Okay, great. We're live. Thank you so much as we continue day one of the Barclays Global Autos and Mobility Conference. I'm Dan Levy. I lead US Autos research coverage and very pleased to have with us American Axle & Manufacturing, mainstay at this conference, leading driveline supplier in the U.S., and now expanding globally quite dramatically with some transformative M&A. Very pleased to have with us David Dauch, the company's CEO and Chairman, as well as Christopher May, CFO. We're going to do a series of fireside chat style questions, and then we'll go into any audience Q&A. I think first, David, you have some opening remarks.
Yeah, just to make a couple of brief remarks. First and foremost, good afternoon, everyone. It's an honor and a pleasure for Christopher and I to be with you here today. We're having a very good year this year as a company, so we're very pleased with the performance that we've had year to date. We just came off a very strong quarter in the third quarter. We also had the opportunity to upgrade our guidance as it relates to the midpoint of our guidance, where we're expecting our sales for the full year now to be between $5.8 billion and $5.9 billion. Our EBITDA to be in the $710 million- $745 million, and our adjusted free cash flow in the $180 million- $210 million range. Again, very pleased with how the company is performing right now.
Clearly, a lot of activity and a lot of excitement going on within our company with respect to the transformational deal that we announced in January with the acquisition of the Dowlais Group, or GKN Automotive and GKN Powder Metallurgy. Our teams are working exceedingly well in regards to the integration and preparing ourselves for day one. We are also making meaningful progress in regards to working towards the close. I think all of you have now seen that we got shareholder approval in the July period of time. We got all of our financing put into place in the September-October period of time. We have eight of the ten jurisdictions from a regulatory approval standpoint in place. The latest one that just happened was Brazil. The only two holdouts right now are Mexico and China.
Things are moving and progressing favorably with both of those countries at this time. We're expecting Mexico here in the fourth quarter, and China will either be in the fourth quarter or the first quarter of next year. Based on China being the long pole in the tent, we now expect the closing to take place in the first quarter of next year versus the fourth quarter of this year, which is what we guided the street to a press release back on October the 27th. Overall, we're super excited with the performance of the business today, the interaction with the Dauch team. There's a very talented team there. There's a lot of chemistry there. There's tremendous synergistic opportunity with our business, as we said. We're going to add size and scale. We're going to generate $300 million or plus in regards to synergy opportunities.
We'll expand a product portfolio that's more agnostic to the marketplace, ICE, hybrid, as well as electrification. In addition to that, we'll get stronger diversity with our customers with our geographic footprint and that product portfolio. We will be positioned to generate some very strong margins and cash flow performance, which is going to allow us to be able to service the debt load that we'll have as an organization. We can talk to you more in regards to what our goals and our objectives are on the debt, as well as our capital allocations. Again, honor and a pleasure to be with you all here today and just excited to take on your questions.
Most importantly for us, we're excited to wrap up this year and get this deal done early next year and start working together and integrating this business and taking it to a whole nother level. Thank you.
Okay, great. Let's just kick off first. One of the questions we've been asking all the suppliers is there's been a number of supply disruptions out there between Nexperia, Ford, Novelis, JLR. I think your exposure on these is relatively limited, but maybe you could just give us a sense in the fourth quarter how that might be weighing on the results.
Yeah, maybe Dan, Christopher, I'll start with that. As you have mentioned, we don't have broad exposure to those issues. We do ship a little to JLR. We do ship some to Ford. Our predominant exposure to Ford is on the Super Duty, as well as their small compact SUV. Broadly speaking, I would tell you it's some pressure on production, but we've not experienced a lot in terms of downtime or impact associated with that. They have been protecting some of the key platforms we support, such as the Ford Super Duty, which has been great. I would expect just a little bit of impact from that, but at this point, not a lot.
From the Nexperia issue trickling into nothing?
Nothing of consequence in the fourth quarter at this moment.
Yeah, on the Nexperia side of things, we've obviously been in close collaboration with our customers. We built inventory to protect for continuity of supply. We're looking to see what else we need to do to continue to expand maybe that inventory coverage that we have to protect that continuity of supply. We're also looking at alternatives, anticipating that things could get worse before they get better.
