All right. Welcome back. Next up, we have American Axle, joined by Matt Girlando, Vice President of Strategy, and David Lim, Head of IR. A quick background on American Axle: it's a global tier-one supplier of driveline and also metal-forming products for primarily the light vehicle market, but also commercial vehicles. Of particular note, the company is currently in the process of acquiring, making a big acquisition of Dowlais in the U.K., which we'll certainly talk about. To kick off, it's been a very volatile start to the year, to say the least. Tariff policy is, however, getting seemingly stable now. What's your visibility, I guess, around production schedules in North America?
Before we even begin there, we just have some opening stuff that we wanted to share with you, and I should have informed you before, so my apologies. Matt will do me an honor.
Yeah, sure. Go ahead.
We wanted to start by acknowledging we put out a press release this morning at, I think, 8:00. We have secured a contract with Scout Motors in North America, and we will be producing the rear beam axle, so the electric beam drive axle for the rear of that truck, and then the front EDU for that truck when it goes to production in 2027. We're very excited about it. It's a big win for us, something that we've been working on in business acquisition for quite some time. The truck and the SUV themselves, the Terra and the Traveler, are interesting in that they are pure battery electric, but also with an option for a range extender EV, which has been a really hot topic. It's probably something we're going to be talking about today.
The range extender EV allows you to, in essence, drive the car as a gasoline-powered car if you want. The vehicle's got a plug, it's got a place to put the gasoline, you can choose which of the two you want. A very compelling-looking vehicle, and we're very excited to be able to announce that it works. We also, I guess we're here to talk about the combination, but I think that'll come naturally out of the Q&A.
Yeah. No, congratulations. That was actually in my list of questions since you brought it up. Let's maybe talk about that, start with that since that's the freshest win so far. How do you think about, I guess, this not so much the product necessarily itself, but the idea that you mentioned that has both power drive options? Do you think this EREV can be a big hit in the U.S.?
This is like my favorite topic, so I'm going to have to be careful.
Awesome.
I want to start by saying if there's anything that we learned in the last years in North America, it's that consumer choice and the consumer will is super important. We were just talking before we started about the concept of a plug-in hybrid, so a vehicle that you could plug into the wall or you could put gas in. I bought one in my house. David has one too, and we both are strong believers in the concept. You'll hear people talking about these range extender EVs and then the plug-in hybrids. I will tell you, when I talk to my extended family, people that I know from my private life, they don't know the difference. They don't care about the difference. It's a question of, does it have a plug? Does it have the gas? Or does it have both?
I believe strongly that if you think about the psychology of buyers and why do some buyers not feel comfortable going to a pure electric lifestyle today, I think that those extended range EVs are a really nice solution for those people, kind of like a toe into the electric lifestyle. The plug-in hybrid that we've got, it drives almost purely electric many months out of the year, but at the same time, if we want to take that long trip or if it's a cold day or if we're worried because the wife and the kids are going somewhere and it's far away, you've got that backup system. I think that's compelling. In a lot of the technology symposium type events that I go to, that's what you hear people talking about is the range extender, the range extender. I think it's for those reasons.
It's a very elegant solution to give you electrification, but at the same time address the psychological concern.
Assuming that I'm going to take your word for it because I believe in it too, when can we start seeing more of these?
Yeah. In the U.S., it's obviously based on who's going to launch what and when. You got to remember, it wasn't so long ago, maybe two years ago or three years ago, all that you heard OEMs talking about were battery electric vehicles. This is really across the spectrum. There are always some exceptions, but people have really been focusing hard on that. It feels like a time of pivot, right? It feels like a time of recognition that we're going to need to have more options. The nature of the car industry is it takes a little time for that to work out. You have to redevelop, redeploy, and to a great extent, change the vehicles that are being manufactured. I think you'll see them coming, some of them sooner. There are a lot of OEMs that have them on the market today.
We also see a lot more discussions about future hybrid architectures that could come not just to the smaller vehicles in the market, but also to some of the bigger trucks and SUVs that you tend to drive here in America.
EREVs actually are already very popular in China. We've got thousands of units sold from Huawei, Li Auto, etc. What's going to be the biggest difference, or what are the biggest differences you think will be with the EREVs we've seen there versus the ones that are here or in Europe?
