Melrose Industries PLC

Hello everyone and welcome to Melrose half-year results for 2026. The last six months have been a busy and an important period for the group as we've continued to execute our growth strategy as a leading global aerospace technology business. We've maintained our positive momentum against the backdrop of strong civil and defence demand. Now before we get started I'd like to welcome Ross McCluskey to his first set of results as Melrose CFO. We're delighted to have Ross on board and leading strongly right from the start. We delivered a good first half performance with continued growth in revenue and profit. We also maintained our increasing cash trajectory with a strong year on year improvement in free cash flow. The markets we serve continue to evolve and the underlying demand story remains compelling. On the civil side, order backlogs are at record levels with production ramping up and the aftermarket continues to perform strongly. In defence, ongoing conflicts and geopolitical uncertainty is driving up spending commitments and stimulating the rapid development of emerging technologies. In May, we had an incident at our Garden Grove facility in California. This site is a global market leader in the production of aerospace acrylic products and the issue involved the storage of an associated chemical. Now most importantly, the incident was managed carefully with no reported injuries or contamination and we're working hard with regulators now and our customers to resume full production in a safe and timely manner. I'll come back to this in more detail later. More broadly, I'm encouraged by the progress we're making in the areas we're investing for future growth. We've identified target opportunities where we have proprietary technology and a clear opportunity to win, particularly in engines additive and in defence uncrewed vehicles. So stepping back, our technology is in demand both from existing positions and emerging opportunities. We are navigating challenges along the way, but we have a clear path to unlocking value within Melrose. It's about execution and this is where our focus remains. Let's turn now to some highlights from the first half. From a financial perspective, we delivered a 10% increase in revenue and that top line growth translated into a 16% improvement in operating profit to nearly £350 million. We also generated a £67 million year-on-year improvement in free cash flow relative to last year. Operationally, our priority is always to keep our people, the flying public and our armed forces safe. In the first half, we had a 25% reduction in total incident rate and this means safety incidents are now down over 65% over the last three years. As we've said previously, our inventory levels are higher than we would like due to supply chain issues, and we're addressing this systematically. In the first half, we reduced DIO by seven days. And finally, we improved productivity by a further 230 basis points in the first half. Our operational improvements are being driven by our lean operating model that we call the Brilliant Basics. This model is becoming increasingly embedded across our business and is central to delivering production ramp-up successfully and profitably. And I'll give some examples of this in action shortly. From a commercial perspective, we've had a busy first half. This includes expanding our engine fan blade repair business in San Diego, which is serving a growing installed fleet. This builds on our recent investments and reinforces our position in an attractive and growing aftermarket. In defence, we're participating broadly across a range of emerging uncrewed programmes. This includes BAE Systems' collaborative combat aircraft, Brontanax, that was unveiled at the Farnborough International Airshow last week and where we're deeply involved in both design and production. And finally, additive fabrication, our breakthrough technology that helps address forging and casting constraints within the industry. And here we've continued to make good progress, including development work, with Pratt & Whitney on the F-135 programme. Before we get further into the H1 results, it's important we cover the incident at Garden Grove. For context, our Garden Grove facility is a global leader in the production of aerospace transparencies, including fighter jet canopies and passenger cabin windows for civil aircraft. We have proprietary technology and know-how built up over 60 years, and we produce a significant proportion of the world's aerospace-grade acrylic. We've invested significantly in the site alongside the US government who've underpinned this with a $150 million expansion to double our F-35 output. Now at the end of May, we had a thermal incident within one of the storage tanks for the MMA chemical we use in our acrylic production process. To ensure safety, production was immediately halted and the local emergency services evacuated nearby residents and businesses. Over the course of five days, we worked alongside local agencies to contain the risks and I'm relieved to say there were no reported injuries, contamination or leaks. As the diagram at the bottom of this slide shows, our Garden Grove site operates in two connected parts. First, we make the base acrylic using MMA and our proprietary production technology. We then take that base acrylic and form, laminate, coat and assemble it into canopies and windows. We've been working very closely with regulators and with the full support of our customers and the US government to restore operations safely. The manufacturing side reopened in July with now around 500 employees back at work producing transparencies for customers using existing material and third-party sourced acrylic. In parallel with this, we're working hard to restart the base acrylic production and we have some important weeks ahead. Our work here is being done in close cooperation with the regulators, as well as customers and the US government who recognise the strategic importance of the site's production within the US industrial base. Beyond the formal regulatory approvals required, we'll give the local community safety reassurance and we're also exploring some form of compensation for the disruption caused by the evacuation. We're also addressing a range of ongoing legal cases regarding the incident. Now, we're making progress here with managing the situation across multiple stakeholders. However, there are still uncertainties about the timing of acrylic production restarting, wider regulatory and legal costs, and our insurance coverage is under review. So with all this in mind, we have paused the current share buyback until the situation is clearer. So let me now hand over to Ross to take us through our H1 results in more detail.

