonte, AAM's President; and Chris May, AAM's Vice President and Chief Financial Officer.

To begin my comments today, I'll review our fourth quarter and full year 2019 financial performance. Next, I'll cover some highlights from 2019. And lastly, I'll review our 2020 financial outlook and 3-year new business backlog 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.

AAM delivered solid operating cash flow performance in the fourth quarter and full year 2019, as we adjusted our operations for lower global production volumes and the GM work stoppage. AAM's fourth quarter 2019 sales were $1.43 billion compared to $1.69 billion in the fourth quarter of 2018. The main reason for this decrease relates to the GM work stoppage that unfavorably impacted our sales in October, November by approximately $186 million. For the full year 2019, AAM sales were $6.53 billion. During the year, we experienced lower sales due to the GM work stoppage, lower overall global production volumes and lower customer pass-throughs related to metal market.

From a profitability perspective, AAM's adjusted EBITDA in the fourth quarter of 2019 was $193.5 million or 13.5% of sales. Our fourth quarter results were -- results reflect the unfavorable adjusted EBITDA impact of the GM work stoppage of approximately $66 million. For the full year 2019, AAM's adjusted EBITDA was $970 million or 14.9% of sales. For the full year, we were impacted by the GM work stoppage by $84 million, most of which was in the fourth quarter, as well as lower global production volumes. However, throughout 2019, we had positive momentum on increasing our operating margins and delivering on synergy and restructuring initiatives.

AAM's adjusted earnings per share in the fourth quarter of 2019 was $0.13 per share. For the full year 2019, AAM's adjusted EPS was $1.62 per share. We estimate the impact of the GM work stoppage on adjusted EPS was approximately $0.47 and $0.59 for both the fourth quarter and full year, respectively.

It is important to highlight, as we noted in our press release this morning, that we recorded a noncash goodwill impairment of $444 million -- $440 million in the fourth quarter of 2019 related to our metal forming business unit, the impact of which has been excluded from our adjusted EBITDA and adjusted EPS calculations. We believe our metal forming business unit provides significant value to both our external customers and our vertical integration strategy and will continue to be a critical core business for AAM. This accounting adjustment does not change our view of this business.

AAM continued to deliver strong free cash flow generation in 2019. AAM's adjusted free cash flow in the fourth quarter of 2019 was $117 million. For the full year 2019, AAM's adjusted free cash flow was $208 million. We reduced our gross debt by $150 million in 2019 and began 2020 with another $100 million prepayment of our senior notes due in 2022. We are committed to continuing to reduce our debt and further strengthen our balance sheet in 2020. Chris will provide additional information regarding the details of our financial results in a few minutes.

Let's now turn to our segment performance for the fourth quarter of 2019. The driveline business unit recorded sales of a little over $1 billion in the fourth quarter of 2019, which delivered $124.9 million of segment adjusted EBITDA. Sales and profitability in this business unit were down versus the fourth quarter of 2018, due -- mainly due to the impact of the GM work stoppage.

We have also included our El Carmen Manufacturing Facility, which was retained as part of the sale of our U.S. casting operations as part of our driveline business unit, and we'll do so going forward. We expect to see improvement in EBITDA margins for this business unit in 2020 as we benefit from the full run rate of recently launched programs and greater productivity.

The metal forming business unit recorded sales of $401 million and segment adjusted EBITDA of $66.2 million in the fourth quarter of 2019. Despite lower sales due to the GM work stoppage and lower European production, this business unit performed at 16.5% of EBITDA margin level for the quarter. And on a full year basis, this business unit performed very well with an adjusted EBITDA margin of over 17%.

The U.S. casting business unit recorded sales of $127.5 million and segment adjusted EBITDA of $2.4 million. This business unit was also impacted by the GM work stoppage and continued to be affected by the weakening commercial and industrial markets. The U.S. casting business unit was sold in mid-December and we'll no longer be reporting on it as part of our financials going forward.

Let me wrap up 2019 with a look back at some of the overall highlights, which you can see on Slide 6 of the presentation package. Despite the challenges that we faced, it was still a solid and good year for AAM in many regards. In 2019, AAM celebrated 25 years of world-class quality, technology leadership and operational excellence. Operationally, we completed approximately 50 program launches, we won 17 customer quality awards and multiple supplier of the year awards. We utilized our flexible cost structure to adjust our operations to the new market demand as well as for the GM work stoppage. We completed the key MPG integration initiatives and achieved the synergy attainment well above the original targets we put forth. We generated significant free cash flow and strengthened our financial profile through gross debt pay downs. From a technology perspective, we were awarded our third electric drive program. Later this year, we will begin supplying an electric front drive unit to SAIC-GM-Wuling for the Baojun E300 program through our Liuzhou AAM joint venture in China. We're excited about this first electric drive business unit -- business win in China and our first out of value brand front-wheel drive passenger car.

We were also named as a 2020 Automotive PACE Award finalist for our industry-leading front and rear axle, electric drive technology featured on the Jaguar I-PACE. This nomination further validates our position as a technology leader in hybrid and electric driveline systems. We also had multiple business wins on components for electric powertrains that will be featured on fully electric pickup and commercial trucks.

