Dowlais : Presentation transcript

D O W L A I S G R O U P P L C H A L F Y E A R R E S U L T S W E B C A S T

1 2 T H S E P T E M B E R 2 0 2 3

R E S U L T S P R E S E N T A T I O N T R A N S C R I P T

Dowlais

Liam Butterworth, Chief Executive Officer

Roberto Fioroni, Chief Financial Officer

Chris Dyett, Investor Relations

Questions From

Vanessa Jefferies, Jefferies

Mark Davies Jones, Stifel

Mark Fielding, RBC

Michael Jacks, Bank of America

William, Exane - via webcast

José, JP Morgan - via webcast

Sanjay, Citi - via webcast

Introduction & Key Highlights

Liam Butterworth, Chief Executive Officer

So, good morning everybody, many thanks for joining us today for our Inaugural First Half Results. I'm Liam Butterworth, the CEO of Dowlais and for those who do not know me, I have spent over 30 plus years in the automotive industry, and was the CEO of GKN Automotive from 2018 until the demerger.

It's great to be speaking to you today about what the Group has achieved and the exciting future that we have ahead of us. In terms of the agenda for the morning I'm going to start by taking you through the half year highlights. I'll then provide an overview of the key achievements for the Group, including an update on our sustainability strategy. Roberto will then present the first half financial performance and guidance. Following this I'm going to take you through the performance of our two market leading businesses GKN Automotive and GKN Powder Metallurgy. I will then conclude, after which we can take some of your questions.

So let me start with the first half highlights. Dowlais has delivered very strong first half performance, making significant financial and strategic progress against the goals we outlined at the Capital Markets Day in January.

Due to the impending UAW strike, which provides a certain level of uncertainty for the second half we are not changing our expectations for the full year.

Our focus has been on three key areas, margin expansion, cash generation and portfolio transition, all of which are well ahead of expectations in the half.

So first of all margin expansion, whilst our revenue in constant currency grew by 10% year on year, our operating profit in absolute pounds grew by 40%, which resulted in 140 basis points of margin expansion, albeit from a softer first half 2022 comparable. This is an outstanding achievement and once again we have fully offset inflation right across the Group.

Secondly, cash management, we are very pleased with our cash performance whereby we generated £33m of adjusted free cash flow during the first half, again ahead of our expectations. And this has improved our net debt and reduced the Group's leverage to 1.4 times, from the 1.5 times at the date of demerger.

And finally, portfolio transition, we continue to make great progress as we transition our portfolio to capture profitable growth from the shift to electrification. And of note, Automotive has secured record bookings and an eDrive programme at target margins. And Powder Met has also grown bookings and secured its first commercial agreement for permanent magnets.

On slide 5 we reinforce the highlights from the first half, starting with GKN Automotive. Operating margin increased by 270 basis points year on year with a 92% profit growth. Automotive has secured record bookings of over £3bn of lifetime revenue in the period. And this is a book to bill ratio greater than 1.3 times. Significantly, these bookings, 78% of which are on EV platforms have been realised across its entire portfolio of products, customer groups, and geographies. And this further reinforces our confidence about the future for the Automotive business.

The Powder Metallurgy business is doing better in recent months as well, after what was a challenging second half of 2022 and first quarter of 2023. This led to an 80-basis point improvement in the first half operating margins when compared to the second half of last year. And this was even better sequentially in the second quarter. This has been driven by improved operational performance following the resolution of some operating challenges it experienced in the US.

It has also seen strong progress on new business bookings with a 36% increase in the first half compared to the prior year. As it works on transitioning its portfolio, it is now seeing momentum in bookings for EV applications which it continues to be heavily focused upon.

And finally, as I've already mentioned, we're extremely excited that the Powder Met team has secured its first commercial agreement for permanent magnets, well ahead of plan and that is with a major global Tier 1 automotive supplier.

As we outlined at our Capital Markets Event in January, sustainability is very important to us, and our goal is to contribute to a cleaner, more sustainable world. With this in mind we set out our sustainability commitments for the year and we have made great progress against those. Based on double materiality we are track to develop our Group sustainability strategy and we will also submit net zero science-based targets for validation by the end of 2023 for both Automotive and Powder Met.

We have established a Group Sustainability Management Committee, which I chair, and we will use this forum to drive progress throughout the Group. And within the business we continue to make progress. For example, this year Powder Met achieve and EcoVadis silver rating and Automotive is currently evaluating a power purchase agreement for renewable electricity for its European operations.

Finally, we are on course to publish a consolidated sustainability report alongside our 2023 annual report. This will contain significant new information including new targets based on the materiality assessment that we are currently conducting.

I am now going to hand over to Roberto who will take you through the financial highlights.

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Financial Update

Roberto Fioroni, Chief Financial Officer

Thank you, Liam. And good morning everyone. For those of you who I haven't met yet, I'm Roberto Fioroni, the Dowlais CFO. Today I will be walking you through the financial performance for Dowlais for the first half of the year.

On slide 8 we showcase the headline results for the Group and for the avoidance of doubt these results are for the whole six-month period, January to June 2023.

As you can see revenue grew 10% on a constant currency basis while operating profit grew 40% in absolute pounds. This clearly demonstrates the effective execution of our financial model.

Incremental revenue in the period dropped through at 35%, excluding central costs. This impressive operating leverage is the consequence of the Group fully offsetting inflation, improved operational performance and the continued benefits of our restructuring programmes.

The drop through rate in the period was higher than our medium-term guide of 30%, also because of softer prior period comparables, as such, and in line with our plans, we expect drop through margins to be lower in the second half of the year as comparatives strengthen.

