American Axle & Manufacturing Holdings Inc (AXL) 2020 Q1 法說會逐字稿

Good morning. My name is Chad, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing First Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the conference over to Mr. Jason Parsons, Director of Investor Relations. Please go ahead, sir.

Thank you, Chad, and good morning. I would like to welcome everyone who is joining us on AAM's first quarter earnings call. Earlier this morning, we released our first quarter 2020 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 10141431. This replay will be available beginning at 1:00 p.m. today through 11:59 p.m. Eastern Time, May 15.

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 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.

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 first quarter of 2020. 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 the highlights of our first quarter 2020. Second, we will discuss how COVID-19 global pandemic has impacted our operations and how we are adjusting our business. We will also discuss our current cash flow breakeven scenario for 2020. And lastly, we will discuss steps we are taking to structurally realign our business to operate profitably and generate significant free cash flow at a reduced level of global light vehicle production than previously planned. After Chris covers the details of our financial results and liquidity status, we will then open up the call for any questions that you all may have.

AAM delivered strong operating performance and free cash flow generation in the first quarter of 2020, despite the unfavorable impact of COVID-19 on global light vehicle production. AAM's first quarter 2020 sales were $1.34 billion compared to $1.72 billion in the first quarter of 2019. The decrease in our revenues on a year-over-year basis reflects primarily 2 factors. The first relates to the global production shutdowns and reduction in consumer demand due to COVID-19 pandemic. We estimate that this had an unfavorable impact of approximately $169 million in the first quarter of 2020. In addition, our first quarter of 2019 sales included $182 million related to our U.S. iron casting operations, which was sold in December of 2019 and is therefore, no longer part of our sales base starting in 2020.

AAM's adjusted EBITDA in the first quarter of 2020 was $213.3 million or 15.9% of sales. This is compared to $245 million in the first quarter of 2019 or 14.3% of sales. Our first quarter adjusted EBITDA was down year-over-year because of the estimated impact of the production shutdown related to COVID-19 of $47 million, and the first quarter of 2019 included $18 million related to our U.S. iron casting business. However, on the upside, improved operating performance and lower launch costs in the first quarter of 2020 helped to partially offset these decreases and was the main driver of significant year-over-year margin improvement.

AAM's adjusted EPS in the first quarter of 2020 was $0.20 per share compared to $0.36 per share in the first quarter of 2019. AAM estimates that COVID-19 impacted earnings per share by approximately $0.33 per share. Another bright spot during the quarter was our generation of free cash flow. We generated adjusted free cash flow in the first quarter of 2020 of over $83 million compared to a use of cash of over $188 million in the first quarter of 2019. Our capital spending in the first quarter of 2020 was over $50 million lower than what we spent in the first quarter of last year. We also experienced favorable working capital compared to last year. Chris will provide additional information regarding the details of our financial results in just a few minutes here.

As part of our call today, I'd like to directly address the COVID-19 health crisis, how it is impacting AAM, and what we are doing to address the short-term impacts and the long-term implications on our business.

On Slide 4 of the presentation deck, you can see some of the issues AAM and the global automotive industry have been dealing with amidst the coronavirus crisis and actions we have taken to support our associates, while flexing our cost structure and preserving cash. Starting in China, in January and February, and then in Europe and North America in March, governmental actions and related production shutdowns have severely impacted operations. We are currently planning for customer production to begin to ramp-up in Europe and in North America here in the mid-May period of time and continue to increase production slowly throughout the month of June. As we ramped up production in China and look to restart operations in Europe and North America, we are laser-focused on taking the necessary steps within our facilities to safeguard our associates while supporting our customers' planned and staggered restart of their production operations.

As far as the actions AAM has taken and is taking to mitigate COVID-19 and the impact on our business, we established a cross-functional COVID-19 task force that reports directly to me and meets daily to track our global company-wide issues and report on developments. Second, we published our own AAM POWERing Up comprehensive guide on COVID-19 workplace safety and facility readiness. This is a benchmark and a guide that we've worked with OEMs, select Tier 1 peers and OESA guidelines that included the Center for Disease control input as well as the World Health Organization input.

From a cost perspective, we are flexing all of our variable costs, including direct material, hourly wages, variable overhead and semi-variable costs such as utilities. We have also implemented pay reductions across our salaried workforce, starting with our Board of Directors at 40%, 30% reduction for Executive Officers and 20% for the rest of our salaried workforce. These reductions will mostly be intact throughout the remainder of 2020. And we have analyzed all discretionary spending and corporate overhead costs for opportunities to delay or reduce expected expenditures. We currently have identified approximately $60 million in salaried and other overhead cost reductions to be achieved in 2020.