We continue to see electrification as an exciting area of growth and diversification for AAM and look forward to our new eDrive business launches in 2020 and keeping you updated on further developments.

Strategically, we finalized the sale of the U.S. casting operations in mid-December, which allowed us to streamline our business while accelerating our debt reduction initiatives and enhance our margin profile. In addition, in the fourth quarter, we acquired the operations of MITEC Automotive AG in Germany, which specializes in balance shaft and MVH gear-based solutions, which will complement our portfolio to support downsized engine and hybridization. While this acquisition was relatively minor, this is a great example of AAM being opportunistic in order to enhance our technology leadership and geographic footprint at an economical price.

And on the sustainability front, we made the great strides in strengthening the monitoring, reporting and performance of our sustainability program. During the year, we updated our global safety and environmental policies, adopted a global human rights policy, publicly disclosed our CDP, energy, greenhouse, gas and water assessments to our investors and established our top 10 sustainability priority topics, and set specific goals to reduce energy use, water consumption and greenhouse gas emissions.

We were recognized by our customers for our work in this area as we won the Gold Supplier Diversity Award from GM and the Sustainability Award from Ford during the year. It's an honor that our key customers viewed us as important partners of driving significant improvements in both diversity and sustainability throughout the industry and within the supply base. We work forward to sustaining this positive momentum here in 2020.

Before I turn it over to Chris, let me cover AAM's 3-year new business backlog and our 2020 full year financial outlook that was included in our press release this morning. AAM expects our gross new business backlog for the 3-year period covering 2020 through 2022 to be approximately $750 million. You can see the breakdown of this backlog on Slide 7. About 70% of this relates to the global light trucks, including crossover vehicles, and another 10% relates to hybrid and electric powertrains. Nearly half of this work will be realized outside of North America, continuing our trend of diversifying geographically on an organic basis. We expect the launch cadence of this backlog to be $400 million in 2020, $200 million in 2021 and $150 million in 2022.

Our new business backlog also factors in the impact of the sale of the U.S. casting operations, updated customer launch timing and our latest customer volume expectations.

Now turning to our 2020 financial outlook. You can see that on Slide 8 of the presentation package. AAM is targeting full year sales between $5.8 billion and $6 billion in 2020. We're targeting adjusted EBITDA margins in 2020 of approximately 16%, projecting an improvement over 100 basis points from 2019 to 2020. And we're targeting adjusted free cash flow of approximately $300 million which contemplates cap spending -- capital spending of approximately 5.5% of sales.

From an end markets perspective, we see the North American light vehicle production in the 16.3 million to 16.5 million unit range. And as it relates to the specific North American programs, we continue to expect favorable mix, weighted heavily towards pickup trucks, SUVs and crossover vehicles. Light trucks made up nearly 75% of production in North America in 2019, and we see no signs of that slowing down in 2020.

While the launch activity decreases significantly here in North America in 2020, there are still some key new and refreshed programs we will be focused on during the year, including launching the independent rear drive axles on the all-new GM full-size SUVs and our EcoTrac disconnecting all-wheel drive systems on another vehicle platform later this year.

In Europe, we believe there is continued pressure due to factors such as stricter CO2 regulations and the continued impact of Brexit. We are expecting these production volumes to be down approximately 1% to 3% year-over-year. However, we do have a key launch related to our second electric drive business award expected to launch this year. At the same time, we've got a good European backlog. We have a recent acquisition, and we have strong growth in our vibration controls business, which are all highlights for the region despite the lower overall vehicle production expectations.

When you turn to China, China provides us the most uncertain of expectations out of the 3 key markets. As you all know, China proved to be a very difficult market to predict heading into last year. And being able to determine if and when the Chinese market will recover from this decline last year has only been made more difficult and compounded by the extended shutdowns of the automotive production facilities caused by the coronavirus containment efforts. We are currently expecting light vehicle production in China to be down 3% to 5% this year.

At the midpoint of our 2020 sales target, we have included an estimated impact of lower production in China due to the coronavirus outbreak of approximately $25 million, which assumes AAM and our customers resuming production over the second half of February and into early March. This represents our best estimate at this time. However, if the impact of this virus is prolonged beyond the time frame or begins to impact production in other regions of the world, it could have a greater impact on AAM, just like others.

While it is great to celebrate a very successful and accomplished 25 years for AAM in 2019, it is our future that has us more energized. As we look towards 2020, we are focused on further free cash flow generation and debt reduction, while continuing to invest in advanced propulsion technologies to drive future profitable growth for our company.

If you look at the history of our company, we have a proven track record of being very profitable directly after heavy periods of launch as the day-to-day operations become more stabilized, normalized and dialed in. We see that being the case again here in 2020.

Now that concludes my prepared remarks for today. 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 2019 results with you today. 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 of 2019, AAM sales were $1.43 billion compared to $1.69 billion in the fourth quarter of 2018. Slide 11 shows a walk down of fourth quarter 2018 sales to fourth quarter 2019 sales. The year-over-year decrease relates mainly to the General Motors work stoppage, which we estimated to be approximately $186 million. While the strike began in mid-September, our operations felt most of the impact in the fourth quarter during the entire month of October and beginning of November.

