Dowlais Group plc

Good day ladies and gentlemen and welcome to Dialys H1 F24 results. At this time all participants are in listen only mode. Later we will conduct a question and answer session. If you wish to ask a question we ask that you please use the raise hand function at the bottom of your zoom screen. If you've dialed in please select star 9 to raise your hand and star 6 to unmute. Instructions will also follow at the time of Q&A. I would like to remind all participants that this call is being recorded. Questions will follow after the presentation. I will now hand over to Liam Butterworth, Chief Executive Officer, to start the presentation.

Thank you and good morning, everybody. Thank you for joining us today for our 2024 interim results. In the first half, our market-leading driveline business, ChinaJV, and powder metallurgy, which account for more than 75% of the group's revenues, all outperform their markets, while volatility in bed production significantly impacted four high-content platforms in our e-powertrain business. The past six months have been challenging for both our industry and Dowlay as we've navigated a volatile market environment, but my management team and I are absolutely laser-focused on everything that we can control, We've navigated volatility before, most recently during COVID and the supply chain and semiconductor crisis, and we'll do it again. We've taken decisive actions to limit the impact of the volume headwinds on profits and unlock value from our portfolio. And here are the actions that I want to highlight. Firstly, we've been absolutely relentless in controlling our cost base to limit the impact of volume decline on operating profit. Secondly, we've initiated a comprehensive programme of commercial recoveries with our customers. Along with ongoing restructuring programmes and performance initiatives, these actions will positively impact the drop-through margin in the second half of the year. And finally, today's announcement of a strategic review of powder metallurgy and the disposal of our hydrogen operations underscores our commitment to unlocking value from our portfolio and delivering shareholder returns. We completed the disposal of GKN hydrogen earlier this month, eliminating the expected cash losses associated with the business, which amounted to £23 million in 2023. And we've commenced a comprehensive review of the GKN powder metallurgy business, considering a range of options, including a potential sale. Over the last 18 months, Roberta and I have worked closely with the teams to understand the business, establish a new leadership team, and develop a clear strategic and commercial plan to accelerate the portfolio transition. I believe now the time is right to move forward with our strategic review. I remain highly confident in the medium at Outlook, and as we continue to accelerate the transition of our portfolio to powertrain agnostic products, which I firmly position will better position us to navigate the market volatility and deliver sustainable, profitable growth and cash generation in the medium term. I'm now going to hand over to Roberto to present the financial results in detail. Thank you, Leo, and good morning, everyone.