Okay. Carrying that out as we're looking into next year and as we're shaping, let's just start with the broader macro environment. I think we've seen a North American environment that's been fairly resilient, healthy volumes. Some question on SAR, whether there's been pull forward or not, but mix has been healthy. What are you looking at next year from a macro perspective as sort of the broad setup? I know on some of the key platforms, both a roughly flattish T1XX and RAMHC. How are you looking at sort of the macro setup for yourselves next year?
Yeah, just when you look at things globally, I mean, we're expecting that 88-90 million units on a global basis. China clearly makes up about 29-30 million of those units. They're going to continue to build in China. They're getting to a point that they're actually starting to plateau in China as far as the demand itself. They're looking to export product globally around the world. Clearly, they're targeting Europe. They're targeting Latin and South America are the main areas that they're focusing on right now. There's some concerns about what's going on in those markets and do the traditional OEMs in those markets, the Western OEMs, can they protect their market share or do they lose it to some of the C OEMs on a go-forward basis? Clearly, Europe has gone from a 22 million unit market to roughly a 17 million unit market.
We still think it's going to hover down in that range, but again, with more intense competition coming in there. That is something that we're keeping a watchful eye on, especially as we're going to increase some of our exposure to Europe. In North America, we see a pretty steady market in regards to North America, especially for the platforms that we're on, that being the truck and the crossover vehicle and SUV type platforms that we have. Christopher, I don't know if you want to add to that.
Yeah, no, I mean, it's obviously a little early to make a call for 2026. We look at a lot of the same data points that you and others look at. The GM truck franchise has been strong for us here this year. It will be strong next year, though they will begin to go through some convergence to their next gen. RAM, we experienced that conversion about 12 months ago and it's been running very strong, meaning the heavy-duty RAM, been running very strong for us here at the balance of the back half of this year. We would expect that strength to continue into next year as well.
Okay. We just had S&P come up here and a very interesting slide on the impact of what's been happening with EVs, where EVs have all been heavily delayed. We're talking about delays all the way up to 36 months, including some cancellations. You look at there's a slide on ICE extensions and the number of ICE extensions you've seen have been quite significant. Knowing that the backlog was primarily a North American backlog, but global, and we've seen some changes in the product cadence, is there a potential for a backlog air pocket? This is, I think, a question for all suppliers.
It applies to everyone for certain. There's definitely an air pocket going through the auto space right now as customers are resetting themselves. I really believe the whole automotive industry is resetting itself right now because everyone was pushing towards the adoption of electrification at these accelerated rates, which we never totally believed in. Now they're having to fall back. The market has spoken and said, "Listen, we want ICE and we want hybrid vehicles. Most importantly, we want affordable vehicles," okay, is the big thing that's there. Customers are having to reassess their long-range product plans right now. They're having to fall back on their existing engines and transmissions because they weren't really working on advanced or new ones because they were focused on electrification. Where electrification was forecasted to be 50% in the U.S. by 2030, now they're forecasting it somewhere in the range of 20%.
We even think that might be a stretch going forward, especially when you look at trucks and SUVs and the big users or the big product that's being produced here. We're a big believer in electrification, always have been. We just don't believe in the adoption rates that the prognosticators or the forecasters were projecting or predicting. Now in China, absolutely believe in it. That market's 55% electric and hybrid today. It's only going to grow going forward. Europe is going to be behind them, significantly behind them, but ahead of the U.S. The U.S. is going to lag considerably, especially with all the policy changes that have taken place under the Trump administration with the $7,500 credit going away, regulatory changes taking place, EV tax credits and all that being adjusted as well. We truly believe that ICE and hybrid are here for a long time.
When I say that, I mean decades, not just years. ICE or EV will continue to grow in the U.S. It's just not going to grow at the accelerated rate that everyone was projecting. That is where a lot of companies have overextended themselves, OEMs as well as tier ones. You do not see American Axle & Manufacturing going through a lot of restructuring because we are very selective about what business we want after. We also announced earlier this year that we won the Scout Award, both the front axle and the rear axle. It was the largest electrification program being sourced this year, and we were the winners of that. We are very proud of that. All we want to do is demonstrate our capability and our value. We are going to continue to make investments in electrification. We have been making investments in electrification since 2010.