In the middle of December, we sold the U.S. casting operations. We estimate the lost sales related to this divestiture to be approximately $15 million.

Our new business backlog, net of attrition, was offset by other volume and mix factors, due mainly to lower global production volumes across each of the key regions that we have discussed on the last few calls.

And lastly, decreases in metal market indices and related customer pass-throughs and foreign currency translations also impacted sales this quarter by $48 million on a year-over-year basis. As a reminder, the metal market pass-through element is a key risk mitigation mechanism we have for certain index-related costs.

For the full year 2019, AAM sales were $6.53 billion as compared to $7.27 billion for the full year of 2018. The GM work stoppage, lower global production volumes and lower metal market pass-throughs and FX translation all played a significant role in this year-over-year decrease.

Now let's move on to profitability. Gross profit was $183.4 million or 12.8% of sales in the fourth quarter 2019. Adjusted EBITDA was $193.5 million in the fourth quarter of 2019 or 13.5% of sales. This compares to $244 million in the fourth quarter of 2018. You can see a year-over-year walk down of adjusted EBITDA on Slide 12. GM work stoppage impacted adjusted EBITDA by $66 million in the fourth quarter of 2019. This represents the contribution margin on lost production as well as some inefficiencies related to restarting production that was idled, in some cases, for nearly 2 months.

Pricing for the year continued to track around $10 million per quarter, and we saw a slight benefit as it relates to metal market and FX on a year-over-year basis. For the second quarter in a row, we saw tangible year-over-year benefits from a performance and launch perspective, this quarter equating to approximately $16 million, and we continued to see benefits of our synergies and business unit consolidation savings of $12 million.

In the fourth quarter of 2019, we incurred restructuring and acquisition-related costs, which included onetime costs related to our sale and final accounting of the U.S. casting operations and the acquisition of MITEC. Since the acquisition of MITEC was a bargained purchase, we recorded a $10.8 million gain related to this transaction. We also completed a financially successful pension buyout program. And as a result, we're required to record the corresponding pension settlement accounting, resulting in a $9.8 million of expense. These costs and gains have been excluded from adjusted EBITDA and adjusted EPS.

We also recorded a noncash goodwill accounting impairment charge in the fourth quarter of 2019 of $440 million in our metal forming 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 reported unit basis. This was driven primarily by lower projected global production volumes compared to a year ago. But as David mentioned, this GAAP accounting charge does not change AAM's view on the long-term success of this business unit or our overall business.

For the full year 2019, AAM's adjusted EBITDA was $970 million, and adjusted EBITDA margin for the full year of 2019 was 14.9% of sales.

Let me now cover SG&A. SG&A expense, including R&D, in the fourth quarter of 2019 was $90 million or 6.3% of sales. This compares to $97 million in the fourth quarter of 2018 or 5.7% of sales. AAM's R&D spending in the fourth quarter of 2019 was $39.8 million compared to $35.9 million in the fourth quarter of 2018. As we have discussed in previous calls, we have increased our R&D investments over the last couple of quarters and are starting to spend towards the higher end of our normal range of $35 million to $40 million per quarter, and we expect that to continue this trend into 2020. However, you can see the positive benefits of our restructuring actions in lower year-over-year SG&A costs, even when you factor in higher R&D.

Let's move on to interest and taxes. Net interest expense was $51 million in the fourth quarter of 2019 compared to $53.4 million in the fourth quarter of 2018. We expect this favorable trend to continue in 2020 as we benefit from continued debt pay downs. In the fourth quarter of 2019, we recorded an income tax benefit of $11.5 million compared to a benefit of $88.5 million in the fourth quarter of 2018. When adjusting for the tax impact of the restructuring and acquisition-related items, impairment charges and other nonrecurring items, we were running at an effective tax rate of around 13% for the full year of 2019. As we head into 2020, 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 AAM's various tax jurisdictions.

Taking all of these sales and cost drivers into account, our GAAP net loss was $454.4 million or $4.04 per share in the fourth quarter of 2019 compared to $361.8 million or $3.24 per share in the fourth quarter of 2018. For the full year 2019, AAM's GAAP net loss was $484.5 million or $4.31 per share compared to $57.5 million or $0.51 per share in the full year 2018.

Adjusted earnings per share excludes the impact of the items discussed on this call and noted in our earnings press release. Adjusted EPS for the fourth quarter of 2019 was $0.13 per share compared to $0.45 per share in the fourth quarter of 2018. For the full year of 2019, adjusted EPS was $1.62.

Let's now move on to cash flow and the balance sheet. Net cash provided by operating activities for the fourth quarter of 2019 was $181 million. Capital expenditures net of proceeds from the sale of property, plant and equipment for the fourth quarter was $95 million. Cash payments for restructuring and acquisition-related activity for the fourth quarter of 2019 were $30.5 million. Reflecting the impact of this activity, AAM generated adjusted free cash flow of $116.5 million in the fourth quarter of 2019.

For the full year 2019, AAM generated adjusted free cash flow of $207.8 million compared to $322.3 million in the full year 2018. The difference primarily reflects lower EBITDA, offset by lower capital expenditures.