We'll go into detail on each of these P&L lines, but in summary, our adjusted revenue declined by 5.1% in the first half, with adjusted operating profit down 9%, driven by lower volume. The adjusted operating margin of 5.9% was 30 basis points lower than prior period, as the impact from lower volume was partially offset by rigorous and proactive cost management and pricing recoveries. We generated 10 million pounds of adjusted free cash flow, down from 33 million pounds in H1 2023. mainly due to lower earnings, higher interest, and restructuring outflows. Adjusted basic earnings per share were 4.9 pence, down 30% year-over-year, and the Board has declared an interim dividend of 1.4 pence per share, in line with the group's dividend policy, reflecting the confidence of the Board in the medium-term outlook. Let's delve further into group revenues. The decline in revenue in the first half was primarily driven by lower revenues in automotive and foreign exchange headwinds, with powder methodology revenues remaining broadly flat. A foreign exchange headwind of £114 million was largely driven by the British pound strengthening against the US dollar, the euro, and this Chinese yuan. At current spot rates, we expect the foreign exchange impact on revenue for the full year to be approximately £200 million. Moving on to operating profit. Adjusting operating profit for the period was £151 million, including a £7 million loss for the hydrogen business. Operating margin declined by 30 basis points year-over-year at constant currency to 5.9%. As you can see in the chart, this decline was mainly driven by lower volumes. Despite the volume weakness, we took actions to proactively manage our cost base, effectively mitigating the impact on margins and limiting the drop-through from 30% in our financial model to 11%. Inflation was more than offset by procurement efficiencies and recovery from customers. The column labeled performance represents the benefits delivered by continued operational efficiencies, which had a positive contribution of $24 million. net of labor inflation. Foreign exchange headwinds were 10 million pounds, and at current spot rates, we expect the foreign exchange impact for the full year to be approximately 17 million pounds. We remain focused on long-term profitability by rigorously managing pricing, proactively controlling costs, and executing our self-help initiatives to deliver improved margins. Let me now deep dive into the performance of our individual businesses, starting with GKN Automotive. Adjusted revenue declined 6.3% to approximately 2 billion pounds. Driveline, with an adjusted revenue decline of 1.4%, outperformed a declining global light vehicle production rate, excluding China of 2.4% in the half, demonstrating resilience through customer and geographical diversification. Our China business continued to perform well, gaining share with local OEMs as revenues grew 6.6% ahead of the market. ePowertrain accounted for over 60% of revenue decline in automotive due to volume decline and product mix, given it has significantly higher content per vehicle than the driveline product group. Adjusted operating profit of £122 million declined 13%, leading to adjusted operating margins of 6%, a decline of 50 basis points at constant currency. The continued execution of the team around commercial recoveries and performance initiatives only partially offset the impact of lower volumes on profit, as we contained the drop-through margin to an impressive 14%. Moving to powder metallurgy. Powder Metallurgy had a good start to the year and generated adjusted revenue of £527 million, a slight increase of 0.2% year-on-year in constant currency, growing ahead of the market. The slight drop in revenue in the core portfolio due to the ice decline was offset by growth in EV products and metal additive manufacturing. Adjusted operating profit for the period was £50 million, resulting in an adjusted operating margin of 9.5%, a 50 basis points improvement from the prior period. This improvement was mainly driven by the successful resolution of one-time operational challenges from the prior period and a favourable regional mix. The business also offset inflationary increases through operational efficiencies, generating a net £2 million benefit versus first half of 2023. Moving to earnings per share, we delivered adjusted basic EPS of 4.9p. Compared to prior period, adjusted EPS was down 30%, largely due to lower earnings and higher finance costs. Adjusted net finance charges of 56 million pounds were higher than prior year as it reflects a full first half impact of the post-emergent capital structure. and our effective interest rate on bank borrowing remained stable at 6.5%. Tax charges were £24 million, with an effective tax rate of 25% in line with our medium-term outlook. Statutory basic EPS was a loss of 7.3%. Moving to cash, as a group we generated £10 million of adjusted free cash flow in the first half, This is £23 million lower than H1 2023, largely due to lower adjusted EBITDA, higher interest payments and higher restructuring payments, partially offset by lower capital expenditure and higher dividends from equity-accounted investments due to the timing of payments from our China joint venture. Working capital will reduce in the second half of the year due to seasonality, and as we take proactive measures to align our working capital requirements with lower volumes. Interest payments totaling £49 million were £28 million higher than the previous period due to the annualization of the post-emerger capital structure. Therefore, interest payments for the full year are expected to be in the range of 80 million to 90 million pounds, in line with previous guidance. Capital expenditure of 103 million pounds was 19 million pounds lower than prior year, as it was adjusted to align with lower volume and did not include any material capital expenditure on new production facilities associated with our footprint restructuring initiatives. Restructuring cash flows of 51 million pounds related to continued performance improvements were higher than previous period, and in 2024 are now expected to be in the range of 105 million to 115 million pounds, higher than the previously communicated range of 90 to 100 million pounds, largely due to further restructuring initiatives resulting from lower volumes. We entered the half with a leverage ratio of 1.6 times, higher than in December 2023 and outside our target range of one to one and a half times due to lower EBITDA and higher net debt. However, we expect this to be temporary and to be back within our target range in the medium term. In our last trading update in May, we indicated that we expected sequential improvement in the second half of the year. However, at the group level, we're now seeing slower than expected growth and we no longer anticipate that H2 revenue will be better than H1, primarily due to weakening market conditions. As a business, we are facing three key headwinds. Firstly, weaker volumes. In May, when we issued our guidance, industry forecasts expected a flat global live vehicle production. Since then, S&P has downgraded its forecasts twice. Secondly, bad volatility. Volatility in certain battery electric vehicles platforms is expected to continue impacting our e-powertrain product line in the second half. And lastly, adverse customer mix. We anticipate that an adverse customer mix will impact performance for the remainder of the year, especially in North America and across our BEV platforms. At the group level, this means that we now expect full-year revenues to decline mid to high single digits. As we continue to execute actions to limit the impact of lower revenues to operating profit, such as commercial recoveries, restructuring savings, and ongoing performance initiatives, we expect constant currency operating margin to be between 6% and 7%. Adjusted free cash flow will be lower than prior year due to reduced volume and higher restructuring costs. We have also included our usual guidance slide to help you with the modeling. If you have any questions on this or other monthly matters, please speak to me or Pierre. Thank you, and I will now hand it back to Liam.

