Melrose Industries upgrades full year guidance

[shareaholic app="share_buttons" id_name="post_below_content"]

Melrose Industries PLC (LON:MRO), an Aerospace Engines and Structures Group, has announced its interim results for the six months ended 30 June 2023.

Highlights

	Adjusted¹ results		Statutory results
	2023	2022²	2023	2022²
Continuing operations	£m	£m	£m	£m
Revenue	1,633	1,364	1,633	1,364
Aerospace operating profit/(loss)	175	67	(4)	(93)
Operating profit/(loss) (post PLC costs)	159	45	(18)	(281)
Profit/(loss) before tax	134	9	(62)	(314)
Diluted earnings per share	7.5p	0.2p	(3.0)p	(16.8)p
Net debt¹	553	1,294	n/a	n/a

Melrose Group – at constant currency³

Trading ahead of expectations – upgraded guidance

§	Upgraded full year guidance: Aerospace 2023 adjusted¹ operating profit range increases by over 8% to between £375 million and £385 million with a higher Engines margin than previously guided
§	Net debt leverage¹ reducing towards 1x EBITDA¹ by the end of 2023 (before share buyback programme)
§	This outperformance further underpins the achievement of the 2025 guidance

Half year results

§	Aerospace revenue of £1.63 billion, growth of 19%³ over last year (15% including businesses being exited)
§	Aerospace adjusted¹ operating profit of £175 million, more than 2.5x the prior year
§	Aerospace adjusted¹ operating margin of 10.7% an increase of 5.8 percentage points on the prior year and 3.2 percentage points on the second half of 2022
§	Adjusted¹ diluted earnings per share increased to 7.5p (2022: 0.2p). Statutory loss per share was 3.0p (2022: 16.8p)
§	Restructuring and repricing progressing well combined with improved quality and arrears reduction
§	Net debt¹ of £553 million in line with expectations, reducing leverage¹ to 1.5x (pro-forma 2022 opening leverage¹ 1.8x)

Earlier shareholder returns

§	Higher confidence and strong progress allows Melrose to commence early its share buyback programme, at the beginning of October 2023, starting with a £500 million buyback over 12 months and being well placed to continue thereafter keeping leverage¹ comfortably within previous guidance
§	Continuation of the progressive annual dividend, with an interim dividend of 1.5 pence per share declared

New Investor Event – Engines

§	To be held on site in Sweden, the global HQ for the Engines business, during October 2023 to showcase in more detail and colour the full quality of the Engines business, including a new target for Engines operating margins to rise above 30% post 2025

Management changes

Melrose is now a long-term aerospace group with exceptional organic growth prospects. In line with this new strategic direction, on 7 March 2024 Simon Peckham and Geoffrey Martin will step down as Melrose Chief Executive and Group Finance Director respectively, to be replaced by Peter Dilnot (currently Melrose Chief Operating Officer) and Matthew Gregory (currently Chief Financial Officer GKN Aerospace) respectively. Thus providing management continuity as Melrose becomes a pureplay aerospace group. Simon Peckham, Geoffrey Martin and Christopher Miller will not stand for re-election as directors at the 2024 AGM

By division – at constant currency³

Engines

§	Engines revenue growth of 19% in the first half with adjusted¹ operating profit nearly doubling and adjusted¹ operating margin up to 24.5%
§	Engines aftermarket growth of 46% driven by recovering flying hours and the Group entering the lucrative aftermarket ‘sweet spot’ allowing an above market performance

Structures

§	Structures revenue growth of 18%³ (13% including businesses being exited) and adjusted operating margin reaching 2.5% in the first half versus loss-making in the first half of 2022
§	Civil ramp-up delivering 24% growth. Defence repricing and portfolio work accelerated with around 25% of the renegotiations planned by 2025 being successfully concluded in the last few months

Demerger of GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen

§	The demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses from Melrose into Dowlais Group PLC successfully completed on 20 April 2023 as scheduled

