American Axle & Manufacturing Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2025

Key Takeaways

  • Positive Sentiment: American Axle delivered Q2 sales of $1.54 billion, adjusted EPS of $0.21, and achieved a 13.2 % EBITDA margin, up 40 bps year-over-year despite lower volumes.
  • Positive Sentiment: Shareholders approved the proposed merger with Dall E, creating a global driveline and metal forming supplier with expected $300 million in cost synergies and accelerated regulatory clearances across key regions.
  • Positive Sentiment: AAM secured a contract with Scout Motors to supply front electric drive units and rear e-beam axles for its new EV SUV and pickup, supporting production start in 2027 and reinforcing its electrification roadmap.
  • Negative Sentiment: Incremental tariffs cost AAM approximately $10 million in Q2, with full-year net impact of $10–15 million expected after customer recoveries despite 90 % USMCA compliance.
  • Positive Sentiment: The company raised its 2025 guidance to $5.75–5.95 billion in sales, $695–745 million in adjusted EBITDA, and $175–215 million in free cash flow, underpinned by resilient truck and SUV volumes.
AI Generated. May Contain Errors.
Earnings Conference Call
American Axle & Manufacturing Q2 2025
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good morning. My name is Betsy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle and Manufacturing Second Quarter twenty twenty five 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

As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. David Lim, Head of Investor Relations. Please go ahead, Mr. Lim.

Speaker 1

Thank you, and good morning, everyone. I'd like to welcome everyone who is joining us on AAM's second quarter earnings call. Now earlier this morning, we released our 2025 earnings announcement and you could access this announcement on the Investor Relations page of our website, www.aam.com and through the PR Newswire services. You can also find the supplemental slides for this conference call on the Investor page of our website as well. In addition, to listen to a replay of this call, you can dial 704-0529, replay access code 636-8162.

Speaker 1

This replay will be available through August 15. Now before we begin, I'd like to remind everyone that the matters discussed in this call may contain comments and forward looking statements that are subject to risks and uncertainties, which cannot be predicted or quantified, which may cause future activities and results of operations to differ materially from those discussed. For additional information, please reference Slide two of our investor presentation or the press release that was issued today. 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 the non GAAP measures to GAAP financial information is available in the presentation.

Speaker 1

With that, let me turn things over to AEM's Chairman and CEO, David Dauk.

Speaker 2

Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AEM's financial results for the 2025. Joining me on the call today is Chris May, AM's Executive Vice President and Chief Financial Officer. To begin, I'll review the highlights of our second quarter financial performance. Then I will touch on some commentary about AM's recent business developments and discuss guidance.

Speaker 2

After Chris covers the details of our financial results, we will open up the call for any questions that you all may have. So let's begin. AM's second quarter twenty twenty five sales were 1,540,000,000 AM's adjusted earnings per share was $0.21 per share. Operating cash flow was $91,900,000 and adjusted free cash flow was approximately 49,000,000 From a profitability perspective, AM posted year over year adjusted EBITDA margin growth in the second quarter driven by productivity and cost controls. AM's adjusted EBITDA in the second quarter was $2.00 $2,000,000 or 13.2% of sales, a 40 basis point improvement versus last year even with lower sales and a 60 basis point improvement sequentially.

Speaker 2

Let me talk about some fantastic updates driving our business on all fronts, which you can see on Slide four of our investor deck. We are excited this year both AM and Dolly shareholders voted for and in favor of the proposed transaction to create a leading global driveline and metal forming supplier with significant size and scale and with strong customer and geographic diversification. Great news. The complementary nature of the two businesses is anticipated to generate significant shareholder value, yielding an estimated $300,000,000 of cost synergies and strong free cash flow potential. With the positive Vogt results, we have passed a significant process in our milestone.

Speaker 2

On the regulatory front, AM continues to make great progress. Approvals have been received from The U. S, Korea, India, Taiwan, Turkey and The UK, and the regulatory approval process in Brazil, China, Mexico and the EU are making excellent progress. From a product win perspective, A announced in the quarter it has secured an agreement with Scout Motors to supply both front electric drive units and rear e beam axles for the much anticipated launch of the all new electric traveler SUV and Terra pickup truck. Both products can be configured with 100% battery electric or range extended systems.

