American Axle & Manufacturing - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered mixed results: revenue declined year over year on lower volumes, but adjusted EBITDA margin improved sequentially due to productivity and cost controls; EPS and EBITDA beat consensus while revenue modestly missed.
• Guidance was lowered across sales, adjusted EBITDA, and adjusted free cash flow to reflect tariff-related uncertainty and lower North American production ranges; capex held at ~5% of sales.
• Management emphasized “buy and build local,” USMCA compliance (~90% North America production), and intent to pass incremental tariff costs to customers; progress on transformational Dowlais combination and joint-venture exits bolstered liquidity.
• Segment performance was mixed: Driveline EBITDA fell with volumes; Metal Forming posted year-over-year and sequential margin gains on operational improvements.
• Near-term stock catalysts: estimate revisions following lowered guidance; tariff clarity and customer recoveries; Dowlais deal milestones (shareholder votes in Q3, targeted closing Q4).

What Went Well and What Went Wrong

What Went Well

• Sequential profitability lift: adjusted EBITDA margin rose ~100 bps versus Q4 on operational performance and continued cost controls (“positive operational performance and continued cost controls”).
• Working capital and cash generation improved: operating cash flow $55.9M vs. $17.8M last year; adjusted FCF improved to $(3.9)M from $(21.4)M.
• Metal Forming momentum: EBITDA margin improved 150 bps YoY and 370 bps QoQ driven by productivity gains; CFO: “operational improvements within our metal form business unit”.
• Strategic actions: exited two China JVs for ~$30M cash; CCI approval to sell India CV axle business, expected to close Q2.
• AI-enabled supply chain initiative: selected aThingz DAKSA AI platform to enhance global logistics planning and visibility.

What Went Wrong

• Volumes and mix headwinds: sales fell to $1.41B from $1.61B (YoY) on lower North American volumes; FX (weaker BRL) and metal pass-throughs also pressured revenue.
• Guidance lowered: FY25 sales, adjusted EBITDA, and adjusted FCF ranges reduced to reflect tariff/macro uncertainty.
• Driveline profitability down: segment adjusted EBITDA decreased year over year with lower volumes.
• Elevated tax rate: adjusted effective tax rate ~50% expected at midpoint for 2025, with cash taxes ~$60–$75M due to valuation allowances and interest deduction limits.
• Continued restructuring and transaction costs: Q1 included $19.7M restructuring/acquisition-related costs and $3.3M debt refinancing costs; Dowlais transaction costs excluded from guidance but will impact actuals.

Transcript

Operator (participant)

Good morning. My name is Gary, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing First QQuarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press the star key, then the number one on your telephone keypad. If you would like to withdraw your question, press the star key, then the number two. 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.

David Lim (Head of Investor Relations)

Thank you and good morning. I'd like to welcome everyone who is joining us on AAM's First Quarter Earnings Call. Earlier this morning, we released our First Quarter of 2025 Earnings Announcement. You can access this announcement on the Investor Relations page of our website, www.aam.com, and through the PR Newswire services. You can also find supplemental slides for this conference call on the investor page of our website as well. To listen to a replay of this call, you can dial 877-344-7529, replay access code 349-2897. This replay will be available through May 9th. 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, and 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. Today's call is not intended and does not constitute an offer to sell or the solicitation of an offer to subscribe for or buy securities of AAM or Dauch in any jurisdiction where such offers or solicitations are not permitted by law. The subject matter of today's call will be addressed in a proxy statement that will be filed with the SEC. Investors should read the information in the proxy statement in its entirety when it becomes available.

Information regarding the participants and the proxy solicitation is contained in AAM's case, in AAM's annual proxy materials filed with the SEC, and in Dauch's case, in Dauch's equivalent filings and announcements made in accordance with applicable U.K. law. With that, let me turn things over to AAM's Chairman and CEO, David Dauch.

David Dauch (Chairman and CEO)

Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AAM's financial results for the first quarter of 2025. Joining me on the call today is Chris May, AAM's Executive Vice President and Chief Financial Officer. To begin my comments, I'll review the highlights of our first quarter financial performance. Next, I'll touch on some AAM business updates, commentary about the industry, and guidance. After Chris covers the details of our financial results, we will open up the call for any questions that you may have. Let's begin. AAM's first quarter 2025 sales were $1.41 billion. AAM's adjusted earnings per share was $0.09 per share. Operating cash flow was $55.9 million, and adjusted free cash flow was a use of $3.9 million. North American production was down approximately 5% year over year.

From a profitability perspective, AAM's adjusted EBITDA in the first quarter was $177 million, or 12.6% of sales. On a sequential basis, adjusted EBITDA margin improved approximately 100 basis points based on our trend of a positive operational performance and continued cost controls. Let me talk about some business updates, which you can see on slide four. In the quarter, we exited our Hefei AAM Automotive and Luohé AAM Automotive joint ventures in China. As a result, we collected approximately $30 million in cash. These exits were a result of a comprehensive analysis of our product portfolio plan, which balances numerous factors, including the focus on our core businesses and capital allocation. In addition, we also received approval from the Competition Commission of India, otherwise known as CCI, to proceed forward with our previously announced sale of our AAM commercial vehicle axle business to Bharat Forge Limited.