Thanks, Roberto. I will now talk in some more detail about our businesses. But first, I want to provide a quick update on the overall market. Let me start by briefly discussing global light vehicle market. After strong growth in 2023, global light vehicle production declined by 0.2% year over year, in the first half of 2024. However, most of this growth was driven by China, where production grew by 5.1%. Excluding China, it was down by 2.4%, mostly driven by softness in EMEA and Asia. For the full year of 2024, S&P is now projecting a 2% year-over-year decline, or 2.9% excluding China, indicating continued market pressure Looking ahead, there are reasons to be optimistic. S&P projects that production will reach approximately 94 million units by 2026, indicating a compound annual growth rate of nearly 3% over the next two years, with strong growth expected in both China and North America. We've seen significant volatility impacting BEVs in both the short and long term. In the short term, there was a notable slowdown in the ramp-up of EVs in the first half, making it challenging for auto manufacturers to plan and commit to long-term investments. In the first half of the year, battery electric vehicle production increased by 2%, but this growth was entirely driven by China. BEV production, excluding China, declined by 9%. Longer term, the adoption of BEVs has consistently been pushed out, According to the most recent S&P forecast, BEV penetration is now expected to be 34% by 2029, compared to 40% at the beginning of the year. Other industry forecasts put BEV penetration as low as 30% in 2029. Therefore, it now seems likely that the EV transition is going to take much longer and be much more complex than previously expected. with ICE and hybrid platforms likely to play a much bigger and longer role. Let's move now to our two market-leading businesses, starting with automotive. To enhance our disclosure and provide more clarity on the different moving parts within our segments, we decided to give more details on the different product lines within the automotive business. Driveline, representing almost 60% of revenues, is the core of the automotive business and includes side shafts and prop shafts. E-powertrain, which includes all-wheel drive systems, E-powertrain components, and E-drive systems represents almost 26% of our revenue. And finally, the equity-accounted portion for our long-established JV in China represents about 13% of revenues. Despite market volatility, More than 70% of the automotive business has outperformed the market in the first half of 24, therefore demonstrating its resilience to propulsion mix. In Driveline, we are the global market leader with a long history of engineering excellence. We entered the automotive industry in 1950 and invented the automotive constant velocity joint in the 1960s when front-wheel drive vehicles were first introduced. We have the largest portfolio in the industry with a vast range of joint sizes and types. And the sheer scale of our business allows us to be competitive and produce our products of the same quality and delivery standards all over the world, close to our customers. We are the number one globally in size shafts for both ICE and BEFS, where we're nearly twice the size of our nearest competitor. We are also number one globally in prop shafts, again, significantly ahead of others, We also work with 90% of the global OEMs across the Americas, Europe, and Asia Pacific. So this means our revenue is highly diversified. No single customer represents more than 15% of sales. And additionally, we're extremely well distributed across our customers' vehicle platforms, meaning that we are never dependent on the performance of one individual program. We have a clear strategy for both of our product groups in Driveline. The side shaft business is the jewel in our crown. In H1, side shaft revenue performed in line with the market as its propulsion agnostic revenue profile demonstrates its resilience despite market volatility. Our strategy remains to continue to invest and grow and given our market leadership, scale and relationship with customers, we are extremely well positioned to grow in line with or slightly ahead of market. As for prop shafts, we intend to maximise the utilisation of existing assets to benefit from the long and slowly defying ICE platforms. Our strategy is simple. We are well positioned to maximise cash generation and profitability given the limited investments and R&D required. Moving on to ePowertrain. The ePowertrain portfolio is made up of three product groups, all wheel drive systems, where we are the market leader in all-wheel drive systems, supplying mainly large pickup trucks and large SUVs in North America and Southeast Asia, where we have the full capabilities to design, engineer, manufacture, optimize, package, and integrate a complete all-wheel drive system in-house. ePowertrain components, we're the market leader in advanced torque management products, a technology developed and built on our legacy and expertise in all-wheel drive. Both product groups make our portfolio Propulsion Agnostic, as most components within an all-wheel drive system transition to e-powertrain components as bed penetration increases. An e-drive system, we've been a pioneer in e-drive market for over 20 years. Building our expertise in all-wheel drive, we've designed over 2,000 subcomponents and have 600 active patterns, with 800 engineers across 10 sites. While our driveline business is well diversified across a broad range of customers, geographies, and platforms, the ePowertrain product line is more exposed to platform and customer mix. It has a significantly higher content per vehicle, making it more prone to volatility and exposed to the commercial success of specific vehicle platforms. In H1, 80% of the overall revenue decline was driven by only four platforms, three of which being eDrive systems and were impacted by bed volatility, and one of which being an all-wheel drive system, which was related to the timing of a new ramp-up and a new launch. Excluding these four platforms, the ePowerTrain product line declined by 4.7%, compared to a market decline of 2.4%. Like Driveline, we have a clear focus strategy to maximise value from the ePowerTrain product portfolio. All-wheel drive systems, we will manage our all-wheel drive portfolio similarly to prop shafts, maximising for cash and profitability. Our all-wheel drive system products are on long-lasting ICE platforms in North America and Southeast Asia. where the ice decline is forecasted to be much slower than the market, benefiting us in the near to medium term. ePowertrain