Melrose Industries Plc · LSE:MRO
Melrose Industries — Investor Day (April 2019)
61 slides from Melrose Industries's investor day presentation, Apr 3, 2019
Slide 1: Melrose Industries PLC Investor Day Presentation
Buy Improve Sell Melrose Industries PLC Investor Day Presentation 3 April 2019
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: Contents
Contents 1. Introduction 2. Aerospace 3. Automotive 4. Closing summary Buy Improve Sell 3
Slide 4: Introduction
Buy Improve Sell Introduction Buy Improve Sell 4
Slide 5: How Melrose creates value
How Melrose creates value Melrose approach Melrose performance Melrose business model is simple and successful through many cycles 1 Identify underperforming industrial assets £1 £17.85 Invested on the first today1 deal in 2005 2 Buy at an appropriate price, disciplined approach 3 1 Average Improve
Slide 6: The previous results
The previous results Melrose operating margin improvement How Elster and Nortek operating margin improved +9ppts 24% (>30% improvement) +1ppt 22% (>70% improvement) (>60% improvement) 18% +2ppts 1 16% (>40% improvement) +6ppts 15% 15% (>40% improvement) 13% +1ppt 11% +1ppt 10% 9% +6ppts +4ppts Entry
Slide 7: GKN common themes (once again)
GKN common themes (once again) Good brand and product... Well engineered Well positioned BUT Over complicated structure Corporate politics a major distraction Poor business culture No clear responsibilities Time wasted Lack of clear vision c. 65% of costs Poor procurement functions Unc
Slide 8: The solution
The solution You are about to hear it Margin improvement only requires limited sales growth, therefore the required actions are largely within our control Forces businesses to address their issues Adjusts focus, management and incentives Ends politics! Buy Improve Sell 8
Slide 9: GKN targets
GKN targets 1 Shareholders equity Aim to double shareholders equity in 3 to 5 years 2 Operating margin targets 12% 10% 14% target target target These targets equate to a blended GKN operating margin of >11%1, higher than the >10% promised on acquisition 3 A disciplined approach to cash and capital W
Slide 10: Aerospace business update
Buy Improve Sell Aerospace business update Buy Improve Sell 10
Slide 11: Introduction
Introduction Appointed GKN Aerospace CEO in November 2017 Previously CEO and Chairman of Fokker Technologies, joining GKN Aerospace with the acquisition in 2015 Previous roles included: ‒ COO Fokker Technologies Hans Büthker ‒ CEO Fokker Aerostructures Chief Executive Officer of GKN Aerospace
Slide 12: Agenda
Agenda Tier 1 supplier with blue chip customers Business and market Well positioned on growth platforms overview Strong and growing demand in key markets 2018: a year of strengthening and progress ‒ New structure, leadership and value drivers ‒ Delivering on priority number one: North Americ
Slide 13: GKN Aerospace business overview
GKN Aerospace GKN Aerospace business overview Buy Improve Sell 13
Slide 14: A leading global tier one Aerospace supplier
A leading global tier one Aerospace supplier Aerostructures Engine Systems Special Technologies 63% 32% 5% £2.2 billion £1.1 billion £0.2 billion (£0.6 billion North America) Strong focused businesses Buy Improve Sell 14
Slide 15: A global business with £3.5bn sales to blue chip customers
A global business with £3.5bn sales to blue chip customers GKN Aerospace has great core strengths Sales by market Global #2 by revenue in Aerostructures and Aero Engines. Aero Engines has very positive longer 2 term cash flow dynamics 1 Commercial (71%) 1 2 Military (29%) Attractive specialist posit
Slide 16: With world leading technologies
With world leading technologies Aerostructures Engines Special Technologies Future Wing Fuselage Nacelles Empennage Fan Fan Booster & Turbine Exit Aircraft & Enviro. Aircraft LGS Hybrid Adaptive Autonomous Rotatives Statics Compressor Structure Engine EWIS systems Windows Electric Structures Systems
Slide 17: Technology driving differentiation
Technology driving differentiation Investment to position us for future growth Record technology investment under Melrose 2018 investment was our highest ever: more than £75m in total, more than £30m of which from external sources 2019 total set to be higher still New UK Global Technology Centre
Slide 18: Positive commercial aerospace market
Positive commercial aerospace market An extended period of strong deliveries Number of commercial aircraft deliveries (historical & forecast)1 Historical deliveries Forecast deliveries (’09-’18) (’19-’22) Strong narrow body backlog of more than 8 5.8% CAGR 2.9% CAGR years production Airbus A220 se
Slide 19: China growth helping drive commercial aircraft demand