From a debt leverage perspective, we ended the year with a net debt of $3.1 billion and LTM adjusted EBITDA of $970 million, calculating a net leverage ratio of 3.2x at December 31.

In the fourth quarter of 2019, we prepaid $60 million on our term loan B, and in early 2020, we prepaid another $100 million of our senior notes due in '22. We were pleased to utilize the free cash flow generating power of AAM, along with the proceeds from the sale of our U.S. casting operations. We do exactly what we said we would do, reduce our debt and future interest payments.

AAM ended 2019 with total available liquidity of $1.5 billion consisting of available cash and borrowing capacity on AAM's global credit facilities. We continue to maintain a strong liquidity position and debt maturity profile.

Before we move on to Q&A, let me close my comments with some thoughts on our 2020 financial outlook. In our earnings slide deck, we have included walks from 2019 actual to our 2020 financial targets. You can find these starting on Slide 14. As for sales, we are targeting the range of $5.8 billion to $6 billion for 2020. Our new business backlog of $400 million is strong in 2020. It is offset by our normal business attrition of $200 million, and $225 million of impacts related to General Motors full-size truck program sourcing. As a reminder, 2020 should be the last year that we feel a significant year-over-year impact from that sourcing decision.

We expect pricing to be a $50 million headwind in 2020, right in line with our 50 to 100 basis points a year that we typically experience. Metal market and FX impacts sales about $75 million as well on a year-over-year basis, primarily representing lower customer pass-throughs that are relatively neutral to profitability.

And lastly, overall volume and mix should be favorable, mainly reflecting some of the year-over-year production gains in 2020 we expect as a result of the GM work stoppage in the second half of 2019, as well as some overall puts and takes on our global programs we support.

From an EBITDA perspective, we are expecting an adjusted EBITDA margin of approximately 16% of sales, which we would represent an over 100 basis point growth from the 14.9% we experienced in 2019. And you can see on the walk down on Page 15, we expect positive volume and mix to contribute to profitability in 2020. As I mentioned back in mid-2019, we expect to benefit from lower launch activity, higher productivity, additional synergy benefits and improved operational performance in 2020. The positive impact of these activities is approximately $60 million.

And lastly, we expect approximately $15 million, primarily R&D spending, in line with previous commentary on these important investments in AAM's future, especially as it relates to alternative propulsion solutions.

From an adjusted cash flow perspective, we are targeting approximately $300 million in 2020, and the year-over-year walk is very simple. The main factor driving an increase from 2019 to 2020 of around $100 million is lower capital expenditures. Lower interest payments and working capital requirements are anticipated to offset slightly higher tax payments. But the show in 2020 is EBITDA performance and capital expenditure reductions, and we are excited to get at both of these objectives.

From a 2020 cadence perspective, in addition to our typical seasonal use of cash in the first quarter, we are also experiencing some customer downtime on several platforms in the first quarter. Also, as David mentioned, we experienced more downtime in the first quarter in China than initially expected due to the containment efforts related to the coronavirus, which we expect to be approximately $25 million as AAM and our customers ramp production back up in late February and early March. Our current guidance today reflects the best estimates based on what we know.

Lastly, we anticipate some downtime in the first half of 2020 to support the launch of General Motors' exciting new full-size SUV.

To wrap things up, despite the challenges we faced in 2019, we experienced many more benefits that allowed us to achieve solid operational performance and generate significant cash flow and reduce our debt. Our flexible operations, variable cost structure, ample liquidity and solid debt maturity profile position us well for 2020. We expect to benefit from lower CapEx for at least the next few years, and we continue to look to strengthen our financial profile with an objective in the current environment to organically reduce net debt leverage around 0.25 turns per year.

We expect 2020 to be about operational excellence, margin expansion, free cash flow generation and propulsion innovation. We're 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 can 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) Our first question today comes from Rod Lache from Wolfe Research.

Wanted to just -- I had a couple of questions. One is you made some adjustments to the net new business. It looked like maybe $50 million got pushed out from '20 to '21. Is that basically what we're seeing there? And as you look out to 2022, any update on renewals? Because you provide the gross backlog. Yesterday, Dana mentioned that they had not gotten a renewal on the Colorado Canyon. I was curious about whether there's any update there for you.

Rod, I'll take the first part of that question as it relates to the difference between '20 and '21. The 21 is additional new business that we've won since our last disclosure. The '20 was a true-up a little bit for the reduction of the elimination of our sale of the castings, which had a little bit in the backlog, and just some final true-up on volume that we see in 2020.

And then Rod, this is David. In respect to Colorado Canyon, as you know, the current program's got another 2 to 3 years to run. At the same time, we're not authorized to comment on any future sourcing or business awards. That's just a condition of doing business with the OEMs. What I will say is that we have and will continue to be the industry leader when it comes to axles and drivelines going forward. And then as you see in the presentation today as far as our backlog in new business, there is some growth in the '20-'22 period of time.