Speaker 2

We are honored to support the rebirth of the iconic Scout brand and play a significant role in these important vehicle launches with AM's award winning electric drive technology. We anticipate start of production in 2027. This business award supports our selective and targeted electrification growth strategy. It also highlights the depth and breadth of our comprehensive product portfolio, including electric drive units and e beam axles. In addition, we have also closed on our divestiture of AM's India commercial axle business to Bharat Forge Limited on July 1 for approximately $65,000,000 The sale is a result of our focus to create a long term value for our stakeholders through our portfolio valuation and management process.

Speaker 2

Even with all this exciting activity, we continue to manage our day to day businesses as evidenced by our second quarter results. Our focus is on operational excellence to control cost, enhance quality and boost productivity. AM's goal is continuous improvement and this was on full display in the quarter as our driveline unit experienced margin growth versus last year and our Metal Forming Group has now tallied five consecutive quarters of year over year margin expansion. In addition, as an overall industry volumes experienced a decline in the quarter, a number of our key truck and SUV programs outperformed the industry and we expect this to continue stemming from consumer preferences of these vehicle segments. It's also evident that ICE and ICE hybrid vehicles will have longevity due to American consumer preferences coupled with recent changes in government policy and incentives.

Speaker 2

Although AM is prepared for electrification, a longer ICE tail is good for AM as we can further leverage our installed fixed asset base and core products. Now let's shift and talk about one of the elements that we are actively managing, trade and tariffs. As we all experience, trade policies can pivot quickly. And with that said, I want to briefly touch on several points on how AM is well positioned to handle this volatility. As we've communicated before, AM's policy is to buy and build local.

Speaker 2

As such, 90% of the products that we produce in North America are already USMCA compliant, and we are working to increase that percentage on a go forward basis. For our North American production needs, nearly all of our steel and aluminum buy is from U. S. Sources. We do have some open capacity to relocate manufacturing to The U.

Speaker 2

S. If needed and we continue to receive positive business inquiries in our U. S. Metal Forming Business Unit. Additionally, we will continue to work closely with our customers to mitigate the majority of our of the incremental tariff costs and or pursue recoveries with them.

Speaker 2

Transitioning to our guidance, we updated our 2025 financial guidance ranges on the strength of our first half results and the resiliency of some of our key product segments. AM is now targeting sales of 5,750,000,000.00 to 5,950,000,000.00 adjusted EBITDA of approximately $695,000,000 to $745,000,000 and adjusted free cash flow of approximately $175,000,000 to $215,000,000 Our guidance ranges are supported by an assumed North American production volume of 14.6 to 15,100,000 units. Chris will provide additional details on the assumptions underpinning our guidance. In summary, AM had a strong first half performance, while successfully navigating market uncertainties and changes in trade policy. Additionally, we continue to make progress in cost control, driving margin performance.

Speaker 2

Concurrently, we continue to advance the Dallet acquisition by achieving shareholder approvals and making progress on the regulatory matters. We still expect the deal to close in the 2025. This deal will transform AAM into a premier driveline and metal forming supplier with increased size and scale positioned to deliver shareholder value. And with that, let me now turn the call over to our Executive Vice President and Chief Financial Officer, Chris May for the second quarter financial details. Chris?

Speaker 3

Thank you, David, and good morning, everyone. I will cover the financial details of our second quarter twenty twenty five results and our updated guidance with you today. I will also refer to the earnings slide deck as part of my prepared comments. So let's go ahead and begin with sales. In the 2025, AAM sales were $1,540,000,000 compared to $1,630,000,000 in the 2024.

Speaker 3

Slide seven shows a walk of second quarter twenty twenty four sales to second quarter twenty twenty five sales. Volume, mix and other was lower by approximately $102,000,000 primarily driven by lower overall volumes compared to a year ago. Metal market pass throughs and FX increased sales by approximately $11,000,000 The majority of this is related to foreign exchange, particularly from the strengthening euro. Now let's move on to profitability. Gross profit was $200,700,000 in the 2025 as compared to $217,300,000 in the 2024.