Thanks, Peter, and good morning. I'm delighted to have the opportunity to talk about my first set of interim results as Melrose CFO, having joined the group in early May. We have delivered a good set of results in the first half, with revenue, profit and cash in line with our expectations pre the impact of Garden Grove. Group revenue grew by 10% on a constant currency basis, led by a strong performance in the engines division. Group operating profit was up 16% to £347 million, driven by positive revenue growth and the continued focus on operational and efficiency improvements underpinned by our brilliant Basics programme. This enabled us to deliver a 50 basis points increase in H1 margin to 18.5%, while EPS improved by over 20% versus the same period last year. We delivered positive free cash flow in the first half of £30 million, resulting in the maintenance of our leverage ratio at 1.8 times EBITDA. This positive cash position was achieved despite a net cash outflow from factoring in the first half. Our results in H1 were impacted by the Garden Grove incident in late May. Group revenue and profit were 60 million and 9 million lower respectively. And adjusting for this impact, we would have delivered revenue growth of 11% and operating profit growth of 19%. Turning to slide seven and focusing on our engines division. We are pleased by the performance of engines in H1 with broad-based growth across the product lines. Revenue was up 19%, with OE accelerating to 23%, and aftermarket continuing at the mid-teen levels we saw in 2025. As you can see, we've provided some additional clarity on the drivers of our revenue growth. Our civil RRSPs grew by 18%, with notable growth in the GTF, GenX, and V2500 platforms. Within this, variable consideration increased to 206 million pounds in line with our full year expectations of 340 to 380 million pounds. We have continued to make commercial progress in our RRSPs, as seen with the recent agreement with Pratt & Whitney to include low pressure compressor vanes on the 15 and 1900 engine platforms. Government partnership growth of 29% was strong, primarily driven by work on the RM12 engine for the Gripen, including the delivery of the first upgraded engine to the Swedish Armed Forces as part of the Enhanced Performance Programme. This reinforces our position as a core strategic partner to the FMV. Repairs continues to perform well with growth of 27% supported by higher fan blade volumes and with the recent contracts announced with Rolls-Royce and Pratt & Whitney providing additional opportunities to grow share. Our site in Johor, Malaysia delivered a particularly strong H1 while our San Diego site completed its first repair of a highly engineered Blisk component demonstrating its strong technical capability. It should be noted that we are lapping a period of tariff disruption for our repairs business in H1 2025. We delivered positive operational leverage in the first half with profit growth of 21% and margin expansion of 40 basis points or 100 basis points, excluding variable consideration. So overall, a strong performance from the engines division. Turning to airframes on slide 8, reported revenue grew by 4% while profit declined by 1%. Adjusting for garden growth, growth would have been 6% and 13% respectively. Defence grew strongly, up 14% driven by the F35, C130 and NH90 and the benefits of work done to ensure the portfolio is sustainably priced. Defence continues to develop commercial opportunities underpinned by positive momentum in NATO members' spending commitments. And later in the presentation, Peter will talk about opportunities we are developing across both our engines and airframes business for uncrewed vehicles, where we continue to work with a number of partners. On the civil side of the business, revenue was marginally lower than 1%. This was primarily driven by a reduction in customer inventory, notably on the A320 platform. Growth in widebody benefited from good momentum from the A350, while business jet revenue was solid despite ongoing supply chain challenges. We also made progress securing additional aftermarket opportunities, particularly in EWIS. Margins for airframes demonstrated solid progress on an underlying basis, improving by 50 basis points, excluding garden growth. And again, our brilliant BASICS program has contributed to margin expansion as evidenced by our H1 productivity improvement of three percentage points and 12% improvement in the cost of poor quality. We've also made progress in improving the productivity at one of our Netherlands manufacturing sites. Overall, end market demand remains buoyant with Airbus and Boeing recording over 1300 new orders in the first half. and we are also encouraged by the double-digit percentage increases in H1 deliveries from both, demonstrating some gradual easing of the broader supply chain challenges. This bodes well for an improved civil outlook into H2 2026 and beyond as the volume ramp builds. Let's move on to our cash performance for H1 on slide nine. We are pleased to report a positive free cash flow performance in H1 of £13 million, representing a £67 million improvement versus the same