Dowlais Group plc (6O7.F) Earnings Call Transcript & Summary

So good morning, everybody, and thank you for joining us today, both remotely and in person for our first full year results as a stand-alone group. I'm Liam Butterworth, the CEO of Dowlais, and I'm joined by Roberto Fioroni, our Chief Financial Officer. In terms of the agenda for today, after a short intro from me, I'll hand over to Roberto, who will go through the financials, and then I'll be back to give you a strategic and operational update for each business segment. And there'll be time for questions at the end of the presentation. 2023 has been a transformational year for Dowlais as we started a new chapter as a stand-alone listed company following our demerger in April. I'm very pleased that the demerger process did not distract the business nor impact on our operational performance and financial execution. In fact, not only did we deliver on all the commitments previously made, but we did so ahead of expectations. Firstly, we expanded margins by 90 basis points, excluding new stand-alone PLC costs and foreign exchange rate. This reaffirms our confidence in Automotive achieving our margin target of more than 10%. Cash generation was also ahead of expectations at GBP 93 million of adjusted free cash flow, which together with EBITDA growth contributed to reducing our debt leverage to 1.4x. We are also demonstrating our strong focus on shareholder returns by firstly recommending a final dividend of 2.8p per share, which will result in a full year dividend of 4.2p per share; and secondly, by announcing a GBP 50 million share buyback program. Finally, both Automotive and Powder Metallurgy remain well positioned to benefit from the long-term electrification of the automotive industry as demonstrated by the record new business bookings in Automotive and growth in propulsion agnostic components in Powder Metallurgy. As we are a relative newcomer to the London Stock Exchange, let me take a few minutes to remind you of the exciting Dowlais proposition. Dowlais is a specialist engineering group focused on the automotive sector, mainly comprising of 2 larger businesses, which are GKN Automotive and GKN Powder Metallurgy. We are a truly global player and a market leader with over 50% of light vehicles on the road, containing our technology, and we serve over 95% of global OEMs with whom we have incredibly long-standing relationships. We are well balanced regionally and our global footprint means that our revenue is highly diversified as well as enable us to leverage our scale to maintain our competitiveness. We also have an outstanding reputation for quality and delivery, meaning we have loyalty and trust from our customers established over decades. We have 2 market-leading businesses. GKN Automotive is the global leader in Drive Systems, and we are well placed to benefit from whatever the speed of transition to EVs. It is the global leader inside shaft and prop shafts, and its ePowertrain product group is the world's leading supplier of all-wheel drive systems and advanced differentials. GKN Powder Metallurgy is the global market leader in centering technology and holds the #2 position in metal powder supply. It produces around 10 million components per day and approximately 300,000 tonnes of powder per year for our automotive and industrial customers. Powder Metallurgy helps its broad range of customers optimize complex components by using its world-class engineering expertise to design and develop parts that are consistently lighter, stronger and more efficient. And finally, we also have our nascent hydrogen business, which continues to make strong progress with its metal hydride storage technology, which delivers green energy solutions to support the world's transition to a net zero economy. We have a clear purpose, which is engineering transformation for a sustainable world. Our strategy is clear and focused on 3 pillars: lead, transform and accelerate. Lead refers to our market-leading products and our ambition to generate the financial performance these businesses deserve. This requires maintaining a relentless focus on operational excellence, adopting world-class manufacturing, commercial and procurement processes. We also drive our businesses to fulfil their potential to deliver industry-leading financial performance in terms of operating margins and cash generation. Next is transform. Our businesses and our teams have a strong track record of transformation. Continuous improvement and agility are fundamental to how we operate. We are digitizing and streamlining our manufacturing processes. We have reshaped our production footprint to improve our competitiveness, and we have invested in the technological innovation of our products that will help drive the sustainable vehicles of the future. And finally, accelerate, we will drive profitable growth. In the last 5 years, the business has invested in growth segments demonstrated by our new business bookings track record. In regard to inorganic growth, our approach is to be prudent and disciplined and to pursue opportunities only when we believe they are aligned to our portfolio strategy and we are confident they will create shareholder value. I'm now going to hand over to Roberto, who will talk you through the detailed financial results.

