American Axle & Manufacturing Holdings, Inc. Price & Performance (AXL)

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 Vale's case Indole's equivalent filings and announcements made in accordance with applicable U. K. Law that, let me turn things over to AM's Chairman and CEO, David Delk. Thank you, David, and good morning, everyone. Thank you for joining us today to discuss AIM's financial results for the fourth quarter and full year of calendar year 2024. Joining me on the call today are Chris May, AM's Executive Vice President and Chief Financial Officer We begin Machemus today, I'll review the highlights of our fourth quarter and year 2024 financial performance, Next, I'll cover our 2025 financial outlook. And after Chris covers the details of our financial results, I'll provide some concluding remarks about our exciting dialing combination and then open it up for questions that you all may have. So let's begin. AAM closed the year out strong by continuing to make good operational progress in generating solid adjusted free cash flow in the quarter. AIM's fourth quarter twenty twenty four sales were $1,400,000,000 dollars and for the full year, AAM sales were approximately $6,100,000,000 From a profitability perspective, AAM's adjusted EBITDA in the fourth quarter was $161,000,000 or 11.6% of sales.

For the full year, AAM's adjusted EBITDA was $749,000,000 dollars or 12.2% of sales. AAM's adjusted earnings per share in the fourth quarter of twenty twenty four was a loss of $0.06 per share, For the full year, adjusted EPS was a positive $0.51 per share. Adjusted free cash flow was $79,000,000 in the quarter and $230,000,000 for the full year in 2024. For 2024, AAM delivered on a financial targets that we had outlined at the beginning of the year. Came in at the high end of our original adjusted EBITDA range and exceeded the midpoint of our adjusted free cash flow target. These were achieved while the industry experienced production revisions throughout the year. Was a solid performance by AM as we manage the factors that are under our control and remain focused on operational efficiency. Let's talk about a couple of recent business updates on Slide four of our presentation deck. We outlined in the past that it was our near term objective to That began with our announcement several years ago where AM secured contracts of more than $10,000,000,000 of lifetime revenues with next generation full size truck axles with multiple customers. Today, we announced we have secured a contract extension to supply power transfer units for the Ford Maverick and Bronco Sport vehicles.

With this latest award, we have secured our next generation core business for years to come. Two weeks ago, we also announced our transformational combination with DALE which will create a leading global driveline and metal forming supplier with significant size and scale, we have high conviction that this will create a significant value for our shareholders. I'll talk more about this exciting deal a little bit later today. From a business perspective, our strategy has been consistent. We continue to strive to improve and optimize our operations, drive EBITDA and free cash flow generation, and manage factors under our control.

And we're going to be remain disciplined and focused on these priorities. Before I hand it over to Chris, on the call, let's talk about our 2025 financial outlook. We forecast North American production at approximately 15,100,000 units. We are also monitoring multiple factors that can swing production including interest rates, tariffs, inventory levels, and the overall financial health of the consumer. 5.5 illustrates AAM's 2025 financial outlook. Where AAM is targeting sales, in the range of $5,800,000,000 to $6,050,000,000 adjusted EBITDA of approximately $700,000,000 to $760,000,000 and adjusted free cash flow of approximately $200,000,000 to $230,000,000 As I said earlier, after Chris' financial commentary, I'll have some additional remarks regarding our recently announced strategic combination with Dowling. Now let me turn the call over to Chris. Thank you, David, and good morning, everyone. Will cover the financial details of our fourth quarter and full year 'twenty four results and our 2025 outlook, which you today. I will also refer to the earnings slide deck as part of my prepared comments. So let's go ahead and begin with sales. In the fourth quarter of twenty twenty four, 8AM sales were $1,380,000,000 compared to $1,460,000,000 in the fourth quarter of twenty twenty three.

