Melrose Industries PLC

Well hello everyone and welcome to Melrose 2024 results. It's great to see so many of you here in London with us and I know we've got lots of others on the webcast too. So welcome to you all and thanks for joining us. Now this is actually our third set of results as a focused aerospace technology business. 2024 was a busy and successful year for us. And we've got good momentum going into 2025. And clearly, we're going to cover lots of that shortly. But importantly, today, we're also announcing new five-year targets. These are built on our clear plans for our repositioned aerospace group. And they also reflect our confidence and our excitement about where we're going to take Melrose from here. So running order today is I'll give some highlights on all of this up front and then Matthew will do 2024 and 2025 before I return to talk in more detail about these five year targets. Let's just get started with some headlines. Firstly, as I said, we delivered a strong performance in 2024 with profit at the top end of expectations against a backdrop of what we all know has been a difficult time in the industry with supply chain challenges. This progress continues with our positive momentum into 2025. And this year, we're going to complete our multi-year transformational restructuring program and will also deliver substantial free cash flow. Now, on the five year target, these include good revenue growth, primarily from the market ramp up, significant further margin expansion and ongoing step ups in cash generation. So lots of value to unlock. Some highlights specifically on 2024 include this 42% increase in profit to £540 million. This was delivered despite lower than expected revenue growth due to these reduced production rates. So our margin expansion was the result of business improvement actions reading through and positive aftermarket mix. Operationally, our priority is always safety and quality. And in 2024, I'm proud to say that we delivered an 80% reduction in lost time accidents and further improvements in quality too. This is important. We also took steps to grow our business for the future, including expanding capacity on existing platforms such as the F-35, as well as investing in engines capability, such as our breakthrough additive fabrication technology, which we're going to talk through in more detail later. And finally, our ongoing portfolio rationalization is now largely complete with the successful sale of three non-core businesses, including two to Boeing. 2025 is all about further delivery and the execution of our plans. We'll see another step up in profit and margins and we'll complete our extensive restructuring programme and deliver improved productivity on our restructured, leaner operating base. Most significantly though, we'll reach an inflection point on cash with recent one timers dropping away and moving from cash outflow in 2024 to more than 100 million positive free cash flow post interest and tax this year. So lastly, a word here on our five year targets, which we think reflect the excellent potential in the group. From a top line perspective, we're targeting high single digit CAGR, leading to 5 billion of revenue by 2029. In terms of margin, we'll continue to see expansion up to 24% plus from the impacts of volume, positive mix and our business improvement initiatives reading through. And this will lead to at least 1.2 billion operating profit. And most excitingly, a greater than 20% CAGR in EPS over the next five years. Finally, cash. Our target is £600 million post-interest and tax, and this is certainly not the peak, with cash generation continuing to increase into the next decade. So with that as an introduction, I'll hand over to Matthew. Thank you.

Thank you, Peter, and good morning, everyone. It's great to be here with you all to talk about the business's strong performance with profits at the top end of our guidance from November. At a headline level, the group revenue has grown 11% on a like-for-like basis, which was very much led by the performance of the engines division. Group operating profit has taken another stride forward, growing 42% to £540 million as a result of the revenue growth and the impact of our restructuring and business improvement programmes. Margins continue to grow, up 400 basis points to 15.6%, with both divisions continuing to grow margins strongly. And logically, EPS has also grown significantly, up 45% to 26.4%. So a strong set of results with profit at the top end of our guidance and continuing our trajectory to the 2025 target set out two years ago. Turning to slide 10, I do have a slide for each division coming up, but at a headline level, you can see that while both divisions delivered revenue growth, our performance is very much driven by the continued strong performance of the engines division, which was up 26%. Structures growth was dampened by the ongoing supply chain challenges being experienced in the sector and the specific customer stocking and