components, we will continue to invest and grow our ePowertrain components portfolio. These are high-value products, typically on high-end platforms, and our heritage and technological capability position as well to increase market share. I expect the demand for advanced talk management systems to increase on both platforms, as customers will increasingly demand better handling of the vehicle to match the driving experience of high-performing ICE platforms. eDrive Systems, as previously stated, will be even more disciplined with our investments in eDrive Systems. We will be very selective in investing in programs that deliver target profit margins, aligning our investment strategy and capital allocation with our ambition to transition to a powertrain-agnostic portfolio. Moving on to China, let me remind you of our strong position in the Chinese market. Our automotive JV with Hasco, which celebrated its 35th anniversary last September, continues to be extremely successful. We work with all the leading Chinese OEMs and are profitably growing our market share with many of them across our entire product portfolio. As in other parts of our business, in China, we are rigorous with our commercial strategy, prioritizing profitable growth over volume. Our Chinese JV's margins are already at target levels, reflecting our disciplined approach. Our strong position in China is evident in the successful execution of our commercial strategy aimed at growing market share with local OEMs. Over the last three years, we've made significant progress For instance, 40% of our H1 2024 China revenue came from local Chinese OEMs, up from 27% in 2021, all without compromising on margin. Our local order book has also continued to improve. In H1, our book-to-bill ratio was 1.5, which is a significant increase from 2022 levels. While our Chinese plants continue to serve the local market, We are extremely well positioned to leverage our long-standing relationships and support our Chinese OEM customers as they pursue global expansion plans. We've also made significant commercial progress in the broader GKN automotive sector. The business continued to expand its pipeline, securing contract awards worth £2.4 billion in forecast lifetime revenue, translating to a book-to-bill ratio of 1.2%. Notably, 52% of new business wins were related to EV programmes, demonstrating our strong alignment with market trends. Our robust order book reflects product, customer and geographical diversity. While current market volatility has impacted this year's performance, the strong order book gives me a high level of confidence in the business is well positioned for the future. To summarize our GKN Automotive business, we are the market leader in driveline, all-wheel drive and torque management systems. We will continue to invest in our core market leading driveline business while maintaining a disciplined investment approach in e-powertrain in order to maximize profitable growth opportunities and cash generation. Our strategy and capital allocation is aligned with our ambition to transition to a powertrain agnostic portfolio. and we remain committed to expanding our margins. And we have a clear line of sight to significantly increasing cash generation in 2026, as all of our restructuring initiatives related to our global footprint comes to an end at the end of 25. Now let's move on to the powder metallurgy business, which comprises of three product lines, sinter metals, powder, and additive manufacturing. Again, we are the market leaders in both sinter and powder segments. We leverage our world-class engineering expertise and globally diversified supply chain to supply a broad range of customers with parts that are lighter, stronger, and more efficient. Our focus on powder metallurgy is centered on accelerating our transition to a more diversified portfolio. To accelerate this transition, we've implemented a new leadership team and developed a clear commercial strategy, and I'm very pleased with the progress they've already made. The PM portfolio performed well in the first half, with revenue growing ahead of market. Our body and chassis and EV portfolio, which includes propulsion agnostic and EV products, grew 3% year on year, more than offsetting the 1% decline in the engine and transmission portfolio. comprised of ICE platforms. Bookings in H1 were also strong, with new contracts secured representing a peak annual revenue of £77 million, which is a 10% year-on-year increase. Notably, 53% of these new wins were from propulsion agnostic product groups, confirming that new products are gaining commercial traction and the business's portfolio transition is well on track. In summary, Powder Metallurgy has had a good start to the year, delivering revenue growth ahead of market and margin expansion. We've continued to make good progress to diversify the portfolio and with a new leadership and commercial strategy in place, it's now is the right time to commence a strategic review of the business with the aim to maximise value creation for our shareholders. In summary, Our market-leading driveline business, China JV, and powder metallurgy all outperformed their markets, while volatility in bed production significantly impacted our e-powertrain business, leading to a 5.1% revenue decline. Despite these challenges, myself and the team have taken several decisive actions. Firstly, we've implemented a relentless focus on cost control, limiting the impact on operating profit, and our proactive measures mitigated the margin decline to 30 basis points. Secondly, we have a comprehensive programme of commercial recovery initiatives with our customers, which, together with the ongoing restructuring programmes and performance initiatives, will limit the impact from lower revenues in the second half of the year. Lastly, we are taking decisive actions to unlock value from our portfolio, and today's announcement of a strategic view of powder metallurgy and the disposal of the hydrogen operations underscores our absolute commitment to unlocking value from our portfolio and delivering shareholder returns. Our strategy and relentless focus on execution remain unchanged. We have the global lead in our core driveline side shaft business and have also market leading positions in prop shafts, all wheel drive and torque management position systems. We will continue to accelerate the transition to a powertrain agnostic business model, which will better position us to navigate market volatility and deliver sustainable, profitable growth and cash generation in the medium term. That's all from me, and we now can open the floor to questions. Thank you very much.