Okay. Great. And I was hoping you can comment on just kind of the longer-term outlook for CapEx and R&D. Is CapEx sustainable at this 5.5% level? What do you consider maintenance CapEx? And just vis-à-vis R&D, do you see yourselves getting to where you need to be competitively in electric driveline solely through kind of organic means? Just maybe a little bit of color on what's been happening, because obviously, there's been some M&A activity as other companies are trying to pick up assets.

Yes. Rod, this is David again. We feel very confident in regards to our CapEx. We've been saying for years that we would be bringing our CapEx spending down as we launch a lot of these new programs. So we're a little under 7% last year. We've guided the Street here at 5.5% this year. We definitely feel that we can hold it at that level. When it comes to maintenance capital, it's dependent on the 2 business units, but it's somewhere in the range of 1% to 2%. But we feel very good that we can hold that and still support the organic growth opportunities that are out there.

When it comes to electrification, we've increased our R&D spending on electrification. You saw that last year. You'll continue to see that this year. We have been successful, as you know, in regards to booking programs. We've already launched the one, the JLR program that's up for the PACE award. We do have our second European luxury OEM that we will be launching yet this year, and then we've conquested a new program in China, our first in China. So we're excited about that. And then we've also been recently awarded some component work on an electric pickup and a commercial vehicle going forward. So we will continue to invest there, both organically ourselves; at the same time, we'll continue to look for partners or appropriate acquisitions at the right time to complement our capability there.

And just lastly, if you don't mind, any updated views on accelerating the debt reduction between -- beyond that 0.25 turn per year? Are there any -- are you guys contemplating any kinds of other actions aside from just generating the cash and paying it down organically?

Well, the biggest thing we did was sell off our U.S. casting business. And obviously, we took that and contributed to paying down debt both in 2019 as well as right here in the beginning of the year in 2020. We are evaluating our product lines to identify some noncore products. We do think there will be some other divestitures that we'll make, but nothing material. But that debt will be -- that -- those proceeds will be used to service debt going forward or support some of our technology advancements on propulsion systems.

And our next question comes from Armintas Sinkevicius from Morgan Stanley.

When I look at the bridge for -- from 2019 into 2020, there's about $20 million -- let me see, it's -- you have about $5 million to $40 million of volume and mix coming back into play for adjusted EBITDA in 2020 versus '19. Just trying to think through how much of the General Motor strike do you anticipate getting back in 2020 versus what you had lost in 2019?

Yes. Armintas, this is Chris. There are also -- that's the EBITDA walk; there's a sales walk included as well. And you can see a part of that sales walk is, I would call it, the front right column, volume mix and other, which is about $50 million to $250 million. Included in that, it would be the primary element of that strike recovery, but we would anticipate around 2/3 going from '19/'20 in terms of some recovery of those sales based on the line capacities with our customers and some of their commentary.

Okay. What are some of the headwinds then that are impacting volume mix and other? Because if I take the math from 2019, it was about $243 million of revenue, 2/3 of that is about $162 million. That pegs you right at the midpoint there. What's dialing that back a bit?

Yes, some of the commentary we talked about China production here this morning, that is a piece of that, that we're looking to, obviously, is included in there. A couple of platforms on a global light truck basis outside of North America are a little weaker, especially in the commercial truck space, and just some puts and takes on some of our other platforms around the globe.

Our next question comes from Joe Spak from RBC Capital.

I guess I wanted to try to get at some of the outlook and -- from a little bit of a different perspective. I know you provided the pro forma sales and EBITDA with the sale of castings. But if we also -- you also provided the impact from the GM strike. So like on a complete apples-to-apples basis, it looks like you had sales of something a little bit over $6 billion. So that's like the high end of your guidance for this year, but the margins are 60 basis points lower on your guidance versus like a pro forma ex strike 16% to $6 billion in '19. So is that just -- I mean I know you talked about some higher R&D. Is there anything else that's driving that lower margin on roughly the same amount of sales?

Yes, Joe, this is Chris. If you annualize it, if you will, the back half of our '16 -- or 2019 performance, adding back the strike pro forma basis, right, we're slightly over 16%, which I think is where you're starting your point. But if you sort of walk that from a margin perspective then into 2020, annualize that, a couple of things, right? You should get a little better with the removal of the U.S. castings, which you indicated. Our overall volumes, if you annualize in the back half, are slightly lower. So you do drop contribution margin there, call it anywhere from 25% to 30%. So that kind of erodes slightly around the edge on that 16% margin. You do have the final piece of the General Motors full-size truck conversion. And we talked about that publicly, that has a slightly higher margin mix than our overall profile. And you've seen that play out in the back half of 2019. Did mention also the R&D step up and the price decreases, which fall dollar for dollar. Now those are offset by several initiatives we have in terms of our synergy step-ups as well as the elimination of some project expense and performance, but a lot of that performance, we are starting to incur and benefit from in the back half of 2019 as well. So those are some of the kind of the main puts and takes to get you to around that 16%.

Okay. And then the second question, just back to the backlog. And I know you won't sort of comment on the renewals. But I think in the past, you've indicated that on average per year, you do sort of have a $150 million to $200 million of normal attrition. And you noted that this year, $200 million, but I mean if we keep that into '21 and '22, it sort of implies 0 net backlog growth. Is that correct?

Yes.

Yes.

