Good morning. My name is Anita and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing Third Quarter 2019 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, Anita and good morning. I would like to welcome everyone who is joining us on AAM's third quarter 2019 earnings call. Earlier this morning, we released our third quarter 2019 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 1-877-344-7529 reservation number 10135307.

This replay will be available beginning at 1:00 P.M.

today through November 8th.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 as a reconciliation of these non-GAAP measures to GAAP financial information is available on the website.Over the next few months we will participate in the following conferences; The Barclays Global Automotive Conference on November 20th, The Bank of America Merrill Lynch Leveraged Finance Conference on December 3rd, and The Credit Suisse Industrials Conference on December 4th.

In addition we are always happy to host investors at any of our facilities. Please feel free to contact me to schedule a visit.With that, let me turn things over to AAM's Chairman and Chief Executive Officer, David Dauch..

Thank you, Jason and good morning everyone. Joining me on the call today are Mike Simonte, our President; and Chris May, AAM's Vice President and Chief Financial Officer.To begin my comments today, I'll provide some color on AAM's third quarter results.

AAM's financial results in the third quarter of 2019 reflects solid operating performance despite lower than expected production volumes resulting from the GM work stoppage which began in mid-September.AAM's sales were $1.68 billion for the third quarter of 2019 compared to $1.82 billion in the third quarter of 2018.

We estimate that sales were negatively impacted by the GM work stoppage during the third quarter of 2019 by approximately $57 million.Adjusted EBITDA for the third quarter of 2019 was $265.8 million or 15.8% of sales. This compared to adjusted EBITDA of $275 million or 15.1% of sales in the third quarter of 2018.

We estimate that adjusted EBITDA was negatively impacted by the GM work stoppage by approximately $18 million during the third quarter of 2019.Despite this, we were able to increase our adjusted EBITDA margin both sequentially and year-over-year through improved operating performance and lower project and launch cost.Adjusted earnings per share for the third quarter of 2019 was $0.58 compared to $0.63 in the third quarter of 2018.

We estimate that adjusted EPS was negatively impacted by the GM work stoppage during the third quarter of 2019 by approximately $0.12 per share.From a cash flow perspective, AAM generated over $160 million of adjusted free cash flow in the third quarter of 2019. This is one of AAM's largest quarterly free cash flow figures in recent years.

AAM's net leverage ratio was 3.25 times at September 30th, 2019. Our strong free cash flow generation in the third quarter allowed us to reduce our debt leverage.Let's now discuss our business unit segment performance.

The driveline business unit recorded sales of $1.15 billion in the third quarter of 2019 compared to $1.23 billion in the third quarter of 2018.Segment-adjusted EBITDA for the third quarter of 2019 was $171.6 million compared to $176.9 million in 2018.

The driveline business unit was significantly impacted by the GM work stoppage.However, it benefited from improved operational performance and lower project and launch cost compared to the third quarter of 2018 was able to improve EBITDA margin year-over-year and quarter-over-quarter despite the unfavorable impact of the GM work stoppage.

The metal forming business unit recorded sales of $476.6 million in the third quarter of 2019 compared to $509 million in the third quarter of 2018.Segment-adjusted EBITDA for the quarter was $80.4 million in 2019 compared to $83.6 million in 2018.

The metal forming business unit was also impacted by the GM work stoppage not only as it relates to components that were sold to our driveline business unit, but also direct shipments to GM and Tier 1 -- or Tier 2, Tier 3 relationships that we have with other GM suppliers.

However, we also experienced higher year-over-year adjusted EBITDA margins in this business unit through lower launch cost, synergy attainment, and improved performance.AAM's casting business unit recorded $209 million of sales in the third quarter of 2019 compared to $219 million in 2018.

Segment-adjusted EBITDA in the quarter was $13.8 million in 2019 compared to $14.5 million in 2018.Our casting margins were flat year-over-year but down from double-digit margins realized in the first two quarters of 2019.

We experienced some lower sales in our commercial and industrial markets and were impacted by higher operating costs including outside process expenses related to some new program launches.In summary despite our lower production volumes and challenging circumstances, AAM's operations performed well and generated solid profitability in the third quarter.

There are also some other developments of interest in the third quarter of 2019. On September 18th, we announced the sale of our U.S. iron casting operations to Gamut Capital Management. This sale enables us to streamline our business, accelerate our debt reduction initiatives, and enhance our margin profile.

It also eliminates fixed costs and improves our resiliency during a potential cyclical downturn.It's also important to note that we are retaining our El Carmen Manufacturing Facility in Mexico.

This facility will continue to provide significant vertical integration benefits to AAM, while also continuing to serve external customers in Mexico and in other global markets.We expect this transaction to close by the end of 2019. And we strongly believe that the sale is best for AAM and best for the U.S.

