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

Good day, ladies and gentlemen, and welcome to the Dowlais full year 2024 results. The presentation will commence shortly. [Operator Instructions] Please note this call is being live streamed to webcast for a wider audience and will be recorded. I would now like to hand over to Liam Butterworth, Chief Executive Officer, to open the presentation. Please go ahead.

Good morning. And thank you for joining us today for our full year 2024 results. Firstly, I will set the context for the decisive actions we took over the last 12 months and the ongoing structural shifts shaping our industry. Roberto is then going to cover the '24 results in detail. And to finish, I will look at our divisional performance and how we're continuing to position ourselves for the future. 2024 was a year of industry challenges but also one of significant strategic progress for Dowlais. Despite ongoing market volatility, we delivered on our updated guidance that was communicated in mid-'24. We remained laser focused on execution, taking decisive strategic actions to strengthen our business. Each of these actions is critical to driving long-term value for our shareholders. Let me give you some examples. As guided in August, we successfully offset the impact of lower volumes on margin through a comprehensive program of commercial recoveries, performance initiatives and ongoing restructuring. And despite the lower volumes, margin increased 10 basis points in 2024. We rightsized the engineering investment in eDrive systems, with a GBP 10 million net benefit expected in 2025. We disposed of our Hydrogen business to eliminate related cash losses. And we initiated a strategic review of Powder Metallurgy, including a potential sale. Then on the 29th of January 2025, we announced a recommended combination of Dowlais with American Axle. All of these actions are focused on unlocking shareholder value whilst transitioning to a powertrain-agnostic business model that navigates market shifts and drives sustainable profitable growth. Let me first provide you with some context on the structural shifts we have seen in the industry before summarizing the benefits of our most recent strategic announcement, the combination with American Axle. The automotive environment is undergoing a profound structural shift across 4 main themes: geopolitics, regionalization, customer landscape and technological landscape. In geopolitics, we are seeing a significant increase in protectionist policies, tariffs and trade tensions that are all reshaping supply chains for goods and raw materials globally. Having a scaled global platform is key to help navigate this and ensure ongoing business and financial resilience. Regionalization is creating fluctuating production rates and powertrain demands across geographies. For example, China's share of GLVP continues to rise, while Europe, North America and Japan and Korea have seen decline in production since 2019. Each region has varying rates of ED -- EV adoption. This is driving the necessity to have a more geographically diverse and flexible business. At the same time, the customer landscape is evolving. The number of OEMs producing over 500,000 light vehicles annually has grown by over 30%, driven by the rise of pure-BEV players and Chinese OEMs. And today, we serve 3 distinct customer groups, traditional OEMs, pure-BEV players and Chinese OEMs. Each group has unique strategies, product requirements and ways of working, adding complexity to our industry. We need scale to adapt, innovate and maintain long-term relevance to each type of customer as this landscape continues to evolve. And finally, technology is also changing significantly. Powertrain complexity is driving the need to have an increasingly agnostic portfolio for ICE, hybrids and BEVs. The growing number of OEMs has led to a proliferation of platforms, with new program launches expected to increase by 75% between 2017 and 2026 even as overall vehicle production is expected to decline by 4% over the same period. Navigating these complexities requires strategic foresight and ability to react and adapt, which we have done and continue to do, for example, regionalizing our supply chain and rightsizing capacity since 2019, especially in Europe; maintaining a disciplined approach to investing in BEV and prioritizing a powertrain-agnostic portfolio; and leveraging our engineering expertise and global scale, including our successful JV in China with its China for China strategy. The auto industry is going through a structural change, and it's critical for suppliers to continuously adapt and transform. This brings us to our most recent strategic announcement, the combination with American Axle, which will create a more resilient global business positioned for long-term success against the structural shifts I've highlighted. Let me remind you of the rationale and key benefits of the proposed transaction. First, scale and focus. This combination brings enhanced resilience and relevance to customers through scale and focus. It brings together 2 highly complementary businesses, creating a scaled, powertrain-agnostic portfolio offering a significant content per vehicle growth opportunity for ICE, hybrid and BEV platforms. For example, in Driveline, from CV joints to propshafts and sideshafts; in axle systems, combines both businesses' expertise in ePowertrain components and axle systems for ICE, hybrid and BEV; and in metal forming, encompassing forging, machining, casting and centering, providing deep vertical integration and access to adjacent industrial markets. Furthermore, this combination grants Dowlais access to the highly profitable and cash-generative North American full-size pickup truck and SUV market which remains at the tail end of the BEV transition, offering greater stability and earnings visibility. Secondly, vertical integration. The combined business will benefit from deeper vertical integration, enhancing capacity utilization and operational efficiencies in areas such as forging, casting and machining to support deeper integration for driveline, ePowertrain components and axle systems; and capacity in powder to strengthen American Axle's metal forming business, improving utilization rates in Powder Metallurgy. And finally, synergies and free cash flow generation. Beyond the strategic and operational fit, this combination brings substantial financial benefits. The combined group will generate free cash flow and sector-leading margins, supported by $300 million in identified synergies, which through our combined teams we are highly confident of delivering the majority within the first 2 years. Both teams have spent a significant amount of time together, pre announcement, working through the synergy potential; and $300 million was the announceable figure signed off under U.K. takeover requirements. We believe this is a compelling opportunity for our shareholders, who will receive approximately 45p in cash whilst also retaining a 49% ownership in the enlarged group. The regulatory filings and process are progressing well, and we expect the transaction to close by the year-end. This combination is fully aligned with our operational strategy as well as our focus on creating significant shareholder value in a dynamic automotive market. I'm now going to hand over to Roberto to present the financial results in detail before coming back to you and discussing the divisional performance and actions we are taking.