Slide eight shows a walk of fourth quarter twenty twenty three sales to fourth quarter twenty twenty four sales. Volume, mix and other lowered sales by $61,000,000 North American production declined by approximately 3% and we were impacted by the timing of launches of new next generation products, Pricing was $5,000,000,000 in the fourth quarter, and metal market pass throughs and FX lowered net sales by approximately $16,000,000 as both were lower year over year. The full year of 2024, AAM sales were $6,120,000,000 as compared to $6,080,000,000 for the full year of 2023. The primary drivers of the increase were volume and mix, partially offset by lower metal market pass throughs and FX. Now let's move on to profitability. Gross profit was $154,300,000 in the fourth quarter of twenty twenty four as compared to $154,900,000 in the fourth quarter of twenty twenty three. Adjusted EBITDA was $160,800,000 in the fourth quarter of twenty twenty four versus 169,500,000.0 Last year, You can see the year over year walk down of adjusted EBITDA on Slide nine. In the quarter, decline in volume mix and other impacted adjusted EBITDA by $20,000,000 in the fourth quarter versus the prior year. R and D was slightly lower year over year and performance was $10,000,000 Favorable.

For the full year of 2024, AAM's adjusted EBITDA was 749,200,000.0 adjusted EBITDA margin was 12.2% of sales. For the full year, this was an 80 basis point margin improvement as we delivered favorable year over year performance every single quarter, This year, SG and A expense including R and D in the fourth quarter of twenty twenty four was $89,000,000 or 6.4% of sales. This compares to $95,700,000 or 6.5% of sales in the fourth quarter of twenty twenty three. AAM's R and D spending in the fourth quarter of twenty twenty four was approximately $37,700,000 a slight decline from last year As we head into 2025, will continue to focus on controlling our SG and A costs. We expect R and D expense to be down on a year over year basis by approximately $20,000,000 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 $37,300,000 in the fourth quarter of twenty twenty four compared to $42,900,000 in the fourth quarter of twenty twenty three. [indiscernible] the fourth quarter of twenty twenty four, we recorded income tax expense of $6,800,000 dollars compared to $5,800,000 in the fourth quarter of twenty twenty three. [indiscernible] As we head into 2025, we expect our adjusted effective tax rate to be approximately 30%.

Taking all these sales and cost drivers into account, our GAAP net loss was $13,700,000 or $0.12 per share in the fourth quarter of twenty twenty four compared to a net loss of $19,100,000 or $0.16 per share in the fourth quarter of twenty twenty Adjusted earnings per share which excludes the impact of items noted in our earnings press release, was a loss of $0.06 per share in the fourth quarter of twenty twenty four compared to a loss of $0.09 per share in the fourth quarter of twenty twenty three. However, for the full year of 2024, AAM's adjusted earnings per share was $0.51 versus a loss of $0.09 per share in 2023. Let's now move to cash flow and the balance sheet. Net cash provided by operating activities for the fourth quarter of twenty twenty four one hundred and fifty one point two million dollars compared to $52,900,000 in the fourth quarter of twenty twenty three. Capital expenditures, net of proceeds from the sale of property, plant and equipment for the fourth quarter of twenty twenty four were $77,600,000 Cash payments for restructuring and acquisition related activity for the fourth quarter of twenty twenty four were $5,600,000 Reflecting the impact of these activities, AAM generated adjusted free cash flow of $79,200,000 in the fourth quarter of twenty twenty four.

We the full year of 2024, AAM generated adjusted free cash flow of $230,000,000 compared to $219,000,000 in 2023. Our increased cash flow was driven by our stronger operational performance, [indiscernible] and lower interest costs. From a debt leverage perspective, we ended the year with a net debt of 2,100,000,000.0 LTM adjusted EBITDA of 749,200,000.0 calculating a net leverage ratio of 2.8 times at December 31.

This is down nearly a half a turn from a year ago at 12/31/2023, During 2024, redeemed all our remaining twenty twenty six senior notes a total of nearly $130,000,000 including approximately $46,000,000 in the fourth quarter.