Thank you, Liam, and good morning, everyone. I'm Roberto Fioroni, CFO of Dowlais. In our first full year, we delivered a strong set of results ultimately delivering on our previously made commitments. As you can see, revenue grew just over 6%, while adjusted operating profit grew 10% to GBP 355 million, a little ahead of consensus expectations. If we exclude stand-alone PLC costs, then we grew operating profit by 20% in constant currency, and this better reflects the year-on-year group trading performance. As highlighted earlier by Liam, the group's relentless focus on cash delivered an adjusted free cash flow of GBP 93 million, well ahead of expectations. We're extremely pleased with the performance, and it bodes well for the future. Adjusted earnings per share was 13.8p, in line with our expectations. Finally, we demonstrated our focus on shareholder returns by delivering a full year dividend in line with our policy and by announcing a GBP 50 million share buyback program. More about this later on. Now let's turn to the P&L. Let me start with revenue and in particular, the key drivers of our growth. Volume was the largest contributor as a result of the strong growth in global light vehicle production. Our revenue growth underperformed GLVP, largely due to geographical mix and our strategic focus to prioritize profitable growth over volume. Price drove an increase of GBP 108 million in the period. This represents the net impact of contractual annual price reductions, which are standard in our industry and customer inflation recoveries. Similar to 2022, we recovered the majority of inflation via customer pricing, an excellent result. Together, volume and price resulted in just over 6% growth in constant currency. Finally, foreign exchange was a headwind of GBP 90 million with a larger impact in the second half, reducing reported growth by approximately 200 basis points. On operating profit, firstly, incremental volume in the period dropped through at 29%, in line with our financial model. Secondly, in 2023, customer price recoveries largely offset standard contractual price reductions as well as the direct and indirect material inflation. The third column, productivity represents the benefits that are delivered by continued operational efficiencies, which had a positive contribution of GBP 28 million, net of labor inflation. Foreign exchange was a headwind of GBP 12 million as the pound strengthened primarily against the U.S. dollar and the Chinese RMB. The negative impact in other is largely due to one-off benefits that we incurred in the prior year, taking the operating profit to GBP 387 million for the year. Finally, we incurred GBP 32 million of PLC costs in the period. A better comparison of operational performance, in my view, versus prior year would be to exclude incremental stand-alone costs. On this basis, adjusted operating margin expanded 90 basis points and adjusted operating profit grew by 20% at constant foreign exchange. This includes a GBP 15 million adjusted operating loss in Hydrogen. Overall, we made good progress in the year by growing profit and expanding margins, notwithstanding the headwinds of inflation and UAW strikes in the U.S. We expect further margin growth in 2024. Here is a quick summary of our financial performance by business unit. In Automotive, revenues grew by 7% and margins expanded by an impressive 110 basis points as a result of higher volumes, operational performance and fully offsetting inflation in the period, driving operating profit 20% higher. In Powder Metallurgy, revenues grew by 3.5%, mainly due to the impact of customer recoveries to offset inflation. Margins contracted by 10 basis points as a result of the dilutive effect of inflation recoveries. Finally, we continue to make progress in Hydrogen business. We currently have 27 operational systems, of which 16 that were commissioned in 2023. The prospects for this business are promising, and we believe they could be accelerated through a strategic partnership. Moving to earnings per share. We delivered basic earnings per share of 13.8p. You will notice there is no comparison versus last year because of the demerger, but let me quickly go through the relevant items. Adjusted net finance costs were GBP 91 million. This largely comprises of GBP 63 million of interest costs from bank borrowings, reflecting our new stand-alone capital structure since April and GBP 17 million of interest on group pension schemes. Tax charges were GBP 66 million on an adjusted profit before tax of GBP 264 million with an effective tax rate of 25%, in line with guidance. Statutory basic earnings per share was a loss of 36p. The gap between adjusted and statutory EPS is largely driven by the impact of a GBP 449 million noncash goodwill impairment in Powder Metallurgy this write-down was taken after completing a detailed business review in which medium-term profit and cash forecasts were lower than previously assumed. We continue to believe that this business has promising long-term prospects. Moving to cash. I'm extremely proud of what the teams delivered in 2023. As a group, we have generated significantly more cash flow than expected. This was driven by a number of factors, including the improved profitability and an GBP 18 million working capital improvement despite growing revenues by 6%, driven by a more efficient supply chain. Restructuring cash outflows of GBP 70 million were lower than guided as a result of phasing. Capital expenditure was GBP 295 million, higher than in prior years and representing 1.2x depreciation and as we invested for the future, including the new site in Hungary and the expansion in Mexico. Interest, tax and pension cash outflows were as expected and in line with the new capital and stand-alone group structure. Excluding the one-off demerger costs, we generated GBP 93 million of adjusted free cash, better cash flow and higher EBITDA resulted in a reduction of net debt and leverage, increasing our range of capital allocation options, which I'll turn to next. Our capital allocation policy remains unchanged. Our first priority is to continue to invest in the business to drive organic profitable growth and support the transition to electric vehicles. In 2023, we did so with a higher capital expenditure, sustained R&D and ongoing restructuring that will support future growth and margin expansion. Secondly, we aim to maintain a strong balance sheet, which we broadly define as maintaining leverage in a range between 1 and 1.5x. Thirdly, we have a clear dividend policy. In our first year as a PLC, we have recommended a final dividend of 2.8p per share, resulting in a total dividend of 4.2p per share and the implied payout ratio of 30% of adjusted net income, in line with our dividend policy. Finally, we aim to use any excess cash to either pursue selective M&A opportunities to strengthen our core businesses or in absence of these, to return it to shareholders. And it is within this framework that today, we announced the intention to commence a share buyback program of up to GBP 50 million over a 12-month period. Before talking about the outlook, let me reiterate the strong first year we had in 2023. We delivered on our key priorities by expanding margins, notwithstanding headwinds, including inflation and UAW strikes, generating a healthy cash flow that enables us to return capital to shareholders and booking record levels of new business that position us for profitable growth in the future. As we look forward to 2024, current industry forecasts imply a slight decline in global light vehicle production. Based on these external forecasts and our current order book, we anticipate group revenues will be similar to 2023 at a constant currency. With a modest reduction in the first half, offset by an improvement in the second half due to the expected timing of several new program launches. On this basis and with our strong continued focus on operational efficiencies, we expect to further expand operating margins and grow free cash flow in 2024. We also expect operating profit to be modestly second half weighted with cash generation also more skewed to the second half, similar to 2023. I don't intend to go through each point on this slide, but hopefully, this is useful for modelling purposes in 2024. We haven't changed our capital expenditure guidance range. But based on our current assumption, we would expect it to be towards the lower end of the range of 1 to 1.2x depreciation. In regards to foreign exchange, the outlook on the previous page is all at constant rates. As usual, we have provided a ready reckoner to help you model the translational impact, which at current rates is a headwind to both revenues and profit. If you have any questions on this or other modelling matters, please do speak to me up here. Thank you, and I will now hand back to Liam.