China growth helping drive commercial aircraft demand Asia Pacific region has highest share of Large jetliner deliveries to China: Total and % of World1 worldwide passenger traffic 350 25% Asia set to become the largest aerospace market 300 20% 250 Demand today largely being met by established globa
Slide 20: Global military market is strong, driven by F-35 ramp up
Global military market is strong, driven by F-35 ramp up F-35 is underpinning military growth World fighter production in number of deliveries1 Historical deliveries Forecast deliveries 20 GKN Aerospace sites contribute to the F-35 (’09-’18) (’19-’23) GKN Aerospace has c.$2.5m of content on each
Slide 21: Five platforms dominate and GKN Aerospace well-positioned on all
Five platforms dominate and GKN Aerospace well-positioned on all Aerospace market – expected cumulative deliveries ($bn) GKN Aerospace $m of revenue per shipset1 - 50 100 150 200 250 300 Airbus A320/Neo Boeing 737NG/MAX B737/ Commercial narrow body Boeing 787 MAX Airbus A350XWB 49% Commercial wide b
Slide 22: GKN Aerospace priorities under Melrose ownership
GKN Aerospace Our priorities going forward – why things will be different under Melrose ownership Margin improvement only requires limited sales growth, therefore the required actions are largely within our control Buy Improve Sell 22
Slide 23: New structure, leadership and priorities
New structure, leadership and priorities A simpler, more focused business Streamlined leadership structure enables faster decision-making Clear responsibilities at all levels Re-prioritised and re-focused our value drivers Achievable targets Investment in immediate improvements and Engine Special Ae
Slide 24: Margin improvement
Margin improvement Aerospace margin improvement Net savings 12% Operational excellence (including fixing 12% 8.2% North America) Procurement Margin target under Melrose ownership £70m+ £40m+ opportunity opportunity Margin improvement only requires limited sales growth, SG&A focus therefore the requi
Slide 25: Operational excellence £70m+
Operational excellence Current initiative pipeline £70m+ opportunity 1 One global, standard So far more than 120 Good progress on Identified and captured tool used to capture, high return ideas have remaining improvement more than 1,000 business manage and monitor all been completed, saving ideas, w
Slide 26: Operational excellence: Fixing North America
Operational excellence: Fixing North America Aerospace management set out a clear plan for six focus sites in North America – and we are delivering Strengthened leadership teams Invested in people Cromwell Internal capability and external experts embedded in rapid deployment teams Employee engagem
Slide 27: Customer relationships improved in 2018
Customer relationships improved in 2018 Customers positive about Melrose ownership and performance improvements 1 Met key customers with Melrose after takeover to reassure them 2 Brought our customers into the heart of the fix process 3 “Fix North America” programme has been well received, averting
Slide 28: A simplified approach to procurement to unlock savings
A simplified approach to procurement to unlock savings Approach Procurement Focusing on 14 workstreams outlined and underway standardisation, price harmonisation and better £40m+ contract visibility 1 2 3 4 Chemicals, 5 opportunity Cutting Temporary Transport Consumables Oils & Tools Greases Lab
Slide 29: Additional opportunities identified to address SG&A costs
Additional opportunities identified to address SG&A costs Underlying selling, general and administrative expenses not yet addressed SG&A benchmark GKN Aerospace 7.5% of sales Current SG&A costs equivalent to 7.5% of sales £40m+ Opportunity 1st quartile performance is significantly better than this 1
Slide 30: Leveraging our global footprint
Leveraging our global footprint 1 San Luis Potosi closed, Structural Invested to strengthen and Cincinnati sold and improvements in key US streamline Americas footprint Camarillo sale sites announced 2 New engines repair centre opened in Johor, Continued investment in Asia Pune, India wiring Progres
Slide 31: Enterprise excellence leading to a stronger, more coherent business
Enterprise excellence leading to a stronger, more coherent business Today Global operating model End 2020 Impact Multiple Commercial One face to the excellence customer Global account management customer contacts Pricing discipline Focused on technologies and processes Fragmented that differenti
Slide 32: Summary
