Dauch Corporation (DCH) Q1 2018 Earnings Report, Transcript and Summary

Good morning. My name is Tabata, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the AAM’s First Quarter 2018 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] 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, Tabata, and good morning. I would like to welcome everyone who's joining us on AAM's first quarter earnings call. Earlier this morning, we released our first quarter of 2018 earnings announcement. You can access this announcement on the Investor Relations page of our website, www.aam.com, and through the PR Newswire services. You can also find supplemental slides for this conference call on the investor page of our website as well. To listen to a replay of this call, you can dial 1 (855) 859-2056, reservation number 3190139. This replay will be available beginning at 1:00 PM today through 11:59 PM Eastern Time, May 11. Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risks and uncertainties, which cannot be predicted or quantified, and which may cause future activities and results of operations to differ materially from those discussed. For additional information, we ask that you refer to our filings with the Securities and Exchange Commission. Also during this call, we may refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website. Over the next couple of months, we expect to participate in the following conferences: RBC Capital Markets Canadian Automotive, Industrials & Transportation Conference on May 14; Barclays High Yield Bond & Syndicated Loan Conference on May 22; and the 2017 KeyBanc Capital Markets Industrial, Automotive & Transportation Conference on May 30. We will also be hosting an investor day in New York City on June 14. 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 first quarter of 2018. Joining me on the call today are Mike Simonte, AAM’s President; and Chris May, AAM Vice President and Chief Financial Officer. To begin my comments today, I'll review the highlights of our first quarter 2018 financial performance. Then, I'll comment on the performance of AAM's business units and provide an update on our synergy attainment and integration activities. Lastly, I'll review a few notable recent business developments, as well as AAM’s 2018 financial outlook. After Chris covers the details of our financial results, we will open up the call for any questions that you may have. Our first quarter financial performance was highlighted by continued strength in our end markets, realization of our new business backlog and operational excellence on a global basis. AAM's first quarter of 2018 sales were $1.86 billion, another quarterly record for the company and significantly higher compared to the $1.05 billion in the first quarter of 2017. Most of this increase reflects the impact of our MPG acquisition, which did not close until early in the second quarter of 2017. We also benefited significantly from the realization of our new business backlog, which more than offset the year-over-year decrease in production volumes related to the GM [indiscernible], and Ram heavy-duty truck programs as they prepare for upcoming launch activities later in 2018. AAM's adjusted EBITDA in the first quarter of 2018 was $317 million or 17.1% of sales. This compares to $183.6 million in the first quarter of 2017 or 17.5% of sales. AAM's adjusted EPS in the first quarter of 2018 was $0.98 per share, compared to $1.03 in the first quarter of 2017. This quarter the power of our new business backlog and accelerated business diversification was on full display. Despite planned extra downtime on our two largest programs, we were able to grow revenues to record levels and maintain very strong operating margins. Chris will provide additional information regarding the details of our financial details in a few minutes. Let's look a little deeper into the segment results for the first quarter. The driveline business unit sales of $1.07 billion in the first quarter of 2018, which translated into $170 million of segment adjusted EBITDA. And as we anticipated and previously communicated, the driveline business unit ran at slightly lower margins than usual in the first quarter of 2018 due to the year-over-year declines in full-size truck production, as well as elevated project expense as we prepare for the upcoming launches. However, our operations are running very well and we are laser focused on supporting our customers through a critical launch period over the next several quarters. The metal forming business unit recorded sales of $397 million and segment-adjusted EBITDA of $75.3 million in the first quarter of 2018, running at 19% adjusted EBITDA margins and continuing their strong operating performance. The powertrain business unit recorded sales of $291.9 million and segment-adjusted