Many thanks, Roberto. I'm now going to talk a bit more detail about each of our businesses. Starting with GKN Automotive. The business has had a very strong year and is on track to deliver its financial targets. Revenue grew by 7%. And whilst this was behind market, this was mainly due to geographical mix and our relentless focus on profitable growth rather than volume. Volume and commercial inflation recoveries helped drive growth and operational performance contributed to expand margins to 6.9%. The business is on a clear path to deliver on its target margin of above 10%, and I'll be giving you more details on this later. Automotive also saw record new business bookings, which demonstrate how we are well placed to benefit from the transition to EV with 74% of bookings being for EVs all at target margins. This slide demonstrates how our portfolio is well positioned to manage the transition to electric vehicles over the medium term. Automotive comprises of 2 key business units: Driveline and ePowertrain. In Driveline, the vast majority of this business relates to side shafts, which are powertrain-agnostic. In fact, we see the benefit of the change to electric propulsion, increasing the content per vehicle driven by both product value and fitment rates. Shifting to ePowertrain, the all-wheel drive business will gradually decline over time. However, we expect this to have a long tail due to the geographic weighting of sales in the U.S. and Southeast Asia and vehicle segment mix of our products towards SUVs and pickup trucks. On ePowertrain Components, we expect demand to increase further as performance features become more sought after by our customers on next-generation electric vehicles. And finally, eDrive systems, in this product group, we have successfully demonstrated our complete technical capabilities building on our all-wheel drive expertise. However, we will continue to approach this market cautiously to ensure we generate an appropriate return in what is an incredibly competitive market. Our balanced portfolio will enable us to transition in line with the market. On this slide, I'd like to talk you through our proven financial model that allowed us to expand margin in Automotive. And let me explain how it worked in 2023. In the full year, incremental volume dropped through to operating profit at 29%, and that was thanks to material inflation being largely offset by price recoveries and labor inflation being more than offset by a range of productivity initiatives in operations, fixed cost and procurement. At constant FX, this resulted in GKN Automotive margins expanding by 110 basis points year-on-year to 6.9%, and this is despite the dilutive effect of inflation recoveries. Earlier, I said we have a clear path to achieving our target of above 10% margin over the medium term, which means approximately 300 basis points of margin improvement. As you can see on flat revenues, approximately 200 basis points will be delivered by 2026 through ongoing already announced self-help. This will largely be driven by footprint optimization, increasing production in best-cost countries and continuous improvement initiatives, and we have a clear visibility on the plan that will deliver this. We previously announced the opening of our new plant in Hungary and the closure of the plant in Germany and the move of further production to Mexico. In addition, we have also very recently announced the closure of our plant in Roxboro in the U.S.A. All of these actions contained within our previous cash restructuring guidance and will make a meaningful difference to our profitability. To close the remaining gap of approximately 100 basis points will require revenue growth. We've already mentioned that in 2023, automotive business wins resulted in booking new lifetime revenue of over GBP 6 billion. This is a new booking record and resulted in a book-to-bill ratio of 1.4x. This record level of order intake not only gives us further confidence in future profitable growth. It also demonstrates how we are positively managing the transition to EV. 74% of our bookings last year have been awarded on EV platforms, all of which are at or above target margins and 69% of those bookings are for pure play BEV platforms. These wins are well balanced across our entire portfolio of customers and are a further demonstration of our market-leading position, Automotive has in terms of technology, quality and operational excellence. As China continues to lead the world in overall volumes and the transition to electric vehicles, I want to highlight GKN Automotive positioning in this market. Our Automotive Joint Venture with HASCO, which celebrated its 35th anniversary last September, continues to be incredibly successful. The JV dedicated to serving the local market has 10 production sites in the country, one Advanced Technology Center and is the market leader in side shafts and prop shafts. We work with all the leading Chinese OEMs and are profitably growing our market share with many of them across the whole of our product portfolio. As elsewhere in our business, in China, we are rigorous with our commercial strategy, prioritizing profitable growth over volume. As a reminder, our Chinese joint ventures margins are already at or above target margin levels. While our Chinese sites continue to serve the local market, we are very well positioned to leverage our long-standing relationships and support our Chinese OEM customers as they pursue