Thank you, Liam. And good morning, everyone. Today, I will take you through our financial results for the full year 2024, covering revenue performance, profitability, cash flow and our capital structure, but let's start with the key financial highlights. We delivered results in line with August guidance despite the challenging environment. This was accomplished by mitigating the impact of lower volumes with rigorous cost management and commercial recoveries. Full year adjusted revenue came in just over GBP 4.9 billion, representing a 6.4% decline at constant currency primarily due to lower volumes in our ePowertrain product line. Adjusted operating profit was GBP 324 million, down 4.2%, while margins improved by 10 basis points. Adjusted basic earnings per share was 11.4p, reflecting a 17% decline largely due to lower earnings and higher finance costs. Free cash flow stood at GBP 15 million, down from GBP 93 million in 2023 mainly due to lower earnings, higher interest and restructuring outflows. The net debt increased to GBP 968 million, resulting in a leverage ratio of 1.7x EBITDA compared to 1.4x at year-end 2023. Shifting to revenue. The year-on-year decline was primarily driven by Automotive, which was down 7.2% as ePowertrain revenue declined 18% due to ongoing volatility in BEV production schedules. Driveline remained resilient, with revenue down 3.2%, slightly outperforming the market outside China. Powder Metallurgy saw a 2.7% decline with softer demand in North America, although this was partially offset by growth in China. Foreign exchange was a notable headwind impacting reported revenue by GBP 199 million as the pound strengthened against the U.S. dollar, the euro and the Chinese yuan. Notwithstanding revenue pressures, we took proactive steps to protect profitability. Adjusted operating profit declined 4.2% to GBP 324 million, while margins improved by 10 basis points to 6.6%, reflecting our focus on rigorous cost control and commercial recoveries. The decrease in adjusted operating profit was primarily driven by lower revenue; and partially offset by approximately GBP 70 million of commercial recoveries, which were mostly one-off in nature, and therefore, most of them are not expected to reoccur in 2025. We also delivered GBP 27 million of efficiencies related to our footprint restructuring initiatives, as per our guidance. In line with our financial model, approximately GBP 31 million of price reductions were offset by other ongoing performance initiatives. As a result, we contained the decremental margin to 6%, well below our financial model assumption of approximately 30%. Foreign exchange headwinds were GBP 16 million. Moving on to GKN Automotive. Revenue declined 7.2% for the year, with the ePowertrain product line down 18% primarily due to ongoing volatility in BEV production schedules. Driveline revenue was more resilient, declining 3.2%. ePowertrain accounted for over 70% of the revenue decline in Automotive, largely due to lower volumes and unfavorable product mix. Given its significantly higher content per vehicle compared to Driveline, the impact was more pronounced. This decline was primarily driven by 4 key platforms, underscoring the heightened sensitivity of this product line to shifts in BEV production schedules. Adjusted operating profit for the segment was GBP 268 million, down 8.5%, with an operating margin of 6.8%, a decline of 10 basis points year-on-year but a sequential improvement of 80 basis points from the first half. While lower volumes weighed on profitability, pricing recoveries, ongoing commercial initiatives and restructuring benefits helped offset some of the pressure. As a result, we limited the drop-through margin impact to 7%, significantly better than typical volume decline scenarios. As I mentioned earlier, the commercial recoveries achieved this year were, for the most part, one-off in nature. However, I do expect self-help initiatives related to our restructuring program and reduced engineering spend in eDrive systems to provide a more sustainable margin improvement going forward. These actions will help enhance the long-term profitability of the business as we continue transitioning towards an ePowertrain-agnostic portfolio. In Powder Metallurgy, revenue declined 2.7%, with North America experiencing lower volumes, while China saw moderate growth. Adjusted operating profit was GBP 89 million, down 3.1%, with a 9.1% margin, broadly in line with the last year as the impact of volume weakness was offset by pricing initiatives and operational efficiencies. Moving on to earnings per share. Adjusted basic EPS for the year was 11.4p, down 17% compared to last year. This decline was primarily driven by lower earnings and higher finance costs. Adjusted net finance charges increased to GBP 109 million, up from GBP 91 million in 2023, mainly due to higher interest rates and the full year impact of debt financing put in place post demerger. Tax charges for the year were GBP 54 million, resulting in an effective tax rate of 25%, in line with our medium-term outlook. Statutory basic EPS was a loss of 12.6p per share versus a loss of 36p per share in 2023. Free cash flow in 2024 was GBP 15 million, down from GBP 93 million in 2023. This decline was mainly driven by lower earnings, higher interest payments, increased working capital and restructuring outflows, though it was partially offset by reduced capital expenditure. Interest paid was GBP 26 million higher, reflecting the full year impact of our post-demerger capital structure, with an effective interest rate of 6.3%. We expect this to remain stable in 2025, assuming no major changes in market conditions or leverage levels. Restructuring-related cash flows were GBP 106 million, in line with our expectations, as we continued optimizing our footprint and driving operational efficiencies. In 2025, restructuring is expected to increase to GBP 120 million to GBP 130 million. The increase versus 2024 is largely due to costs related to the rightsizing of the engineering spend in eDrive systems. Capital expenditure was GBP 191 million, a reduction of GBP 104 million year-over-year as we took a disciplined approach to spending and benefited from not having any major new production facility expansions. In 2025, we expect CapEx to remain at the lower end of our revised medium-term guidance of 0.9x to 1.1x depreciation and broadly similar to this year. Working capital improved in the second half as we took proactive steps to reduce inventory and align receivables with production volumes, ensuring more efficient cash usage. However, these improvements were not enough to offset the higher working capital from the first half. While we do not anticipate a significant working capital benefit in 2025, we'll remain focused on cash conversion and efficiency. Tax outflows for the year were GBP 56 million, broadly similar to the prior year. Tax outflows in 2025 are expected to be slightly higher due to a legislative withdrawal of a patent box tax relief previously claimed in Italy and the settlement of a tax audit in Germany. Pension payments remained steady at GBP 44 million, consistent with our guidance. We maintained a strong liquidity position throughout the year while executing strategic refinancing actions to strengthen our balance sheet. Net debt at the year stood at GBP 968 million, up from GBP 847 million in 2023. This increase was driven by lower free cash flow generation due to reduced earnings, higher restructuring outflows and share buybacks completed prior to the American Axle combination announcement. During the year, we successfully refinanced $500 million in the U.S. private placement market, spreading the debt maturities between 2028 and 2036. As a result, we diversified our investor base, improved our debt maturity profile and reduced refinancing risks in the medium term. Looking ahead, industry forecasts GLVP to remain flat year-on-year with a 0.9% decline when excluding China. Based on these external forecasts and our current order book, we anticipate group revenue to range from flat to a mid-single-digit decline in 2025, with an adjusted operating margin between 6.5% and 7% in constant currency. Restructuring savings and ongoing performance initiatives are expected to offset the impact of lower volumes and the commercial recoveries achieved in 2024. In line with industry trends, revenue growth in constant currency is expected to be stronger in the first half, while adjusted operating margin will improve in second half, reflecting the phasing of restructuring benefits. Free cash flow for 2025 is expected to be slightly higher than prior year, with working capital seasonality and restructuring outflows more weighted towards H1. By 2026, we expect a significant increase in adjusted free cash flow, as our global footprint restructuring is set to conclude by the end of 2025. As a reminder. Our outlook does not consider the impact of recent tariffs, which seem to be changing on a daily basis. However, let me briefly outline our approach and how we plan to minimize the potential impact on the business. Since 2019, we have taken proactive steps to localize our supply chain, significantly reducing reliance on global imports. Our intercompany flows across regions are minimal, but we have some raw materials and components shipped into our U.S. operations that will be exposed to these new tariffs. In regards to finished goods, there are no shipments from China and Canada to the U.S. And as for Mexico, the vast majority of products are picked up directly by the OEMs at our factory gates, making them responsible for onward shipment costs, including freight and duties. This is industry practice for suppliers like us. Additionally, we have a strong track record of recovering a significant part of any direct tariff impact on the business, as demonstrated under the last Trump administration when steel tariffs were imposed. In summary, while we're not entirely new to some potential tariffs, we are well positioned to remain resilient and effectively mitigate their impact. Finally, on Slide 18 (sic) [ 16 ], you can find our usual guidance slide to help you with the modeling. If you have any questions on this or other modeling matters, please speak to Pier or me. Thank you. I will now hand back to Liam.