Our expectation is that this deal will close in the second quarter of 2025. Next, I'd like to give you a progress report on our transformational transaction with Dauch to combine the GKN Automotive and Powder Metal businesses with AAM. As previously announced, this strong combination is anticipated to yield significant size and scale to better weather operating cycles, such as the one that we're experiencing today, deliver strong synergy potential for approximately $300 million in synergies, generate significant cash flow to support our focus on deleveraging, and institute a more balanced capital allocation policy in the future. This strategic combination will unlock significant shareholder value, and the teams are making great strides and working diligently together. On the financing side, the bridge syndication is completed. Our core credit agreement amendments have also been completed. On the regulatory front, U.S. HSR antitrust clearance was received in March.

Additionally, we have now completed all other initial antitrust submissions with the required jurisdictions listed in the January announcement. Both AAM and Dauch shareholders' votes are expected to take place in the third quarter. We are very excited about this transformational acquisition and the value it brings to our stakeholders. Our teams are working well together on the integration planning process, as I mentioned earlier. We are on track to close this transaction in the fourth quarter of 2025. Now let's talk about the auto industry as a whole. There's been plenty of macro uncertainty driven by new trade policies. For AAM, our operating policy is to buy and build local. Approximately 90% of the products that we produce in North America are USMCA compliant, and we are evaluating other actions required to improve this percentage.

Nearly all of our steel and aluminum buy is from U.S. sources for North American production. What we produce in Mexico is predominantly delivered to our customers in Mexico, and we do have some open capacity to relocate manufacturing to the U.S. if needed. This will require close coordination with our OEM customers as they finalize their plant loading and respective production plants. Specifically on tariffs, we are working diligently to mitigate what tariff impact we can, and as far as the remainder, our intent is to pass those tariff costs on to our customers since they have the end market pricing power, which the supply base does not. Even in this world of tariff uncertainty, there are positives that leverage AAM's strength.

For example, we are receiving inquiries about our U.S. metal forming operations that will leverage our install capacity as our customers are weighing onshoring options to address the tariff concerns that are out there. Furthermore, as we combine with Dauch, this combination and capability will be expanded and enhanced. As communicated before, the AAM management team will stay focused on the matters that we can control and make necessary adjustments to our businesses based on market conditions. Now let's talk about our guidance. Recognizing we have a lot of data points, estimates, and uncertainty, we have updated our 2025 guidance ranges. AAM is now targeting sales in the range of $5.65 billion-$5.95 billion, adjusted EBITDA in the range of approximately $665 million-$745 million, and adjusted free cash flow of approximately $165 million-$215 million.

Our guidance ranges are supported by an assumed North American production volume of 14.0 million units on the bottom side, 15.1 million units on the top side. Chris will provide additional details on assumptions underpinning our guidance. To say we are busy may be an understatement, but to say that we are excited about our future cannot be overstated. Our core operations are gaining performance momentum that you can see in our results. Our combination with Dauch is on track and gaining speed, and our experience of the past is guiding the AAM team to deal with the uncertainty of today in a positive and a constructive manner.

To conclude my remarks, our aim is on the future, and we are going to continue to drive our efforts towards first and foremost closing and integrating the Dauch transaction, generating strong free cash flow, strengthening our balance sheet, advancing our ICE hybrid and EV portfolio to be more agnostic, and positioning AAM for future profitable growth. Now let me turn the call over to our Executive Vice President and Chief Financial Officer, Chris May, for his first quarter financial details. Chris.

Chris May (EVP and CFO)

Thank you, David, and good morning to everyone. I will cover the financial details of our First Quarter 2025 Results and our updated guidance with you today. I will also refer to the earnings slide deck as part of my prepared comments. Let's go ahead and begin with sales. In the first quarter of 2025, AAM sales were $1.41 billion compared to $1.61 billion in the first quarter of 2024. Slide eight shows a walk of first quarter 2024 sales to first quarter 2025 sales. Volume mix and other was lower by $166 million, primarily driven by lower overall volumes in North America. Metal market pass-throughs and FX lowered sales by approximately $28 million. More than half of this is related to foreign exchange, particularly from a weaker Brazilian real. Now let's move on to profitability.

Gross profit was $173.9 million in the first quarter of 2025 as compared to $198.5 million in the first quarter of 2024. For the first quarter of 2025, adjusted EBITDA was $177.3 million, and adjusted EBITDA margin was 12.6% versus $205.6 million and 12.8% last year. You can see the year-over-year walkdown of adjusted EBITDA on slide nine. In the quarter, adjusted EBITDA was lower due to volume mix and other by $44 million versus the prior year, resulting in a decremental margin related to sales volume of approximately 27%. R&D was slightly lower year-over-year, and performance and other was favorable to adjusted EBITDA by $13 million, driven primarily by operational improvements within our metal forming business unit. Even with lower sales, the metal forming EBITDA margin improved 150 basis points year-over-year and 370 basis points quarter-over-quarter.