The 140-basis points margin improvement on the prior year includes incremental standalone Plc costs for the first half of 2023. Excluding these costs, in order to get a better reflection of the underlying operational improvement, margins expanded 190 basis points and operating profit grew by 52% in absolute pounds.

As highlighted earlier by Liam, the Group's relentless focus on cash delivered an adjusted free cash flow of £33m. Finally on this slide I want to highlight our inaugural dividend of 1.4 pence per share, which is in line with our stated capital allocation policy.

The Board approved an appropriate dividend that we believe provides the right balance between returning cash to shareholders and de-levering our debt and reinvesting in the Group for future growth.

Moving to slide 9 we show our revenue growth by key driver and relative revenue share by geography. Starting with the key drivers of revenue.

Volume was the major contributor, driving £183m of year over year revenue increase. This is the result of the strong growth in the global light vehicle production market.

Price drove an increase of £62m in the period, this is the net of contractual annual price reductions, standard in our industry and the customer inflation recoveries. Similar to the prior year we continue to recover more than 70% of inflation via customer pricing. Together, volume and price resulted in a 10% growth versus H1 2022.

Finally, foreign exchange provided a benefit versus prior year. Geographically the Group's revenues continue to be well balanced, mitigating any risk deriving from over exposure to a country or region.

Lastly, we continued to serve a broad customer base the includes pure EV manufacturers and Chinese OEMs.

On slide 10 we show the year over year bridge that explains the £50m operating profit growth versus the prior period. As this is the first time we have showed this chart I will carefully explain the key drivers.

Volume, this is the operating income generated from volume growth at prior year contribution margins. Volume drove a £53m increase in profit versus the first half of the prior year.

Secondly price, this column is the sum of three factors; the standard annual contractual price reductions, direct and indirect material year over year inflation impact and customer price recoveries to offset inflation. This translated into a slight headwind of £4m versus the prior period.

The third column, performance represents the benefits that are delivered via continued operational efficiencies and prior year restructuring. Labour inflation is also accounted for in this column.

Performance in the period provided a £17m benefit versus the same period last year. As we execute our financial model you would expect the sum of price and performance to be positive when added together. This is the case for the first half of the year with a £13m improvement versus prior year.

Finally, we incurred £15m of central costs in the period. These incremental Plc costs are in line with the previous guidance.

Slide 11 provides more detail by business unit. As a reminder the year over year comparisons are at constant currencies.

In Automotive revenues grew by 12% and margins expanded by an impressive 270 basis points, as a result of higher volumes, operational performance and fully offsetting inflation in the period.

In Powder Met revenues grew by 2%, including the impact of customer recoveries to offset inflation.

Margins contracted by 110 basis points as a result of a one-off issue in Q1 this year and some operational performance challenges in North America. I will talk more about this on the next page.

Finally, we continue to make progress in the Hydrogen business, we currently have 17 operational systems with a further two that are in the process of being commissioned. The prospects for this business are promising and

we believe they could be accelerated through a strategic partnership. Therefore we have initiated a process to assess opportunities and we will update you in due course.

On slide 12 we take a deeper dive on Powder Met's recent margin performance. Powder Met is a great business with exciting prospects which has not performed to its full potential over the recent periods due to operational efficiencies driven by one off events. These events impacted margins negatively in the second half of 2022 and in H1 2023, as can be seen on the chart.

Despite these challenges we have many reasons to be optimistic about the business. Firstly, our H1 margins expanded by 90 basis points on a reported basis, versus H2 of last year.

Secondly, in the first half of this year the business has managed a further step up in performance as Q2 margins were sequentially higher than Q1 by 170 basis points.

Finally, the Q2 margin was higher than full year 2022, also as a result of healthy volumes. As such, Powder Met is back on track to flow incremental volume to operating profit at the expected drop through margins of approximately 30%.

Moving to slide 13, I want to discuss cash. As you know we are relentlessly focused on cash and Dowlais is cash generative. The table on the left of the page splits the £313m of cash flow we generated into the two main sources, EBITDA and dividends from our JVs.

The chart in the middle shows a relative view of the uses of cash that amount to £280m for the period. The key highlight is that we have generated adjusted free cash flow of £33m, while absorbing the seasonal buildup of working capital, as well as the significant levels of investment in capex and restructuring to support future growth and productivity. A major part of which is a result of Automotive's footprint expansion in best cost countries.

Improving profitability and rigorous cash management has enabled the Group to de-lever since demerger. We remain focused on cash generation, which is a strategic priority for us, we are very satisfied with the strength of our balance and at the same time remain mindful of the macroeconomic environment and sector dynamics. Simply said, we are balancing our commitment to maintain a solid balance sheet, whilst returning value to our shareholders.

The dividend announced today is a good example of our thoughtful capital allocation strategy.

Finally, on slide 14 we are giving you some technical guidance to help with your modelling. I am not going to go through each point as it largely reflects what we communicated to you in January during the Capital Markets Day. One of the items I do want to highlight is the effective tax rate. In 2023 we expect this to be between 25 and 26% as we work through finalising positions post demerger. I expect this to reduce in future years.

Thank you. And I will now hand over back to Liam.

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Business Update

Liam Butterworth, Chief Executive Officer

Thanks, Roberto. I'm now going to talk in a bit more detail about the first half performance of our two core businesses.

The Automotive business made excellent progress against all its strategic objectives, with revenue growth of 12% to £2.3bn, driven by volume and pricing recoveries. Importantly this led to a significant margin growth of 92% versus the prior year, which is an expansion of 270 basis points to 6.5%.

I should clarify that H1 2022 didn't have the benefit of the pricing recoveries that we realised from the second half of 2022.

The business, as previously, continues to fully offset the impact of inflation through multiple levers, including commercial recoveries, procurement efficiency and plant productivity. I'll cover this in more detail on the next slide.