Thanks, Roberto. I'm now going to talk in more detail about our businesses, starting with GKN Automotive. Our Automotive business is built around 2 key product lines and our JV in China. Driveline is the core of the auto business, making up 57% of revenue, the majority coming from sideshafts which contribute 49%, while propshafts [ has another ] 8%. ePowertrain accounts for 27% of revenue and includes all-wheel-drive systems, ePowertrain components and eDrive systems. And finally, our long-established joint venture in China, which is equity accounted, represents 14% of revenue. Within this, Driveline makes up approximately 80% of the JV's revenues. Let me share with you why I believe our Driveline portfolio, the core of our business, remains on a solid footing. In 2024, Driveline slightly outperformed the decline in light vehicle market outside China, demonstrating its resilience in a challenging environment. At the core of Driveline is our market-leading sideshaft portfolio, which has performed in line with light vehicle -- the light vehicle market outside China over the last 3 years. This success is driven by our scale; deep technical expertise; and comprehensive portfolio of agnostic products for ICE, hybrid and BEV platforms, all of which creates a strong competitive moat. Additionally, our well-balanced customer platform and geographical mix provides diversification and stability in a volatile market. The powertrain-agnostic nature of our driveline products allows us to navigate shifts in powertrain trends, ensuring long-term resilience regardless of technology shifts. 2024 was a challenging year for our ePowertrain portfolio, with revenue declining by approximately 18% year-over-year primarily as a result of sudden changes in build schedules on several BEV platforms we saw in Q1. Unlike Driveline, ePowertrain remains highly concentrated, making it more sensitive to platform and customer mix. Around 80% of the revenue decline was concentrated in just 4 high-content platforms, 3 in eDrive systems and 1 in all-wheel drive. And this concentration highlights the risk of dependency on a limited number of high-content vehicle programs. While we expect and we're already seeing volumes from the delayed all-wheel drive related platform to recover, we do not anticipate a return of volume from the 3 impacted eDrive systems. eDrive systems now account for just 1% of GKN Automotive's total revenue, down from 4% a year ago. This decline reflects structural shift in the market that have fundamentally reshaped the medium- to long-term outlook for eDrive systems. One of the key drivers behind this shift is higher in-sourcing by OEMs as they increasingly bring eDrive system production in house to gain greater control over the technology, cost and supply chain. As a result, the market available to automotive suppliers has contracted, leading to an abnormally competitive environment. Beyond these challenges, eDrive systems lack the vertical integration that strengthens our Driveline business. This limits our ability to control input costs, while their concentration on fewer platforms with high content per vehicle makes them more vulnerable to OEM production schedule volatility. Given these factors, we took decisive actions to rightsize our investment in eDrive systems. We've reduced engineering gross spend in ePowertrain by GBP 35 million, delivering a GBP 10 million net benefit in 2025. At the same time, we also made the decision to close our U.K. research center. While we remain committed to maintaining our capabilities in developing eDrive systems should the market improve, our focus is now on investing in areas with stronger returns, ensuring that our ePowertrain business remains competitive and aligned with our broader powertrain-agnostic strategy. Moving to China. Our SDS joint venture remains the market leader in sideshaft in China, with 40% market share. Our customer-focused approach has earned multiple industry awards, reflecting our commitment to quality and innovation. We've also enhanced engagement through digital platforms enabling real-time inventory tracking and production planning for improved efficiency. And to reinforce our leadership, we showcased industry-leading solutions at [ BYD and Chery ] events; and strengthened relationships with Chinese OEMs, hosting them at several of our global facilities across Europe and Asia. As Chinese OEMs expand globally, we are well positioned to support their growth leveraging our expertise, relationships and global footprint. Our strategic focus in China is to continue to profitably improve our share of revenue with Chinese OEMs. Over the past few years, local OEMs have expanded their share of light vehicle production in China, rising from 51% in 2021 to 67% in 2024. In parallel, our own revenue mix has shifted accordingly, with revenue from Chinese OEMs growing from 27% in 2021 to 42% in 2024. While this progress is encouraging, we see further opportunity for profitable growth. Our strong order book and an improving book-to-bill ratio which has risen from 0.9x in 2022 to 1.5x in 2024 -- highlighting our success in winning business and deepening partnerships with these customers. This momentum reinforces our commitment to strengthen our market position and capturing long-term growth opportunities in this rapidly evolving segment. Earlier, I outlined how the industry has evolved and how suppliers have had to adapt. Before we move on to Powder Metallurgy, I'd like