Good morning. My name is Chad, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing First Quarter 2020 Earnings Conference Call. 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 conference call over to Mr. Jason Parsons, Director of Investor Relations. Please go ahead, sir.

Thank you, Chad, and good morning, I would like to welcome everyone who is joining us on AAM's first quarter earnings call. Earlier this morning, we released our first quarter 2020 earnings announcement. You can access this announcement on the Investor Relations page of our website, www.aam.com, and through the PR newswire services. You can also find supplemental slides for this conference call on the Investors page of our website as well. To listen to a replay of this call, you can dial 1-877-344-7529, replay access code 10141431. This replay will be available beginning at 1 p.m. Eastern Time May 15th.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.With that, let me turn things over to AAM's Chairman and CEO, David Dauch.

Thank you, Jason, and good morning, everyone. Thank you for joining us today to discuss AAM's financial results for the first quarter of 2020. Joining me on the call today are: Mike Simonte, AAM's President; and Chris May, AAM's Vice President and Chief Financial Officer. To begin my comments today, I'll review the highlight of our first quarter 2020. Second, we will discuss how COVID-19 global pandemic is impacting our operations and how we are adjusting our business.We will also discuss our current cash flow breakeven scenario for 2020. And lastly, we will discuss steps we are taking to structurally realize our business to operate profitably and generate significant free cash flow at a reduced level of global light vehicle production as previously planned.After Chris covers the details of our financial results and liquidity status, we will then open up the call for any questions that you all may have. AAM delivered strong operating performance and free cash flow generation the first quarter of 2020 despite the unfavorable impact of COVID-19 on global light vehicle production. AAM's first quarter 2020 sales were 1.34 billion, compared to 1.72 billion in the first quarter of 2019.The decrease in our revenues on a year-over-year basis reflects primarily two factors. The first relates to the global production shutdowns and reduction in consumer demand due to COVID-19 pandemic. We estimate that this had an unfavorable impact of approximately 169 million in the first quarter of 2020.In addition, our first quarter of 2019 sales included a 182 million related to our U.S. iron casting operations, which was sold in December of 2019 and is therefore no longer part of our sales base, starting in 2020. AAM's adjusted EBITDA in the first quarter 2020 was 213.3 million or 15.9% of sales. This is compared to 245 million…

Thank you, David, and good morning everyone. I will cover the financial details of our first quarter of 2020 results with you today. I will also refer to the earnings slide deck as part of my prepared comments. So let's go ahead and get started with sales.In the first quarter of 2020, AAM sales were 1.34 billion, compared to 1.72 billion in the first quarter of 2019. Slide 7 shows a walk down a first quarter 2019 sales the first quarter of 2020 sales. First, we set down our first quarter 2019 sales by $182 million to reflect the sale of the U.S. casting business unit that was completed in December of 2019.We estimated the impact of the COVID-19-related production shutdowns across the globe in the first quarter of 2020 was a $269 million, certainly having an unexpected and significant impact on our quarterly results. Excluding the impact of COVID-19, we did see a benefit of other volume mix of approximately $18 million. We also continue to see the trend of lower year-over-year metal market prices and foreign currency in the first quarter of 2020, resulting in a decrease in sales of $42 million.Now, let's move on to profitability. Gross profit was $195.3 million or 14.5% of sales in the first quarter of 2020. This compares to $222.2 million or 12.9% in the first quarter of 2019. Adjusted EBITDA was $213.3 million in the first quarter of 2020 or 15.9% of sales, as compared to $245 million in the first quarter of 2019 or 14.3% of sales. This represents 160 basis point increased in margin on a year-over-year basis despite the unfavorable COVID-19 impact. This increase in EBITDA margin is mainly driven by improved operating performance productivity and lower launch costs along with the sale of our lower margin U.S.…

Thank you, Chris and thank you, David. We have reserved some time to take questions. I would ask that you choose limit your questions to no more than two. So at this time, I'll turn it over to Chad to proceed with any questions you may have.

Thank you. [Operator Instructions]. And our first question will come from John Murphy with Bank of America. Please go ahead.

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

Look, John, this is Chris. First, I will tell you from a liquidity perspective, I think we're in very good shape, but we're constantly looking at our maturity table, our continued access to liquidity, and if there was an opportunity, we'll certainly consider.

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

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

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

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

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

Can you just clarify two things? One is the volume mix in pricing benefit on EBITDA of $17 million on $18 million top line impact. Typically, you'd see something like that if there was some kind of pricing adjustment with such a high flow through. Was that the case? Or is that something else? And then lastly, obviously Mexico is still a major concern for many suppliers and what the policies there will be. What's your latest thinking there just given us your base of operations there?

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

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

That is a working assumption and that you believe that, that is something that is likely to happen or is it still uncertain?

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

The next question will come from Ryan Brinkman with JP Morgan. Please go ahead.

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

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

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

First part of your question relates to the 20% decremental we experienced here on our COVID impact in Q1, which is really the back half. So that was actually a broad since the entire company in North America and Europe and all Asia was kind of back online by in the quarter, but that was more of a broad based company average you saw. But at the same time, as our facility shut down to some cases near in zero production, we were able to eliminate some semi-fixed and fixed costs associated with the tailwind, which allowed us to kind of minimize a little bit of that. I would expect similar or a little bit higher in terms of impact in the second quarter, in terms of -- because of the dynamic and change of last year to this year in the size and magnitude to that.