Next question comes from James Picariello from KeyBanc Capital Markets.

So within the 3-year backlog number, what portion of last year's $1.25 billion attributed to U.S. casting? I think the comment was that it was small. Just wondering if you could provide that.

Yes. Like, 5% to 10%.

Okay.

I mean roughly in line with our proportional (inaudible) revenues.

Got it. And then just what's your overall assessment of the e-AAM business? It looks like backlog is down 40%, almost $50 million or so. Just wondering what the quoting activity looks like. Have you seen any notable launch or program award delays?

Well, this is David Dauch. First, speaking on the current business in production today, the JLR volumes for the I-PACE are down compared to what we originally had planned. So that's some of the impact there. As I mentioned, we feel good about the business that we have booked that we'll be launching our second program this year and another program, a value-based program going forward. We are continuing to quote on over $1.5 billion worth of new and incremental business opportunities. Now not all of that is electrified, but a portion of it there is. And as I commented in my earlier remarks, we have conquested some component work on electric pickups and commercial vehicles. So we convert that into the backlog. That may be out a little bit further than the timing that we discovered the '20 through '22 period of time. But we continue to be very bullish in regard to opportunities in the electrification space.

Got it. That's helpful. And then previously, you guys provided that the framework of targeted opportunities within -- I think it was $50 million to $75 million in internal EBITDA improvement for 2020. Just wondering within your current EBITDA bridge, I guess it would be in that $60 million bucket, what portion of that would attribute to those internal targets?

Yes. So that previous target you referred to that is that $60 million. So keep in mind, back when we announced the $50 million to $75 million, we also had casting and other things in there. So you have to remove a little bit of casting and this puts us right near the high end of that range.

Our next question comes from Dan Levy from Crédit Suisse.

First off, just wanted to ask, just underlying platform assumptions. Just tell us what volume you're assuming for K2, T1? And if we wanted to sensitize your EBITDA to increase production, should we just assume a typical mid- to high 20% contribution margin on that?

So as it relates to our assumption on the full-size General Motors platform, the T1 platform, you see we're generally aligned with IHS and our customer on that commentary. But that is one of our more profitable programs, as we've discussed previously. And like you saw experience -- us experience during the work stoppage in the back half of 2019, it's more near the 30% to 35% contribution margin range.

Got it. And then similarly, I assume you're in line with IHS on brand HD being up 9%. It's also, obviously, a very high contribution margin revving to you.

It appears to us, IHS includes maybe some other elements in that disclosure. We are not. We're more a little bit flattish to slight increase.

Got it. That's helpful. The second, I wanted to ask, I guess just more strategically, and one of the prior questions alluded to this. But one of the key developments, obviously, we saw in supplier land as it relates to EV is just consolidation of 2 large suppliers in the powertrain arena. So realize you don't really compete with either of these suppliers in the traditional combustion product set. But in EV, there is overlap. You're making drive units. One of these other suppliers is making drive units. So a couple of questions on this. One, you currently outsource motors and power electronics. Is it your view that in-sourcing these components isn't an advantage? Or would you ultimately look to bring some of these capabilities in-house? And second, to what extent is there some opportunity for you to form partnerships with others that maybe help defray the cost or to enhance the overall offering?

Yes. This is David Dauch speaking. I'll start with the second part of your question. We're already involved in partnerships today that are satisfying our electric drive units. We are not making motors or the power electronics or the inverter specifically today. We're working with partners, and then we're integrating those into our electric drive solutions. So we've got that integration capability, let alone the gearbox capability. So we'll continue with that partnership arrangement. At the same time, we're continuing to spend R&D dollars there to expand our capability. We'd like to have a greater capability, but we're also comfortable with the partnership arrangements that we have, and we'll continue to pursue and look at evaluating other partnerships or alternatives that will complement our portfolio as we go forward here. But we expect to be relevant. We expect to control our cost structure. At the same time, we expect to be able to provide a value proposition to our customers. The critical thing is going to be working on fully integrated solutions, which they call more of a 3-in-1 type solution, and we think we're well prepared to support that going forward.

So the outsourcing of the motors and power electronics, that's simply the view that, that's the most resource or capital efficient way for you to address those capabilities?

Yes, at this time. But at the same time, it doesn't mean that partnerships or strategic relationships can't come together. We'll just have to evaluate that as time goes forward.

Our next question comes from Ryan Brinkman from JPMorgan.

This is Rajat Gupta on for Ryan. Just had a question on the 2020 EBITDA bridge. The $60 million from performance, launch and synergies, it looks like it just slightly offsets the pricing headwinds. But in 2019, you had a number of onetime costs related to performance, inefficiencies and launch costs and things like that. That automatically should be a tailwind year-over-year. And then you had the restructuring actions also that you took. So 2 questions. I mean why isn't that $60 million a little higher because it's just barely offsetting pricing? And then if you look forward to 2021, it looks like pricing would still be the same? And then what would be -- I mean how did you -- like what would be the offsets to that going forward? I mean you're doing restructuring again this year, but just trying to think like what would be the other offsets to pricing going forward? And then also for this year's bridge, why isn't the $60 million a little higher? And I have a follow-up.