Speaker 3

For the 2025, adjusted EBITDA was $202,200,000 and adjusted EBITDA margin was 13.2% versus $208,400,000 and 12.8% last year. You can see a year over year walk down of adjusted EBITDA on Slide eight. In the quarter, adjusted EBITDA was lower due to volume mix and other by $23,000,000 versus the prior year, resulting in a decremental margin of approximately 23%. R and D was lower year over year by $8,000,000 as we continue to optimize our engineering spend. And lastly, Performance and Other was favorable by $9,000,000 This year over year favorability was driven by adjusted EBITDA margin improvements by both of AAM's business units.

Speaker 3

Drylines margin increased approximately 30 basis points to 13.8%, while metal forming margins increased approximately 20 basis points to 8.9% from last year. AAM remains focused on productivity, efficiency and cost optimization in all areas of our business and our trends and results are demonstrating this. Let me now cover SG and A. SG and A expense, including R and D in the 2025 was $100,800,000 or 6.6% of sales. This compares to $105,200,000 or 6.4% of sales in the 2024.

Speaker 3

AAM's R and D spending in the 2025 was approximately $36,000,000 For the full year, we continue to anticipate R and D expense to be down on a year over year basis by approximately $20,000,000 resulting from current market requirements and continued focus on spend optimization. Let's move on to interest and taxes. Net interest expense was $37,500,000 in the 2025 compared to $41,800,000 in the 2024. Our lower interest expense was due to lower weighted average interest rates of our outstanding long term debt and lower year over year debt balances. In the 2025, we recorded income tax expense of $28,100,000 compared to $17,200,000 in the 2024.

Speaker 3

For the full year of 2025, we expect our adjusted effective tax rate to be approximately 50%. This elevated book tax rate is due to valuation allowances on certain foreign jurisdictions and interest deduction limitations in The U. S. This book rate excludes the potential benefits from recent U. S.

Speaker 3

Tax legislation. We are evaluating the full impact of this legislation and we would expect to reflect any benefits in the third quarter. As for cash taxes, we expect approximately 70,000,000 to $75,000,000 this year. Taking all these sales and cost drivers into account, our GAAP net income was $39,300,000 or $0.32 per share in the 2025 compared to net income or $18,200,000 or $0.15 per share in the 2024. Adjusted earnings per share, which excludes the impact of items noted in our earnings press release was $0.21 per share in the 2025 compared to earnings per share of $0.19 for the 2024.

Speaker 3

Let's now move on to cash flow and the balance sheet. Net cash provided by operating activities for the 2025 was $91,900,000 compared to $142,800,000 in the 2024. Capital expenditures net of the proceeds from the sale of property plant and equipment for the 2025 were $52,900,000 Cash payments for restructuring and acquisition related activity for the 2025 were $9,700,000 Reflecting the impact of these activities, AAM's adjusted free cash flow was $48,700,000 in the 2025. From a debt leverage perspective, we ended the quarter with net debt of 2,000,000,000 and LTM adjusted EBITDA of $715,000,000 calculating a net leverage ratio of 2.8 times at 06/30/2025. We also maintained a strong cash position of nearly $600,000,000 AAM ended the quarter with total available liquidity of over $1,500,000,000 consisting of available cash and borrowing capacity on our global credit facilities.

Speaker 3

Before we dive a little deeper into our updated guidance, let's touch on tariffs. As a quick reminder, the following is our potential direct tariff exposure profile. Most of the products we ship to our customers in North America are USMCA compliant. Almost all of our AAM steel and aluminum consumed in North America is from U. S.-based sources.

Speaker 3

So we are generally in very good spot with these commodities. For our U. S. Operations, we import from Mexico approximately 100,000,000 on an annual basis, the majority of which is USMCA compliant. We import from Canada approximately $25,000,000 on an annual basis, the majority of which is also USMCA compliant.

Speaker 3

We directly import very little from China into The U. S. And therefore have very minimal exposures here. And lastly, AAM's rest of the world import exposures are approximately $100,000,000 of annualized values and we are working to mitigate these exposures plus any additional exposures our supply base may have while gaining clarity on final tariff agreements. Our intent is to mitigate a majority of incremental tariff costs, which include working with our OEM customers to receive recoveries.

