Melrose Industries PLC (LON:MRO) today published the following trading update for the four months from 1 January 2020 to 30 April 2020 ahead of its Annual General Meeting taking place later today. All numbers are calculated at constant currency.
Trading update
The Group traded in line with expectations from 1 January 2020 until mid-March 2020, at which point the worldwide impact from COVID-19 caused significant disruption, resulting in many factories being shut or remaining only partially open. As a result of the effects from COVID-19, Group sales in the Period were down approximately 20% versus the same period last year.
As previously stated in our announcement dated 30 March 2020, due to the impact of COVID-19, Melrose is not in a position to give any trading guidance for the year as conditions remain too unpredictable to forecast. In these challenging times, the health and safety of our employees is clearly of vital importance and we are following government guidance on hygiene and social distancing protocols, as well as coordinating the sourcing of protective equipment globally to ensure no disruptions.
Robust cash management remains the top commercial priority of the Group this year with comprehensive cash preservation actions being successfully implemented in each business, including a focus on reducing working capital to match reduced sales, cutting or delaying both capital expenditure and longer-term restructuring projects and also reducing costs. Capital expenditure and trade working capital actions alone are forecast to deliver approximately £200 million of cash savings in the second quarter.
Melrose started the year with approximately £1 billion of committed bank facility headroom and due to the excellent results of the cash management procedures put into place, this amount of headroom also exists at the end of April 2020. On the basis of current Group forecasts this is not expected to materially change at the half year. A combination of salary sacrifices by Group employees and furloughing (where possible with the benefit of the relevant government schemes) has also helped to reduce costs. Additionally, cash preservation has been significantly assisted by the cancellation of the 2019 final dividend to shareholders.
Aerospace
Factories in our Aerospace division have largely remained open. Defence related factories make up approximately 30% of last year’s sales and are expected to be relatively unaffected by the COVID-19 virus.
In relation to civil aerospace, five factories within the Aerospace division are currently closed (representing 5% of the division’s sales in 2019) and the rest are operating at reduced capacity.
Actions have been taken to reduce the cost base of this division and detailed plans are being drawn up to position the business appropriately for future demand. Further information on this will be disclosed in the 2020 interim announcement. Whilst clearly there will be a detrimental effect on the aerospace industry arising from current events, the Board believes there is substantial opportunity to continue to improve this market leading business and position it well for the future.
The net result of the above trading conditions in the Period was a sales decline of 8% versus the same period last year.
Automotive and Powder Metallurgy
The Automotive and Powder Metallurgy businesses have seen similar trading patterns to each other with their factories in Europe and North America largely being shut since mid-March. Factories closed in whole or part during this period represented approximately 88% of the 2019 sales. All our factories in China have now been open for several weeks and we are seeing encouraging signs of a recovery in demand. There is also a steady process of factories being reopened in Europe and North America, albeit a gradual return with productivity affected by social distancing measures.
Again, management has taken significant actions to reduce the cost base of these businesses, and plans are being drawn up to position for the future. In both cases these businesses enjoy large market shares and strong customer relationships and the Board believes significant opportunity exists to improve their performance.
The net result of the above trading conditions in the Period was that these two divisions combined had a sales decline of 31% versus the same period last year.
Nortek Air Management and Other Industrial
The economic impact of the virus on the Nortek Air Management and Other Industrial businesses has varied but overall it has been less pronounced than within the other divisions. HVAC has seen StatePoint and data centre sales continue their extremely encouraging development. Ergotron has coped well with significant growth in its health and education sectors. AQH and Security have been more affected by COVID-19.
The net result of the above trading conditions in the Period was that these two divisions combined had a sales decline of 12% versus the same period last year.
Financial position
Melrose debt facilities are well balanced and there are no short-term maturities. Prudently, the Group took action at the end of last year to extend the maturity of the c.£0.9 billion committed term loan, solely at Melrose’s option, from April 2021 to April 2024. The Group’s committed c.£3.2 billion revolving credit facility is repayable in January 2023. The leverage covenant (net debt to EBITDA) on the Group’s committed banking facilities has been waived for the June 2020 and December 2020 testing periods. In addition to these committed banking lines the Group has two bonds: a £450 million bond maturing in September 2022; and a £300 million bond maturing in May 2032, both of which have no financial covenants.
As stated above, the headroom on the committed bank facilities at the end of April remains largely unchanged since the start of the year, at c.£1 billion, and is not expected to change materially over the remainder of the first half of 2020.
The Board
In the circumstances the Board has asked David Roper to delay his retirement as Executive Vice Chairman and we are pleased to inform shareholders that he has agreed to do so.
AGM
In light of current government guidance prohibiting gatherings of more than two people, your Board has also upgraded the attendance restrictions for our AGM and so regretfully are unable to allow attendees other than the two employee shareholders necessary for a quorum.
Simon Peckham, CEO of Melrose Industries PLC, said:
“Our divisional management teams and head office employees have responded brilliantly to these unparalleled circumstances, which are likely to remain challenging for a while. During the next few months we will put in place plans to position our businesses to achieve their future potential in different market conditions. Melrose has a track record of managing its businesses successfully in all market environments and crucially our recent cash generation performance shows we have been able to maintain the strength of the balance sheet to position the Group’s businesses in the best way for the future.”