This performance is demonstrating our continued productivity improvements are driving profitability uplift. We continue to be very positive on the momentum of performance for both of AAM's business units. Let me now cover SG&A. SG&A expense, including R&D, in the first quarter of 2025 was $90.9 million, or 6.4% of sales. This compares to $98.3 million, or 6.1% of sales in the first quarter of 2024. AAM's R&D spending in the first quarter of 2025 was approximately $36 million, which, as I mentioned, is slightly lower year-over-year. For the full year, we expect R&D expense to be down on a year-over-year basis by approximately $20 million as we optimize our spend in this area to reflect current market requirements. Let's move on to interest and taxes. Net interest expense was $37.3 million in the first quarter of 2025 compared to $40.7 million in the first quarter of 2024.

The weighted average interest rate of our outstanding long-term debt was lower year-over-year, and we also had lower debt balances. In the first quarter of 2025, we recorded income tax expense of $14 million compared to $15.9 million in the first quarter of 2024. As we head into 2025, we expect our adjusted effective tax rate to be approximately 50% at the midpoint. This elevated book tax rate is due to valuation allowances on certain foreign jurisdictions and interest deduction limitations in the U.S. We expect cash taxes of approximately $60-$75 million this year. Taking all these sales and cost drivers into account, our GAAP net income was $7.1 million, or $0.06 per share in the first quarter of 2025, compared to a net income of $20.5 million, or $0.17 per share in the first quarter of 2024.

Adjusted earnings per share, which excludes the impact of items noted in our earnings press release, was $0.09 per share in the first quarter of 2025 compared to earnings per share of $0.18 for the first quarter of 2024. Let's now move to cash flow and the balance sheet. Net cash provided by operating activities for the first quarter of 2025 was $55.9 million compared to $17.8 million in the first quarter of 2024, driven by strong working capital performance in inventory and other areas. Capital expenditures, net of proceeds from the sale of property, plant, and equipment for the first quarter of 2025, were $68.7 million. Cash payments for restructuring and acquisition-related activity for the first quarter of 2025 were $8.9 million. Reflecting the impact of these activities, AAM's adjusted free cash flow was a seasonal use of $3.9 million in the first quarter of 2025.

This was a significant improvement from prior year. From a debt leverage perspective, we ended the quarter with net debt of $2.1 billion and LTM adjusted EBITDA of $720.9 million, calculating a net leverage ratio of 2.9 times at March 31, 2025. We also maintained a very strong cash position of well over $500 million due to our operational performance and the benefit of the proceeds from the sale of our joint venture interests that David shared with you. AAM ended the quarter with total available liquidity of approximately $1.5 billion, consisting of available cash and borrowing capacity on AAM's global credit facilities. Now let's talk about tariffs. There's been quite a bit of news on this front as it relates to regulation rates and general updates.

To drill down a little deeper as it relates to AAM, we thought it best to provide you with the dimensions of our primary product movement so you can better understand our positioning as it relates to tariffs. Let's get started. For AAM, most of the products we ship to customers in North America, as David mentioned, are USMCA compliant. Almost all of AAM's steel and aluminum consumed in North America is from U.S.-based sources, so we are generally in a very good spot with these commodities. For our U.S. operations, we import from Mexico up to $150 million on an annual basis, the majority of which is USMCA compliant, and we are now evaluating how to reduce this amount even further.

We import from Canada approximately $25 million on an annual basis, the majority of which is USMCA compliant, and we are also evaluating how to reduce this amount. We directly import very little from China into the U.S. and therefore have very minimal exposures here. Lastly, AAM's rest of the world import exposures are approximately $100 million of annualized values, and we are working to mitigate these exposures as well as any additional exposures our supply base may have while gaining clarity on final tariff agreements. As David stated, our intent is to work closely with our OEM customers to mitigate the tariff impact and receive recoveries for any incremental tariff costs. As we work through the year and the respective recovery processes, there can be some timing lags, but overall, our assumption is clear. With that background in place, let's talk about our guidance on slide six.

Our outlook has been adjusted from our initial targets provided on February 14th. The new outlook is designed to provide you with a framework or guideposts, if you will, of our best estimate of the tariff-related volume impact based on recent third-party volume estimates. While some clarity has been provided as it relates to tariffs, we note that the situation is very fluid and dynamic. Our updated targets are as follows. For sales, our new range is $5.65 billion-$5.95 billion. This sales target is based upon a North America production range of 14.0 million-15.1 million units and certain assumptions for our key programs. We continue to anticipate GM's full-size pickup truck and SUV production in the range of 1.3 million-1.4 million units in that range. From an EBITDA perspective, the range is now $665 million-$745 million.

