Earnings Call Transcript - DCH Q2 2025

Operator, Operator

Good morning. My name is Betsy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the American Axle & Manufacturing Second Quarter 2025 Earnings Conference Call. 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 H. Lim, Head of Investor Relations

Thank you, and good morning, everyone. I'd like to welcome everyone who is joining us on AAM's second quarter earnings call. Now, earlier this morning, we released our second quarter of 2025 earnings announcement, and you could access this announcement on the Investor Relations page of our website, www.aam.com, and through the PR Newswire services. You can also find the supplemental slides for this conference call on the Investor page of our website as well. In addition, to listen to a replay of this call, you can dial 1 (877) 344-7529, replay access code 6368162. This replay will be available through August 15. 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. With that, let me turn things over to AAM's Chairman and CEO, David Dauch.

David Charles 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 second quarter of 2025. Joining me on the call today is Chris May, AAM's Executive Vice President and Chief Financial Officer. To begin, I'll review the highlights of our second quarter financial performance. Then I will touch on some commentary about AAM's recent business developments and discuss 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 second quarter 2025 sales were $1.54 billion. AAM's adjusted earnings per share was $0.21 per share. Operating cash flow was $91.9 million and adjusted free cash flow was approximately $49 million. From a profitability perspective, AAM posted year-over-year adjusted EBITDA margin growth in the second quarter, driven by productivity and cost controls. AAM's adjusted EBITDA in the second quarter was $202 million or 13.2% of sales, a 40 basis point improvement compared to last year, even with lower sales and a 60 basis point improvement sequentially. Let me talk about some great updates driving our business on all fronts. We are excited to share that both AAM and Dowlais shareholders voted in favor of the proposed transaction to create a leading global driveline and metal forming supplier with significant size and scale along with strong customer and geographic diversification. The complementary nature of the two businesses is expected to generate substantial shareholder value, yielding an estimated $300 million of cost synergies and strong free cash flow potential. With the positive vote results, we have reached a significant milestone. On the regulatory front, AAM continues to make great progress. Approvals have been received from the U.S., Korea, India, Taiwan, Turkey, and the U.K., and the regulatory approval process in Brazil, China, Mexico, and the EU is progressing well. From a product win perspective, we announced in the quarter that we secured an agreement with Scout Motors to supply both front electric drive units and rear e-Beam axles for the highly anticipated launch of the all-new electric Traveler SUV and Terra pickup truck. Both products can be configured with 100% battery electric or range-extended systems. We are honored to support the revival of the iconic Scout brand and play a significant role in these important vehicle launches with AAM's award-winning electric drive technology. We anticipate production to start in 2027. This business award supports our selective electrification growth strategy and highlights the depth and breadth of our comprehensive product portfolio, including electric drive units and e-Beam axles. Additionally, we closed on our divestiture of AAM's India commercial axle business to Bharat Forge Limited on July 1 for approximately $65 million. The sale is part of our focus to create long-term value for our stakeholders through portfolio evaluation and management. Despite all this exciting activity, we are continuing to manage our daily operations as evidenced by our second quarter results. We maintain a focus on operational excellence to control costs, enhance quality, and boost productivity. AAM's goal is continuous improvement, which was clearly demonstrated in the quarter as our driveline unit experienced margin growth compared to last year, and our Metal Forming group has now recorded five consecutive quarters of year-over-year margin expansion. Moreover, while overall industry volumes declined in the quarter, several of our key truck and SUV programs outperformed the industry, and we expect this trend to continue due to consumer preferences for these vehicle segments. It's also evident that internal combustion engine and hybrid vehicles will remain popular because of American consumer preferences, coupled with recent government policy changes and incentives. Although AAM is prepared for electrification, a longer lifespan for ICE vehicles benefits us as we can further leverage our existing asset base and core products. Now let's shift and discuss trade and tariffs. Trade policies can change quickly, and I want to summarize how AAM is positioned to handle this volatility. Our policy is to buy and build locally, so approximately 90% of the products we produce in North America are already USMCA compliant, and we're working to increase that percentage moving forward. For our North American production needs, nearly all our steel and aluminum is sourced from U.S. suppliers. We do have some capacity available to relocate manufacturing to the U.S. if necessary, and we continue to receive positive inquiries in our U.S. Metal Forming business unit. Furthermore, we will work closely with our customers to mitigate most of our additional tariff costs and seek recoveries with them. Moving to our guidance, we updated our 2025 financial guidance ranges based on the strength of our first half results and the resilience of some of our key product segments. AAM now targets sales of $5.75 billion to $5.95 billion, adjusted EBITDA of approximately $695 million to $745 million, and adjusted free cash flow of approximately $175 million to $215 million. Our guidance ranges are based on an assumed North American production volume of 14.6 million to 15.1 million units. Chris will provide more details on the assumptions supporting our guidance. In summary, AAM had a strong first half performance while successfully navigating market uncertainties and changes in trade policy. We continue to make progress in cost control and margin performance while advancing the Dowlais acquisition by obtaining shareholder approvals and progressing through regulatory matters. We still expect the deal to close in the fourth quarter of 2025, transforming AAM into a premier driveline and metal forming supplier with increased size and scale to deliver shareholder value. Now, let me turn the call over to our Executive Vice President and Chief Financial Officer, Chris May, for the second quarter financial details. Chris?

