Good morning. My name is Ian, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the AAM’s Fourth Quarter and Full-Year 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer period. [Operator Instructions] And as a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Jason Parsons, Director of Investor Relations. Please go ahead, Mr. Parsons.

Thank you, Ian, and good morning. I would like to welcome everyone who's joining us on AAM's fourth quarter earnings call. Earlier this morning, we released our fourth quarter and full-year 2017 earnings announcement. You can access this announcement on the Investor Relations page of our website, www.aam.com, and through the PR Newswire services. You can also find supplemental slides for this conference call on the investor page of our website as well. To listen to a replay of this call, you can dial 1 (855) 859-2056, reservation number 87956027. This replay will be available beginning at 1:00 PM today through 11:59 PM Eastern Time, February 21. Before we begin this call, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risks and uncertainties, which cannot be predicted or quantified, and which may cause future activities and results of operations to differ materially from those discussed. For additional information, we ask that you refer to our filings with the Securities and Exchange Commission. Also during this call, we will refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website. Over the next couple months, we will participate in the following conferences: the Citi 2018 Global Industrials Conference on February 22; the J.P. Morgan 2018 Global High Yield & Leveraged Finance Conference on February 27; and the Bank of America Merrill Lynch New York Auto Summit on March 28. In addition, we are always happy to host investors at any of our facilities. Please feel free to contact me to schedule a visit. With that, let me turn things over to AAM's Chairman and CEO, David Dauch.

Thank you, Jason, and good morning to everyone. Thank you for joining us today to discuss AAM’s financial results for the fourth quarter and full-year of 2017. Joining me on the call today are Mike Simonte, our President; and Chris May, our Vice President and Chief Financial Officer. To begin my comments today, I'll review the highlights of our fourth quarter and full-year 2017 financial performance. Next, I'll comment on the performance of AAM's business units and provide an update on our synergy attainment and integration activities. And lastly, I'll review AAM new business backlogs and our 2018 financial outlook before turning things over to Chris. After Chris covers the details of our financial results, we will then open up the call to any questions that you all may have. Let me start by stating that 2017 was a transformational year for AAM. We achieved another record year of sales and profitability while increasing our scale and accelerating business diversification through the acquisition of MPG. AAM's fourth quarter 2017 sales were $1.73 billion, significantly higher compared to the $947 million in the fourth quarter of 2016. Non-GM sales were over $1 billion for the second quarter in a row representing over 58% of total sales in the fourth quarter of 2017. For the full-year 2017 AAM sales increased to $6.27 billion, easily a new annual record for AAM. If you add in the first quarter sales of MPG before the acquisition, our pro forma sales would have been over $6.9 billion. Our non-GM sales in 2017 were over $3.3 billion compared to $1.3 billion in 2016. The customer diversification benefit of our acquisition of MPG had an immediate and obvious impact on our business, and we expect it to continue over the next few years. From a profitability perspective, AAM…

Thank you, David, and good morning to everyone. I will cover the financial details of our fourth quarter and full-year 2017 results with you today. And I also refer to new earnings slide deck as part of my prepared comments. So let's go ahead and get started with sales. In the fourth quarter of 2017, AAM sales increased over 80% on a year-over-year basis to $1.73 billion, primarily as a result of the MPG acquisition. Slide 12 shows a walk down of pro forma fourth quarter 2016 sales to fourth quarter 2017 sales. In addition to the impact of MPG, AAM sales were positively impacted by favorable volume and mix, continued realization of our new business backlog as well as higher metal market customer pass-throughs. AAM experienced nearly 9% net organic growth in the fourth quarter of 2017 on a pro forma year-over-year basis. For the full-year 2017, AAM sales increased nearly 60% to $6.27 billion as compared to $3.95 billion for the full-year of 2016. In addition to the impact of the MPG acquisition, this sales increase reflected the realization of a solid new business backlog, strong production volumes in the core vehicle segments, we support of light trucks, SUVs, the crossover vehicles and higher metal market and pass-throughs. The increase in sales we experienced in 2017 was both the result of our strategic actions as well as significant organic growth. Just as a quick reminder, full year 2017 financial results do not include the pre-acquisition financial results of MPG from January 1 through April 5. Now, let's move on to profitability. In both the fourth quarter and full-year 2017, AAM continued to deliver strong operating profit metrics. Gross profit was $294.3 million or 17% of sales in the fourth quarter of 2017. This compares $176.1 million or 18.6%…

Thank you, Chris and David. We have reserved 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 Brian Johnson of Barclays. Your line is open.