Upgraded guidance for 2023 full year (assuming US $ = 1.25 average exchange rate for the year)

Group

§	Revenue of between £3.35 billion and £3.45 billion
§	Aerospace adjusted¹ operating profit between £375 million and £385 million
§	Aerospace adjusted¹ EBITDA of between £525 million and £535 million
§	PLC costs reducing to £30 million
§	Net debt leverage¹ reducing towards 1x EBITDA¹ by the end of 2023 (before share buyback programme)

Simon Peckham, Chief Executive of Melrose Industries PLC, today said:

“We are delighted with these results and the outlook for Melrose. Whilst there is still work to do, the business is very capable of producing over £1 billion of EBITDA and providing excellent returns for shareholders. This is further demonstrated by the confidence to start early the share buyback programme. Chris, Geoff and I are pleased to hand over to Peter and Matthew to continue the great performance achieved by Aerospace, and to guide this handover during the coming months and into 2024. Melrose shareholders own a truly special business, with rapidly increasing profits, exceptionally strong long-term cash flows and a disciplined shareholder focused approach to capital.”

^{1. Described in the glossary to the 2023 Interim Financial Statements}

^{2. Results for the period ended 30 June 2022 have been restated for discontinued operations and the one for three share consolidation}

^{3. Like-for-like growth is calculated at constant currency against 2022 results and excludes businesses being exited}

CHAIRMAN’S STATEMENT

I am pleased to report a strong set of interim results for the six months ended 30 June 2023 (the “Period”), which have underpinned the confidence in making an upgrade to the full year results. Furthermore, as we have evolved into being a long-term aerospace group in line with previous announcements, we are providing details and timing about the intended executive management changes scheduled for the first half of next year to take this exciting new strategy forward.

RESULTS FOR THE CONTINUING GROUP

These results include statutory revenue for the Group of £1,633 million (2022: £1,364 million), an adjusted operating profit of £159 million (2022: £45 million) and a statutory loss before tax of £62 million (2022: £314 million). This includes solely the Aerospace business, post PLC costs, as a result of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses being demerged from the Group on 20 April 2023 and therefore being treated as discontinued in these results for accounting purposes.

Further details of these results are contained in the Finance Director’s Review.

TRADING

The Aerospace business has performed well during the Period. The industry-leading Engines division has exceeded its margin guidance and continues to demonstrate exceptional profit growth and long-term cash flows. The design-led Structures division continues to improve and deliver on its strong positions on excellent platforms.

CASH AND SHARE BUYBACK PROGRAMME

These interim results demonstrate increasing confidence and strong progress, with upgraded profit guidance and with net debt reducing towards 1x EBITDA by the end of 2023 (prior to share buybacks). With profits rising fast, and with restructuring already well-advanced to realise the Aerospace business’s full potential, your Board is confident to commence early its share buyback programme, at the beginning of October 2023, starting with a £500 million buyback over 12 months, and being well placed to continue thereafter while keeping leverage well within the previous guidance.

DIVIDEND

Your Board has declared an interim dividend of 1.5 pence per share, which will be paid on 20 October 2023 to shareholders on the register at the close of business on 15 September 2023.

DEMERGER OF GKN AUTOMOTIVE, GKN POWDER METALLURGY AND GKN HYDROGEN

The demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses from the Company into Dowlais Group PLC (“Dowlais”) completed on 20 April 2023 as scheduled (the “Demerger”). This transaction marks the successful transformation of these businesses whilst under Melrose ownership, enabling them to continue as a standalone automotive-focused group listed on the London Stock Exchange.

Prior to the Demerger, the Company undertook a one for three consolidation of the existing Melrose ordinary shares after 6:00 p.m. on 19 April 2023. Admission and dealings in the new Melrose ordinary shares on the London Stock Exchange commenced at 8.00 a.m. on 20 April 2023, and there are now 1,351,475,321 Melrose ordinary shares of 160/7 pence in issue.

