Melrose Industries Plc · LSE:MRO
Melrose Industries — H1 2022 Earnings Presentation
46 slides from Melrose Industries's earnings presentation, Sep 8, 2022
Slide 1: Melrose Industries PLC
Buy Improve Sell Strictly private and confidential Melrose Industries PLC Section 1: Intention to demerge Automotive and Powder Metallurgy Section 2: 2022 Interim Results – six months ended 30 June 2022 8 September 2022 Buy Improve Sell
Slide 2: Disclaimer
Disclaimer This presentation has been prepared by or on behalf of Melrose Industries PLC (“Melrose”). The information set out in this presentation is not intended to form the basis of any contract. By attending (whether in person, by telephone or webcast) this presentation or by reading the presenta
Slide 3: Key messages
Buy Improve Sell Key messages The revenue and profit numbers included in this presentation are shown in round millions. Unless otherwise stated, growth metrics are at constant currency and adjusted for disposed businesses, material in size to a division, to ensure a like-for-like basis 3
Slide 4: Key messages
Key messages Intention to demerge Automotive Establishing two independent UK quoted PLCs, an Automotive Group1 (‘DemergerCo’) and Melrose with Aerospace, to give each their best positioning to and Powder Metallurgy: deliver superior returns to shareholders, including from transformative acquisitions
Slide 5: Section 1: Intention to demerge the Automotive Group
Buy Improve Sell Section 1: Intention to demerge the Automotive Group1 ▪ Strategic rationale and timeline ▪ Shape of the two groups on demerger – six key points 1. Comprises the Automotive, Powder Metallurgy and Hydrogen group of businesses 5
Slide 6: Intention to demerge the Automotive Group
Buy Improve Sell Intention to demerge the Automotive Group1 Strategic rationale and timeline 1. Comprises the Automotive, Powder Metallurgy and Hydrogen group of businesses 6
Slide 7: Strategic rationale and timeline
Strategic rationale and timeline ▪ To separate the Melrose portfolio into: ‒ An Automotive Group1, retaining senior Melrose guidance and support; and ‒ The Melrose Group continuing its “Buy, Improve, Sell” strategy, currently owning Aerospace ▪ This allows each Melrose shareholder to: ‒ Enjoy enhanc
Slide 8: Shape of the two groups on demerger
Buy Improve Sell Intention to demerge the Automotive Group1 Shape of the two groups on demerger – six key points 1. Comprises the Automotive, Powder Metallurgy and Hydrogen group of businesses 8
Slide 9: Shape of the two groups on demerger: Six key points
Shape of the two groups on demerger: Six key points ▪ Six key points (quantitative in nature and based on consensus1 views for 2022) 1 The relative size of each Group 2 The potential market recovery remaining Current margin targets, significant upside 3 a. Melrose (Aerospace) b. Automotive Group2 (D
Slide 10: Key point 1: Relative size of each group
Key point 1: Relative size of each group 1. Consensus1 views for 2022 (pre-central costs) Melrose (Aerospace) Melrose (Aerospace) pre-central costs Consensus1 £m 2022 Melrose Group today: Adjusted results2 Revenue 2,776 c.1/3 EBITDA3 (pre-central costs) 327 Consensus1 £m 2022 EBITDA3 margin % 11.8%
Slide 11: Key point 2: Potential market recovery remaining
Key point 2: Potential market recovery remaining 2. Further market recovery potential beyond 2022 consensus1 (back to 2019 levels2) Melrose Group today: Adjusted results3 Further market recovery potential beyond 2022 consensus1 (back to 2019 levels2) Consensus1 £m 2022 Group remaining Revenue 7,635
Slide 12: Key point 3a: Current margin targets in Melrose (Aerospace)
Key point 3a: Current margin targets in Melrose (Aerospace) – significant upside 3a. Aerospace on track to meet recently upgraded operating margin target Melrose Melrose (Aerospace) (Aerospace) Adjusted results1 pre-central costs Implied target EBITDA margin Consensus2 £m 2022 Revenue 2,776 18%+ EBI
Slide 13: Key point 3b: Current margin targets in the Automotive Group
Key point 3b: Current margin targets in the Automotive Group1 (DemergerCo) – significant upside 3b. The Automotive Group1 on track to meet operating margin targets Automotive Group1 Automotive Group1 (DemergerCo) (DemergerCo) Adjusted results2 pre-central costs Implied target EBITDA margins Consensu
Slide 14: Key point 4: Potential profit recovery remaining
Key point 4: Potential profit recovery remaining 4. Potential profit recovery remaining beyond 2022 consensus1 (if recovering to 2019 revenue2) Further profit recovery potential (if recovering from Melrose Group today: Adjusted results3 2022 consensus1 to 2019 revenue2) Consensus1 £m 2022 Revenue 7,