Yes. Thank you for taking the question. I wanted to ask a little bit over on the e-axle side, sort of beyond the puts and takes around this guidance. It seems like plans for the medium-duty truck and the smaller end of the LCV market are going to go electrified first. We've seen a competitor show up on medium duty trucks. And I know you're not generally in commercial vehicles, but if you think about things like the Transit, the Econoline van, the Safari over here, those seem like prime markets to go electrified due to city-specific emissions controls. What are you doing? Do you have a pipeline in that marketplace? Could you take some of the things you are currently kind of pushing in the CUV, SUV world and bring them into that market?

Yes, Brian. This is David. Good morning. With respect to your question on electrification, our primary focus initially has been on the passenger car and the CUV side as we see those markets and segments being ones that accept and adopt the technology first. As we've just communicated again here today, we're launching the CUV program this year and we won a passenger car P3 solutions going forward here, and we expect our electric drive to be somewhere between $100 million to $200 million by the 2021 calendar period of time. A lot of what we're developing for the passenger car and CUV applications can be applicable to light truck and even medium commercial truck, obviously there's different configurations and different battery sizes and motor sizes and axle size that would need to be integrated, but we are clearly keeping that in front of us and looking at that as an opportunity for us in the future.

Okay and would that include the potential light pickup truck market? We know from [indiscernible] in Chicago Auto Show that Ford is bringing out a hybrid electric pickup truck around 2020, and I assume if they do it, the other 2 players won’t be far behind?

Yes, I mean, right now, we still feel that most of the pickup truck will stay at traditional IC-based engine, but even with the hybrid, our products are still relevant in that environment, but at the same time, we're positioning ourselves if the customers have demands and needs for hybrid electric applications for trucks in the future, then we'll make sure we're positioned to support that.

Okay. Second question a lot of volatility around, worries about commodity, it's driven we think by worries about commodity prices and between the general upswing, due to stronger global economy and then of course the Twitter and Sheets. Could you give us a sense of where you might be exposed on the sales side? Just a couple of quick recaps. One, overall pass-through in North America, the U.S. in particular. Two, what is your sourcing domestic, Mexican, or coming in from the Pacific? And then three, given that how would you be affected by a change in tariffs or price levels around the state?

Our pass-through is around 90% as we communicated to you guys earlier. With respect to our sourcing, most of our sourcing supporting our North American operations is supported here in the U.S. both for U.S. consumption as well as Mexico consumption. We've got long-term contracts in place with multiple suppliers. We've negotiated many of those here just this past year. So we feel like we're in a solid position in that respect. We have seen some material increases in regards to the European market with the acquisition of MPG and the forging applications we have in Europe. So clearly, we'll have to work on the pass-through of some of those commercial increases with respect to those items, but overall, we feel very good about where we are in materials at this time.

Okay. Thank you.

Thanks Brian.

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

Good morning, everybody. I had a couple of questions. One is it's interesting you had 31% conversion on your backlog volume and mix even with the castings margins presumably down year-over-year. Could you just give us a little bit more color, on I think you said that some of the issues there were self-inflicted and just MPG having moved a bunch of product into a single plant and increasing the complexity. So maybe just talk a little bit about what you are doing to fix that, what you think the margins can get to and by when?