Speaker 3

Given the nature of this process, the timing of recoveries can lag. As such, we incurred incremental tariff costs of approximately $10,000,000 in the second quarter. We are assuming to receive offsets starting in the second half of the year. We anticipate the full year 2025 net impact to be approximately 10,000,000 to $15,000,000 after mitigation and customer recoveries. With that background in place, let's talk about our guidance on Slide five.

Speaker 3

Our outlook has been adjusted from the previous targets, which were provided on May 2. Our updated targets are as follows: For sales, our new range is 5,750,000,000.00 to $5,950,000,000 versus $5,650,000,000 to $5,950,000,000 previously. This sales target is based on a North American production range of 14.6 to 15,100,000 units and certain assumptions for our key programs. We continue to anticipate GM's full size pickup and SUV production in the range of 1,300,000 to 1,400,000 units. From an EBITDA perspective, the range is now $695,000,000 to $745,000,000 versus $665,000,000 to $745,000,000 previously.

Speaker 3

We now anticipate adjusted free cash flow in the range of $175,000,000 to $215,000,000 Our CapEx assumption is unchanged at approximately 5% of sales as we run-in the organization for important upcoming launches, especially for one of our major truck programs. In addition, while not included in our adjusted free cash flow figures, we estimate our restructuring related cash payments for AAM as a standalone entity to continue to be in the range of 20,000,000 to $30,000,000 for 2025 as we look to further optimize our business and further reduce fixed costs. We underscore that the guidance figures we are providing today are on an AAM standalone pre combination basis and excludes any costs or expenses related to our announced Dolly transaction. AAM delivered good first half results and although second half includes some extended customer downtime, particularly in the third quarter and a slight uptick in the second half launch costs in preparation for upcoming programs, we are excited about our fundamental underlying performance improvements carrying into 2026. Simply, we expect continued improvement in both of our business units, further fixed cost reductions to align capacity and tightly controlled spending.

Speaker 3

In sum, these factors should benefit future periods. Thank you for your time and participation on the call today. I'm going to stop here and turn the call back over to David, so we can start the Q and A.

Speaker 1

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

Operator

Your first question today comes from Joe Sack with UBS. Please go ahead.

Speaker 4

Thanks. Good morning, everyone. Chris, maybe if we could just sort of get I know you should provide some of the overarching points for your guidance. Maybe just some thoughts on T1 production levels for the year, maybe even cadence in the back half given we've seen some of the downtime announcements that's allowed. But then if you look at S and P also looks like some pretty low levels in the fourth quarter, which maybe there's some upside to that.

Speaker 4

So just wondering how you're thinking about that for the back half of the year?

Speaker 3

Yes. No, great question, Joe. Obviously, that's a key platform for our business. As I mentioned in the prepared remarks, our range that we assume for the year is 1,300,000 to 1,400,000 units. You will face in terms of just cadence through the year, obviously, the first half of the year was pretty strong, almost about half

Speaker 2

of that was built at

Speaker 3

the high end, meaning closer to 700,000 in the first half of the year. The second half, obviously, would fall normal cadences associated with seasonality and production days Q3 versus Q4. And then lastly, as you mentioned, or maybe second to last, we did experience a little bit of some extra downtime pretty much already almost behind us here in the third quarter related to Salau. But that said, we are as a franchise quite bullish on that platform. If you think about the range we provided in the context of that, the HD platform continues to run very strong.

Speaker 3

The SUV platform continues to run very strong. You even see the light duty truck inventories only in the sixty day range at this point in time. So we continue to be bullish on that, but the cadence would follow probably more of the seasonality in terms of the second half. You can pick your macro number that

Speaker 5

you want to use for

Speaker 3

that and a little bit of downtime related to slough in the third quarter. Hopefully, that helps and provide some context for you.

Speaker 4

Yes. Thanks for that. And then just a second question, just sticking on GM, but want to tie in some other elements here with the longer tail for ICE and sort of their announcement to onshore some, especially T1 capacity to The U. S. How you're thinking about that for Axle?

