Dowlais Group H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2025

Key Takeaways

  • Positive Sentiment: Despite a 1.6% volume decline, adjusted operating profit rose to £154 m and operating margin expanded by 40 basis points to 6.3%.
  • Positive Sentiment: Tariff impacts in H1 were lower than initially anticipated, and management expects to recover these costs in H2, leaving full-year results materially unaffected.
  • Positive Sentiment: New business wins totalled £55 m in powder metallurgy (62% EV-related) and over £1.5 bn in automotive bookings diversified across ICE, mild hybrid, and electric programs.
  • Positive Sentiment: Shareholders approved the planned combination with American Axle, creating a global leader with ~$12 bn in sales, ~50,000 employees, and targeted run-rate synergies of at least $300 m.
  • Negative Sentiment: Adjusted free cash flow was a £29 m outflow (versus a £10 m inflow last year) and net debt rose to £1.034 bn, reflecting tariff costs and higher restructuring spend.
AI Generated. May Contain Errors.
Earnings Conference Call
Dowlais Group H1 2025
00:00 / 00:00

There are 4 speakers on the call.

Speaker 1

Good morning. Thank you for joining our 2025 interim results presentation. I will start with a brief update on our first half performance and the progress made on the American Axle combination before handing over to Roberto for the financial review. I'll then return to cover our divisional performance and then leave time for our usual Q&A session. The first half was marked by ongoing macroeconomic uncertainty and market volatility, largely driven by tariff-related disruption and other geopolitical events. Despite this challenging environment, we delivered a solid set of results. Strong execution of our restructuring and performance initiatives, more than offsetting the impact of lower volumes and tariffs, enabled us to deliver margin expansion. Although tariffs did impact the first half, the effect was lower than initially anticipated, and we continue to expect to recover these costs in the second half.

Speaker 1

As a result, we do not anticipate tariffs having a material impact on our full-year results. Commercially, both divisions continue to make good progress. Powder Metallurgy secured £55 million in new business wins, 62% of which was for EV or propulsion-agnostic products. GKN Automotive achieved bookings worth over £1.5 billion in forecast lifetime revenue, well-diversified across products, customers, and geographies. Around 54% of contracts won were either extensions or new wins on ICE and mild hybrid programs, while 46% were on electric or full hybrid programs, reflecting a continuation of a broader slowdown in electrification. Finally, we continue to make good progress on the planned combination with American Axle. In July, shareholders of both Dowlais and American Axle overwhelmingly approved the proposed combination, marking a pivotal milestone in our strategic journey.

Speaker 1

The transaction will create a global leader in driveline and metal forming technologies, with approximately $12 billion in sales, roughly 50,000 employees, and over 170 facilities worldwide. With at least $300 million in expected run-rate synergies, it has the potential to deliver significant long-term value for our shareholders. We remain on track to complete the transaction in Q4 2025, with American Axle having already secured regulatory approval in nine out of 15 jurisdictions and continues to engage constructively with the remaining authorities. I'll now hand over to Roberto to take you through the financial results.

Speaker 2

Thank you, Liam, and good morning, everyone. Let me walk you through the group's financial performance for the first half of 2025. We delivered a resilient set of results in a volatile macroeconomic environment. Revenue was £3.46 billion, down 1.6% at constant currency, primarily due to lower volumes in Driveline and Powder Metallurgy. Foreign exchange headwinds, driven by sterling strength, further impacted reported revenue, leading to a 4.2% year-on-year decline. Despite this, adjusted operating profit grew to £154 million, and we expanded our operating margin by 40 basis points to 6.3%, reflecting strong execution on our performance and restructuring initiatives. Adjusted basic earnings per share was £0.056, an increase of 14% as a result of higher earnings and lower finance costs.

Speaker 2

Adjusted free cash flow was a £29 million cash outflow, compared to a £10 million cash inflow in the first half of 2024, primarily due to the impact of tariffs, higher restructuring outflows in line with expectations, and the timing of dividend receipts from our China joint venture. Net debt increased to £1.034 billion, resulting in a leverage ratio of 2 times EBITDA. Adjusted revenue declined 1.6% as growth in the ePowertrain product line in the China joint venture was more than offset by a decline in the Driveline product line and Powder Metallurgy. Foreign exchange was a headwind, reducing reported revenue by £67 million, with the pound strengthening against the USD, the euro, and the CNY during the period. Adjusted operating profits increased to £154 million, with margin expanding 40 basis points to 6.3%.

