Earnings Call Transcript - DCH Q1 2025

Operator, Operator

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 Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. As a reminder, today's call is being recorded. I would now like to turn the 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 3492897. This replay will be available through May 9. 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 2 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 Dowlais in any jurisdiction where such offers or solicitations are not permitted by law. The subject matter of today's call will be addressed in the 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 Dowlais' case in Dowlais' 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. So, 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 4. In the quarter, we exited our Hefei AAM automotive and Liuzhou 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 Dowlais 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, and 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 Dowlais 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. And 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. But 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 plans. Specifically on tariffs, we are working diligently to mitigate what tariff impact we can. 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 strength. For example, we are receiving inquiries about our U.S. metal forming operations that will leverage our installed capacity as our customers are weighing onshore options to address the tariff concerns that are out there. Furthermore, as we combine with Dowlais, 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 to $5.95 billion. Adjusted EBITDA in the range of approximately $665 million to $745 million and adjusted free cash flow of approximately $165 million to $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 can't be overstated. Our core operations are gaining performance momentum that you can see in our results. Our combination with Dowlais 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 constructive manner. To conclude my remarks, our aim is on the future, and we're going to continue to drive our efforts toward, first and foremost, closing and integrating the Dowlais transaction, generating strong free cash flow, strengthening our balance sheet, advancing our ICE hybrid and EV portfolio to be more agnostic, and position AAM for future profitable growth. So 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, Executive Vice President and Chief Financial Officer

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. So, 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 8 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 walk down of adjusted EBITDA on Slide 9. 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 form business unit. Even with lower sales, the metal form 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 million to $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 the 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. So, 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 to 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 could be some timing lags, but overall, our assumption is clear. With that background in place, let's talk about our guidance on Slide 6. Our outlook has been adjusted from our initial targets provided on February 14. 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 to $5.95 billion. This sales target is based upon a North America production range of 14.0 million to 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 to 1.4 million units within that range. From an EBITDA perspective, the range is now $665 million to $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 to $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 stand-alone entity to continue to be in the range of $20 million to $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 stand-alone pre-combination basis and exclude any costs or expenses related to our announced Dowlais 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 that range, especially as we gain more momentum on our internal performance improvements, volume levels become clearer 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. So at this time, please feel free to proceed with any questions you may have.

Operator, Operator

The first question is from Joe Spak with UBS. Please go ahead.

Joe Spak, Analyst

Good morning. I guess I just want to, I guess, 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., like maybe you could give us a sense as to sort of what utilization is there. And then, even if you wanted to sort of up that, I know about a year ago, we were sort of talking about some labor challenges. So, is that something else we need to consider in that situation?

David Dauch, Chairman and CEO

Good morning, Joe. This is David. Our approach remains focused on buying and building locally, as we've mentioned before. We aim for our products to be more substantial and to be close to our customers. We're continuing this strategy. What we need now is clearer information from the government and our OEMs regarding their long-term financial and product plans, as well as their production requirements. Based on that information, we'll adjust as needed to support our business in coordination with our customers. We strive for high capacity utilization in our facilities, although we do have some available capacity in Three Rivers since we exited a program. We can also make adjustments in some smaller facilities by shifting our component and machining operations to create more space in the larger plants for assembly. Additionally, if the deal with Dowlais closes by year-end, it will increase our capacity in the U.S., allowing us more opportunities to collaborate. We aim to maintain our capacity utilization at a minimum of 85%, and we are flexible enough to work with our customers to make necessary adjustments going forward. Regarding labor, the situation has improved, though it's not fully resolved. Companies need to offer competitive wages to attract the right talent. If more jobs return to the states, it will likely necessitate increased use of robotics and automation moving forward. We are already implementing many of these technologies, and if we need to scale up, we'll expedite those efforts. I hope this answers your question.

Joe Spak, Analyst

Thank you for the information. My second question is about understanding the potential tariff exposure for Dowlais. I assume you have conducted some research on this topic as well. Could you clarify what that exposure might look like?