AAM ended twenty twenty four with total available liquidity of approximately 1,500,000,000.0 consisting of available cash and borrowing capacity, at AAM's global credit facilities. Before we move to the Q and A portion of the call, let me provide some thoughts and details on our 2025 financial outlook. In our earnings slide deck, we have included walks from our '24 actual results to our 2025 financial targets and you can see those starting on Slide 11. 2025 will bring about many exciting opportunities for AAM to grow and drive value creation. The guidance figures we are providing today are on an AAM standalone pre combination basis and do not reflect any costs or expenses related to the announced combination with Dolly. For sales, we are targeting the range of $5,800,000 to $6,050,000,000 for 2025.

To begin, the sales target is based upon a North American production of approximately 15,100,000 units at the midpoint and certain assumptions for our key programs. Such as we anticipate GM's full size pickup truck and SUV production in the range of 1,300,000 to 1,400,000 units. [indiscernible] In addition, 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 twenty twenty five. And our financial guidance reflects that timing as you can see on our walk. From an EBITDA perspective, we are expecting adjusted EBITDA in the range of $700,000,000 Let me provide some color on the key elements of our year over year EBITDA walk that is on Page 12. We expect decremental margins for our volume and mix change to be slightly lower than our average of 25% to 30% as our India commercial vehicle margins are lower than our overall average. As mentioned earlier, our focus on optimizing our spend R and D, should yield a year over year improvement of $20,000,000 and AAM expects to deliver continued cost reductions operational productivity and deliver year over year efficiency gains. You can see that year over year performance improvements as a net favorable $15,000,000 On Page 10, from an adjusted free cash flow perspective, are targeting approximately $200,000,000 to $230,000,000 in 2025.

The main factors driving our cash flow changes are as follows: have higher capital expenditures stemming from investments for our largest truck platforms next generation products. These are the cornerstone for AAM's revenues and profitability for a long time to come. Even with the scale of these programs, we've been leveraging our installed capital base, driving purchasing efficiency and operational effectiveness. And we are targeting CapEx as a percent of sales in 2025 of approximately 5%. Lower outstanding debt, also means lower cash interest of approximately $10,000,000 We do see higher cash taxes in 2025 the range of $60,000,000 to $70,000,000 in total, which is approximately $15,000,000 higher than 2024. As for working capital, we believe we have continued opportunities across all areas of our working capital in 2025 and expect good performance in this area. And lastly, while not included in our adjusted free cash flow figures, we estimate our restructuring payments to be in the range of $20,000,000 to $30,000,000 for 2025 as we look to further optimize our business and further reduce fixed costs While we do not provide quarterly guidance, we do want to provide some perspectives on timing in 2025. As it relates to revenue cadence for the year, due to early January downtime at key customers and the continued ramp curve of a key next generation program launch in North America, we anticipate the first quarter sales per production day to be lower relative to the remainder of the year In addition, expect a normal seasonal cash flow use in the first quarter of the year.

So taking all that in, what does it mean? It means on a standalone basis, AAM is driving increased margins, delivering strong and steady cash flow, and positioning its portfolio to support arguably one of the best automotive product franchises around that being North America light trucks. And when we combine with DALL E and its complementary product set, and performance capabilities, this will be an even more exciting company. You for your time and participation on the call today. I'm going to stop here and turn the call back over to David Dowd for his closing remarks regarding our upcoming combination. David? Thanks, Chris.

And before we go into the Q and A session, I wanted to discuss our transformational combination with DALLE that we announced on January 29 compelling strategic combination brings together two complementary global Tier one suppliers to create a leading global driveline and metal forming company the world. Simply AM plus DALE creates a more balanced and more resilient company with revenues on a non adjusted combined basis of approximately $12,000,000,000 Combined adjusted EBITDA margin, including $300,000,000 of run rate synergies of and we anticipate day one net leverage after the impact of the transaction financing of approximately 2.5 times including synergies. Finally, close of the transaction, we expect strong earnings accretion in the first full year. Upon closing, AM will become a top 10 North American and top 25 global supplier. From a diversification standpoint, the combined business benefits greatly from a more balanced customer mix, and geographic presence. We anticipate our GM concentricity to reduce 25% post close from approximately 40% today. As to our geographic presence, our North American dependence reduces to 54% from 73% today while our European and Asian exposure grows. This improved geographic balance allows us to better serve our customers where their operations are located, which positions us to grow the business that we already have and importantly gain new customers.