We will now begin the question and answer session. If you wish to ask a question, we ask that you please use the raise hand function at the bottom of your Zoom screen. If you've dialed in, please select star nine to raise your hand and star six to unmute. Participants can also submit questions through the webcast page using the ask a question button. I would like to remind all participants that this call is being recorded. we will take our first question from Vanessa Jeffries. Please go ahead and ask your question.

Morning, guys. Just a question first on the order book mix. So in the order book you've given for order, obviously hybrids have now doubled to 32% from 16% last time you disclosed it, and BEVs down to 21% from 33%. I'm just wondering how we think about the 2026 margin target now with that mix shift?

Hi, Vanessa. Sorry, I'm a bit. I'm not sure we've given our order book by propulsion type, but I'll answer your question around the margin target. You know, we're still very much committed in order to double digit margins. As you heard from Liam, our restructuring programs are on track. So those are going to deliver two percentage points of margin expansion of 23 flat volumes. So then as we're not standing still, we're looking to see, given the market volatility, if there's more that we need to do. But we're still very much committed to take more into within our control, sorry, and rely less on volumes. but the summary is we're still very much committed to those double digit target margins in the, in the medium term.

Okay. Thank you. Um, and then just on Pat and Matt, obviously Jean-Marc's been in the role for six months now. Are there any early learnings or any kind of thoughts on the strategy transition that you gave compared to last year?

No, I think I haven't asked, this is Liam. Um, you know, as I alluded to in the, um, in my talk is we're very, very happy with John Mark and he brought some excellent talent into the team as well. And, you know, a lot of the focus that John Mark is doing is looking at the commercial strategy and the front end of the business in terms of how to accelerate growth. And, you know, as we've seen how the business has performed in the first half, a number of new products and new programmes that were in the pipeline I've really started to take off in the half and we're very happy with that overall transition. I was also in China with John Mark about two weeks ago and Roberto looking at our China strategy and how we can also accelerate growth there with a lot of new exciting products really around electric braking systems, electric steering, where powder metallurgy technology is extremely relevant in terms of just the complexity of the mechanical systems where sintering is very, very unique to that kind of application. So we're extremely excited about the portfolio, the technology and the drive that John Mark and his team are bringing into that business.

Thank you. And then just because you just mentioned it, on China, obviously auto is seeing pretty fantastic momentum there. I think a big improvement on last year. Is there anything specifically driving that?

No, I think it's, again, Roberto and I were over there a few weeks ago and we have an outstanding relationship with our JV partner, Hasco. We've been with them for 35 years and it's all about making sure that we're aligned with them in terms of which are the key customers we want to focus on and how are we going to get set up to support them? You know, that's having the right engineering and commercial support close to those customers where they're designing the new platforms, making sure we've got the right cost structure and focus in terms of the portfolio of product that we need for the Chinese OEMs. And, um, been very, very focused on in terms of the margin targets and expectations. And you can see that that mix of Chinese versus global OEMs has really started to transition in the first half of this year. And we're very, very aligned with our JV partner, how we want that to move going forwards, as well as supporting those OEMs as they put capacity outside of China.

Yeah, that's really evident. Thank you.