period in prior year. Importantly, this was achieved despite a reduction in our factoring balance, which resulted in a net cash outflow of £50 million in H1. Pre-factoring, our cash flow in the period would have been positive £28 million, and I will come back to our approach to factoring shortly. Our year-on-year improvement in cash was driven by a number of key factors, namely improvements in underlying profit generation, the anticipated reductions in GTF PMI payment and restructuring cash spend, and a net neutral working capital position versus outflow in each one prior year. It should be noted that we did benefit from an unexpected timing acceleration of some customer receipts at the end of June, worth about 20 to 25 million pounds. Within H1, we incurred exceptional cash costs of five million pounds in relation to the Garden Grove incident. On a net basis, our cash impact resulting from Garden Grove was actually a net positive seven million pounds, with an operational working capital unwind more than offsetting the incurred cash costs. and I'll come back to our outlook for H2 for Garden Grove shortly. Capital expenditure was up slightly versus prior year to £52 million and we continue to anticipate an acceleration of spend in H2 on CapEx in line with a full year guidance of £120 to £140 million. Net interest and tax increased by around £7 million versus prior year due to higher cash interest costs. And the GTF payment of £27 million was in line with our full year guidance of £50 million. And we continue to expect to resolve this issue within the £200 million envelope advised to us by Pratt & Whitney. And just as a reminder, our underlying cash generation is seasonally weighted towards H2O. Turning to page 10, you can see the bridge to our net debt number of 1.53 billion as of the end of June, equivalent to 1.8 times net debt to EBITDA, which is down from two times at this time last year. Our period end leverage sits well within our stated leverage policy of 1.5 to two times EBITDA. And during the first half, we have returned around £130 million to shareholders, 60 of which was with dividends, with the rest coming from our share buyback programmes. The previous £250 million programme was completed in Q1 and £12 million of the current £175 million programme has been spent. As communicated in our announcement this morning, we have paused the £175 million programme until we achieve greater clarity on the impact of garden growth. As I mentioned, I'd like to take the opportunity to address our approach to factoring. Importantly, we continue to believe it represents an efficient source of capital for the group. In terms of future guidance, we are clarifying that we will cap the growth in our year-end balance to be no more than the growth in group annual revenue, excluding the impact of FX. To aid understanding, we are now providing a guidance range of our full year expected balance based upon the group's growth outcomes. And to enhance our disclosure clarity, our cash flow presentation will now split out movements pre and post factoring, and you saw this on our previous slide. I've also included an additional slide in the appendix, which provides a further bridge of our factoring balance between cash and FX. Now, turning our attention to the Garden Grove incident. Peter has already spent some time discussing what has happened and I will now address the financial split between operational and exceptional impacts. Operationally, our H1 impact was a negative £60 million on revenue, £9 million on profit and positive £12 million on cash. Now, given the uncertainty regarding the timing for full resumption of site acrylic production, we are guiding to a monthly run rate impact for H2. Based on anticipated levels of activity, we expect the site to deliver at around about 50% of its normal monthly revenue, which will impact top line by around about £6 million per month. We expect this to fully flow to profit and cash given we are operating with higher production costs from bought in acrylic and a change in business mix towards repair. The actual site-level cash impact for H2 will depend upon the timing of full production opening and the rebuild of WIP and working capital. From an exceptionalist perspective, we incurred £13 million of P&L costs in H1 from the initial response, recovery and advisory costs, £5 million of which was paid in cash in H1. For H2, we currently anticipate additional exceptional costs of between £25 and £30 million. This excludes the impact of any potential legal, regulatory or compensation scheme processes. Nor does it include the potential for any insurance-related recoverability. We are closely monitoring the situation, but given the uncertainty that persists, we have made the appropriate decision to pause our current BiPAP programme until we have greater clarity. We will of course provide further updates as appropriate. Turn into our outlook for 2026 on page 12. At a group level, we are reiterating our full year guidance for the current year, excluding the impact of garden growth I just outlined. We continue to expect robust revenue growth in 2026, driven by OE volume ramp and