Iron Casting operations and the associates that are associated with it.In addition we also achieved some significant accomplishments on the electrification front in the third quarter.

In August, we were awarded our third e-Drive unit program in which we will be providing front e-Drive units for small fully electric passenger car program through our Liuzhou, China joint venture.

This new business award is quite different from our previous award business as it represents our first electrification award in China and is also our first award for our value-oriented product.AAM also was awarded new business with an exciting new customer for differential assemblies on an upcoming electric commercial vehicle.

These new awards further demonstrate our ability to meet customer requirements across the globe with our wide range of scalable electric drive solutions and related components.We were also pleased to announce recently that our electric driveline technology featuring EAMs, all-wheel drive, front and rear electric drive units on the fully electric Jaguar I-PACE has been named a 2020 Automotive News PACE Award finalist.

The PACE Award recognizes supplier advancements in automotive technologies and processes that have reached the market.

This recognition further validates AAM as a technology leader in electric propulsion.As we look to our future business strategy, we'll continue to optimize and invest in our highly engineered product portfolio, focus on profitable growth opportunities including electrification, and further strengthen AAM's value proposition to all of our key stakeholders.Let me now review our revised 2019 financial outlook.

Earlier this morning, we provided an update on our 2019 financial outlook in our third quarter earnings release.

Our revised full year targets are as follows; our sales will be approximately $6.6 billion, adjusted EBITDA will be in the range of $950 million to $975 million, and adjusted free cash flow will be approximately $175 million.The most significant update from our previously disclosed targets relates to the estimated impact of the GM work stoppage.

While we began to feel the impact of the work stoppage in the third quarter of 2019, its impact will be exponentially greater in the fourth quarter of 2019.

Not only were we impacted for nearly the entire month of October, but the breadth of the impact of the work stoppage expanded geographically during the fourth quarter.We have also reflected the impact of lower than expected metal market customer pass-throughs and foreign currency translation as part of this update to our full year targets.Before I turn things over to Chris, I'd like to reinforce a few key points.

First, we've made great strides in resolving our operational issues and improving our launch performance.

We continue to go through some very important launches and steep ramp curves here in the fourth quarter including a very important transmission differential assembly program at our Bluffton Indiana facility supporting the Ford F-Series Super Duty trucks.As our project launch activity normalizes into next year, we expect to benefit from a more stable operating environment, lower project expenses and greater productivity realization.

Second, as we head into the uncertain macroeconomic and automotive production environment over the next few years, we are already demonstrating our capability to proactively adjust our operations and adapt our business accordingly.Recently we have consolidated business units, shed fixed costs with the sale of the U.S.

casting operations and are focused on reducing capital expenditures. We will continue to look at additional opportunities within our business to optimize capacity, reduce our fixed cost and improve efficiency across the globe.And finally, the strong free cash flow generated during the quarter along with the announced sale of our U.S.

iron casting business, positions us to continue to deliver on our commitment to reduce debt and strengthen our financial profile. This remains a key priority for AAM.This concludes my prepared remarks for this morning. I'll now turn the call over to Chris.

Chris?.

Thank you David and good morning everyone. I will cover the financial details of our third quarter of 2019 results with you today. I will also refer to the earnings slide deck as part of my prepared comments.So let's go ahead and start with sales.

Sales in the third quarter of 2019 were $1.68 billion compared to $1.82 billion in the third quarter of 2018. Slide 9, shows a walk down of third quarter 2018 sales to the third quarter 2019 sales.As David mentioned we estimated our sales were negatively impacted by the GM work stoppage by $57 million in the third quarter.

It is important to note, while the work stoppage began on September 15, many of General Motors North American facilities located outside the United States continue to operate during the first week or two.In addition, we continued to fill supply chain throughout all of North America for much of the month.

However as the work stoppage went on, we saw a significant drop in this activity and additional facilities halted production near the end of the quarter or shortly thereafter.

As a result the fourth quarter will have a significantly larger impact of lost sales and related profit associated with the work stoppage.Our new business backlog was a net increase of approximately $95 million which nearly offset other volume and mix decreases of $118 million, due mainly to lower global production volumes across each of our key regions that we have described on previous earnings calls.And lastly decreases in metal market indices and related customer pass-throughs and foreign currency translation have impacted sales for the quarter.

The impact of these items for the quarter was a decrease of $50 million of revenue on a year-over-year basis. But remember these pass-through elements of our sales are a key risk mitigation mechanism for which we have for certain commodity pricing.Now let's move on to profitability.

Gross profit was $248.7 million or 14.8% of sales in the third quarter of 2019. Adjusted EBITDA was $265.8 million in the third quarter of 2019 or 15.8% of sales. This compares to $275 million in the third quarter of 2018 or 15.1% of sales.AAM's adjusted EBITDA margin in the third quarter of 2019 increase both year-over-year and sequentially.