EBITDA of $50.1 million. Our powertrain business unit experienced sequential margin improvement due to higher sales and solid operating performance. The casting business unit recorded sales of $239 million and segment adjusted EBITDA of $21.6 million. This represents an increase in margin performance of 330 basis points from 5.7 in the fourth quarter 2017 to 9% in the first quarter of 2018 and reflects further improvements in the performance of our casting operations. We expect to see this trend continue as we target double-digit EBITDA margins in the second quarter of 2018. Let me now provide a quick update on synergy attainment progress. As of the end of March, we were running at an annual cost reduction synergy rate of $85 million, right in line with our updated synergy target for the first full year after the MPG acquisition. Our progress over the last 12 months has us on track of achieving our $120 million of synergy achievement by the end of the first quarter of 2019, and we continue to look for potential ways to go above and beyond that target. Switching gears, I like to cover a couple of recent developments. First I would like to cover our newly signed joint venture with Liuzhou Wuling, a Chinese manufacturer of axles, chassis, engines, stamping and welding products and special purpose vehicles. This joint venture will begin production later this year and will start by providing independent rear axles and driveheads to SAIC-GM-Wuling for use in sport utility and multipurpose vehicles. After initial launch of this 50:50 joint venture, we expect the entity to generate about 25 million of annual revenue. However, the potential of this partnership goes well beyond that and represents an excellent opportunity for AAM to grow both our traditional driveline, as well as our electric driveline products in China, the largest automotive market in the world. This region has considerable growth opportunities for us as a company, not only with the new joint venture, but also our driveline, powertrain and metal forming segments. Second, as we disclosed in our press release this morning, in April 2018, we sold our aftermarket business associated with our Powertrain business unit to. Cash proceeds from the sale of these non-core assets were approximately $50 million, and we plan to use these funds to make further debt payments in the second quarter of 2018. This was an excellent opportunity for AAM to optimize its portfolio and receive solid return on our investment. While we have not specifically identified any additional parts of our business as non-core, we will continue to analyze our assets and align them with our future business strategies. And lastly for the second straight year, AAM was recognized as one of the Supplier of the Year recipient from General Motors. This award is awarded to suppliers who have consistently exceeded GM's expectations, created outstanding value or brought new innovations to the company. While we continue to focus on further customer diversification, we greatly value our strategic relationship and partnership with our largest customer. We are honored by this award and the recognition from GM, and we look forward to continuing our mission to provide value to all of our customers. Before I turn it over to Chris, let me provide some quick comments on AAM’s 2018 full-year financial outlook. Today, we are reaffirming the targets we previously shared with you in our last earnings call. AAM is targeting full-year sales of approximately $7 billion in 2018, and this assumes a US dollar of 16.8 million to 17 million units, right in line with what we experienced in the first few months of sales activity this year. For the full-year 2018, AAM is targeting an adjusted EBITDA margin in the range of 17.5% to 18% of sales. And AAM is targeting adjusted free cash in the range of 5% of sales for the full-year 2018. We were off to a great start in achieving 2018 financial targets, while continuing to focus on critical launch and acquisition integration activities during the year. This year is shaping up to be a very exciting one for AAM. As we look forward to major milestones during the year, we have major issues such as the launch of the new generation full-size truck programs for GM and FCA; our first electric drive P4 solution for a battery electric all-wheel-drive crossover vehicle; greater expansion and growth in both China and Europe and we expect another record financial year from a performance standpoint. We look forward to providing another business update to all of you at our investor event in June. That is all of my prepared remarks here today. I thank each and every one of you for your attention today, and appreciate your continued interest in AAM. Let me now turn the call over to our Vice President and Chief Financial Officer, Chris May. Chris?

