Good morning. My name is Siya and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing Fourth Quarter 2018 Earnings Conference Call. All the 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 and good morning. I would like to welcome everyone who is joining us on the AAM's fourth quarter earnings call. Earlier this morning, we released our fourth quarter and full year 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 3389085. This replay will be available beginning at 3:00 p.m. today through 11:59 p.m. Eastern Time, February 21. Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements subject to risks and uncertainties, which cannot be predicted or quantified, and which may cause future activities and results of operations to differ materially from those discussed. For additional information, we ask that you refer to our filings with the Securities and Exchange Commission. Also, during this call, we will refer to certain non-GAAP financial measures. Information regarding these non-GAAP measures, as well a reconciliation of these non-GAAP measures to GAAP financial information is available on our website. Over the next couple months, we expect to participate in the following conferences. The Citi Global Industrial Conference on February 20th. The GP Morgan Global High Yield and Leverage Finance Conference on February 26. And the Bank of America Merrill Lynch New Your Auto Summit on April 17th. 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 to everyone. Thank you for joining us today to discuss AAM's financial results for the fourth quarter and full year of 2018. Joining me on the call today is Mike Simonte, AAM's President; and Chris May, AAM's Vice President and Chief Financial Officer. To begin my comments today, I'll review the highlights of our fourth quarter and full year 2018 finance performance. Next, I'll comment on the performance of AAM's business unit and lastly I'll review our 2019 financial outlook before turning things over to Chris. After Chris covers the details of our financial results, we'll open the call for any questions that you may have. Let me start by stating that AAM's full year 2018 financial results reflect record sales, gross profit and operating cash flow. Despite some launch and operating related challenges during the second half of the year. AAM's fourth quarter 2018 sales were $1.69 billion compared to $1.73 billion in the fourth quarter of 2017. For the full year 2018, AAM's sales increased to $7.27 billion, $1 billion higher than year our full year 2017 and new annual record for AAM. The primary reasons for this increase are related to operating for a full year as an integrated company, a solid new business backlog, strong light truck SUV and crossover vehicle production volumes and higher customer pass through related to metal market. From profitability perspective, AAM progress in its fourth quarter on a launch and operational issue that we faced in the third quarter of 2018 and continue to expect resolution that matters for the second quarter of this year. AAM's adjusted EBITDA in the fourth quarter of 2018 was $244 million, or 14.4% of sales. This compared to $295.7 million in the fourth quarter of 2017, or 17.1% of…

Thank you David and good morning everyone. I would cover the financial details of our fourth quarter and full year 2018 results with you today, and I will also refer to the earnings slide back as part of my prepared comments. Let's go ahead and get started with sales. In the fourth quarter of 2018, AAM sales were $1.69 billion compared to $1.73 billion in the fourth quarter of 2017. Slide 12 showed the walk down of fourth quarter of 2017 sales through the fourth quarter of 2018 sales. The year-over-year decrease related mainly to the impact of the transition to the next generation GM full-size truck platform, partially offset by continued realization of our new business backlog. Higher metal market pass throughs also contributed slightly to the higher sales of about $8 million. For the full year 2018 AAM sales increased over 15% to $7.27 billion as compared to $6.27 billion in the full year of 2017. Having a full year impact of the MPG acquisition added over $700 million to the top-line in 2018 as compared to 2017. While AAM also grew organically mainly on the strength of our new business backlog. This increase also reflected higher customer metal market pass throughs which increased sales, but had a detrimental impact on our margins in 2018 of about 20 to 30 basis points. Now let's move on to profitability. As David covered earlier, we made progress in some of the launch and operational challenges that we faced last quarter. Gross profit was $225.3 million or 13.3% of sales in the fourth quarter of 2018. For the full year of 2018 AAM achieved record gross profit of $1,140 million. This equates to 15.7% of sales. Adjusted EBITDA was $244 million in the fourth quarter of 2018 or 14.4% sales. This…

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

[Operator Instructions] And the first question will come from Rod Lache with Wolfe Research. Please go ahead.