Christopher John May, Executive Vice President and CFO

Thank you, David, and good morning, everyone. I will cover the financial details of our second 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 second quarter of 2025, AAM sales were $1.54 billion compared to $1.63 billion in the second quarter of 2024. Slide 7 shows a walk of second quarter 2024 sales to second quarter 2025 sales. Volume, mix, and other was lower by approximately $102 million, primarily driven by lower overall volumes compared to a year ago. Metal market pass-throughs and FX increased sales by approximately $11 million. The majority of this is related to foreign exchange, particularly from the strengthening euro. Now let's move on to profitability. Gross profit was $200.7 million in the second quarter of 2025 as compared to $217.3 million in the second quarter of 2024. For the second quarter of 2025, adjusted EBITDA was $202.2 million and adjusted EBITDA margin was 13.2% versus $208.4 million and 12.8% last year. You can see a year-over-year walk down of adjusted EBITDA on Slide 8. In the quarter, adjusted EBITDA was lower due to volume mix and other by $23 million versus the prior year, resulting in a decremental margin of approximately 23%. R&D was lower year-over-year by $8 million as we continue to optimize our engineering spending. Lastly, performance and other was favorable by $9 million. This year-over-year favorability was driven by adjusted EBITDA margin improvements by both of AAM's business units. Driveline's margin increased approximately 30 basis points to 13.8%, while Metal Forming margins increased approximately 20 basis points to 8.9% from last year. AAM remains focused on productivity, efficiency, and cost optimization in all areas of our business, and our trends and results are demonstrating this. Let me now cover SG&A. SG&A expense, including R&D, in the second quarter of 2025 was $100.8 million or 6.6% of sales. This compares to $105.2 million or 6.4% of sales in the second quarter of 2024. AAM's R&D spending in the second quarter of 2025 was approximately $36 million. For the full year, we continue to anticipate R&D expense to be down on a year-over-year basis by approximately $20 million resulting from current market requirements and continued focus on spending optimization. Let's move on to interest and taxes. Net interest expense was $37.5 million in the second quarter of 2025 compared to $41.8 million in the second quarter of 2024. Our lower interest expense was due to lower weighted average interest rates of our outstanding long-term debt and lower year-over-year debt balances. In the second quarter of 2025, we recorded an income tax expense of $28.1 million compared to $17.2 million in the second quarter of 2024. For the full year of 2025, we expect our adjusted effective tax rate to be approximately 50%. This elevated book tax rate is due to valuation allowances on certain foreign jurisdictions and interest deduction limitations in the U.S. This book rate excludes the potential benefits from recent U.S. tax legislation. We are evaluating the full impact of this legislation, and we expect to reflect any benefits in the third quarter. As for cash taxes, we expect approximately $70 million to $75 million this year. Taking all these sales and cost drivers into account, our GAAP net income was $39.3 million or $0.32 per share in the second quarter of 2025 compared to net income of $18.2 million or $0.15 per share in the second quarter of 2024. Adjusted earnings per share, which excludes the impact of items noted in our earnings press release, was $0.21 per share in the second quarter of 2025 compared to earnings per share of $0.19 for the second quarter of 2024. Let's now move on to cash flow and the balance sheet. Net cash provided by operating activities for the second quarter of 2025 was $91.9 million compared to $142.8 million in the second quarter of 2024. Capital expenditures, net of the proceeds