We've reduced our capital spending forecast for the year from $325 million to $250 million based on our current assessment of the market and customer launch schedules. And lastly, we recently announced an amendment to our credit agreement, which provides AAM additional financial flexibility as we adjust our business for the impact of COVID-19 on current and future global light vehicle production.

Needless to say, it has been a very difficult and challenging time for everyone. Reacting to this crisis has required swift and decisive actions that requires a level of sacrifice from each associate. We very much appreciate our global AAM associates who have demonstrated tremendous teamwork and contributed to our prompt and appropriate response.

Due to the level of uncertainty associated with COVID-19, we withdrew our 2020 financial guidance on March 25. Clearly, the level of uncertainty continues to remain high, including country and state executive orders, customer plan restart dates and global and domestic production volumes and ultimately end consumer demand. And as a result, we are not issuing revised 2020 financial targets at this time. However, we are offering a view of our free cash flow breakeven scenario for the year. We estimate that we can be breakeven from an adjusted free cash flow perspective in a scenario in which 2020 full year sales are 25% to 30% lower than our initial expectations for the year. This is very consistent with our previous cash breakeven disclosures. Assuming we are adjusted free cash flow breakeven for 2020, our total liquidity at the end of the year would be well over $1 billion of target -- which meets our targeted liquidity level. This analysis factors in the cost and capital spending reductions I mentioned earlier.

Again, with the significant uncertainty that exists today, it is difficult to gauge how reasonable this scenario is and how likely it is that we will experience levels above or below this scenario. But I do believe it represents a solid baseline to use and to flex up and down from -- and the confirmation of previous assertions we have made. As we look to the future, it is important that we not only plan for the eventual ramp-up of the global light vehicle production, but that we look at what the new normal will look like as it relates to the new approach to health and safety, manufacturing and consumer demand. We're not only focused on being resilient through this temporary crisis, but how we position our business going forward to be profitable and generate strong cash flow in a lower production environment. The actions that we are taking aim to restructure our business and maintain our industry-leading profit margins at approximately a 14 million U.S. SAAR level. We are reassessing and realigning global capacity to support updated light vehicle demand, and we are targeting facility and supply based consolidation and capacity optimization. We are analyzing our current overhead costs and identifying opportunities to rightsize this cost structure to an adjusted expectation of light vehicle demand. And we are actively planning to reduce capital expenditures to 5% of sales or below for the next several years.

In every crisis, there's an opportunity, and we are taking this opportunity to position our company for future success as we make our way out of this very difficult time.

Before I transition to Chris, I'd like to discuss some positive developments as it relates to our electric drive technology. First, AAM's technology was recently recognized with 2, and I'll mention that again, 2, Automotive News PACE awards, which serves as the industry benchmark for innovation. AAM won both the innovation award and the partnership award for our front rear electric drive units featured on the fully electric Jaguar I-PACE. We are honored to not only be recognized for AAM's market-leading technology and electric drive lines, but also our ability to effectively collaborate with our customer, in this case, Jaguar Land Rover, to deliver best-in-class vehicle integration, software and controls, along with superior NVH performance. These awards further validate AAM's position as a global leader in electric propulsion technology.

We're also happy to announce another new business win as it relates to our electric driveline technology. Recently, we were awarded another new electric driveline program in China. This one with a brand new customer. Like our last award, this program will support a value brand front-wheel drive battery electric vehicle in the local Chinese market. This is our second e-drive win in China, and we are clearly gaining momentum in this growth part of the market. We see many opportunities to grow our share of the new energy vehicles in China and believe our technology leadership and growing customer relationships strongly position AAM for future profitable growth.

It is important to note that while we are realigning our business to the new market demand and tightly managing our cost structure, we remain steadfast in our plan to invest in our future. We will continue to seek profitable growth through organic new business opportunities, we will continue to support important book business and customer launches, and we will continue to invest in the next-generation of electric drive and alternative propulsion solutions.

And with that, 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 first quarter 2020 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 first quarter of 2020, AAM sales were $1.34 billion compared to $1.72 billion in the first quarter of 2019. Slide 7 shows a walk down of first quarter 2019 sales to first quarter of 2020 sales. First, we stepped down our first quarter 2019 sales by $182 million to reflect the sale of the U.S. casting business unit that was completed in December of 2019. We estimate that the impact of the COVID-19 related production shutdowns across the globe in the first quarter of 2020 was $169 million, certainly having an unexpected and significant impact on our quarterly results. Excluding the impact of COVID-19, we did see a benefit of other volume and mix of approximately $18 million. We also continue to see the trend of lower year-over-year metal market prices and foreign currency in the first quarter of 2020, resulting in a decrease in sales of $42 million.