In summary, this strategic combination provides a more robust business model positioned to deliver higher earnings and cash flow. DALLE is a market leading high technology engineering group, which is comprised of two operating business units, GKN Automotive and GKN Powder Metallurgy. GCAN Automotive is a leader in the development and production of side shafts prop shafts, all wheel drive systems, e drive systems, and e powertrain components. GCAN powder melogy is a global leader of high performance and precision powder metal products for the automotive and industrial markets. This transaction brings together a complementary product portfolio with DALL E strengths and side shafts coupled with AAM strength and axles. On Slide 18, you'll see that DALL E is a pioneer of automotive CV joints is the number one global supplier of side chest in the world. SideShafts deliver power to the wheels for ice, [indiscernible] DALL E possesses industry leading technology and strong vertical integration which complements and expands AAM's existing capabilities. As industry transitions to electrification, the content per vehicle opportunity for SideChase increases.

This is another great benefit of this power train agnostic product line. This strategic combination is expected to deliver approximately $300,000,000 of synergies. We expect run rate savings to be approximately 60% achieved after year two and the remainder substantially achieved by the third year after the deal closes. The transaction positions AMs for high margin potential strong earnings accretion strong cash flow and a strong balance sheet.

We are already making plans to integrate our two businesses so that when we close, we will confidently hit the ground running to achieve these synergies. Which we have a solid track record of delivering with other deals that we have completed over the years. Furthermore, our confidence to achieve these synergies is very high based on the robust process that we were required to undertake in order to announce our $300,000,000 synergy number. In person diligence sessions for 10 work streams which were conducted over multiple weeks between AM and Dallie's management teams with the support of our respective global This process ultimately resulted in both a quantified synergy report and a supporting opinion being issued by an outside accounting firm. Our process is to identify greater opportunities or what we call a market basket well in excess of our targets. This supports our ability and our high confidence level to deliver these synergy opportunities. As such, on Slide 21, you can see the cash flow generation potential is very strong. Plus the realization of full synergies, Based on the applied combined market cap of the company, this implies a very attractive 50% let me say it again, 50% free cash flow yield.

Now let's transition to financing the balance sheet and capital allocation. We have fully committed financing in place to support this transaction. And we expect to raise approximately $2,200,000,000 of new debt financing to refinance Dowless' existing debt and fund the cash purchase price of the deal. At closing, this deal is anticipated to be approximately net leverage neutral [indiscernible] and we expect to have ample liquidity available to us. Regarding capital allocation, historically, AIM has focused on organic growth and debt pay down. However, as a combined organization, with greater size and scale, and higher free cash flow generating capability, once we are below 2.5 times net leverage including a strong consideration of recurring capital to our shareholders. Finally, on the regulatory front, EIM and Dolly have already done a significant amount of analysis and preparatory work and have already actioned a number of items. On February 7, AAM submitted its U. S. Regulatory filing Additionally, AAM has progressed with other country filings and engaging with appropriate regulators. Expect regulatory approval and closing in the fourth quarter of this year and we are happy to share that initial customer feedback has been supportive given the complementary nature of the product and the customer portfolios.

Are extremely excited about the strategic combination as it will create an organization with meaningful size and scale, and synergy opportunities a more robust business model based on compelling strategic rationale and industrial logic, a powertrain agnostic product portfolio while realizing enhanced diversification, A strong experience and blended management team with a proven track record for success Significant margin and earnings accretion while accelerating opportunities for growth. And finally, strong value creation for all stakeholders included an enhanced capital allocation policy in the near future. In conclusion, AM delivered strong 2024 financial results. We are positioned to have a solid year in 2025 as a standalone company. And we are excited about the future strategic combination thank you for your participation today. Before I turn it over to David Lim to start the Q and A portion of the call, we also want to let you know that we are planning to do investor meetings in New York, and Boston for current and prospective shareholders we have shown interest in AAM. These means will be held on February 24, and February 25, respectively. Please feel free to email david. Limaam dot com to register your interest. I will now turn it back over to David Lim to start the Q and A portion of our call.