Our next question comes from Harry Phillips of Peel Hunt. Please go ahead.

Yeah, hello.

It's Harry Phillips of Peel Hunt. Three questions inevitably, I'm afraid. Just in terms of the four particular programmes and how they're going to perform ongoing, I'm just trying to do the crude maths. It looks like the four have suffered a volume drop of about £140 million. which obviously is pretty substantial. Just can you give an idea of how that sort of plays out over the next couple of years in terms of potential recovery? And are those programs centered in particular facilities? So you've got sort of considerable underutilization of particular plants. The second one is just on the phasing of restructuring. Obviously you've got the 200 basis points in auto and what have you, but just how is there any changes to how that sort of plays out in current volume environment? And then lastly, just one of the downsides for you guys and having more time to read the statement, just looking at the cashflow, just seeing the JV sort of outflow is 53 million and the joint venture dividend is 70. Both seem quite big numbers and obviously interesting seeing the dividend being bigger than the, um, and the outflow. So some explanation around that would be very helpful. Thank you.

Hi, Harry. This is Leo. Let me kick off with the Bev platform challenge. I think it's four platforms, three of which are Bev specific platforms. And one is a transition. It's a brand new all-wheel drive portfolio, very high content in North America. that's going through, our OEM customers going through a changeover, that changeover has been much more challenging for that OEM than they forecasted. But that's now ramping up and we're seeing the volumes coming through for the second half. On the three BEV platforms, they're primarily impacted by, I would say, the chaos that we're seeing in Europe with regards to the BEV transition. and the stop-start of subsidies and the changing dynamics that we're seeing across different countries and different OEMs in terms of their overall BEV strategy. We've seen significant volume drops in the first half of three BEV platforms. We don't foresee, and in our outlook, we're not foreseeing that those volumes will come back. And as you can imagine, we're having very robust commercial discussions with the associated customers as a result of those platforms. Those platforms are across a couple of manufacturing facilities. And as you can imagine, you know, my operational team are taking extreme measures to make sure that we mitigate any impacts or as much as we can, the impact associated with the lower volumes on those platforms. Roberto, do you want to?

Yeah, so hi, Harry, again. So let's talk about the 200 basis points. First of all, you know, our auto restructuring programs, as I mentioned earlier, are very much on track and on budget, and we said that those 200 basis points were going to be, you know, the timeline around those or the phasing would be a quarter this year, half next year, and a quarter in 2026. We're still very much committed to that. As I alluded to answering Vanessa's earlier question, we're also looking to see if there's more we can take into our own control in terms of achieving that double-digit target margin and being less reliant on volumes. And then in regards to the cash flow question, I just want to remind everyone that on the adjusted EBITDA perspective, it includes consolidating China. I think that's what you're referring to in terms of 53 million in the cash flow. So we remove the China EBITDA to get to a, let me call it cash EBITDA number. um that's just an adjustment essentially and then the 70 million dividends um that we got from sds is because it takes you back to more equity accounting practices i would say but that's the inflow and again the the dividend policy in china has always been at least since i've been in the auto team for over five years to distribute 100% of retained earnings. There's a bit of withholding tax for us to repatriate that cash, but that equated to 70 million, which is last year's essentially earnings being distributed. Now, what happened this year, and I think you alluded to that, is we got the full dividend paid in the first half. Typically, it's split equally, 50-50, first half to second half. But that was an agreement with both Hasco and ourselves, so the two JD partners. So I hope that got a bit technical, but I hope it answered your question, Harry.

No, that's really helpful. Thank you very much indeed.

As a reminder, if you wish to ask a question, we ask that you please use the raise hand function at the bottom of your Zoom screen. If you have dialed in, please select star nine to raise your hand and star six to unmute. Participants can also submit questions through the webcast page using the ask a question button. Our next question comes from Aria from Barclays. Please go ahead.

Hi, can you hear me?

Hi, Aria. Morning again. Hi.

Thanks for taking the questions. The first one, I was wondering if you could maybe provide a bit more color on e-powertrain and how you're currently thinking that might develop into H2 and 2025 at this stage. I think you said to one of the earlier questions, you don't foresee the volumes on those four platforms which impacted you in H1. You don't foresee those volumes recovering into H2, but do you have any new key programs coming online in the second half and 25 provide additional volume momentum? That's the first question. And then secondly, could you maybe provide a bit more color on the key drivers for the sequential improvement in EBIT into H2? Thanks.