Now let's move on to profitability. Gross profit was $195.3 million or 14.5% of sales in the first quarter of 2020. This compares to $222.2 million or 12.9% in the first quarter of 2019. Adjusted EBITDA was $213.3 million in the first quarter of 2020 or 15.9% of sales, as compared to $245 million in the first quarter of 2019 or 14.3% of sales. This represents a 160 basis point increase in margin on a year-over-year basis, despite the unfavorable COVID-19 impact. This increase in EBITDA margin is mainly driven by improved operating performance, productivity and lower launch costs, along with the sale of our lower-margin U.S. casting business.

You can see a year-over-year walk down of adjusted EBITDA on Slide 8 for more details. Our first step in our EBITDA walk, similar to sales, is to back out the first quarter of 2019 casting EBITDA to provide a comparable figure after the sale of our U.S. casting business. The impact of COVID-19 would lower production related to governmental stay-at-home orders and production shutdowns impacted adjusted EBITDA by an estimated $47 million, representing a decremental margin of about 28%. We did see a benefit from other volume and mix, with mix being a positive factor in the first quarter of 2020. And operating performance, lower launch costs and productivity drove a year-over-year improvement of $21 million in the first quarter of 2020 compared to 2019. We spoke at the beginning of the year about these factors being positive catalysts for AAM in 2020, and we certainly saw the benefits in the first quarter, before we became significantly impacted by the COVID-19 disruption. And we expect these and other factors to continue to positively contribute once our operations get back and running over the next couple of months.

We also recorded a noncash goodwill accounting impairment charge in the first quarter of 2020 of $510 million. While typically an annual process, the production disruption from the COVID-19 pandemic and related potential impact it will have on future demand represented an indicator to test their goodwill for impairment. This result was driven primarily by lower projected global production volumes and changes to market-related inputs, such as increased discount rates as compared to our last assessment.

Let me now cover SG&A, interest and taxes. SG&A expense, including R&D, in the first quarter of 2020 was $90.3 million or 6.7% of sales. This compares to $90.7 million in the first quarter of 2019 or 5.3% of sales. AAM's R&D spending in the first quarter of 2020 was $36.6 million compared to $34.3 million in the first quarter of 2019. We would expect to see SG&A decrease in the second quarter compared to the first quarter as wage reductions and other cost savings actions take hold.

Net interest expense was $48.7 million in the first quarter of 2020 compared to $52.7 million in the first quarter of 2019, reflecting the favorable impact of lower overall year-over-year debt balances.

In the first quarter of 2020, we recorded a tax expense of $3.3 million. This includes a $7.5 million benefit related to our ability to carry back losses from prior years under the CARES Act. This onetime gain has been excluded from our calculation of adjusted EPS. While we may experience some volatile quarterly tax rates during 2020, we continue to expect our adjusted effective income tax rate for the full year to be in a approximately 20% range.

Taking all these sales and cost charges into account, our GAAP net loss was $501.3 million in the first quarter of 2020 compared to net income of $41.6 million in the first quarter of 2019. Adjusted EPS for the first quarter of 2020 was $0.20 per share compared to $0.36 per share in the first quarter of 2019. We estimate that the lower production related to COVID-19 unfavorably impacted our adjusted EPS by $0.33.

Let's now move on to cash flow and the balance sheet. We define free cash flow to be net cash provided by operating activities less capital expenditures, net of proceeds from the sale of property, plant and equipment. AAM defines adjusted free cash flow to be free cash flow, excluding the impact of cash payments for restructuring and acquisition-related costs. Net cash provided by operating activities for the first quarter of 2020 was $139.4 million. Capital expenditures, net of proceeds from the sale of property, plant and equipment for the first quarter of 2020 was $69.2 million. Cash payments for restructuring and acquisition-related activity for the first quarter of 2020 were $13.1 million. We expect restructuring and acquisition-related payments to be between $55 million to $70 million for the full year of 2020, up from our initial estimate at the beginning of the year due to additional restructuring actions that we are taking and plan to take in response to the expected impact of the COVID-19 pandemic on future global light vehicle production and consumer demand. Reflecting the impact of this activity, AAM generated adjusted free cash flow of $83.3 million in the first quarter of 2020. This is a significant improvement from the first quarter of 2019, we saw an adjusted free cash outflow of over $188 million. We benefited from cutting capital spending that was nearly cut in half in the first quarter of 2020, compared to last year and working capital benefits.