The market was not ready, but now the market and the strategy has to be different between China, Europe, and North America completely. We feel very good about where we are from an overall product portfolio standpoint. With the Dauch acquisition, we will actually strengthen our electrification capability, a more well-rounded capability, especially in the EDU or electric drive unit area. On the beam axles, they are not in the beam axles, so we are leading that initiative ourselves. As I said, that is pushed out based on what the market penetration will be.
Okay. How are you looking at the opportunity as it? You talked about some air pocket, the reshoring opportunity. How much in terms of incremental capacity coming to the U.S.? We know obviously GM is expanding its capacity on the large truck side and adding capacity in Orion and whatnot. How much of an opportunity is that for you?
I think a few things. First and foremost, to the earlier question you were talking about, every OEM is reaching out to their supply base, but no different in our case in asking for extensions on their existing programs. That's a positive for us. A longer ICE, longer hybrid, great for American Axle & Manufacturing, for the most part, runs across the existing installed infrastructure that we have, with the exception where we have engineering changes to address customer and desire specific designs. On the reshoring activity to the U.S., that's a big benefit and a big opportunity for us, especially on the metal forming side. The driveline side will take a little bit longer to put into place. Much more capital intensity there. We're not just sitting on a lot of idle capacity.
We've always tried to have a policy of buy and build local in the local markets that we serve. That serves us well, especially with the tariff issues that are going on today. For a company our size, we're not paying the amount of tariffs that you would expect. At the same time, we're working with our customers to mitigate those tariffs that exist out there today. More importantly, we're seeing tremendous opportunities on our forging side of our business because a lot of companies, tier ones as well as the OEMs, are looking to onshore that work or reshore that work back to the U.S. to mitigate those tariffs going forward. We're the largest steel forger in the world, and we think we can not only benefit on that activity, but also benefit from the Dauch acquisition where they buy a lot of their forgements as well.
On the insourcing side, we buy a lot of powder from Dauch today, but we can buy more powder from Dauch in the future as part of the synergies of the bigger deal.
I don't know if you've disclosed before, GM, you've historically had roughly two-thirds or three-quarters, something thereabout of that T1 volume. Is there a sense with the incremental capacity coming online, can you maintain that mix?
Absolutely. Absolutely. We're in concert with General Motors in regards to what we need to do. All we're working on with General Motors right now is as they're addressing their plant loading needs to address what their commitments are to the US government, we're reevaluating what our manufacturing strategy will be to be in close proximity to them.
Okay. Let's also understand the margin side because you've had really good performance, really good tailwinds on the net performance side in your EBITDA average. Can you just talk about what's going on there and maybe how sustainable that is?
Yeah, we've shown, I would say year- over- year, positive performance now over the last almost eight quarters. It's been a great trend for the company. I would say what's driving that, if you break it down into our two segments, our driveline segment and our metal form segment, what you've experienced, first of all, at a macro level, right? If you go back a couple of years, there was a lot of, I would call it extreme volatility in the marketplace with production schedules, etc., which does not allow you to operate in the best environment. That has sort of stabilized some. It's still volatile, but that stability has allowed, in particular, our driveline business unit to continue now to perform very strong, very steady, very focused on productivity, offsetting inflation.
They've been able to gain in terms of margin over that period of time. The metal form operation has been, I would say, a margin recovery story. Now we've seen over the last, call it three- six quarters, continuous improvement in their margins. The focus has been inside their four walls on operational efficiency. Probably didn't have the strongest third quarter here this year, but we still project that to continue to improve into next year. We got hopefully some margin upside and lift from our metal form operation. I would say the macro, a little more, or I should say a little less volatile, has allowed us to focus on productivity and a self-help story on metal form. Are they continuing to be resilient margin performance? I would say yes.
That driveline was in 3Q. That was like your best result in four years.
Yeah, they had a great quarter.
What happened?