Slide 15: Key point 5: Cash generation dynamics transformed
Key point 5: Cash generation dynamics transformed 5. All GKN businesses have self-funded their restructuring projects from operational cash generation Cash generation since acquisition All GKN businesses cash generative in Melrose ownership (pre-interest and tax)1 Melrose Automotive Group2 (Aerospac
Slide 16: Key point 6: UK pension schemes now fully funded
Key point 6: UK pension schemes now fully funded 6. GKN UK pension schemes in surplus; commitment delivered ahead of schedule Melrose (Aerospace) At GKN acquisition At 30 June 2022 (2018) 116% funded1 81% funded1 at 116% funded1 acquisition Automotive Group2 (DemergerCo) 116% funded1 GKN UK pension
Slide 17: Summary: Shape of the two groups on demerger
Summary: Shape of the two groups on demerger Melrose Automotive Group1 (Aerospace) (DemergerCo) Relative size of the new groups c.1/3 c.2/3 Significant market recovery2 remaining c.35% c.15% Operating margin Operating margin 6.6% 14%+ 6.3% 11%+ Significant margin upside EBITDA margin EBITDA margin 1
Slide 18: Section 2: Interim results
Buy Improve Sell Section 2: Interim results ▪ Melrose Group highlights and cash generation ▪ Business update Buy Improve Sell 18
Slide 19: Interim results
Buy Improve Sell Interim results Melrose Group highlights and cash generation Buy Improve Sell 19
Slide 20: Interim results: Melrose Group highlights
Interim results: Melrose Group highlights Adjusted1 results Statutory results 2022 20212 2022 20212 Continuing operations £m £m £m £m Revenue 3,878 3,719 3,594 3,431 Operating profit/(loss) 171 196 (317) (156) Profit/(loss) before tax 128 114 (358) (275) Diluted earnings per share 2.2p 1.8p (6.3)p (
Slide 21: Interim results: Melrose Group cash generation in the first half
Interim results: Melrose Group cash generation in the first half Free cash flow1 Reconciliation of opening to closing net debt1 Cash flow Group Reconciliation of net debt1 Group £m H1 2022 £m H1 2022 Adjusted EBITDA2 349 Net debt1 brought forward (950) Lease obligation payments (24) Adverse foreign
Slide 22: Business update: well positioned for strong profit growth
Buy Improve Sell Interim results Business update: well positioned for strong profit growth Buy Improve Sell 22
Slide 23: Business update: H1 2022 versus H1 2021
Business update: H1 2022 versus H1 2021 Adjusted1 results H1 2022 H1 2022 H1 2021 H1 2021 Continuing operations H1 2022 Operating Operating H1 2021 Operating Operating £m Revenue profit/(loss) margin Revenue profit/(loss) margin Aerospace 1,366 67 4.9% 1,219 41 3.4% Automotive 1,997 78 3.9% 1,965 12
Slide 24: Positive momentum from H2 2021
Positive momentum from H2 2021 Automotive Powder Metallurgy 2000 7 600 14 1800 6 500 12 1600 Operating margin % Operating margin % 1400 5 10 400 Revenue £m Revenue £m 1200 4 8 1000 300 800 3 6 200 600 2 4 400 1 100 2 200 0 0 0 0 H1 21 H2 21 H1 22 H1 21 H2 21 H1 22 Inflationary revenue increase Infla
Slide 25: Active management in challenging markets
Active management in challenging markets Powder Aerospace Automotive Metallurgy Offsetting ▪ Fully offset YTD; initiatives ▪ Partially offset YTD; with ▪ Fully offset YTD; raw material underway to mitigate future risk unrecovered £30 million in H1 price surcharge mechanisms in inflation due to time
Slide 26: GKN Aerospace
GKN Aerospace 35% of Melrose1 Buy Improve 1. Based on adjusted H1 2022 revenue for all continuing businesses Sell 26
Slide 27: Aerospace: overview
Aerospace: overview Adjusted1 ▪ Industry continues to be impacted by post COVID-19 issues; but market results Growth vs recovery gaining pace £m H1 2022 H1 2021 Revenue 1,366 11% ▪ Sales growth of 11% versus H1 2021 – up 6% in Q1 and 17% in Q2 EBITDA 139 22% ▪ 65% increase in operating profit; margi
Slide 28: Aerospace: highlights
Aerospace: highlights Market recovery well underway and GKN gaining momentum ▪ Civil market anticipated to continue to improve throughout 2022; narrowbody ramping-up and winning opportunities in business jets ▪ Engine OEMs facing supply chain challenges; however, GKN engine deliveries largely on tra
Slide 29: GKN Automotive
GKN Automotive 52% of Melrose1 Buy Improve 1. Based on adjusted H1 2022 revenue for all continuing businesses Sell 29
Slide 30: Automotive: overview
Automotive: overview Adjusted1 ▪ Semi-conductor shortages continued to result in schedule volatility and supply results Growth vs Growth vs disruption £m H1 2022 H1 2021 H2 2021 Revenue 1,997 (3%)2 9%2 ▪ Volumes down 3% versus H1 2021, up 9% versus H2 2021 EBITDA3 190 (22%) 6% ▪ Inflation impacts be