the strength of the aftermarket. We are guiding to revenue from between 3.75 billion to 3.95 billion, which at the midpoint represents like-for-like revenue growth of circa 10%, in line with our H1 performance. This revenue growth continues to be weighted towards engines. We are guiding to a pre-Garden Grove operating profit of between 700 and 750 million pounds. And at the midpoint, this represents profit growth of 16%, again in line with our H1 delivery. Underlying cash flow is expected to be in the 150 to 200 million pounds range. So to wrap up, we have delivered a good performance NH1 while managing through the garden growth situation from May. Revenue and profit both grew by double digit percentages with margin expansion and positive free cash flow. While the precise impacts of garden growth are difficult to quantify at this stage, we have taken steps to provide additional financial flexibility. And with that, I will hand back to Peter.

Thanks, Ross. I'll now talk about the longer term outlook and the progress we're making executing our growth strategy. Let's start by briefly touching on our markets. The headline message here is that the structural growth drivers remain very strong. Indeed, the challenge for the industry is not demand, but supply. On the civil OE side, backlogs have continued to grow in H1, with encouraging orders for widebodies as well as the A220. The major OEMs are now targeting strong build rate increases every year to the end of the decade, and this will drive growth in both our civil airframes and engines businesses. Engine flight hours, which drive our aftermarket business and our RSP portfolio, have also remained strong. The conflict in Iran and increasing jet fuel prices has raised concerns about potential aftermarket reductions in 2027 and beyond. However, flying activity has been resilient and the outlook remains positive, especially given constrained shop visit capacity. Our RSPs give us good exposure here as we have an aftermarket entitlement on over 70% of global flying hours. Defence largely speaks for itself. We're continuing to see increasing commitments across NATO, particularly with a greater proportion of European nations' GDP being allocated, as well as further investment in the US. This is benefiting our existing platform positions such as the F-35 and Gripen, both in OE and the aftermarket, as well as driving rapid developments in uncrewed vehicles and missiles, which are attractive growth markets for us going forwards. So stepping back, demand is our friend and our focus is on executing our strategy to capitalise on our position in these growing markets. As many of you know, we have a clear and consistent growth strategy which is built around the three waves shown on this slide. The first is delivering growth from our existing platform positions. We have embedded technology on all the world's leading aircraft, and as production rates increase and the aftermarket continues to expand, we will grow alongside our customers. Around 90% of the value we'll create over the next few years will come from these existing positions. The second wave is expanding in targeted new opportunities where we have differentiated technology and a clear right to win. We're deploying capital selectively in these areas, such as additive fabrication, and around 10% of our financial plan to 2029 is driven by these opportunities. The third wave is positioning the business for the next generation of aircraft. Here, our technology continues to be in demand in both civil and defence programmes, creating opportunities for growth over the longer term. So three clear waves to create value. Let's now turn to the first and most important of these, delivering growth from our existing platform positions, starting with engines. Engines' strong performance in the first half was driven by continued growth on our core programs, including the GTF, GenX and XWB, together with the ongoing cash contribution from our portfolio of 19 RRSPs. In H1, we expanded our scope within the GTF program, and more broadly, we're encouraged by the reduction in GTF AOGs, the GTF Advantage entering service, and progress with the Hot Section Plus upgrades. We remain confident that the GTF program will become cash positive for us in 2028. We've continued to strengthen the business operationally and commercially, including new multi-year repair agreements with both Rolls-Royce and Pratt & Whitney, and we're expanding our blade manufacturing capacity in North Charleston to support future growth in advanced engine components. We're facing significant demand growth in engines, and it's essential that we deliver the ramp-up successfully for all stakeholders. And the key to this is our lean operating model, which we call the Brilliant Basics. This focuses on the core elements of operational excellence, daily management, breakthrough delivery, and problem solving. Our approach is gaining traction and is driving improvements in quality, delivery, inventory, and productivity. And we're also applying the brilliant basics in cooperation with our customers and supply chain partners. A great example of this is working alongside GE