Okay Rod, this is David. You touched on some of the key issues that we highlighted earlier. We took over some challenges with respect to the casting program when we acquired MPG. There is a lack of maintenance in certain areas and the lack of infrastructure support and neglect that we’ve had to step up to some of that. We also dealt with the manpower shortage issue. Volumes were trending down, before the sale of MPG’s assets to American Axle. So therefore manpower has taken out only for the volume especially in industrial ag and commercial to bounce back, so we had to work through the manpower shortage issue. And then as you also commented on, they had announced a closure of a plant that was being integrated into other plants. Plan on paper was one thing, the execution was something different and they had also, recently or prior to our acquisition, had acquired the Brillion assets and announced the plant closing and all that had to be integrated into the business. So we've gone back and we've looked at all the capacities, install capacities. We’ve looked at the capability. We've now got the directionally in line with where it needs to be and we see improvements taking place. We expect first half of the year to trend towards that 10% to 12% margin or EBITDA type range and then hopefully, higher than that in the second half of the year, but we clearly see it turning in a favorable direction, but not to our expectation at this time.

Okay, great. And then secondly, can you comment on any update on the discussions with, regarding their decision to move truck production from Mexico to Warren in 2020. Are you still anticipating that you would produce axles for the metal Guanajuato? And if that changes, is that all kind of achievable within the context of your 6% CapEx forecast?

Yes. Right now, we've been given the direction from FCA to continue with our launch out of our Mexican operations so that's what we'll be doing to support the next-generation MAN heavy-duty program. Yes, they did announce the movement of that product up to Michigan here under the 2020 calendar year period of time, and we're in discussions with FCA as to what the longer term implications are, associated with that decision from a plant loading standpoint, nothing more than we can announce at this point in time, but we are in discussions with them.

Great, thanks. Congratulations on the strong performance.

Thanks, appreciate it.

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

Thank you. Good morning. Good morning everyone.

Good morning.

Hi, Joe.

So the first question just on some of the color around the guidance, so the changeover stiffness in first quarter. I think HIS has the pickups down about 35k and GM sort of stating something similar – so does that mean and I know is what you're planning for in that – a pretty steady unit volume decline over the remaining three quarter to sort of get in line with what GM is indicated the trucks will be down year-over-year?

Yes, Joe as our cadence out through 2018, we would anticipate obviously, as we mentioned a weaker first quarter and we typically have stronger quarters from there.

Okay.

Based on production basis.

Right, so the synergy target at the high end of the prior range, correct me if I’m wrong, but it’s sounded mostly like that's just some greater visibility into the initial opportunity identified, but it also sounded like maybe you are alluding to some additional opportunities beyond that. I was wondering if you can talk a little bit more about maybe not sort of quantifying them yet, but where such opportunities may lie.

Sure. Again, you’re right. We move to the high-end of the target that we had put out there. Remember, we have identified $45 million to $50 million in overhead. $45 million, $50 million in purchasing the supply chain management, another $10 million to $20 million in regards to manufacturing and other. So we feel highly confident that we'll meet the first quarter 2018 target at the $84 million, which is 70% of the original target. At the same time we will now guide industry that $120 million for the first quarter of 2019. We do feel that there may be some additional opportunity in manufacturing other category that tend to take a little bit longer, as you know from a product allocation standpoint, plant loading initiative. Some of that will be realizing in 2019, others will be realized beyond that. But we feel highly confident that we will meet the $120 million in our hopeful with confidence that we can even beat that, but nothing further to announce this time.

Okay. And then last one for me. Can you talk about the casting improvement margin in the first half of 2018? And then beyond that, I mean just so we could sort of frame the opportunity even if we are a little bit more vague on timeline. If we look back at sort of old MPG, is that still like an 800 basis point plus sort of opportunity from the fourth quarter levels? Is that the right way to think about it?

Yes, Joe. This is Chris. So right now, if you look at our fourth quarter casting performance is 5.7% from a segment level, right. Our objective here is to keep that up, as David mentioned, towards the 12% plus – plus range by midyear.

Right, but that would still be, I believe below sort of what that segment did prior to acquisition, or is that not correct?

Well, a couple of perspectives. One, we would anticipate it to continue to perform better than that so I said plus. And secondly, you deal with a little bit of difference on segment cost allocations between what you see AAM today and MPG previously. So there's some subtle differences between that.