Thank you, David, and good morning to everyone. I will cover the financial details of our first quarter of 2018 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 2018, AAM sales increased 77% on a year-over-year basis to $1.86 billion. This increase is attributed to the MPG acquisition, launches of new business and higher middle-market pass-throughs in foreign currency. On a pro forma basis for the MPG acquisition, revenues were up over $80 million. Slide 8 shows a walk down of pro forma first quarter 2017 sales and first quarter of 2018 sales. AAM sales were impacted by lower year-over-year production of General Motors full-size trucks, and Ram heavy-duty trucks as our customers prepared for upcoming new model launch activity. We had initially indicated that first-quarter sales would be impacted by this customer downtime, and they were. However, we did see some higher than initially expected volumes in the first quarter related to the Ram heavy-duty trucks as some of the downtime was retimed into the first few weeks of the second quarter. The great news for us was the decrease in sales for these two important platforms was more than offset by increased revenues as a result of our new business backlog across many vehicle types and other positive volume and mix factors. We also saw increases in sales related to middle-market pass-throughs and FX mainly related to the Euro, renminbi and [indiscernible]. And lastly, we incurred a small impact related to normal customer place down activity. So the bottom line, even when you back out FX and metal market impacts, we still grew over sales organically year-over-year despite lower K2XX and Ram heavy-duty volumes. Now let's move on to profitability. In the first quarter of 2018, AAM continued to deliver strong operating profit metrics. Gross profit was $316.3 million or 17% of sales in the first quarter of 2018. Adjusted EBITDA or earnings before interest expense, income taxes and depreciation and amortization, excluding the impact of restructuring and acquisition-related costs, and debt refinancing and redemption costs was $317 million in the first quarter of 2018 or 17.1% of sales. You can see a year-over-year walk down of adjusted EBITDA on Slide 9. Again, we calculated the first quarter of 2017 pro forma adjusted EBITDA by combining AAM's adjusted EBITDA with MPG’s estimated EBITDA from last year. Adjusted EBITDA grew $11 million as a result of our organic growth. With the favorable impact of our new business backlog realization, more than offsetting the unfavorable impact of the year-over-year production declines of our full-size truck programs. We continue to see the benefit of our integration activities as cost reduction synergies improved our performance by $20 million in the quarter. As we have discussed previously, we are incurring expenses related to our significant launches of new and replacement programs. We experience these costs every year, but they are magnified this time period due to the size and scope of our launches in 2018. As we also mentioned previously, we anticipate that these expenses to be more weighted towards the first half of 2018 and that is still our expectation. The last thing I wanted to point out as it relates to margins is the impact of metal market pass throughs in FX. As it relates to metal market, we saw our sales increase $27 million as a result of increasing middle-market indices. As we have discussed many times, we passed through to our customers approximately 90% of the impact related to these index driven metal market changes. So there is usually a small impact to profitability dollars in a period of rising metal market prices and a manageable impact on margin. And we saw this thing again in the first quarter of 2018 as we experienced a small $2 million unfavorable impact. However, when you remove yourself from the margin mess, these factors are very effective at protecting AAM from significant changes in certain metal market index related costs. On a year-over-year basis, we have also been impacted by FX with a weaker US dollar, our revenues and profits denominated in euro, renminbi and Thai Baht as well as some other currencies translated higher in the first quarter of 2018. However, most of this profit benefit was offset by the unfavorable impact of the stronger Mexican Peso in Q1 of 2018 versus prior year. So just to summarize, while these two factors did not have a significant impact on our operating profit or cash flow dollars in the quarter, they did create a headwind as it relates to margin, approximately 50 basis points when comparing the first quarter of 2018 to the same period in 2017. As it relates to restructuring and acquisition related costs in the first quarter of 2018, we incurred $18.3 million of restructuring and acquisition-related costs, most of which related to investments in integration and synergy implementation. We continue to expect these expenses will be approximately $50 million to $75 million for the full year of 2018. Let me now cover SG&A. SG&A expense including R&D in the first quarter of 2018 was $97.3 million or 5.2% of sales. This compares to $81.2 million in the first quarter of 2017 or 7.7% of sales. AAM's R&D spending in the first quarter of 2018 was $38.5 million compared to $41 million in the first quarter of 2017. Lower SG&A as a percent of sales this clearly reflecting the benefits of a portion of synergy attainment from our acquisitions. Amortization of intangible assets for the first quarter