to take a moment to highlight how we're responding to these trends; and the key changes we've made to our footprint, particularly in Europe. Since late 2018, when Roberto and I took on our respective roles at GKN Automotive, we have made significant progress in transforming our business to be leaner and more aligned to the trends of the industry. Today, we operate a -- highly local-for-local supply chains, with production facilities serving their respective regions, whether that be China, Europe, North America, South America, India, Japan or Southeast Asia. Over the same period, we've reduced our overall head count by approximately 20%, improving efficiency and agility. Additionally, we have taken decisive actions to optimize our footprint, closing 10 plants in high-cost countries while opening a new greenfield facility in Hungary. This has increased our share of best-cost country production by 10 percentage points, strengthening our cost position. These actions have not only lowered our cost base and enhanced our local-for-local strategy. They have also improved working capital management, creating a more flexible workforce, and increased our overall resilience and supply chain agility. Let me now highlight the specific actions we have successfully taken in Europe, an important region that has faced a challenging market. We acted quickly and decisively. And we're among one of the first Tier 1 suppliers to implement a major transformation program in the region. In fact, as the chart shows, a significant portion of our restructuring efforts we launched in 2019 have been focused in Europe. More than 50% of our global head count reduction and 6 of the 10 high-cost plant closures have been in Europe. Between 2019 and 2024, European light vehicle production declined by 19%. And we adjusted our sideshaft and propshaft capacity accordingly, reducing both by 20% and 13%, respectively. We are now in the final phase of our footprint restructuring program with the transfer of production from Germany to Hungary. By 2026, when our transformation is largely completed, our European cost structure will be fully aligned to the structural shifts in the market. This has given our European business a solid foundation rightsized for the market with lower cost of production and well positioned for future profitable growth. And finally, this slide shows why I remain confident in the long-term prospects for our Automotive business. Despite market volatility, 2024 was another strong year for commercial progress. We continued to expand our order pipeline securing contract awards worth GBP 4.8 billion in forecast lifetime revenue, resulting in a book-to-bill ratio of 1.2x, reinforcing the strength of our diversified portfolio across products, customers and geographies. And now let's move on to Powder Metallurgy, the world's largest producer of sinter metal components and the #1 producer of iron powder, supplying a broad range of industries with high-performance materials. Our strategic focus in Powder Metallurgy is on diversifying our portfolio and strengthening long-term growth. Our industrial segment performed well, driven by growth in metal additive manufacturing for nonautomotive customers. Our automotive body, chassis and BEV portfolio saw a decline primarily due to customer and platform mix in North America. Meanwhile, our auto engine and transmission portfolio slightly underperformed the market, though we are seeing positive tailwinds as OEMs extend ICE programs and pivot to hybrid technologies. Additionally, we are securing key contract extensions as OEMs extend platform lifetimes, reinforcing long-term stability and growth for GKN Powder Metallurgy's core portfolio. In line with our strategy, Powder Metallurgy is making strong progress in expanding into new growth areas, including iron powder for LFP batteries, magnets, metal additive manufacturing and powder for brake disc coating. And let me highlight a couple of key examples. One significant development is our success in supplying high-quality iron powder for LFP batteries, which are gaining traction in both automotive and off-grid storage applications. In November, we signed a supply agreement with First Phosphate Canada, a company specializing in high-purity phosphate for LFP cathodes, with potential for future expansion. We also [Audio Gap] Powder Metallurgy is well positioned to adapt to evolving market trends and driving sustainable profitable growth. So in summary. In a challenging market environment, we've remained focused on everything under our control, ensuring we offset the impact of lower volumes on operating profit and protect our operating margins. We also took strategic steps to unlock value from our portfolio, including the proposed combination with American Axle creating a global leader in driveline and metal forming. This combination will enhance scale and focus and is an excellent strategic fit that accelerates the execution of our strategy. With $300 million in synergies, it will drive improved free cash flow, margin expansion; and create a more agile and resilient business better equipped to navigate industry volatility and structural shifts. I'm excited about the opportunities this combination brings; and the significant value it will create for our business, employees and shareholders. I look forward to discussing our results and strategy with shareholders in the U.K., Europe and U.S. over the coming days. We can now open to questions. Thank you.