Thanks a lot guys.

Thanks Joe.

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

Good morning, guys. Just a first question and I'm not sure if this is a fair question or how much visibility you have into this. But in the – now that we're heading into sort of the period where GM has the – business takes resourced away from you, about to ramp up, I mean, do you have any visibility or are you hearing anything on that? And really, the reason I'm asking is one, would it be the potential for them to maybe resource more away from you or two could this business eventually maybe come back to you over time?

John, this is David. We are not hearing anything that would challenge their launch capability so we expect them to launch on schedule. As you know, we're going to be supplying them some components, too, to support their axle production moving forward. Second thing is – second part of your question was, do we expect that they'll in-source any more of this? No. The answer is no to that. We have contractual agreements that are in place and they have a defined capacity that they put in place for both front and rear axles. So we don't see any issues with respect to that. We're just working out the mix between our two facilities. As I said, they have designed and developed a specific product for front axles and rear axles for a single product and we have the full complement of the range and so in the event that they have any problem with their launch, we could be there to support them. So we have a very good relationship with General Motors. As you said, they made the sourcing decision. We've offset that sourcing decision and added incremental sales to our overall backlog and new business. It helps our diversification efforts. I mean obviously we are disappointed to lose that business, but that was a commodity strategy decision by General Motors and we respect their decision and we're right now, we're just focused on successfully building the K2XX out and successfully launching the T2XX next generation product for GM.

Okay. That’s helpful. And then just a second question. I mean I'm just curious if you could give us sort of an update on bidding on business outside of the stated backlog? And also, as you're getting into new components like e-drive and everything, are you seeing sort of the usual suspects that you're going up and against in the bidding process? Or are there some new suppliers that are kind of rolling into the bidding process?

Yes. With respect to the new business opportunities, we're calling about $1.5 billion of opportunity in our market basket right now. Just historically, I'd say two thirds of that, let's say AAM legacy and one third of it is MPG legacy. Our normal hit rate in the past, between both organizations was in that 25% to 30% range and so we expect it to continue to deliver to that and to add to our backlog going forward especially in that 2020 calendar year period of time and beyond. With respect to the types of products, I mean, obviously, there's light truck applications. You know the normal players that we bump up against whether it's in-house or predominantly being on the light truck and SUV side of things. On the passenger car crossover vehicle side, we run into a number of people in regards to Magna and Linamar and GKN, ZF. And some of those same people hold true with respect to some of the electric drive applications, but there are some other emerging competitors, the BorgWarners, what do I say, the Bosches, the Continentals and others with respect to some of the e-drive application as well fighting for space in the future.

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

The answer would be yes to that, but we are finding those people that tend to have the historical knowledge of driveline tend to be the preferred customers – preferred suppliers that the customer likes to work with.

Perfect. Thank you very much.

Thank you.

Thanks John.

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

Great. Thank you. Good morning. Just a two questions on the prior guidance of 17% to 18% margin through 2020. I wanted to specifically focus on 2020. So two questions there are, one, do you need to actually – as you allude to the prior question, win more backlog to kind of sustained margin in the range over that the incremental? And then secondly, how should we think about the price-down relative to cost reduction outside of the MPG synergies over the next couple of years? How much of that are you able to offset do you think every year?

Itay, this is Chris. Good morning. Two parts to your question, as we think about that guidance as it relates to margin between here and 2020, obviously we have our book backlog. As David mentioned, we're still quoting on some activity over $1.5 billion. Some of that will hit potentially 2019 or more of that activity in 2020. So we do have some growth assuming that, but all within our past historical run rates. So we should absolutely achieve that. When you think about in terms of price-downs, in terms of what we historically have seen, call it 0.5% or 50 basis points plus or minus. We would typically see that offset with core productivity, outside of synergy attainment activity. So I would expect that trend to continue.

Okay that continues. And just a quick follow-up and just a housekeeping, I think you mentioned the tax rate for 2018 that was about 15% to 20% is that kind of sustainable going forward? And secondly, can you kind of share what you thinking roughly that 2018 D&A expense should be?