At the lower end versus previous guidance, this represents a flow-through decremental margin in the low 20% range, which highlights AAM's intent to actively work our playbook to mitigate downside impacts should they occur. At the higher end of our guidance, you can see our performance delivering very good profitability flow-through. We now anticipate adjusted free cash flow in the range of $165 million-$215 million. Our CapEx assumption is unchanged at approximately 5% of sales as we ready the organization for important upcoming launches, especially for one of our major franchise truck programs. In addition, while not included in our adjusted free cash flow figures, we estimate our restructuring-related payments for AAM as a standalone entity to continue to be in the range of $20 million-$30 million for 2025 as we look to further optimize our business and further reduce fixed costs.

As mentioned on our fourth quarter earnings call, we are assuming the pending sale of our commercial vehicle axle business in India will be completed by the end of the first half of 2025, and our financial guidance reflects that timing. We underscore that the guidance figures we are providing today are on an AAM standalone pre-combination basis and exclude any costs or expenses related to our announced Dauch transaction. AAM's first quarter results represent a very good start to the year, and we believe we still have work to do to drive even further performance. We remain focused on executing our key performance drivers inside of our core business. We are also actively managing the evolving tariff environment, which continues to introduce new complexities and uncertainties in the industry.

Looking ahead, we are confident in our ability to navigate these challenges and also leverage the opportunities that they will present for us. Going forward, if we see a reduction in the level of macro uncertainty, tariff cost mitigation takes hold, and industry production is stable, we believe the risk to our guidance may potentially be to the upside in our range, especially as we gain more momentum on our internal performance improvements, volume levels become more clear, and new trade deals are negotiated. 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 Q&A.

David Lim (Head of Investor Relations)

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. At this time, please feel free to proceed with any questions you may have.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. The first question is from Joe Spak with UBS. Please go ahead.

Joe Spak (Managing Director)

Good morning, team. I guess I just want to start the conversation talking about how you're thinking about some potential future contingencies. I know you mentioned you do have some excess capacity in the U.S. Maybe you could give us a sense as to sort of what utilization is there. Even if you wanted to sort of up that, I know about a year ago we were sort of talking about some labor challenges. Is that something else we need to consider in that situation?

David Dauch (Chairman and CEO)

Yeah, Joe, this is David. Good morning to you. Obviously, our policy is to buy and build local, like we've communicated. We want our products, our larger products, so we want to be in close proximity to our customers. That's what we've done. That's what we'll continue to do. What we need to do is just get clarity from the government and our OEMs, to be honest with you, not only their long-range financial or long-range product plans, but also their plant loading and product requirements. From there, we'll make the necessary adjustments that we need to make to support our business and do it at, like I said in my opening comments, in concert with the customers. We try to drive high capacity utilization in our facilities, but we do have some open capacity in Three Rivers.

We exited out of programs, so we have some open capacity in our Three Rivers facility that we could accommodate. At the same time, we have some open capacity in a couple of other smaller facilities that we can make some adjustments and realign our operations where we move some of our component and machining operations to maybe some of the smaller plants to free up open space in the larger plants, more of the assembly operations. As I mentioned with Dauch, assuming that that deal goes through at the end of the year here, we'll pick up even more capacity in the US, which will give us more of an opportunity to work with that.

Overall, we always try to drive our capacity utilization at a minimum to that 85% level, but obviously, we've got a little bit of latitude there that we'll work with our customers, and we're willing to make the necessary adjustments that we need to to support our customers on a go-forward basis. On the labor side of things, the labor situation's improved. I wouldn't say it's fixed. Obviously, everyone's got to pay at market to be able to attract the appropriate talent. Even with that being said, if more jobs are required to come back to the states, then I think it's also going to require a greater level of robotics and automation to be able to deal with things on a go-forward basis. Quite honestly, we're doing a lot of that already ourselves.

At the same time, if we need to add incremental volume to that, then we'll accelerate those initiatives even further. Hopefully that addresses your question, yeah.

Joe Spak (Managing Director)

Yeah. Yeah. Thanks for that. The second question is, and again, I'm not sure what you can say here, although presumably you have been doing diligence on this as well, but can you help us understand what some of the tariff exposure would look like for Dauch?

Chris May (EVP and CFO)

Yeah, Joe, this is Chris. I'll take that. In terms of Dauch exposure, obviously, they need to comment on them as a standalone company. We're not at liberty to speak on their behalf. However, if you look at their footprint, in many cases, very similar to us. They have U.S. production, Mexico production. They also have a European footprint, and they're managing their tariff exposure in a very similar way that we are. As David mentioned, combined will bring us even more, I would call it, size and scale and production locations to navigate through exactly the three items that we're talking about here today. We actually see some benefits as we combine together in this topic.

Joe Spak (Managing Director)

Thanks for that.

Chris May (EVP and CFO)

Yep.

Operator (participant)

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

Edison Yu (Director)

Hey, good morning. Thanks for taking our questions. First off, GM obviously had earnings this week, and they seem pretty, I would say, positive on the volume outlook. Are you incorporating that in the assumptions and the guidance on the full-size trucks?