[Operator Instructions] I would like to remind all participants that this call is being recorded. Our first question comes from Vanessa Jeffriess from Jefferies.

Can you hear me?

Yes.

First one. I guess it seems like there's a lot of really positive strategic progress made in Powder Metallurgy this year. Now that Jean-Marc has been in the role for a year, where do you think you can get to from a margin perspective?

Yes. The -- I think the margin ambitions haven't changed, Vanessa. We'd like to see that business getting above the 10% margin. It's now low 9s. The -- what Jean-Marc has really been focusing on is the commercial growth strategy and making sure we have clear line of sight to how we can manage that product portfolio as the BEV transition occurs.

Yes. And I think, Vanessa, as we highlighted on the slide, there's a number of adjacent areas where we're very excited about the opportunities, such as in LFP batteries, brake coatings. We continue to make progress on magnets, so we're -- and also some exciting growth channels in cooling systems for AI chips. So using our metal additive manufacturing technology. So we're very optimistic about how that business is evolving.

Yes, no, it seems like a really good progress. And then second: You opened the call talking about the benefits of more geographic diversification and how growth will continue to come from China. I guess, on American Axle's side, they've talked about the benefits of this deal from their perspective being further geographic diversification, but then the combined group will be significantly less geographically diversified than you are now with less exposure to China and, I guess, the least geographically diversified supplier in North America, so maybe, how do you reconcile those? And then maybe the same question from a customer diversification perspective. Appreciate your direct tariff impact is limited, but I think GM is the OEM most exposed to tariffs. And you'll be going from 11% exposure to 25%, so I guess, any comments around the attractiveness of that?

Yes. So we -- clearly we went through a very rigorous process to assess the strategic rationale and benefit for the proposed combined -- combination with American Axle. And as we highlighted, there was a number of elements that we proposed, which was around the cash element per share, the participation for our shareholders of 49% in the combined group and the significant synergies of $300 million. Now what it brings us from a portfolio standpoint, if I step back and look at the driveline space: An area where Dowlais has always been underrepresented and we've always seen a significant opportunity is really in the -- is in the full-size truck and SUV market in North America, which as you can see, American Axle have an incredibly strong position in that space. And it's highly complementary to the overall driveline system itself when you look at rigid beam axles. And then if you look at the ePowertrain components space. We've got a business in differentials and advanced differentials, which when you bring that together with American Axle's capability in that area, it creates a business of significant scale and technological capability. That's on the driveline space. And then if you look at metal forming, that clearly brings a significant amount of vertical integration that brings much greater cost control in the overall portfolio. So when we bring those 2 elements together, we see that the combination is a perfect strategic fit; and creates a very strong, leading driveline supplier in -- well, in driveline and metal forming.

[Operator Instructions] Our next question comes from Harry Philips from Peel Hunt.

A couple of questions, please. Just in terms of the sort of eDrive systems and ePowertrain and the sort of arithmetic around the reduction in engineering, I'm just checking the detail. You've got a net GBP 10 million saving, GBP 30 million less in the way of sort of customer-funded engineering cost expenses. Call it what you will. Is that now of a net gain? Or would -- is there another step to come going forward into outer-years? And then secondly, just on the customer recoveries and the GBP 70 million. As you said, Roberto, from the presentation, obviously a lot of this is nonrecurring. I'm just trying to do the math actually. And you caught me as I was doing it, in terms of making -- speaking on the line. If you add the GBP 70 million back in, I'm assuming the drop-through would be about -- take you back to your normal or somewhere near your normal trend rate. And therefore, in the context of this year, is that sort of 25% to 30% drop-through the sort of right math to think about, please?