You can see a year-over-year walk down of adjusted EBITDA on slide 10. As mentioned we estimate the impact due to the GM work stoppage on adjusted EBITDA to be approximately $18 million.

We were also impacted by other volume and mix and normal year-over-year price downs.We experienced a slight benefit from lower metal market in the quarter and a small unfavorable impact for material, freight and tariffs although the impact of these items have decreased consistently over the last couple of quarters.Over the course of 2019 AAM significantly improved its operational performance and reduced its project and launch costs.

You can see this when you compare the third quarter of 2019 to the same period a year ago.

This is a year-over-year positive in the quarter of about $20 million.And we did continue to realize the benefit of our integration activities and business unit consolidation which improved our performance by $12 million in the quarter compared to the third quarter of 2018.As it relates to restructuring and acquisition-related costs in the third quarter of 2019 we incurred $11.7 million of such costs.

AAM also recorded an impairment charge in the third quarter of 2019 of $225 million to reduce the carrying value of our U.S. casting operations to fair value in conjunction with our announced sale of these assets. These costs have been excluded from adjusted EBITDA and adjusted EPS.Let's take a look at SG&A expense.

SG&A including R&D in the third quarter of 2019 was $92.7 million or 5.5% of sales. This compares to $96.3 million or 5.3% of sales in the third quarter of 2018. R&D spending was approximately $37 million for the third quarter of both 2019 and 2018, but up from the $33 million in the second quarter of 2019.

While we saw a sequential increase in R&D spending, primarily related to our advanced electrification products and strategies, we did defer some additional planned spending into the fourth quarter of 2019 in order to reduce expenditures during the GM work stoppage.Now let me cover interest and taxes.

Net interest expense in the third quarter of 2019 was $52.1 million as compared to $54.3 million in the third quarter of 2018 reflecting the benefit of gross debt paydowns we made in the second quarter.

Income tax was a benefit of $40.4 million in the third quarter of 2019 as compared to expense of $11.5 million in the third quarter of 2018.Our effective income tax rate when adjusting for special items was approximately 13.4% in the third quarter of 2019 and 14% year-to-date in 2019.

We continue to track to the low end of our expected adjusted effective tax rate between 15% and 20% for the full year.Taking all of these sales and cost drivers into account, GAAP net loss was $124.2 million or $1.10 per share in the third quarter of 2019 compared to net income of $63.8 million or $0.55 per share in the third quarter of 2018.

Adjusted earnings per share was $0.58 in the third quarter of 2019.Now let's move on to cash flow and the balance sheet. We define free cash flow to be net cash provided by operating activities, less capital expenditures, net of proceeds received from the sale of property, plant and equipment.

AAM defines adjusted free cash flow to be free cash flow excluding the impact of cash payments for restructuring and acquisition-related costs.Net cash generated by operating activities in the third quarter of 2019 was $241.7 million.

Capital spending net of proceeds from the sale of property plant and equipment was $97.5 million in the third quarter of 2019.Cash payments for restructuring and acquisition-related costs for the third quarter of 2019 were $16.3 million. Reflecting these activities AAM's adjusted free cash flow in the third quarter of 2019 was $160.5 million.

The third quarter was a very strong free cash flow quarter for AAM.From a debt leverage perspective we ended the quarter with a net debt to LTM adjusted EBITDA or net leverage ratio at 3.25 times at the end of the third quarter down from the second quarter of 2019 on the strength of our cash flow generation.

Liquidity at the end of September was over $1.3 billion.David has gone through the details of our updated full year financial targets, so I will not repeat them. Certainly the estimated effect of the GM work stoppage will be far greater in the fourth quarter as it impacted nearly all of October.

Our adjusted EBITDA guidance reflects the impact of our lower sales primarily as a result of the GM work stoppage.In the fourth quarter this impact includes loss contribution margin on a broader product set as the work stoppage expanded and estimated inefficiencies to resume production that in some cases have been idled for nearly 1.5 months.

This will be reflective in higher decremental margins when determining the impact of the work stoppage in the fourth quarter.But the team also continued to reduce capital spending in 2019 to align with our sales changes to mitigate some of the impact on cash flow due to lower sales.

Lower-than-expected global production volumes and the impact of the work stoppage at our largest customer have made it a challenging year from a top line perspective.However our operations have done a commendable job reacting and adjusting to the challenges that they have faced.

We have focused on controlling what we can control.During 2019, we have significantly reduced capital expenditures throughout the course of the year, reduced inventory, improved costs, deferred expenses and worked closely with customers to meet demand at the appropriate capacity levels.

