American Axle at Wolfe Research Summit: Merger and Market Strategies

On Tuesday, 18 March 2025, American Axle & Manufacturing (NYSE: AXL) presented at the Wolfe Research Virtual Autos Summit, offering insights into its 2024 performance and future strategies. The company discussed its robust financial results, strategic merger plans with DAOLE, and the challenges and opportunities in the automotive market. While the merger promises growth and diversification, the company also faces market fluctuations and tariff concerns.

Key Takeaways

• American Axle reported a strong 2024 with a 12.2% adjusted EBITDA margin and significant cash flow.
• The proposed merger with DAOLE is expected to create a combined entity with nearly $12 billion in revenue.
• The company is focusing on mitigating tariff impacts through regionalized production.
• There is a shift in quotation activity towards ICE and hybrid applications.
• American Axle plans to prioritize debt reduction post-merger before considering shareholder returns.

Financial Results

• 2024 Adjusted EBITDA Margin: 12.2%
• 2024 Adjusted EBITDA: Approximately $749 million
• 2024 Cash Flow Generation: Over $230 million
• Projected combined revenue with DAOLE: Nearly $12 billion
• Potential combined adjusted free cash flow: Nearly $600 million annually
• Synergy Target: $300 million within three years, with 60% realized within the first 24 months
• R&D Spend: 2025 R&D spending is expected to decrease by $20 million compared to the previous year
• Debt Reduction: $1.6 billion debt paydown since MPG acquisition in 2017

Operational Updates

• DAOLE Merger Progress: Bridge syndication and credit agreement amendments complete, with regulatory filings progressing
• 2025 Outlook: Q1 sales expected to be the lowest due to early January downtime at customer truck plants
• New Business: Resurgence in quotation activity, with $1.5 billion in new business being quoted
• Sourcing Shift: 75% of quotation activity now focuses on ICE or hybrid applications
• Tariff Mitigation: Emphasizing regional production to reduce tariff impacts
• Vertical Integration: Synergies anticipated from insourcing and vertical integration

Future Outlook

• Minimal exposure to steel and aluminum tariffs due to sourcing from U.S. suppliers
• Confidence in achieving $300 million in synergies from the DAOLE merger
• GM full-size pickup truck production volume expected at 1.4 million units for 2025
• Diversification through the DAOLE merger, adding exposure to Toyota and Volkswagen
• Strengthened position in electrification with combined technical capabilities
• Capital Allocation: Focus on debt reduction until a leverage target of 2.5 times is reached
• R&D Spending: Potential decline in spending over time without significant new programs
• China Market: Continued trend towards domestic conversion of the revenue base

Q&A Highlights

• Tariff Exposure: Minimal imports from China, with $25 million from Canada and $150 million from Mexico annually
• Reshoring: Potential for reshoring production to the U.S., dependent on customer decisions
• Synergy Confidence: Strong confidence in realizing $300 million in synergies, supported by Deloitte
• Free Cash Flow: Strong potential for nearly $600 million in annual free cash flow
• DAOLE Restructuring: Restructuring activities winding down in 2025, enhancing cash flow potential in 2026
• Shareholder Feedback: Limited feedback due to UK regulations
• North American Truck Market: Merger strengthens presence in the North American truck market

American Axle’s strategic focus on merger synergies and market positioning sets the stage for future growth. For more detailed insights, readers can refer to the full transcript below.

Full transcript - Wolfe Research Virtual Autos Summit:

Emmanuel, Analyst, Wolf Research: As well as the heavy duty ramp. Now American Axle could evolve significantly in the next few years with its planned merger with Dallas, the legacy GKN driveline unit, which would materially shift its customer and geographic mix. While the market’s initial reaction to the deal has been mixed, the potential synergies along with the earnings and free cash flow upside could be substantial. So to discuss this and American Axle’s broader outlook, we’re very happy to welcome CFO Chris May along with David and Joe from Investor Relations. Gentlemen, thank you so much for being with us.

Chris May, CFO, American Axle: Thanks. Thank you, Emmanuel. Glad to be here.

Emmanuel, Analyst, Wolf Research: So maybe just to kick it off, Chris, we’d like to offer some opening remarks and then, you know, we’re most of the way through Q1. You know, how are business conditions tracking in general?