BOARD MATTERS

Given Melrose has transitioned into a long-term aerospace group, the Company believes that this is the right time to begin evolving the executive management team to progress the changed strategy. Christopher Miller our Executive Vice-Chairman, and Simon Peckham our Chief Executive, who have each served the Company since it was founded in 2003, and Geoffrey Martin who joined as Group Finance Director in 2005, have overseen the successful execution of the Company’s ‘Buy, Improve, Sell’ strategy. Christopher, Simon and Geoffrey have expressed their intention not to stand for re-election at the Company’s Annual General Meeting in 2024, leaving behind a highly successful record of shareholder value creation.

The Board has nominated Peter Dilnot to oversee Melrose to realise the next chapter of development of the Aerospace business, and to be appointed Chief Executive from 7 March 2024. This will allow an orderly transition with the benefit of Peter’s continued insight and stewardship, having served as Melrose Chief Operating Officer since 2019, during which time he also served as CEO of GKN Aerospace on an interim basis.

Peter will be joined by Matthew Gregory, whom the Board has nominated for appointment as Group Finance Director of Melrose from 7 March 2024. Matthew brings further continuity to the Company’s transition, currently serving as the Chief Financial Officer of GKN Aerospace.

You might also enjoy reading Melrose Industries appoints Ian Barkshire as a Non-Executive Director

Separately, during the Period, Funmi Adegoke resigned as a non-executive director of the Board with effect from 16 June 2023 following a promotion within Halma PLC. We thank Funmi for her contributions to the Company and are pleased to have welcomed Gillian Elcock, who was appointed to the Board as a non-executive director with effect from 21 June 2023. Gillian has extensive investment research experience including several years covering aerospace and defence as an analyst at Putnam Investments and Insight Investment, with two engineering degrees from MIT and an MBA from the Harvard Business School.

STRATEGY AND PURPOSE

Since being founded in 2003, Melrose has created significant shareholder value through its ‘Buy, Improve, Sell’ strategy. Following completion of the Demerger, Melrose has now changed strategy to being purely an aerospace business, and thus will now report publicly as two divisions: Engines and Structures. The Board has already confirmed that it will not seek to undertake another acquisition of an unrelated industrial business or, in the near term, a material aerospace business.

For the next few months the focus is to complete the current restructuring plans. These are well underway and are expected to be largely complete by the time of the 2023 preliminary full year results announcement in March next year. As part of this strategy, Aerospace is continuing to invest heavily in sustainable technology as it pursues its mission to be a highly trusted and sustainable aerospace partner in the sky.

OUTLOOK

The Board is confident of achieving its upgraded full year expectations. In Engines, our RRSP portfolio looks towards continued market growth and an upcoming lucrative aftermarket phase. Operational efficiencies and the benefit of ongoing restructuring means that we expect full year 2023 to show an excellent improvement in performance, with the Aerospace business positioned for further profitable success over the coming years.

Justin Dowley

Non-executive Chairman

7 September 2023

CHIEF EXECUTIVE’S REVIEW

It has been a busy period, with the successful demerger of the Dowlais businesses allowing full focus on executing the remaining restructuring plans for Aerospace, as a standalone business. Aerospace continues to perform strongly, with restructuring projects well underway and on track to be materially complete in the near future, unlocking the full potential of this great business.

The business’s adjusted operating margin more than doubled compared to the prior period to 10.7%, representing good progress towards its 2025 operating margin guidance of 17-18% as outlined during the Capital Markets Event in May 2023. This has allowed an upgrade to 2023 expectations, predominantly focused on Engines, with further volume recovery and improvements to come.

Supported by continued strong momentum and market recovery underpinned by robust demand, the outlook for the Aerospace business is very positive and we remain confident in its prospects and ability to perform well in 2023 and beyond. Aerospace’s technology is embedded on the world’s most successful, highest volume platforms. This progress is supported over the medium-term through ongoing business improvements, as well as the increase in flight hours and narrowbody production in civil and growing defence budgets driving demand for military platforms.

