Dauch Corporation (DCH) Q2 2017 Earnings Report, Transcript and Summary

Good morning. My name is Jack, and I’ll be your conference facilitator today. At this time, I’d like to welcome everyone to the American Axle & Manufacturing Second Quarter 2017 Earnings Conference Call. All lines have been placed to mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, today’s call is being recorded. I’d now like to turn the call over to Mr. Jason Parsons, Director of Investor Relations. Please go ahead, Mr. Parsons.

Thank you and good morning. I would like to welcome everyone who’s joining us on AAM’s second quarter of 2017 earnings call. Earlier this morning, we released our second quarter of 2017 earnings announcement. You can access this announcement on the Investor Relations page of our website, www.aam.com, and through the PR Newswire services. You can find supplemental slides for this conference call on the Investors page of our website as well. To listen to a replay of this call, you can dial 1-855-859-2056, reservation number 87956025. This replay will be available beginning at 1:00 PM today through 11:59 PM Eastern Time, August 4. 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 to refer to our filings with the Securities and Exchange Commission. Also during this call, we will refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures as well as the reconciliation of these non-GAAP measures to GAAP financial information is available on our website. Over the next few months, we will participate in the following conferences: the JPMorgan Automotive Conference on August 8, the Guggenheim Auto’s Assembly Conference on September 6 and the 2017 RBC Capital Markets Global Investor Conference on September 15. In addition, we are always happy to host investors at any of our facilities. Please feel free to contact me to schedule a visit. With that, let me turn things over to AAM's Chairman and Chief Executive Officer, David Dauch.