Summary Sustainable growth and a clear path to maximise value 1 Market continues to be strong and we are well-positioned 2 Melrose’s business model is a good fit 3 We are delivering in North America 4 Fundamentals now in place and we have a clear pipeline of improvement initiatives 5 Outstanding tec
Slide 33: Automotive business update
Buy Improve Sell Automotive business update Buy Improve Sell 33
Slide 34: Introduction
Introduction Started career at Lucas Industries, where he served a five year toolmaking apprenticeship Joined FCI in 2000 and held positions in technical sales, marketing, purchasing, and general management Liam Butterworth Joined Delphi in 2012 when the company acquired FCI’s Motorised Vehicl
Slide 35: My due diligence
My due diligence Since November 2018: More than 10 customer and partner visits, covering ~40% of revenues 22 site visits and employee town hall meetings, representing 50% of total headcount New leadership team recruited and reorganised Solid foundations with significant improvement Thorough
Slide 36: GKN Automotive business overview
GKN Automotive GKN Automotive business overview Buy Improve Sell 36
Slide 37: Balanced business across products, regions and customers
Balanced business across products, regions and customers Product mix1 Regional mix1,4 Customer mix1,4 1 Customer A (16%) 2 Customer B (13%) 3 Customer C (13%) 13 1 4 4 1112 4 Customer D (9%) 3 10 5 Customer E (9%) 1 Driveshafts² (62%) 1 Europe (36%) 9 2 6 Customer F (7%) 3 1 1 2 Propshafts (11%) 2 A
Slide 38: Strong customer relationships
Strong customer relationships 48% 47% 26% 44% Americas market Europe market Asia-Pacific market China market share1 share1 share1,2 share1 Strongly positioned with all OEMs across all regions 1. Driveshafts only Buy 2. Includes Middle East and Africa Improve Note: list of OEMs not exhaustive Sell 38
Slide 39: Global, localised manufacturing footprint
Global, localised manufacturing footprint Key stats Sweden Germany United Kingdom Poland France Slovenia Turkey South Korea 54 Spain Italy China Japan Manufacturing locations Taiwan India Thailand Colombia Malaysia 5 Tech centres Brazil 21 Australia Countries 29,000 Employees1 Manufacturing plant Jo
Slide 40: Global leader
Global leader 2018 sales GKN Automotive Competitor Key competitors market share market shares £4.9bn 20% Driveline1 47% (#1) 8% 6% 4% >82m driveshafts Competitor 1 Competitor 2 Competitor 3 Competitor 4 delivered in 2018 16% 15% All Wheel Drive (AWD)2 30% (#1) 8% 8% >2.9m AWD units Competitor 1 Comp
Slide 41: World class technologies and innovation excellence
World class technologies and innovation excellence Our in-house engineering capability… … develops world class innovative technology World's first 2- speed disconnecting eAxle 5 Technical centres BMW VL3 Driveshaft system Engineers1 c.2,200 Volvo eAxle additional 3792 in China SDS JV Modular lightwe
Slide 42: Positioned to benefit from electrification growth
Positioned to benefit from electrification growth ICE FWD ICE AWD Plug-In/Full Hybrid AWD Battery Electric AWD -5%1 -5%1,2 29%3 Content Content per vehicle Content per vehicle ~£2,500- Content per vehicle ~£1,500- per vehicle £3,500 ~£600- £2,000 ~£60- £700 2 Front Driveshafts £120 2 Front Drive
Slide 43: Long established position in China
Long established position in China GKN Automotive in China Key stats Balanced customer mix 30 years of experience and profitable growth £1.3bn Revenue by customer 2018 sales, of which Established joint venture with GKN has a 50% share Hasco in 1988 In 2009, agreed to extend the SDS joint venture for
Slide 44: Resilient business fundamentals
Resilient business fundamentals Industry trend GKN Automotive resilience 1 Winners and losers at OEM level ~50% of vehicles have our driveshafts 2 Increasing tariffs and trade barriers Global, localised footprint 3 Accelerating technology change Leading global innovation platform 4 Move to electrifi
Slide 45: GKN Automotive priorities under Melrose ownership
GKN Automotive Our priorities going forward – why things will be different under Melrose ownership Margin improvement only requires limited sales growth, therefore the required actions are largely within our control Buy Improve Sell 45
Slide 46: Major opportunity for margin improvement
Major opportunity for margin improvement Operating profit margin 126 133 128 110 113 100 91 84 75 77 76 45 (6) 2007 2009 2011 2013 2015 2017 2018 1 2,3 Operating profit margin Industry (Indexed) Operating profit margin GKN Automotive (Indexed) Revenue 4.9 4.9 3.4 3.5 2.8 2.3 1.8 2007 2009 2011 2013
Slide 47: We know the drivers of historical underperformance
