Melrose Industries Plc · LSE:MRO
Melrose Industries — Investor Day (June 2022)
56 slides from Melrose Industries's investor day presentation, Jun 8, 2022
Slide 1: GKN Aerospace
GKN Aerospace Clear path to the upgraded margin target with excellent cash flow dynamics 8 June 2022
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: Content
Content ▪ Key messages from the Melrose CEO, Simon Peckham ▪ Aerospace CEO, David Paja ▪ Closing remarks from the Melrose CFO, Geoff Martin 3
Slide 4: Key messages from the Melrose CEO
Key messages from the Melrose CEO 4
Slide 5: Key messages from the Melrose CEO
Key messages from the Melrose CEO ▪ Melrose has doubled shareholders’ money on every completed deal; it will take longer for GKN, but the significant opportunity is still there ▪ GKN is responding to the same actions just like all previous deals ▪ The improvement being achieved 'under the bonnet' is
Slide 6: GKN Aerospace – higher potential
GKN Aerospace – higher potential ▪ Aerospace has the highest potential equity return of all the GKN businesses ▪ Aerospace is rapidly being restructured and its markets are improving ▪ An upgraded operating margin target is announced today ▪ The Aerospace long-term cash flow dynamics are excellent f
Slide 7: GKN Aerospace
GKN Aerospace Clear path to the upgraded margin target with excellent cash flow dynamics 7
Slide 8: Executive summary – higher potential
Executive summary – higher potential Leading Tier 1 supplier in the aerospace industry ‒ highly resilient market position ▪ Product on over 90% of commercial aircraft1 with entrenched customer relationships ▪ 95% of revenue from industry leading positions2 ▪ For >70% of revenue GKN Aerospace is the
Slide 9: GKN Aerospace today in numbers
GKN Aerospace today in numbers ONBOARD 38 90% £2.3bn £3.4bn MANUFACTURING OF COMMERCIAL SITES AIRCRAFT MADE TODAY1 20193 20214 2030 95% c.14000 REVENUE PEOPLE RECOVERY REVENUE FROM INDUSTRY LEADING POSITIONS2 £100m 12 JOINT FOR >70% REVENUE GKN INVESTMENT IN AEROSPACE IS THE SINGLE SUSTAINABLE COUNT
Slide 10: Three business lines
Three business lines Engines Civil Defence Customers Engine OEMs Civil OEMs Defence OEMs 2021 revenue1 £850m £800m £640m Structural and rotating parts, Wing, fuselage & empennage structures, Composite & metallic structures, Products aftermarket, repair & overhaul front and cabin windows, electrical
Slide 11: A strong portfolio of products and customers
A strong portfolio of products and customers Revenue by business line Revenue by customer Revenue by channel Revenue by region1 Today Other Aftermarket China Asia 10% North Airbus America 3% Europe Defence Civil Other (ex. UK) OEM 28% 35% 29% 90% 46% NGC Safran NHI Rolls- Pratt & 2030 Royce Whitney
Slide 12: Content on 90% of commercial aircraft currently made
Content on 90% of commercial aircraft1 currently made Aero surfaces ▪ Winglets ▪ Movables & control surfaces Major structural assemblies Empennage ▪ Wing spar & fixed trailing edge ▪ Lightweight solutions Electrical distribution ▪ Fuselage ▪ Business jets & rotorcraft Transparencies ▪ Cockpit windsc
Slide 13: Optimising the global manufacturing footprint
Optimising the global manufacturing footprint Total number of sites 2019 51 TODAY 38 Manufacturing sites 38 17 Americas, including 2 in Mexico 13 Europe 8 Asia Pacific, including 3 in China1 END 2023 33 4 Technology and innovation centres Consolidating North America and Europe footprint, expanding c
Slide 14: Experienced leadership team
Experienced leadership team Name Position Experience Name Position Experience CEO Functional leaders David Paja Chief Executive Officer 30 years Gwen Rouy-Poirier Chief Financial Officer 20+ years Chief Human Gordon Pitman 25+ years Resources Officer Business line presidents Chief Technology Russ Du
Slide 15: Clear path to upgraded operating margin target of 14%+
Clear path to upgraded operating margin target of 14%+ 15
Slide 16: Re-engineered the way we operate