from the sale of property, plant, and equipment for the second quarter of 2025 were $52.9 million. Cash payments for restructuring and acquisition-related activity for the second quarter of 2025 were $9.7 million. Reflecting the impact of these activities, AAM's adjusted free cash flow was $48.7 million in the second quarter of 2025. From a debt leverage perspective, we ended the quarter with net debt of $2.0 billion and LTM adjusted EBITDA of $715 million, calculating a net leverage ratio of 2.8x at June 30, 2025. We also maintained a strong cash position of nearly $600 million. AAM ended the quarter with total available liquidity of over $1.5 billion, consisting of available cash and borrowing capacity on our global credit facilities. Before we dive a little deeper into our updated guidance, let's touch on tariffs. As a quick reminder, the following is our potential direct tariff exposure profile. Most of the products we ship to our customers in North America are USMCA compliant. Almost all of our steel and aluminum consumed in North America is from U.S.-based sources. So we are generally in a very good position with these commodities. For our U.S. operations, we import approximately $100 million from Mexico on an annual basis, the majority of which is USMCA compliant. We import from Canada approximately $25 million on an annual basis, the majority of which is also USMCA compliant. 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 plus any additional exposures our supply base may have while gaining clarity on final tariff agreements. Our intent is to mitigate the majority of incremental tariff costs, which include working with our OEM customers to receive recoveries. Given the nature of this process, the timing of recoveries can lag. As such, we incurred incremental tariff costs of approximately $10 million in the second quarter. We are assuming to receive offsets starting in the second half of the year. We anticipate the full year 2025 net impact to be approximately $10 million to $15 million after mitigation and customer recoveries. With that background in place, let's talk about our guidance on Slide 5. Our outlook has been adjusted from the previous targets, which were provided on May 2. Our updated targets are as follows: for sales, our new range is $5.75 billion to $5.95 billion versus $5.65 billion to $5.95 billion previously. This sales target is based on a North American production range of 14.6 million to 15.1 million units and certain assumptions for our key programs. We continue to anticipate GM's full-size pickup and SUV production in the range of 1.3 million to 1.4 million units. From an EBITDA perspective, the range is now $695 million to $745 million versus $665 million to $745 million previously. We now anticipate adjusted free cash flow in the range of $175 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 truck programs. In addition, while not included in our adjusted free cash flow figures, we estimate our restructuring-related cash payments for AAM as a 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. We underscore that the guidance figures we are providing today are on an AAM stand-alone pre-combination basis and excludes any costs or expenses related to our announced Dowlais transaction. AAM delivered good first half results, and all the second half includes some extended customer downtime, particularly in the third quarter and a slight uptick in the second-half launch costs in preparation for upcoming programs. We are excited about our fundamental underlying performance improvements carrying into 2026. In summary, we expect continued improvement in both of our business units, further fixed cost reductions to align capacity, and tightly controlled spending. In sum, these factors should benefit future periods. Thank you for your time and participation on the call today. I'm going to stop here and turn the call back over to David so we can start the Q&A. David?