I just want to mention that Li Auto One was one of the first applications we were on in China. Super compelling. It's the same concept, right? It drives an electric vehicle until you need backup, and then the engine would fire. I think that that type of solution will work well in the U.S. market for certain vehicle types. Certain vehicle types.
Are you stunning today or are you just saying?
Smaller cars, passenger cars, not the kind of cars you necessarily want to tow or do work with. We have a lot of discussions, especially with Detroit customers who are in that big truck and SUV space. We spend a lot of time kind of mapping out what's the best hybrid solution or architecture for a car the size of the Prius, right? Okay. Now, what is it for a much larger SUV? Finally, what is it for a truck which might do work? Doing work means pulling something heavy on the highway. What we found is the architecture is different depending on which of those things you want to do. Just so fundamentally, the question is, if the mission is, I want to be able to carry four people for 50 or 60 miles, that extended range EV model is really good.
That is why it has been so successful in China. If the mission is, I want to be able to pull a boat or a trailer or drive a work truck, and I need to be able to drive at 80 or 100 or 150 miles fully loaded, then the architecture could be something else. I think the big driver is going to be how big is the vehicle and how is that vehicle really going to get used in life. There will be different architectures depending on the answer to that question.
When you say different architectures, does that mean you just have a bigger engine or is it more complicated?
This is going to get into that discussion about, well, where do the parts go under the hood? I would say broadly, the range extender EV is really a battery electric car with kind of like a backup generator on board where the only connection from that generator to the wheels is through wires. There's this situation where the more load that the engine has to pull, the more work is being done by the combustion engine, the greater the benefit to have a mechanical link from that engine to the wheels. What that means is the way the powertrain is designed could be very, very different. Some of those applications might really have powertrains that look a lot like the way combustion trucks look today, the kind of products that we make today and maybe a little bit of light electrification elsewhere.
Other ones would go all the way to the point where you say there's no mechanical link between the engine and the wheels, like Scout is doing in their concept. Maybe this is the point where I have to say what we're certain about is this D-MAX architecture, which is the core of our business today. We're certain that it applies regardless of which of those cases the OEMs will choose. That's why we're so happy about that Scout award to be able to show how that system works.
I don't know if you can necessarily answer this, but is there more coming?
There's definitely more coming. We're working on a lot of things in a lot of places around the world. Maybe, as you mentioned a minute ago, a little bit different technology coming out in different regions. There'll be more to talk about in the future.
All right. Let's switch gears to 180 to Dowlais. I understand that you're very involved, intimately involved in this. Just for people who are not so familiar with what's going on, can you provide some context about your interest in Dowlai or GKN? Some people know as GKN and remind us of the GKN.
Yeah, absolutely. Okay. So Dowlais, we had a big argument about this. I guess I'm supposed to say it again. Dowlais is a village in Wales, and it's also the name of a public listed company in the U.K., which has two businesses under it, and both of those businesses are called GKN. GKN is a company that a lot of us know about. They've been around actually since the 1700s, I've learned. They made cannonballs during the Napoleonic War. Dowlais has two business units. One of them is strong in powdered metal and the powder to make the powdered metal parts and then the parts themselves. And then they have a second part that today is called GKN Automotive. Historically, it was called GKN Driveline. They are the leaders by far in the space of side shafts.
Side shafts are one of those parts that you never see, but they're really important. It's the thing that connects from the transmission to the wheels in the car to make the wheels spin. Part of the attractiveness of those side shafts is kind of like the tire. It doesn't matter if it's a battery car, a hybrid car, a hydrogen car. It doesn't matter. You need that shaft to connect to whatever it is that's propelling the car to the wheels. That's kind of what led to our interest with them. We have this thesis that given the environment that we're all in right now, there's uncertainty, there's turbulence. I can feel your tariff question coming.