David?

Thank you, So operator, can you start with the question and answer session, please? Today's first question comes from John Murphy at Bank of America. Good morning, guys. Just have a couple here. David, when you were mentioning maybe when you're going through the walk on the outlook, you mentioned mix and volume. I'm just curious if you could talk about sort of that in the context of GM trucks and then also the Ram HD what your expectations are on those two specific programs for mix?

Yes. So the underpinning at the macro level, John, 15,100,000 North American American, overall. From the T1 perspective or the GM full size truck, I should say, about the range of our revenue mix, anywhere from 1,300,000 units to 1,400,000 units for the full year. And then some of our other top platforms like for example, the the upcoming Ram HD platform as you know has been transitioning model years the end of last year beginning of this year. Big picture, we would see that relatively flattish year over year. Because there was declines in the fourth quarter. We expect lower volumes in the first quarter, but then picking back up the production run rates in the second quarter and beyond.

Just maybe in the T1, is there something going on with mix that platform where you think it might be less rich, maybe less 4x4s or is it that mix relatively flat?

It's relatively flat. We continue from that perspective, we continue to see strong robust demand on the HD, the heavy duty side. In terms of let's call it, platform mix inside of that and obviously strong mixed stalls on the SUV. From a four wheel drive perspective relatively flat.

Got it. And then just a follow-up on Dele. The R and D, it's down $20,000,000 and the CapEx is down $50,000,000 in your outlook for 2025.

Is that Is that organic or is there some kind of precursor of understanding that you might be able to use some of the capital at LA, particularly on the capacity side and some of the R and D from some of their products to overlay and save even before you get to the close? Or is this really stuff that you're doing purely on an organic basis, Yes, this is purely organic, John. The guidance is our stand alone guidance perspective. Got it. And then just lastly, Dele, you mentioned the customer reception was pretty good or actually very good, I should say. But can you talk about the customer reception outside of the D3 and the incumbent European companies? I mean, has there been any commentary from the Asian brands or the Chinese brands that might lead you to believe you might have a real revenue synergy above and beyond what we're talking about so far?

Yes, John, this is David. Again, on the Detroit III, everything was very positive in regards to the initial [indiscernible] again, people are excited about two complementary business coming together. The product portfolio becomes more expansive Therefore, we'll be able to cross sell and have greater opportunities with different customers around the world. They like the stability and the technology and the innovation that both companies bring to the table. So that's important. At the same time, remember, Dolly has a very important joint venture in [indiscernible] There's obviously a relation that we want to maintain and continue there and grow that. And there'll be meetings that will be upcoming with respect to the leadership of that joint venture and the ultimate customers. But it's been overall positively received Europe, in Asia and here in North America. So we're very happy with the initial feedback from the customers.

That's great. Thank you very much guys.

Thank you. And our next question today comes from James Picariello with BNP. Hey, guys. This is Jake on for James.

So I think we all appreciate the level of detail you've given us on some of these cost synergies and how that flows through to pro form a free cash flow? But can you just talk a little bit about maybe any top line synergies you see especially given complementary insurance portfolios? Thank you.

Well, as I just mentioned, I mean, you're bringing together two very complementary businesses whose product portfolios support and are complementary and expansive to one another. So there's going to be cross selling opportunities we think with multiple customers globally around the world. So we definitely see opportunity for revenue growth that way. We also recognize and understand that They're innovative and technology leading based company. We've done similar things. We both have positioned ourselves very well on the electric electrification front, when the markets take off there. And obviously, that's going to vary by region of the world where China is already leading an active Europe is moving along because of CO2 requirements changing, meaning getting tougher And then in North America, we know that it's slowing down a little bit here under the Trump administration. But regardless of the administration, we're putting ourselves in a position that we have a product powertrain agnostic product portfolio that can support the consumer requirements and the market requirements on a go forward basis. And we see tremendous opportunity and flexibility and optionality with our portfolio. Especially as we bring these two dynamic and positive companies together. Thanks, David. And could you guys also just kind of help me with the free cash flow bridge So at the midpoint of your EBIT EBITDA was down about $30,000,000 CapEx up about $50,000,000 and you've managed to hold free cash flow more or less flat year over year.