David H. 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 2. So at this time, please feel free to proceed with any questions you may have.

Operator, Operator

Your first question today comes from Joe Spak with UBS.

Joseph Robert Spak, Analyst

Chris, could you share some key points regarding your guidance? I'm interested in your thoughts on T1 production levels for the year and possibly how things might shape up in the second half, especially considering the downtime announcements at Silao. Additionally, I noticed S&P appears to have low levels in the fourth quarter, which might indicate some potential improvements. I'm curious about your outlook for the latter half of the year.

Christopher John May, Executive Vice President and CFO

Yes. No, great question, Joe. Obviously, that's a key platform for our business. As I mentioned in the prepared remarks, our range that we assume for the year is 1.3 million to 1.4 million units. You will face in terms of just cadence through the year. Obviously, the first half of the year was pretty strong. Almost about half of that was built at the high end, meaning closer to 700,000 in the first half of the year. The second half, obviously, would fall normal cadences associated with seasonality and production days, Q3 versus Q4. And then lastly, as you mentioned or maybe second to last, we did experience a little bit of some extra downtime, pretty much already almost behind us here in the third quarter related to Silao. But that said, we are, as a franchise, quite bullish on that platform. If you think about the range we provided in the context of that, the HD platform continues to run very strong. The SUV platform continues to run very strong. You even see the light-duty truck inventories only in the 60-day range at this point in time. So we continue to be bullish on that. But the cadence would follow probably more of a seasonal pattern in terms of the second half. You can pick your macro number that you want to use for that and a little bit of downtime related to Silao in the third quarter. Hopefully, that helps and provides some context for you.

Joseph Robert Spak, Analyst

Yes. For my second question, I'd like to focus on GM while also incorporating other aspects related to the long-term outlook for internal combustion engines and their decision to relocate some Tier 1 capacity to the U.S. I'm interested in your thoughts on this in relation to Axle. It appears that the additional SUV production is clearly a positive development, but I would like to understand your perspective and whether, after the Dowlais deal is finalized, there might also be opportunities for increased content resulting from this onshoring.

David Charles Dauch, Chairman and CEO

Yes, John, this is David. Obviously, Chris, and you just talked about the T1XX volumes. GM's announced product plans to shift some of their production around to the U.S. operations. Clearly, we've got the flexibility and the capacity to be able to support that. We'll have to make some adjustments to our global operations to do that, but we're working with General Motors with respect to what needs to be done in that area there. So we're encouraged and pleased with that. I mean, obviously, our policy is to buy and build local and our parts tend to be a little bit larger. So therefore, we need to be closer in proximity to the assembly plants. And if GM is shifting that production, which they are, then we need to make the necessary adjustments in concert with them, and we'll do that. With respect to Dowlais, assuming that everything closes in the fourth quarter, which is on track to do, it's just going to give us even more flexibility in the U.S. or even globally to support all customers, not just GM, but all customers. And we do expect that there'll be some content gains for us on the T1XX based on Dowlais position on those programs.

Operator, Operator

The next question comes from Tom Narayan with RBC.

Gautam Narayan, Analyst

I remember you mentioning that there was additional plant due diligence at Dowlais that still needed to be completed, which could potentially increase the synergy total. I'm curious about the progress on that extra plant due diligence since you received deal approval from Dowlais. Congratulations on that. Where do we stand on that? I also have a follow-up.

David Charles Dauch, Chairman and CEO

Yes, Tom, this is David. Good question. Now that we've got the shareholder approval from both sides, we're now able to spend more time with Dowlais, get more information that we need in order to do the proper assessment on the manufacturing portion of the synergy side. We are also starting to get into more of their plants, which will give us an opportunity to have a better assessment of what that true opportunity is. We still feel that there's some upside potential there. We can't quantify that at this point in time. At the same time, on the purchasing side of things, clearly, we're dealing with a challenging and uncertain market with the tariffs and the policy changes. So we'll continue to manage that appropriately. We still feel confident about what we can do in the synergy area there based on what we've communicated already. But it's still ongoing, I guess, is the best way to answer it, but we're hopeful that there'll be incremental upside still on the operations side.