Good morning, everybody. I wanted to ask you about the casting side of the business a little bit more. Obviously, the business has been very weak. You had goodwill impairment. The business is not been consolidated into the rest of the business. So it sounds -- it seems like you're signaling something here that at the very least that, that business is really separate and I was wondering if you can just speak to what you are really thinking here? Could this be a candidate for divesture? Could this be more valuable to someone else or the real synergies at some point to holding it?

Yes, Rod. This is David. We are not trying to telegraph anything. I mean we had four business units when we started the year. Now we made the decision to consolidate to three business units by consolidating our powertrain business unit, into driveline and metal forming as I outlined. We just felt that it was the final stage of the integration, in the powertrain it was mid predominately legacy MPG facilities. To back to your question on casting. Our focus right now is fixing the labor issues and the operational stability issues. We are making improvement there. At the same time as I covered, we have addressed in the pricing issues with the industrial and commercial. We don't have anything to announce at this time. As we said to you before and others before, we are always assessing core and non core assets and at the appropriate we will communicate that to everybody.

Okay, thank you. And just secondly on the performance improvement plan. You talked about $11 million of sequential improvement in the fourth quarter. Was there anything unusual in that number in terms of recovery from a customer -- was -- can you just talk to that? And what are you expecting from Q4 to Q1 in terms of the magnitude, the improvement? And then just also related to that it sounds like one of the more challenging problem was that your Bluffton plant, you replaced management there. Is that still a significant track, how is that kind of play out in the numbers?

Hey, Rod. This is Chris. I will cover some of those financial numbers and then we will proceed to the rest of your questions there. As it relates to the $11 million on the sequential loss from Q3 into Q4. I would tell you that's clearly a net number. We saw good performance improvements on our driveline side of the house. We did get some customer recoveries that we did talk about in the four quarter but we also had some premiums associated with that. So net-net that's probably neutral in the quarter but offset any incremental costs. Our driveline performed well in terms of on its path of improvements. We saw improvements in our powertrain business as well from some of the premium cost that we incurred in the third quarter. You asked us about casting earlier. If you look at the segment information for casting you can actually see they ceded back a little bit. So their operational performance was slightly negative in the quarter. So if you do that math, driveline and powertrain total was greater than $11 million casting was down a little. But trending in the areas that we targeted suppliers. Suppliers issues getting resolved, premium freight, outside processing, labor issues getting resolved and kind of working through that. So holistically on the plan that we described to you. You asked about also going into the first quarter of 2019. We did have a bridge in our earnings deck as well. We are going to anticipate on tracking another $5 million to $15 million in terms of improvements. Again, targeting those key areas that we just talked about and improved on in the fourth quarter. We will continue to chip away those and make progress.

Yes. Then Rod this is David. In regards to your comment on Blufftons. We did change out part of the management team there. We got an AAM team settled into that facility now. They are making marked improvements and starting to address some of the premium cost we've been incurring there. But as we indicated, some of those challenges will continue into the first half of 2019. We are highly confident we can put them behind us by then.

The next question will come from Brian Johnson with Barclays. Go ahead.

Yes. Good morning. So news of the day is Amazon investing in Rivian. There have been rumors not confirmed one way or the other that GM could be investing at all. Ford of course made noises about an all electric pick up as is another firm out in Silicon Valley making noises about it. So just kind of what you're thinking on the pick up e-drive opportunity we should talk about. And then in particular where you're primary customer could be going that and your involvement to if any.

Yes. Brian, this is David. Clearly we are planning our future for electrification. But we are also strong believer that IC engines especially on pickup trucks are going to be around for a longer period of time than plan. We've recognized and appreciate what Rivian is doing. And selling a potential mid set is there. More from an off road and maybe a fun vehicle type application versus the heavy use of pickups for construction, agriculture and other types of need. But clearly GM and Amazon have made commitments that they want to get into this business. GM from electrification standpoint likes to see zero emission over time. That needs to include trucks as well and we are going to part of that solution. We are already developing and testing electric axle applications for truck application. And as you know, we already have electric axles in crossover vehicle and then also in the future performance passenger car. So we are prepared. We are working with our customers. At the same time, our customers are going to dictate the integration of electrification along with the market with respect to pickup trucks.