As a result, we have improved our operational performance, reduced project and launch costs and sequentially improved profit margins.And while we expect a challenging macro landscape heading into next year, we will continue to rely on our operational excellence, technology leadership and world-class quality to assist us in strengthening our financial profile.

Thank you for your time and participation on the call today.I'm going to turn the call back over to Jason, so we can start Q&A.

Jason?.

Thank you, Chris and David. We have reserved some time to take questions. I would ask you that 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] The first question today comes from John Murphy with Bank of America. Please go ahead..

Good morning, guys..

Good morning, John..

Just a first question, as we look at this, there's a couple of ways you could calculate the decremental just given the metal market pass-throughs or in addition to the or change in the guidance but it kind of roughly looks like at the midpoint, it's around a 30% decremental.

I'm just curious if this is about right and if what you are thinking about here, which seems like it's very good performance because this is kind of a shocked environment that you're looking at in this full production.Are there any sort of lessons learned or things you could tell us about what you're doing there as we kind of think about a potential downturn in the next year or two or three?.

Yes. Okay John, this is Chris. In relation to the decremental margin, I'd tell you on a year-over-year basis for the third quarter I would think of it more around 32%, fourth quarter is going to be slightly higher than 35% embedded with again sort of as I mentioned in some of my prepared comments.

A little bit broader product set but also those inefficiencies to bring production back up online that have been down for an extended period of time.But as we think about heading down in the past -- into the future I think this demonstrates our ability to flex our capacity and our inputs such as manpower other variable costs into our manufacturing process and how we can move those along with the correlating change in sales and through the course of this process.Obviously, we did have associates on layoff.

We also deployed them for bringing forward maintenance and other activities. But again, showing our quick reaction to this activity I think demonstrates what we can do going forward in whatever market we face..

John, this is David. As you know, we've been proactively adjusting our workforce throughout the year here both at the corporate level as well as the plant level. That includes some of the business unit consolidation work that we've done.

We continue to assess our capacity utilization in all of our various facilities to make sure we're driving high capacity utilization.We've made structural changes to our business including some plant closings this year and we'll finish some additional ones before the year is out.

We will continue to evaluate our capacity utilization, especially as we go forward with a softy market or uncertain market and make appropriate adjustments along the way. But that's what we get paid to do.At the same time, we worked on divesting of the U.S. casting business that will close here in the fourth quarter.

And as we've indicated before we'll look at other non-core businesses but nothing to announce at this time..

Okay. And then maybe just a follow-up. It sounds like you are being much more efficient in stripping CapEx.

I mean, how much of an opportunity is there? Or is there a catchup that might occur in 2020?.

John, as you know, we've been operating around that 7%. At the same time we indicated in previous calls that we expect that to tread downwards especially as our launch load lightens up a little bit and subsides. So we're clearly on target to meet those commitments from earlier..

Great. Okay. And then just lastly on Slide 7 you kind of highlighted the electrification awards. I'm just curious, as we think about the profit return profile of those products and those programs I would imagine early days, there might be a bit below corporate average.

But how should we think about those products and programs as they mature over time? Could they be close to the corp average or would they remain below?.

Yes, John, this is Chris. Now as we think about those products we think they are consistent with other products that we bid quote on and win.

Right? Over the course of time they are required to meet our minimum -- at least our minimum objectives from a financial hurdle perspective.Obviously, when you launch them they incur some costs upfront but no, we expect them to be right in line with the rest of our product portfolio from a margin, a return on invested capital perspective..

Great. Thank you very much guys..

Thanks, John..

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

Great. Much appreciated. When we think about the year forward, the General Motors strike being a one-time impact in nature, we can divide our own estimates and assumptions for 2020.

But the base that we start with for 2019, should we think about that as ex General Motors? In other words any reason why the strike would have lingering impact into 2020?.

No, we don't expect any lingering impact into 2020. I mean, there's a big issue comes down to is, how many units will GM be able to make up in 2019 or in 2020. Ultimately we'll see that in our schedule releases but we don't expect the impact of the strike to carry into 2020..

Okay. And then how should we be thinking about the potential pricing implications from this if any and mindful of the Tier 2 supply chain.

If you could talk about that? I know there were some challenges in the early part of the year but how does that -- how does your Tier 2 supply chain look today and moving forward?.

The only real issue that we still have in our supply chain right now is the casting supplier supporting our electric drive program out of Europe. They're keeping up with our production requirements but not at the desired level that we like them to be at and we continue to work with them.

That's really the only known major issue that we're still working our way through..

Okay. Appreciate it. Thank you..

Thank you..

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

Good morning, everybody..

Good morning, Rod..

Good morning, Rod..