You have to ask yourself, in this uncertain environment, especially given what's been going on with the electrification mix in the last years, how do you set your company up for staying power and for success as we go through this transition? The transition is coming. Electrification will increase, but how fast is really important to a company like ours. We kind of laid out, well, what do you want to have? What do you want to be? What we put especially at the center of our strategy, as we said, we need scale. Scale means we want to be bigger in terms of revenue. We want to be bigger in terms of our buying power. We want to have a flexible footprint so that we can flex for things like what are going on today.
We want to have a diversity both in the product and then in the geography. Product means we want to be agnostic to what the market needs. We said we want to be prepared to sell to combustion customers. We want to be prepared to sell to BEV customers. We want to be flexible to switch. The side shaft solves that for us. We also wanted to have a lesser dependence on any one customer, any one region, or any one technology. That is the second thing you get. If you look at our investor deck, you will see there is a lot of increased diversification that we stressed in that communication. The other part of it is in terms of overlap, right? The overlap is not so great. We are really a truck company. We make truck axles, especially for North American products.
GKN Auto, very much a global company, side shafts going in all kinds of cars around the world. If you would go that funny Renault that you might rent when you're in Europe in the summer or even a vehicle that you might drive in Japan when you're on a business trip, those all have these GKN side shafts. It is a very, very nice story. The overlap is limited. That is especially helpful for us in terms of the regulatory approval that we're going for. At the same time, because we're both in the automotive space, it opens up the ability for significant synergies in the operations. We've laid out a plan that leads us to $300 million of synergies that we can attain after we achieve the full run rate.
That amount of cash, it's a significant amount of extra EBITDA, will help us to pay down our debt quickly, strengthen our balance sheet so that we can be prepared to, I don't want to call it a storm, but let's just say to weather the events that we're going through and be prepared on the other side for whatever are the next steps in this industry.
I want to follow up on the synergy aspect. There's two angles. One, $300 million does sound like a lot. But I think based on some of the comments that the company has made, at least, it's a bit conservative. Is there a reason why there could be actually much more?
This is a hotly debated topic. I want to start by saying we were very, very consequential in our planning process, our targeting of what the synergies would be. Like anything, you look at it top down, you look at it bottom up. When we targeted $300 million, which is some number, it's about 5% of sales, that's really smack in the center of what companies like this announce when they do combinations like this. I would say it's not an aggressive number. Without bringing you through the gory detail of our plan, I would say because Dowlais is a U.K. company, the takeover has to adhere to the United Kingdom takeover code, which has really specific rules about what you can announce and how that is vetted and verified by an independent firm. We ran through such a process in January.
As part of that process, we had to build a big list of, here are all the individual ideas that you could put into place, and here's how much money that could save. Then with the help of an external financial auditing firm, they essentially sensitized it down based on things like, what's your track record? How much of the data have you actually seen? To what extent could this idea in this country or this region be read across the globe? They really reduced the number that we submitted down to the 300. From our perspective, we went through a rigorous process. We saw a lot of data. It's certainly not everything because we are in a way competitor, so you can't get into all the data.
You can't necessarily see what is the SG&A, what do the individual people make, or what precisely are you paying for contracts? You can, in an aggregated way, get a feel for the data in a way that you can build these plans. We are confident, and we're excited to get more insight into that as we move forward between now and close.
Just one thing to clarify is that Dowlais was actually doing its own restructuring regardless of the acquisition. Has that been playing out? Would that be incremental to $300 million or part of it?
In terms of how does it apply, the rules and the panel are clear. You have your standalone plan, and everything that you report as synergies must be those synergies only realized because of the combination. The answer is yes. Your point leads to one of the things that was very interesting about us. The present Dowlais leadership team have been, I think, very forward-thinking in the restructuring of their business. They have been open. If you look at their investor material, they have been open about where they do business, what their cost structure is, where they do business, where they would like to be. They have been investing in the business to make it, let's say, to reduce the cost structure. I expect that we are going to benefit from that post-close, benefit from that, excuse me.
Yep. More generally, on just this idea you mentioned earlier about getting bigger, we sort of think about it as consolidation versus specialization. Is the idea then that you will kind of initiate some level of consolidation among too many, basically having too many power to replace it?