Speaker 2

The increase in adjusted operating profit was primarily driven by £23 million of efficiencies resulting from our footprint restructuring and volume reduction initiatives, and £15 million from last year's decision to right-size engineering investments, largely in the ePowertrain product line. The full-year net benefit from engineering spend is expected to be approximately £10 million due to the impact of lower customer-funded engineering spend in the second half, in line with previous guidance in our 2024 full-year results. The impact of trade-related tariffs was £12 million, lower than initially anticipated due to several exemptions and postponements introduced since the U.S. administration's original announcement in April. In line with our financial model, approximately £7 million of pricing impact was broadly offset by other ongoing performance initiatives. The margin improvement underlines the strength of our operating model and our ability to mitigate headwinds through disciplined execution.

Speaker 2

Foreign exchange headwinds in the period were £5 million higher than prior year, resulting in a reported adjusted operating profit increase of 2%. Moving to GKN Automotive, adjusted revenue declined 0.9% year-on-year to £1.98 billion. The primary driver was a 4.6% decline in driveline revenue, reflecting a mix of weaker volumes and adverse customer mix. Additionally, we also saw the phasing out of legacy programs, with new platform ramp-ups expected to be more heavily weighted to the second half of the year. ePowertrain revenue grew 5%, benefiting from a low base and the recovery of volumes on an all-wheel drive platform previously impacted by production delays. Adjusted operating profit was £132 million, up 11%, with margin improving by 70 basis points to 6.7%. This performance was supported by restructuring benefits, right-sizing of engineering spend, and disciplined execution on other ongoing performance initiatives.

Speaker 2

In Powder Metallurgy, adjusted revenue declined by 4% to £489 million, impacted by volume softness in North America and Europe. China performed better, helping to partially offset the weakness. Adjusted operating profit declined 16% to £41 million, with operating margin at 8.4%, largely as a result of lower volumes. Adjusted basic earnings per share for the period was £0.056, up 14% year-on-year. This reflects both higher adjusted operating profit and a reduction in finance charges. Adjusted net finance charges were £50 million, £6 million lower than the prior year, largely as a result of higher interest income. Tax charges were £27 million, resulting in an effective tax rate of 26% due to higher withholding tax on account of dividend proceeds from our subsidiaries. The lower share count following the conclusion of our IBAC program in January 2025 also contributed to EPS growth.

Speaker 2

Adjusted free cash flow was an outflow of £29 million, compared to an inflow of £10 million in the first half of 2024. The decline reflects high restructuring and tax outflows in line with plan and several temporary effects, which include tariff costs, which we expect to recover in the second half, the timing of dividend receipts from our China joint venture, with only 70% received in each one, compared to 100% received in the prior year. Pension payments, slightly higher in the first half, but expected to be £30 million for the full year, slightly lower than in the prior year. Finally, a temporary increase in inventory to support footprint transitions. These headwinds are timing-related, and we expect an improved cash performance in the second half, albeit I still expect adjusted free cash flow to be lower than prior year.

Speaker 2

In addition, interest payments totaled £47 million, broadly in line with the prior year. Tax payments were £31 million, up slightly due to legislative changes in Italy and a tax audit settlement in Germany. Both items have been previously communicated. Restructuring cash outflows were £63 million, up £12 million versus the prior year. This was consistent with expectations and supports our wider performance and footprint initiative. Expectations for full-year outflows remain unchanged at £120 million to £130 million. Looking ahead at the remainder of the year, our full-year guidance remains unchanged, despite macroeconomic and specific market volatility as a result of U.S. trade actions. We continue to expect performance to be towards the lower end of our previously stated range of flat to mid-single-digit decline in adjusted revenue and an adjusted operating margin of between 6.5% and 7% on a constant currency basis.

Speaker 2

Adjusted free cash flow is anticipated to be below the prior year, reflecting the impact of lower volumes and increased restructuring expenditure. We remain confident in our ability to recover tariff-related costs in the second half through commercial and operational actions. Finally, on slide 14, 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 Pierre or me. Thank you. I will now hand back to Liam.