Chris May (EVP and CFO)

Yeah, Edison. Underpinning our guidance, as I mentioned in some of my prepared comments, was 1.3-1.4 million units of the full-size truck platform. As you know, that's been a very, very strong platform over the last couple of years. We typically, I would say, are bullish on that platform. I think the results have shown that over the last couple of years as well. As we think about that platform stepping into the year, it's really broken down into, I would call it, three components. They're light duty, they're heavy duty, and they're SUV applications. If you think about the core products we support, especially on the heavy-duty side, very strong demand, of course, built here in Flint, Michigan. They have also some capacity and production in Canada to serve that market. Again, strong demand from that.

We do not see that really waning on the heavy-duty side. The SUV has been very strong demand, built in Arlington, Texas, which is great. We continue to supply and support that operation. On the light-duty side, they have a few assembly plants to support that. Demand still seems to be robust, and we supply all of their assembly plants to support that. We are generally very bullish on that platform, and we continue to expect good solid demand. We did articulate at least a range inside of our guidance of how we think about that.

Edison Yu (Director)

Understood. Second question on Dauch, I know you reiterated the timing, and I believe you said the votes will be, both votes will be in the third quarter. How has the kind of macro volatility around policy affected it? It seems like it hasn't had much impact, but curious if you can maybe comment on or give us your view on if this has kind of delayed or made it more tricky, the process.

David Dauch (Chairman and CEO)

Edison, this is David Dauch. It does not make the process any more complicated. I think, as Chris indicated, they have got a similar policy that we do to try to buy and build local in the region. They have obviously got to navigate their USMCA compliancy as well. As Chris also indicated, and we identified as part of the synergistic opportunity, we also think that there are insourcing opportunities that we can leverage each other's strengths. In the meantime, we have to operate as two independent companies and make those decisions independently on our own. As we come together, obviously we will take advantage of those opportunities, leverage the required footprints that are in place. Back to your original question as far as how does the policy impact it, I think they are no different than any other supplier right now.

We're all just trying to get clarity from the government on the policies and the direction, understand the impact that it has on each of the individual OEMs because it varies by OEM, so that we can put the right plans in place to support our customers.

Edison Yu (Director)

Great. Thank you.

David Dauch (Chairman and CEO)

Yep.

Operator (participant)

The next question is from Itay Michaeli with TD Cowen. Please go ahead.

Justin (Analyst)

Hey, this is Justin for Ita. Thanks for taking the question. Quick one on just general customer schedules. How are things looking near-term-wise? We've heard from a bunch of other suppliers just looking to get your view on near-term production schedules.

David Dauch (Chairman and CEO)

Yeah. What I would say on the customer schedule side of things, we did start seeing a little bit more volatility at the end of the first quarter and beginning here of the second quarter. Again, largely due to just what's going on with the tariff policy issues that are out there. Everyone just needs to understand and get clarity so we can plan our businesses is really what it comes down to. There is volatility that's in the schedules. Some programs are running very solid, very strong, and we're experiencing that ourselves where we have very strong schedules at this point in time. We had some softening in the first quarter, largely because of some inventory adjustments or some launches that were going on with some of our key customers, but those are starting to subside.

There is some volatility that's found its way into the schedules, no doubt about it.

Chris May (EVP and CFO)

Yeah. Justin, this is Chris. We're keeping a close eye on the end of the second quarter July shutdown activity. As David mentioned, some of our core platforms running strong. However, we are keeping a little bit of eye towards the end of the second quarter July shutdown.

David Dauch (Chairman and CEO)

Yeah. Some of the customers have taken certain assembly plants down. It has impacted multiple suppliers. Fortunately for us, we have not been impacted as much by that, and we are benefiting from the strong performance of the key platforms that we are on.

Justin (Analyst)

Perfect. Definitely appreciate the color there. Maybe at the low end for my second question, the low end of the North America production range, the 14 million, any key assumptions in there outside of the GM programs that you might be baking in for key program exposure? Just maybe better trying to understand the low end of that range relative to the revision on the low end of the sales guide.

Chris May (EVP and CFO)

Yeah. As we thought about the implications for the low end, Justin, I would say aside from our positioning on the full-size truck for General Motors, obviously our second largest platform is the Ram heavy-duty. They had a low volume of production as they were stepping into their next generation of product in the first quarter, and they continue to step through that. We still, generally speaking, think of that as a fairly robust platform. Absent those two programs for our guidance, as we think about the low end, we generally took a broad-based approach to overall reductions across most platforms to get to the lower end.

Justin (Analyst)

Perfect. Thank you so much for the color. Appreciate it.

Chris May (EVP and CFO)

Yep.

Operator (participant)

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

Tom Narayan (Lead Equity Analyst)

Hi. Thanks for taking the questions. Currently, the tariff policy is it's worded says USMCA compliant parts are exempt from tariffs. There is this kind of room for further evaluation, I guess, from the administration on potentially further U.S. contenting. It sounds like you guys, not just you guys, sounds like everybody is assuming that this sticks. In this event, the direct tariff impact to you guys is quite limited. Is that fair to say?

Chris May (EVP and CFO)

Yeah. Under the current USMCA regime, yeah, I would tell you based upon our imports from Mexico and Canada, yes, reasonably limited. Though, as I mentioned in some of our prepared remarks, we do bring product in from outside of the North America region. Not a lot, but some. It is probably a few plus million a month of, I would call it, tariff payment or tariff expense that we are working to mitigate and/or pass along into our customer base. It sort of sits today.

