Good morning. My name is Elisa, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing Fourth 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. As a reminder, today's call is being recorded. I would now like to turn the conference over to Mr. Jason Parsons, Head of Investor Relations. Please go ahead, Mr. Parsons.

Thank you, and good morning. I would like to welcome everyone who is joining us on AAM's fourth quarter earnings call. Earlier this morning, we released our fourth quarter 2020 earnings announcement. You can access this announcement on the Investor Relations page of our website, www.aam.com, and through PR Newswire services. You can also find supplemental slides for this conference call on the Investor Relations page of our website as well. To listen to a replay of this call, you can dial 1-877-344-7529, replay access code 10150289. This replay will be available beginning at 1:00 PM today through 11:59 PM Eastern Time February 19. 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 to everyone. Thank you for joining us today to discuss AAM's financial results for the fourth quarter and full year 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 highlights of our fourth quarter and full-year 2020 financial performance. Next, I'll cover some highlights from 2020 including some updates about the technology and innovation front. Then lastly, I'll review our 2021 financial outlook and our three-year new business backlog before turning things over to Chris. After Chris covers the details of our financial results, we will open up the call for any questions that you may have. AAM delivered solid operating financial results and cash flow performance in the fourth quarter and full year of 2020 as global production continued to recover and resulted in strong EBITDA conversion. AAM's fourth quarter 2020 sales were $1.44 billion compared to $1.43 billion in the fourth quarter of 2019. Recall last year we were impacted by the GM work stoppage and we sold our U.S. Casting business.

Thank you, David, and good morning, everyone. I will cover the financial details of our fourth quarter and full-year 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 fourth quarter of 2020 AAM sales were $1.44 billion compared to $1.43 billion in the fourth quarter of 2019. Slide 11 shows a walk down of fourth quarter 2019 sales to fourth quarter 2020 sales. First, we reduced our fourth quarter 2019 sales by $190 million to reflect the sale of the U.S. Casting business unit that was completed in December of 2019. Next, we add back the impact of the GM work stoppage from the fourth quarter of last year. We then accounted for the unfavorable impact of COVID-19 on our fourth quarter of 2020 sales, which we estimate to be approximately $40 million. At this point, our estimated sales impact from COVID is primarily for our India and Brazil locations, which have not recovered to pre-COVID levels for us. On a year-over-year basis, we were also impacted by GM's exit of its Thailand operations by approximately $10 million and the transition from a rear beam axle to a new lightweight and highly efficient independent rear drive axle for GM's new full-size SUV impacted sales by about $35 million in the quarter. We'll have one more quarter of year-over-year transition impact in the first quarter of 2021. Other volume and mix was positive by $38 million mainly driven by strong light truck mix in North America. Pricing contributed $19 million on a year-over-year basis and metal market pass-through and foreign currency resulted in an increase in sales of about $7 million year-over-year. For the full year of 2020 AAM sales were $4.71 billion as compared to $6.53 billion in the full year of 2019. The impacts of COVID-19 and the sale of the U.S. Castings business were the primary drivers of this year-over-year decrease. Now let's move on to profitability. Gross profit was $236.5 million or 16.4% of sales in the fourth quarter of 2020 compared to $183.4 million or 12.8% of sales in the fourth quarter of 2019. Adjusted EBITDA was $261.5 million in the fourth quarter of 2020 or 18.2% of sales. This compares to $193.5 million in the fourth quarter of 2019 or 13.5% of sales. As David mentioned, this was AAM's best fourth quarter adjusted EBITDA margin in our company's history.

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

Your first question today comes from Rod Lache with Wolfe Research. Please go ahead.

Good morning, everybody. I was hoping you could maybe just touch on EVs and backlog. Maybe just starting out with the background on Inovance in China. What is their market position, even prior to the relationship with you? Are those four contracts that you referenced in the backlog that you quoted? And maybe if you can talk about net backlog? I think that in the past, you've provided a gross backlog number and I believe that's what you provided here today. What is the net number, net of attrition?