Just a follow-up on the bridging items that we're thinking about for next year. It sounds like you're suggesting we could add back the strike at 32% and 35% in Q3 and Q4, which should be like $85 million of EBITDA. And I'm wondering, if you can just comment on some of the other things.

You previously said that CapEx could fall to 5% or 6%, so maybe $50 million or $75 million of additional from that.

And how much of the $50 million to $75 million savings that you've been talking about previously, what would the net number be of that?.

Ron, obviously at this point it's still a little too early to give any 2020 specific guidance. But in terms of maybe just ways to think about some of those puts and takes into 2020, obviously the strike in isolation if that revenue materializes you can see the profit associated with that.

I think that's relatively straightforward.Your commentary on CapEx, as David mentioned previously, we're guiding that down towards the 5% to 6% range and we still see a line of sight for that into the 2020 time frame.

So that will obviously be very favorable from a cash flow generation perspective.And the $50 million to $75 million that you referred to this is something we talked about back in the August time frame, consisting of lower project expense, lower launch costs, the final leg of our synergy step up, our consolidation savings from the business unit in addition to some of the restructuring and core productivity initiatives that David mentioned also previously.

A small portion of that does relate to our castings operation but not the majority just a small sliver of that. But for these activities that are underway to support that are still on track..

That's a gross number though, if I remember correctly.

Should we be thinking in the back of our minds about some inflation or higher R&D spending that kind of mitigates some of the benefit of that $50 million to $75 million?.

Yes, that is a gross number. And yes, obviously, we stepped a little bit of our R&D up here in the back half of 2019.

We will continue that trend into next year as we support some of these new programs that we're on and some exciting opportunities, especially on the electrification front that we continue to support.But other things that we will obviously discuss a little bit more towards the earlier 2020 but you'll have your annual price downs from customers, inflationary-type items so that seems to be moderating some in terms of inflation across the board for us but we'll give you a much clearer perspective of that early 2020..

Great. Thank you. And just secondly, there are several paths obviously to reducing leverage including, just organically, the cash flow that you guys are generating.

But maybe you could just talk about how you're thinking about it at the moment? Whether you feel that there's an urgency to strengthen the balance sheet for cyclicality or to increase flexibility for strategic things? What's the current thinking? And what are some of the ideas that are being assessed?.

Yes, Rod. This is David. Our focus is on the operational performance and driving cash flow performance through the business. That has been our thinking. It continues to be our thinking.

And again, to service the debt associated with that, clearly, we're taking action with respect to divestitures of non-core businesses, starting with the close aftermarket earlier and then also the U.S. casting business, and then we'll evaluate other things at this time. But the big focus right now is, just driving performance to our business.

We're aware of some other opportunities that are there but that's not our priority right now..

Okay, great. Thank you..

Yeah. Thank you..

The next question comes from Emmanuel Rosner with Deutsche Bank. Please go ahead..

Hi. Good morning..

Good morning..

I wanted to ask you a couple of items in the sales and EBITDA walk on slides nine and 10. So first of all the backlog contribution, net of attrition, was really solid in the quarter.

Last quarter you had actually lowered your backlog for the year, I think, by about $100 million sort of on a gross basis.Just curious your latest thoughts on this year's backlog and so basically what's left to be expected in the fourth quarter? And to what extent some of the things that were sort of like being pushed out, do you have confidence or not of them materializing in 2020?.

Yes. Last quarter, Emmanuel, we did reset our 2019 gross backlog. The number that we articulated in the previous quarter is still true here for 2019.

I would expect to see the fourth quarter very similar towards what you see here in the third quarter, as the backlog step in was somewhat back-half weighted versus first-half weighted throughout the course of 2019.Some of the elements when we did take our backlog down last quarter, some of them were deferred into next year from a timing perspective, some of them we viewed as -- will be gone permanently, with just lower volumes.

Those commentary that we made back then continue to be true..

Okay. And then, the other item I was interested in is the bucket of other volume and mix. So the $180 million negative revenue impact, only $10 million on the EBITDA impact.

Can you maybe talk about what's in there and sort of reflect the drivers of this really low decremental margin?.

Yes. In terms of that other volume and mix, at least from a revenue perspective, if you think of some of the commentary on our last call where we saw some weakness across some of our China platforms that, for example, would be items running through here are the TITAN platform, as well as some other programs that we support on a global basis.

So very consistent with commentary that we previously said.When you look at the year-over-year adjusted EBITDA walk on the incremental margins, you point to $10 million, I will tell you, you need to take the backlog and the other volume and mix and net those together and compare that.

So you can see that net sort of brings that decremental in line with sort of normal run rates. It's a small number, so you get little trapped in the percentage ratio, but its right in line with what we would expect..

Okay.

So the decremental is on these non-GM volumes that are declining there, but in line with the company average?.