Thank you, Jason, and good morning, everyone. Joining me on the call today are Mike Simonte, AAM's President; and Chris May, our Vice President and Chief Financial Officer. To begin my comments today, I'll provide some highlights of our second quarter activity. The first major accomplishment of the second quarter of 2017 was the completion of AAM's acquisition of Metaldyne Performance Group back in April 6. Since then we've been working very hard on integration activities while continuing to focus on flawless and anonymous support of customer program launches and daily operational performance. I'd like to personally thank the 25,000-plus AAM associates across the globe for all their hard work, dedication and determination during this busy and exciting time for AAM. Our second quarter financial results reflect the impact of the MPG acquisition, and as a result, AAM’s sales for the quarter were $1.76 billion, easily a quarterly record and significantly higher compared to the $1.03 billion in the second quarter of 2016. A key element of the MPG acquisition was accelerated customer diversification, and we began to realize this benefit in a meaningful way in the second quarter. Our non-GM sales for the second quarter were over 55% of total sale at $969.7 million. This marks the first quarter in AAM's history that the non-GM sales were over 50% of our total sales. This compared to $333.9 million or 33% of our total sales in the second quarter of 2016. We look forward to continuing this diversification through the launch of our new business backlog over the next couple of years. The second quarter also represented another strong performance for AAM as it relates to profitability. Adjusted EBITDA for the second quarter of 2017 was $325.7 million or 18.5% of sales, both quarterly records for AAM by a wide margin. This compared to adjusted EBITDA of $164.8 million or 16.1% of sales in the second quarter of 2016. Adjusted earnings per share for the second quarter of 2017 was $0.99 as compared to $0.89 in the second quarter of 2016. AAM's profitability in the second quarter of 2017 shows the power of the strong product mix, global operations that are delivering productivity, operational excellence worldwide and attainment of planned cost reduction synergies. I'll provide you more progress in details as we go forward in the presentation on our cost reduction synergies. From a cash flow perspective, AAM generated a $141.6 million of adjusted free cash flow in second quarter and over $200 million during the first half of 2017. As a result of delivering EBITDA performance and free cash flow generation, AAM has reduced its net leverage ratio since closing of MPG acquisition to $3.1 times as of June 30. AAM's operational performance has put us in a great position to meet our objectives in the future. As you can see, our financial results in the second quarter of 2017 demonstrates the favorable impact of AAM’s recent strategic acquisition and our ability to deliver operational excellence, technology leadership, the world-class quality on a larger and more diverse scale. With the acquisition of MPG, we are now running the business under four separate operating segments: our Driveline business, Metal Forming business, Powertrain business and Casting business. As a result, we have reported our financial performance for the first of each of these segments in the second quarter, another first for AAM. Let me run you through the sales and segment-adjusted EBITDA for each of the business units. The Driveline business unit recorded sales of just over $1 billion in the second quarter of 2017, this translated to $178.9 million of segment-adjusted EBITDA. AAM’s Driveline business unit benefited from strong global full-size truck production and the impact of new product launches supporting multiple crossover vehicle platforms. The Metal Forming business unit recorded sales of $369.3 million in the second quarter and $69.4 million of segment-adjusted EBITDA. Resulted AAM’s Metal Forming business unit shows the operating earnings power of our vertical integration as well as significant external sales growth as a result of the MPG acquisition. AAM’s Powertrain business unit recorded $283.6 million in sales and segment-adjusted EBITDA of $51.9 million. These results reflect continued growth in Europe and Asia and a business unit that is operating and performing very well across the globe. AAM’s Casting business unit recorded $225.6 million of sales and segment-adjusted EBITDA of $25.5 million. The Casting business unit experienced increased volumes in commercial vehicle and industrial markets in the first half of 2017 and contributed very nicely to AAM’s diversification strategy. We look forward to updating you on our progress of each of these business units in quarters to come as we go forward. Let me switch gears and provide a brief update on our synergy of 10-year progress, which you can see on Slide 7 of the earnings call presentation. As you may recall, we have targeted an annual cost reduction synergy run rate of $100 million to $120 million by the end of the second full year of the acquisition, after the completion of our integration activities. We are also targeting to achieve 70% of this annual run rate by the end of the first full year of the acquisition. So let’s call that by the end of the first quarter of 2018. As we close out the month of July, we have currently attained synergies that on an annualize run rate basis amounts to approximately $38 million. Many of these initial synergies relates to a reduction in redundant public company cost, overhead spending and the optimization of our operating structure. AAM has also identified considerable purchasing and manufacturing initiatives that are currently underway in order to achieve further cost reductions. We are driving hard and very focus on the organization to achieve our synergy goals. There is still plenty of work to do, but we are very pleased with our progress for the first couple of months of the integration and believe we are well on our way of achieving our previously communicated synergy attainment targets. Stay tuned for further updates along the way. Let me now review our 2017 financial outlook. The first thing I’d like to note is that we revise our full year 2017 US SAAR assumption from 17.5 million units to approximately 17 million of light vehicle units, based on the most recent sales data from the last couple of months. The good news is, despite reduced macro assumption, we are confirming our full year financial outlook for 2017, which includes consolidated sales of approximately $6.1 billion, adjusted EBITDA margin in the range of 17% to 18% and adjusted free cash flow of approximately 5% of sales. The fact that we’re able to maintain our 2017 financial outlook, while reduce our macro level US SAAR assumption, highlight a few important factors driving AAM's current and future sales and profitability, including: a product portfolio that is concentrated in light truck, SUVs and crossover; vehicles that continue to experience high levels of consumer demand, despite recent weaknesses in overall US SAAR levels; continued growth in markets outside of the United States that are not impacted by the US SAAR; and macro-level improvements in non-automotive industries that we support, such as commercial vehicles, industrial and agricultural market. Sales in these markets make up about 10% of our current sales. AAM is well positioned to deliver sale growth and superior profit performance in 2017. Before I turn it over to Chris, let me touch based on our new business backlog. Back in the last earnings call, we disclosed our updated growth new and incremental business backlogs for the three-year period of 2017 through 2019 to be approximately $1.5 billion. This new business backlog includes key business wins throughout each of our business units and represents many of our advanced technologies, including our e-AAM hybrid and electric driveline solutions and our EcoTrac disconnecting all-wheel drive systems. On Slide 10, you can see that we will continue to diversify our business through the realization of this backlog over the next few years. Approximately half of the new business relates to all important and growing crossover vehicle segment and approximately 35% of this new business is outside of North America. We will also continue to reduce our customer concentricity over the next few years as we expect sales of the GM to become about one-third of our total revenue by 2020. And with approximately $1.5 billion of quoting and emerging new business opportunities, organic growth and diversification continues to be a priority for AAM. To sum things up, AAM had an outstanding and transformational second quarter and we are off to a great start in our integration activity and look forward to driving further value through the achievement of our synergy and debt reduction targets. We are laser-focused on our near-term goals of profitable sales growth, superior profit margins, synergy attainment, strong free cash flow generation and deleveraging the business. I strongly believe that best is yet to come and that AAM and our stakeholders have a bright future in front of us. This concludes my prepared comments for this morning. I'd thank everyone for your attention today and your interest in AAM, and I'll now turn it over to Chris. Thank you.