of 2018 was $24.9 million as compared to $1.6 million in the first quarter of 2017. With the increase solely related to the significant amount of intangible assets recorded to our balance sheet in 2017 as part of our acquisition activity. Starting in the second quarter of 2018, this line item will be much more comparable. So, let's move on to interest and taxes. Net interest expense was $52.7 million in the first quarter of 2018, compared to $25 million in the first quarter of 2017. This increase reflects the impact of the additional debt required to fund the MPG acquisition. In the first quarter of 2018, we recorded an income tax expense of $17.9 million compared to $7.5 million in the first quarter of 2017. Our effective tax rate in the first quarter of 2018 was 16.7%. When you adjust for the restructuring and integration charges in the quarter, our effective tax rate is right around 17.6%, basically splitting the upper range of our guidance of 15% to 20% for 2018. Taking all these sales and cost drivers into account, GAAP net income was $89.5 million or $0.78 per share in the first quarter of 2018 compared to $78.4 million or $0.99 per share in the first quarter of 2017. Adjusted earnings per share, excludes the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs and non-recurring items. Adjusted EPS for the first quarter of 2018 was $0.98 per share compared to $1.03 per share for the first quarter of 2017. Let's now move on to cash flow and the balance sheet. We define 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 and settlements of pre-existing accounts payable balances. Net cash provided by operating activities in the first quarter of 2018 was $66.9 million. Capital expenditures net of proceeds from the sale of PP&E equipment for the first quarter of 2018 was $130.4 million. Cash payments for restructuring and acquisition related activity for the first quarter of 2018 were $21.8 million. Reflecting the impact of this activity, AAM had a seasonal use of adjusted free cash flow of $41.7 million in the first quarter of 2018. It is not uncommon for us to have a free cash flow outflow in the first quarter of the year, as working capital typically is a significant use as we are increasing production, inventory and accounts receivable of year-end holiday shutdowns. Of our last five years, all of which were positive free cash flow years, four of them experienced free cash flow use in the first quarter. From a debt leverage perspective, we ended the quarter with a net debt to LTM adjusted EBITDA or net leverage ratio of 2.97 times 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. As it relates to cash flow, we are right where we thought we would be at the end of the first quarter, maybe even a little better. We are confident in our ability to generate adjusted free cash flow of approximately 5% of sales this year. I also wanted to touch on a few other recent actions since the last earnings call. First we refinanced $400 million of our [6.250] senior notes that was previously due in 2021, and were able to extend the maturity up to 2026. As we analyze the rising interest-rate environment this was a great opportunity to improve an already healthy debt maturity profile and lock-in at attractive interest rates for the company. At the end of the quarter, the average maturity life of our outstanding debt is now in excess of six years. Second, as David mentioned, we closed on the sale of the aftermarket business of our powertrain segment in early April for approximately $50 million. While relatively small in nature, this was a great opportunity for us to divest off non-core assets. This action aligns perfectly with our objective to maintain focus at our core operations and also strengthen our balance sheet. To that effect, as we announced our [agreement to leave today], we have also issued a notice of redemption for $100 million of our 6.625 senior notes due in 2022. We will use cash on hand, including proceeds from the sale of our powertrain aftermarket sale to fund this gross debt pay down. We are confident in our ability to generate free cash flow in 2018 and will continue to look for ways to utilize this cash flow as we work towards our goal of reducing leverage and enhancing our financial position. As it relates to the liquidity, AAM had over $1.3 billion as of March 31st consisting of available cash and borrowing capacity on AAM's global credit facilities. And before we move into Q&A, let me end with a few closing comments. AAM’s financial performance continues to benefit from strong end markets and customer demand for the products we support with a healthy backlog of new and incremental business, including the launch of our electric drive units going on right now. Business diversification from a customer, geographic, product portfolio and end markets perspective continues to strengthen, our synergy attainment and acquisition integration activities are on track, operational excellence across the world, and our key technologies on electrification, lightweighting and fuel efficiency and lastly, we had industry-leading profit margins and cash flow generating power. AAM’s first-quarter performance sets a strong foundation for the full year in achievement of our key 2018 objectives. We are confident in our 2018 financial targets, and will continue to monitor positive trends in the industry that drive consumer demand and mix that favors our products. 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 session. Jason?