Yes, normal. Normal what we would expect. That's right. Yes..

Okay. Thank you very much..

Yes..

The next question comes from Brian Johnson with Barclays. Please go ahead..

Yes. A couple of questions. One around China and just one around some of the electrification wins. First, vis-à-vis China, can you provide just a little more color on straightening out some of the issues that plagued 2Q, which weren't really noticeable in Q3 or Q4.

Does that mean they've gone away, or just kind of swamped by the other things going on, like the GM work stoppage?.

No. In terms of that, we experienced, Brian, there kind of lower volumes. We continue to see those lower volumes and that's a part of that other volume and mix element on a year-over-year basis, but they have somewhat plateaued to the level where we reset them back a quarter ago..

Okay. Because that -- the decremental is on that other and volume and mix were fairly mild, roughly under 10%.

Is that reflective of other puts and takes?.

No. You have to take the combination of the backlog, which was plus $95 million and other volume and mix of minus $118 million. You net those together, that will drive your other volume and mix..

Okay. And….

So that will be more in line with what we would expect to see for customary margins..

And second, now that you've got three awards, the Jaguar, the premium European P3 hybrid and then the new P4 BV. Do you have any better sense of where you want to play between P4 BVs and P3 hybrids? That's number one.

And then two, given the EU CO2 mandates that are hitting hard in 2021, is there any opportunity for additional business hitting then or at least additional awards as those automakers prepare for the mid-2020s?.

Brian, this is David. P4 is going to be our main focus although there are some P3 applications that we're going in -- we'll be going into production with. And most of everything that we're working on is targeted towards the mid-2020 time period..

Okay.

And in terms of P4 wins, what was the feedback on Chinese sale in terms of key unique selling proposition for AAM versus, I can imagine, any number of competitors with P4 solutions?.

Well, I mean, they were very pleased with our technology offering, the power density of it, the compactness of the package as well. At the same time, we met the cost targets that were associated with it, from a value-oriented standpoint.

That was a key initiative of ours, was to -- we focused initially on the high-performance type products and luxury products, but now we've also designed a product portfolio that's modular and scalable that allows us to deal with the value-oriented brands as well..

Okay. Thank you..

Yeah. Thank you..

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

Hey, good morning, guys..

Hey, good morning..

Just back to the decrementals related to the GM strike. Obviously, at 35%, very successful demonstration in your ability to flex the cost structure. I imagine, it was certainly a combination of headcount reductions, but also reallocating resources.

Can you maybe bucket those two, just so we could get a sense for -- I mean, your take on maybe how quickly you can get that head count back online once production re-ramps? Thanks..

Well, production is re-ramping now. Most of our headcount is getting back online. We should have all of it back online by next week, as we follow our customer schedules..

Got it. And then, just one more broadly. When you think about your portfolio, the U.S. casting business now, out of the mix by the end of this year, what's your general assessment of your remaining assets in terms of core versus maybe what's identified as non-core? Thanks..

Well, we've gone from the start of the year four business units. When it's all said and done, after the sale of the U.S. casting business, we'll work our way down to two business units. Those two business units are our driveline business, as well as our metal forming business. Majority of the product line we consider to be core.

There are some products that we're evaluating at this point in time. And at the appropriate time, we'll communicate that. But I would expect it would have, not a major impact, but a minimal impact to any leverage reduction..

Thanks..

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

Hi. Good morning..

Good morning..

Thanks for taking my questions. First, just wanted to clarify regarding the lower CapEx outlook for the year and I apologize if I missed that, but is some of that related to GM? It sounds like most of it is timing.

I mean, is there better reuse? Or is some of your lower CapEx outlook really just a bit more conservatism amid a tougher macro environment?.

No, I'd say, it's a combination of things. I mean, most of the capital that we needed to spend to support the launches over the last several years is in place, which is why we have the high CapEx levels. Remember, we've had 180 launches over the last three-year period of time.

So we consider it an average of 60 a year.Going forward, that subsides considerably. Therefore, our CapEx should be able to drop with that. At the same time, there's been a very intense focus from myself down to the team to look at how we can reuse more of our equipment.

At the same time, be sensitive to the changing environment from a macroeconomic standpoint, which goes back to the whole capacity utilization comment I mentioned to you earlier..

Got it. Okay. Well, I want to ask a follow-up on that and maybe a bit more long term and this is thinking about the long-term free cash. Back at your Investor Day, year and half ago although it seems end market-wise like ages ago, you talked to potential free cash flow of 6% to 7% I think in 2020 or beyond.

Obviously the light-vehicle markets have gotten much worse since then. Is this -- amid this end market deterioration? Do you think this free cash flow target is still one day on the table? And more specifically is this the target that you have in mind as you're doing your portfolio review? We saw the casting deal is margin accretive.