From a debt leverage perspective, we ended the quarter with a net debt-to-LTM adjusted EBITDA or net leverage ratio of 3.3x at the end of March. This calculation takes our total debt minus our available cash balances, divided by the last 12 months of adjusted EBITDA. While we lowered our net debt levels as a result of the free cash flow we generated in the first quarter, the impact of COVID-19 on our adjusted EBITDA resulted in a slight increase of this ratio from the end of 2019.

On Slide 10, we have our debt maturity schedule. In the first quarter, we redeemed $100 million of our 2022 notes. In addition, on April 28, we amended our credit agreement to, among other things, revise our financial maintenance covenants to provide additional financial flexibility as we navigate the uncertainty that exists in our business today. We do not have any significant debt maturities until October of 2022. We ended at March 31, 2020, with $683 million of cash on hand, including $200 million of proceeds we drew down on our revolver. Since the end of the quarter, we drew an additional $150 million on our revolver to hold this cash on hand.

On Slide 11, we highlighted a few important notes regarding the second quarter of 2020. While we are already through 1 month of the quarter, significant uncertainty remains related to the resumption of production in the automotive industry in key regions, including the pace and effectiveness of these restarts by our customers and the entire supply chain. We are currently expecting production to begin ramp-up in Europe and North America in mid-May in a phased approach and continue to increase production throughout the month of June. Given the uncertainty, we are including in our planning that there will be some start-up in supplier inefficiency costs as we resume production. We currently estimate these to be approximately $40 million in 2020. However, we should more than offset these costs with AAM's additional cost reduction actions. Despite the challenges we are facing, we expect to end the second quarter with over $1.2 billion of liquidity.

While we are not providing any financial targets for the full year of 2020, David provided you with some information on our free cash flow breakeven scenario for the year.

On Slide 12, we have included 2 walks to show you some puts and takes that get us from our initial 2020 financial targets to the cash flow breakeven scenario David discussed. The table on the left starts with the midpoint of our initial adjusted EBITDA target for 2020 and walks to the midpoint of our adjusted EBITDA, where we expect based on the assumption that our revenue is down 25% to 30% from our initial 2020 assumptions. We are accounted not only for the assumed significant reduction in production volumes for our target, but also the start-up inefficiency expenses and expected cost savings as well. We are diligently working to minimize those start-up efficiencies but believe it prudent to include for planning purposes. Most importantly, we are very focused on our cost savings initiatives that will benefit AAM in 2020 and beyond. Our areas of cost saving focus are temporary wage adjustments that began in the second quarter, adjusting staffing level to a lower run rate of production on top of variable cost structure reductions, fixed cost reductions in our facilities, including utilities, indirect labor and other elements of overhead, even more cost-effective ways to conduct business by leveraging technologies to support back office demand, reduced travel, so on and so forth.

Beyond the revised adjusted EBITDA amount, we reduced capital spending down to $250 million, expected interest payments of $205 million, and tax payments of approximately $50 million, which is about $40 million lower than our initial expectations at the beginning of the year. We expect inventory reductions and other working capital items to be a positive $40 million, resulting in an estimated adjusted free cash flow of approximately breakeven.

The walk on the right takes a slightly different approach, but demonstrates the same conclusion and actions we are taking. This walks from our initial free cash flow target to a cash breakeven level. This slide shows all of the cash preservation levers AAM is managing to offset the implications of COVID-19 and new market demands.

We have talked about our downside protection playbook and the actions we would take in different scenarios based on the breadth and duration of the expected industry downturn. The playbook is now in full effect. We are focused on both the short-term and long-term implications on light vehicle demand and adjusting our business to be positioned for financial success at lower production volumes. We are taking decisive actions while ensuring our ability to support future customer schedules, important program launches and future profitable growth.

Before we move on to Q&A, let me end with a few summary points as I look at the challenges and opportunities AAM will face in the near-term and the longer term. AAM has significant liquidity with our cash on hand and revolver availability to handle the short-term production shutdowns caused by COVID-19. At these most difficult times, AAM is benefiting from our experienced management team, variable cost structure and established playbook for declines in production. AAM will work with customers, our supply base and other stakeholders to ramp up production in a safe and healthy way for our associates, and we'll continue to support critical customer launches with important capital and R&D investments. We expect to exit this temporary business disruption as a leaner, stronger company by accelerating and upsizing existing restructuring plans and have the opportunity to benefit us for years to come. AAM is focused on positioning our business to be profitable and generate significant free cash flow and a 14 million unit North America production U.S. SAAR environment following the near-term COVID impacts. And if that environment changes, we will, too.

Thank you for your time and participation on the call today. I'm going to stop here and turn the call back over to Jason so we can start the Q&A.