Hi, good morning. It's Liam. I'll talk about the powertrain side of things. Then Roberto can talk about your second question on margins. So as we look out for the rest of the year, as I said, we are assuming that the volumes won't come back on those e-powertrain programs. But as we've seen, the volatility of the EV transition is it. Something I've never seen before in my entire career in terms of the stop-start that we're seeing with the customer build rates and incentives as OEMs wrestle to put more EVs or not into the market. We've assumed that it will remain at the current level for the rest of the year. As I look out to next year, you know, we're still in the early stages of looking at our planning for 2024. But sorry for 2025. But, you know, what I can say is, you know, we've got another one new eDrive program that's starting to ramp up at the end of this year. And also we've got... an all-wheel drive program that is one of the programs that has been delayed in terms of the start of production this year that will continue to ramp next year and will be at full volume with that program next year in north america um and we also see you know a number of our all-wheel drive platforms continuing to be um or extended throughout throughout the period so it's a bit early to say what we think next year will look like but um you know i would say that um relatively flat, if not some slight growth in our e-power train business next year.

And Arya, from a profitability perspective, H1 to H2 sequential, I guess there's one headwind which is aligned with the industry, which is volume, and then the tailwinds come from commercial recoveries, hydrogen coming out of of the numbers, and then restructuring savings. Those are the three key categories that drive the improvement, H2 versus H1. Great.

Thanks a lot.

Our next question comes from Akshat Kakkar from JP Morgan. Please go ahead.

Good morning. Thank you for taking my questions. Two left on. The first one on eDrive systems. Are you still quoting for new orders on systems? And how should we think about specific R&D expenditure on assembly and integration to evolve going forward, please? That's the first one. And the second one coming back on China. The book to bill has clearly improved in the last 18 months. Could you just lay out any key success factors, any products or OEMs that are being very successful in the last few months there? Thank you.

Hi, good morning. I'll take both of those questions, Roberto, you can complement. So let me talk about eDrive systems to start with. So the eDrive system market has significantly evolved, I would say, over the last couple of years. And I think there's two fundamental changes that we've seen. One is, it's clear that the OEMs are doing a significant portion of those systems in-house themselves as they want to vertically integrate and control the cost structure of their platforms. And the second one is, you know, the number of eDrive systems that are coming out onto the market, the competitive intensity makes absolutely no commercial sense for me to allocate and dedicate an engineering resource to pursuing those programs. because it's a recipe, it's the race to zero in my opinion. So we are being incredibly selective where we will pursue an eDrive program if it meets our financial criteria, which is due to generate returns and free cash flow for the company. What does that mean for us going forward as a business? It means that Roberto and I and the Auto team are looking very closely at our eDrive engineering resources how much we're investing, and is that the right amount we need for the future? And that process is underway as we speak. The second part of your question was around China. And key success factors is our China business is China for China. One of the things that I did with Roberto over the last couple of years is we put We removed any expats that were over there and we put a Chinese team in working closely with the JV. As I said, we have a very, very long, very aligned relationship with our JV partner. And the success is to make sure that we give our Chinese operating team the freedom to operate in the local market with local specifications, local commercial agreements. dealing with the local OEMs and having the right individual relationships at engineering and commercial teams where it's appropriate. And just making sure that we make sure that with our JV partner, the boundaries around that relationship remain very, very firm in terms of what we expect. And, you know, as we go over there, as we were over there a couple of weeks ago, it's just make sure that the boundaries are still in place and we're happy with how things are progressing. And again, it's been also very focused on five or six local domestic Chinese OEMs that we believe value our technology. and will be successful as they start to export out of the Chinese market and grow in international markets. And that's our strategy is to be focused on those five or six OEMs. Excuse me. Thank you for that.

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

Yeah, we have a few questions. So first one is from Mark Fielding from RBC. He's asking to talk about the path to the auto 10% margin target and the timeline and what volume recovery from now global levels are needed together with the 200 basis points of self-help.

Morning, Mark. I'll tackle this one again. We had previously said that off RBC, prior year revenues in auto, so about 4.3 and change, 4.4 billion pounds, we could get two percentage points of margin expansion just by restructuring programs. And the last 1% needed to come from revenue growth, which was, you know, you can do the maths, but we flow volume at 30%, right? That's our targeted operational leverage. That equation hasn't significantly changed. So we're still very much focused on executing the already announced and ongoing restructuring programs that will drive 200 basis points. And then there's this volume needed. Now what we are looking at, as I hinted, answering a couple of other questions this morning, is how do we bring more of that within our control? And Again, nothing has been identified or kicked off just yet, but we are looking at options to take more of that journey within our control.