Slide 31: Automotive: highlights
Automotive: highlights Strong underlying demand continues to be constrained by industry supply issues ▪ Sales continue to be constrained by ongoing supply chain shortages; significant level of pent-up demand remains ▪ Demand volatile in H1 with OEM changes at short notice; customer cancellations ‘in
Slide 32: Automotive: dual path electrification growth
Automotive: dual path electrification growth GKN electric vehicle/hybrid portfolio Core sideshafts eDrive systems & components Above market growth from differentiated core products Strong growth from new eDrive solutions required for xEV1 required for xEV1 ▪ Increased torque and power requirements d
Slide 33: GKN Powder Metallurgy
GKN Powder Metallurgy 13% of Melrose1 Buy Improve 1. Based on adjusted H1 2022 revenue for all continuing businesses Sell 33
Slide 34: Powder Metallurgy: overview
Powder Metallurgy: overview Adjusted1 ▪ Semi-conductor shortages continue to impact automotive demand; other results Growth vs Growth vs sectors less impacted £m H1 2022 H1 2021 H2 2021 ▪ Volumes down 9% versus H1 2021, partially driven by exiting low margin Revenue 515 (9%)2 12%2 US business; volum
Slide 35: Powder Metallurgy: highlights
Powder Metallurgy: highlights Automotive market constrained by supply chain, focused growth initiatives gaining traction ▪ Revenue impacted by automotive supply chain issues; significant pent-up demand remains ▪ Continued market share gains in electrification and higher-margin precision components ▪
Slide 36: Powder Metallurgy: exciting e-Magnets opportunity
Powder Metallurgy: exciting e-Magnets opportunity ▪ Growth in electric vehicles is demanding new supply chains for specialist components ▪ Global e-Magnet market for EVs is estimated at €3 billion1; Structural Europe and America growth expected to be ~25% CAGR1 market growth ▪ Currently 90% of globa
Slide 37: Sustainability: decarbonising technology
Sustainability: decarbonising technology Aerospace Automotive Powder Metallurgy Improving efficiency and sustainability Producing driveline solutions tailored to Focusing on supporting vehicle of current aircraft: electric vehicles: electrification: Wing of Tomorrow High efficiency, e-Differentials
Slide 38: Demerger recap
Demerger recap Melrose (Aerospace) Automotive (DemergerCo) ▪ Leading global tier one supplier on major civil and ▪ #1 in Driveline with ICE, hybrid and EV technology defence platforms leadership; supplies 90% of OEMs Strong market ▪ Attractive engine contracts with excellent long-term ▪ #1 in supply
Slide 39: Appendices
Buy Improve Sell Appendices 39
Slide 40: Intention to demerge the Automotive Group
Buy Improve Sell Intention to demerge the Automotive Group1 Structure 1. Comprises the Automotive, Powder Metallurgy and Hydrogen group of businesses 40
Slide 41: Structure
Structure ▪ GKN Automotive and GKN Powder Metallurgy1 businesses intended to be separated from the Group into DemergerCo, an independent company headquartered in the UK with shares listed on the premium segment of the Official List and admitted to trading on the Main Market of the London Stock Excha
Slide 42: Structure
Structure DemergerCo board ▪ Led by an independent non-executive chairman with selected non-executive directors in line with UK Corporate Governance Code ▪ CEO and Finance Director of GKN Automotive will assume these roles on the DemergerCo board ▪ Melrose CEO and Finance Director will take up addit
Slide 43: Interim results
Buy Improve Sell Interim results 43
Slide 44: Reconciliation between statutory and adjusted results
Reconciliation between statutory and adjusted1 results Cash Continuing operations spent in £m Total H1 2022 Statutory operating loss (317) Amortisation of intangible assets acquired in business combinations 223 - Restructuring costs 82 53 Impairment of assets 20 - Exchange movements not hedge accoun
Slide 45: Foreign exchange → forward looking
Foreign exchange → forward looking HY 2022 HY 2021 FY 2021 Exchange rates USD EUR USD EUR USD EUR Average rates 1.30 1.19 1.39 1.15 1.38 1.16 Closing rates 1.22 1.16 1.38 1.16 1.35 1.19 Income Statement volatility – Translational impact Balance Sheet volatility Impact on adjusted1 operating profit o
Slide 46: Some helpful data for 2022
Some helpful data for 2022 Continuing operations Income Statement Cash Flow Item H1 2022 adjusted1 results H1 2022 adjusted1 results Adjusted1 operating profit £171 million N/A £22 million (includes a divisional Central costs (£19 million) LTIP charge of £3 million) Free cash flow1 N/A (£104 million