Jason?

Thank you, Chris, and thank you, David. We have reserved some time to take questions.

(Operator Instructions) So at this time, I'll turn it over to Chad to proceed with any questions you may have.

(Operator Instructions) And our first question will come from John Murphy with Bank of America.

It's great to hear from you. A first question around the balance sheet. I mean, it seems like you've got this situation really in a headlock, to put it bluntly, and have done a really good job here in reacting quickly. I'm just curious on the balance sheet, though, if there were any openings or windows to opportunistically raise capital at reasonable costs. Would you consider that? Or do you think you're really just in very good shape here and don't need to even entertain that kind of idea?

Look, John, this is Chris. I hope you're well. At first, I would tell you, from a liquidity perspective, I think we're in very good shape. But we're constantly looking at our maturity table, our continued access to liquidity and if there was an opportunity, we'd certainly consider it.

Okay. And then a second question on the restart. There's obviously a lot of focus by the automakers in producing the most profitable highest mixed vehicles as they restart to really get things going here. I'm just curious, as you look at this, particularly around GM and the North American market, if you can sort of remind us of sort of the range of content per vehicle, high and low, maybe you would have on pickups, SUVs and crossovers because, I mean, there's going to be a real significant difference in richer mix as we ramp up here, and it seems like it's probably going to be an opportunity that might be underappreciated by a lot of folks.

Yes, John, this is David. As far as content per vehicle, on full size truck, your range is anywhere between $1,700 on average, up to maybe around $2,500. On the crossover vehicle side of things, it's in that $1,200, $1,300 range. So your comment's spot on, in regards to -- as the OEMs prioritize the full-sized truck and the crossover vehicles for their own profitability and profitable needs. That should also benefit American Axle as we go forward. And we've said we've been positioned very favorably in the marketplace with those segments. Those segments have continued to grow over the years, where it was over 70% last year. Now last month, it was over 76% of the overall market or the sales that are taking place to right in that, that sweet spot of trucks and SUVs. But our #1 priority with the restart is really focused on the health and safety of our associates and implementing all the sapient and new manufacturing protocols that need to be put into place. We think we're very well prepared for that. At the same time, we published our own powering up guidelines, which clearly articulate, and we've communicated that to our workforce with respect to those new safety guidelines. So that's the priority for us. But at the same time, like you said, we will benefit from the richer mix.

The next question will be from Rod Lache with Wolfe Research.

Thanks for all the additional information this morning. So it looks like you're thinking EBITDA would be around $465 million on roughly $1.5 billion revenue decline in this hypothetical scenario, so 32% decremental. Was just hoping, first of all, you could just address, if you get some of that back, that revenue that you lose, would the incremental margins be kind of linear to what you're seeing? So in other words, it certainly feels like full-sized truck comes back faster and stronger than the rest of the market. But if we wanted to calibrate and think about a $1.1 billion coming back or $1.2 billion or whatever, would we apply a similar 32% incremental margin to that?

Yes, Rod, this is Chris. Yes, the scenario here, we're using the midpoint of our previous sales guidance, around $5.9 billion. So it's a little more closer to $1.6 billion in terms of sales decline in this analysis. But generally speaking, yes, you would see this would flex up and down in similar ranges.

Okay. Great. And can you just clarify 2 things. One is the -- this volume mix and pricing benefit on EBITDA of $17 million on an $18 million top line impact. Typically, you'd see something like that, if there was some kind of pricing adjustment with such a high flow through. Was that the case? Or is that something else?

And then lastly, obviously, Mexico is still a major concern for many suppliers and what the policies there will be. What's your latest thinking there just given your base of operations there?

Yes, Rod. I'll answer the first part of that question as it relates to your other volume mix and pricing. It is not related to pricing, as you've indicated. It's truly actually a mix element where we saw some high volumes in some of our higher contribution margin product, and we saw some lower volumes declines in some of our lower contribution margin products. So it happened to work in a favorable way this quarter. And with the low sales change, it kind of exemplifies it a little bit.

And Rod, this is David. With respect to Mexico, clearly, the country order, executive order, right now runs until the end of May. That's probably still our remaining concern now that Michigan has allowed folks to come back to work, starting as early as next week. Clearly, the OEMs, the trade associations, the supply base is all working with the government in Mexico, and we're hopeful that they will align with the mid start -- or the restart here in the mid-May period of time instead of the end of May. It's very critical that, that happens in order to protect the value chain and the continuity of supply going forward for the whole industry.

That is a working assumption then that you believe that, that is -- that's something that is likely to happen? Or is it still uncertain?