Next is from William from BNP. For the powder metallurgy strategic review, what options are you considering alongside the potential sales? And if you did react to sell the business, do you have any idea of the size of the offers you would entertain?

So I'm not going to discuss valuation or timing. We'll update the audience as relevant. In terms of other strategic options, it's part of the execution of the transition from ICE to BEV. So just to name a few examples, you know that we've been looking at Magnets. So is there an opportunity to partner with someone at Magnets? I mean, we're just looking at the whole strategic portfolio. As Liam said, in the last 18 months or so, we've gotten the opportunity to really get into the details of the business. And most recently with Jean-Marc and his team, we've developed what we've aligned on what is an exciting the transition, and now we're just going to look at strategic options to execute and accelerate the execution of that plan.

Next one is from PY from Stifer. Interim dividend was flat. How should we think about full year? Would it be maintained flat for the full year as well?

Hi, PY. You asked me this earlier this morning as well, I think. But all I'll say for now is the board approved the interim dividend, as you rightfully pointed out, flat 1.4 P per share. We will have a discussion with the board later in the year to see what the full year dividend is. But you know our capital allocation policy, which is 25% to 35% of adjusted net income. There will be a board discussion later in the year.

Next one is from Michael from Bank of America. Are you comfortable that existing contract structures with OEMs are providing adequate compensation for significant volume misses? And going forward, for new model and platform launches, particularly for BEVs, any thoughts on linking pricing more directly to actual volume levels, i.e. a sliding scale approach?

So, you know, I... have an extremely strong commercial team in the automotive business as we do in powder metallurgy and that that commercial team has shown its ability to perform as we've as we've seen over the last several years in terms of covid supply chain disruption and specifically inflation where we have a very disciplined approach to how we enter into contracts with customers and how we enforce those contracts, whether that be volume related discussions or commodity related, you know, steel, energy, labor, et cetera. Nothing has changed in terms of how we contract with our customers. And, you know, we will continue to make sure that we've got all the right volume clauses in place. And we are having discussions with the customers at the moment regarding the shortfall on volumes on some of those bed platforms. which are, we have contractual volumes in the agreements with them. And that's, you know, coming, elaborating a little bit further is talking about our Chinese business, that commercial rigor and discipline also remains in place with our China team. So we make sure that whenever we enter into a contract with a customer, it's entered into only fair agreement with, between ourselves and the customer in terms of what are the volume expectations? What are we capacitating for? How much are we investing? And what are the commodity indexation clauses that we have in those contracts? That's in place today and will remain in place as we go forward in the future.

Next one is from David. I come from Edison. Powder metallurgy sales seems to have slowed later in the half, given the growth report in the previous update. Is there anything to note? Also, do we have any timescale on the review of the business, on the strategic review of the business?

Morning, David. I would say, you know, just like for the first half result, PowerMed has pretty much performed in line, most loudly outperformed market, and market has slowed in the last two months of the half as well since our trading update. In regards, so that's just, you know, you're right, there was a bit of a slowdown, but it's trended within the street. And in terms of the Sorry, the second question. In terms of the sale. As I said earlier, I'm not going to comment on the timeline. We'll update the audience as and when relevant.

Okay, a couple more questions. If there were to be a cash proceed from the strategic review for the metagogy, how would you use those proceeds? And then separately, how do you think about restructuring cost in 2025? Okay.

So if and when there should be a sale of pattern methodology, we have a capital allocation policy that is very focused on returning value to the shareholders. There'll be a discussion with the board and there's a lot of variables that go into that conversation. So More to come as the process continues. And then in regards to restructuring for next year, I don't really want to get into 2025 conversation just yet, considering the volatility and the uncertainty that is in the industry. We'll pick that up later in the year, if you don't mind.

And the last question for you, Roberto. Does the full year guidance include the hydrogen business that was sold? Yes.

So again, I said this, you know, in the step up required to achieve the full year guidance, if you pick the midpoint, really key, three key actions. One is the commercial recoveries. Two is to continue seeing the restructuring benefits flow through. And then there's the hydrogen business. we had 7 million losses in H1 that are not going to recur in H2.

Okay, that was the last question. Liam, if you have any final closing remarks?

No, I think we've covered everything on the call today. I just want to thank everybody for taking your time, for joining us this morning, and I look forward to seeing many of you in person over the coming weeks. Thank you very much.

Thank you all.