Tom Narayan (Lead Equity Analyst)

Just kind of a fuzzy question. This week, there seems to be kind of a somewhat of a sentiment shift probably since the Tuesday administration policy adjustment. We've heard it from some OEMs reporting results this week as well. That sounds more kind of constructive or optimistic that the administration perhaps is looking to with some more nuance as it relates to the U.S. auto industry. It's not an American Axle-specific question, but I'd love to hear your guys' thoughts on this kind of at a high level if you would agree or share that sentiment. Thanks.

David Dauch (Chairman and CEO)

Yeah. Tom, this is David. Listen, Trump is doing exactly what he said he was going to do when he was campaigning, is he wants to build a strong manufacturing base in the U.S. He wants to support and strengthen the U.S. auto industry. He wants to bring jobs back to America and strengthen our economy. We're going through a bumpy road right now. We all just need to be patient and work our way through this whole thing together and not overreact. At the same time, when we get to the other side, I think America will be much stronger. At the same time, he's driving a lot of investment by foreign companies into the U.S. Instead of a lot of money going offshore, it's going to stay in the U.S. and it's going to create those jobs for Americans here.

I mean, part of the concern that was kind of raised by Joe earlier is labor availability. There's a lot of open jobs today. That's why I think automation, robotics, and other things are going to have to come into play in order to be able to support the amount of jobs that potentially can be created with the policies that are put into place. Make no mistake, I mean, Trump is just attacking the tariff imbalance that existed for decades, and he's just trying to level the playing field to give the U.S. auto industry and other industries for that matter a competitive playing field or a level playing field to do business on. If we didn't, then there was a risk of some of those businesses being at risk longer term.

Overall, I'm very supportive of what he's doing or we're supportive of what he's doing. It has created some issues as far as additional work for all of us. At the same time, you do what you need to do to manage through these tough times. As we said in our comments, Chris and I together, we see this as an ultimate positive when it's all said and done, and we think that we can actually gain business, especially through our metal forming business with a lot of the onshore and the reshore that needs to take place here. We're just staying true to our policies and our procedures about buying and building local.

We're trying to leverage our capacities wherever needed, and we're coming to our customers with solutions to help them address some of the concerns and some of the issues that exist right now. That's my view, Chris. I don't know if you have anything else you want to comment on.

Chris May (EVP and CFO)

That's exactly.

David Dauch (Chairman and CEO)

Okay.

Tom Narayan (Lead Equity Analyst)

Great. Thanks a lot.

David Dauch (Chairman and CEO)

Yeah. Thank you.

Operator (participant)

The next question is from James Picariello with BNP Paribas. Please go ahead.

James Picariello (Director)

Hi. Good morning, guys.

Chris May (EVP and CFO)

Hi, James.

James Picariello (Director)

My question's on GM. They announced the 50,000 annualized units moving from Mexico to their Fort Wayne plant. Just curious, will they be able to insource, fully insource and support those axles, or is there a situation whereby you guys come in and supply the full driveline system at the Fort Wayne plant?

David Dauch (Chairman and CEO)

Yeah. I mean, Fort Wayne today is being supported by both AAM and General Motors. Yes, there's an incremental volume that's going there. At the same time, GM's got contractual obligations, and we'd expect them to honor those contractual obligations. As I said earlier, we'll work collectively with our customer, in this case, GM, to manage that opportunity there. They're responding appropriately to what Trump has asked them to do in regards to looking at bringing certain work back to the U.S. Plus, they're also mitigating their own financial exposure due to the tariffs. We respect all those decisions, and we'll support our customer whatever way we need to on this going forward. We do supply all the GM assembly plants around North America based on the portfolio that we have in place and the plants that we have in place.

We're supplying Fort Wayne, Arlington, Flint, Oshawa, and go on. We'll just have to work that out with the customer as we get a little bit more clarity.

James Picariello (Director)

The content for AAM is very similar in terms of the Mexico versus Fort Wayne plants?

David Dauch (Chairman and CEO)

Yeah. Yeah. No, absolutely. At the same time, GM only has so much installed capacity on the axle side based on the agreements that we have. Like I said, there's contractual obligations there as well. We'll work with them. If they permanently reload things, we'll have to have those discussions about what we need to do on a go-forward basis.

James Picariello (Director)

Got it. Just a housecleaning thing, I think I missed the clarification. The business that you sold in the first quarter here that shows up in the cash flow statement, is that the India business that we talked about likely getting sold in the second half, or is it something different?

Chris May (EVP and CFO)

This is not the India business. This is our interest in two joint ventures in China that we sold and received proceeds of about $30 million. For the India sale of our commercial vehicle axle business, that will be in the second quarter. That is in addition to the activities on the first quarter.

James Picariello (Director)

Perfect. Thank you.

Operator (participant)

The next question is from Dan Levy with Barclays. Please go ahead.