It's still uncertain in it, but we're very hopeful.

The next question will come from Ryan Brinkman with JPMorgan.

Firstly, just relative to the outlook for liquidity of over $1.2 billion on June 30 versus $1.46 billion on March 31. Can we assume that total change in liquidity of less than $260 million is tantamount to the expected free cash flow during the quarter? Or there are other items in financing cash flows or otherwise that impact liquidity, et cetera, that don't allow us to make that assumption? And are you able to sort of maybe bucket out that less than $260 million change in cash or liquidity by maybe working capital versus CapEx impact, et cetera?

Ryan, this is Chris. Yes, that's predominantly our change in cash through the course of the second quarter. We would expect a significant decline in operational cash with our reduced sales. We had a very small working capital benefit at the tail end of Q1. We were free cash flow positive in Q1. We would have been free cash flow positive in Q1, even pre-COVID. You'll have a gain in working capital at the beginning part of the second quarter, and then you'll start to consume working capital at the back end of the second quarter and early part of third quarter as operations come back up. But there's no other matters, other than -- those are your main 2 inputs into that movement of liquidity.

Okay. And maybe could you speak to how you contained the decremental margin as well as you did in 1Q? And then as we think about decrementals, how can we think about them tracking like as the year progresses? By what quarter do you expect to get the $60 million additional run rate savings implemented? Is it fair to say that 2Q decrementals will be harshest this year given just it has the largest degree of year-over-year decline in production, maybe we won't have quite the full $60 million run rate in there? Any guidance you can give us in terms of how the decrementals might track?

Yes. The first part of your question, it relates to the 28% decrementals we experienced here on our COVID impact in Q1, which was really the back half. So that was actually a broad, since the entire company in North America and Europe and the whole Asia was kind of back online by the end of the quarter. But that was more of a broad-based company average you saw. But at the same time, as our facility shut down to, in some cases, near 0 production, we were able to eliminate some semi-fixed and fixed costs associated with that at the tail end, which allowed us to kind of minimize a little bit of that. I would expect similar or a little bit higher in terms of impact in the second quarter in terms of -- because of the dynamic and change of last year to this year in the size and magnitude to that.

Okay. And finally, just a housekeeping item. What is the cash cost of the $60 million restructuring savings? Or just said differently, like what kind of non-adjusted free cash flow could we expect in a breakeven adjusted FCF scenario this year given any restructuring or other backed out items?

Yes. We have restructuring items here, this year, $55 million to $70 million and the piece associated with that $60 million, think of that kind of in line with the delta to where we previously worked. At the beginning of the year, we were around the $35 million to $40 million range.

The next question will come from Dan Levy with Crédit Suisse.

Wanted to just start with the CapEx reduction. The $75 million CapEx reduction. How much of that is your own discretionary action in trying to cut CapEx versus simply a function of launches getting delayed? And how should we view the lower CapEx as sustainable beyond this year?

Dan, this is David Dauch. The efforts to reduce the CapEx were largely driven by AAM's internal initiatives. But obviously, we retimed some of our spending based on some of the retiming of our customer programs and the launches that we're associated with.

Regarding to the second part of your question in regards to CapEx. Again, we've been targeting all along the 5% or less. We're very confident that we can hold those numbers for several years going forward.

Okay. Great. And then my second question, your primary exposure is North American truck and recognize that you're diversifying your exposure. But we are in an environment of cheaper gas and softened fuel efficiency regulations. So this arguably provides some ability to take your foot off the pedal on spend on [advanced tech]. So how are you looking at the tech spend here? What are the near term benefits? And does the disruption make you more structurally slow down tech spend given your core exposures are still North American truck?

No. Obviously, first and foremost, we're going to protect the core business and continue to invest in our core business. We've been steadfast with respect to that. At the same time, as part of our cost reduction activity, we have not touched all of our R&D spending and commitments to electrification.

No near-term benefits on that, that's fully impacted?

We've just realigned our product engineering, how we want to spend the money without jeopardizing what we're doing for advanced and alternative propulsion technology.

And we are taking cost savings actions outside of that as well in our engineering spend.

The next question will come from Itay Michaeli with Citi.

Just had a couple of follow-ups. First, I just want to make sure I'm clear on the working capital, Chris. Just with the analysis you've laid out, would we expect directionally in second half of the year, working capital, to then be a source of cash?

Yes. You will see the back half of the year, and particularly in the fourth quarter, where we typically have a working capital benefit, I would still expect that to happen. You'll see us benefit sort of the very tail end of the first quarter, first half of the second quarter, and then it flipped to a use the back half of the second quarter, early part of the third quarter and then revert back. It's just the nature of the downtime of the sales.