Gautam Narayan, Analyst

Great. Regarding my follow-up on tariffs, the $10 million in Q2 brings the total to between $10 million and $15 million for the full year after mitigation recoveries. I'm curious about the source of that figure. Is it related to the rest of the world? Additionally, regarding tariffs overall, are you hearing any discussions about reshoring now that deals with the EU, Korea, and Japan have been finalized? Have those original equipment manufacturers mentioned anything to you about it?

Christopher John May, Executive Vice President and CFO

Tom, this is Chris. I'll address the first part of your question regarding the $10 million. Most of that amount is related to scenarios outside the U.S. and how it impacts our U.S. operations. That's correct. We are primarily compliant with USMCA for our imports from Mexico and Canada, so the focus is mainly on the rest of the world.

David Charles Dauch, Chairman and CEO

And then Tom, this is David. In regards to the second part of your question, we are receiving several inquiries from many of the global OEMs that are looking to localize production capacity or component capability to the U.S. to address the tariff issues that are out there. That's positive for us in regard, especially for our metal forming business unit. But we're seeing it from the Europeans and all the Asians as well with respect to those inquiries. So it's still early, but we're working that process right now. And hopefully, we can conquest new business going forward.

Operator, Operator

Next question comes from Itay Michaeli with TD Cowen.

Itay Michaeli, Analyst

Great. Thanks. Good morning, everybody. Just a bigger picture question. I'm curious what you think some of the changes in emissions regulations at the federal level and other levels could mean for American Axle over the next couple of years, both in terms of mix and just key program volume. I'm curious if you've had discussions yet on that with some of your customers.

David Charles Dauch, Chairman and CEO

So Itay, this is David. Obviously, as I said in my prepared remarks, first of all, the consumer is showing what their preference is for ICE and ICE hybrid-type vehicles, but there's still a need for electrification. It's just that electrification demand is slowing down to what the prognosticators were saying. There's still significant progress being made on ICE vehicles and ICE and hybrid as it relates to fuel economy performance. As you all know, there was a significant bill associated with trying to convert things to electrification. So it's going to benefit not only the OEMs in terms of less capital investment, but will also benefit the supply base, including American Axle in regards to using our installed fixed capacity and leverage of our core components and our products that we have today. I still believe in electrification. I've always said that I think it's going to be adopted or accepted in the U.S. market slower than it is in China or globally around the world. And that's really starting to play out and pan out the way we thought and the way we've planned our business. But at the same time, we have to be agnostic to the market from a propulsion standpoint, and that's what we're doing is preparing ourselves where we have an extensive portfolio of ICE, hybrid, and electrification. The Dowlais acquisition will just complement that and give us a more comprehensive portfolio there. But customer wise, I mean, they're evaluating everything as far as continuing to push ICE, looking at hybrids because there is an increased demand for hybrids and electrification. There's still a desire for electrification. Obviously, we wouldn't have gone after Scout if we didn't think that there was a true market for that. But we're very encouraged with where we're seeing balance now in regards to the approach towards multiple propulsion systems.

Itay Michaeli, Analyst

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

Christopher John May, Executive Vice President and CFO

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

Operator, Operator

The next question comes from James Picariello with BMP.

Thomas Jacob Scholl, Analyst

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

Christopher John May, Executive Vice President and CFO

Yes. James, this is Chris. In terms of steel and aluminum, primarily all of our steel and aluminum that we procure or consume inside the United States, we procure from U.S. sources. So we are largely exempt from any tariff exposures associated with that. There are some small tool steel type elements, but very minor that we would incur from that perspective. So I think we're in a really good spot as it relates to our primary production consumption of steel and aluminum. The second part of your question was what?