their global expansion plans. Over the last year, we've dedicated a significant amount of time in assessing the challenges and opportunities faced by Powder Metallurgy. The business performance in 2023 was in line with expectations, including cash generation. Adjusted revenues grew by 3.5% versus 2022. This was driven by inflation recoveries as volumes were flat year-on-year. The market underperformance was largely driven by the EV transition headwinds, engine downsizing and the impact of the UAW strike in the U.S. Operational improvement would have increased margins by approximately 40 basis points. However, this benefit was more than offset by the 50 basis points dilutive effect of inflation recoveries. We've also appointed a new CEO to the business whose primary focus is to continue accelerating change to realize the long-term financial potential of this market-leading business. With regards to commercial performance, Powder Metallurgy continued to take steps to address the impact of the EV transition. It achieved a 23% year-on-year increase in new business bookings with 72% of these relating to propulsion-agnostic products, which is a significant increase on the prior year. These business awards will cross a wide range of applications such as differential gears and components for power steering, suspension and cooling pumps. The booked business continues to be our target profitability levels. This slide illustrates the evolution of the Powder Metallurgy portfolio as a result of electrification. Engine and transmission products will decline over time in line with the market. Within the chassis and EV segment, as mentioned earlier, we have identified and commercialized several promising growth opportunities. And the industrial portfolio is clearly agnostic to the EV transition, and we are allocating appropriate focus to explore growth opportunities for products in this sector. Overall, we believe there is long-term growth potential in our core portfolio, and we are looking to supplement this growth through incremental EV products. One such area is high purity iron powder for LFP battery cathodes, for which we have made progress during the year supplying our first volume deliveries in China. Finally, as presented at the half year, the team has secured its first commercial agreement for the manufacturer of magnets for Scheffler. And the business continues to see significant interest in these products from multiple Tier 1 and OEM customers. However, as already mentioned, we will only invest in capacity for this product group as and when an OEM or Tier 1 contractually commit to volumes at the right economics to warrant the investment. Briefly on Hydrogen, a start-up business that was incubated in Powder Metallurgy uses innovative iron powder technology for metal-hydride storage of hydrogen. It's a business with an exciting and innovative technology operating in a nascent market. As Roberto said, it's made good progress in 2023 with the business seeing its first repeat customers, and this momentum is expected to continue in 2024. We're also continuing to seek the right strategic partner to facilitate the next phase of growth for this business. Our approach to sustainability at Dowlais comprises of 2 key focuses: addressing key global sustainability challenges through our products and technologies being at the forefront of the global shift to electric vehicles while ensuring that we run the business sustainably, considering all our impacts on people, society and the planet. This year, we've made a strong start. We have taken a fresh look at our material issues. We've put structures in place for robust sustainability governance and ownership and we've solidified our decarbonization plans with the development of science-based targets. We're proud that both businesses improved their EcoVadis ratings with Automotive achieving a silver medal and Powder Metallurgy at platinum metal, the latter being only awarded to the top 1% of companies assessed. Group scope 1 and 2 emissions fell by 6.4% against the 2022 baseline, and we have submitted science-based targets for validation for both Automotive and Powder Metallurgy with Automotive recently receiving approval. We'll be providing much more details on our approach to the ESG in our inaugural sustainability report to be published alongside the annual report. So in summary, we're delighted with our performance and progress the business has made in its first year. Since we listed in April, the management team has taken decisive and bold actions that have delivered meaningful progress across our 3 key strategic priorities. Firstly, we've continued to grow margins and operating profit. Secondly, we've generated cash above our expectations, enabled us to return capital to shareholders. And lastly, we've made significant progress on transitioning the portfolio of our businesses, specifically record bookings in Automotive and significant progress in transitioning the portfolio in Powder Metallurgy. Also through the impairment of Powder Metallurgy alongside the appointment of its new CEO, the business now has a right platform from which it can realize its long-term financial potential. So I'm really excited with the group's performance in 2023 and couldn't be more excited about the future ahead. We're now happy to take any questions you may have. Please do state your name and affiliation for the call that is being broadcasted this morning. Thank you very much.