Chris May, Executive Vice President and Chief Financial Officer

Yeah, Joe, this is Chris. I'll take that. In terms of Dowlais exposure, obviously, they need to comment on them as a stand-alone company. We're not at liberty to speak on their behalf. However, if you look at their footprint, in many cases, it's 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, so combined, this will bring us even more, I would call it, size and scale and production locations to navigate through exactly the same items that we're talking about here today. We see some benefits as we combine together in this topic.

Joe Spak, Analyst

Thanks for that.

Operator, Operator

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

Edison Yu, Analyst

Hey, good morning. Thanks for taking our questions.

David Dauch, Chairman and CEO

Good morning.

Edison Yu, Analyst

So, 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 in the guidance on the full-sized trucks?

Chris May, Executive Vice President and Chief Financial Officer

Yeah, Edison. So, underpinning our guidance, as I mentioned in some of my prepared comments, was 1.3 million to 1.4 million units on 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. Their light-duty, their heavy-duty and their SUV applications. And if you think about the core products we support, especially on the heavy-duty side, there's 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 don't see that really waning on the heavy-duty side. The SUV has been very strong demand built in Arlington, Texas, which is great, and we continue to supply and support that operation. Then 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. But we are generally very bullish on that platform, and we continue to expect good solid demand, but we did articulate at least a range inside of our guidance on how we think about that.

Edison Yu, Analyst

Understood. For the second question regarding Dowlais, I know you reiterated the timing and that the votes will occur in the third quarter. How has the macro volatility around policy affected this? It appears it hasn't had much impact, but could you comment on whether this has delayed the process or made it more complicated?

David Dauch, Chairman and CEO

This is David. It doesn't make the process any more complicated. I think as Chris indicated, they've got a similar policy that we do to try to buy and build local in the region. They've obviously got to navigate their USMCA compliance as well. As Chris also indicated, and we identified as part of the synergistic opportunity, we also think that there's in-sourcing opportunities that we can leverage each other's strengths. But in the meantime, we have to operate as two independent companies and make those decisions independently on our own. But as we come together, then obviously, we'll take advantage of those opportunities and leverage the required footprints that are in place. But back to your original question as far as how does the policy impacted? I think they're 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, Analyst

Great. Thank you.

Operator, Operator

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

Unidentified Analyst, Analyst

Hey, this is Justin on for Itay. Thanks for taking the question. So, a quick one on just general customer schedules. How are things looking near-term? 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

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, beginning here in the second quarter. Again, largely due to what's going on with the tariff policy issues that are out there. And again, I would just need to understand and get clarity so we can plan our businesses is really what it comes down to. But 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. But there is some volatility that's found its way into the schedule, no doubt about it.

Chris May, Executive Vice President and Chief Financial Officer

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

David Dauch, Chairman and CEO

Yeah. And some of the customers have taken certain assembly plants down, that's impacted multiple suppliers. Fortunately for us, we haven't been impacted as much by that, and we're benefiting from the strong performance of the key platforms that we're on.

Unidentified Analyst, Analyst

I appreciate the details you've provided. For my second question, regarding the low end of the North America production at $14 million, could you clarify any significant assumptions that might be included beyond the GM programs for key program exposure? I'm trying to better understand the lower end of that range in relation to the revised low end of the sales guidance.

Chris May, Executive Vice President and Chief Financial Officer

Yeah. As we talk 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 low-volume production as they were stepping into their next generation of product in the first quarter, and they continue to step through that. But 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.

Operator, Operator

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

Tom Narayan, Analyst

Hi. Thank you for the questions. Currently, the existing tariff policies state that parts compliant with USMCA are exempt from tariffs. However, there is still potential for the administration to evaluate further U.S. content requirements. It seems that everyone expects this to remain in place, and if that's the case, the direct tariff impact on your operations is quite limited. Would you agree?

Chris May, Executive Vice President and Chief Financial Officer

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

Tom Narayan, Analyst

There seems to be a shift in sentiment this week, likely following the administration's policy change on Tuesday. We've heard from some OEMs who are reporting results that suggest a more constructive or optimistic outlook regarding the administration's approach to the U.S. auto industry. While this isn't a specific question about American Axle, I would appreciate hearing your thoughts on this at a high level and whether you share that sentiment. Thank you.