Thomas Jacob Scholl, Analyst

Just about recovery.

Christopher John May, Executive Vice President and CFO

Recovery. So the primary element of recovery is all the commodity pass-throughs in terms of the input costs to our steel is passed along to our customers by contract either every 30 days or 90 days depending on the customer. So we're primarily covered, call it, 80% to 90% in terms of those cost increases or decreases we would pass through as well. And those markets surprisingly have been relatively stable in the last quarter or so.

Thomas Jacob Scholl, Analyst

Got it. And then obviously, the Scout Award is a pretty significant validation of your e-Beam capability. Are you able to share whether you guys are also able to leverage your proprietary e-Drive in the program or whether it's leveraging more off-the-shelf parts?

David Charles Dauch, Chairman and CEO

No. We clearly leveraged our IP and our own capability. At the same time, we work closely with the Scout team and the VW Group in regards to what they were looking for, for the specific vehicles that we are developing products for. But this is a testament to the comprehensive portfolio that we have. We've been positioned for electrification for quite some time. At the same time, we're going to continue to make investments in electrification, but on a balanced basis. We just want to make sure we have a comprehensive proposal that gives us the vertical integration capability that can satisfy customer needs, whether it's component subassembly or the full complete systems. And in this case, we're winning complete systems with respect to both e-Beam and EDUs. So a very big win for us; validation of our technology and capability at the same time sends the message to the marketplace that we do have the ability to satisfy ICE, hybrid, and electrification.

Operator, Operator

The next question comes from Edison Yu with Deutsche Bank.

Xin Yu, Analyst

I want to ask about Europe. With the acquisition, you'll be much deeper in that market and have significantly more business. What is the latest thinking on entering that market and the regulatory environment surrounding it?

David Charles Dauch, Chairman and CEO

Yes, this is David. Listen, we're very excited about the acquisition of Dowlais. The strategic combination is very powerful. As we indicated, it's going to give us more balance from a customer diversification and geographic diversification. We're heavily concentrated in North America as a stand-alone, meaning AAM. We'll get more balanced with the Dowlais combination. But Europe becomes approximately 30-plus percent of our overall business. We recognize that the market is challenged right now. It's down from where it typically runs in the 20 million to 22 million units. It's currently running 17 million to 18 million units. We recognize some of the restructuring going on there. But Dowlais is very well positioned with their customers there from a product standpoint. At the same time, as you're aware, Dowlais has been going through some of their own restructuring efforts on the automotive side of their business, both in North America as well as in Europe. And they are close to completing that. So we're actually getting a hold of this business at the appropriate time. What we're going to be able to do is bring a more comprehensive and expansive portfolio to those markets, which will allow us to hopefully cross-sell capabilities with customers there. At the same time, we'll continue to look at our portfolio and our manufacturing locations as well as theirs. And if there's further optimization that we can do to get better utilization of the factories and drive more synergies, then we'll pursue that as well. But we're very excited about how they're positioned themselves in Europe and how we're positioned in Europe, knowing that we're still doing some restructuring ourselves there based on the Tekfor acquisition. But overall, I think we'll be very well positioned to satisfy the European market on a go-forward basis.

Xin Yu, Analyst

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

David Charles Dauch, Chairman and CEO

No. The timing was on track. So we had our shareholder approval on July 15. They had theirs on July 22. We were able to do a number of shareholder meetings, both in the U.S. as well as in Europe to support those votes. Obviously, they came back unanimously in favor of the deal, both shareholders, which was a strong message in itself and supports our thesis of strategically bringing these businesses together to deal with uncertainty in the marketplace, which only continues to become a larger issue. I think we'll be stronger when it's all said and done when we come together. So very excited about the combination. But everything was on track.

Operator, Operator

The next question comes from Federico Merendi with Bank of America.