Thank you, Liam and Roberto, just two quick questions for me, please. Interested on the new lifetime business wins. Are there any major platforms that you didn't win and is a geographical SKU? Just any sort of more color around that would be good. It's good to hear that they're at target margins. And then I've got a second question. If you want me to ask that now or?

No, no. So on new business wins. So it's across the entire portfolio. And we're very mindful in terms of making sure that we're not over-indexing on one product line or one customer. So I would say it's very well balanced geographically and across the portfolio of customers and regions.

And the second question, can we assume that the sort of free cash flow generation you're expecting in full year '24 should sort of cover the dividend and the set GBP 50 million share buyback? Is that how we should think about it? So therefore, sort of net debt-EBITDA ratio doesn't increase.

The short answer is yes. There are some other puts and takes, but I would -- as stated, we're committed to staying at or below the 1.5x net debt leverage.

I'm Arya from Barclays. The first one is on the current industry slowdown in EV adoption. I think it's one of the main themes in the sector at the moment. My question is how is that going to impact Dowlais. I guess, on the one hand, it should support your ICE exposed product areas like all-wheel drive systems, prop shafts, a lot of powder met. And I understand a lot of these ICE areas are quite good in terms of cash generation. But on the other hand, is slowing EV adoption going to materially impact your organic growth potential in the coming years. I'll ask the second question after this.

Maybe I can start with that if you've got something to add. So clearly, if -- and we went through the portfolio of both businesses, Automotive and Powder Met and starting with Automotive. It's significantly agnostic that business. There are some products within the portfolio that are dedicated to ICE -- but the current slowdown, and we believe it is just -- it's a temporary slowdown. EV will definitely happen and we'll see some new platforms coming towards the end of the decade. We see it as a slight tailwind for us. And what we're seeing is probably some program extensions on existing products. On our all-wheel drive portfolio, and I alluded to it in the script was that the majority of platforms that those products are on are on North American platforms and Southeast Asia vehicles, where that tends to be a later transition to EV anyway. If I look at Powder metallurgy, clearly, 50% of the business is ICE dependent. So we see that slowdown being a slight tailwind for the Powder Metallurgy business.

Yes. The only thing I'll add is, first of all, the market is still extremely volatile, right? 2 months ago, everybody was going full blast on EV transition. Then we've seen a slowdown. I think just last night, Biden announced something which implies a speed up that is fair to assume if Trump comes in, it's going to be slowed down again. So who knows, right, how quickly it's going to happen. We've worked very hard, and we continue to do so to drive the agnostic aspect on the rate of transition but be ready for the transition, right? The only thing I'll say is don't assume that a slowdown will tremendously help Powder Metallurgy because one thing that is happening independently of the transition is the downsizing of ICE engines, right? So there is a content per vehicle headwind anyway in that.

Great. And then the second question was on restructuring. I think it's another big topic at the moment for suppliers, a lot of your peers in Europe are undergoing significant restructuring programs. Arguably, you're well ahead of the curve, given all the work that marrows have done in previous years. So my question is, are you now at a position where you're largely happy with your headcount and footprint, and we should expect 2024 to be the peak in terms of restructuring cash outs? Or should we expect more meaningful restructuring to continue in the coming years?

So just in terms of our industrial strategy, so we're more or less done now in terms of what we wanted -- we laid out in 2019, just after nor acquired the business, where we wanted the footprint to be over the kind of next 5 or 6 years. Hungary was kind of the last piece of that puzzle, which was to transition from one plant in Germany across to Hungary. And then as we said, we have announced the closure of a plant in North America. We now have the footprint that we were very, very happy with going forward. And we've taken out, I think, 8 or 9 facilities over the last 4 years and not added any capacity. So there was significant overcapacity in the business in the wrong locations. We've now got the right capacity we need in the locations where we think -- we believe it where we want to be.

I'm Mark Fielding from RBC. Sort of a 2-part question, but I will ask it all in one go. In terms of just the 2024 growth outlook, I suppose, overall, you're guiding for relatively stable sales in both divisions. I'm just a bit curious on the dynamics within that. I mean, obviously, the aspiration in the automotive side is to slightly outgrow the market. And obviously, you talk very clearly about the geographic mix and focusing on profitability in 2023, but just curious how that's evolving in 2024 and how you think about that? And then the counterpoint is obviously Powder Met, I think as the price pass-through stuff, the implication of the volumes were down in 2023 and it's actually quite a recovery to be growing in line the market in 2024. Just so again, if you could just give more clarity is that the new product wins that are coming through? Or is it the ICE being a bit better than thought? Or just what's the mix in that?