production rate changes that our business has faced. This, alongside the weaker dollar impact of around £70 million, resulted in overall revenue falling slightly short of expectations. However, margins continue to grow strongly in each division due to the buoyant engines aftermarket, as well as the impact of restructuring and our business improvement programmes. Engines has beaten its margin target one year earlier than planned and Structures continues its good progress towards the 2025 targets. And a result of this better performance and despite an FX headwind of around £10 million, we were able to deliver operating profit at the top end of our expectations. So let's dig a little deeper into the performance of each division. Turning to engines on slide 11. Revenue growth was robust at 26% up, driven by strong aftermarket performance across all of our subsectors, as well as good OE growth. Aftermarket revenue was up 32% in the year. Within this, we saw a particularly strong performance in our Swedish military business, which was up 74%, driven by the higher level of support required for the upgrade of the Gripen RM12 engine. In addition, during the year, this business signed a multi-year agreement with Sweden's FMV to explore the propulsion requirements for future fighter systems. And our technology helped propel the Ariane 6 rocket during its inaugural launch in July. Our aftermarket repair business continued to grow, up 18% on last year, driven by the higher number of certified parts for both LEAP and GTF that are able to go through our facilities, as well as our Malaysia facility being online for a full year. We expect this growth to continue as we've now opened our new $55 million, 150,000 square foot state-of-the-art repair facility in San Diego. The final contributor to our aftermarket growth was the performance of our RSP business, which was up 30%. And the RSP revenue included $274 million of variable consideration. On the other side of the engines business, OE grew 19% in the year, and this was driven by stronger GTF volumes and a higher spare engine ratio, as well as increased revenue on GE engines. And we also saw good commercial wins on the OE side of the business, with a decade-long agreement with Safran to supply shafts for the LEAP 1A variant, and we expect this agreement to expand to the LEAP 1B variant in 2025. Operating profit grew 40% to £422 million and margins at 28.9% have beaten our 2025 target of 28% one year early. And this strong margin reflects the growth in the highly profitable aftermarket business, the improvements in productivity and quality, as well as the read-through from restructuring projects in this division. So a very strong performance from the engines division with further growth and improvements to come. Turning to structures on slide 12, after taking account of the three businesses that were sold in the year, the division delivered revenue growth of 3%. The civil side of the business grew 1%, and this was impacted by well-publicized customer stocking and rate changes during the year, which was driven by sector-wide supply chain issues. The business element of this business continued to see good growth during the year. And on the commercial side, we secured a contract renewal with Airbus for the full wiring package for the A220. And production is well underway at our new electrical wiring center of excellence in Chihuahua, Mexico. Revenue was stronger in defence, up 7%, where increased build rates and improved commercial terms read through in the year, and we now see 61% of the portfolio being sustainably priced, up from 42% last year, with good momentum to reach our 85% target by the end of 2025. Commercially, Defence secured customer investment of more than £100 million to double its F-35 canopy production capacity in Garden Grove, California, extending our participation into the 2030s. Margins continue to improve, despite the slow ramp-up, with the impact of pricing, business improvement, restructuring and the sale of lower-margin businesses dropping through. Operating profit grew by 32% to £144 million and margins grew from 5.1% to 7.2%, an increase of 210 basis points. So despite the volume and supply chain challenges, the business continued to grow profits and margins strongly in the year, with line of sight to the 2025 margin target of 9%. So having talked about the businesses individually, I think it's worth a quick recap on slide 13 of our progress towards the 2025 margin targets that we set out two years ago. For engines, we set a target margin of 28% for 2025, which we've exceeded this year. And a strong performance has been driven by the aftermarket performance and mix effect over the past two years, as well as the division fully delivering on its business improvement initiatives. The final part of our margin growth comes from the growth in our part repair business, which is well on track. So good performance from engines with more to come in 2025. For structures, we set a margin, a target margin