Okay. And in terms of what percent of the market you think could go electric for pickup? And when do you have any --so you mentioned off road, high torque, and luxury. So should we be thinking sort of rafter -ish kind of applications versus crew cabs and commercial use?

Yes. Brian, as I said I think its niche application. You can put whatever percentage you want to put on there. But it will be very low compared to what I think IC engines and power change will continue to support the other product portfolio that's there today.

Okay. Second question. There has been some press around labor unrest and strikes and lobbying for higher wage in Mexico. Do you expect any kind of wage and salary inflation in Mexico and as your guidance assume that?

We always have labor and wage inflation in Mexico. Each and every year we negotiate those every year, benefits every other year. And we've been able to offset that with productivity. We are obviously having a couple -- we obviously keep a watch live with respect to the marketplace. But we feel we are in a solid shape at this time in Mexico.

The next question will come from Jose Spak with RBC Capital Markets. Please go ahead.

Thanks very much. Just want to turn back to casting first again. I know it's been a difficult year I think way back when you indicated you thought this could eventually be 15% EBITDA margin business. I mean given what you experienced this year, is that still the view and do the pricing action and some of the other operational actions get you there or is this something else need to occur and any sort of updated timeframe when you think that might be achievable will be helpful.

Yes, Joe, this is David. You are spot on. I mean our initial goal was to get this business back over 10% which we did back in the second quarter of 2018. Unfortunately, we've slid here in the third quarter and fourth quarter of 2018. As I indicated, we did take some commercial actions with the industrial and commercial vehicle customers which will help us in regards some of the profitability. But the biggest issue that we are still working to resolve right now is that we had a labor shortage that creates instability in the operations that labor shortage is getting better for us now. And therefore we expect to see improvements in our operations as we go forward. So resetting ourselves, we are just trying to get ourselves back to 10%. But ultimately getting back to that 12% to 15% our longer-term goal. And we have plan to do that.

Okay. Second just on SG&A. I think in the middle of this past year, you should have talked about that be coming in around 6% of sales. It came in lower -- how much of that was sort of maybe some tightening of the belt versus given some of the issues and some of the businesses. And how should we think about that going forward?

Yes, Joe, this is Chris. Good morning. Yes, certainly that was our thought early in the year. Couple things as went through the year occur, our sales came in little bit higher was just on a percentage basis since they are little bit not a lot but little bit. We've been managing very costly, very diligently. Our R&D expenditures, those were down a little bit. So we are investing where we need to, to continue to grow this business. But investing in tools to optimize our ability to engineer new products in a more cost efficient manner. We are seeing that play out. Of course, our synergies continue to kind of build through that momentum. But managing cost on the SG&A line is critical, one of the key elements to our success. And we thought we were pretty successful in 2018. Looking forward, I would tell you we will think more closely. We are guiding a little bit towards 6% in 2018. I think for 2019 think closer to 5.5% to 6%. So we want-- we dropped down below the 6% closer to where we were in 2018.

Okay, last one. The fifth EcoTrac award. Can you just remind us sort of the size of that EcoTrac let's just say in totality and then how large does it get once all those five awards are launched?

Yes. That business will grow by 2020 and our backlog will over $800 million. It's actually about $550 million - $600 today. And at the same time we expect it to grow beyond that 2020 calendar year period time as well.

The next question will come from John Murphy with Bank of America. Please go ahead.

Good morning, guys. If we look at slide 5 and issues that you had with MPG asset. You seemed to have gotten a pretty good stranglehold on this pretty quickly but if so I mean from a customer standpoint I got to imagine they are reasonably happy. I am just curious as you look at the competitive setout there and everything is going on in casting and metal forming and also to metal launches in the industry. It doesn't sound like you're really unique position having some of these launches issues. So I am just curious when you think, a lot of folks look at this maybe a potential to dispose of assets and raise cash and fix the balance sheet. But as you look at this and the customer receptivity to what you've done and you've identified. Is there maybe a greater potential for you to kind of consolidate some of these other underperforming assets into this business? I mean I guess the first question is really competitive landscape or other folks running into same issues and two, maybe is this more of an opportunity than an issue.