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] And your first question comes from Jason Spak with RBC Capital Markets.

Hi, thanks for taking my questions. It's Joe. The first question is as you pointed out, without the FX and commodity headwinds, some really strong margins here. It looks like the backlog came through pretty nicely. I'm assuming you sort of mark-to-market the FX and commodity assumptions for your guidance. So is the right interpretation that the underlying EBITDA was actually – or EBITDA margin guidance was actually raised considering you – I know you held it constant, but I guess I'm trying to get at the underlying level of the business?

Hi, Joe. Good morning. This is Chris. From a metal market perspective, the rates we experienced in the first quarter are very similar to what we experienced in the latter part of last year. So those were essentially already assumed into all our guidance. What you see here is really a comparison to the first quarter of the previous year, where they are starting to upswing. So I don't know if that made sense for you. And then on FX basis, we did see some strengthening a little bit in the currencies that I mentioned. Keep in mind 80% of our revenues are US dollar denominated. I don't see that as a major swing either direction on a go forward basis.

Okay, thanks. And then I appreciate the commentary on the Ram schedules and some of that being pushed, it sounds like into second quarter on the downtime. Can you just comment on your view of how the GM truck changeover is going, is it as planned? Any more or less downtime than you expected?

Joe, this is David. Everything is on schedule as originally planned by General Motors both for them and for us. So we feel like we are in solid shape for that upcoming launch.

Okay, thank you.

Thank you.

And your next question comes from the line of Emmanuel Rosner with Guggenheim.

Hi, good morning everybody.

Good morning, Emmanuel.

Good morning, Emmanuel.

So, looking at performance by segments, it looks like revenues and margins were outside of driveline looked a lot better in the quarter-over-quarter, can you go maybe over what was driving that versus let us say, a fourth quarter run rate, is there some sort of seasonality in the acquired Metaldyne business that makes 1Q revenue, or margins stronger than the rest of the year?

Emmanuel. This is Chris. From a seasonality perspective, particularly as it relates to revenue, certainly there is more production days in the first quarter as it relates to the fourth quarter. So you do experience some lift just mechanically associated with that especially in those three segments outside of driveline. However, we do continue to see nice backlog, especially in our powertrain business and our casting business and the demand on the industrial and commercial side continues to remain strong. Each one from a margin perspective, it has grown for example, the metal forming has been a solid margin performing unit for the past several quarters. That continued. The powertrain, you saw sort of dip a little bit in the third quarter last year as they were going through some launch activity and that has been up-tick and improving, which is sort of on track, and then castings, which we have articulated many times in the past few quarters obviously had troughed out in the middle of last year, and we continue to rebuild that back. And that is on track for the continued enhancing performance.

Okay. That is very helpful color, and then just I guess follow-up on sort of like cadence for some of these metrics over the rest of the year, obviously you are off to a fairly strong start in the first quarter, from a revenue point of view despite some downtime at GM. So how do we think about the cadence from here and any upside risk to the $7 billion figure?

Yes. In terms of cadence, Emmanuel, as I mentioned in my prepared remarks, some of the Ram downtime was pushed to the first part of the second quarter. That is now done and behind us from a quarterly cadence perspective. You will have a little bit of remaining downtime at some of the other full-size truck plants for GM as they convert up. But then the new truck launch and as I well articulated, as we start to rebalance that production between us and General Motors, in the second half of the year that will take hold. From a backlog cadence perspective pretty flat, pretty consistent on a quarter-over-quarter basis throughout the year. Last year we saw that sort of ramp-up through the year. This year it is somewhat flat. And then, of course, you are subject to the normal dynamic of production days in each quarter.

Great. Thank you very much.

Thanks Immanuel.

And your next question comes from the line of Ryan Brinkman with JP Morgan.

Hi thanks for taking my question. When you first announced the MPG acquisition in November of 2016, levering up to 3.4 times from 1.5 times, you targeted getting back down to 2 times I think it was by the end of 2019. So back in November of 16, 2019 and it was a lot further away, and I think it seemed a lot further still, but since then you have exceeded most investor’s estimates for cash generation and EBITDA. Now with these latest aftermarket proceeds chipping away at the debt, it no longer seems like hugely premature to ask what are your priorities for use of free cash once you get down to the targeted leverage ratio? I can put MPG having done so well that makes me think that maybe you have got appetite for more acquisitions, but then again you have had a recently instituted share repurchase program before the acquisition, and your shares are lower now than they were at the time of the announcement of the acquisition. So that almost makes me think that maybe you would be more inclined to purchase the shares. Have you started to give thought to this given that it is not so far away now that you might be within your range?

Well, first and foremost – this is David, but I mean, we are obviously committed first to supporting the organic growth business that we have. As you mentioned, we are totally committed to paying down our debts, and we are clearly on track and actually taking actions to try to hold that ahead of our minimum delivered by the end of the 2019 period of time, which we committed to doing earlier. With respect to the other uses of cash, I mean clearly the opportunity for inorganic growth or strategic growth of some of the shareholder friendly activities like you said, clearly we like the investment community to value us for where we think we belong. But we will evaluate that as we go forward here, but most importantly right now the proceeds of cash or operating performance are going to go towards organic growth and debt management, and then we will balance that with the other priorities going forward and the opportunities that present themselves by quarter.