Chris May, CFO, American Axle: Sure. Yeah. So I’ll start with a few prepared remarks, and then, like you said, we’ll dive into, I would, surmise a lot of questions you you have on your mind and others may have on their mind that are listening in here today. So first and foremost, thank you, Emmanuel and Wolf Research to hosting this event. We look forward to the conversations we’re gonna have today.

It’s always a great way to connect with yourself as well as key interested parties in AAM. I would also remind everybody to take a look at our website for our forward looking statement information for items we’re gonna talk about today, and of course you can find that at www.aam.com. I think the start of the year, as I would describe for American Axle, has been quite frankly very exciting. So we ended 2024 on a strong note, 12.2% adjusted EBITDA margins, nearly $749,000,000 in adjusted EBITDA, and also closed out the year with a strong cash flow generation of over $230,000,000 So great way to end 2024 and really start to set up 2025 for success. Our Q4 earnings and full year 2024 earnings weren’t the only exciting news that we talked about about in the first part of this year.

As you know, at the January, that Emmanuel referred to, we announced on January 29 our transformational combination with DAOLE. This was really centered around strong industrial logic with the complementary product portfolio of these two companies bringing together a global driveline and metal forming supplier. We’re going to leverage the strength of new significant size and scale. On a combined basis. We’re nearly $12,000,000,000 in revenue.

We’re going to diversify our customer and geographic revenue mix, and we’re certainly going to leverage about $300,000,000 of key synergies we see as part of this transaction, and I’m sure we’ll get into some more of those questions and dialogue as we go along. And if you take that, put it all together, package it up, this company is going to have potential for very high cash flow, very high margins, and you can see some illustrative analysis in some of our investor materials with combined cash flow generation potential of nearly $600,000,000 each year. So that’s exciting stuff. Those are benchmark numbers. We’re really looking forward to this transaction.

And as we continued on since our announcement in January 29, we’re making great progress. Our bridge syndication is done. Our credit agreement amendments are done. Obviously, we’ll go to the market to finance the transaction near the close time frame, which we’re looking to close near the end of this year. And our regulatory filings are tracking right on progress.

We filed with The United States. We’ve cleared the waiting periods. We put out a press release to that effect last week. So making great progress on all fronts to advance this transaction. So that’s exciting.

We’ll talk more about that, like I said, in a few moments. As it relates to 2025 commentary, you teed this up a little bit, Emmanuel. We provided our initial guidance for the year in mid February at our earnings call. We also provided some initial commentary in terms of cadence of calendar year 2025, where we would expect to see first quarter sales on a sales per production day basis probably the lowest of the year. We experienced downtime in early January with several of our key customers, including some of their truck plants.

And on a year over year basis, S and P Global and others, as you know, have production down. And we are experiencing just as we described on our earnings call here inside the first quarter. And as you know, production is a primary driver for our EBITDA and our cadence of profitability. So keep that in mind as we continue to kind of work through the course of 2025. With that said, we made great progress on closing the transaction.

We’re setting up here for 2025, as I just discussed. The ICE for longer environment, very good for AAM. We’ll talk a little bit about some of our quotation activity, I would suspect, through some of our Q and A. But as a company, we’re focused on our core productivity, we’re focused on 2025, we’re seeing increased activity in our quotation activity for our core business. So it’s going to be an exciting year.

I know ’25 is going to have some challenges. I think we all know the macro that swirls around us, but it’s going to be a very exciting year here for AM. So maybe with that, I’ll pause, turn it back over to you, Emmanuel, and see if you have any questions you wanna take a little bit of a deeper dive into.

Emmanuel, Analyst, Wolf Research: Yeah. No, thanks so much, Chris, for this overview. So for the full year, you’ve guided to revenue down a bit with backlog essentially offset by attrition and then some negative volume mix effect. Can you first remind us what drives this volume outlook?

Chris May, CFO, American Axle: Sure. Yeah. The underpinnings of our guidance that we released at our earnings call time from a macro perspective really centered around so think of our midpoint of our guide at the time, North America production around 15,100,000 units. And I know S and P Global updated some of their views yesterday. It’s still pretty close to that, but a tad bit softer, but 15,100,000 units was our assumption for North America production.

The GM full size pickup truck, commonly referred to as the T1XX platform, that’s a critical platform for our company. We to 1,400,000 units for the year of 2025. And of course, like most of our peers, as well as our customers, this does not include the impact of any tariffs or any of those type of ramifications from a macro perspective. But that’s the underpinnings of our revenue guide for the year and corresponding profitability.