So is there any working capital benefit driving that. And Should we think about some sort of potential unwind in 2026 or is this number that could potentially continue to move move higher once we get through the next generation GM full size launch. Jake, this is Chris. I'll take that. You can see our free cash flow bridge on Page 13 of our earnings deck another contributor to favorable cash flow is we do expect some favorability as it relates to lower interest expenses as we've been paying down our debt. But from a working capital perspective, that's going to be a key driver for us here in 2025. From an inventory perspective, we see still continued opportunity there. From a turns basis, we've been relatively flat year over year, which means we have opportunity continue to reduce that down to levels we ran pre COVID as things are stabilizing across the industry. In addition from our payables and receivables, let's call [indiscernible] type of working capital elements, we see some additional opportunity inside those So we're excited to get at that working capital and I would not really envision any unwind of inventory or others as we clear through '25 on these structural changes for working capital.

Very helpful. Thanks, Chris.

Thank you. And our next question today comes from Edison Yoo with Deutsche Bank. Hey, thank you for taking our questions and good morning. [indiscernible] Great.

I want to ask on the transaction and maybe more of a strategic or higher level point of view. It seems that we've seen a lot of suppliers kind of go the opposite way where they're getting smaller Great. Kind of the approach of getting bigger and expanding. So I'm curious, you look down wherever three, four five years, what do you think the supplier landscape looks like? Is it [indiscernible] Be more your direction that more people are going to consolidate or do you think that actually this is other kind of countertrend that's been happening over the last couple of years actually is is the way it goes. Listen, this is David Douc.

I've been saying for years that I feel that the automotive market needs to consolidate both at the OEM level as well as and especially at the supplier level. I'm still true to my conviction that way and my beliefs and our thought process Our team feels very strongly about that. That's why we've done a lot of the acquisitions that we've done. The biggest one we did was MPG back in 2017. But now this is even bigger here with Dow Lake here 2025. We think the markets are very uncertain, very dynamic. And you need size and scale to be able to weather the storm and be in a position that you can balance the requirements that are out there And there's new challenges every day that the market brings. Or countries or regions bring. We need to be in a position to leverage those global resources, those expansive resource that we have. But most importantly, when it's all said and done, we've got to bring solutions to our customers that meet their needs and ultimately meet the market needs, meaning the consumer and what they want. And we think bringing together two complementary companies with an expansive product portfolio that's very We're doing just what the market and what our customers need.

And we're very pleased with the strength that they have with their leadership team. Combined with our leadership team. We'll blend that together We'll have a leading and proven management team that has tremendous experience and we'll be able to manage that effectively going forward.

Yes, there are some people that are taking actions to reduce their concentricity in different regions or actually not of certain businesses. What we're trying to do is make sure that we have a powertrain agnostic portfolio that can meet the requirements no matter what the market conditions are on a global basis. And we're still true to that. At the same time, we recognize that each region requires a different strategy.

But holistically, there's a way that we can balance that out and be efficient from an operation standpoint and from a product development and from a cash management standpoint going forward. So long answer to your question, but the short answer we feel very strongly that the markets will continue to consolidate going forward. That's the whole premise of our strategic [indiscernible] Not only do we feel that way, the Dowling Board and management team feels that way as well. And others that I've talked to in the industry also. That way.

Appreciate the [indiscernible] Follow-up on the DALA side, for those of us maybe not as as close, you've had quite a bit of time to do work. The Chinese business, the China business on there is actually quite strong. I think maybe to many people's surprise, Can you maybe from your perspective, maybe describe why that is given just the level of competition there I think we're kind of from The U. S. Perspective on the impression that the local suppliers would be doing much better. So curious as to why maybe you think they're actually holding up quite well, they're doing quite well there?