of 9% for 2025, and we've grown from our original 2023 guidance of 3% to 7.2% in 2024. The defense portfolio and repricing activities are very much on track and business improvements are also reading through. Now, the civil ramp up was a key part of our margin improvement target. And whilst this is reading through in part, we're not getting the full effect as volumes remain constrained. This is a challenge, but we've already delivered margin improvements in line with our plans and are confident that the further margin improvement is achievable. And we remain committed to delivering 9% margin for 2025. So having talked about the divisions, let's talk about the numbers below the operating profit on slide 14. Now we put the details of all of our adjustments to operating profits in the appendix as normal. Net financing costs are £102 million, which largely reflects the interest on bank loans with an average cost of 5.7%. The ETR for the year is lower than expectations at 20.1%, and this was due to recognition of certain tax assets in Malaysia and Sweden. And the combination of all the above shows EPS at 26.4p, a growth of 45%. And as a result of that strong performance and progress in the year, a final dividend of 4 pence per share is proposed, increasing the full year dividend to a total of 6 pence per share. So let me now turn to our cash performance for 2024 on slide 15. A cash performance is in line with expectations with operating cash before CapEx at £298 million and free cash flow before interest and tax at £23 million. We consider this a robust performance given the challenging operating environment. Turning to working capital, you can see that we've split out the impact of the movement in unbilled work done to give full transparency as to how this impacts our results. And this was very much in line with our expectations. Trade working capital in the second half of the year was good, particularly in the context of the challenge supply chain. And this reflects the seasonality of the business, which we expect to continue. And for those that want it, you'll be able to see the details of the factoring position, which ended the year at £338 million in the appendix of the presentation. Just a quick update on the powder metal issue. We saw around £40 million impact coming through in 2024. This is a little over half the amount that we guided to at the start of the year, but does reflect the direct activity from Pratt & Whitney. CAPEX was £123 million and represents 1.1 times depreciation, and this includes our net investment in additive fabrication in Sweden and also the completion of our repair centre in San Diego. Looking at restructuring, we're now very much at the back end of our restructuring work, and we expect these to complete during 2025. From a cash perspective, the cost was £126 million, which is below the £140 million cost guided earlier in the year. And our guidance remains that we expect the completion of these projects in 2025 to cost between £40 and £50 million. Moving on to the shared buyback programme, this continues. We completed the previous £500 million shared buyback programme by the end of September 2024, as planned, and commenced our £250 million programme in October. Total spend in 2024 was £431 million, and the £250 million programme is due to be completed by March 2026. Net debt ended the year at £1,321,000,000 and leverage at 1.9 times, and this was in line with our expectations, slightly helped by the timing of the share buyback programme. So let me finish off with a couple of slides which update our guidance for 2025. So let's talk about the P&L first on slide 16. Given the continued supply chain challenges that are affecting the whole aerospace industry and the recent announcement specific to the platforms of our largest customer Airbus, it should be little surprise that we are tempering our revenue guidance for 2025. We're guiding to revenue from £3.5 billion to £3.7 billion, which at the midpoint represents like-for-like growth of around 7%. Given the strength of our aftermarket business and the delivery of our business improvement plans, we are guiding to aerospace operating profit of between £680 million and £720 million. And at the midpoint, this represents profit growth of around 25% and is in line with the target we set out at our Capital Markets Day in 2023. The midpoint margin of greater than 19% exceeds the target we set out in 2023 by 1%. At a divisional level, we expect engines to maintain strong growth rates just into double-digit territory, driven by continued strength in aftermarket, and operating profit guidance is £515 million to £545 million, and this includes variable consideration of around £340 million at the midpoint. We expect margins to be greater than 32%, well ahead of our original target. The structures division is expected to deliver low to mid single digit revenue growth on a like for like basis. And as I mentioned earlier, the division's growth is impacted by the constrained volumes