Emmanuel, Analyst, Wolf Research: And then on the new business side, you’ve commented that there is a bit of an air pocket as the OEMs reassess their plans. Can you elaborate for us?

Chris May, CFO, American Axle: Yes. Yeah, we’ve experienced this air pocket now, and that’s a term I think we started to use maybe a year or so ago, as I would say a level of uncertainty emerged, I was in the macro and impacting clearly our customers in terms of propulsive trends, whether they’re regulatory elements that they’re facing, customer adoption, capital investments, and you saw a slowing of of sourcing of new programs. And that’s why I think you found ourselves as well as others of our peers really not announcing new business wins. We started to see that change a little bit here now with the U. S.

Elections clearing in the fall of last year. It sort of has now started to kind of reignite additional interest in program extensions, new programs to quote on. Now it’s not fully where it was several years ago, but it’s now starting to come back to life. You’re starting to see us make some announcements on our extensions, like we talked about the Bronco Sport. We now were aware of that extension.

We talked about that in our last earnings call. And our active quotation activity is about a billion and a half of new business. If you remember that number sounds familiar, that’s something we were quoting on a couple years back. Most of that a couple of years back was related to electrification. Now we’ve seen the complete inverse of that.

Nearly 75% of our quotation activity is on ICE or hybrid applications versus electrification. So it’s starting to come back. We did have that air pocket, but we’re certainly starting to excited to see some of the trends we’re seeing with our customers.

Emmanuel, Analyst, Wolf Research: Let’s shift to tariffs a little bit. Can you just remind us what is your exposure to potential US tariffs, both in terms of your products and inputs that are crossing the border and also in terms of materials economics? And then what pass through mechanism are already in place?

Chris May, CFO, American Axle: Sure. I think it would be fair to start though, as we think about tariffs at AM, you know, what’s our principal mitigation activity? We talked a lot about this, Mac, when this was a hot topic in, call it, 2017, ’20 ’18 timeframe. And our core company philosophy has been and continues to be to build and buy in the region that we support our customers. And that’s helped mitigate us from some level of tariff impacts historically, also continues to help mitigate us to date from some of these impacts.

So that’s key. I think I should dimensionalize a little bit of our potential exposures that we have. I think you’ll find some this approach of regionalization and building by local is protecting us from some of that. But let me share some data points here with you because I think this would be beneficial to you and those listening. From a steel and aluminum perspective inside The United States, we have very minimal direct exposure as we source most of our steel and aluminum from U.

S. Source suppliers. So that’s very positive for us. As it relates to China imports into North America, our core North or into The United States, our core U. S.

Operations import very minimal amounts from China. So again, that localization has proved very beneficial to protecting us from these elements. From a Canadian perspective, we import about $25,000,000 worth of product into The United States from Canada. And of course, from Mexico, we import about $150,000,000 worth of products throughout the course of a full year. So that’s a little bit of our content exposure in the North America region.

A key element for us also to keep in mind, as you know, a large part of our operations is our Mexico driveline facility. It’s the largest one we have inside the company. And about 70% of the product that we ship out of our Mexico facility ends up in Mexico based OEM facility. So I think that’s a key factor to keep in mind. And generally speaking, across the entire spectrum, our finished product that ends up on our docks, our customers take delivery at our docks and then are therefore responsible to handle any of the freight duties and customs from there.

So I think those are some key benchmarks to think about as you think about our company as it relates to tariffs. Obviously, this is a very active topic, a lot changing every day. You know, early April brings on another dimension to this, and we’ll see how that plays out. I think it’d be too early to make any calls one way or the other, but hopefully that that information helps dimensionalize our exposures there and and the and the positive things we’re doing to help mitigate

Emmanuel, Analyst, Wolf Research: it. Yeah. And then on the, the material economics, can you just remind us if, you know, the net impact of all this is to essentially raise the market price of some of these metals? Responsibility versus, the the automakers?

Chris May, CFO, American Axle: Sure. As it relates to tariff, there’s not an automatic pass through. That’s something you’d have to have a discussion with in terms of dialogue with your customer. But to the extent it would disrupt or cause changes in pricing for commodity based inputs that we buy into our components, so think of things such as scrap metal, nickel, moly, etcetera, as well as aluminum, to the extent spot index related charges for those occur, that dynamic is passed up and down to the customer whether favorable or unfavorable each month or each quarter based on contractual arrangements. Now that’s the commodity element of our business.