Okay. Thank you, David, and good morning, everyone. I will cover the financial details of our second quarter of 2017 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 start with sales. As David mentioned, sales increased over $732 million on a year-over-year basis primarily as a result of the MPG acquisition. Excluding the impact of MPG, AAM sales also benefited from higher global light truck volumes and new business backlog launches related primarily to product supporting crossover vehicle platforms. Slide 13 shows a walk-down of pro forma second quarter 2016 sales with the second quarter of 2017 sales. As you can see, you need to adjust or MPG exiting the KBI business and eliminate the five stages (00:15:14) from April 1 through April 5 before MPG was acquired by AAM to represent comparable quarter-over-quarter results. After those adjustments, the most significant factors in our sales growth relate to launching our backlog of new business and volume and mix on our core products. Also, as metal prices have increased since last year, metal market pass-throughs added $40 million of revenue on a year-over-year basis. Compared to the pro forma sales in the second quarter of 2016, AAM realized approximately 3.5% of organic net growth. AAM's content per vehicle, which is measured by the dollar value of our Driveline business segment product sales supporting our customers’ North America light truck and SUV programs was $1,660 in the second quarter of 2017. This compares to the $1,609 in the second quarter of 2016. This increase relates primarily to increased metal market customer pass-throughs and stronger mix, including higher estimated four-wheel drive penetration from 70% up to 73%. So now let’s move on to profitability. AAM continued to deliver strong operating profit metrics. Gross profit was $316.4 million or 18% of sales in the second quarter of 2017. This compares to $191.4 million or 18.7% in the second quarter of 2016. However, gross profit in the second quarter of 2017 was impacted by two acquisition-related adjustments during the quarter, the largest specifically related to the nuance of purchase accounting. It was an adjustment related to an increase in the recorded value of acquired inventory from MPG to its fair value by $24.9 million. That was quickly recorded as an expense through cost of goods sold during the second quarter as the inventory was sold. There was also a one-time gain of $3.7 million for change of economy related to either direct inventory. All of these items have been excluded as adjustments to our reported results. Excluding the net impact of these items, gross margin in the second quarter of 2017 would have been 19.2%. Adjusted EBITDA, or earnings before interest expense, income taxes, depreciation and amortization, excluding the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs, was $325.7 million in the second quarter of 2017 or 18.5% of sales. This compares to $164.8 million in the second quarter of 2016 or 16.1% of sales. You can see the year-over-year walk-down of adjusted EBITDA on our Slide 14, which again begins with a pro forma adjusted EBITDA and just for the impact of pre-acquisition sales and exiting of the KBI business. Key drivers of EBITDA growth include not only the margin earned on our backlog in other favorable volume and mix factors but we are delivery results and our acquisition activities. You can see the benefit of our recent acquisition of USM’s Mexico operations, which allow us to capture value and margin by vertical integration of several key declines. Also note, the initial impact of the synergies of our MPG acquisition has started to reflect in our results. And lastly but just as important, our core productivity initiatives continued to drive performance and have more than offset the breakdowns we incurred in this quarter. In the second quarter of 2017, in addition to the previously mentioned purchase accounting adjustments in cost of goods sold, we also incurred $51.7 million of restructuring and acquisition-related costs, which are shown in detail on Slide 15. This included restructuring cost of $1.7 million associated with our global restructuring efforts that we communicated to you in our fourth quarter of 2016. Cost related to the closing of our acquisitions, such as professional fees and expenses related to the severance and accelerated vesting-of-stock (00:19:12) compensation of MPG associates due to the acquisition, also rolling $40.6 million; and costs related to the integration and synergy attainment activities $9.4 million. Ultimately, we expect to incur between $45 million and $60 million of restructuring and acquisition-related costs over the last six months of 2017. These amounts are in line with what we have previously disclosed to you and directly support the successful implementation of our synergies from our recent acquisitions. SG&A expense, including R&D in the second quarter of 2017, was $105.6 million or 6% of sales. This compares to $78.7 million or 7.7% of sales in the second quarter of 2016. R&D spending for the second quarter of 2017 was $41 million compared to $35 million in the second quarter of 2016. SG&A as a percent of sales declined due to the benefits of bonding the AAM and MPG SG&A expenses for the combined companies, but also reflects the favorable impacts from AAM's global restructuring that was initiated in the fourth quarter of 2016 as well as of synergies realized as part of the integration activities of the MPG acquisition. Amortization of intangible assets for the second quarter of 2017 was $24.8 million as compared to $1.2 million in the second quarter of 2016. This increase relates to the amortization of intangible assets recorded during 2017 as part of the purchase accounting for acquisitions, and I would expect this to run at approximately $25 million per quarter for the next few years. Now let me cover other income and expense and interest. Other income and expense was expensed for the second quarter of 2017 of $9.5 million compared to income of $2.1 million in the second quarter of 2016. $2.7 million of the expense in the second quarter of 2017 related to onetime debt refinancing costs attributable to the premiums