Dan Levy (Senior Equity Research Analyst)

Hi. Good morning. Thanks for taking the questions. I wanted to follow up on the questions on modifying footprint. Maybe you could just talk about some of the CapEx considerations. Obviously, I see your CapEx here is maintained, but how do you think about the potential magnitude of CapEx changes ahead, and what is the potential for that to be reimbursed by your customers?

David Dauch (Chairman and CEO)

Yeah. Dan, it's too early to speculate what that CapEx number may be because we don't have clarity yet. At the same time, we're in a capital-intensive business, and we try not to have a lot of excess capacity sitting around, try to keep our assets utilized. Obviously, as I said, we'll do it in close coordination with the customer, whether it's GM or other customers, based on what they decide their production footprint is going to be on a go-forward basis. Clearly, if there's new investments that are being put into place, we would expect some recovery and sharing of that responsibility. It's a partnership. We got to work together.

Dan Levy (Senior Equity Research Analyst)

Okay. In the context of the CapEx the last few years, which has actually been held in really well, I guess it's too early to tell if there's going to be some sort of a CapEx bubble, if there's some catch-up on that, correct? Just maybe some context on how it's held in.

David Dauch (Chairman and CEO)

Yeah. No. I mean, we've guided that our CapEx will be approximately 5% of sales. We've demonstrated a very strong discipline the last several years to operate at that number or below. That doesn't contemplate any footprint-type moves and stuff that may be impacted as a result of the tariff matters. Obviously, we'll evaluate all the CapEx. If there's other requirements that come in, then we'll rebalance some of the CapEx to minimize that impact as best we can or spread it out over multiple years to be able to accommodate what we need to do. Clearly, the number one thing we need is just clarity from our customers in regards to their manufacturing footprint, and then we can plan our businesses appropriately.

The other thing that we just need to understand, and we're getting more clarity, is that parts that are USMCA compliant, they're not subject to the tariffs, which gives us a lot of flexibility with the existing installed capacity that we have.

Operator (participant)

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

John Murphy (Managing Director)

Good morning, guys. David, I just wanted to follow up on that because customs put a letter out yesterday basically indicating that USMCA compliant parts were not going to be tariffed for the foreseeable future. That seems like that's kind of the letter of where this is right now. Is that your understanding? Where is this $100 million rest of world import coming from? I'm assuming non-China, but just trying to understand what the levels are there.

David Dauch (Chairman and CEO)

Yeah. That's our understanding, John, is that no tariffs for USMCA compliant parts. That's why we're trying to make sure that we have over about 90% of our product that's USMCA compliant today. We're working to mitigate the remaining balance. At the same time, the Trump administration hinted around about giving credit only for US content. We are mapping our supply bases right now to make sure that we can understand what's USMCA compliant versus US content compliant so that we can mitigate any future impact on a go-forward basis. Yes, we see it as positive news based on what we heard the other day. At the same time, we have to prepare ourselves because of the comments that were made earlier about only giving benefits on the US content because there's still potential that that could be instituted.

Right now, we're focused on just the USMCA compliancy and making sure that we got all of our parts there and work on substitutions where required, work on reshoring where required, or work with OEMs where we have some direct-to-buy components to deal with some of those matters.

Chris May (EVP and CFO)

Yeah. John, this is Chris. Second part of your question, I think related to the $100 million rest of world exposure. Think countries like India, Korea, and some others to a lesser extent, but that would not include China. We have very, very little exposure at all to China.

John Murphy (Managing Director)

Got it. Okay. Hopefully, that letter from customs yesterday holds because that means that you're in very good shape and do not need to really do much, if anything at all, here in North America. One other.

Chris May (EVP and CFO)

It's all right.

John Murphy (Managing Director)

Yeah. I mean, it seems like it's going to hold, and you're fine. You don't have to move anything. On carb and EVs, I mean, this is just not being discussed, but it's almost as consequential to the business at large or maybe even more consequential depending on where you sit in the value chain. This cancellation of carb and a significant slowdown in EVs, I'm just curious what you think that means to your business sort of mid and long term and what it means as far as maybe pulling back on R&D and other capital commitments that are not having much payoff, if at all, particularly in North America. What do you think that means, and how do you kind of think about that in your planning going forward?

David Dauch (Chairman and CEO)

Yeah. John, this is David. I'll make some comments first, then open it up to Chris. Clearly, if we see ICE and hybrid activity continuing longer, I mean, that's a good thing for us because we already have installed assets and have more volume going across those assets. That's a big positive for us. It'll help us generate even more cash flow to be able to support what we need to do to fill out and complete our EV portfolio. Clearly, part of the acquisition at Dowlais that's important to us is expanding our EV capability and developing a more agnostic product portfolio. We have trimmed down some of our ER&D expenses year over year based on the fact that we have a lot of our electrification strategy put into place, but we do have some more to do, so there's still work that's there.