We know the drivers of historical underperformance Procurement Capital allocation Decentralised, site-led procurement Insufficient commodity protections Low payback from previous investments Limited costing intelligence Poor working capital management Excessive use of single sourcing Org
Slide 48: How we are going to do it – Project Full Potential
How we are going to do it – Project "Full Potential" Focus areas Improvement 6 levers Procurement Fixed cost Commercial Operational optimisation reduction improvement excellence >50 Projects >350 Workstreams >1000 People involved Organisation and culture Reporting directly PMO1 Disciplined allocatio
Slide 49: New path forward for GKN Automotive
New path forward for GKN Automotive Key elements of the plan Target margins Gross savings Focus on selective, profitable growth 10% Procurement Operational optimisation excellence Expand leading position in ePowertrain £200m+ £75m+ opportunity opportunity 6.7% Drive operational performance in our Fi
Slide 50: Our approach is different
Our approach is different Past Top-down corporate initiatives Limited accountability New Full potential – bottom-up program with buy-in at all levels Design Execution Thorough up-front thought testing Strong governance through project management office structure Use of internal/external conten
Slide 51: We have the right team in place
We have the right team in place New organisational structure New culture Global Central CEO GKN Business Automotive Improvement Disciplined allocation Functions of capital Driving excellence Chief Market Facing Business Units Taking pride Financial in our work Commercial rigour Officer Accelerated d
Slide 52: We have the right project governance in place
We have the right project governance in place Governance pyramid up to Project organisational structure CEO's SteerCo VP Full Potential CEO Five levels of progress & Dedicated PMO reviews Comms support HR support Finance support Process support ‒ Work Streams: daily ‒ Managers: weekly Programme
Slide 53: Procurement optimisation
Procurement optimisation Example initiative Selected KPI Achievements to date Resourcing to BCC2 - Forging Reorganised procurement team, led by new CPO Target savings on Annual spend with "Supplier X": >10% indirect spend mid Renegotiation of supplier contracts – £14m term c. £14m savings iden
Slide 54: Operational excellence
Operational excellence Example initiatives Selected KPI Achievements to date Re-sourcing in Newton Thorough operational review of existing manufacturing sites Select components to be brought in- 2 Payback period years across projects house again Comprehensive evaluation of current "make or buy
Slide 55: Fixed cost reduction
Fixed cost reduction Example initiative Selected KPIs Achievements to date SG&A restructuring Cost base addressed Phase 1 of fixed cost restructuring implemented, £100m in Phase 1 focusing on people costs above plant-level Elimination of regional structure in Driveline Consolidation of sales a
Slide 56: Commercial improvement
Commercial improvement Example initiative Selected KPI Achievements to date £200m of loss-making contracts identified New centralised global commercial organisation Losses on contracts established Actions identified to either £200m to be addressed renegotiate, review internal costs, or Compreh
Slide 57: Optimise capital allocation to drive shareholder returns
Optimise capital allocation to drive shareholder returns 1 Operational model Insourcing of Footprint essential, core expansion in Smart Disciplined investment in core GKN best cost automation manufacturing capabilities capabilities locations 2 Innovation CAPEX Continue to projects to invest in core
Slide 58: Conclusions
Conclusions Building a platform to realise the full potential of GKN Automotive 1 Global leader with long-term customer relationships and localised manufacturing footprint 2 World class technology platform – uniquely positioned to capitalise on future market trends 3 Performance improvement levers w
Slide 59: Closing summary
Buy Improve Sell Closing summary Buy Improve Sell 59
Slide 60: Significant investment being made – consistent with all Melrose acquisitions
Significant investment being made – consistent with all Melrose acquisitions 1 Significant investments made. 2018 was Research and development Aerospace’s record year in technology investment 2 Melrose has historically invested 1.3x depreciation in capital expenditure. In 2018 the GKN Capital expend
Slide 61: Closing summary
Closing summary GKN is on track to be another successful Melrose acquisition 1 GKN Aerospace and Automotive are attractive, well positioned businesses Historical operational problems and programme underperformance are fixable. These 2 challenges are not new to us Melrose is confident of delivering s