Yes, Rod, this is David. Just working backwards on your questions. From a net standpoint, we typically will run off about $100 million a year, so you can do the math across the three-year period of time. With respect to the Inovance organization, they are a strong and leading producer of power electronics and motors in the China market; they're number two in the overall market in regards to supply of those products in that market. They have strong technical competency and manufacturing competency, very compatible with our technology. We're working very hard to develop obviously scalable and integrated technology, where we integrate the inverter, the motor and the gearbox all into one unit that's more power dense, smaller in packaging space, with greater performance and greater efficiency while still offering our customers value propositions. That partnership started realizing such with four program awards in China, one that we were awarded last year, and three that were awarded here in January of this year. We're working on other opportunities in China, while at the same time we're working on opportunities both in Europe as well as in North America, as more and more opportunities are starting to present themselves with respect to customers' long-range product plans and opportunities.

With those wins in your backlog, those four wins?

Yes, sorry I apologize. Yes, they were, Rod.

Definitely, and they're obviously increasing volume.

Okay. And secondly, obviously performance looks pretty strong in Q4, and that looks pretty fine in 2021. But it's pretty apparent investors are thinking about the disruption that the industry is facing. And I'm sure you spend a lot of time thinking about that, too. Right now, the consequence is low valuations for everybody that is in the traditional driveline space. And I'm wondering if you could maybe talk a little bit about how you're thinking about strategic alternatives and options for American Axle—whether you're looking at more acquisitions at this point, divestitures in the conventional driveline business, what is the sort of consequence of the environment that you're seeing right now?

Yes, Rod. This is David. In regards to the strategic side of things, when you look at our portfolio, we've pared down a lot of our portfolio, and we don't have a lot of material things to divest at this time. Nothing to announce at this time. But twice a year, we evaluate our portfolio and then make strategic decisions about that. Again, we don't see anything meaningful that's going to have a major impact with respect to debt pay down. Our debt pay down is going to really come through the strength of our operations and the performance that we're seeing from cash flow generation which is only getting stronger, especially with the restructuring efforts that we put into place and have been able to demonstrate in the third and fourth quarters. You can see the strength of our guidance in 2021 as well. Clearly, we made a big move in regards to expanding our relationship with Inovance from a technology and innovation standpoint, heavily focused on electric drive. Some people felt critical that maybe we were falling behind; we weren't falling behind—we're already in production on a number of programs. We've now landed incremental programs and we've shored up where our gap was, and we were very open about it in regards to power electronics and motors. We're also working on a number of other next-generation technologies for electric drive, with Inovance and independent of Inovance, to satisfy the marketplace as we go forward across different vehicle segments and tailored for each of the respective markets that we're going to support. When it comes to the bigger strategic side of things and the environment out there right now, clearly there's a lot of uncertainty in the marketplace, just with COVID alone with labor availability and health and safety protocols. There's uncertainty with this global semiconductor shortage. The good news for us is our largest customers said they're going to protect the truck platform and do everything possible to protect the truck platform here in 2021, and we're seeing that in their schedules which are very strong throughout the year. Where they are making adjustments, that does have an impact on us; they expect to make some of that up in the second half of the year. That's not just General Motors; that's some of the other customers that were impacted as well. There are some other constraints in the marketplace from a supplier standpoint—steel shortages—but we don't have anything that's negatively impacting us because we've secured that going forward. We're managing our way through port delays and container shortages mainly by putting greater inventory buffers in place to protect our customers. But I do think it's going to put a lot of stress on the supply base going forward, especially as buying starts to ramp up globally, working capital demands intensify, plus some of the other challenges we've discussed. That can present some opportunities for us. But again, we'll take everything in balance with our priority: continue to generate strong financial performance, continue to grow our backlog and new business—which we think we can add to over that three-year period—while at the same time making sure we're de-leveraging the balance sheet and paying down the debt. So long answer to your question, but hopefully it addressed what you're asking for.

Okay, great. Thank you.

Thanks, Rod.