Yes. So let me tackle the engineering, first. And then I'll help you think about the '25 guidance. The -- on the engineering, we look at -- obviously what we incur is what we call gross spend, which is pre customer contributions. Then depending on programs, and it tends to be higher on the ePowertrain and eDrive systems specifically within the ePowertrain arena, where programs are more tailored, we seek customer contributions to that engineering expense. So that then takes us the sum of -- or sorry. Taking your gross spend which is on us, minus whatever contributions we get from customers, gets you to a net expense, which is what you see reported. Now the math is we're taking 35 million of that gross line because of our restructuring actions on the engineering, which will result, in '25, in a GBP 10 million net benefit because we also have a decrease of, let's call it the maximum, say, GBP 25 million in customer recoveries year-on-year, okay. So that's that [ GBP 10 million ] in this year.

Yes, yes, perfect.

Going forward, I would expect -- we'll manage attrition, but I would expect that to be a structural change that continues going forwards. And there might be some immaterial carryover because not everybody is coming out January 1, so the GBP 10 million is a '25 net benefit. The -- in terms of '25 modeling, you're right. The way we mitigated that drop-through margin in last year, in '24, was really driven by 2 key levers, I would say. One is the customer recoveries that you mentioned, but also I don't want people to forget our footprint restructuring efforts, right? We always said that we'd have roughly 20 million, 25 million come through. And I think it was just above that amount, as we also did some SG&A restructuring. So you have -- as I think about '25, you're right. You have to put in your 25% to 30% decline. Now where it gets tricky is, if you take midpoint of guidance in terms of revenue decline year-on-year, you have to also discount it for, I would say, at least those commercial recoveries which were in price prior year. So the portion that is not recoverable, this doesn't repeat in 2025. You have to reduce it from that top line decline before you calculate a volume impact, true volume impact, [ which I would ] flow through at 25% to 30%...

Perfect. Yes, I got that. That's really helpful.

The offset is we still have some commercial recoveries that we're going after, as the -- well, not all the conversations ended last year for the volume decline. And then this is the year we always said would be the big year in term of restructuring benefits, with the footprint benefits generating roughly -- that 40 million is what we said previously; and then [ as both from Liam and I ], GBP 10 million of engineering.

Our next question comes from Mark Fielding with RBC.

You've actually just covered most of what I was going to ask about in terms of the commercial recoveries, but I suppose I just wanted a little bit more clarity. I'm curious with these recoveries. How -- are they, like, very widespread across the business in terms of across multiple contracts and programs and things? Or are they quite specific to a few particular ones? And to that context of you said there are still some, obviously, that you're pursuing into 2025, I'm curious that, if we end up at the worst end of expectations, for example, and volumes are down again, in 2025, does that open up more potential for further discussions to be needed. I'm just curious about the flexing around this.

Okay. So Mark, the -- I guess, 2 things. On the prior year recoveries, it's the -- it's 2 key categories. We completed in the first half, and we talked about this during interims, some inflation recoveries linked to cost pressures that we -- impacted us in '22 and '23. Conversations sometimes take a bit longer to conclude. And some were concluded early last year. And then the majority, though, was volume commercial recoveries, volume related. The way to think about it is we've been quite open and transparent saying that the majority of our volume decline prior year was really linked to 4 programs. So you can imagine, around those 4 programs, we were seeking some compensation, but there's also been a slew of other programs that have either been delayed, for which we've had these -- and these are regular ongoing conversations, and other volume shortfalls. I'll remind you that our contracts allow for a tunnel of plus -- on average, plus or minus 10% of volume. And if volumes go outside of that tunnel, it opens the doors for a conversation. Obviously, if volumes are higher, what we tend to see is OEMs coming to us to ask for more efficiency. So a bit more price from their perspective. And like -- last year, volumes were significantly lower, which opened the door for us to go and say, "Look. We committed to higher volumes because of your contracts. Let's have a conversation." And linking it to what happens this year, it really depends, if it's going to be widespread. And what happens to this plus or minus 10%? Again, it's an average, but it's a platform by-customer and by-region conversation that we were always monitoring.

All right. And can I just ask a separate question which is just in terms of -- obviously, in the context of the American Axle offer, it obviously brings back, at the half last year, you announced the sort of strategic review and potential sale of powder met. I'm just a bit curious how far down the line you've gotten in that process or when the sort of American Axle side of things took over and just whether there wasn't significant interest on the powder met side. Or just a little more context around that as well, please.