we paid on the extinguishment of MPG's existing debt upon acquisition. The remaining net expense in the second quarter of 2017 primarily relates to foreign exchange, balance sheet remeasurement losses as a result of the dollar weakening against the Mexican peso and euro. In the second quarter of 2016, we recorded a foreign exchange remeasurement gain in this account mainly related to the strengthening of the US dollar against the peso. Net interest expense in the second quarter of 2017 was $56.1 million as compared to $21.9 million in the second quarter of 2016. This increase in interest expense reflects the impact on the additional debt required to fund the MPG acquisition. The weighted average interest rate for the second quarter of 2017 was 5.6%. Now onto one of everybody's favorite topics these days, taxes. Income tax expense was $2.4 million in the second quarter of 2017 as compared to $20.7 million in the second quarter of 2016. The effective income tax rate was 3.6% in the second quarter of 2017 as compared to 22.6% in the first quarter of 2016. The lower income tax expense and effective tax rate can be explained by two factors. First, significant restructuring and acquisition-related cost in the US causing lower than normal income in the United States, a higher rate jurisdiction in 2017 and a net discrete favorable tax adjustment in the quarter of 2017 of $4.2 million resulting from the tax benefits of the MPG acquisition. The effective income tax rate, when adjusted for these items, would have been approximately 23%, right in the line with the guidance of 22% to 25% that we have provided previously. Taking all of these sales and cost parameters into account, GAAP net income was $66.3 million or $0.59 per share in the second quarter of 2017 compared to $71 million or $0.90 per share in the second quarter of 2016. Adjusted earnings per share, which excludes the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs and non-recurring items, including the tax effect, was $0.99 per share in the second quarter of 2017 compared to $0.89 per share in the second quarter of 2016. 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 received from the sale of property, plant and equipment and government grants. AAM defines adjusted free cash flow to be free cash flow excluding the impact of cash payments for restructuring and acquisition-related costs and settlements of pre-existing accounts payable balances and interest expense payable for acquired entity. Net cash generated by operating activities in the second quarter of 2017 was $150.9 million. Capital spending, net of proceeds from the sale of property, plant and equipment, was a $103 million in the second quarter of 2017. Cash payments for restructuring and acquisition-related costs for the second quarter of 2017 was $56.7 million. The cash payment for the settlement of pre-existing accounts payable balances with acquire entities was $12.4 million. This relates to a purchase price accounting adjustment that required AAM to treat a portion of the price we’ve paid for MPG to be classified as a reduction of cash flow from operations resulting from the settlement of pre-existing balances we had with MPG immediately before the acquisition. We also paid $24.6 million in the second quarter of 2017 while interest payments due upon the redemption of MPG’s outstanding legacy debt on the acquisition date. Reflecting these activities, AAM’s adjusted free cash flow in the second quarter of 2017 was $141.6 million compared to $105 million in the second quarter of 2016. With first add in 2017, AAM generated over $200 million adjusted free cash flow as compared to $81.2 million in the first half of 2016. Note that our capital spending will be second-half heavy due to the timing of our launches and upcoming replacement programs, such as a JET full-size truck programs for General Motors and for FCA. Lastly, as David mentioned, we expect adjusted free cash flow for 2017 to be approximately 5% of sales, which represents a free cash flow yield of approximately 17%. From a debt leverage perspective, we ended the quarter with a net debt to LTM pro forma adjusted EBITDA, or net leverage ratio, of 3.1 times at June 30. This calculation takes our total debt net, minus or available cash balances, divided by our pro forma adjusted EBITDA, which includes the pre-acquisition adjusted EBITDA recognized in the last 12 months by our acquired entity. Liquidity at the end of June was $1.45 billion, inline with our target of over $1 billion post acquisition. So big picture, we are a little high of where we were thought we would be as it relates to our net leverage ratio, and reducing our net debt leverage continues to be a quite for AAM. In fact, we prepaid over $20 million of our scheduled term loan amortization payments for the next 12 months in the second quarter of 2017. David confirmed our 2017 full year financial outlook that was communicated on last quarter’s conference call, so I won’t repeat our targets again, but I will say that we are very confident on our ability to achieve these targets. Before we open up for Q&A, let me quickly summarize the key observations from the quarter: first, outstanding operational performance from our global team at the same time we have significant integration activities and product launches worldwide, resulting in record quarterly sales, adjusted EBITDA, adjusted EBITDA margin and strong adjusted free cash flow generation; second, maintaining our current 2017 full year outlook across the board, despite lower US SAAR levels, adjustments to our strong product mix and end-market diversification supplemented by the MPG acquisition. And lastly, our synergy attainment is on track. Business diversification is being achieved and deleveraging of the business has begun. It is only about a few months since our acquisition of MPG has been completed, but we are off to running to see significant opportunities ahead of us, continue to build on a foundation of profitable growth, improving our profit margins and a robust free cash flow generation. Thank you for your time and participation on the call today. I am going to turn the call back over to Jason, so we can start our Q&A.