Thanks, Rod.

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

Good morning, guys. Just a follow-up on Rod’s question on Inovance—just curious, I mean it sounds like it's burgeoning and starting out of China, but is it going global? Or are you going to be going global with this partnership? And as you're going global and bidding on business, you yourselves are potentially in this partnership as well. Are you running into sort of the usual suspects in powertrain and truck management in sort of your axle business? I'm just trying to really understand if you're running into new players, or it's the same folks with new technology, and really trying to understand your right to play on a standalone basis and with Inovance in those discussions?

Yes, John, this is David. Historically, our biggest competitors on the truck side have really been Dana and some in-house manufacturing operations. On the passenger car and crossover side, as far as ICE-related products, the biggest competitor has been GKN, but Dana and Magna and some of the others are out there as well. Clearly, with the electrification market, there's a whole host of new entrants or new players. You have traditional driveline companies beyond the ones I mentioned, but you also have motor and inverter companies that want to enter this space. You've seen some of the partnerships that are being formed—the recent LG Magna partnership, the BorgWarner/Delphi activity, the Denso relationships. We feel that our partnership with Inovance will allow us to compete with any of those going forward. We've got the technology and are working on other advanced technology as I'm sure they are as well. We're a proven supplier in the marketplace and we feel that we can bring a value proposition to our customers. The biggest thing we need to do is clearly understand their needs, the timing of those needs based on their long-range product plans, and make sure that we're ready with proven and bookshelf technology to support those regardless of vehicle segment—whether it's pickup, crossover, passenger car—and regardless of region—North America, Europe or Asia. We're positioning the organization to support that; we've shifted and reallocated a lot of resources internally towards advanced propulsion technologies, heavily weighted towards electrification. But we're not forgetting about our core business—we're protecting that core business by securing next-generation replacement programs that will support our cash flow generation for years to come. We feel very good about the advancement with Inovance, we feel very good about our investment and discussions with them, and hopefully there'll be growth in those relationships as we go forward. As I said, we're agnostic to the market—let the market dictate what type of propulsion system they want between internal combustion, hybrid or electrification. But we clearly recognize the market is pivoting toward electrification and we'll make sure we're properly prepared to win our fair share of the business.

And David, maybe just a follow-up to that. Can you remind us your content per vehicle potential on an ICE versus EV and maybe trucks and car EV platforms?

Yes. On a pickup truck, full-size truck it's around $1,600 of content per vehicle. Crossover vehicles range between $900 to $1,200. Some passenger cars are $500 and below, depending on components or independent systems. When you get into electrification, as we've said before, what we're doing on the Jaguar I-PACE is around $2,500 of content, but that involves both a front and a rear unit. Clearly as you move across different product portfolios, there's an opportunity to grow that with some pickup applications. But there's also a possibility to reduce that and size it appropriately for individual vehicles. A big thing that will impact price—in a favorable way—will be these three-in-one integrated solutions, which will allow us to offer lower price content per vehicle but give more performance to the vehicle while still commanding profits to support the overall business.

Your next question is from James Picariello of KeyBanc Capital Markets. Please go ahead.

Hey, good morning guys. My apologies if I missed this, but the four new programs in China—are all of those EV programs? Are all those tied to your agreement with Inovance?

Our technology agreement is a separate matter; we're working through our relationship with Inovance and our performance with Inovance. Ultimately, we're looking to have a stronger and bigger relationship with Inovance going forward. This is just one part of it as far as the sourcing that we earn from them. At the same time, the confidence they have in us—and we have in them—regarding the technology led us to put a technology agreement together. We think there are better and brighter things ahead for that relationship on a global basis.

Okay, got it. What's the latest timeframe on your hybrid award with the premium European OEM that's been in the backlog?

That program is going to be launching late this year, and we'll roll into the next couple of years. There are multiple variants that will be coming off of that. We're very excited about that program and excited about announcing who that customer is because we've been talking about it for a period of time. The technology that's going to go into this vehicle will be something you haven't seen as far as the type of performance the vehicle will be supporting.