I can't answer for the other companies in our space. What I can say broadly, and everybody would agree, we're all in this kind of environment together. Some of the forces that I talked about before, the uncertainty of the mix, the tariff threat that's coming in, we haven't talked about it today, but it seems like it's getting more and more expensive whenever we develop new programs or new products these days. The technology has increased, and therefore the cost has also increased. Combining enterprises is very helpful in that environment to help either with the buying power or the sharing of the costs. It makes sense for us. I can imagine it making sense for others, but at the same time, I'm not certain. David?
Yeah, no, I think that's a great point. I would back that up 100%. I think there's a number of times when our management team said that it just makes sense for the consolidation to happen within the industry. You've seen it with the OEMs. Given the turbulence that we've seen in the market in the last five years, given chip shortages, tariffs, COVID, that makes a lot of sense also from a supplier parts perspective.
Back to Dowlais specifically, it does have a pretty sizable U.S. footprint. Can you go over that and how you can potentially take advantage of it?
Look, I think they have a sizable footprint. As more and more OEMs may consider onshoring to the U.S. in the assumption that maybe next year in 2026, once we get the deal done, it's going to close in 2025. At that time, it opens definite opportunities where we could leverage that footprint, and there could be more installed capacity. To your point right now, we are getting additional inquiries on the metal forming side for additional business. There are a lot of OEMs that are saying, well, maybe we could source more from the U.S. again on the metal forming side of the business.
It's a big deal. I think one natural question is leverage. Are we comfortable with the leverage coming out of the transaction?
Look, I think the way that we would couch it is, I mean, when we did the, when we're doing the deal, I mean, we had some very, very strict parameters laid out by our board of directors, and one of which was we got to be very, very sensitive to our net leverage. We want to get as net leverage neutral as possible upon the close. What we see is because of the combination and the synergies and the combined EBITDA, we feel a lot, we feel comfortable in getting to that two and a half times, hopefully relatively quick. At that time, look, open up the playbook for some shareholder-friendly activity. I don't want to say that we're not going to stop delivering. That's still the primary focus of our management team is to continue to deliver.
At two and a half times, while we deliver, then we open up the coffers for maybe other options.
Technically, timing-wise, I think you're targeting year-end. Is that still doable?
Yeah, so what we've announced is year-end, and we're confident that we're going to be able to get there. We've announced when our shareholder vote's going to be. We're in the midst of these regulatory approvals. We've got 10 total. I think we've said that we've got three of them approved so far. A lot of kind of bureaucratic process work that we are pushing through. We're confident we'll be able to get there at the end of the year.
I saw that you're doing dual listing now as well in the U.K..
Yeah. Yeah, I mean, look, the dual listing, look, we're very receptive to the shareholders. We listened to what they had to say, and we decided that that was the right thing to do for both shareholders on both sides of the pond to really convert on the value creation of the combination. That is what led us to that decision.
Wanted to switch gears. It's not the tariffs. Not yet. Not yet. Back to my first question, I guess, production schedules in North America. How are they looking, especially on the truck side?
Look, I would say production schedules in general, a little volatile, but nothing crazy. I mean, we still have several weeks to go. We've got to keep a good eye on what's happening. There's a little bit of volatility. Yeah, that's the way I'd probably couch it.
Okay. I will now proceed to the share question. Has it been happening, recovering at the same pace that you would have expected?
Yeah. Let me just, okay, so the tariff situation. I'm going to start with it's really early days. The discussions have been progressing. I've heard this question a few times today, and I want to start with it's not as simple. If you run a business, it's not as simple as just saying, "Dear customer, here's your bill. Let's talk." What we're trying to start with is where is their tariff exposure and why? I should have said the nature of our products is that they're big and they're heavy, and we therefore tend to build them very close to where our customers consume them. We also tend to buy the parts, those big heavy parts that we use, also relatively nearby. The exposure for us is relatively low, I think, compared to some of our peers.
The discussion with the OEM now, what you start with is not, "Please pay." What you start with is, "Here's why there is an exposure, and here's what we can do to mitigate that." In some cases, it's as simple as just resourcing a part. Maybe resourcing a part to a higher-cost country where there would be a cost to do so. At least there's an analysis. There's a study that you can make to say, "Here's an option," or, "Here is another option." That is where we are starting. As these things go, there are kind of some common themes that suppliers like us have, and there are some discussions about what might make sense to onshore or nearshore from the portfolio today.