Yes. John, this is David. As you know, our company is engineering and manufacturing based company that's heavily focused on operational excellence. We stumbled in the third quarter based on some launch issues and some operational challenges. As I covered with you on the driveline side we -- for the most part got those operational issues behind us. We are still working on one launch issues with the JLR side of the things. Our metal forming group has done an exceptional job in regards to integrating and consolidating the market place and the MPG acquisition. So that's been very positive for us and in both those areas we would continue to look to be a consolidated there. The powertrain business unit, clearly we took that over from MPG and we've announced now that we are going to integrate that into our core driveline and metal forming businesses. And on the casting side, that business was really a roll up under American Securities and the Grede organization. And so we continue to evaluate what needs to be done in that respect. But as we've said all along, I mean we've got to fix our balance sheet first. We'll balance our priorities as it relates to capital uses, but at the same time longer-term, a midterm and longer-term we want to continue to consolidate roll up our core businesses.

Okay, that's helpful. Then just lastly on trade 301 and 232, I am just curious what your thoughts are there? Are you see any sort of customer inventory building in front of any risk around either one of those and how you sort of think about how to manage that as they manage it as well?

Yes, hey, John, this is Chris. We told you from a dollar perspective for us impact here in 2018 closer to $5 million. We're anticipating closer towards $15 million impact from those tariffs in 2019. We've been working some ways to mitigate that, but in sort of the crux of your question working --we're monitoring or watching behaviors. We don't see anything abnormal at this point, but obviously there are some announcements coming out here in the next short period of time, which we will pay very close attention to and then react appropriately.

The next question will come from Ryan Brinkman with JPMorgan. Please go ahead,

Hi, good morning. Thanks for taking my questions. That it seems we are about more than halfway through the GM light-duty full-size pickup truck launch. Can you give us an update both on this program and your involvement in it? Specifically and I know IHS hasn't had the best track record forecast in this program, but it looks like they materially increased their outlook this morning for the T1. What are you seeing in terms of demand from the customer? And then also I think importantly how have your decremental margins tracking relative to your expectations? I think on the roughly sort of 35% lower content per vehicle on those tracks.

Ryan, this is David. Let me start with the first part of the question. I'll have Chris cover the second part, but as we communicated earlier from the current K2XX program to the T1, we had a 100% of business on the K2 program. And we're maintaining about 65% that business on the T1 program. Where GM in source some work and then there's some other activities there in addition to the vehicle architecture type items. So everything is directionally in line with what we've communicated to you in regards to what our share of the business was going to be going forward. The launches at Fort Wayne have gone very smooth. The launches in Silao gone very smooth. We're very pleased with the performance of our team with respect to the launch and production performance. And then clearly, we've got the heavy duty and the SUVs that we'll deal with over the next a year and a half period of time as they work through their launch cadence. With respect to volumes, we're pretty well aligned with General Motors in regards to about 1.25 million vehicles and I test the last time. I seen at NC today's announcement was around 1.24. I believe was worth more the number was, so but I think we feel good about that and then Chris on the decremental margins, I'll let you speak to that.

Yes, Ryan, this is Chris, good morning. From the decremental margin standpoint, we have historically talked about that platform closer on the 30% contribution margin basis. And that gets continuing to track both up and down on that platform. So nothing -- that assessment.

Yes, that's helpful, thanks. And then just the last question for me, just wanted to probe a little bit more around the section 232 if I can. If these tariffs are extended to bronze, steel and aluminum to also cover autos and other parts, is it your understanding that Mexico would be exempted as part of last year's new US NCA? If so, I would think that the core historical American axle business should not really see any impact, but I thought to ask about the former Metaldyne side. Whether import much product into the US from outside Canada or Mexico. I don't think so but what I was curious.

Yes. Ryan, this is Chris again. In terms of holistically as a company we do import a little bit outside of the North America in and that's amount I mentioned earlier in terms of our impact. As you know, our philosophy is to try to source historically it has been our philosophy to try and source in the region for which we produce, as well as our vertical integration strategies and then to mitigate a little bit of any of these type of actions. Our operational thought right now is watching this sort of transpire over the last year or so. Mexico has typically been exempt when there's been some activity in this area. We would be helpful with that continues.