at our Talasee facility, where we manufacture GenX fan cases for Boeing 787. We ran three Kaizen events at the heart of the operation and these delivered a 90% reduction in inspection times, improved yield in the core composites workflow and a roadmap for increased autoclave throughput. You can see us in the photo in front of one of them here. This event underpins the planned production ramp-up from around 5 cases per week today to around 10 cases per week in the years ahead. More broadly, we're investing heavily in production capacity and automation to increase our build rates for the Gen X, XWB, and GTF, ensuring we're ready to support the strong OE ramp-up of these important engines. Going forward, we'll therefore benefit from increasing engine production rates, growing aftermarket activity, and higher RSP cash generation from newer engines entering shop visits where we have a greater share. Let's turn now to airframes. The story here is similar in many respects. Unprecedented civil and defence backlogs provide a long runway for future growth, especially as we're now the world's largest independent airframes business. Industry production rates are increasing, although they're still constrained by supply chain issues. In the first half, we continue to invest in capability, capacity and automation across our full portfolio of aerostructures, wiring transparencies, landing gear and ice protection systems. We're increasingly leveraging our global footprint to serve customers locally and cost-effectively too. For example, in the first half, we progressed our global hub for wiring in Mexico and we started producing glass windows in China for the aftermarket. Operationally, I'm encouraged by the progress we've made in the Netherlands in recent months. Following the production transfers we discussed at the full year results, output and productivity have improved significantly. As with engines, these improvements are being driven by brilliant basics. And a good example here is Hyggeveen, where we've applied our lean tools to supplier quality management. By working systematically with our problem-solving approach, we've achieved an 80% reduction in customer issues linked to supplier parts, driving both better delivery performance and lower costs. Looking beyond the first half, the opportunity remains clear. Our focus is on converting record order backlogs into profitable growth and increasing cash flow, expanding our participation in the aftermarket, and continuing to drive operational improvements through lean, digitalization, and AI. Now, alongside this existing platform growth, we're also progressing the second wave of our strategy, investing in targeted new opportunities. So let's now turn to that. A good example of our new opportunities is the Defence Uncrewed Aerial Vehicle Market or DUAVs. This is a rapidly evolving market given the changing nature of warfighting that we've seen in Ukraine and Iran. It's a dynamic and growing market and it's attractive for us as we have three distinct routes to market that leverage GKN Aerospace capabilities. The first is on the airframe side, where we're building on our established strength in advanced composites and structures. We're participating across a range of national programmes and platform sizes with the combination of deep engineering design capability and our production capabilities in key NATO sovereign nations, including UK, US, Netherlands, Sweden, Norway and Germany. Examples here include Anduril's Thunder programme and BAE's Brontanax programme, which I mentioned earlier. The second path is on the engine side. Here we're developing a range of engines for uncrewed applications starting at the lower end of the thrust range and building our established capability as the engines OEM for the European Gripen fleet. Now in the centre of this slide is what is effectively a new market for us combining our airframes and engines capabilities to deliver integrated systems and establish us as an integrated OEM player in this field. The flagship development here is our work with the Swedish FMV to bring a one-way effector platform to market. This vehicle will take flight next year. So put together, we're addressing a range of sophisticated operational needs by leveraging GCN's technologies and capabilities. Another example of where we're investing significantly is engines additive fabrication. At its core, this proprietary technology is about creating a new way of manufacturing structural components for gas turbine engines, both in aerospace and in industrial gas turbines. The availability of large-scale, sophisticated forgings and castings is an industry constraint, and we've developed a proprietary manufacturing capability that provides an alternative approach for a range of components. Put simply, we're able to manufacture and assemble complex structural components in new ways. As part of the solution, we used our patented laser wire deposition technology, which is attracting substantial interest across the industry. Here, we print structural components using robots and lasers to melt titanium or super alloy wire in inert gas chambers. We produce near final