Finally, just a housekeeping item, what is the cash cost of the 60 million restructuring savings? Or just said differently, what kind of non-adjusted free cash flow could we expect in a breakeven adjusted FCF scenario this year give it any restructuring or other backed out items?

Yes, we have restructuring items here in 55 million to 70 million and the piece associated with that 60. Think of it kind of in line with the delta to where we previously were. Beginning of the year, we were on 35 to 40 range.

The next question will come from Dan Levy with Credit Suisse. Please go ahead.

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

This is David. The efforts to reduce and CapEx were largely driven by AAM's internal initiatives, but obviously, we retimed some of our spending based on some of the retiming of our customer programs and the launches that were associated with. Regarding the second part of your question with regards to CapEx, again, we've been targeting all along the 5% or less. We're very confident that we can hold those numbers for several years going forward.

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

Obviously, first and foremost, we're going to protect the core business and continue to invest in our core business. We've been steadfast with respect to that. At the same time, as part of our cost reduction activity, we have not touched all of our R&D spending and commitments to electrification.

No near term benefits on that as fully impact?

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

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

The next question will come from the Itay Michaeli with Citi. Please go ahead.

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

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

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

Itay, I mean, clearly with the global volumes changing, the regional volume is changing, there's going to be excess capacity in some of our facilities. We're working very hard to consolidate those facilities to drive greater utilization. At the same time, that'll free up capacity to go after new business. So, we're not changing any of the organic opportunities that are in our market basket at this time, if anything, we think that we can capitalize on that as we go forward. And then in other cases which our senior managements are making decisions to trim the sales a little bit in light of the current environment that we're in. But we still, we feel, as I mentioned earlier, very confident that we can continue to execute the plan that we have at the reduced CapEx spending levels that we've identified.

Our next question will come from Brian Johnson with Barclays.

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

I think you've made a good point. We do have our team assembled almost entirely, not exactly entirely, but mostly from the last time around, and we're flexing the same muscles that we flex before in terms of the cost structure adjustments, and really the quick adjustments to this type of environment. We were hoping we wouldn't have to do that but quite frankly, here we are, again. Relative to the MPG facilities, look, we've owned these facilities now for a period of time. As far as we're concerned, we don't really see any difference between these operations and others.The one areas is different Brian is the size of some of these operations. And so as David just mentioned in looking at our capacity footprint and looking for ways to, not just reduce cash, but improve efficiency in operations, get a better fixed cost utilization, we are consolidating some of these operations, and we're finding opportunities to consolidate into slightly larger not the same sizes Three Rivers in Guanajuato, but larger operations that can be more efficient and make us more cost competitive.We're seeing that show up in our quoting activities in a favorable light. We don't have to increase our CapEx to add incremental business in components such as balance shafts, for example. This is an area for us to capitalize on. So, I hear you in terms of some of the launch challenges that we had a year or two years ago. But our point-of-view is we've got very close control over how these operations are going to restart and very close control. In fact, David, me, Chris and the whole senior management team into the details of how we're going to restructure every one of these operations.

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

The European footprint brought us sort of two core businesses. One was a European forging footprint. The former Zell business which is now operated by us, in Germany and the Czech Republic, that is, while they're sales are down, reflecting the OEM marketplace, that business is being restructured and improved very nicely by our team. And that business is strong in some areas, and we'll be ready to fire up here very soon.The other business that we had in Europe was in our, what we originally called our powertrain businesses, that's now part of our driveline business. And this is the vibration control systems business. This is the business that is levered to small engine, smaller engines and of course balanced in those engines. So, I think hybrid engines and small displacement engines. So there's still a fair amount of growth potential in this business. We operate that business across four facilities and that business is one that we are looking for some consolidation.

Thank you, very helpful, Mike. And I hate to be back here with you again, but I remember how you follow through last time.

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

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

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

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

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

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

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

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

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

So, yes, as it relates two quarter Joe, so we try to articulate through that to our liquidity end of the quarter. Remember, it's just greater than 1.2 billion. But yes, we will consume cash because of our lower EBITDA operations. And you're going to also then consume some working capital as well. You'll get a benefit on the flow part. It'll be ultimately tied in with our customers' startup in the back half years, or your working capital move between second and third quarter.

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

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

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

You mentioned positive free cash flow in the first quarter, even pre-COVID. Can you talk about the drivers of that positive free cash flow? Usually first quarter is a seasonally soft quarter. You have no cash outflows. What was the difference here? Is it working capital or something else?

Last couple of years, it's been seasonally outflows. Couple of years prior to that, we were actually positive free cash flow, Armintas. But, we had stronger -- you had timing of your working capital. And that ebbs and flows a little bit in different orders, but it was favorable for us here in Q1, focus on inventory and then CapEx was done.

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

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

Right, but are you seeing conversation around new business starting to pick up now as well?

As far as new business award opportunities?

Yes. Correct. So you have the one award, is sign up for more things to come in the near-term? Or is it more of a one half year?

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

And we thank all of you who have participated on this call. I appreciate your interest in AAM. We certainly look forward to talking with you in the future.

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