Federico Merendi, Analyst

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

Christopher John May, Executive Vice President and CFO

Yes, Federico, this is Chris. Regarding our free cash flow profile, it typically follows a pattern through our four quarters each year, with a significant focus on the working capital aspect of our business. We generally see a large cash outflow in the first quarter and a large inflow in the fourth quarter, mainly due to the timing of our sales as we taper off sales leading into the Christmas holidays. Conversely, in the first quarter, we ramp up sales, especially with what's usually a stronger March. Therefore, you can expect a stronger working capital contribution in the fourth quarter, particularly from receivables. Additionally, we anticipate improved working capital cash conversion related to inventory in the second half compared to the first half, which will further enhance our cash flow. Other factors include capital expenditures, which are slightly more weighted in the second half. The profitability flow-through will also be relatively consistent across these periods, but the key element remains the working capital factor I mentioned.

Federico Merendi, Analyst

Got it. And on a more long-term perspective on free cash flow, I mean, it's all positive that you're getting quotes from customers around the world that they may relocate to the U.S. and GM is potentially moving some production into the U.S. But I would assume that you guys have to put more capital in the business. And I was wondering how should we think about cash flow generation in the future post-deal closure and the deleveraging portion of the story?

Christopher John May, Executive Vice President and CFO

Yes. I'll take that sort of the capital piece of this, Federico, if you think about it. If you look at some of our recent materials that we have published, especially in relation to our combination with Dowlais and the cash flow generation potential of the company is significant. But it also brings us greater capacity and scale that allows us to pivot with some of our customers' moves inside of whatever they decide to put their production, whether it's in Europe or in U.S., we'll have a greater footprint to leverage, which would require then less capital intensity for some of those changes as well. But we still continue to see a very strong free cash flow generating capability of a stand-alone American Axle, and we would expect to have that in even greater scale when we combine with Dowlais, even accommodating some of the elements that you just described.

Operator, Operator

The last question today comes from Doug Karson with Bank of America.

Douglas Evan Karson, Analyst

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

Christopher John May, Executive Vice President and CFO

We will begin by discussing cash flow. We anticipate maintaining very strong cash flow from the combined entity. Looking at our pro forma materials based on our 2023 and 2024 historical performance, we are operating at around 5% of revenue. With the synergies factored in, this creates a robust cash flow generation capability. We are preparing to secure final financing to enhance our balance sheet and facilitate the transaction, which may lead to additional debt. However, our immediate aim is to reduce leverage quickly, particularly in the initial stages. Strengthening our balance sheet will be our primary focus as we transition through the merger while utilizing cash flow. Once we reach our leverage target of 2.5x, we will broaden our capital allocation strategy. Our ongoing commitment will be to fortify the balance sheet and reduce the leverage ratio through our strong EBITDA performance and cash flow generation.

Douglas Evan Karson, Analyst

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

Christopher John May, Executive Vice President and CFO

Yes. When we announced the transaction earlier in the year, we were just under 3, sort of that 2.8, 2.9x depending on the quarter. We are driving towards trying to be approximately leverage neutral at close. Obviously, our guidance of both companies has moved around a little bit here this year, but that is still what we're striving for. And that would be at close on an actual basis.

David Charles Dauch, Chairman and CEO

Doug, this is David. As a stand-alone company, we've said that we wanted to try to work our way towards less than 2x. With Dowlais, we're going to continue to work towards 2x. But we also said that because we're going to have a larger company and more robust business model than when we got to that approximately 2.5x or less, then we would essentially reevaluate our capital allocation opportunities including shareholder-friendly activities. So that would be the only kind of real change to the current strategy that AAM has. But we're going to continue to focus on paying down debt. We're going to generate a lot of cash from the combined business with the synergies, which is going to open up the opportunity for us to have more opportunities on the capital allocation side.

David H. Lim, Head of Investor Relations

Thank you, Doug. And that concludes the question-and-answer session of the call. We thank all of you who have participated in this call and appreciate your interest in AAM. We certainly look forward to talking with you in the future. Thank you.

Operator, Operator

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