Yes, sure. So if I look at -- and chime in, Roberto, if I look at 2023, the majority of the growth was driven by China, where we, as the automotive business has a lower level of exposure because of our JV and also where we're positioned with the Chinese OEMs. We see that changing this year as we go through this year, where China is flat in terms of growth year-on-year. So we see geographic mix being slightly more favorable for us. And also, we see -- we've got a number of new product launches that will be kicking in, in the second half of the year, which is why Roberto said, we're going to see kind of a year of 2 halves in terms of growth and profitability. So we remain confident that the auto business will grow at or slightly above market this year. From Powder Metallurgy, as you rightly said, last year was down on volumes. I think one of the challenges that business has with it being a Tier 2 business, you tend to have a ball with effect as well in terms of the supply chain dynamics. So I think there was -- we've seen quite a bit of destocking that took place throughout the second half of last year, and we're seeing some slight restocking going on through the first half of this year in the Powder Metallurgy supply chain. And also, we had a number of product portfolio pruning initiatives that took place last year that impacted the growth. I don't know if you want to add anything to that, Roberto?

No. The -- just on the Powder Met side, I think, Auto is clear on the Powder Met side, as we always said, the transition and the downsizing hands off the wheel creates roughly a 3% to 4% headwind. And we're also quite satisfied with the progress the team is making to find applications outside of ICE. So whether that's body on chassis, whether that's powders for batteries or whether that's on the magnets or on BEV specific powertrains. So we've also seen some of those products kick in this year. And again, the outlook based on current global light vehicle production is similar sales to prior year.

Vanessa Jeffriess from Jefferies. Just as a follow-on to that. Obviously, you've done an excellent job with price recovery over the last couple of years. How do you think about OEM industry ability to hold on to that? And when do we return to the kind of 1%, 2% price down environment? And then also, what's the headwind from the UAW kind of wage increases in the U.S.? That's the first question. That was kind of like...

A very clear answer, we will hold on to it. There's absolutely no doubt about I was holding on to it. In terms of our -- I let you go to the financials shortly, Roberto. Our model is basically any price givebacks that we-- contractual price reduction we give back to our customers we offset through procurement performance, and we're in the region of around 1% in terms of price givebacks. We see little inflation impact this year on the business from a material standpoint. And then from a labor standpoint, again, we're fully offsetting that through all the productivity initiatives we've got running through the business. We have very -- I think we have less than 100 UAW employees in the business in North America. And as you heard earlier on, we're transitioning another plant down to Mexico. We've settled most of our labor agreements for this year, and so we don't see any pass-through impact of UAW agreements. If we do start to see that, then the first port of coal will be back to the OEMs to renegotiate our commercial conditions with them because we're not absorbing the impact of an agreement that the OEMs made with their unions.

So just to add on Liam's comments, the -- what has changed contractually in terms of indexed price adjustments. So Automatic is just we've expanded the customer participation or a number of customers which are on steel, scrap and base indices. But otherwise, that was there before anyway. So I agree with Liam and we will hold on to most of the recoveries. In terms of your question around when do we go back to a normal world, it's our financial business model expected to be this year, where we'll see net price down, driven by the annual price reductions, which are, again, as I said, standard in our industry. But just like pre-inflationary pressures, as i.e., '22, '23 -- year, sorry, not pressures, we -- the expectation will be to fully offset those with direct material productivity.

And then Powder Met, so the headwind to margins from pricing was 200-250 bps. Is that right? I mean what we see that normally over the next few years. And then the other part is, you said that you're booking business at target margins in Powder Met. I assume that's not 14% margins. But I mean, it's obviously above where it is now, right? That was what I was...

So the headwind -- let's just speak over the last 2.5 years of inflation recovery time. So we started in '22 in last year. We've cumulatively created a margin dilution impact. I think this is what you're getting at, of about, let's call it, just below 200 basis points, between 180 and 200 basis points. So said differently, if you're trying to refer back to the 14% target margin, it would now be at 12% just because of dilution. The -- we -- right now, we've stepped away from that. We've got our first priority in Powder Metallurgy is to solve for that revenue growth and the ICE headwind. As we start to see revenue growth coming back in, in that, we said, don't expect it in the midterm, then I would expect margins to continue start increasing.

It's Harry Philips from Peel Hunt. Just sort of continuing just on that Powder Met theme to given a sort of ICE headwind, say, of 300 basis points just as a sort of number and you look at forecast for globalized vehicle production over the next few years, without anything else, sort of standing still revenue-wise, would be a pretty decent performance. Is that-- am I missing something in that sort of crude arithmetic. And then I guess, I suppose we added on to that then is what kicks Powder Met margins back into positive territory or growth territory, if there is that sort of flat platform? And then secondary to that is, I know we're just talking about it outside Liam, but the sort of magnet profile and sort of-- because clearly, that would add a huge accelerator. But again, that's not a '24-'25 debate.