With that being said, we've been very selective about what electrification programs we'll go after and with which customers and on which platforms. We're also trying to protect ourselves with respect to the appropriate terms and conditions because of the volatility that exists on the acceptance rates by consumers, especially here in North America. Electrification's here. It's only going to grow. It's just not going to grow at the rate that the prognosticators were forecasting earlier. The consumer has spoken, and it's going to take a lot longer. ICE and hybrid are going to be here for decades. While EV is going to gain market share on a go-forward basis, it'll be at a much slower ramp in North America than what people were projecting or predicting.

John Murphy (Managing Director)

David, I'm just sorry. Just a sneak one follow-up in there. It's fair to say that ICE program extensions are net positive for American Axle because there's some debate on that?

David Dauch (Chairman and CEO)

Absolutely.

Chris May (EVP and CFO)

I'm not sure what the debate is, but I think that's a very clear yes.

David Lim (Head of Investor Relations)

I mean, I think.

Chris May (EVP and CFO)

I agree with you.

R&D. We have a very strong installed capital base we'll be able to leverage for a very long time, which will generate a lot of cash and profitability off of that. Your core operations are focusing on productivity on existing products. I mean, there's nothing but good.

John Murphy (Managing Director)

I agree. All right. Thank you very much, guys.

David Dauch (Chairman and CEO)

Yeah. Thanks, John. See you.

Operator (participant)

Thank you, gentlemen. Your last question comes from Doug Karson with Bank of America. Please go ahead.

Doug Karson (Financial Analyst)

Hey, guys. Thanks so much for sneaking me in here at the end. It would not be a fun day without talking about the balance sheet for a moment. With the completion of this transaction, which looks like it is a green light, can you just reiterate how you want to structure the balance sheet as far as leverage? I have a more open-ended question considering you guys have been in the industry for my entire career. The OEMs are contemplating bringing back your potential assembly plants or various production. How hard do you think that is going to really be? I know it is hard to make a comment on that, but I mean, in my career, that has been a really slow process to move plants around. I am just kind of wondering how you think about it when you are at the water cooler sharing ideas.

David Dauch (Chairman and CEO)

This is David. Let me start with the second question first, and then Chris can cover the other question. We just talked earlier in regards to some of the OEMs evaluating what needs to be done. Listen, that's not an easy task, all right? It's been decades to build up the infrastructure and the facility and the footprint that OEMs have, and for that matter, suppliers as well. It's billions of dollars to try to build a brand new assembly plant, and it takes time to do that as well. It's not like these jobs can move immediately. Some jobs can move based on line rate increases or if there's open capacity at an existing facility. Plants aren't just sitting there accept waiting. They'd have to be retooled or built in their entirety for that. This will take years to do.

At the same time, I think what the Trump administration is looking for is jobs to come back to the U.S., commitments made by OEMs, and he's obviously having discussions with each of the OEMs. You've seen the amount of commitments that have been made both from the Detroit 3 as well as the international OEMs. A lot of investments have already been announced and jobs to be created. It is just a matter of the timing to ultimately complete those initiatives that are taking place. I think the intent that Trump has to bring work back to the U.S. is working. It is just going to be costly, and it is going to be timely in order to be able to get that done. Like I said, it just does not happen overnight. Obviously, we've got a global footprint and infrastructure.

We leverage that to try to buy and build local for the local markets. As Chris said, what we're making in Mexico is for the most part consumed in Mexico or a large part of it. Same thing here in the U.S. We'll balance that based on what the needs are and what the requirements are of the administration and our customers.

Chris May (EVP and CFO)

Yeah. Doug, this is Chris. Let's dial back over back to your first part of your question on the balance sheet as it relates to the larger transaction with Dowlais. We're in great shape from that perspective. The bridge has been syndicated. We have now amended and adjusted our core revolver as a standalone company for AAM, but also it's positioned very well now for the transaction to put us plenty of capacity where we need there from $1.5 billion in terms of revolver capacity. We're very focused also on having a nice maturity table at close. I think we'll accomplish that once we go to market near the end of the year when we close the transaction. We're heavily focused, as you know, on leverage. Today, a standalone American Axle & Manufacturing, we closed March at 2.9 times.

Our goal, at least at close of the transaction with Dowlais, would be to be approximately leverage neutral to that. As we go forward, our primary source of our cash flow, obviously, is from our operations and the strong synergy opportunity that we'll see. That cash flow, in turn, will then delever the company with the objective, an initial step, if you will, to 2.5 times. At that point, we'll continue to delever the company further. However, we'll also open up the capital allocation playbook at that level to, I'll call it, other shareholder-type activity. Deleveraging and strengthening the balance sheet is a top priority for us. Today, as a standalone company, it'll be a top priority for us as a combined company together.

Doug Karson (Financial Analyst)

Thanks. It seems that with the additional new business, the delevering could potentially even be accelerated from the prior plan. It sounds like that. If that's true, that'd be great.

David Dauch (Chairman and CEO)

Yep. Agreed.

Doug Karson (Financial Analyst)

Thanks, guys.

David Dauch (Chairman and CEO)

All right. Thanks, Doug.

David Lim (Head of Investor Relations)

Thank you, Doug. We thank all of you who have participated on this call, and we look forward to talking with you soon in the future. Thank you.

Operator (participant)

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