Yes. No, that's a good question. And certainly, this aligns with what we were sharing with you, what we were expecting walking into 2020, that $50 million to $75 million range. But keep in mind, a lot of these operational issues, you see this in our last 2 quarterly calls, we're putting these -- the rest into bed. So the back half of 2019, we're starting to deliver performance improvements, all up where we were in the second quarter of 2019, the first quarter of 2019 compared to the back half of 2018. So a lot of that is already built into your run rate going into 2020. So this is a step-up from that perspective. And then, of course, we use this to offset price. We got core productivity, and you also have core productivity offsetting things like inflation as well. So those are some of the key elements.

So in order to get that core productivity going forward in 2021, I mean would that require like continued restructuring? Or would that just work its way on its own?

Look, part of the premise we've been talking about why we're so excited about 2020, right, our operations just are coming through now, big launch activity. So the operations are much more stable. So you have core productivity that will continue to keep pace or beat inflation. At the same time, we'll continue to assess our capacity globally. If we need to make some actions to restructure our capacity to align our cost structure for performance, we will continue to do so.

Got it. Just another follow-up on the free cash flow. I mean just walking through from EBITDA to the $590 million of operating cash flow, it looks like the $945 million of EBITDA, the midpoint, like $240 million of interest and taxes, $35 million or so of cash restructuring. I mean that gets us to somewhere around $670 million, $665 million. So it looks like working capital is still like a $75 million to $80 million drag in 2020. Given the fact that the overall revenues are flat here, I mean just trying to see, is there any opportunity or contingency there from working capital perspective? Or is that normal?

Yes. I mean working capital -- yes, you get a little bit of timing at the end of the year, points on your sales and your payables and receivables that will ebb and flow there, but obviously, continuing to reduce inventory and working cost -- capital cost structurally in the company is a key priority for us. Rajat, you're spot on in your view.

Our next question comes from Itay Michaeli from Citi.

Just touch first on China. I hope you can share the -- where the 2019 revenue came in. I know it will be in the 10-K, hoping you can share that. And then perhaps kind of what the guidance assumes for China revenue in 2020.

Yes. Our -- you'll see in our 10-K published today, our China revenue of about $315 million for 2019. And you saw our general guidance for the overall market for China down 3% to 5%. Also, we'll have probably a little bit of an accelerated impact as we mentioned today on the coronavirus, around $25 million. That's as we know of today.

Got it. So we should think about it in terms of market decline, as you expect, plus the $25 million is sort of what you're looking at this point?

Yes, it will also have a little bit of our backlog, right, that we'll launch into the China market. So you'll get a little lift from that as well. So net-net.

Got it. And then, Dave, I think you mentioned, going back to the coronavirus risk, that the guidance that does not contemplate any potential other production disruptions around the world. Is that something that you're hearing from your customers as -- like an imminent issue? Just wondering kind of what you are being told by the customers around the overall kind of global supply chain.

Yes. I wouldn't say it's a critical imminent issue right at this moment just because of the pipeline of inventory that exists between China and the rest of the world. However, that pipeline is shrinking. So there's a concern that's out there because, clearly, there's a flow of product that comes out of China into Europe as well as into North America. So we're all keeping a watchful eye on that. The critical thing for us is understanding what the China government is allowing as it relates to companies coming back to work. The good news for us is that we've got the majority of our plants back to work now. They started up on Monday, the 10th. At the same time, there's a final facility that we have, will be up and running on the 15th. We still got to monitor some of our suppliers because not all of our suppliers are up and running at this point in time, but there is a flow of product to us based on inventories that existed before. So I think it's just a dynamic situation that the whole industry is going to have to watch very closely here. Hopefully, we can control it and contain it to within China itself. But we also all need to be prepared that it could have global implications.

That's very helpful. And then just lastly, in the past, the company you have to provide a 3-year free cash flow outlook. And I was hoping maybe you can give us a couple of pointers just to have to think about your view of the next 3 years, just directionally, both in terms of free cash generation capability versus 2020. And then the overall rate of deleveraging that you're generally targeting for the balance sheet.

Yes. Itay, this is Chris. If you think about starting at the macro, right, obviously, driving your sales and EBITDA. We talked about the performance elements of our business. But from a sales perspective, a relatively flat to slight erosion over this time period. We mentioned CapEx. We expect to maintain in that 5% to 6% or, call it, flat range for this period of time, which really sets us up well to generate cash flow through this next period of years. Continue to decline in terms of interest calls on the company as we pay down debt is another key element of that as well. And then we'll, of course, tightly manage working capital as we talked about on one of the previous questions. That's how I would think about over the next 3 years. And as I mentioned in my prepared remarks, we're looking in an environment like that, look, we can reduce our leverage around 0.25 turn a year.

Our next question comes from Brian Johnson from Barclays.

I just want to talk a little bit more about the eDrive theme. Just a couple of things. First, last year, it was about 10% of your backlog which would be $125 million. This year, it's 10% of your backlog, that's $75 million. So are there bookings that you got that are not in the backlog? Because sort of -- or was there stuff added to year 3 that was sort of swamped by what you were doing for Jaguar and others this year?