Got it. And then just two quick modeling questions. The $15 million in increased R&D within the EBITDA walk—does that just reflect the third quarter commercial settlement that benefited the quarter? And for the $205 million interest expense, does that account for any debt prepayment through the year?

Good morning. Yes, as it relates to the R&D, a portion relates to the one-time clip from the third quarter where we had that reimbursement in the third quarter of 2020, but also a slight increase in net spending overall as we're directing some of our efforts towards product expansion from that standpoint. The $205 million of interest would begin to reflect debt pay down through the course of the year. Obviously, we would be subject to timing of when any debt payment was done, but yes, it should reflect that as well.

Okay, thanks.

The next question is from Ryan Brinkman of JPMorgan. Please go ahead.

Hi, thanks for taking my question. Are you able to quantify any more of your investment in that company either in terms of dollar amount or percent ownership stake? I think I heard you say it was a small investment. But I'm mindful that sometimes with these pre-revenue companies, an initial small investment can turn into a larger one. What drove you to make the initial investment? And more broadly, my understanding is someone has assigned one of these so-called skateboard-type platforms. I'm just curious what you think the implications are to American Axle from skateboard-type platforms, or the integration of traditional vehicle components into the arch of the wheel?

Yes, Ryan, hi good morning. I would start by saying a couple things. David was clear about the fact that we're looking at multiple different strategies to access the new energy vehicle markets going forward. Electrification is the number one focus for our company. We're looking at ways to bring our electrification technology to the skateboard technology that you just referred to. But we're looking for multiple different ways to bring that technology to market. We were first introduced to this company a couple to three years ago, we saw the potential they had, and we made a relatively small investment. When we talk about smaller, we're talking about cost basis, Ryan, and we've been in contact over the years looking for ways to advance the relationship beyond a passive venture capital-type investment. We saw opportunity from the start and we're optimistic—nothing has been done quite yet—but we're optimistic we can advance this relationship, assist this very creative and ambitious group to realize their longer-term vision with our industrialization experience. So we see opportunities there and we're going to pursue them.

Very interesting. Thank you. And then just lastly relative to capital allocation, I heard you say that you're highly focused on debt de-leveraging—does that mean that you intend to deploy the full $300 million to $400 million of 2021 free cash flow toward debt pay down? Or with the rising EBITDA also helping does that maybe leave room for electrification-related M&A? I wanted to check in on what you think the market looks like for electrification-related M&A currently—are valuations overheated or are there attractive opportunities?

Ryan, I'll start with the first question as it relates to our free cash flow guidance of $300 million to $400 million. Obviously, we'll generate that through the course of the year; that also funds a little bit of some restructuring payments because that's a gross number. Also, as you've seen us in the past, we've made small investments into joint ventures where we expanded those in China and elsewhere. I would expect some small capital allocation into that space as well. But our primary objective is continuing to reduce our leverage on this company.

Ryan, on the strategic front, clearly the valuations of some of these power electronics companies far exceed what we were willing to pay at this point in time based on where our balance sheet stands. So our priority is clearly to service the balance sheet. But we also don't feel like we're being limited in regards to opportunities to support our customers with the partnerships that we have in place. As Mike alluded to, we're also looking at other creative ways to leverage our technology in core and new markets.

Okay, very helpful. Thank you.

Your next question is from Dan Levy of Credit Suisse. Please go ahead.

Hey, good morning. Thank you. First, starting with the backlog—I apologize if this was addressed already—your backlog was effectively flat for 2021 and 2022 versus the prior year. Can you walk us through the puts and takes on those years? Is it simply that incremental business wins are being offset by weaker end markets versus what you assumed last year?