Okay, and then the last question is I know you don't guide by quarter, but is there anyway you can help us to mention what you think the impact of the partial roll off of some of the K2XX business will be in the back half of the year, I think you were seen as having half, that passed in the third quarter of last year, when K2XX production was up I think it was like 26%. And this quarter GM was telling us that 1Q seasonal low for them for pickup truck production. What is the challenging quarter for you in the back half, is it 3Q or 4Q when GM is going through more of their transition, or more of your product is kind of rolling off and after your experience with some of these pickup truck production declines, when you actually came through with flying colors. I think on the margin side, what can you tell investors to prepare them for what the results might look like in one of those quarters, anything to keep in mind in terms of cadence or what not?

First, as you pointed out at the start of your question, Ryan, we do not provide quarterly guidance. The conversion to the next-gen truck will happen predominantly starting in the third quarter, but keep in mind we are launching significant backlog activity outside of just the full-size truck program this year. And as we have articulated previously, we are hitting the higher end of our margin range, and we would anticipate on that new business backlog. So that will offset and mitigate a lot of that transition effect on us. So, a full year guide remains at 17.5 to 18. You saw us start the first quarter at 17.1. Obviously we are going to build from there to hit our whole numbers for the full year.

At the same time, GM is continuing to build strong on the K2XX business. The existing batch will come onboard. So, I think they are going to get stronger.

Okay, very good. Thanks a lot.

Thank you.

And your next question comes from the line of Itay Michaeli.

Great. Thank you. Good morning.

Good morning.

Just on the slides, I think 8 and 9, I was hoping you actually mentioned the decremental margin on the 72 million from the K2XX and Ram, and incremental on the [108] from the backlog volume, and just how that relates to the 11 million overall EBITDA impact from the combination of those factors?

Yes, as a rule of thumb that I would tell you when it relates to the K2XX and the Ram we are using a 30%-ish contribution margin as we have articulated in the past. Generally the backlog in all other bucket was 108 million. We have used 25%, 20% to 25%. We have experienced a little bit at the higher-end of that range, which then when you do that math gets you into the 11.

Okay. It looks like it was mainly higher-end on the backlog portion and pretty consistent for your expectations on the K2 portion, would that be fair?

I'm sorry, can you repeat that last part of your question?

I guess first as your prior indications, you are in line on the decremental, maybe a little bit better than you thought on the incremental side of it.

Yes.

Perfect. And then just a quick follow-up on – and I apologize if I missed this, but the metal market impact on EBITDA for the full year and then anything else you could just think of in terms of just the margin cadence as we go through the rest of ’18?

It relates to metal. We pass through about 90% of any industry related changes, either in the form of price reductions or price increases. You saw here in the first quarter we passed through at least on a year-over-year basis approximately $27 million associated with the property impact of $2 million. So call that 7%, pretty close to the kind of 90:10 ratio we described. That dynamic would play out all year. So effectively we risk managed this and only pass through about a 90%, retaining 10%.

Okay, great. That is helpful. Thank you.

And your next question comes from the line of John Murphy with Bank of America.

Good morning guys. I just wanted to follow up on the sale of the aftermarket powertrain business, if you just think about the sales and profit impact going forward, I think it will be probably relatively small, but also David as you kind of think about the portfolio of businesses that you have at this point, you mentioned you might consider other sales, what is the process for assessing what you are selling, is it just underperforming or is it non-core business, how do you think about identifying those assets?

John, as you said, first and foremost for me, American Axle in the past hasn’t traditionally been in the aftermarket business. So when we assessed the MPG business and we brought in it was clear to us that the aftermarket business, and our powertrain business unit wasn’t something that we wanted to be in longer-term, and it was a good source of cash for us to support accelerating some of the bets down although it is small – at the 50 million that we referenced in the prepared remarks earlier. We have said all along that we want to be a consolidator in the driveline and metal forming space, and with the MPG acquisition we created the powertrain and the casting business. We consider both of those businesses to be core at this time and clearly on the casting side, we got some improvement that we need to do and we are demonstrating that. We are on track to deliver what we said we would deliver from a financial standpoint there. But the biggest thing that we have to understand is just is manage, like you said, the performance of the businesses, are they meeting our financial hurdles as an overall organization as it relates to delivering cash. Are we a leader in regards to the different segments that we serve and the parts that we serve, and if not, we have to really make a decision if that is the best place for us to be. And clearly there is going to be demand. So they are going to be greater than our funding ability on the business going forward, and what we are going to need to do is figure out how we can be very meaningful in certain spaces and then get out of some of the other spaces, so that we can redirect that cash to paying down debt, and/or growing in the other area. So nothing more to announce right now in regards to the non-core assets, but what I would say to you is that we are actively reviewing that. Our priority in the first year of the acquisition was really to focus on the integration activity and the synergy attainment, which we are clearly on track to accomplish and what we need to do is just make sure that we are staying focused on the megatrends in the industry, and that was part of the reason why we went after MPG to begin with because of where they are on high-speed transmissions, and where they are on downsized engines. It is complementary to what we do in regards to lightweighting, mass optimization and fuel economy. So we think we are right in the sweet spot of the megatrends. We are right in the sweet spot of the vehicle segments, trucks, SUVs and crossovers. But at the same time there is still work to be done as it relates to optimizing our portfolio.