As you're operating in a tougher environment, is the one sort of thing that you're pushing for is just greater free cash efficiency in the face of some of this macro weakness?.

Yes, I mean, cash is king for us right now. And we need to generate cash from our operations. We need to manage our working capital. We need -- including the CapEx side of things. And ultimately we need the cash in order to serve us the debt. Our debt's in very good situation. We don't have any maturities due until 2022 and 2024.

So we've got good financial runway. But the number one priority around American Axle is driving cash flow performance in the business..

Yes. And Dan, this is Chris. We've been very focused on converting that EBITDA, which is obviously driven by some of the factors you mentioned down into free cash flow. So reducing interest, reducing CapEx, moderating tax, things of these nature are really top of our mind on that conversion of EBITDA..

And as you're looking at I guess potential future portfolio actions, is this the type of sort of key metric that you have in mind, or is it more just focusing on starting with the balance sheet or what's the sort of overarching focus as you're doing potential future portfolio actions?.

And the most important thing for us to look at is, what product lines do we want to be in and we've said all along that we want to be in the highly engineered products business. At the same time, the commodity business of the forging supports a lot of that highly engineered products business both internally and externally with customers.

So it's heavily weighted in regards to the product portfolio. And then also looking at the resource requirement that supports what is core versus noncore and reallocating resources appropriately, obviously, with an emphasis on electrification as we go forward..

And Dan, this is Chris. From a financial perspective, obviously, we focused on the cash flow profile, a lot of different financial metrics but of course return on invested capital and that investment that we make into that portfolio and it's ultimate returns as a critical objective..

Great. Thank you..

The next question comes from Ryan Brinkman with JPMorgan. Please go ahead..

Hi. Great. Thanks for taking my question. Can you just share, what is embedded within your 4Q guide about GM's ramps back up to full production? We've heard some other suppliers say it could take one week; another the other day said it could take 10 days.

Although, I think GM indicated in the first few days back to work at least that the ramp was maybe tracking better. And then there was some discussion on GM's call too about the potential for adding overtime or other work through the holidays in 4Q.

The message was sort of not a lot of ability to recoup the loss production near term but they're still going to try.

So any kind of color on what you've assumed along these lines in your 4Q guide and whether there could be any potential upside would be helpful?.

This is David. I'll speak first and I'll turn it over to Chris. But GM is moving favorably in regards to returning their operations to work. We're following their releases as are the other suppliers to meet that but I expect them to get up to full production very quickly here.

Your comments about being limited this year in regards to being able to make up some of the units I think that that's true and we've heard that in the GM commentary.Remember especially the product lines that we're heavily involved with on the trucks, the SUVs and the crossovers, most of those plants were already running six-seven days a week and high overtime.

So there's at least a little opportunity to try to make up some of those units. But I'd say that's really where we're at, at this point in time. I do expect that they will try to make up some of those units in 2020. I just can't tell you what that number would be, GM could better provide that.

Chris?.

And Ryan from a financial forecast perspective, that's basically how David just described it is what's included in our financial forecast. That's our best estimate at the time..

Okay, great. Thank you. And then there have been a few questions already on the better-than-expected decremental, so I'll just try to approach it from a little bit different of an angle. The change in the full year outlook looks to assume about a 32% decremental maybe helped some by the metal pass-throughs.

I don't know if you could exactly quantify that but still clearly better than the market assumed. I think GM a few years ago, remember, they were going through some inventory reductions where they cut their production by like a quarter.

You sailed through that with pretty flying colors and now this too.So just curious, while you passed those tests, we still haven't seen kind of a protracted downturn in 10 years. Maybe you could just sort of reflect on the flexibility of your cost structure now relative to in the past.

And what that flexibility means for decremental margin in a recession scenario in North America?.

Yes, Ryan, this is Chris. Look great question. You saw through this course obviously on our adjustment in our guidance, you saw the kind of the mid-30% and the decrementals that, of course, is a short-term action; meaning this came on us very quickly with an end.

You saw our variable cost structure really take hold whether it be our purchase components our inventory management.

At the same time, we were able to flex our workforce that supports that production.As we think forward, in terms of being able to adapt and to react to what those market demands are, it's that exact flexibility that you saw us exercise here again on the workforce side also on some other variable inputs into our manufacturing process.

And of course if we faced more prolonged type of a downturn scenario we would attack our semi-fixed and fixed cost structures right in line with some of the previous commentary that we had.

So being nimble, being fast and being aggressive to take out these costs are really critical for us and I think you've seen us demonstrate that now a couple of times..

Okay, great. Thanks.

And then just lastly for me can you remind us from a just from a high-level strategic perspective without naming names businesses et cetera, what are the characteristics that would make a business or product line of yours to ever be considered core versus noncore?.