Yes. [ The answer ] -- it's a great question. I -- maybe I'll give you maybe a broader answer to that. So the -- I think it would be good to just walk you through the process that we went through as a Board to get to the recommendation. We've -- and we've always said this ever since we demerged from Melrose, which is looking at how can we unlock shareholder value for the business. And that's really been looking at continuing to focus on our existing strategy but also looking at things such as the sum of the parts of the business and looking at where is there opportunity to unlock shareholder value. I think we demonstrated a number of things that we did over the last 18 months to drive that, which is around the dividend, the share buyback, the disposal of Hydrogen, reducing investment in eDrive systems; and then as we announced in August, which was the strategic review of Powder Metallurgy, which was to look at the question of what do we do with powder met. Do we keep it within the group? Do we sell it as a whole? Do we look -- what's the interest externally? Or do we even look at selling it in pieces? We launched that review in August, then in -- around middle or end of September, we were approached by the American Axle team, which was an unsolicited approach, regarding a possible cash and share combination of the 2 companies. We looked at that very, very seriously. And obviously we looked at that in the context of the interest that we were getting for the Powder Metallurgy business externally which was not overwhelmingly exciting, to be honest. And we looked at, if we could have sold the Powder Metallurgy business, what would we have done with the proceeds. We then looked at that versus what would the stand-alone share price of the company be going forward based on the macro that we've seen in the industry. And then what was the merits of a merger with American Axle? And I think, as you look at the driveline space, it's clear that there are significant opportunities for consolidation, so we evaluated their offering in a lot of detail against a number of criteria, including conducting a very detailed risk assessment. And the conclusion was, when you look at the benefits of the deal, the fit of the portfolio for both Driveline and Powder Metallurgy -- because -- let's not forget the Powder Metallurgy business fits incredibly well with our metal forming business. And in fact, American Axle was one of the largest customers for powder for the powder met business, so the 2 businesses fit together extremely well. And when we added that and looked at the synergies, it was clearly a compelling recommendation from the Board to proceed with the announcement that we made in January.

Our next question comes from William Jones with BNP Paribas Exane.

I've got a couple, if that's all right. ePowertrain -- or the eDrive systems restructuring. I think you've previously indicated that you were open to exiting that business almost entirely. And you'd kind of pointed to the potential that, that could support ePowertrain components demand with some of your competitors. I presume the actions you're taking today precludes that. Is that fair?

Yes. So if I look at our eDrive systems, there's 3 pieces to that portfolio. You've got the components, so the differentials, the gears, the gearbox capability. You've got the software, and also you've got the motors and the electronics around it. The majority of our restructuring has really been around the electronics and software and systems engineering expense. The core of our capability, which is in gears and gearboxes, [ we've retained because ] we have a number of eDrive systems that we want to continue to support, but also we see ePowertrain components which, again, are very complementary to the ePowertrain components portfolio of American Axle. We see that as a key area for growth and that's why we've retained our engineering capability for the future.

Okay, understood. Then switching tack slightly: The -- you've previously guided to around 200 basis points of margin support from the footprint relocation in Automotive. Now, of course, that was contingent on probably higher volumes than we've seen. Can you just give an update on how much you expect to gain this year and then next year? Because obviously 200 is probably a little bit high, well, given where we are with volumes, but how much of what is left is going to be front or back loaded?

Yes. So Will, the 200 basis points was really driven on flat volumes, to your point, and volume versus '23; and translated to a net benefit of roughly GBP 80 million, if you do the math on the '23 auto revenues. Those projects are still very much on track to deliver that GBP 80 million benefit. I've always said that the benefit is, by nature, not -- for the most part, not volume dependent because it's -- don't forget we're getting rid of some fixed costs as we close the plants, independent of where they are, but the fixed cost goes away. Then there's labor arbitrage and also efficiencies, as in the indirect labor transfer it's not a one for one. And the restructuring actions have also been in the Driveline segment of auto, which has been not as impacted as much by volume, right, so -- and we are still very much committed to the GBP 80 million net benefit approximately. Last year, we said we'd deliver GBP 20 million. And you saw by today's conversation as well that it -- we exceeded that expectation. And this year, we had always earmarked roughly GBP 40 million; and I'm still committed to that GBP 40 million. That's one of the drivers that will offset the onetime benefit of commercial recoveries in 2024. And that leaves the remaining GBP 20 million roughly to be achieved in 2026. And as I said, we're on track for that to the -- on this path.

And just to be clear. So the outperformance last year, does that detract from the expected performance next year? Or is that incremental benefit above the GBP 80 million...

No. That was incremental, as we also did some SG&A restructuring.

Okay, great...

So expect about GBP 40 million this year from those footprints and then add the engineering. That's additional to that GBP 40 million.

Of course. Powder Metallurgy, what's the scope for restructuring in that business? Or is it quite limited? Is the focus there really on turning over the product portfolio to be less reliant on auto?

Yes. So maybe I'll take this one. So when I look at Powder Metallurgy and -- we're not looking at a business that's got a major footprint transformation opportunity, like we saw with Automotive, or an urgency to do that. I -- Powder Metallurgy is much more around the portfolio, making sure that we pursue growth in new adjacent areas and also non-ICE specific areas. There's some opportunity in North America with the footprint, but it's nothing major like you would see with -- like you saw with Automotive. And again looking at the combination with American Axle: They've got some very complementary plants, so clearly when you look at the opportunity for synergies and capacity utilization, we see that as an opportunity.

Great. That's helpful. And one last, if I may. You obviously have the Chinese JV, which I believe you license your technology to, to sell in China. As part of the broader American Axle group, would you expect that all of the technologies that they have would also be licensed to that Chinese JV? And do you expect that could drive significant growth in China above what you already would have as a standalone?

Yes, I think it's early days to be able to comment on that. And clearly that's something that David and I will be discussing as we go forward as planning the integration. I was in China last week. And American Axle have got a very capable business in China, as do we. I think, as the [ teams go forward ], we'll look at what's the best thing to do for the business combined and for the future. So too early to say really at this point.