I'll leave you he magnets. I want to take one step back on Powder Metallurgy right, because it is a business that we still very much believe in and we think it's great. Now I know we took an impairment, but it is, first of all, high margins and accretive to the group, right? It's cash generative. And let's not forget that, okay. And the Powder Metallurgy is operating in a very fragmented industry. We are #1 player in Synta, #2 in powders. But with relatively low market share, right? There's an opportunity there to grow, and I'm talking about organic growth, not only inorganic and make that business better. So there is -- I think I like what you said, Harry, that it is a good performance, having offset some of the headwinds. I still think there's some more value to be unleashed there as we work through it.

Yes. So in terms of some of the growth drivers to offset some of the ICE decline this year. So we've-- as we alluded to, there are a number of new products that we've booked that are non-ICE specific that are obviously launching this year. There's a number of conquest opportunities that we've picked up last year as a result of how fragmented the market is. And also the industrial-- so we've got some industrial products that are also -- we're seeing signs of growth. So when you bring all that mix all that together, we -- our outlook is somewhat flat in terms of revenue. Now in terms of magnets, so we announced that we had our first commercial agreement last September. We've spent a considerable amount of time making sure that we have got the right supply chain because what the OEMs are looking for is a completely derisked diversified supply chain from the rock in the ground through to the magnet that's coming out of the end of the manufacturing process. So we've been working and talking with a number of supply chain partners down to mines for doing the mining, the separation, the metallization through to the manufacturing. And we've made some significant progress there. So we have a very clear supply chain strategy. We have a very clear range of partners to work for raw material supply, but all that hinged on the commercial conditions that the OEM is prepared to pay because we know with that solution, we're not going to compete head-to-head with a Chinese source. We're going to be -- we have a certain commercial conditions that we need to meet. There will be a premium to pay for that. And we won't invest until the OEM as it gives us-- we have a contract with an OEM with certain volume conditions and commercial conditions that meet our requirements to make the investment. But there's clearly-- there's a significant amount of interest right through the supply chain because this is going to become a very, very big issue for the OEMs as they electrify their vehicle platforms in terms of the quantity of magnets and rare earth that they need for their EV systems in North America and in Europe.

I should say Europe primarily, but then in North America.

And just to follow up on that, the sort of GBP 300 million opportunity is sort of still there?

Yes, that's still our outlook where we believe, if you look at the size of the market and our market share assumption by the end of the decade, we're still aiming to work towards that number.

And then just finally on that, the -- we shouldn't expect any sort of-- if there is a CapEx and as investment announcement in magnets, we should expect that maybe not an entirely perfect world, but broadly a sort of underpinned from an OE or a Tier 1 to sort of...

Yes. We're not going to build a plant and then wait for customers to hope for customers to come and fill it because that's an unwise strategy, and that's the strategy of the past. So we will only build a plant and put capacity in place when we have a piece of paper with a signature on it.

That last comment is very interesting about the past. And then just very finally, just in terms of OE offtake at the moment, is there because of the EV sort of slowdown, call it what you will, is there a sort of marked change in volatility of offtake at the moment? Or is it sort of evening out.

That's a really good question because it's -- if I look at Europe at the moment, we're seeing-- and probably more in our Powder Met business at this point in time, they're coming back to the supply chain, [ balling effect ]. We're seeing quite a lot of demand on ICE with some of the big European OEMs of their pivoting, their vehicle builds to more ICE related. And that's-- that happened very, very quickly. And I think one of the big triggers for that was the dropping off of the incentives in Germany, where we saw the shift from EV to ICE platforms going very quickly. So we're seeing the supply chain being refilled on some of some of the engine platforms. But overall, I would say the volatility in supply chain that we were seeing during Covid of 20% to 25% schedule fluctuations, that's over, I would say.

Mark Fielding from RBC. Just one quick follow-up wells not follow-up to anything that's been asked because I'm going to ask about Hydrogen, which we don't talk about that often. But I mean, just can you clarify for us that GBP 15 million of losses, that's the ongoing rate for the next year or 2? Is there any reason that would be changing? Obviously, business is getting more units out there. Is that all cash? And then obviously, you said you're in the process of looking for the partners. Is that something you'd hope to get done in the first half of the year or?

Yes. So let me talk about the cash requirements, but Hydrogen as I alluded to on the slide was created out of the Powder Metallurgy business. They've got a very innovative technology for normal pressure, normal temperature storage of hydrogen in metal hydrides-- and it's-- we believe it's one of the best in the market there is today. And there's some traction in the market in terms of applications. The challenge we've got is we're kind of-- we're automotive manufacturing. So we're not experts in energy transition. We believe it's a very exciting business, but it would definitely benefit from a strategic partner. And we're in the middle of a process to find a strategic partner who can help in 2 ways, one, to go to market and develop and grow the right opportunities for that technology and that business. And the second is to minimize the cash burden that it's having on the group.