Speaker 1

Thank you, Roberto. Now, let me start with Automotive outside of China. Driveline revenue declined 4.6%, while ePowertrain grew 5%. As shown on the chart, Driveline outperformed the market in the Americas and was broadly in line with Asia, but underperformance in EMEA drove the overall decline. This was mainly due to adverse customer mix and platform timing, as the phase-out of older programs was not yet fully offset by new platform ramp-ups. Many OEMs have also postponed product launches amid tariff uncertainty, adding to the short-term volatility. ePowertrain revenue growth reflected the stabilization of eDrive Systems platforms that impacted last year and a recovery in all-wheel drive volumes previously hit by production delays. Moving to China, revenue from our China joint venture grew 3.4% year-on-year, but underperformed the 12% growth in light vehicle and local light vehicle production.

Speaker 1

This was largely due to customer mix, as about 85% of market growth came from five OEMs where we have underweighted exposure. While we work with the majority of leading local players like BYD and Geely, we are underweight relative to their market share and have not grown at the same pace as the market. We remain laser-focused on increasing our share with Chinese OEMs to ensure we capture long-term profitable growth in this important and fast-evolving market. Let me briefly update you on the execution of our restructuring initiatives, which all remain fully on track. In North America, we're in the final stages of streamlining operations, with the transfer of production from the U.S. to Mexico fully on track for completion by the end of 2025. In Europe, the transfer from Germany to Hungary is also on track and progressing well, with expected completion by the end of 2026.

Speaker 1

We also continue to optimize headcount and our cost structure to mitigate softer volumes and economic headwinds. These actions delivered £20 million in net benefits in the first half. In addition, we made strong progress in right-sizing our ePowertrain engineering spend and generated a further £15 million in net benefits in the period. These results are a testament to the strength and capability of our teams, who continue to execute complex, multi-geographic restructuring initiatives on track and to the highest standards. Moving to Powder Metallurgy, our strategic focus remains on diversifying the portfolio beyond the core into new growth areas, and we made good progress in this direction. Our acceleration platform segment, which consolidates revenues from these new areas, grew at 5.7% year-on-year. We continue to expand in metal additive manufacturing, securing another customer in the computing thermal management space, a key area for AI infrastructure.

Speaker 1

Activity on our magnet project also increased as customers seek localized supply chains. The project remains on track, with all equipment now installed in Germany and the first industrial-scale samples successfully produced. By leveraging our market-leading core, diversification, and innovation, we are executing our strategies to ensure Powder Metallurgy is well-positioned to adapt to evolving market trends and drive sustainable growth. To summarize, in a challenging macroeconomic environment, we delivered a solid performance. Our strong execution of restructuring programs and performance initiatives drove 40 basis points of margin expansion, more than offsetting the impact of tariffs and lower volumes. We continue to engage constructively with customers and remain confident the direct impact of tariffs will be offset in the second half through commercial recoveries and performance actions. Looking ahead, our full-year guidance remains unchanged, and the combination with American Axle is on track for completion in Q4 2025.

Speaker 1

Finally, I want to thank all our employees. While this may feel like a period of uncertainty for some, your hard work and dedication in challenging circumstances have made these results possible. Thank you. We'll now open the call for questions. As we remain in an offer period on the UK takeover code, we are restricting our ability to answer some of your possible questions, so please bear that in mind with any queries you may have. Over to you, operator.

Operator

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 *9 to raise your hand and *6 to unmute. Participants can also submit questions through the webcast page using the ask question button. I would like to remind all participants that this call is being recorded. We'll take our first question from Vanessa Jeffries of Jefferies. Please go ahead. If you would like to unmute your line, Vanessa, you are able to ask your question.

Operator

Sorry, can you hear me?

Speaker 1

Yes, we can hear you now. Hi, Vanessa. Morning.

Speaker 1

Morning, guys. Thank you for taking my question. Just a question on the sales guidance. You're minus 2% in the first half, expecting mid-single-digit decline for the year, S&P as in minus 2% for the second half. I'm just curious, it seems like a bit of a bearish view on the second half, but probably at the high single-digit decline level. Does that seem a bit conservative? Is there anything specific in that? Especially because at the midpoint of your margin guidance, you're expecting, what, 90 bps sequential improvement in margins?

Speaker 1

The midpoint being 6.75% margin, Vanessa, I think that the improvement is slightly less than 90 basis points versus prior year. On the revenue side, as stated, the volatility remains high. Just look at the U.S. approach to trade. There's new news pretty much on a daily basis. We are waiting for the full impact of the August shutdowns of the OEMs to become clearer to us. As of now, we feel that not changing the guidance is the right approach. Vanessa, we've also got a number of new programs that are scheduled to be launched in the second half. As we said in our comments, a number of OEMs have been changing their schedules quite regularly over the first half. We're just being prudent regarding the timing of those ramp-ups in the second half.