Having said that, we've said publicly, as have some of our peers, our intention is for whatever residual exposure there is, we intend to recover it. That has been our position. Let's say discussions are constructive and professional at this point in time. It's still early days.
Understood. Related to that, GM had a big announcement yesterday about bringing some full-size trucks, full-size SUV production to the U.S.. Any preliminary thoughts around that?
I want to start with that factory is like four miles from my house, and the bulldozers have not stopped running for three years, so I sensed something would come. There's a little bit packed in there. Certainly, it's interesting, and it's important that they're announcing expanded footprint for trucks in the U.S.. The second thing is they're going to bring the production of their sport utility vehicles also into that factory. If you follow GM closely, you would know the one plant where they build the full-size sport utilities, which are very, very successful vehicles today, is in Texas. This would bring some additional capacity online. We serve both of those vehicles today. We, of course, serve GM from a kind of a combined footprint.
We have a facility in Michigan where we kind of ship to the north plants, and then we have a facility in Mexico where we kind of ship to the southern plants. There is a little bit of cross that's in there. We think it's good news for them. We think it's good news for us. We have the ability to supply to all of those facilities they mentioned from the footprint that we've got. I guess the last point that I'm going to say is we're all eagerly awaiting the next information from the administration that's going to relate to what about powertrain products that would cross borders? How will they be treated? Today, our products are USMCA, and we're in a kind of a wait-and-see approach to what's going to come out there.
Not to dwell too much on GM, before yesterday, they also made a big engine, I think, announcement.
Tonawanda, that's right.
Yeah, yeah. Any impact there?
Certainly no impact there. Their announcement about Tonawanda was they're changing the investment profile. There had been a certain technology slater for that business, and they said, "It's still going to be investment, but it's going to be in combustion V8 engines," which at General Motors broadly serves the truck and full-size SUV portfolio. From our standpoint, that would be a signal that they continue to believe in ICE, ICE and hybrid. They continue to believe in the full-size truck and utility franchise, and we're positioned to benefit from that greatly. I expect that those engines are going to go into some of those trucks we just talked about.
Yep. Yep. Okay. Want to take a side pause here to see if we have any questions from the audience. All right. I will continue. Back to this is more of an industry thing. I guess, what do you think the competitive dynamics in powertrain look like going forward? Because we just had Borg before this, and we have a couple more tomorrow. It seems that companies such as yourself, the setup is actually pretty favorable, I would say. The competition seems to be, especially once you start moving down the list, the competition gets thinner and weaker. Is that how you read it, or how do you read the kind of competitive backdrop?
You go first. I'll go second.
No.
Look, I think the competition is always stiff. I think I'm going to probably give you more of a general answer. I think what we have to do is just have the right technology in place, the right cost structure in place, and just continue to drive that in all aspects of our business. I think that's probably the high-level explanation. Maybe Matt will give you a little bit more details behind.
Please be controversial.
I think the last three or four years have been crazy. It's just been a crazy time. I would say openly, we've all been through this real hype cycle of, I'm speaking to North America now, we've been through this huge hype cycle of electrification where there has been a concertedness, I would say almost a panic to secure electric business. A lot of that business has just not played out well, and we know it, right? You can point at us and all of our peer groups and say, "This is where we see you guys on that continuum." We're all on that same chart somewhere. I think outside of formal events like this, we all talk about how are we positioned? How do we do? How do we feel about the business that we've got? What about these other guys?
Two years ago when they took that, we were so upset. How do we feel about that? I will tell you, I frame everything as we talk about the competitive set today through how are they positioned for electrification and to what extent has the business that they have won panned out in a good way. God, I hope that is not my phone. I think that now we are down in this kind of trough of disillusionment in the hype cycle. A lot of us had these contracts. We have made these commitments, and we see what the business looks like. We think, "Boy, maybe we should not have been so aggressive at that time." Some of us might say that. I think this year, what do I see when we compete for business with our known competitors that we have been working against since before I was born, really?