form parts, which are then machined to use with very high buy to fly ratios. Today, we're the only company with a certified additive manufactured structural part on commercial aircraft engines, namely the GTF fan case mount ring. We're now working on expanding the portfolio by gaining more certifications and with some good momentum in the pipeline in H1. We're also now producing 100% of that GTF fan case mount ring using additive, and we're working on improving productivity, reducing cost, and improving repeatability at scale. We're exploring a modular factory approach that would enable us to rapidly scale production wherever it's needed to. This is technology that is in demand today and will become increasingly important for the future. It strengthens our position on existing platforms, expands our scope with customers and creates attractive opportunities for the longer term. And this brings me to the final wave of growth, next generation. This slide shows that we're already deeply embedded across many of the programmes that will shape the future of flight within both civil and defence. On the civil airframe side, we're working closely with customers on the next generation of single aisle aircraft. This builds on our expertise in advanced composite structures where we already manufacture some of the world's largest load-bearing components. programmes such as the Wing of Tomorrow and Suswings are defining future aircraft design with developments such as folding wings coupled with new materials and manufacturing methods. In civil engines, we're the only design partner positioned on both current next-generation single-aisle engine development programs. That's the CFM Rise and NextGen GTF. We're also involved with the Rolls-Royce UltraFan plus longer-term EU projects in hydrogen electric propulsion. Across these programs, we're leveraging our expertise in advanced composites, lightweight structural component design, and of course, additive fabrication. On the defence side, we're involved in the next generation of combat aircraft through programmes such as GCAP, alongside opportunities in missiles and canister systems. In defence engines, we're building on our established position supporting the Gripen fighter fleet, while also developing propulsion technologies for the next generation of uncrewed platforms and future combat aircraft with partners including Pratt & Whitney and GE. So we are playing an influential role across our markets. And we're doing this as a design-led tier one partner alongside our customers and also often with government support. These next generation opportunities are important for long-term growth. So this covers the three waves of our strategy. And I'd now like to turn to how all this contributes to growing cashflow. As we've said before, there are three key drivers of our free cashflow. These are clear and consistent. The first is growing operating profit. You've heard us talk about the production ramp, the continued growth of the aftermarket, our operational improvement programmes and our expansion into new areas. Growing profit in our core business combined with strong cash conversion remains a foundation of our free cash flow story. The second is our RSP portfolio. Today, 17 of our 19 RSP programmes are cash generative and as those engine fleets continue to mature and move further into their aftermarket phase, the associated cash generation will continue to increase. And the third is the GTF. As we've discussed, the programme remains in its investment phase today, but we expect it to become cash positive in 2028. As the fleet matures and GTF advantage penetration increases, the programme will become an increasingly important cash contributor. It's also worth stepping back and looking at what drives the RSP cash generation more broadly. In the near term, we'll benefit from continued growth of our newer engine programmes, the GTF, GenX and XWB. As those fleets grow and shop visit volumes increase, our higher program shares on these engines will provide a growing contribution to aftermarket cash flows. At the same time, the mature engine fleets continue to generate valuable aftermarket cash flows through extended in-service lives before slowly declining late in the decade. We're already investing in the next generation engines and expect this to ramp up steadily in the early 2030s, pending any decisions we make on future RSPs. All of these drivers underpin our confidence in the path to £600 million of free cash flow in 2029, with cash generation continuing to grow thereafter. So in closing, it's fair to say it's been a busy and important first half for us. We've maintained positive momentum with our financial performance, particularly with improved H1 operating cash flow. The incident at Garden Grove has been challenging, and while we've made progress, there are uncertainties for us to navigate carefully from here. That said, we have a clear strategy to capture market growth and expand our technologies. We're therefore confident of unlocking value from Melrose, and our focus remains on executing our plan with grip and determination. And with that, we'll open to questions.