Well, I mean, I think you have to recognize first and foremost the two joint venture partners. That being ASCO and that being GKN and the management teams and the strategy that they put together for that JV. That JV is 35 years old. It's been a lot of experience there. They're tailored and designed. China for China as far as support the local market. They've got an effective product portfolio heavily weighted towards Hash Ash, but also supporting all wheel drive and electrification and e powertrain components. For that market, which is what's in demand. They've got a competitive cost structure. And supportive management team. That is growing both with the domestic Chinese manufacturers or OEMs as well as with the international or Western OEMs that are doing business in China. So credit to those two organizations, we had nothing to do with that. However, what we want to do is make sure that we not only maintain the relationship, but build on that relationship especially as our product portfolio expands as a combined business. And then we'll look to bring other operational excellence in support to that joint venture going forward. But don't mess with something as you said that's performing very well.

So we just got to meet that management team that's over there and that new partner going forward. And appropriate meetings will take place first and foremost, which between DALLE and their existing partner. And then we'll follow-up with the appropriate meetings with myself and others to meet their leadership team and position ourselves and talk about what the future holds.

Great. Thank you. And our next question comes from Doug Carson at Bank of America. Please go ahead.

Great, guys. Good morning. Thanks for hosting the call. Good morning, Nick. I'm kind of excited about the scale getting bigger In my career, think rating agencies kind of like [indiscernible] auto suppliers [indiscernible] give you some mass relative to the market pressures and you're actually emerging with a company that had lower leverage than than AAM. And the combined entity, I think out of the gate, you said it would be about 2.5 turns of leverage I think you made some comments that maybe going forward you'll be able to harvest some of the cash flow to get back to equity rather than the delevering that we've seen in the last few years. So when might this kind of I know the agencies kind of commented, but do you think longer term you could safely get [indiscernible] the combined entity more into the mid BB range rather than single B range for ratings given the scale almost double? [indiscernible] A few questions in there. This is Chris. I'll take crack at a few of those. First of all, we agree with your enthusiasm about the size and the scale. But as it relates to delevering, if you listen to some of our comments we talk about at 2.5x, we would open up to some additional capital allocation priorities.

But before that happens, we will continue to reduce and strengthen our balance sheet down into the 2.5 times. So we'll continue to prioritize the organic growth. We'll continue to prioritize debt repayment and drive a stronger and stronger balance sheet through that process. So I think that's a key point to keep in mind. And then we would have a balanced portfolio or balanced capital allocation going forward, which would still include an element of debt reduction as well. It wouldn't be solely overweight one versus the other.

Right.

But longer term, obviously driving higher ratings is critical to cost of capital. But so we're focused on the elements of those, whether the agencies rewrite us or not, that's up to them, but we're focused on strengthening the balance sheet reducing our leverage, the size and scale, free cash flow to debt ratios, things of that nature, elements of our business that are good for the business will ultimately drive to a stronger company and hopefully will reflect in the ratings over time.

That's helpful. And then maybe just a quick follow-up. There's obviously lots of headlines around tariffs and steel prices and I know that you've got some pretty good pass through capabilities in Seal. Can you just kind of refresh us on you're looking at some of those commodity risks out there in the market? Yes, Doug, this is David. I'll take the first shot at it and Chris can comment on it. But I think you know and others know and we've been very forthright that our long standing policy has been to buy and build local in the regions that we support and that we serve. And that's proved very effective to us in mitigating tariff risk that we're experiencing in the past, but also potentially experienced here in the future. We'll obviously look to mitigate any other impacts that may happen once they get announced in regards to what's going on between The U. S. With Canada, and Mexico, and we'll see where that goes in March. With respect to steel and the aluminum side right now, We have very minimal exposure as our U. S. Steel and our aluminum is sourced [indiscernible] So we feel very good about where we are that way.