So we are insulated from some of that, and we do talk about that. We do try to show those on our quarter over quarter bridges that we release each quarter as well, and you’ll see that dynamic play out.

Emmanuel, Analyst, Wolf Research: And then longer term, do you see a scenario where American Axle or your customers would reshore production to The US? Do you have room or capacity to do that? And what would the impact be?

Chris May, CFO, American Axle: Yeah. Well, look, that’s a great question. I think it’s very topical today, especially given the macro discussions that we’re talking about as it relates to tariffs and the consequences with those. But of course, at the end of the day, our customers would have to ultimately make those decisions to direct traffic and direct sourcing requirements because they source us a product and they source from particular locations for that product. So then they have to take a look at their entire supply chain and balance cost structures, balance logistics, balance how they want to handle exports outside The United States.

So these would all have to come into play as part of that analysis. As you would imagine, it’s a complicated equation, but certainly could see some reshoring back into The U. S. As it relates to us, meaning American Axle, we do have some limited capacity, certainly to accommodate some, especially on machining and forging. Our driveline systems are generally custom assembly lines to support our customers in the particular regions.

You heard me articulate a little bit, for example, our Mexico supporting Mexico operations. Our driveline facilities in The U. S. Are supporting U. S.

Operations predominantly. So we’d have to kind of work through that logistics with the customer. At the end of the day, can it be done? Absolutely. It would take certainly time to do, as well as some investment dollars to relocate these facilities, whether ours or our customers.

Emmanuel, Analyst, Wolf Research: And then shifting gears to the proposed merger. For investors that are less familiar, can you walk us through the industrial logic behind the merger with Thales?

Chris May, CFO, American Axle: Yeah, absolutely. And this is, you know, this is something, as I indicated in my prepared remarks at the beginning, this is a transaction we are highly excited for, and it really starts with the industrial logic supporting this transaction. It’s very clear to us, it’s very evident. The feedback we receive is also very similar. But at the end of the day, right, we are creating a global driveline and metal form supplier, significant size and scale, nearly $12,000,000,000 of combined revenues.

That’s important not only for some of the Synergies achievement, but it’s important as we continue to advance forward and grow our business. Our view is the size and scale will allow us to not only leverage our existing product set today, but also make the appropriate investments and have the resources, both dollars and capability and technical and capacity, to pivot into the world of electrification over the next couple of decades. So we think that’s a critical factor for us in terms of us facing future growth. Also, it brings from an industrial logic perspective diversifying our customer base and our geographic base. As you know, American Axle is overweight to the big three in The United States and clearly overweight to North America from a revenue perspective.

This will bring much more balance to our top line revenue. We’ll still remain, by the way, the largest, probably one of the largest exposures into North America in the supply base, so that’s great. We certainly like that fact. But it will also allow us to gain, I would call it exposures and relationships to new customers that we have very little exposure to today, names such as Toyota and Volkswagen. So very exciting from that perspective.

And of course, the economics of the synergies, the cash flow generation power, the margin potential, really brings home this industrial logic of this transaction.

Emmanuel, Analyst, Wolf Research: What’s been the shareholder feedback on both the American Axle and on the Dallas side around the proposed merger?

Chris May, CFO, American Axle: Yeah. No. Great question. I I would love to give you some some feedback on that. Unfortunately, due to, UK regulations, we are prohibited, from providing direct feedback on your question.

It’s a great question. Unfortunately, I I cannot provide you a response to that question.

Emmanuel, Analyst, Wolf Research: Understood. But just just in terms of understanding the, the mechanics, like, is this is this subject to a shareholder vote?

Chris May, CFO, American Axle: Oh, okay. So, yeah, from a mechanic standpoint, yes. It is subject to really a couple elements, a shareholder vote on both sides, meaning, Axle shareholders as well as Dowley shareholders, and of course, working through the remainder of our regulatory processes and clearances around the world. And that’s what will take course through the balance of the year and we’re tracking very positive on that fund.

Emmanuel, Analyst, Wolf Research: Great. Now your free cash outlook this year represents roughly 40% free cash flow yield at current valuation. And combined with the deleveraging, many investors saw a clear path to strong value creation. Now adding over $2,000,000,000 of new debt for DAO, which generated just limited amount of free cash flow last year, makes the pass through value creation perhaps a little bit more difficult. So can you maybe just walk through some of these combined free cash flow dynamics?