Yes, I think there were a couple of puts and takes. Through the course of 2020, some of our customers deferred some of that backlog that was in 2020 into 2021—moves out—and you had some attrition and recalibration as well, and some volume adjustments in the overall market. There was a little bit of retiming on some program launches. You've heard us talk about this in the past—some retiming from months to several months through 2021 and 2022 based on COVID-related activity and how they retimed programs. But net-net, the key programs that were in our backlog previously continue to be in our backlog for the next two years and they're ready to launch. We're able to maintain a good hold on that and also keep our attrition level at the low end of previous ranges. From a net backlog standpoint, we remain pretty strong.

Great. And on the backlog as well, the e-drive piece is up slightly—some could argue it should be up more. Is that simply a function of timing of programs? It went up about $15 million but not more.

I think some of the announcements we've had over the past months and quarters and the relationships with Inovance that we discussed continue to step in volume increases through that three-year period as these vehicles launch. A lot of these e-drive units are launching this year and they continue to step in in 2021, 2022 and even more in 2023. That's why we curve up through that period.

Okay, great. Second question that's a bit more existential: we saw GM outline a target to be fully electric by 2035. I realize a lot can happen between now and 2035, and they called it aspirational. As you think through all the things you need to do to transition to a full EV world—product side, manufacturing side—is 15 years a reasonable period of time for you to make that full transition?

Dan, you've asked me to predict the future a bit. First and foremost, I applaud GM's efforts to be carbon neutral by 2040 and eliminate tailpipe emissions by 2035. That's good stewardship. At the same time, they have leading-edge electrification technology and want to capitalize on that. We're well aware of their transition and the announcement was not a surprise to us. It's aspirational, but they wouldn't put it out there if they didn't have a plan to deliver on it. Ultimately, the market will be the boss and determine the acceptance rate of electrification. As I said earlier, our position is to be agnostic to the market—whether providing IC engines and hybrids as we do today or offering more electrified units in the future. We're going to be prepared either way and partner with OEMs; GM is our largest customer and a strategic partner. We've been suppliers to them for years and we'll get on that journey with them to support carbon neutrality and reduced tailpipe emissions. Our big issue is to develop three-in-one integrated solutions with our partner Inovance and others to offer a value proposition to them and other customers, and design solutions that are scalable and marketable to obtain economies of scale as volume increases. Yes, by that period of time we can convert our operations. A lot of the components we manufacture today are transferable to electrification, though we would need to modify some assembly lines to accommodate these configurations. We know how to do that. There's more to learn on the motor and inverter side, and we're comfortable with our engineering and manufacturing capabilities and partnerships to accommodate that. Most important is that our technology is being recognized and awarded in the marketplace today—we've validated that with multiple customers, especially two European OEMs. We're excited about electrification's future, but also recognize many things must be in place before full adoption—charging infrastructure, grid readiness, advancements in battery technology especially for cold climates, and affordability for consumers. People need vehicles in accessible price ranges to drive the volumes that will lead to economies of scale. With continued technology advancement, we'll see progress. We'll be ready when the market is.

Great, thank you.

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

Thank you for taking my question. Continuing on the prior question, GM slated per their board to have all-electric GMC in roughly '22, '23 as well as electric versions of the Silverado and Sierra. I know you don't like to comment on specific programs, but could you think through the content opportunities in a dedicated pickup truck, what they might be doing with the Cybertruck, Rivian, etc., versus a conversion or an e-powertrain version of an existing platform?

I want to make sure I'm clear on your question—you want to understand content per vehicle and some of the impact with respect to content per vehicle based on what GM is doing? As far as GM's announcements, they have the Ultium battery portfolio and their Ultium electric drive unit portfolio supporting the Hummer program and some initial pickup programs. Those volumes are incremental to trucks produced today and will depend on market receptivity. There is content for us, but more at the component and sub-assembly stage—thinking less than $250 of content in that area. But if we get into full integrated EDU-type systems, then content can be much greater, even up to the $1,600 content we provide today. As we've said, benchmarks exist—what we're doing with Jaguar I-PACE and with the upcoming European OEM program—so we have an understanding of market prices for these products. Advancements in technology and three-in-one integrated scalable solutions will dictate future price points, and we feel confident we can compete. For pickups, our current content on a full-size truck today for IC and hybrid is about $1,600 per vehicle, and going forward it could be that or greater as electrification ramps. There's a lot of dialogue needed with customers to identify exact content per vehicle, but we feel very good about the pickup opportunity and other vehicle segments like crossovers and passenger cars.