Inflationary pressure and global supply chains continue to provide some challenges which are expected to continue into 2024, but the business continues to manage these and has been able to fully offset all additional costs.

Building on its commitment to developing best in class sustainable technology solutions that will assist in moving the aviation sector into the era of more sustainable air travel, the business continues to progress the technological advances made on the successful H2Gear project. Aerospace signed a partnership agreement with Embraer at the 2023 Paris Air Show, laying the path to flight testing a zero-emissions liquid hydrogen propulsion system. The business also advanced its Additive Manufacturing leadership, introducing its largest Additive Manufacturing cell at the new Global Technology Centre in the US.

Further details are set out in the divisional reviews below.

ENGINES

The Engines business made excellent progress during the first half. This was driven by strong market growth underpinned by the performance of its diverse portfolio of 19 RRSPs, which are set to generate approximately £20 billion in net cash flow in the future. These gains were reinforced by positive momentum from target growth initiatives and the benefits of business improvements.

During the Period, like-for-like revenue was up 19% versus 2022 with aftermarket growth of 46% reflecting increased flying hours and above market contribution from RRSP contracts entering their lucrative aftermarket phase. Adjusted operating margins improved 8.6 percentage points to 24.5%. Encouragingly this first half performance is ahead of previous full year guidance of 22% and moving further towards the 2025 guidance of 28%. The first half margin expansion was driven by increased aftermarket RRSP profits, global spares business expansion and operational improvement – including restructuring projects delivering positive returns.

Good progress was made with growth initiatives, including global spares ramp-up, additive manufacturing capability, and commercial contracts. The repair business grew by 21% in the first half and the Malaysia fan blade repair centre gained its CAAC certification opening up the China and Asia markets. Additionally, factory preparation is underway for a new state-of-the-art dedicated engine component repair centre in California. Additive manufacturing for structural engine components has accelerated with a multi-year £40 million investment in new production capabilities in Sweden, while commercial progress continues with all major engine OEMs to insert GKN Additive technology into existing engine designs. The business is also extending its OEM supply agreements, such as an important 10 year extension that has recently been signed with Pratt & Whitney for the production of F135 engine ducts.

Inevitably the development of engines is an ongoing process and recently Pratt & Whitney announced there was a manufacturing process issue affecting PW1100G engines. The production of powdered metal parts continues, and Pratt & Whitney will continue to deliver both new engines and new spares across all product lines. We are confident that the PW1100G engine will be highly successful and have always taken a conservative approach to its commercial development. Whilst there will be short-term issues for some customers, we are confident that there will be many years of success to come.

The substantial reshaping of the Engines manufacturing footprint is on track. Production has now ceased at the Manchester, US plant and all other restructuring moves are expected to be largely complete in the next four months. As a result of restructuring over the last three years, Engines operations will be concentrated into nine global manufacturing sites with the consolidation of key product lines into highly productive Centres of Excellence. In parallel there have been operational gains in productivity and quality with the number of ‘escapes’ (quality issues reaching customers) down 33% in the first half of this year. Despite the industry’s supply chain challenges, the business has sustained high levels of on time delivery.

We are confident that with ongoing market recovery, RRSP portfolio contribution and operational momentum, the Engines business has the potential to achieve above 30% operating margins post 2025.

STRUCTURES

The Structures business continued to make good financial and operational progress in the first half. The ongoing ramp-up in Civil production volumes and the successful actions to reshape the Defence portfolio give promising momentum into the second half of the year. This was underpinned by further progress on restructuring and operational gains with improved quality and lower arrears despite industry supply chain issues.