Chris May, CFO, American Axle: Yeah, no, look, I think the free cash flow story of this combination is very exciting, it’s very compelling. You know, we’ve provided some materials in our Investor Relations presentations you can find on our website, you can see some of the data that I’m gonna share here with you, if you wanna look at it in more detail. But in terms of the cash flow generating power, you think we might adjust it free cash flow as we articulate our cash flow. The combined companies over the last two years have delivered nearly $400,000,000 of adjusted free cash flow. That would be before restructuring, and we’ll come back to restructuring in a minute because that’s a key piece of this story as well.

So this combined cash flow plus the power of our future synergy achievement, which as we just talked about was $300,000,000 plus you’ll obviously have some taxes and associated interests, you made some remarks under new debt, will get us close to almost $600,000,000 of adjusted free cash flow generating power of this combined company. So I think that’s very compelling. I think it’s very exciting. It’s a big number. It’s nearly 5% of sales from a market cap perspective, also a high percentage, as you know.

So that’s the underpinning of it. In terms of some of the recent dynamics in terms of cash flow of both companies, I think we’ve talked about ours and all our public commentary and our earnings call and year end update pretty clearly. As it relates to DAHLI, they’ve been experiencing over the last couple of years making investments in restructuring a lot of their business, which has consumed some cash. So you see, where they do not provide an adjusted cash flow number, they have just a true cash flow number after restructuring, as they’ve been relocating many of their facilities, converting them from the high cost countries to best cost countries and optimizing their footprint. They’ve reduced or reduced a lot of their spend inside of Europe, also the same in The United States.

And here’s what’s the great thing about this, Emmanuel, and I think this is a little bit underappreciated. I think people are looking at historical data and not realizing what it’s going to be into the future. Number one, the $600,000,000 But two, as Dalla indicated on their most recent earnings call and some of their annual announcements, their restructuring endeavors are starting to wind down here in 2025, meaning that consumption of cash. So this is all going to start to convert to just true cash flow generating power and all the benefits of this restructuring activity that they’ve done over the last couple of years will start to contribute to the combined company in 2026 and beyond. So I think that’s a really key piece of information people need to appreciate as they look at the data historically, but also think about where we are going in that trajectory from a cash flow perspective.

Emmanuel, Analyst, Wolf Research: Definitely. So correct me if I’m wrong, but the, so I think Dallas spent $140,000,000 on restructuring, last year. I thought this year is they’re planning something like 160. You’re saying beyond beyond this year, you know, the the amount would essentially taper off or or most of these actions are would be substantially complete beyond 2025?

Chris May, CFO, American Axle: Yeah. They they they indicated in their public remarks that the their their major restructuring activities are starting to wind down. Now look, we’re in the auto space. As you know, we will continue to restrict both them and us, as well as all our peers. We’ll continue to have some element of restructuring as we optimize our business and rationalize capacity over time.

But some of the major stepping stones that they’ve been working on over the last couple of years are winding down per their remarks.

Emmanuel, Analyst, Wolf Research: And then the synergies are expected to be $300,000,000 within three years with 60% in the first twenty four months, half of which from purchasing. Given, you know, broadly OEMs often absorb, you know, supplier cost savings, especially when it comes from, you know, purchasing, you know, how confident are you in realizing these purchasing synergies?

Chris May, CFO, American Axle: Look, we’re very confident. We went through that we had to go through to acquire a UK company and provide a synergy estimate. It’s different in The UK than what we would experience typically in The US. And what do I mean by that? We have to go through a synergy assessment process.

We work jointly with DAHLI to work through our best estimates. In some cases, we need clean rooms, especially on sensitive purchasing data, work through our best estimate. But as a part of The UK process, we also are required to have an opinion from a third party, that being an auditor. And in this case, we used Deloitte. And you can see their reports on our website as part of this transaction, where they go through our assessment and provide an opinion on the synergy attainment value that it’s realizable.

Obviously, you have to achieve it and accomplish it in the future, but the methodology, the estimates, and that it’s incremental to your existing book of business today, meaning on top of your current plans of both companies. So the process itself is fairly robust in The UK, First and foremost. But secondly, let’s peel back a little bit about take a little deeper dive into your commentary as it relates to purchasing. This is the largest piece of our synergies, about 50% of our synergy savings we have in the, I’ll call it, purchasing bucket or area. But you have to break that down even further.