Yeah, some favorable mix. Ram continues to run very strong. As I mentioned, they came out of a model changeover earlier in the year. Stars aligned on strong performance for the quarter. You really have to be careful. You got to look at the sort of the trailing four quarters always when we look at these margin performance because each quarter has a little bit of its own story. Again, stars lined up really nice from a performance, strong mixed product that they supply into from a driveline perspective, especially inside of North America, allowed them to have a great quarter.
Metal forming, you used to be at a mid-teens margin and you're now running at eight-ish %. Is there a path to getting back to that mid-teens level?
Yeah. I mean, that's certainly our objective. We sort of, I would say, bottomed out maybe back half of the third quarter, back half of 2023, I should say. A lot of self-help, a lot of efficiency improvements. We struggled with some labor challenges back then. We've been putting in remedies and fixes and working on each of these issues. Our goal is absolutely to get back into double-digit margin performance. That's where we're driving them towards in our planning process, in our actions. Yes, we believe we have a pathway back.
Okay. I want to go back to an earlier point on the EV environment and how that's factored into your backlog. I know we've seen a very, I'd say, balanced effort from AAM as far as focusing on core ICE, but at the same time expanding the EV portfolio. You won Scout and there had been some other wins as well along the way. North America, I think we can all agree is probably much more muted. What is the presence right now in Europe and China where that EV uptake is still on track?
Yeah. Remember, we started our electrification business in Europe, supplying driveline with Jaguar Land Rover on the high-paced program. We expanded that into Mercedes-Benz with the AMG and the six or seven different variants that we're doing for them. That is where that business originated from. We then took that technology over to China. We're doing a lot of work in China today for both domestics as well as Western OEMs over there. That volume only continues to grow. Our penetration continues to shift more towards the China OEMs, which is a good thing because they're realizing the growth within China, but also outside of China. We can follow them and they can help lead us in some of the other global markets. Here in the U.S., like we said, we properly positioned ourselves to benefit from electrification going forward with various customers.
We won multiple different awards in the component state, the subassembly state, and even in the full system state, as evident by the Scout. It is just a matter of what the customer long-range product plans are going to be going forward. What we are going to continue to do is we were working towards putting a bookshelf technology together so that whatever the market wanted, we would have available to us, whether it is an ICE product, we already have it 100% complete. Hybrid product, essentially 100% complete, but we are re-reviewing that. And then in EDU, we were short to some of the products. That is where we will continue some of our development. The acquisition of Dowlais allows us to close that gap a little bit quicker.
There's still some work that needs to be done in regards to some beam axles, but we'll do a lot of that with the Scout development. We'll continue to work on inverter and motor capability, but we'll be picking up some extended capability on that with the Dauch acquisition. Again, we're just trying to be agnostic to the market when it comes to the propulsion system. Let the market be the boss and then we provide the products required by the market.
How do we look at the resource allocation at AAM given this change? Meaning, I think your R&D had ticked up because you were putting out more spend application engineering for these programs. That's obviously down. How do we think about the R&D profile going forward and sort of the broader resource allocation?
Start first, then I'll add to it.
Yeah, absolutely. Obviously with the macro trend as we stepped into this year, meaning 2025, we sort of reevaluated our spend in an area to sort of mirror what the market was trending towards. As we were trending very close to about $40 million a quarter of R&D spend over the last couple of years, this year we stepped in now. We made some reductions, kind of recalibrated where our spend is to optimize that area of our business. We're down to about $35 million a quarter. So $20 million year-over-year savings as it relates to R&D spend. I would expect that evaluation to continue as we go into the future, meaning into 2026 and into 2027, to continue to mirror some of the market trends and really kind of squeeze out some cost opportunities in that area.
Yeah. As I said earlier, there's an air pocket going through the industry right now as well. Just in regards to there are not new programs that are being actively quoted. Most of what we're working on right now is extensions to existing business. We are going to reassess all of our SG&A requirements, including the product engineering side as to what we need to do. Also, remember when we bring Dauch in, they'll bring a certain level of capability as well. We will assess both organizations from a synergistic standpoint to see what we can do to try to beat the synergy target number that we originally put forward.
If we tie into David's previous comment about that bookshelf technology for electrification, that investment's been made. It's on the shelf. We've spent it previously. I think we're in a really good spot.
Yeah.