During the Period, like-for-like revenue was up 18% versus 2022 with Civil growth of 24% reflecting higher OEM production rates, particularly with Airbus, Boeing and Gulfstream. Defence revenue increased by 6% (excluding work being exited) in line with the associated programme demand. Adjusted operating margins improved by 3.6 percentage points to 2.5% from a loss making position in the first half of 2022. This first half performance is in line with the expected 3% margin for the full year and demonstrates positive momentum towards the full recovery of the business as volumes ramp up. The first half margin expansion was driven by Civil volume increases, improving quality of earnings in Defence and operational improvements – including the positive impact of restructuring projects.

There was a record number of orders for new aircraft in this Period with particularly strong new demand from Asia. OEM production rates remain constrained by supply chain and operational issues, so order backlogs are currently at record levels of over 12,000 aircraft. For illustration, the A320 range is now scheduling slots into 2029. The Structures business has established positions on all major aircraft and is successfully ramping up at pace while sustaining operational standards. During the Period, quality improved further with the number of ‘escapes’ (quality issues reaching customers) reducing by 44% versus 2022, and customer arrears also improved by 31%.

There was also positive progress with commercial initiatives in the first half. In Defence, the repricing and portfolio work accelerated with around 25% of the renegotiations planned by 2025 being successfully concluded in the last few months. There is also momentum on exiting non-core work with production handovers well underway, particularly in the US. In Civil, a new contract was signed with Airbus extending A220 wiring supply from our global centres in Turkey, China and Mexico. Agreements have been reached with Joby and Supernal, leading players in the emerging electric air mobility market, covering composite structures and electrical distribution systems. The China JV with COMAC is also moving forward with initial work packages agreed for the new site which is on track to be operational during the first half of 2024.

The extensive restructuring programme within Structures is nearing completion following three years of activity. The resulting operational footprint will be 24 global sites largely focused on design to build programmes. In the first half, the Netherlands consolidation project has delivered major milestones ahead of plant closures later this year. Selected work is also being moved from the US to our growing Mexico facility with all key projects underway. The ongoing industry supply chain challenges continue to be navigated without impact for key customers, however they caused internal operational issues in the first half, including reduced productivity in some sites. We would expect an improvement in the second half and into 2024.

The ongoing structural ramp-up in Civil production, coupled with positive momentum on improving the Defence portfolio and delivering operational gains, gives us confidence that Structures is on track to achieve its target 9% margin in 2025 with further expansion potential thereafter.

OUTLOOK

The Engines business continues to de-risk its progress towards achieving 28% margins in 2025 and then above 30% margins post 2025, with the market recovery continuing to accelerate, and bolstered by strong long-term platform positions and business improvements. The business is in a strong position to benefit from the opportunity in parts repair, with its expanding certified global repair capability in key strategic locations. Over the medium to long-term, the business is primed to pursue leading positions on next generation platforms, with ongoing efforts to scale up its disruptive additive fabrication technology, and expand its partnerships with leading civil engines manufacturers and air forces. We look forward to explaining this full potential in more detail at the new Engines Investor Event in October this year in Sweden.

Continued growth within the Structures business remains underpinned by very strong demand and growing backlogs, giving a positive near-term outlook led by narrowbody. Flight hours are returning strongly, with OEM deliveries ramping up fast to address the continued backlog of orders in civil, with spending increasing in defence. The business is well placed on all key platforms, and on track to achieve its target 9% margin in 2025, with civil volume ramp-ups driving growth, and the defence portfolio repricing and rationalisation well underway. Longer-term prospects are supported by ongoing footprint consolidation and quality improvements which are progressing well.

MANAGEMENT CHANGES

We have announced today that Geoffrey and I will be stepping down as Chief Executive and Group Finance Director respectively on 7 March 2024. Together with Christopher, Executive Vice-Chairman, we will also step down from the Board at the next AGM. It has been a very enjoyable 20 years, and we would like to thank all the people both within and outside Melrose who have contributed to Melrose’s journey. We are very pleased to leave the business in such great condition to be taken forward by a talented management team led by Peter and Matthew. We believe that Melrose Industries has a very exciting future as one of the world’s leading aerospace companies.