So think about some of the industrial logic we talked about in terms of the company being the size and scale. One of the key elements of that size and scale, not only for the revenue growth of the company, but it also brings our ability to have size and scale and buying power with our supply base. So we clearly see opportunities set there in terms of, call it, supplier price reductions because we’re able to bring a a larger or scaled buy to the supply base. I think that’s a win win for both sides in terms of the supply base as well as us. In addition, with now a larger footprint, the opportunity to, I’ll call it, rationalize our global logistics and supply chain elements will also provide some synergy opportunities.

And then lastly, and almost I’ll say almost exclusively within our control is, as you know, Emmanuel, as very well, we have benefited from a vertical integration style company for really since day one. There’s a key element of our synergy savings associated with vertical integration and you’re going to say, well, what does that mean? We’ll also refer to this as insourcing. We, as you know, stand alone axle is the largest automotive forger in the world. DAOLE procures a lot of forgings on the outside, natural fit for us from a potential vertical integration.

We, meaning American Axle today, standalone is in the powdered metal business. We buy some of our raw powder from DAHLY today. And DAHLY is the second largest producer of raw powder in the world. We have further insourcing vertical integration opportunities in that area as well. Again, these are elements inside of our control.

None of them really have to do with the OEMs. So, yeah, so we’re confident in our ability to deliver the holistic $300,000,000 of synergies and we are confident as we think about the opportunity set that sits in front of us as it relates to purchasing. Probably a long winded answer, but I think some of the extra details in that space is probably worth sharing with you. Yeah.

Emmanuel, Analyst, Wolf Research: It’s good color. And then so in this context, what level of synergies would you expect in year one?

Chris May, CFO, American Axle: Yeah. Look, starting fast is certainly a key for success on these type of endeavors. I think in year one, you would see some of the traditional elements in terms of savings, so think of elimination of public company costs, attacking some key SG and A synergies, you know, you have duplicate departments, if you will, when you bring the two companies together from an SG and A perspective, those you’ll get at pretty quickly. The same with a similar concept with our product engineering spend, we’ll have some duplication we can rationalize quickly. And then some of those insourcing slash vertical integration capabilities, we should be able to get at sooner rather than later as well.

But again, getting a fast start is key. We’ve been talking about it as a management team. We’re working on making sure we set the structure up to do that.

Emmanuel, Analyst, Wolf Research: And then to the extent the, you know, the the process around these 300,000,000 is pretty robust. I assume that there’s some level of conservatism, you know, embedded in it. Now that you’ve had a chance to do, you know, more diligence, maybe on some of the facilities, have you identified any sources of potential upside to some of these targets?

Chris May, CFO, American Axle: Yeah. I think it would be a little early in our process to declare upside. But what I would tell you is, and I think you kind of hit on the point, we’ve articulated, David Dow, our CEO articulated when we made the announcement, we have not had access to their facilities. We, since that timeframe, has started to now go into some of their facilities jointly with the DAOLE team. And if you look at our synergy set of the $300,000,000 only 20% of that $300,000,000 relates to our operations, whether it’s operational improvement or capacity rationalization.

And as you know, we’re well known as an operating company, and that’s where a key strength of American Axle sits. But it’s also a key strength of DOWLY, to be frank. So initial signs getting into the facilities, having some dialogues, you know, leveraging the strength of best of the best operating systems for system wide efficiencies, you know, is starting to look positive. Same with us now starting to assess the capacity rationalization and opportunity set there. So I would say very early days.

Again, too early to comment on any upside, but in terms of opportunity set inside that bucket, you know, we’re pretty excited about. Long way to go yet, but early signs is we’re excited about the opportunities that sit inside that bucket.

Emmanuel, Analyst, Wolf Research: Now, one of the big benefits you’ve highlighted is diversification. But, you know, from the outside, it would look like American Axle is in a way diversifying away from North American trucks, which is one of these industry one of the auto industry’s most profitable and stable programs, towards maybe a tougher global market. Can you just explain the rationale?

Chris May, CFO, American Axle: Yeah. Look, I hear your comment, and of course, as you know, we certainly love our North America truck market. We’re not shy about our passion for that segment. I wouldn’t say we’re diversifying away from it. I would tell you we are building upon it.