Yes. In terms of this year, I expect revenues to continue growing that will drive some slight improvement on the operating loss, but not that material for modeling purposes, and I expect cash to be pretty much aligned with the operating loss.

A couple of questions from Akshat from JPM. Could you please talk about the operational efficiencies of your European footprint, given the zero recovery in volumes post the pandemic? And should we expect more restructuring measures to optimize profitability? And related to that is what are your restructuring expectation for 2024…

[Technical Difficulty] to expand even further over time. All of our effort now is ramping up that facility and that is basically transitioning final assembly and machining work from our plant in Moselle, Germany across there. Once we've concluded that our European footprint reaches, [Technical Difficulty] additional opportunities we could do without significant cash outcome flows, but we're pretty happy [Technical Difficulty]

I'll start maybe by just reemphasizing a message that Liam said during the presentation, which is in Auto… [Technical Difficulty] change in '23 and '24. I hope that answers your question.

And so talk about the petitions for the automotive business in China in 2020 were and what do you expect it further organic the customer mix and ongoing headwind?

Yes, our customer mix in China in 2024 is on hold more Chinese OEM business than last year with a number of programs launching with [Technical Difficulty] programs ramping up with those guys this year. So we expect that we'll continue to grow with the Chinese OEMs. We'll still be slightly underweighted. And that's partly because we continue to be extremely focused on profit and profitable growth rather than growth for the sake of it. So we think our China business will perform in line or maybe slightly ahead of market this year and continue to be at target margins. And that's something that when Roberto and I were in China, probably 6 January. And we're fully aligned with our JV partner in terms of the strategy, how we want to develop on the profitability target. So this absolute alignment with our JV partner there.

And on Powder Met, can you please-- can you [Technical Difficulty] square the sizable impairment on Powder Met…

Cash impairment of GBP 449 million, taking the carrying value from just above GBP 1.3 billion to just below GBP 900 million. That was a consequence of us really working with the team on what we believe is a more grounded forecast and plan. And so as you know, no better than me, carrying value is a DCF discounted cash flow exercise, right? So essentially, there's lower growth and therefore lower profit and lower cash than previously forecasted, but it's fully aligned with our new guidance in the next 2 to 3 years, flat revenues at margins which are at around approximately 10% or we'll work their way up to that 10%. For this year, as per the guidance in the RNS, I would say, very similar to revenues to prior year on roughly the same margins.

One question now from Michael from [indiscernible], what are your expectations for the year by major cost bucket, so wage inflation, raw materials and other? And how would you summarize the main puts and takes for '24 group margin in relation to FX headwind, corporate cost and pass-through as on?

Yes. So Michael, first of all, nice to speak to you again. But the-- we don't really give that level of granularity by cost bucket. But overall, we are sticking to our financial model, right? So what does that mean in terms of '24 puts and takes? Volume would flow down at 30%, but as we said, don't expect much volume. Then we offset inflation or price with productivity. And ultimately, the margin expansion is driven by big footprint optimization projects. So what does that mean for '24? We said on similar revenues, expect margins to keep on expanding. That's driven by the footprint optimization projects partially offset by foreign exchange headwind, right? So looking at current spot rates, driven by the strengthening of the pound, this is purely translational impact, but expect a GBP 15 million to GBP 20 million FX headwind.

And just to add to that, in terms of phasing, as we said, Hungary is a greenfield site where we've probably got 10 assembly lines in there at the moment. So there's quite a lot to do between now and the end of next year, and that's contributing a chunk towards the 200 bps of self-help. So we've got to ramp up the assembly and all of the machining over the next 18 months. And then the same with Mexico is we announced the closure of Roxboro 3 weeks ago. So we're just at the start of that transitionary process. But on the Hungary plant, just to conclude, we're very, very happy with the choice of location. We have a fantastic management team in place in there already. And all of the OEM customers, mainly primarily the German ones have been and given very good audit ratings and green light to supply. So we're already supplying from that site. And our team is to make sure that we can ramp up as quickly, but it also safely as possible.

A couple of questions from Pierre from Stifel. Any chance to see some organic growth in the second half, exceeding high VP? And are you comfortable with consensus expectations above GBP 400 million for adjusted OP? And thirdly, free cash flow has been burdened by $48 million merger out today, any additional headwind to be expected in 2024.

[Technical Difficulty] we've said that we've got a number of programs launching in the second half of the year specifically in Europe, the U.S. and China, but mainly Europe and the U.S. [Technical Difficulty] is kicking in the second half of the year, which is why [Technical Difficulty]

[Technical Difficulty] Specifically again I'm not going to give the answer in terms of just [Technical Difficulty].