Speaker 4

It seems like the incremental SUV production is almost unabashedly a positive, but wanted to get your point of view on that and whether even there is once the Dali deal closed, whether there's even an opportunity for some additional content from that onshoring?

Speaker 2

John, this is David. Obviously, Chris and you just talked about the QNX volumes. GM's announced product plans to shift some of their production around to The U. S. Operations.

Speaker 2

Clearly, we've got the flexibility and the capacity to be able to support that. We'll have to make some adjustments to our global operations to do that. But we're working with General Motors with respect to what needs to be done in that area there. So we're encouraged and pleased with that. Mean, policy is to buy and build local and our parts tend to be a little bit larger.

Speaker 2

So therefore we need to be closer in proximity to assembly plants and if GM shifting that production which they are then we need to make the necessary adjustments in concert with them and we'll do that. With respect to Dowling, assuming that everything closes in the fourth quarter, which is on track to do, it's just going to give us even more flexibility in The U. S. Or even globally to support all customers, not just GM, but all customers. And we do expect that there'll be some content gains for us on the T1XX based on Dolly's position on those programs.

Operator

The next question comes from Tom Narayan with RBC. Please go ahead.

Speaker 6

Hey, thanks for taking the questions. I remember you guys mentioning that there was some extra plant due diligence at Dallee that you still had yet to do and that that potentially could create some upside to the synergy total that you have. Just curious, I know you guys got the deal approval from the DALL E side, congrats on that. Just curious if where we were on that extra plant due diligence? And then I have a follow-up.

Speaker 6

Thanks.

Speaker 2

Yes, Todd, this is David. Good question. Now that we've got the shareholder approval from both sides, we're now able to spend more time with DALL E, get more information that we need in order to do the proper assessment on the manufacturing portion of the synergy side. We are also starting to get into more of their plants, which will give us an opportunity to have a better assessment of what that true opportunity is. We still feel that there's some upside potential there.

Speaker 2

We can't quantify that at this point in time. At the same time, on the purchasing side of things, clearly we're dealing with a challenge in an uncertain market with the tariffs and the policy changes. So we'll continue to manage that appropriately, but still feel confident about what we can do in the synergy area there based on what we've communicated already. But still ongoing, I guess, is the best way to answer it. But we're hopeful that there'll be incremental upside still on the operations side.

Speaker 6

Great. And my follow-up on tariff side, just quick housekeeping. The $10,000,000 in Q2 and then the total is 10,000,000 to 15 for the full year after mitigation recoveries. Just curious where that is coming from specifically? Is that that rest of the world piece?

Speaker 6

And then on tariffs in general, are you hearing maybe too early, but reshoring potentially now we have the EU, Korea, Japan deals done like have those OEMs talked at all about that with you guys?

Speaker 3

Thanks. Tom, this is Chris. I'll take the first part of your question as it relates to the $10,000,000 It comes from the majority of that is through rest of world scenarios in terms of how it finds our way into our U. S. Operations.

Speaker 3

That would be correct. It's not obviously, we are primarily USMCA compliant for our Mexico and Canadian imports. It's primarily rest of the world.

Speaker 2

And then Tom, this is David. In regards to the second part of your question, we are receiving several inquiries from many of the global OEMs that are looking to localize production capability or component capability to The U. S. To address the tariff issues that are out there. That's positive for us in regard especially for our metal forming business unit.

Speaker 2

But we're seeing it from the Europeans and all the Asians as well with respect to those inquiries. So it's still early, but we're working that process right now and hopefully we can conquest new business going forward.

Speaker 7

Great. Thank you.

Speaker 2

Thank you.

Operator

Next question comes from Itay Michaeli with TD Cowen. Please go ahead.

Speaker 8

Great. Thanks. Good morning, everybody. Just a bigger picture question. I'm curious what you think some of the changes in emissions regulations at the federal level and other levels could mean for American Axle over the next couple of years, both in terms of mix and just keep program volume.

Speaker 8

I'm curious if you've had discussions yet on that with some of your customers.