David Dauch, Chairman and CEO

Tom, this is David. The administration is following through on their campaign promises to build a strong manufacturing base in the U.S. and support the auto industry. They are focused on bringing jobs back to America and fortifying our economy. While we're currently facing challenges, we need to stay patient and work through these issues together instead of overreacting. I believe that once we move past this, America will emerge stronger. Additionally, there is a significant push for foreign investment to remain in the U.S., which will create jobs for Americans. A key concern raised earlier by Joe is the availability of labor, as there are many open positions right now. This situation makes it imperative for us to adopt automation and robotics to meet potential job creation resulting from these policies. The administration is addressing the longstanding tariff imbalance to level the playing field for U.S. industries, including the auto sector, to remain competitive. If we do not adapt, some businesses could face long-term risks. Overall, I support the administration's direction, even though it has introduced additional work for all of us. Chris and I believe that, in the end, this will yield positive outcomes, especially for our metal forming business, given the need for onshoring and reshoring. We remain committed to our policies of buying and building locally, leveraging our resources as needed, and offering solutions to our customers to address their current concerns. That's my perspective; Chris, do you have anything else to add?

Chris May, Executive Vice President and Chief Financial Officer

Exactly.

Tom Narayan, Analyst

All right. Thanks a lot.

David Dauch, Chairman and CEO

Yeah, thank you.

Operator, Operator

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

James Picariello, Analyst

Hi, good morning, guys.

David Dauch, Chairman and CEO

Hi, James.

James Picariello, Analyst

My question is about GM. They announced the transfer of 50,000 annualized units from Mexico to their Fort Wayne plant. I'm curious if they will be able to fully in-source and support those axles, or will you supply the entire driveline system at the Fort Wayne plant?

David Dauch, Chairman and CEO

Yes. I mean, Fort Wayne today is being supported by both AAM and General Motors. So yes, there's an incremental volume that's going there. At the same time, GM has got contractual obligations, and we'd expect them to honor those contractual obligations. But 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 the administration 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. But we do supply all the GM assembly plants around North America based on the portfolio that we have in place and the plans that we have in place. So, we're supplying Fort Wayne, Arlington, Flint, Oshawa and more; but we'll just have to work that out with the customer as we get a little bit more clarity.

James Picariello, Analyst

So, the content for AAM is very similar in terms of the Mexico versus Fort Wayne?

David Dauch, Chairman and CEO

Absolutely. At the same time, GM only has so much installed capacity on the axle side based on the agreements that we have. And like I said, there's contractual obligations there as well. But 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, Analyst

Got it. Just to clarify, is the business that you sold in the first quarter, which appears in the cash flow statement, the India business we discussed that is likely to be sold in the second half, or is it something else?

Chris May, Executive Vice President and Chief Financial Officer

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

James Picariello, Analyst

Perfect. Thank you.

Operator, Operator

Next question is from Dan Levy with Barclays. Please go ahead.

Dan Levy, Analyst

Hi, good morning. Thanks for taking the questions. I want to follow up on the questions on modifying footprint. And 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 and trying 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 plan, their production footprint is going to be on a go-forward basis. And clearly, if there are new investments that are being put into place, we would expect some recovery and sharing of that responsibility. But it's a partnership. We've got to work together.

Dan Levy, Analyst

Okay. But in the context of the CapEx for 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 catch-up on that, correct? Just maybe some context on how it's held.

David Dauch, Chairman and CEO

No. I mean, we've guided that our CapEx to be approximately 5% of sales. We've demonstrated a very strong discipline in the last several years to operate at that number or below, but 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; that will rebalance some of the CapEx to minimize that impact as best we can or spread it out over multiple years to accommodate what we need to do. But clearly, the number one thing we need is just clarity from our customers regarding 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 are not subject to the tariffs, which gives us a lot of flexibility with the existing installed capacity that we have.

Operator, Operator

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

John Murphy, Analyst

Good morning, guys.

David Dauch, Chairman and CEO

Hi, John.