That is very helpful. Just a sales and profit number for that, is it sort of de minimis in our thought process and forward estimates?

Hi, John. This is Chris. Sales were approximately $30 million a year for this unit, and from an EBITDA margin perspective, very, very close to our corporate average.

Okay, that is very helpful and then just a second question, if you look at Slide 5 and the synergies, obviously you are tracking fairly well. It does seem like there is some potential real upside, and if we think of the three buckets there David, overhead, purchasing and other cost savings, and maybe particularly plant lowering optimization, because it sounds like it might be a real opportunity there, where do you think the most upside is and as we sort of think about this sort of in dollar terms, and a time frame, could there be more upside to this 120 million bucks by the first quarter of ’19, or should we think about this as sort of an ongoing effort. It might be materially higher beyond that time frame.

It is the latter part of your comment. Yes, we are right on track in regards to what we said we want to do as it relates to our run rate from a synergy attainment standpoint. We recently committed $100 million to $120 million to the Street. We raised that to the high-end of that range, the $120 million. We are well on our way as it relates to the overhead and the purchasing activities. Where the upside is John, which we communicated earlier was we think in the other, which is really the manufacturing area, plant loading, product loading a lot of works being done in that space right now. We are on track to deliver the 120 by the first quarter of ’19. However, we do think there is some potential upside. We are not ready today to announce that. Hopefully sometime in the new future, but it is clearly associated with the manufacturing side of the business. It will be post that first quarter ’19 period of time, that we will be able to realize those types of things.

Okay, great. Thank you very much.

Thank you, gentlemen. Your last question comes from the line of [indiscernible] with Morgan Stanley.

Great. Thank you for taking the question. We are just hoping to get more color on the competitive dynamics for the eDrive. You have a launch coming up this year. How are you seeing your bookings in that area and competitive dynamics?

Obviously, we are very excited about the eDrive activity. The two major programs that we went after on eDrive, we booked both those programs. One of those programs launched in here, a P4 solution for a crossover [valve]. We already really ourselves in the launch role. The customer is ramping up with respect to that, but we feel very good about where we are in regards to that and we are hopeful that there will be incremental volume or derivatives off that program in the future. The second program that we won as we told you is a P3 solution that is a 2020 launch and the ramp up from there. And that is associated with a high-performance passenger car again with a luxury automaker out of Europe. We are spending a lot of time right now positioning our product portfolio to really be able to satisfy the various markets of the word. Clearly it is launching in Europe first for us, but we expect the rapid growth of the whole market in China. We have positioned our product portfolio appropriately and we are dealing with multiple Chinese OEMs at this point in time, both domestic as well as global OEMs with respect to new opportunities. So, we don't really want to get into where we are with respect to all those at this point in time. But it is going to become a greater part of our emerging opportunities and hopefully a greater part of our backlog going forward. And as we have already said in the backlog, this business will grow over $150 million for us by 2021 plus period of time.

Okay, and then the joint venture in China, what is your contribution from a dollar perspective that we should be thinking of, and you said $25 million of revenues, but what does that translate to as far as equity income?

It won't be a sizable equity income on the P&L. That really won't start to take place until 2019. But from a contribution basis, I think around $10 million. That is very significant.

Okay. Thank you.

Thank you.

And thank you gentlemen. Your final question comes from the line of Bryan Johnson. Bryan? Bryan your line is… It seems he has dropped from the queue, sir.

Okay. Thank you Tabata.

You are welcome.

We like to thank you all for participating on the call today and appreciate your interest in AAM. We certainly look forward to talking with you in the future.