How do you think about fixed costs in this environment, be it capacity that you've devoted to your EV product? Is it fungible with ICE? And then for programs where clearly the volumes haven't materialized, how much runway is there on commercial discussions to recoup some of that incurred cost?
No, I mean, listen, if you do not have the right capacity utilization, you are going to hemorrhage, especially in a capital-intensive business like ours and a heavy fixed cost business. Volume is the critical part of that. Now, we try to design our systems to be as flexible as possible that can run different technologies across them. To your point, it is fungible from a capacity allocation standpoint. There are certain pieces of equipment that are more dedicated towards electrification applications. Think like in the ICE and a hybrid, you are working more with hypoid gears. In an EV environment, you are working more with helical gears, okay? Two different technologies, two different heat treating applications. We have to make sure that utilization is being properly utilized based on the volume.
As we're quoting business, we're putting volume protection clauses in our quotes today to make sure that no matter what the volumes are, we're getting the returns on those investments. At the same time, we are having commercial discussions and we're getting resolution with those customers in regards to where we put a certain amount of capacity in place that didn't materialize. Now, we were very disciplined and selective about what investments we'd put in and how we'd put it in on a staggered basis to minimize that exposure, which now is left in that commercial discussion, but it's still an issue that's on the table, but we are bringing resolution to those matters.
Yeah. It is not just an EV ICE, sorry, Dan. It is everything across our business. Go back to your previous question. You said, how will metal forming get back into double-digit margins? Yes, we absolutely said we can. Part of that story is also optimizing that fixed cost element of that side of our business. We have been closing some factories. We have been optimizing our capacity from that standpoint as well and on our traditional ICE and hybrid book of business. It is across the whole business, not just the ICE EV situation.
Okay. Let's pivot to the Dowlais deal. Big picture. Last really large deal you did was Metaldyne in 2017.
2017, yeah.
What are some of the lessons learned from that transaction and how has that shaped the contours of the Dauch deal?
Yeah. I guess first and foremost, I'll start with the synergy side of things. In the MPG deal, we targeted 3% of sales, roughly $90-$100 million. We delivered over 5% of sales from a synergy standpoint. The playbook that we utilized, we're utilizing much of that to lay out the original plan from a synergy standpoint with Dauch or GKN. That has now been audited by an outside third party that gives us a strong confidence level that we can achieve the $300 million that we've committed to that way. At the same time, we learned some lessons in regards to double-checking their base business plan. Meaning, as we're going into Dauch, we're re-reviewing their base business plan. When we took over MPG, they had certain programs that they committed in the plan that didn't materialize.
We're also reviewing and double-checking certain quotes and also installed capacity against schedules. Those are some areas that we were caught short based on just the planning and some of the diligence of the MPG side of things. We're factoring all that in. The other side, as I mentioned to you earlier, there's a tremendous talent level also that we're picking up on the GKN side, much stronger than what we got from the MPG side of the business. The teams are working very well together in regards to all of our day one readiness, day 100, and even out full year one and full year two from a planning perspective standpoint. We feel very good about where we are.
I mean, obviously, we got a little extra time because of the slight delay in regards to getting the regulatory approvals, but we'll be ready for day one. We're really leveraging and leaning on the lessons that we learned from our previous acquisitions, whether it be Metaldyne in 2017, but we've done eight or ten other ones in that period of time as well. It's much smaller, but this will be the largest acquisition that we as a company have done, meaning the Dowlais acquisition.
Can you talk about the path of unlocking your synergy? You guided $300 million purchasing SG&A ops, 60% by the end of year two, full run rate by year three. What are the things you need to achieve to unlock those synergies? What's lower hanging fruit? What's tougher?
Yeah. The lower hanging fruit's more the SG&A and the engineering side. It's going to come down to the organization design. How do we optimize that design, be efficient, address the air pocket going through the industry today? At the same time, make sure we have the right resources and the right capabilities to support not only what the needs are today, but also looking ahead to what the future requirements are going to be. We think there's an opportunity to beat the SG&A target as well as the engineering target that we put forward. There's purchasing benefits that we'll realize. Some will be low hanging fruit, like you say, will just leverage our economy of the scales that are out there. Other things will take a little bit of time to get through.