John Murphy, Analyst

I just wanted to follow up on that because I mean customs put a letter out yesterday, basically indicated that USMCA compliant parts were not going to be tariffed for the foreseeable future, and that seems like that's kind of the letter of where this is right now. Is that your understanding? And 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 90% of our product that's USMCA compliant today. We're working to mitigate the remaining balance. At the same time, the administration hinted around about giving credit only for U.S. content. So we're mapping our supply base right now to make sure that we can understand what's USMCA compliant versus U.S. content compliant so that we can mitigate any future impact on a go-forward basis. So, yeah, so we see it as positive news based on what we heard the other day. But at the same time, we have to prepare ourselves because of the comments that were made earlier about only giving benefits on the U.S. content because there's still potential that could be instituted. But right now, we're focused on just the USMCA compliance and making sure that we get all of our parts there and work on substitutions where we 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, Executive Vice President and Chief Financial Officer

And John, this is Chris. The second part of your question, I think, related to the $100 million rest of world exposures. So, I 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, Analyst

Understood. I hope that the letter from customs received yesterday is valid because it indicates that you are in a strong position and won't need to take significant actions in North America. It appears that everything will remain stable, and there’s no need for any adjustments. Regarding CARB and electric vehicles, this topic isn't being widely addressed, but it could be quite significant for the overall business, perhaps even more so depending on your position in the value chain. I'm curious about your perspective on the implications of the cancellation of CARB and the notable decline in electric vehicles for your business in the medium to long term. Additionally, how do you see this affecting potential reductions in research and development as well as other capital investments that may not yield much return, particularly in North America? What are your thoughts on this matter as you strategize for the future?

David Dauch, Chairman and CEO

So, John, this is David. I'll make some comments first, then open it up to Chris. But 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. So that's a big positive for us. It will 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 R&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. And 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. Electrifications is 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 will be at a much slower ramp in North America than what people were projecting or predicting.

John Murphy, Analyst

David, I'm sorry, just to 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, Executive Vice President and Chief Financial Officer

I think they have a very clear view.

David Dauch, Chairman and CEO

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, Analyst

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

David Dauch, Chairman and CEO

Thanks, John.

Operator, Operator

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

Doug Karson, Analyst

Hey, guys. Thanks so much for sneaking me in here at the end. It wouldn't be a fun day without talking about the balance sheet for a moment. With the completion of this transaction, which looks like it's a green light, can you just reiterate how you want to structure the balance sheet as far as leverage? And then, 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 productions. How hard do you think that's going to really be? I know it's hard to make a comment on that. But I mean, in my career, that's been a really slow process to move plants around. And I'm just kind of wondering how you think about it when you're like at the watercooler 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, 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 been billions of dollars to try to build a brand-new assembly plant, and it takes time to do that as well. So, 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. But plants aren't just sitting there waiting; they have to be retooled or built in their entirety for that. This will take years to do. But at the same time, I think the administration is looking for jobs to come back to the U.S., commitments made by OEMs, and they're obviously having discussions with 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 investment has already been announced, and jobs to be created; it's just a matter of the timing to ultimately complete those initiatives that are taking place. So, I think the intent that the administration has to bring work back to the U.S. is working. It's just going to be costly, and it's going to be timely in order to be able to get that done. And like I said, it just doesn't 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. And 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. But we'll balance that based on what the needs and requirements of the administration and our customers are.

Chris May, Executive Vice President and Chief Financial Officer

This is Chris. Let's dial back over 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 stand-alone company for AAM, but also it's positioned very well for the transaction to put us plenty of capacity where we need there from $1.5 billion in terms of revolver capacity. But 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. And then, we're heavily focused, as you know, on leverage. So today, a stand-alone American Axle, we closed March at 2.9 times. Our goal, at least at close of the transaction for 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 of 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. But deleveraging and strengthening the balance sheet is a top priority for us today as a stand-alone company. It will be a top priority for us as a combined company together.

Doug Karson, Analyst

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

David Dauch, Chairman and CEO

Yeah. Agree.

Chris May, Executive Vice President and Chief Financial Officer

Thanks, Doug.

David Lim, Head of Investor Relations

Thank you, Doug, and 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, Operator

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