Re-engineered the way we operate Before ‘One Aerospace’ transformation Today • Organised by product group / geography Organised by end market segment • Each site acting as a different company Fully integrated, one face to customers and suppliers • Onerous contracts and overcapacity Renegotiated cont
Slide 17: Upgraded operating margin target
Upgraded operating margin target Operating margin (%) 16 14%+ 14 1 Adjusted costs due to COVID-19 Details on following ▪ Flexed down costs to match OEM demand 6%+ 3 12 10.6% pages ▪ Achieved breakeven in 2020 on 27% lower sales 10 ▪2 4ppts operating margin expansion in 2021 on 8 Volume broadly flat
Slide 18: Further business improvement actions - net savings
Further business improvement actions - net savings Operational Commercial Restructuring excellence £45m £50m £50m Incremental Incremental Incremental savings savings savings ▪ Portfolio actions ▪ Footprint rationalisation ▪ Reduced cost of poor quality ▪ Price/value alignment ▪ Product Centres of Ex
Slide 19: All restructuring projects launched and moving rapidly
All restructuring projects launched and moving rapidly UK ▪ Closed: Kings Norton site Complete ▪ Downsize: Norway site ~50% complete, Nordics ▪ Refocus: Creation of distinct and separate product on track centres of excellence in Sweden and Norway ▪ Close: Helmond and Hoogerheide sites Announced Q1 2
Slide 20: Healthy growth with faster rebound to 2025
Healthy growth with faster rebound to 2025 Expected growth rates1 applied to GKN portfolio CAGR 2021 to 2030 Key growth drivers Engines ▪ Flight hour recovery ~10% ▪ OE build rates Civil ~7% blended GKN ▪ OE build rates ~9% Aerospace CAGR to 2030 Faster Defence rebound to ▪ Defence budgets ~2% 2025
Slide 21: Premium Engines business with excellent long-term cash flows
Premium Engines business with excellent long-term cash flows 21
Slide 22: Premium Engines business
Premium Engines business 2021 revenue by business model Core products Risk and revenue Strong position today Long-term sharing Engineered components Fan blade repair £850m partnerships & assemblies agreements ▪ Differentiated products, processes & IP 53% (RRSPs) 47% ▪ Technology, design and build pa
Slide 23: Flight hours returning strongly
Flight hours returning strongly Million Engine flight hours Flight hours rebounding strongly 250 CAGR ~10% ▪ Continued flight hours recovery expected in Actual coming years 200 ▪ Full recovery during 2024 ▪ Engines CAGR broadly in line with the market to 2030 150 Increasing aftermarket 100 ▪ RRSP pr
Slide 24: Multipronged strategy to deliver full business potential
Multipronged strategy to deliver full business potential 2030 GKN Engines revenue Governmental partnerships 2021 GKN Engines revenue RRSP growth RRSPs Governmental partnerships Parts repair growth RRSPs Repairs Repairs Additive fabrication technology insertion £850m Governmental systems Long-term gr
Slide 25: RRSP engine programmes reaching harvest period
RRSP engine programmes reaching harvest period OEM decision to Programme Entry into Production invest launch service ends Technology Product OE Aftermarket development development production services 7 years 7 years 15 years 30 years - Market requirements - Define engine - Produce engine - Fleet man
Slide 26: Risk and revenue sharing partnerships (RRSPs)
Risk and revenue sharing partnerships (RRSPs) Risk and revenue sharing business model Cash profile of GKN’s 19 RRSPs RRSP A ▪ Life-of-programme commitment £m ▪ GKN contributes an agreed percentage of total annual engine Cash generation phase RRSP C RRSP B programme costs, and receives the same perce
Slide 27: Example: Pratt & Whitney GTF engine
Example: Pratt & Whitney GTF engine GTF engine GTF highlights1 ▪ Powers industry-leading A220 and A320 families ▪ 1,100+ aircraft in service with 58 airlines ▪ 80+ customers with 10,000+ orders and commitments ▪ 3 million+ flights and 11 million+ engine flight hours GKN Aerospace a key partner Two v
Slide 28: Outstanding future cash flows from secured aftermarket