Thank you, Chris and David. We reserve some time to take questions. I would ask that you please limit your questions to no more than two. So at this time, please feel free to proceed with any questions you may have.

[Operator Instructions] Your first question comes from the line of Rod Lache with Deutsche Bank. Your line is open.

I’ll try to limit it to two. Just first of all, pretty impressive level of SG&A as a percentage of revenue in the quarter. Could you just give us a sense of how you’re thinking about that going forward?

Rod, this is Chris. Good morning. Yes, you saw a 6% level here in the second quarter, obviously a little higher than the first quarter as we blend these two companies together. I would think about that sort of in the mid-6% range for the full year as we level up from the sales in the third and fourth quarters.

Okay. And then I’d like to ask about how we should be thinking about the EBITDA going forward just in light of some of these production cuts that we’re seeing from General Motors. Three might be somewhat instructive since it’s a quarter of pretty low run rate of K2 production, and then for next year GM is talking about something like a 100,000-unit decline year-over-year for that platform. Any high level thoughts there? Is that somewhat weaker than you’ve been expecting? The number obviously this quarter is quite strong and there is some speculation out there that basically the upside from this quarter is offsetting some modest downside maybe for the back half?

Yes, Rod, this is Chris again. First of all, no, nothing different than from what we were expecting. I guess, from a macro level, I would think about it from that perspective. Our full year guide for the year on an EBITDA margin is 17% to 18%. On a year-to-date basis, we’re right to that high end of the range. We continue to be focused on performing as a company in the second half, and we expect to fall in that range and are quite frankly driving towards the higher end of that leverage. We see continued strong performance in the second half of the year. In addition, our synergies continued to grow and take whole through the third and fourth quarter are also key consideration in that factor.

So Q3, in light of where the production for General Motors is coming in, I presume would be below that range, though?

Well, I mean, in terms of -- it will fall within our overall guide, but we do see some lower K2 production in the third and fourth quarter compared to the first half, and as you know, that’s a stronger margin profile product for us but you’ll see a little bit associated to that growth.

Right. So it could be below -- when you see that’s the range, 17%, 18% that’s the range for the year, but you’re saying that the quarters are also going to fall within that range, some quarters at the lower end and some at the upper end?

Yes. I mean, think about range again for full year, first half performed -- we’re focused on the top half of that range. I expect we will fall full year within that range and we will continue to perform going forward.

Right. Okay. And do you believe that -- I mean, is that expectation for next year, about 100,000-unit decline, that’s in line with expectations and synergies and other factors are sufficient to mitigate that?

Rod, this is David. Absolutely, what GM communicated is in line with what plan had been. Clearly, they got some scheduled downtime because of the transition from the K2XX to T1XX. And the whole supply base, included the AAM, is going to feel a little bit of that impact. But it's not a surprise for us. It’s known and has been planned and contemplated in our numbers.

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

A couple of housekeeping question than a more strategic question. The housekeeping question is can you remind us on the restructuring, a couple of questions. One, what's the accrual versus cash payouts to-date? Kind of second as you roll that forward, you mentioned a number in the deck. I'm not sure if that's accrual or cash, but just how is the cash payout against those accruals going to work?