One of the big benefits that we're seeing is insourcing opportunities, both on the metal forming side, really on both the steel forging side as well as on the powder side. That's a positive. We think that we can quickly get after office consolidation based on the offices that we have and offices that they have. The heavy lifting, which will take the most amount of time year two, year three, will just be the manufacturing improvements. Christopher already indicated we're going to look at and already are identifying plants that we can consolidate to drive up that fixed cost utilization and drive up the overall capacity utilization. The other part will just be we need to put our operating systems in. They have some good operating systems. Together, we have very strong operating systems.
We got to put the unified operating system into place and then hold the teams accountable to drive that manufacturing performance at the plant level that will generate greater margins, greater cash flow for the overall business. We feel very good about where we are on the synergy planning, our ability to hit the $300 million, our ability to hit what we committed to in the 60%, like you mentioned in year two, 100% by year three. If anything, we're trying to raise that number and pull it ahead. That's what we're trying to do.
Any opportunity for revenue synergies?
We did not build any of that into our synergy calculation, so that's upside potential. We didn't build that in, one, because it takes time, especially in driveline products. You're not going to get slotted for a program probably out for three to four years. Where on the metal forming side, we did build some of that in based on an insourcing opportunity, but we think that opportunity is greater than maybe what we originally thought it would be.
Okay. Maybe just one more on this. You're going from a North America-centric business to one that is more globally diversified with a more significant European footprint. We know that Europe LVP was once 22 million units and today is running at 17 million units. That is before we even talk about the whole question of what's happening with Chinese coming into Europe, Chinese OEMs coming into Europe, taking share and potentially further changing that picture. What makes you comfortable taking on this European footprint?
Yeah. I'll just talk geographically around the world first. I mean, American Axle standalone, 73% concentrated in North America with the Dauch acquisition that goes down to 57%. In Europe, like you said, today we're about 15%. That will go up to, what, Chris, 22%-23%. And then in Asia, essentially in the rest of the world is the balance of that. The big Asia jump is really through the joint venture that they have is what it is. And that's a very strong joint venture that is much stronger and much more capable than I originally thought it was going to be. We'll look to say, how do we get synergies in China between our wholly owned business versus the joint venture business that exists there today? Back to your question on Europe, we're going to go from that 15% to roughly that 22%23%.
As I mentioned earlier, we'll still be lower than any other Tier 1 in that market. That market has gone and will continue to go, not just next year, but the next several years through restructuring. That restructuring is going to be a challenge for everyone that's there. What I like is the fact that most of the Dauch restructuring was concentrated in Europe and the U.S. the last several years. We're actually going to hit it when a lot of their restructuring in Europe is done. The initial restructuring is done. Now, as we come together as two companies, we're also going to look as there are ways that we can further optimize that and get ahead of things knowing that the pressure that's out there at this point in time.
Clearly, Dauch was spending a lot of money and it was impacting their cash flow reporting. We are going to hit this market. This deal is going to close at the right time where most of that is behind us and we can enjoy that free cash flow ride.
Okay. So.
I don't know if there's anything else.
Spot on. That's the plan.
Wrap up with some questions on balance sheet cash flow at that point. Leverage. You're targeting net leverage at close to be neutral, just under three times net debt to EBITDA. Target over time, you said, is two and a half and eventually to get to two. What's the path to getting there? Is it just synergies, EBITDA expansion?
Yeah. I think it's a combination of synergies, which will drive your EBITDA expansion. Those synergies, as well as the base business, will also drive cash flow. You will really sort of attack it from two angles. Number one, as you generate that cash flow, you'll continue to pay down debt. As you grow your EBITDA through synergies and company performance, you'll lift, hopefully, the plan where you lift your total EBITDA, so therefore your leverage continues to come down. You say a target of two and a half times, I would say that's sort of a point number one. That's really to focus our leverage reduction through two and a half times, meaning almost exclusive use of our free cash flow to do that.