from a major customer that is affected by continuing supply chain challenges. However, the structures division is expected to make continued good progress on margins in 2025 through the further impact of restructuring and business improvement. And we expect margins to be around 9% this coming year. Operating profit is guided at £165 million to £175 million. Now, at this point, I should talk about tariffs and the impact that this may have on the business. We do have product that now attracts a higher rate of tariffs on imports into the USA, particularly from Mexico. Now, obviously, we've been monitoring the situation and it says that the overall impact on the group for this year would not be material. We've seen that the tariffs have been implemented this week, but it's unclear how long this will last, whether they'll continue to apply to all of our products in aerospace, and also ultimately who will pay for these additional costs. So given that the situation has been dynamic since the start of the year, we've not included this in our guidance. And depending on the impact on the aerospace sector, we'll update as we go through the year. And I would point out that the impact to us has been reduced due to the fact that certain contracts require the customer to pay any duties and the fact that we have a distributed global footprint. Moving down the P&L for 2025, I'd expect absolute net interest costs to increase, reflecting the continuation of the share buyback and the fact that cash generation of this business will continue to be back-end loaded in the year. For 2025, the interest rate for gross bank debt is expected to be around 5.4%. Guidance for ETR is 21% to 22%, and this is still very much weighted towards the Swedish tax rate, but will depend on the precise balance of profits during the year. Now, as a final point, just a reminder that the above numbers are aerospace numbers. In addition to this, the PLC costs are anticipated to be around £30 million, broken into operating costs of £27 million and a non-cash LTIP cost of £3 million in the year. Now, these LTIP costs were previously charged below the line, but with the change in our strategy, it's appropriate that they get put into operating profit. Once we're through the 2025 year, which had specific aerospace targets attached to it, we will revert to a more conventional approach of including the PLC costs within our guidance. So with all that, from a P&L perspective, it's very pleasing to be able to guide operating profit directly in line with the targets we set out in 2023. Now, my final slide, slide 16, relates to our cash guidance for 2025. As shown on the graph, 2025 will be an inflection point for the group, and we're guiding to positive free cash flow after interest and tax that is in excess of £100 million. Now, this is the first time Melrose has guided on an absolute basis, and it reflects us now reporting as a conventional aerospace company. We've given the P&L guidance on the previous slide and also an indication of the impact of variable consideration on the P&L. Trade working capital is expected to grow in relation to revenue growth at around 13% of sales, and we're not anticipating that supply chain performance will improve significantly during the year. In addition to this, we expect powder metal issue to have around a £70 million impact in 2025. Now, we remain confident that the total cost of Melrose of resolving this issue will still be around £200 million, as advised by Pratt & Whitney. So the remainder will flow through 2026 and into 2027. We expect capex for 2025 to be between 1 and 1.1 times depreciation, and this includes our net £25 million investment in additive fabrication technology. As a reminder, cash tax at £10 million is lower than the P&L charge due to carried forward losses, and the cash tax costs will increase in absolute terms for 2025, but will still be very low compared to the P&L charge as we continue to utilise historic losses. And we expect cash tax to be around 4% of the adjusted profit after tax, before tax, sorry. So we expect cash tax to be around 4% of the adjusted profit before tax. Now, when you combine all of this with the restructuring cash guidance of 40 to 50 million pounds that I've already given, we'd expect leverage to be below two times EBITDA in line with our capital allocation policy. So to repeat, free cash flow after interest in tax is guided at in excess of £100 million. This cash flow will be weighted to the second half of the year in line with historic Melrose seasonality. And as such, free cash flow will be negative in the first half. So to conclude from my side, the business has performed well in 2024 and despite continued supply chain challenges. And for 2025, we expect the business to deliver on the profit target we set two years ago. And in addition, 2025 will be the year that substantial cash will be generated, an important inflection point on our way to our longer term targets that I'll now hand over to Peter to talk about.