Yes. In terms of how we think about cash payments for the first half of the year, in terms of all the restructuring payments, we're about $40 million in terms of expense. The cost related to the closing the acquisition and the cash payments are very similar. Same with the restructuring side in terms of guidance going forward, as I mentioned, will be about $45 million to $60 million in the second half of the year, and I would think of those very similar to cash payments and equal to the expense, very similar.

Okay. But first half run the cash payments were ahead of expense?

Pretty close -- net, net close, very close to expense.

Second. We were on the call with Mr. Marchionne yesterday and he talked about a portfolio review and kind of not doing things that suppliers could be doing better. Any hope or possibility that FCA, or perhaps Ford, with the new CEO could return to the age-old issues of outsourcing their in-house operations, or with some of their declines in car production, need to labor busy is that just not something we should be thinking about?

Brian, this is David. You're clearly where you need to look at is their portfolio and identify what's core and what's non-core. At the same time, they've got to assess what their capital needs and uses they’re going to be going forward in the future. Clearly, the supply base is capable on the axle and driveline side. I was supporting that that they made a decision to divest those assets. And as Ford, or FCA, had an interest in divesting that, maybe we have an interest in having discussions with them.

Okay. And then final question just kind of thinking of beyond 2018. How are you thinking about GM’s share of the large pickup truck market now and kind of it's been a bit up and down, maybe down in the last few months, and whether that's something they're going to pull out of, whether they’re sort of going stingy on the incentive side just to make sure they have enough inventory? Or just how you're thinking about that?

GM's product has gotten a little bit longer than compared to some of its competitors, As Ford came our with some new product, clearly FCA is coming out with some new product as well. Typically, when you get along on the two, it tend to lose a little bit of share. As the same time, the competitors have been aggressive in regards to some of the incentives that they put forward there. GM has been very disciplined on their transaction pricing. But, I expect GM will fight their way and maintain their portion of their market share and there'll be some percentage gains here and there or percentage losses across the three, but that's typically historically has what has happened based on the new models they introduced and based on where the product portfolio stands in this life cycle. Overall, I think that GM will be able to protect and maintain their share going forward.

And I guess just final question. Hybrids, any kind of update in terms of signings, backlog, discussions? We heard again from BorgWarner this week that the pace of discussions around the hybrid programs and various flavors maybe are increasing model years 2020-ish. We have certainly point that out when we look at upcoming competition in Tesla. But how are your discussions going?

Well as we communicate to you all before, we’ve got electrification programs built into our backlog. They’ll be launched in starting next year and then ramping up from there. At the same time, in the market advancement, what we are quoting on right now, there are some significant opportunities there and we need deepened discussions on those. So hope we will have some further updates for you in the near future.

Okay, thanks.

Your next question comes from the line of Joseph Spak with RBC Capital Markets. Your line is open.

Thanks. Good morning, everyone.

Good morning, Joe.

Just – well, first of all, I appreciate the bridges on sales and EBITDA. I guess I just wanted to get a little bit more familiar with how you are doing these a little bit. So in the 65 – in the sales log, 65, plus from backlog volume mix, other, I mean it would actually seem like a good chunk of that is backlog, because I know it was still a strong K2 quarter but it wasn’t that many units year-over-year, and then conversely, G charity which was down pretty massively. So is that, a, an accurate assessment? And related, is that a net number, so you’re putting the roll-offs in that bucket as well?

Joe, you’re thinking about it perfectly. Yes, it’s in that number. So you had some net of attrition. And as you mentioned, Q2 of last year to Q2 of this year, K2 is up very slightly and we do have a decline on the charity program. So if you think about this, almost is of a net backlog piece for the second quarter of 2017. You get this – and this is on the core but some of the key pieces that you mentioned. Or also, as you know, the backlog driving a lot of this, the new D2 platform for General Motors, which is key and has been a significant launch activity and of course in the second quarter.

Okay, that’s helpful. And I guess related, I heard you talk a little bit about no change form -- on the K2 from what sort of GM said just it was expected, but can you – are going to sort of give exactly or around about to the units embedded in full year forecast for 2017?

Joe, this is David. I mean, we have got roughly 1.267 units built into our forecast going forward, especially the full year, which is slightly under where the GMM schedules are and the HIS. We feel very comfortable…

Okay, that’s helpful. And then one last one. This one is, I guess, sort of housekeeping. But if I go back to the bridges, it’s like MPG acquisition synergies plus 6%, which I know this is simple math. But if you just annualize it, that’s 24%. So how does -- and then I think you said the annualize rate is higher 38%. So what’s discrepancy there?