Speaker 1

Thank you. I think this is one of the smallest gaps we've seen between the auto and Powder Metallurgy margins. Given the challenges Powder Metallurgy is facing and the restructuring progress you're making in auto, maybe you could speak about how you see that dynamic between the two and if Powder Metallurgy even should be making much higher margins than auto in the future.

Speaker 1

As you know, we don't really compare the gap between one of the business units and the other. What we're seeing is, if I just take the two strategies separate for a second, which on auto has always been the focus on margin expansion as we benefit from all the restructuring activities that are coming to an end. We stated a couple of years back, and I think early 2023, that automotive had started the last major round of restructuring, which was going to result in 2 percentage points of margin expansion or an absolute pound benefit of roughly £80 million of EBIT growth. This is now, we're halfway through the second year of those benefits. I always hinted that those benefits were going to be split between 2023, 2024, and 2025, and 2026 P&Ls at about a £20, £40, and £20 million cadence in terms of that amount split.

Speaker 1

Very happy to see that the execution of that strategy is fully on time and on budget. You saw that in the first half results with about £23 million of benefits flowing through to the P&L. On Powder Metallurgy, we've always said the strategy there is to solve for the headwind of ICE-to-BEV transition, which we've always said is a double whammy impact for the team. One, because for every BEV car that is produced, there's one less ICE and therefore no content per vehicle. As you remember, more than 50% of Powder Metallurgy's content is for ICE. The second one is the current ICE engines that are being produced have lower content per vehicle as we're seeing smaller engines, V6s instead of V8s, for example. The strategy there was to find alternative growth platforms. We talked about that.

Speaker 1

We are making good progress in the accelerated platforms, but not as fast as the decline in the ICE platforms. What that is resulting in, because there hasn't been any major restructuring in Powder Metallurgy, is that the volume essentially flows through at 30%. I would say I wouldn't compare one business versus the other. It's more the execution of a strategy of one versus the other.

Speaker 1

Thank you. That's helpful. Finally, unless I missed this, I know you gave us the % of sales with local OEMs in China, but are you able to give us a % of the order book at all?

Speaker 1

No, we don't do that.

Speaker 1

All right. Thank you.

Operator

As a reminder, if you would like to ask a question, please use the raise hand function at the bottom of your screen. Alternatively, you can submit written questions using the ask a question button on the Spark Live webcast page. I will pause for a moment to allow the queue to form. There are no further questions on the webinar. I will now hand over to Pierre Falcione to read out written questions submitted via the webcast page.

Speaker 2

You have a couple of questions. One is if you can please elaborate or confirm any regulatory conditions that are currently outstanding before the deal can complete.

Speaker 1

Yeah, obviously, we're actively engaged with all the authorities to get the regulatory approvals. As we said, we've got nine approvals completed, and there's five outstanding, which are the merger controls in Europe, Mexico, Brazil, and China. There's an FDI approval in France. We're confident that those will continue to progress well. We're in a detailed dialogue with the authorities to get those approvals through, and we remain on target for a Q4 closure.

Speaker 2

Thank you. A couple more questions. Particularly in EMEA, the underperformance in Driveline, is it driven by flash out? If that's the case, are you losing market share and to whom?

Speaker 1

No, I think we elaborated a little bit during the comments. It's more to do with platform timing. We've got a number of new platforms that are ramping up in the second half. Some of those platforms have been delayed. It's really mostly with platform timing as we transition from old programs onto the new ones.

Speaker 2

Regarding magnets, can you provide an update on the long-term roadmap and size of the price? What milestones should we expect in the coming years? How big business could this become?

Speaker 1

Yeah, we're actively engaged in influencing our pilot facility in Germany, which we've commented on previously, which is now operational and started to produce test parts. We're obviously very much engaged with a number of OEMs and tier ones, especially in Europe, as they're looking to localize or find alternative sources for magnets. Until that capacity is sold and we've got the acceptable commercial conditions, once that's in place, we'll then look at expanding that capacity into our facility in Romania. As I say, we're actively engaged with a number of OEMs, and we're very happy with the progress that we're making.

Speaker 2

Thank you. If there are no more questions on the line, we can close.

Operator

Thank you for joining today's call. We are no longer live. Have a nice day.

Powered by Quartr