Again, Ryan, this is David. We've identified the driveline business is core to us. Metal Forming business is core to us. There's various variants within each of those business units.

At the same time, we've identified that we like to have greater diversification in our customer base, our product portfolio and our geographic reach, so all those are critical to us in regards to our strategy as we go forward. And then as I mentioned to you we want to concentrate on highly engineered products in our portfolio..

Okay, appreciate it. Thanks. Congrats on the quarter..

Thank you..

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

Thank you. First one is just clarification. Of the $50 million year-over-year headwind –well, we saw the $50 million of your headwind, I guess, from metals in the third quarter. There's also a $50 million reduction in the guidance from metals.

But how much of that annual reduction was in the third quarter versus the fourth quarter?.

About half..

About half? Okay..

Typically we’d look at run rates on metal..

Yeah. Okay. All right. So I want to just follow back on for a second for the balance sheet discussion that was happening earlier.

So like the Grede transaction, when it was initially announced it seemed like it was pretty neutral net debt-to-EBITDA just on an LTM basis, but I also didn't consider I guess the $60 million to $70 million in cash restructuring you're announcing today. So that, obviously, takes it up a little bit. But again it's on a pro forma LTM basis.

So I'm just curious, how you see that impacting the mid-term ability on your leverage targets especially since it sounds like you think getting rid of that business is helpful to your free cash flow profile?.

Yeah. No, Joe this is Chris. In terms of the initial transaction it's somewhat neutral on our leverage ratios.

The restructuring items we talked about were contemplated as part of the previous announcement and will be funded with the proceeds of the sale and that's been all included in part of our commentary.Obviously going forward this will reduce some of the gross debt on the company, which will produce interest costs as well. So that's critical.

And you also commented that the $60 million to $70 million uptick in restructuring -- keep in mind it was previously $50 million to $60 million. So only the delta is associated with this transaction. It's net..

Okay. Just finally back on the electrification award update. So it was identified now three awards. I think your strategy has been to integrate some of the components. And I guess we focus on the motor here. How has that played out? Have you -- you consistently used one supplier for that.

Has it been directed by the OE? Or have you begun to identify preferred relationships?.

Yeah. No specifically speaking to the motor side of things, it's really been working with the OEM and their preferred relationship with their motor suppliers, although that has led to a preferred relationship with us as well.As it relates to us going to market regarding our products, we're taking a multi-phased approach I guess.

First we're looking at the component side, we're looking at subassembly size, we're looking at gearbox side and then we're looking at the fully integrated system.

And clearly as we indicated to you before, we'd like to vertically integrate where we can, which means we need to spend more time looking at software controls and power electronics and motors. And we can either do that individually ourselves or we can do that in technical or strategic partnerships with those preferred partners..

Okay. Thank you very much..

Thanks, Joe..

Thank you. Gentlemen your last question today comes from Itay Michaeli with Citi. Please go ahead..

Great, thank you. Good morning, everyone..

Good morning..

Just two first questions on cash flow. I think the operating cash flow guidance came down by $150 million. It sounds like it's a little bit more than the strike impact.

Is there any working capital there that we should think about this year? And how that might affect next year? As well as maybe you can update us as well on the outlook for cash restructuring going to 2020?.

Yeah, Itay this is Chris. The operating cash flow is generally in line with the change in the EBITDA guidance. Obviously then it was mitigated some by the CapEx guide. No significant working capital items, just nuances think about the strike happened midyear.

So the beginning and endpoints of the year really don't change a lot from a working capital perspective.

So that's how, I would think about that for 2019.In terms of the restructuring charges, as you know we -- $60 million to $70 million of this year a portion does relate to the casting sale that was talked about previously that we would think about next year around half or less than that..

Got it.

And then just secondly, maybe for David, hoping you could update us on just the overall level of quoting and booking activity? And then maybe outside the GM situation, just broadly what you're seeing in production schedules as of late both the direction and volatility within the schedules?.

On the quoting activity, we're still quoting about $1.5 billion worth of activity right now. Before we had about $500 million of that was electrification that's probably closer to about $300 million right now just because of some of the awards that took place and all or decisions that were made.

So the traditional product makes up the majority of the balance of the quoting activity.With regards to customer schedules, I mean clearly we're seeing a softening on a global basis around the world, although I think it's aligning with where we came out in the second quarter and what we've now experienced here through the third quarter.Our core products the -- especially the trucks, the SUVs and the crossover vehicles remained fairly strong.

We have seen some softening in the crossover vehicle as we indicated to you before in China especially and that's now factored in back to Brian's earlier question..

Great. That’s helpful. Thank you..

Okay. Thank you, Itay..

Thank you, Itay. 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 the future..

Thank you..

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