Yes. So, Joe, think about it this way. As we closed just at the beginning of the second quarter, and it continued to grow through the quarter, the synergies realized, they’re exiting through the higher pace when you started. While 6% was that’s when dollar blend for the quarter, you have an exit, means that’s higher. So you’re continuing to see that build as we go forward.

Perfect. Thanks a lot.

Okay, Joe. Thanks.

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

Hi, good morning, everybody.

Good morning. Emmanuel. How are you?

Good. So first question on the reiterated guidance. In light of the low SAAR assumption, what are some of the offsetting positive factors that sort of prompt you to be confident with the guidance?

Emmanuel, this is David. Clearly, we are looking at the macro assumption, and based on historical sales over the last couple of months, we felt that compelling to bring the US SAAR down to 17 million. But what’s clearly and say in our favorite right now, and I said this for the last couple of quarters, is the mix is very favorable to American Axle. The sweet spot for us is trucks and SUVs and crossover vehicles and luxury passenger cars, and each of those segments continue to again market share going forward, and we expect them to gain market share going forward for quarters to come as well. So that’s really what allows us to maintain our guidance for the year.

Okay. And then sort of going back to sort of the initial question about 2018 view, so in light of GM’s comments, we use them to be in this sort of like on same -- onboard for the production decline next year maybe double digits or so in the light trucks. What are sort of like some of the offsets to sort of look for in 2018? Obviously, large synergies from the MPG acquisition, some backlog, and anything else to in terms of big bucket to think about?

Yes. The only other thing was we’re seeing an upswing in regards to some of the industrial and commercial markets as well, so -- but you hit the key points in regards the backlog in new business. As we had a strong backlog over the next three years, obviously launching 500 million this year, 450 million next year and 550 million year up for that. But you hit the main items. The one thing I guess that I’d add would be the upstream in some of the industrial and commercial market for us.

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

Obviously, you’re doing a really good job on margin. So I would have not been surprised to see you perhaps maintain to EBITDA while cutting sales and increasing margin outlook today. So I guess I’m just a little bit surprised, though, that you’re lower the SAAR outlook but not the revenue outlook. Can you talk about what’s contributing to your ability to maintain the revenue guide? Is it that the GM has said that the lower SAARs led by pass cars and daily rental in your under index there, and then I know you’re reiterating the guide. But would you say that, if you had to say if risk puts the upside or downside, that maybe risk on revenue is to the downside in the back half, but risk to margin is on the upside?

Ryan, quite the opposite. I mean, I just answered earlier. I mean, we lowered the SAAR because of the macro conditions. At the same time, we’re benefiting significantly from the mix. North American full-size truck and SUV continue to show gains quarter to quarter and continue to show that going forward here. You’re seeing a big swing in demand to crossover vehicles from mid-size and small passenger cars, which are down. At the same time, our global light vehicle business continues to grow. Our commercial vehicle, as I just mentioned, the industrial commercial is growing. And then we’re going feeling a little bit of the impact on the passenger car coming down through some of the MPG assets that we took over. But the net of everything is up for us, and therefore, with lower SAAR, we can still hold our guidance-ing forecast for the year. So we feel very confident about where we are.

And then just finally sort of sticking with margin, it looks like the first half was kind of 18% and the full year 17% to 18%. It looks like maybe the implication is more like 17% margin in the back half, and I know that K2XX is kind of inordinately profitable and soft during the back half, but I now you got less exposure there now with MPG. So I guess I was just trying to understand, again, sort of if the lower K2 -- is that sufficient enough to drive the margin difference? Or is there some other factor contributing to it, you called that metals, but -- or again, if the margin guide, if there's any conservatism there, because the synergy just continue to come on a little bit more each quarter?

Ryan, this is Chris. I'll reiterate our guidance is 17% to 18%, and again, driving towards the higher end of that range. Some elements to think about in the second half, obviously, you mentioned the K2 piece, which does obviously work on our margin a little bit. But as we're getting ready to launch some of these new significant platforms next year, especially on the full-size truck for both FCA and K2, we'll experience some higher project-type related expenses in the second half. Metal market continuing to work up in the second quarter of this year, which generally has a little bit of a following quarter trail to it, so you put a little bit of pressure on our margins associated with that. The level of some of our stock comp that started in the kind of mid second quarter through our acquired entity, and that picks up a little bit in terms of just a run rate perspective. But some of that is all being offset by our continued and demonstrated improvements and implementations of our synergy achievements. So we're pretty excited to offset a lot of that through that process. And obviously we work through the FX side as well. The peso has been strengthening a little bit against us. So we have a little bit margin roll on that but not whole a lot. But those are some of the things I would think about for the second half.