And follow-up: thinking about the plant footprint you got from Metaldyne and the product set that was primarily engine and transmission-related—those plants are well-utilized. As you think very long-term, is there a way to repurpose that capital equipment toward components that go into electric vehicles, whether rough cutting, rough forming, gearing that you send to the OEM, or potentially in-sourcing e-gearing? Could you comment on that infrastructure and whether it could serve e-motor, e-drive three-in-one units or other components in the future?

Yes, Brian, you asked a lot in that question, but the simple answer is yes. We have positioned ourselves to go to market from an electrification standpoint both from a component standpoint and a sub-assembly standpoint—think differentials, gearboxes—and also from a fully integrated EDU standpoint. All of the component plants manufacturing product today that are IC engine and hybrid-related—components, gears, shafts, differentials—can clearly be converted to electric-type products. Some full integrated driveline solution plants can also be converted, though a bit more work is needed on assembly systems. Many of our IC engine- and hybrid-related products—think 8-, 9-, 10-speed transmission components, downsized engines with balance shafts and dampers—will continue for a long period, perhaps a decade, as we transition. As the market accepts electrification at greater scale then we'll convert more facilities to provide electric products. We want to be agnostic to the market and have strong operational excellence and technology capabilities; we'll make sure we have products of relevance ready for the market. We just need the market to tell us when they're ready to adopt.

Okay, thank you.

Thank you, gentlemen. Your last question comes from Joseph Spak with RBC. Please go ahead.

Thank you, everyone. Maybe just a point of clarification. On Slide 5 you mentioned some electric pickup and commercial vehicle component business launching—is that within the scope of the backlog? Is that new? And I guess, are you considering that within the e-drive piece or not, because it's sort of more components on electric programs, but not actual e-drive business?

Yes, these are not electric drive units; they're components supporting electric drive unit manufacturing.

Joe, this is Chris. This is included in our backlog. Think about some of the commentary we've talked about previously where we're winning component work on commercial vehicles and pickup trucks for BEV platforms—those types of platforms and segments would fall into those categories.

But just to be clear, if we were to look at it through a different lens—content on electric vehicles—it would be above that 15% because this business is spread across that 40% light truck and SUV mix?

No, it would be in the e-drive; it supports those vehicles. These support fully electric vehicles.

Okay, okay. Thank you. And then maybe one more on the chip shortage—some automakers are getting creative and might build vehicles without some constrained components and finish them later. Do you think that impacts the cadence of your business? If you're able to still supply, you might ship subassemblies and they finish vehicles later, so you could decouple from finished vehicle assembly in the first half of the year?

Joe, first of all it's an unfortunate situation the industry is facing with the semiconductor shortage, but the industry has overcome other challenges and will overcome this one. Clearly it's going to impact the market in the first half of the year, but they hope to have it resolved by the second half. OEMs are trying to protect their large profit pools with trucks and SUVs, which benefits American Axle and our continuity of supply. We're being impacted by some crossover and passenger car applications and even some truck applications. But OEMs plan to make up those units as long as the chips are available in the future, which they expect. As you referenced, OEMs are creative and will find ways to build product where they can—perhaps build without some parts for a period of time and then integrate sub-assemblies once chips are available, validate quality and ship vehicles. Overall we haven't been disrupted too badly, but we have been impacted and will continue to monitor. It's part of the uncertainty I mentioned earlier. Right now our schedules look very strong for most of our products going forward.

Just a follow-up—so it's more of an indirect impact thus far than a direct one. Have you had any trouble getting supply where you need it?

We have a couple of tight spots, but we're working with our customers as they're allocating chip production and making decisions on which plants to run. At this time we're not being directly impacted so much as indirectly.

Okay, thank you.

Thank you, Joe. 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.

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