Thanks, Matthew. And let's now look further out and unlocking the promising potential of Melrose. We're very well placed as a leading tier one technology company. And of course, this has been reinforced by all the repositioning work we've done over the last few years. We've got a diversified portfolio covering civil and defense. And we also have engines and structures. And importantly, of course, not just the OE side of the business, but access to that lucrative aftermarket. And indeed, our technologies are on over 100,000 flights every day. And you name a major platform and we're on it with GKN Technology. And over 70% of those positions are sole source. And if you look at the structures business today, we're now the largest independent player in the market with global reach and local presence in the US, Europe and Asia. And this is important with world events. In engines, we have our unique portfolio of RSPs, which gives us this entitlement to long-term cash flows over the full life of the engines. These contracts cover an unparalleled 70% of all flying hours globally. So every time one of those engines goes into a shop visit, we get returns. And longer term, we have our breakthrough technologies, particularly around additive fabrication and our position on next generation engines. So this all provides a strong foundation for growth. We also have a clear and consistent growth strategy, which simply put, is based around three core elements. First, delivering growth from our existing positions. Second, expanding in selected target opportunities. And third, participating in next generation of aircraft. But to be clear, though, 90% of the plan we're presenting today is driven from this first element. We think this is important and a reassuring point. Effectively, as production ramps up and the aftermarket continues to grow, we step up in sync because of the established positions we have both in OE deliveries, but also through aftermarket activities. At the same time, we are on track with growing our business by gaining share and capturing new opportunities where we're advantage and we can generate attractive returns. This is well underway already as we have traction with additive fabrication, advanced air mobility, new military uncrewed vehicles and civil growth in China. And finally, we will continue to play our part with next generation aircraft. and also engines for the longer term. And this includes work on both of the leading narrowbody next generation engine developments and work with Airbus on sustainable wings for next generation of single aisle. Now, those strong foundations and our linked strategy for growth enable us to present our five year targets with conviction. So let's start on the revenue side. This, as I say, is predominantly driven by the platforms we're on. And we've assumed that by the time we get to 2029, the targeted build rates for the industry will be met. Now, clearly, there is some question mark at the rate at which OEMs will get there. But we're confident that these rates will be achieved within five years, given the record order backlogs on both the civil and the defence side. We're also assuming that flying hours will continue as the industry predicts with the resulting aftermarket growth coming to us. And this all reads through to high single digit combined annual growth rate in revenue through to 2029. In terms of operating profit, we expect a 17% plus CAGR to take us to over 1.2 billion with margins in excess of 24% for the group. The key drivers here are that volume drop through, ongoing efficiency and commercial excellence, and the positive mix from strong ongoing aftermarket growth. To be clear, the operating profit target includes 500 million of variable consideration from our engines RSP portfolio. Now that operating profit growth plus the reducing interest costs will give us a CAGR and EPS of greater than 20% over the next five years. And this excludes the benefits of further buybacks beyond the current programme. Our target for free cash flow is 600 million after interest and tax with further growth beyond. So let's get into that important cash bridge in more detail. This slide highlights the drivers to 600 million free cash flow over the next five years. The overarching point here is that the sources of cash are increasing and there is a decrease in the one time uses of cash. On the sources side, we have cash coming from the growth in operating profit, and this is from both divisions, including the non-RSP part of engines. The second element is the RSP portfolio maturing, giving good growth from GenX and XWB and contributions from the legacy V2500 and CFM56. Our current uses of cash will reduce at different rates over the period. The GTF program itself is currently consuming cash at this stage of its development cycle as it was expected. Going forward, we and our partners are increasingly confident that the GTF will be a highly successful engine family, especially with the imminent launch of the new Advantage variant. So the programme is on track to turn cash positive in 2028 as originally anticipated. We also expect the GTF powder metal headwinds to fall away in 2027 and the conclusion of our restructuring programme at the end of 2025. During this period, we'll also be driving an improvement in trade working capital, especially given it's above the level that we would want or expect given all the supply chain challenges we have right now. There are some other cash items which are included in the appendix, but hopefully this provides a helpful route map to the higher level of free cash flow. And to be clear, we have excellent visibility on each of these drivers. Now, we set out our capital allocation policy in August last year, and we're outlining it again today as a reminder of the clear prioritization. Our first priority is investing in the health of the business. This includes automation projects and growth opportunities with a focus naturally on the engines division. New opportunities in structures will typically be capital light with primarily customer funding. Now, given this model, we expect CapEx to be in the range of 1 to 1.2 times. And for clarity, this does include the additive fabrication CapEx we've announced previously. Balance sheet will remain strong through the period with a leverage