Speaker 2

So Itay, this is David. Obviously, as I said in my prepared remarks, first of all, the consumer has shown what their preference is for ICE and ICE hybrid type vehicles. But there's still a need for electrification. It's just that electrification demand is slowing down than what the prognosticators were saying. There's still significant progress being made on ICE vehicles and ICE and hybrid as it relates to fuel economy performance.

Speaker 2

As you all know, there was a significant bill associated with trying to convert things to electrification. So it's going to benefit not only the OEMs as far as less capital investment, but will also benefit the supply base including American Axle in regards to using our installed fixed capacity and leverage of our core components and our products that we have today. I just I still believe in electrification. I've always said that I think it's going to be adopted or accepted in The U. S.

Speaker 2

Market slower than it is in China or globally around the world. And that's really starting to play out and pan out the way we thought and the way we've planned our business. But at the same time, we have to be agnostic to the market from a propulsion standpoint and that's what we're doing is preparing ourselves where we have an extensive portfolio of ICE, hybrid and electrification and the Dahlia acquisition will just complement that and give us a more comprehensive portfolio there. But customer wise, I mean, they're evaluating everything as far as continuing to push ICE, looking at hybrids because there is an increased demand for hybrids and electrification. There's still a desire for electrification.

Speaker 2

Obviously, we wouldn't have gone after scout if we didn't think that there was a true market for that. But we're very encouraged with where we're seeing balance now in regards to the approach towards multiple propulsion systems.

Speaker 8

That's very helpful. Thank you, David. And as a quick follow-up, I think Chris you mentioned some launch costs second half of the year to support programs in 2026. Anyway you can roughly quantify what those launch costs, how we should think about them?

Speaker 3

Yes, would think about them at around 5,000,000 to $10,000,000 in the back half of the year versus let's say versus what we experienced in the first half. And it aligns with sort of our capital timing that we've been talking about as well.

Operator

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

Speaker 9

Hey guys, this is Jake on for James. So I just wanted to spend a second talking about the steel and aluminum tariffs. Could you discuss just first if there's any direct impact on your business? And then can you remind us what portion of your steel exposure is covered by contractual recoveries?

Speaker 3

Yes. James, this is Chris. In terms of steel and aluminum, primarily all of our steel and aluminum that we procure or consume inside The United States were procured from U. S. Sources.

Speaker 3

So we are largely exempt from any tariff exposures associated with that. There are some small tool steel type elements, but very minor that we would incur from that perspective. So I think we're in a really good spot as it relates to our primary production consumption of steel and aluminum. And the second part of your question was what? Recovery.

Speaker 3

Recovery. So the primary element of recovery is all the commodity pass throughs in terms of the input costs to our steel is passed along to our customers by contract either every thirty days or ninety days depending on the customer. So we're primarily covered, call it, percent to 90% in terms of those cost increases or decreases we would pass through as well. And those markets surprisingly have been relatively stable the last quarter or so.

Speaker 9

Got it. Thank you. And then, obviously, the SCOUT award is a pretty significant validation of of your ABN capability. Are you able to share whether you guys are also able to leverage your proprietary eDrive in the program or whether it's leveraging more off the shelf parts?

Speaker 3

Thanks. No.

Speaker 2

We clearly leveraged our IP and our own capability. At the same time, we work closely with the Scout team and the VW Group in regards to what they were looking for, At the same time, we're going to continue to make investments in electrification, but on a balanced basis. We just want to make sure we have a comprehensive proposal that gives us the vertical integration capability that can satisfy customer needs, whether it's components sub assembly or the full complete systems. And in this case, we're winning complete systems with respect to both e beam and EDUs. So very big win for us.

Speaker 2

Validation of our technology and capability, at the same time, sends the message to the marketplace that we do have the ability to satisfy ICE, hybrid and electrification.

Speaker 3

Thanks guys. Thank you.

Operator

The next question comes from Edison Yu with Deutsche Bank. Please go ahead.

Speaker 9

Hey, good morning. Thanks for taking our questions. Want to ask about Europe. Obviously, the acquisition, you're going to

Speaker 3

be much

Speaker 9

more deeper and have much higher much more business there. What's the latest thinking, I guess, on just the market getting more into that market and also kind of the regulatory backdrop of that? Yes. This is David.