As it relates to tax, I would expect 15% to 20%, 2018 I mentioned, it will probably drift up closer to 20 as we post 2018, so premature there, but that's what I would expect that to trends toward. And then D&A, if you think about our D&A perspective this year, we miss in terms of – we did on the first quarter of MPG now, we're going to step-up for amortization. So it will essentially be very similar to this year plus about half of a quarter or so.

Great. Thanks very much.

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

Good morning. Thanks for taking my question. It will be great if you could provide some sort of an update on the revenue side of the merger-related synergies. Can you address the opportunity from both sort of the customer introduction side of things? But then also maybe from the vertical integration side of things, in terms of maybe doing things more in-house via Metaldyne relative to what components you might have sourced from the outside that went into your axles. The customer introduction opportunity, I think it was more discussed or speculated upon at least, at the time of the acquisition, but also deemed to be I guess relatively further out more skin to the sort of three to five-year development. Is the vertical integration opportunity something that is more possible over the near term? How material could that be and when might we start to see it?

So Ryan, this is David. One of the key factors and strategic logic that we have when we did the MPG acquisition, it was a vertical integration plan. And clearly, they were a supplier to us already in castings and we're realizing that benefit today. At this time, we’ve already made strategic sourcing decisions that impact some of our next-generation product through that cadence going forward to in-source some of that work. So that will further benefit us going forward on the casting side. We also have the opportunity to do some in-sourcing on some incremental forging. We are large forger already. At the same time, we're now the largest forger in the world. So we have that global capability now to support our global operations in Europe and as well as in Asia and we’ll work up to do that in the future. And then also with their center metal or powder metal capability, we've already made some decisions to in-source some of that work in the future, again as part of some of the synergistic plans that we have. So we feel very good the opportunities they’re presenting themselves from the vertical integration side. As it relates to customer side of things, as we said to you and you commented on, it may take us a little bit longer to realize that, but we clearly have a cross-selling opportunity where we have strong relationships, meaning AAM with some of the customer base. We'll pull the MPG portfolio into those customers, and where the MPG legacy relationships with the customers existed, we'll leverage that to pull the AAM portfolio into those customers discussion and negotiations. So yes, we feel good about where we are. We're seeing the opportunities present themselves, we’ve already been awarded some business because of that, but some of that business doesn't realize itself in some of the out years. Again, we definitely think there's opportunity from a sales standpoint with the customers.

Okay. That’s very helpful. Thanks. And just as a quick follow-up, I imagine the customer introduction stop that that will probably be beyond the backlog window I'm guessing, but is the vertical integration – is some of that already in the 2018 through 2020 backlog? And is there potential, because it doesn't have quite as long of the lead time for more to enter into it, thus providing maybe some upside risk to the backlog?

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

I see. Okay. Very helpful. Thanks.

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

And is there a still potential for more upside than I guess to the margin as opposed to revenue or depending upon how these things get in…

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

And Ryan, this is Mike speaking. When you break down the $20 million other category of synergy attainment, in-sourcing is a big part of what we're doing in that area, so there's over $100 million, pushing $200 million of vertical integration activity that we see in our internal management reporting because it's internally consumed. That's what David meant by you won't see sales – net sales of the company increasing, but you do see our cost structure improving and that is a significant element of our synergy plan. The one other thing I want to mention about cross-selling and customer opportunities and where our backlog has great potential. We see outstanding opportunities for growth in China. We have relationships there that are from either side, either legacy side of the two companies and we are bringing our sales teams together. In some cases, we're bringing our manufacturing capabilities together where we have a significant campus in Changshu. MPG was in Suzhou. They're located reasonably close, as you probably know and so we are seeing great opportunity for those revenue synergy activities in China.

Super helpful. Thanks a lot.

Thanks Ryan. End of Q&A

Thank you, Ryan. I want to thank all of you who have participated on the call and appreciate your interest in AAM. We certainly look forward to talking with you in the future.

This concludes today's conference call. You may now disconnect.