Got it. That's very clear. And maybe for David, a second question, just how we should think about some of the CapEx cuts, including beyond 2020, how you're pursuing new business? And any changes there in terms of what the company is looking to pursue as well as just the overall kind of quoting environment through this crisis, how that's looking?

No, Itay, I mean, clearly, with the global volumes changing, the regional volume is changing, there's going to be excess capacity in some of our facilities. We're working very hard to consolidate those facilities to drive greater utilization. At the same time, that will free up capacity to go after new business. So we're not changing any of the organic opportunities that are in our market basket at this time. If anything, we think that we can capitalize on that as we go forward. And then in other cases, it was just us, senior management, making decisions to trim the sales a little bit in light of the current environment that we're in. But we feel -- as I mentioned earlier, we're very confident that we can continue to execute the plan that we have at the reduced CapEx spending levels that we've identified.

Our next question will come from Brian Johnson with Barclays.

Yes. I just wanted to get a sense from kind of Mike, and you've been through this before in '08, '09. We remember those days. And I'm going to take as a given that at Three Rivers and Silao, you know how to manage through it. But what are you seeing vis-à-vis the acquired metaldyne plants sort of picking on you because you're close to the front line? And how have those been -- how are you looking at those as they restart? Are there opportunities? Could you maybe elaborate on some of the opportunities to consolidate that? Because I think just bluntly, in general, we feel more comfortable with your ability to reramp at legacy Axle, and we've seen some issues with the acquired MPG properties over the last couple of years.

Yes, Brian, look, I think you make a good point. We do have our team assembled almost entirely, not exactly entirely, but mostly, from the last time around. And we're flexing the same muscles that we flexed before in terms of the cost structure adjustments and really, the quick adjustment to this type of environment. We were hoping we wouldn't have to do that, but quite frankly, here we are again.

Relative to the MPG facilities, look, I mean, we've owned these facilities now for a period of time. As far as we're concerned, we don't really see any difference between these operations and others. The one area that's different, Brian, is the size of some of these operations. And so as David just mentioned, in looking at our capacity footprint and looking for ways to not just reduce CapEx, but improve efficiency in our operations, get a better fixed cost utilization, we are consolidating some of these operations. And we're finding opportunities to consolidate it to slightly larger, not the same size as Three Rivers in Guanajuato, but larger operations that can be more efficient and make us more cost competitive.

We're seeing that show up in our quoting activities in a favorable light. We don't have to increase our CapEx to add incremental business in components such as balance shafts, for example. This is an area for us to capitalize on. So I hear you in terms of some of the launch challenges that we had 1 year, 2 years ago. But our point of view is we've got very close control over how these operations are going to restart and very close control. In fact, David, me, Chris and the whole senior management team into the details of how we're going to restructure every one of these operations.

And just as a follow-up, can you remind us of what the acquisition brought in terms of the European footprint and how that's faring through the shutdown over there and gradual restart?

Yes. The European footprint brought us sort of 2 core businesses. One was a European forging footprint, the former Zell business, which is now operated by us in Germany and the Czech Republic. That business, while their sales are down, reflecting the OEM marketplace, that business is being restructured and improved very nicely by our team. And that business is still running in some areas, and we'll be ready to fire up here very soon.

The other bit of business that we had in Europe was in our -- what we originally called our powertrain business, that's now part of our driveline business. And this is the vibration control systems business. This is a business that is levered to small engine -- smaller engines and, of course, balance in those engines. So I think hybrid engines and small displacement engines. So there's still a fair amount of growth potential in this business. We operate that business across 4 facilities. That business is one that we are looking for some consolidation.

Okay. Very helpful, Mike. And I hate to be back here with you again, but I remember how you plowed through it last time.

Yes. Well, yes -- we're not pleased. We would be rather to manage a lot of growth, but we know how to manage this side of it, too. And quite frankly, we do -- how we feel about this right now is we do a really great job managing the cost structure through this situation. We're going to be set up for a really competitive positioning coming out of this. And you can count on some very attractive incremental margins when we get our sales back.

The next question comes from James Picariello with KeyBanc Capital Markets.

Really appreciate the breakeven free cash flow analysis. Just on the implied decrementals at 30% in a down revenue scenario, the question is, in the down revenue scenario beyond the 25% to 30% range you're using, how would the decremental performance change, if at all? Could it actually theoretically find additional cost savings at that point, sustain a similar level of conversion? So any color there would be helpful. And then just on the $250 million in CapEx within that scenario, does that establish the minimum level you'd be willing to go down for this year?