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

Just on Slide 13, just can you talk a little bit about the pricing of $7 million? I think you kind of implied actually a pretty small impact relative to what we see typically from suppliers. Is that kind of sustainable quarterly pricing impact? And do you think, maybe on Slide 14, that you can keep on getting a net benefit of EBITDA from productivity net of pricing?

Itay, this is Chris. First, in terms of a pricing perspective, that's a little less than a 0.5%. And you may recall, historically we sit anywhere from 0.5% to 1% is what we would experience. It’s pretty much in line with that. We believe we'll be able to continue to hold that into the foreseeable future. And yes, our productivity initiates throughout the company, in addition to our synergy actions that we're taking, should continue offset pricing. I mean that's one of our main objectives is to continue to grow margin, offset any negative declines whether it'd through pricing or economic inflation. So that is a core of our company in terms of our operational excellence.

That’s helpful, and just a follow-up housekeeping. With the post MPG, can you just remind us of through company's commodity impact, how the [indiscernible] this year just as relative to your contracts and pass-throughs and things like that?

Yes, think about – we both as a combined entity, we've pretty good coverage there. Think about the 85% to 90% of what we would pass through, and you can see a little bit of that element and dynamic on the whats we provided from the sales and between Pages 13 and 14, you can see that impact. But yes, so think about 85% to 90% covered on the commodity side.

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

Just a first question here. I mean I know it's early days, but as you're talking to customers, I’m just curious what kind of revenue synergies you're digging up here with the MPG acquisition? I mean, we’re focusing on costs a lot here, but just curious what you're hearing out there from your customers as opportunities?

John, this is David. First of all, we’ve met with most of the major customers that we've had already, and first of all, they're very supportive of the transaction that we did the integration. The clear focus that they have right now is just making sure were production, daily production as well as protecting the customer launches going forward. From a pricing and from an opportunity standpoint, there is clearly some cross-selling opportunities because of the relations that MPG had, let’s say the likes of BMW or some other European or Asian customers that maybe American Axle didn’t have. So we see opportunities that way and then clearly we are looking at other opportunities with respect what we can do from a pricing standpoint. But the customers have been very respective to the acquisition. They understand our commitment to support their programs. At the same time, they’re clearly going to look for some sort of benefit as we go forward based on the synergy attainment, and we’re working with each of the customers on a case-by-case basis not only today but going forward in the future.

Okay. And then just a second question. I mean, obviously, you have schedules from GM, you got outlooks from IHS on where the GM truck buying is going to next year. Things can change obviously for the positive and the negative. I am just curious, as you think about the variability in the schedule and the potential risk to the downside, where you kind of see the real material increment and how do you respond to potential declines in the schedule? I mean, the 10,000 units something that you need react to in a big way, or is it 50,000 units, and how do you react, David?

John, as you know, we have been very good about flux in our business both upward when the schedules go up as well bringing them downward. And we have got a discipline in place, the management team in place. At the same time, MPG had a good capability of doing a similar type of things. So we welcome incremental volumes. We will find a way to make that product. Especially with in the capacity that we have today, we are really driving hard of the utilization of that capacity and hopefully trying to free up some capacity to go after new business. But in the even that they go the other way, then we understand what we need to do from an operational standpoint. Clearly, we will adjust our variable costs and our manpower in line with what the market demand would be. Chris, I don’t know if there is anything else you want to add financially.

No, just as David said, you look at the variable elements of our business in the ability to accommodate whatever the market -- highly variable in terms of the labor side, highly variable in terms of purchase material components, over 60% of our cost relate to that. So we are prepare to, again, accommodate whatever comes our way.

Okay, it’s helpful. And then just one last housekeeping. D&A running sort of roughly annualized 500 million, is that sound about right?

Yes, it’s about right. Correct.

Great. Thank you very much.

Thank, John.

Your last question comes from the line of [Alrina Hudakowski] with KeyBanc. Your line is open.

Thank you. Good morning. Actually, all of my questions have been answered. I appreciate the time.

Good to hear your voice. Thank you.

We thank all of you who are participating on this call and appreciate your interest in AAM. We certainly look forward to talking with you in the future.

This concludes today’s call. Thank you for your participation. All participants may now disconnect.