Ryan, this is David. Our policy from AAM standpoint for a production and sourcing standpoint is to predominantly produce and sourced products in the markets that our customers are going to consume those products. That's why from a historical AAM standpoint we haven't been impacted as much with respect to the tariff side of things. Some of the legacy MPG side, we did get some of the impact which is what Chris has outlined. And we're in the process that we said of mitigating some of those issues including some resourcing and following the historical AAM policy as it relates to flat loading and sourcing.

The next question will come from Armintas Sinkevicius with Morgan Stanley. Please go ahead.

Great, thank you for taking the question. Can you talk about the landscape of the e-drive awards? I think it is going, just an update there that would be helpful.

Yes, you understand, Armintas, this in regards to the two book programs that we have. One P4 solution that on the Jaguar I-PACE and that business will continue to ramp up from a volume standpoint. So we got a couple challenges as I mentioned to you in the presentation, but we'll work our way through that here in the first quarter. Where I'm scheduled to deliver our P3 solution that 2020 calendar year period of time. And then right now we're working on I'd say 8 to 10 electrification initiatives that have global implications, nothing to announce at this time, but we're quoting in various levels from components to sub assembly and gearboxes to full assemblies. And we're hopeful that we can secure some of that as we move forward.

Okay and to the question around Rivian earlier. What is your understanding of the architecture? That does that include an e-Drive? Does that include just electric motors? How would you fit into truck architecture?

We've got to understand a little bit more about that. I'm not the expert on Rivian but I think it's more of a skate design that still has an e-axle application, not so much a corner module or corner wheel end application, but that's about all I really know at this time, but clearly we'll investigate that further.

The final question is from James Picariello with KeyBanc Capital. Please go ahead.

Hey, good morning, guys. Just to your free cash flow targets. You clearly have high confidence in achieving the $1.5 billion through 2020. This does include a material ramp down in CapEx toward 6% of the sales. Can you speak to what drives the rationalization and CapEx? What are some of the key examples of the opportunity that you identified here? Because you are reducing the investment run rate by roughly $100 million give or take by next year. You'll, obviously, still be investing for growth. So any color here would be helpful.

Great question and 6% obviously lay out for that time period as we mentioned and you just pointed out. But f you think about what was driving some of our elevated CapEx a little bit in 2018 and we saw achieve a little better than we thought, as well as in prior years was not only our new book business which is very high in 2018 also in 2019 with the launches that we've been discussing. But also significant replacement business in the General Motors full-size truck also on the ramp HD both of those programs throws significant capital expenditures into those next-generation platforms. And those really start to from an investment standpoint phase down here to through 2019 where we'll see that benefit in 2020.

Got it. And maybe you already quantified this. But with respect to the $35 million or so that you identified as addressable inefficiencies as of last quarter, could you provide -- you obviously provided the helpful status updates through the quarters in one of those slides, but can you quantify what was captured in the fourth quarter and what that cadence looks like through the year?

You said cadence you mean into 2019?

Yes, right. You had that status update through 2Q 2019. You had the $35 million that you've identified. Just wondering if you could quantify that cadence in terms of recapturing?

Correct. Well, we will recapture in the first quarter of 2019 another $5 million and $15 million sequential run rate savings. And then $5 million to $10 million in the second quarter and then hopefully these are all put behind us, but again it will target areas of premium frame which we've been reducing sequentially. It will target reductions in inefficient labor, inefficient scrap output things of those natures as well. Some outside premium costs associated with material. So those are there we are targeting and that sequence of improvement I would expect to be very similar to what we dialogue on the last quarter. And we're on track to deliver that.

Okay. And just last on the electrification questions have already been asked. But can you just provide context on the regional breakout, generally, within that $500 million in new business opportunity that is currently being quoted out there? Just wondering from the regional perspective.

I mean it touches all three of the major regions as it relates to North America, Europe and China. I'd say Europe and China are weighted more heavily in those areas compared to North America. End of Q&A

Thank you, James. And we thank all of you who have participated on this call. And appreciate your interest in AAM. We certainly look forward to talking with you in a future. This concludes today's call.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.