between 1.5 and 2 times while targeting investment grade metrics over time. We would expect for leverage, if you put this together, to naturally reduce through the period, given the improving profit and the cash generation dynamics in the years ahead. And this provides opportunities for further returns to cash, in cash, sorry, to our shareholders, both through the ordinary dividend, as well as potential further share buybacks. Now, we'll consider this based on an assessment of our free cash flow and leverage each year with our next decision point in March 2026. We think this capital allocation policy provides a valuable element of our overall equity case. So that's the overall group story. Let's now go into each of our divisions. In engines, you can see the target here over the five year period is high single digit growth on the top line. This is driven not only by increasing build rates, but of course, the aftermarket reading through. Operating margins will continue to expand from where we are today to mid to high 30s. And this is driven particularly by the aftermarket, including variable consideration from our RSP portfolio. The structures business will continue to grow at around mid single digits, driven by the increase in production rates. Our margin target now goes well beyond the 9% we've guided to for this year. And we can see a clear trajectory to get this business to low teens margins. Both these businesses are uniquely positioned with proprietary technology and diversified portfolios. In engines, there's much focus on our RSP portfolio, and rightly so. But it's really important to recognize that about half our engines business sits outside of these RSPs. This includes commercial contracts where we have long term agreements to supply military and civil customers on an original equipment basis. We have government partnerships which are performing particularly well because they're defence related. And we have our expanding parts repair business, which is meeting the growing demand for aftermarket parts. And again, this is where we've invested our shareholders capital for growth. Turning to our structures business, this is a design-led business with deep technical capability. We're not a manufacturing business that builds to print. We embed our technology onto our customers' platform, and we do that in four core areas. In wings and in other aero structures, with deep OEM relationships, particularly with the likes of Airbus and with the U.S. defense primes. We have a leading global electrical distribution business, which is clearly set for growth given the proliferation of electrics on aircraft. And finally, our advanced transparency business serving civil and defence customers. Now, we're going to talk a little bit more about growth in each of these businesses in turn. But let's start with our most exciting investment for the future. And that's engines additive fabrication. So as you've just seen, this technology is a revolutionary new way to manufacture structural components, which is at the heart of what we do. But the key reason why it's so in demand is because it addresses supply chain shortages, which in some cases with forgings and castings is actually gating the production rate of aircraft. Now, we're the only company to have certified structural aerospace parts flying on engines today. And our task, therefore, is to now certify more parts. And we've got a very long list of opportunities. And we're working through these in partnership with all the major OEMs. We're also working on the industrialization side. And as you may have got a sense from that video, it's a modular approach. We don't need to build very large factories in one go. You can create a module which consists of robots, our proprietary software and the appropriate tooling. We're able to replicate these advanced manufacturing cells and our plan is to build capability to start with in our existing factories and then time alongside our OEM customer facilities. We've got some great traction here and it's only increasing over time. Our target is to generate 50 million pounds of incremental profit by 2029. We've got a clear roadmap to make that happen. So finally, a word on our expansion in structures, which is underway and typically employing a more capital light approach. An example of this is the F-35 canopy, where we've been asked by the US government to increase our production. We're delighted, of course, to be able to do that, but not using our capital up front. So in discussions with the US government and in close partnership with our customer Lockheed Martin, we've secured funding to be able to build a factory to double our capacity. And on the back of that, we'll have a 10-year contract to supply this important operational fleet. Now, a very different example, but uses the same sort of approach, is our expansion in the China civil industry. This is going to represent a significant part of the global aerospace market in the years ahead. So an important play for us. We're working here through a local for local strategy with much of the capital funding coming from our local JV partner, Comac. So hopefully here you've got a sense of a clear growth strategy based on established positions, plus appropriate degree of ambition around new technologies. We believe this all leads up to a compelling equity case. Our business sits in a structurally growing market. We're well placed with established presence on all the world's leading aircraft, and we have this unique portfolio in engines with an entitlement to the aftermarket for decades to come. Beyond this structural position of where we sit, we're a business and a team with a track record and real momentum around business improvement and making sure we get the very best from our assets in terms of productivity and cash generation. And coupled with our new opportunities that are coming through, In the future and today, we're very well placed. Now, I'm not going to repeat the targets again. They're out there for you to see. But what I can say is all our focus is on delivering these targets and positioning for the longer term because these are not the peak. And with that, we'll open to questions. Thanks, Sam. Shall we start with you? Oh, sorry. Just a second. If you could just introduce yourself, that would be helpful.