There are no further questions on the webinar. I will now hand over to Pier to read out the written questions submitted via the webcast page.

There are just a couple of questions, one of which you already answered, in terms of magnitude and phasing of the benefits from the restructuring program. Then Liam, we have the questions around talking a lot about unlocking shareholder value through all the strategic and operating action that you've done. However, there is evidence the share price of Dowlais has reduced since the demerger, so why do you think the share price does not reflects this unlocking of shareholder value?

Yes. I think there's a few things. I can comment too on that, Pier. Well, first of all, since we demerged, we had a tremendous amount of shareholder churn, nearly 100% actually, over the first 6 to 12 months, so we had a huge amount of shareholder rotation in the stock following the demerger. The second thing is really, if I look at the macro and what's going on in the automotive industry and as you saw from our '24 numbers, it's been a very challenging year last year in terms of volumes. And as I highlighted on Slide 5, I think the overall macro in the industry is changing. And there's a structural change taking place around tariffs, geopolitics, regionalization, the different requirements from our customers. And that's created a strong headwind for a number of automotive suppliers. So the whole sector has been really challenged over the last 18, 24 months, so what we've been doing as a Board and a management team is looking at pulling every single lever we can that's under our control to try and unlock shareholder value; and get the business, the share price to reflect what we believe is the true value of the company. And we've been looking, as you say, at divesting the Hydrogen business, strategic review of PM, continuing to accelerate on all of our restructuring. And as we've recommended, we believe that the right way forward is a combination with American Axle, which gives the business significant scale and focus to be able to continue to navigate these macro trends that are clearly the structural shift in the industry.

And sorry. One question regarding sideshafts outside China. Why has it only tracked LVP when CPV per BEV is greater and BEV penetration has been increasing over the past year? Shouldn't sideshaft outperform LVP?

If you look at the overall -- it depends on the customers and the platforms that we're on, whether they're 4-wheel drive or 2-wheel drive platforms, but we -- the way that we look at our sideshaft business is that, if we're tracking LVP with this significant volatility and mix going on in BEV platforms, we're very comfortable in terms of how that's been growing.

Okay. And one last question from the web. It's around the American Axle combination. The $300 million synergies announced with the combination of the American Axle represents 1/4, roughly, the combined group EBITDA. "Can you please explain the process you went through to come up with a number and the confidence to achieve it?"

Yes. So under U.K. takeover rules, we have to go through a very rigorous process. So first of all, what defines as a synergy is only something that can be achieved, thanks to the combination of the 2 businesses. So as an example: All of our ongoing restructuring programs are excluded from that synergy calculation, so they're truly incremental. And the other thing is if assurance has to be given on the synergy numbers. So one of the "big 4" audit firms signed off on this synergy number. And you can appreciate that they required a lot of data and performed their, I would say, rigorous analysis to make sure that these synergies are tangible. And on the other side, they also not only have to sign off on the benefits but on the cost to achieve. So when we say that these synergies are expected to have a onetime cost to achieve, both the $300 million benefit was signed off, as well, as I mentioned, the cost to achieve. I can give you some specifics, but essentially what happens is we provide data. We say, for this kind of work stream, as an example, corporate costs, we expect a certain amount of synergies. And they go through almost line item by line item to see the achievability of that, and they rank it. And then depending on the ranking that each line item gets, we're allowed to hold a certain percentage of that number that we first quoted to them. So we obviously went in with a high number that was then given assurance after a certain discount. And that's how the $300 million -- the other thing I want to point out, the synergies. They fall across 3 categories in order of importance in terms -- or relevance, I should say. The first one is procurement and the vertical integration. That is about 50% of the synergies. Then you have SG&A and corporate costs, which is about 30% of that $300 million. And that is forecasted to impact maybe 1% of the combined workforce, so about 500 people. And then the last one is operations, which is about 20% of the synergies, again impacted -- expected to impact about 1.5%. The point I wanted to stress is the fact that operations is only 20%, I think, is another testament to how the 2 businesses really are complementary and not overlapping and the great strategic fit of this combination.

But I think I also, want to add that, if I look at the $300 million of synergies, the majority of those synergies are within our control and don't require us to go and give back a chunk of that to the customers. And that's -- if there are any customer givebacks required, that's already baked into the number, the $300 million, but as Roberto said, the majority of it is within our control. Now in terms of our confidence of achieving that number, I think there's 2 things, 2 proof points. One is David and the American Axle team have done an acquisition and a big integration where they exceeded the synergies in the past. So they've got experience in driving synergies; and secondly, the management team and leadership. David is very, very focused on making sure he's got the best of the best. So where the Dowlais team have got expertise and experience in integrating business and driving performance and engineering expertise and procurement, he's making sure that we've got the right -- the best people coming together to make sure that one plus one equals three.

And then as you heard us say, these synergies are really cost focused. We -- what we will also be looking at is if there's any -- and it was hinted at a previous question and answer, is if there's going to be any commercial synergies and then also cash synergies, as we can -- as an example: Can we optimize CapEx as a combined group?

Okay, there are no further questions. I think, operator, we can [indiscernible].

Okay, thank you very much and look forward to seeing some of you as we're on the road over the next 2 or 3 weeks. Thanks so much.