Speaker 2

Listen, we're very excited about the acquisition of Dalloy. The strategic combination is very powerful. As we indicated, it's going to give us more balance from our customer diversification and geographic diversification. We're heavily concentrated in North America as a standalone, meaning AM. We'll get more balanced with the DOLA combination.

Speaker 2

But Europe becomes approximately 30% plus of our overall business. We recognize that market is challenged right now. It's down from where it typically runs in the 20,000,000, 22,000,000 units. It's down running 17,000,000, 18,000,000 units. We recognize some of the restructuring going on there, but Dahle is very well positioned with their customers there from a product standpoint.

Speaker 2

At the same time, as you're aware, Dahle has been going through some of their own restructuring efforts on the automotive side of their business, both in North America as well as in Europe. And they are close to completing that. So we're actually getting a hold of this business at the appropriate time. And what we're going to be able to do is bring a more comprehensive and expansive portfolio to those markets, which will allow us to hopefully cross sell capabilities with customers there. At the same time, we'll continue to look at our portfolio and our manufacturing locations as well as theirs.

Speaker 2

If there's further optimization that we can do to get better utilization of the factories and drive more synergies, then we'll pursue that as well. But we're very excited about how they're positioned themselves in Europe and how we're positioned in Europe knowing that we're still doing some restructuring ourselves there based on the Techfor acquisition. But overall, I think we'll be very well positioned to satisfy the European market on a go forward basis.

Speaker 9

Understood. Understood. Then just, I guess, a logistical housekeeping question on the deal. I think the shareholder vote happened a bit sooner, maybe a couple of months sooner than you may have thought. Is that fair?

Speaker 9

Or was the timing actually on track, the shareholder votes?

Speaker 2

No. The timing was on track. So we had our shareholder approval on July 15. They had theirs on July 22. We were able to do a number of shareholder meetings, both in The U.

Speaker 2

S. As well as in Europe to support those votes. And obviously, they came back unanimously in favor of the deal both shareholders, which was a strong message in itself. So it supports our thesis of strategically bringing these businesses together to deal with uncertainty in the marketplace, which only continues to become larger a larger issue. And I think we'll be stronger when it's all said and done when we come together.

Speaker 2

So very excited about the combination, but everything was on track.

Speaker 4

Okay, great. Thank you.

Speaker 3

Thank you. Thanks, guys.

Operator

The next question comes from Federico Marendi with Bank of America. Please go ahead.

Speaker 7

Hi, good morning, guys.

Speaker 2

Good morning.

Speaker 7

I have a question on the free cash flow generation in the second half of the year. So if I look at the EBITDA, it's largely flat first half versus second half, but there is a meaningful step up in free cash flow. What is driving that?

Speaker 3

Federico, this is Chris. Good morning. Yes. In terms of our free cash flow profile, very customary for us through the course of our four quarters each year, we would have a it's primarily focused on the working capital element of our business. Generally speaking, we have a large outflow in the first quarter.

Speaker 3

We have a large inflow in the fourth quarter and that principally relates to the timing of our sales, how you're ramping down sales through the fourth quarter into the Christmas holidays, the opposite tapping in the first quarter where you're ramping up on those two generally what's typically a stronger March. So you would have a stronger fourth quarter working capital element, think of receivables primarily. The other element inside of that is we continue to anticipate some strength in our working capital cash conversion as it relates to inventory in the back half versus the first half. So that will also drive some cash flow for us. The rest of the elements CapEx, a little bit heavier weighted in the second half.

Speaker 3

Obviously, your profitability flow through as well will be very similar each of these periods. But it's principally that working capital piece that I mentioned.

Speaker 7

Got it. Thank you. And on a more long term perspective on free cash flow, I mean, it's all positive that you're getting quotes from customers around the world that they may relocate to The U. S. And GM is potentially moving some production into The U.

Speaker 7

S. But I would assume that you guys have to put more capital in the business. And I was wondering how should we think about cash flow generation in the future post deal closure and the deleveraging portion of the story?