What do I see? What I see is I see a lot more rational behavior coming back in. That is part of what I see. I also see a lot more of what we call selectiveness about what are we going to quote. My boss loves to explain to us, "We do not have unlimited poker chips to bet. We have only so much money, so much capital, and we got to bet on winners." The question is, who are those winners that we are going to put our capital into? Being certain they are going to move those cars, and we are going to get a return on our investment. What I have seen of late is kind of a return to that kind of thinking. How are we therefore positioned? My view is always going to be we are positioned very, very well because we have been selective until now.
We've been focused on the basics, excuse me, in particular, remain profitable in the business that we've got. Also, we're to a great extent a manufacturing technology company. We've focused on that stuff. Kind of after this loop that we've all been through in the last three or four years, things kind of come back to that. We return to where we started, which is OEMs need reliable partners, and that's what we are.
Want to move on to Europe really quick? Want to ask quickly about Europe? I know historically, obviously, it's not been as important, but with this deal, obviously, now Europe becomes much more important. Are you worried at all about kind of the complexity of having a much bigger European operation, both from a margin perspective and also from a kind of segment of vehicle?
I would not say that we're worried. I would say that we carefully thought through what is the European footprint of Dowlais. We put out a chart in our IR deck that kind of looks at, "What does our pie chart look like today?" and then, "What will it be after we combine?" and, "To what extent will we be exposed to Europe?" This is kind of part of the analysis that we did pre-announce. If you take a look at the combination profile versus the peer group, you would say, "Still underrepresented or underexposed compared to some others." That was part of the thinking of how deep do you want to be in that market? Because if we're honest, there's a buying situation there and there's a restructuring.
The second part of it, and we've got obviously a little bit more insight than we've announced, but the second part of it is that the management team of Dowlais has really been proactive about looking at what is their footprint, where are they doing business, where are their customers, what is their cost structure, and what do they want to look like in five years? They've invested significantly in that, and I think the combined enterprise has been a benefit from that. We are not concerned about it. We think it will be additive to the deal.
And then just to close the loop on that, you got North America, you got Europe. Dowlais is also very big in China.
Yes.
I'm sure you know more than we do. What was the, I guess, what was the thinking? Or what do you think the prospects are?
I want to start by explaining the GKN Automotive side has a 50% stake in a JV in China with HASCO. That joint venture is called SES, and it's a very, very successful business. I think I said early on that GKN is the biggest player by far in the side shaft market where they do business, and the same holds true for China. There's, I guess, a couple of obvious points. First obvious point, the Chinese market is huge and growing. Another obvious point is the electrification business, like ground zero for penetration or speed of technology change and for cost structure for China. The importance of that market cannot be understated.
You might look at that market and say, "Whatever reads across to North America and Europe, to a great extent, that technology might be coming from China in the future." It is very, very attractive to us. It is foundational to their business thesis today, and it is going to become foundational to the combination in the future. I think the last thing to say about that JV is the importance, and what I am thinking applies to the JV in China. An important successful as a supplier in China in the future is being connected to the customers who are winning, not just now, but are going to continue to win in the years. From what you can see from their IR material, you can see they are well positioned with those kind of growing customers as our standalone captive businesses in China today.
I'm convinced it's going to work out well. We've kind of done that analysis of who are their customers, our customers, and then our customers. We also see some opportunity in bringing those groups together.
Fantastic. I'll end with a probably very mundane question, maybe to David. Guidance? Yeah, I knew it.
Oh, look, our guidance, we gave guidance on May 2nd. Look, we're going to go through our typical exercise of evaluating and doing the analysis. You'll just have to wait until we announce our earnings in some time in early August. I think your follow-up to that is, what are we thinking about the second half? It's really too soon to tell. There's a lot of volatility that's going on. The tariffs can move things up or down. Things change by the minute. I mean, maybe not literally, but we got to keep a close eye on that. No further comments on the actual guidance itself, other than refer to May 2nd.
It was a good guidance.
Yeah.
Yeah, I think a good guidance. I'm not worried about it.
Yeah, yeah.
All right. Thank you, Matt and David. It's been a pleasure.
Great.
Hope to have you again.
Thank you.
Thank you very much.
Thanks.
Appreciate it. Thanks.