No. Brian, this is David. Again, the Jaguar volumes are down, but that's contemplated in our base volumes. We're launching the next-generation program for our second product here this year. That launch curve is a little bit different than what we had originally forecasted. So we just got to work our way through the launches there. And then we're bringing on the third program thereafter. The third program isn't contemplated in our backlog because it's through our joint venture operations. And then the other programs that we just recently identified are outside of that backlog.

And Brian, this is Chris. Also keep in mind, comparing the 2 backlog periods, substantial amount launched here in 2019.

Right. That was my point. But in terms of the other players who are positioning for the e-future will talk about bookings or pursuit opportunities. Could you maybe talk a bit more about that? And then I have just a follow-up question off that.

Brian, again, this is David. I mean clearly, it's a very competitive landscape when it comes to electric drive. The gearbox guys like ourselves participate in that. You have a lot of the motor and power electronic guys that are competing there. You've seen some of the consolidation or acquisitions that are taking place in the marketplace. I think you're going to see more of that in the future. Just like you're going to see more OEM consolidation, I believe, in the future as well. I think that, that activity is going to take place and grow as years go forward. What we're trying to do, as I said, is just make sure that we're significantly relevant when it comes to electrification, that we've got bookshelf technology that can satisfy the different vehicle segments as well as the geographic regions of the world. Because they all differ based on what their vehicle requirements and the timing are going to be. But we're going to continue to look at what we need to do ourselves to grow organically. But we'll also be opportunistic from a strategic standpoint, either through technical or strategic partnerships or outright acquisitions in the future.

And Brian, of course, that aligns with our increased spend in R&D that we've been talking about, really allowing us to play in the entire spectrum of the eDrive units as well. So we're seeing a lot of exciting opportunities from that perspective.

Okay. And just -- outside of just electric, that'll be part of it, but just what are your thinkings on broader consolidation? Of course, you led the way -- MPG was a consolidator, you then consolidated them. We've seen more recently, Borg and Delphi. Just where are you thinking the next steps in consolidation for the driveline powertrain industry? And how would American Axle fit into that?

Well, we've said all along that we want to be a consolidator. We did that with the MPG in regard to the metal forming side of the business that impacted the powertrain segment. We want to continue to look at doing that, both on the driveline side of our business as well as on the metal forming side of the business. We also had to be cognizant that the market penetration for electric vehicles is increasing, and we just need to make sure that we're positioned to offer a product portfolio that will satisfy everything from IC engines to hybrids to electric propulsion systems. And really, what I've instructed the team here is that we want to be agnostic to the market. We want to have a product portfolio that will satisfy our customers in the markets and the regions of the world and be prepared to handle that. And that's the path that we're working on right now.

And ladies and gentlemen, our last question will come from John Murphy from Bank of America.

And just staying on sort of the EV side of things. I'm just curious, if you look at the electric pickups that are being proposed by GM and Ford and even Rivian, and you think about the potential content for you on those relative to the K2. I'm just curious if you could give us a range of potential content you think could be on these body-on-frame EV pickup trucks versus what you're delivering right now on the ICE side?

Yes. John, I would say it's too early to really speculate on that because some of the architectures are still evolving at this point in time. It could be a large range, and I don't really want to get specific about that today. You understand our content per vehicle and the various products that we have today, mainly being around $1,600 on the full-size truck platform. You also understand on some of the electric drive programs that we have, our content is around $2,500. So again, I think it will be a sizable number. I just can't tell you exactly what that number is right now because it all depends on what the configuration of the vehicle is going to be, how many motors are going to be involved, what's the horsepower and torque requirements and the payload requirements of those vehicles, and a lot of that's still evolving. But what we're trying to do is make sure that we're significantly relevant, as I mentioned earlier. I think a lot of the activity that you're seeing in electric pickup and SUV space today is more for your leisure lifestyle vehicles. I still think the IC engine will be around for a long period of time on those products, meaning the present pickup and SUVs. However, like I said, we want to make sure that we protect our core business, and that we're agnostic to the market based on the propulsion solutions at the market and the consumer are looking for. And that's the direction we're working towards, and we're doing a lot of work in that area right now to protect the core, meaning pickup truck-type work as well as crossover vehicle. And you know already that we're in the luxury and performance passenger car and now the value brands out of China based on the recent conquest win that we had.

David, is it a fair statement to say it's likely materially higher at this point based on everything we know? I mean it sounds like it -- potential.

I think it will be equal to or higher than, yes.

Okay. And then just one last question on the backlog. And I think you may have stated this, but I missed it. On what you're bidding on right now incrementally above and beyond the $750 million and when you think, maybe if you give us some color what the time frame of that is. Is it's more toward a 2022 stuff? Or could there be some incremental business that rolls on in 2021?

John, we had mentioned $1.5 billion is what we're actively quoting on right now. Most of what we're working on is '22 and beyond. There may be a slight increase in the '22 calendar year period of time, but it's beyond that. So I don't really see anything meaningful in 2020 or 2021.

Thanks, John. We thank all of you who have participated on this call and appreciate your interest in AAM. We certainly look forward taking with you -- talking with you in the future.

And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.