And what does that mean? Clearly, the core franchise of American Axle will remain intact. We’re bringing on with this combination the strong franchise of side shafts, also commonly referred to as half shafts in the marketplace of DAOLE. And of course, half shafts and side shafts, they also go on trucks, by the way, in North America. So we’re continuing to build upon that.

But that also gives us a whole other set of vehicle applications that we can grow into globally: crossover vehicles, light truck, passenger cars. So we’re excited to bring that piece in as well. So I wouldn’t say we’re a diversifying, we’re building upon it.

Emmanuel, Analyst, Wolf Research: And then how does this deal change your positioning in electrification and also in hybrids?

Chris May, CFO, American Axle: Yeah, look, as we think about electrification in this transaction, this, in our view, improves our positioning. As you know, we have a pretty good electrification franchise. We’ve been winning in China. We’ve, as you know, in Europe in terms of AMG and other products as a standalone AM company, as well as from a components standpoint. And we’ve announced a fair amount of component wins over the last couple of years.

In terms of look at the DALI side of the equation, they’re in a lot of vehicles as it relates to DRIVE units and have made investments in that space as well. So we bring these together, we bring strong technical capabilities together, we bring strong global reach together, different customer mix in terms of where we’ve penetrated from electrification. And now we have a strong product set from drive units, E beams, components, and a very capable, I’ll call it engineering community inside the company now when we combine them together to continue to design and develop some of the best products in the world. So I think it strengthens our position. And again, it goes back to a little bit of that industrial logic of size and scale as we face the pivot to electrification over the next couple of decades and the growth associated with that, we think this is a key piece of this transaction in terms of how we will face in and benefit from that, our combined positioning to grow the company going forward.

Emmanuel, Analyst, Wolf Research: And now with greater exposure to China, what will be your mix between global and local Chinese customers?

Chris May, CFO, American Axle: Yeah, that’s another very interesting and great question. That’s clearly a trend inside the China market. We’ve experienced it as our wholly owned operations, which on a relative scale are quite small inside of American Axle. It’s about 5% of our business. And Pivot as well in our own business going from predominantly, call it, non China based OEMs, converting now to China based OEMs with our growth with Cherry, some of our e beam applications with some OEMs.

DAOLE participates in the China market principally through a large joint venture. It has total revenues, call it $1,500,000,000 for which they have a 50% interest. And they’ve been going through the same domestic conversion of their revenue base, meaning highly overweight towards non China OEMs. And over the last couple of years, that joint venture, which sells all the same products, basically that DAHLI does around the globe, but inside the China marketplace, they’ve been converting now towards China national OEMs. So that transition continues there.

I think it puts us in a really great spot from a mix of customers. I would expect that trend to continue, and they’re clearly winning business in that space as well. Combine that with the same experience we have, I think we’re lining up for the right trends inside the China marketplace.

Emmanuel, Analyst, Wolf Research: And then still on China, are you seeing any increasing competition from local Chinese suppliers in your field of business?

Chris May, CFO, American Axle: Oh, yes. I mean, China’s a very competitive market for every, well, probably every industry, quite frankly, but especially on the supply base. Yes. But we’re clearly announcing new wins in that space. So we’re competitive from a product perspective, a timing perspective, which is very critical in terms of that marketplace and a cost perspective.

But yes, it’s clearly heavy competition inside that marketplace. But that’s to be fair, I mean, the automotive space is very competitive in China, it’s very competitive in North America, and it’s very competitive in Europe, the three big markets. So nothing new to us, but it’s something clearly we need to continue to stay competitive on those key elements.

Emmanuel, Analyst, Wolf Research: And then in your introduction, you were mentioning that ICE, stronger for longer, is good for American Axle. Can you just elaborate a little bit on this? What is sort of like the current mix? What is the backlog mix? And then does it essentially enable you to have more positive revenue dynamics?

Or are there other expenses that you could pull back on? I guess in which ways is it most beneficial?

Chris May, CFO, American Axle: Yeah, in the moment, meaning in the current environment, why is it beneficial? It really it’s from a couple different perspectives. If you think about you referred to our passion for trucks inside of North America holistically between how we supply into General Motors and Stellantis and Ford. That’s almost half of our revenue base as a standalone AM. These comments relate to standalone AM, by the way.