Once we get to two and a half times, I would expect us to continue to reduce the leverage of the business, but also then open the playbook for capital allocation to more shareholder-type activities once we cross that threshold. Still, as David mentioned, driving towards two times or below would be an ultimate goal for us, not just to stop at two and a half times. Strengthening the balance sheet, but it's going to come through EBITDA growth, which synergies will be a main driver, and that free cash flow generation.
We will have a much more robust business model with a combination of the two companies that we can rebalance the whole capital allocation across organic growth, debt pay down, strategic growth, and then shareholder-friendly activities, stock buybacks or dividends.
How does the CapEx profile should be? You've actually been really good on CapEx. CapEx relative to historical levels has been low.
Yeah. The last, call it three or four years at American Axle standalone, some of the lowest capital that we've spent in the last 20 years as a percent of sales. This year, we're about 5% as we're going through some of the cycles of the next-gen trucks that are launching. Dauch has spent in sort of the 4%-5% range. I would see as a combined company in the near term, we're in that 4%-5% range. Our goal, and we've articulated this as standalone, is try to stay at that 5% of sales or below. I think we can accomplish that in the near term for sure.
The free cash flow, because I think we see the adjusted numbers, but there can frequently be a lot of one-time expenses, restructuring, etc. How should we look at the actual free cash flow in the early part post-deal?
Yeah. I think immediately post-deal, the language we speak about is adjusted free cash flow, I think, is what you're referring to, which is excluding restructuring charges. I would say in first year of 2026, Dauch will complete their restructuring element that David referred to. We have a little bit of restructuring that we talked about in our fixed cost elements. You will have sort of the, call it the one-timers to launch and get your synergies up and running. We had said that we would expect to spend, call it approximately $300 million or one per dollar of synergy savings to get those costs up and running into your P&L. That will be front-weighted towards, I'll call it, year one and year two of the transaction post-close. The thought process is we're generating positive free cash flow in all these scenarios.
Okay. Questions? Okay. Why don't we just go back to EV? And maybe you can give us a sense of how the emphasis on EV perhaps changes with Dauch, if at all.
I mean, it's naturally got to change just because the market isn't there, the demand and the pull isn't there. At the same time, as I said, I mean, they've made a lot of investments in electrification. Back in the day, there was only really two companies that were competing in the early days for the electrification business. It was us and Dauch and us and GKN. All of a sudden, everyone started to believe this prognosticator that the volumes are going to spike up. Everyone that was doing inverters and motors tried to get in the driveline space. Everyone in the driveline space was trying to get into the inverter and motor space because we're trying to protect content per vehicle and also manage the margins. Okay?
As I said, this is going to allow us to put a bookshelf product on a shelf quicker based on we already had certain things developed and certain things in the pipeline to be developed. They've already done some of that development and we've already done some of what they were going to put. That is why I think the engineering dollars can come down. There is still E beam work that will need to be done to make it all bookshelf. There is clearly a certain amount of work that needs to be done to deliver the Scout program and both the front and the rear axle there and then other components. We are also really focused heavily on the component side and the sub-assembly side.
Think like differential sides, think gearboxes themselves as the OEMs are trying to figure out what their strategy is going to do. All we want to do is be a full-stop shop for them. We can give you the full entire system or we can give you the individual components that you need. We are going to balance that with the proper R&D investments and the proper capacity installation to make sure we can get the right return. We actually think that we have really strengthened our position and put ourselves in a position from a product agnostic standpoint in a much better light.
Maybe just to wrap, your China exposure pro forma is going to be, it sounds like it's going to be sub 20% roughly.
Yes.
Can you just talk about your pro forma mix of domestic versus multinational OEMs? As you're getting on more of that domestic mix, is that in line with margins or is it diluted? I think that's a question.
Yeah. The margins are in line. We started with a heavy emphasis on the Western OEMs are the ones that originally brought us there. We have converted a lot of our business going forward to the Chinese OEMs. When you look at the joint venture, because I said I just visited them this summer, they did the same thing. They probably have 60-plus %, maybe 70% of their business today is already shifted over to the China OEMs. Both our standalone, wholly owned facilities as well as their joint venture are profitable. That is not true for all suppliers in China.
Okay. Great. We'll leave it there. Great. David, Christopher, thank you so much.
Okay. Great. Thank you.
I really appreciate it. Thank you.