We just got to understand what the details are going to be with respect to the tariff strategy or policies between The U. S, Mexico and Canada. As well as any other countries that may be involved longer term. But overall, like I said, our strategy is to buy and build local. And that benefits us when you have tariff issues or trade war issues that are taking place. Chris, any other comments at all? Yes. And you referred to Doug some of the pass through mechanisms. If this activity brings more volatility to the input costs, not tariff related, but that are driving the commodity costs to go into our product. As you know, we pass around 80% plus up and down to the customer by contract on this. So we are insulated and protected from of that say not tariffs, but the the market inputs that impact our purchases through our supply base. So that's a nice protection mechanism for the company. [indiscernible] It is good.

Thanks guys. That's it from me. [indiscernible] Thank you. And gentlemen, your last today comes from Dan Levy with Barclays.

Hi, Josh on for Dan today. Thanks for taking my question. I had a question on just backlog and bidding dynamics. I know you've said in the past couple of air pocket while the OEMs consider their EV plans and I saw today that there's an extension on the four program, which I guess would not be included in the backlog.

Wanted to see how exactly things are going with bidding and if you're seeing a greater ICS Yes. So this is David, and I'll let Chris talk from there. As we've said all along with the OEMs reevaluating their product portfolios right now, it is creating a bit of an air pocket in regards to some of the sourcing here. In the initial years, meaning, let's say over the next three years, But at the same time, we've been very forthright in regards to to what our backlog has been over the last three years and there's not a meaningful five, slightly lower just based on some of the re timing and re volumes of some of the programs that the customers put forward. I think the most important thing for us and the big swing that we're seeing right now is we're still actively quoting about 1,000,000,005 of new and incremental opportunities. And again, our backlog is only new and incremental. We don't count any replacement business in that. But on that new and incremental business that we're quoting, in the past couple of years, that was heavily weighted towards electrification like 75%, 80% Today, that has swung the other way.

Where we still have some electrification in it, but it's more heavily weighted towards and hybrid applications going forward. So what we're very excited about is the fact that one, we've got our next generation business essentially and substantially secured, which I covered in my earlier remarks. Two, we're actively quoting on $1,500,000,000 of new and [indiscernible] of our ICE and Hybrid business today, but at the same time three, we have already have an existing portfolio and that portfolio will expand with DALLE that better positions us with the powertrain agnostic portfolio to quote on more electrification requirements as they evolve.

Based on the different markets globally around the world. And then we'll also be able to leverage the global footprint of the two organizations to better position ourselves from a cost effectiveness standpoint so that we improve our hit rate of trying to win that new business going forward. But overall, we feel good about the market basket of opportunities. There is an air pocket going through the industry, not only for AM, but many [indiscernible] But most importantly, a lot of the programs are being extended which is a positive because that allows us to continue to drive operational efficiency and financial performance with COVID-nineteen. We delivered in 2024 and we were positioned to deliver as a standalone company in 2025. And we obviously, we've conveyed what we think the synergies are and the incremental opportunities when we bring DALA and American Axle together.

As a quick follow-up on that, of the R and D decline year over year, would you say a lot of that is within EV spending given the slowdown and assuming there's an uptick in hybrid next couple of years, would that require any incremental spending beyond your current ICE and EV port is that kind of already included in what you already have?

Yes, I would say, hey, Josh, this is Chris.

The R and D decline is to align really with current market requirements and demands of our customers. Part of our elevated spend over the past year or two has to been to build out our eDrive portfolio, which we now have in place and has gained a lot of traction in China and other markets as well. So that's sort of done and behind us. So we can now start to reap the cost benefits of sort of repositioning with the curve market dynamics and harvest those savings this year and we would expect going forward. The nice thing about the hybrid applications for us in many cases uses the exact same product as our ICE vehicle products. There's not a lot of R and D associated with that. So that's a that's a perfect alignment of some of that powertrain applications between ICE and a hybrid perspective.

Okay. Thank you. Thank you, Travis. I think that was our last question. And we thank all of you who have participated on this call. And appreciate your interest in AAM. We certainly look forward to talking with you in the future.

Thank you. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.