Speaker 3

Yes. I'll take that sort of the capital piece of this, you think about it. If you look at some of our recent materials that we have published, especially in relation to our combination with Dowling and the cash flow generation potential of the company is significant. But it also brings us greater capacity and scale that allows us to pivot with some of our customers moves inside of whatever they decide to put their production, whether it's in Europe or in U. S, we'll have a greater footprint to leverage, which will require then less capital intensity for some of those changes as well.

Speaker 3

But we still continue to see a very strong free cash flow generating capability of a standalone American Axle and we would expect to have that in even greater scale when we combine with Dollar A even accommodating some of the elements that you just described.

Speaker 4

Thank you.

Operator

The last question today comes from Doug Carson with Bank of America. Please go ahead.

Speaker 5

Hi, guys. Thanks for sneaking me in here. Nice work this quarter.

Speaker 4

Thanks Doug.

Speaker 5

Don't want to get ahead of myself, but we definitely have bondholders on the call here. Maybe just help refresh us of how you envision the balance sheet with this acquisition. Obviously, it close to doubles the size of the company, which is a positive typically for credit investors. But maybe just kind of touch again on the balance sheet and maybe perhaps what type of capital investment you may need and how it affect your cash flow to kind of get this business where you want it in next few years?

Speaker 3

Yes, guess we'll start in reverse in terms of the cash flow. I guess I would tie in a little bit to the commentary of the previous question. We would expect to continue to have very strong cash flow as it relates for the combined entity. If you look at some of our materials on a pro form a basis based on our 2023 and 2024 historical performance, we're running near approximately 5% of revenue. So with the synergies involved in that number as well and it's pretty powerful combined group to generate from a cash flow perspective.

Speaker 3

But look, we'll go to market here to take out our final financing leg here to continue to strengthen our balance sheet and finance the transaction. I think we will bring on some additional debt to do so. But our goal is to deleverage quickly, especially in terms of the first couple of steps. Our primary goal will be to strengthen the balance sheet as we come out of the combined combination using that cash flow. And then after we get towards our target of 2.5 times of our intermediate step, we'll then expand our capital allocation a little bit broader.

Speaker 3

But our focus will continue to be to strengthen that balance sheet and continue to grind down that leverage ratio back on the back of our strong EBITDA performance and our cash flow generation.

Speaker 5

That's helpful. And have you guys come out with a range of where leverage would go kind of post closure? I think your leverage has been coming down over the last few years following the story. And I guess I just wanted to make sure I wasn't missing where leverage is expected to be after the close. I think your net debt right now is $2,000,000,000 and net leverage ratio is 2.8.

Speaker 5

So just wondering if we have a sense of kind of just a rough framework of where it would be upon a post close.

Speaker 3

Yes. When we announced the transaction earlier in the year, we were just under three sort of that 2.8, 2.9 times depending on the quarter. And we are driving towards trying to be approximately leverage neutral at close. Obviously, guidance of both companies has moved around a little bit here this year, but that is still what we're striving for. And that would be at close on an actual basis.

Speaker 2

Doug, this is David. As a standalone company, we've said that we wanted to try to work our way towards less than two times. With DALL E, we're going to continue to work towards two times. But we also said that because we're going to have a larger company and more robust business model that when we got to that approximately 2.5 times or less, then we would essentially reevaluate our capital allocation opportunities including shareholder friendly activity. So that would be the only kind of real change to the current strategy that AAM has.

Speaker 2

But we're going to continue to focus on paying down debt. We're going to generate a lot of cash from the combined business with the synergies, which is going to open up the opportunity for us to have more opportunities on the capital allocation side.

Speaker 5

Right. Does this sum it up? So I got it straight and thank you for that. So let the net leverage coming out of the close of transaction about where we are now and then you're grinding that down as a priority to around 2.5 and then going forward once at 2.5 given the company will be larger than redeploying capital perhaps elsewhere?

Speaker 2

Right on. Yes.

Speaker 5

All right. Thank you, guys. I appreciate it.

Speaker 2

Yes. Thanks, Doug.

Speaker 1

Thank you, Doug. And that concludes the question and answer session of the call. 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.

Operator

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

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