First, James, this is Chris. As it relates to the contribution margin decrementals, you would, obviously, as it decline, you would experience a similar rate. But if you think about our playbook, if we thought that duration would be extended, I would suspect that levels, as you start to drop further than this, you would probably take that view. We would begin to do some holistic structure -- restructuring of some of our capacity, where you would then be able to call back some of that margin loss. But if you look at the playbook on that next slide, you'll see exactly how we'd step down and some of the actions we've taken today, especially from a footprint standpoint and some additional fixed cost elements.

This is David Dauch. In respect to your question on the CapEx, $250 million is a minimum level that we're going to work through at this time. But we'll obviously, we'll adjust with the market as need be, but we think that's the appropriate level to be operating with, with an understanding that we got book programs and committed programs that we need to launch and we'll launch and support our customers.

Got it. Yes, that makes a lot of sense. And then just on the latest E-drive award in China, can you just provide an update on maybe what your best assessment is of the timing for the 3 programs that have yet to launch? I believe the P2 program in Europe had a mid -- or has a mid-2021 start. That first China award possibly later this year. Any change in the timing?

First, China award is still on time. The European is moved out slightly into the 2021 calendar year period of time. But again, staggered because of the various variants that go on that program. But overall, things are relatively in line.

The next question comes from Joseph Spak with RBC Capital Markets.

I wanted to quickly go back to Ryan's question just to clarify. So of the $260 million lower or sort of cash outflow in the quarter, based on your other CapEx commentary, it sounds like maybe that's $50 million or so of it. And it sounds like you're planning net for some working capital use over the quarter. So sort of mid- to high 100s EBITDA, the right way to think about marketing all for those factors?

So yes, as it relates to the quarter, Joe, so we tried to articulate through that through our liquidity at the end of the quarter. Remember, it is a greater than $1.2 billion. But yes, we'll consume cash because of our lower EBITDA operations, and you're going to also then consume some working capital as well. You'll get a benefit on the flow part. It will be ultimately timed in with how the customers start-up in the back half year where your working capital move between the second and third quarter.

Right. And then just -- I think Slide 13 is really, really interesting, sort of the playbook. And I like the way you sort of put this between the sales decline range and the duration range. And it seems like right now, we're in the steeper part of the sales decline, but maybe the duration is shorter. But the midterm duration, I think, is still unclear. I think as sort of we talked to some of your customers, and I'm sure you do as well. So how do you go about thinking about executing this sort of playbook that you laid out here? And has this experience sort of cause you to rethink whether maybe you should be more aggressive with some of the actions you can take in the more dire scenario, even if it's just preventatively?

Yes, Joe, this is David. We are going to be very aggressive and are being very aggressive with respect to implementing our downside to our protection playbook. So you can expect that all the 4 buckets that are on here, we're going to be very focused on it. And there'll be activity in every one of those areas. And as I mentioned earlier, we're realigning and restructuring our business from the 16.5 million units SAAR here in North America to a 14 million U.S. SAAR, which is a second half run rate of this year, knowing that, this year, the full SAAR will be around 12 million.

Gentlemen, your last question comes from Armintas Sinkevicius with Morgan Stanley.

You mentioned positive free cash flow in the first quarter, even pre-COVID. Can you talk about the drivers of that positive free cash flow? Usually, first quarter is a seasonally soft quarter. You have cash outflows. What was the difference here? Is it working capital or something else?

Yes. It's typical -- the last couple of years, it's been seasonally outflow. A couple of years prior to that, we were actually positive free cash flow, Armintas. But we had stronger -- you had timing of your working capital. And that ebbs and flows a little bit in different quarters, but it was favorable for us here in the Q1. Focus on inventory, and then CapEx was done.

Okay. And then the China E-Drive award here, impressive, particularly given the environment. What are you seeing out of China, operationally? And from a conversation standpoint, is that starting to pick up? Or people still in China trying to manage getting their operations up and running?

No -- this is David, Armintas. We're seeing China, obviously ramping up and getting very close to pre-COVID production levels. Month of April was actually a growth month for them, first time in a couple of years. I think you're going to continue to see improvements within China going forward here. So they're pretty well almost caught up to where they were pre-COVID.

Right. But are you seeing conversations around new business starting to pick up now as well?

As far as new business award opportunities?

Yes, correct. So you had the one award. Is this a sign of more things to come in the near term? Or is it more of a one-off here?

No. I think there'll be more opportunities, especially as the government continues to press and push new energy vehicles there. And they've also put the incentives back in for another couple of years now. So that's how going to stimulate more demand for new energy vehicles. And I think there'll be additional sourcing opportunities that we'll get our fair share of.

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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.