We’ll continue to be extended. We have now announced almost all of our primary driveline programs that we support with all our customers are secured to the 02/1930 and beyond timeframe as we’ve gone through various extensions with the Bronco Sport and Ford being the most recent one. So what that does is really puts you on a solid footing from a capacity utilization standpoint, puts you on a solid footing from a revenue generation standpoint that you can either add upon or build around, which brings some level of, I’m going to use the word certainties, certain things can be in the auto space, to our revenue mix. So you leverage that. And then as you’re going through these extensions, in many cases, the customers are very focused on either extending existing programs or when they do convert to next generation, which we are experiencing, the changes and modifications to some of the products aren’t as great as they were in the past.

So you require less capital investment, less R and D dollars, etcetera. So you can benefit from that from your cash flow profile. And then lastly, and you see a little bit of this as we think about 2025 as it relates to electrification, with the, I’ll call it, deferral of electrification, the elongation of some of the adoption rates, part of our objective was to build our electrification platform. So it’s ready to go to market and it is and we’ve completed that. We’ve won various awards through that, as we’ve announced.

But it also allows us now to sort of recalibrate and dial in our product development spend or our R and D spend. And you saw the first signs of some of these benefits stepping into our 2025 guide where we reduced our R and D spend by $20,000,000 That’s some of the tangible benefits that we’re talking about in terms of this ICE’s longer perspective, where we’re able to benefit from a more stable revenue line, we’re benefiting from lower capital intensity in some of these extension programs, and we’re benefiting from being able to dial down a little bit of our product engineering spend. So those are some of the perspectives I would offer as it relates to that concept.

Emmanuel, Analyst, Wolf Research: And then from a capital allocation point of view, I think the goal is to get to a leverage target below 2.5 times. Once that’s the case, are you going back to returning capital to shareholders as as the main priority?

Chris May, CFO, American Axle: So if you think about think about today as a stand alone entity for American Axle, what our capital allocation, priorities have done. It’s to continue to fund organic growth, which would include capital expenditures and R and D for new programs. And then it was from there, it was essentially heavily overweighted towards paying down our outstanding debt, which we have done almost $1,600,000,000 we have paid down really since the acquisition of MPG in 2017. And then we had some small, call it tactical M and A. With the objective of before we thought more broadly in terms of capital allocation, we want to get to two times level.

Bring on the transaction in the combination with LA and that size and scale, the resiliency of our balance sheet, really allows us to kind of take a step back or allowed us to take a step back and say, look, with the benefits of this combined company, the cash flow generating power, the stronger balance sheet, the current state of the industry, we’re able to rethink about our capital allocation to where not driving towards a two time lever. We’re much more comfortable at a 2.5 time lever before we open up that playbook. So we’ll continue to fund our organic growth. We’ll continue to fund R and D as appropriate. We will continue to pay down debt.

It will be overweight towards debt pay down until 2.5 times now versus two times. And once we hit that 2.5 times, that opens the playbook. We’ll have a much more I would say our intent is to have a much more balanced capital allocation perspective. I would suspect we’ll still continue to pay some debt down, but we’ll also then open it up to some of the more shareholder elements of a capital allocation playbook, whether it be a buyback, dividend or whatever. And we would make the call at that time once we cross that threshold.

But I think this is another outstanding element of this transaction that brings to our perspective on capital allocation.

Emmanuel, Analyst, Wolf Research: Then maybe just finally, how should we be thinking about R and D spending over time? From the current state, should spending be trending up or down?

Chris May, CFO, American Axle: You know, one of the absent any significant programs, because significant programs can drive, let’s call it, lumpy R and D spend. And that’s, to me, good spend, by the way, because that means you have a big program you’re launching. But I would suspect, especially with the elongation of EV and some of that deferred out, as well as some of our key products designed and developed and put on the shelf, you would start to see a decline in our R and D spend. You see it here in ’25. I think there’s some more opportunity to reduce that spend going forward past ’25.

But again, large program development, if you want something new, that might put that into a little slightly different direction. But holistically, yeah, I would expect to have some R and D savings continuing.

Emmanuel, Analyst, Wolf Research: Great. Well, I think we’re basically at the end of our session. So, Chris, David, and Joe, thank you so much for joining us, and thanks for all the insights. Thanks everyone for tuning in. Thank you.

Alright. Thank

Chris May, CFO, American Axle: you for your

Emmanuel, Analyst, Wolf Research: time. Take care.

Chris May, CFO, American Axle: Bye bye.

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