Outstanding future cash flows from secured aftermarket GKN Engines cash flow outlook1 Net present value £m of future expected cash flow5 700 £5bn ▪ 19 RRSP programmes across OEMs 600 Forecast Orders Firm orders2 ▪ 17 programmes now cash positive Firm Orders Forecast orders3 annually 500 Investment I
Slide 29: Well positioned for next-generation single-aisle engines
Well positioned for next-generation single-aisle engines ▪ Technology demonstration partner in next-generation Pratt & Whitney GTF Next-generation engine market forecast1 programme 25 ▪ GKN Aerospace bringing expertise in design of complex load-carrying statics 20 Significant ▪ Expected to be 100% S
Slide 30: Expanding the parts repair business
Expanding the parts repair business Important Projected engine shop visits 1 element of GKN Aerospace growth strategy aftermarket growth to 50% 9000 11% CAGR by 2030 1. Expanding £100m+ 8000 Repair offering GKN Aerospace repair revenue 7000 growth by 2025 6000 Shop visits 5000 2. Executing 4000 Repa
Slide 31: Technology move to additive manufacturing
Technology move to additive manufacturing Castings & forgings Advanced fabrications Mounts Cases £150m+ increased sales by 20251 Housings Additive solutions offer more sustainable Ducts manufacturing, lower lead-times & reduced waste Applying future technology “today” on current long-term agreement
Slide 32: OEM manufacturer in defence engines
OEM manufacturer in defence engines RM12 / Gripen C/D RM16 / Gripen E Future Combat Air System ▪ Responsibility for engine upgrades & ▪ GKN system-level responsibility for engine ▪ Swedish national champion aftermarket ▪ £1.5bn forecast programme revenue ▪ Large market opportunity ▪ Started support
Slide 33: Strong Civil Airframe business, well positioned on growth platforms
Strong Civil Airframe business, well positioned on growth platforms 33
Slide 34: Strong Civil Airframe business, well positioned on key platforms
Strong Civil Airframe business, well positioned on key platforms Core products 2021 revenue Strong position today Wing structures / surfaces Electrical distribution ▪ Great product portfolio Widebody ▪ Global industrial footprint Single-aisle ▪ Well positioned on single-aisle aircraft ▪ Strong wideb
Slide 35: Major volume decline driven by Covid; single-aisle leading recovery
Major volume decline driven by Covid; single-aisle leading recovery OEM deliveries Recovery underway 2500 50%+ decline in deliveries during Covid Actual CAGR ~9% ▪ ▪ Strong global order book of 13,000+ aircraft 2000 -50% decline ▪ Industry focus on supply chain readiness ▪ Civil CAGR broadly in line
Slide 36: Flagship platform: Airbus A320 family
Flagship platform: Airbus A320 family Market-leading single-aisle family 83% ▪ A320 family comprises the vast majority of Airbus’ future order book of Airbus backlog is ▪ Well positioned to support industry ramp- A320s up of efficient narrowbody aircraft Enabled by GKN Aerospace technology ▪ GKN Aer
Slide 37: Optimising our global footprint to accelerate growth
Optimising our global footprint to accelerate growth Right-sizing US & Europe footprint Expanding in China Capacity Sites Utilisation Footprint Revenue1 Optimisation 2020: 19 2020: 68% 2020: 12,000m2 2020: £60m 2025: 11 2025: 95%+ 2030: 135,000 m2 2030: £270m+ Growing our revenue with substantially
Slide 38: COMAC and AVIC joint venture to drive rapid revenue growth in China
COMAC and AVIC joint venture1 to drive rapid revenue growth in China Two wholly owned sites today New joint venture site to open in 2023 ▪ China to become the largest aviation market in the 2030s 12,000 m2 100,000m2 ▪ COMAC >1,300 orders for 850 people site opening single-aisle aircraft end of 2023
Slide 39: Developing next-generation manufacturing technology (2030+)
Developing next-generation manufacturing technology (2030+) Current manufacturing process - A350 Wing ▪ Large dedicated capex ▪ Inflexible to rate and mix Benefits1 ▪ Prone to under-absorption 1. Production cost -30% Batch oven Large dedicated assembly Future manufacturing process 2. Cycle time -60%
Slide 40: Airbus ‘Wing of Tomorrow’ provides path to commercialisation
Airbus ‘Wing of Tomorrow’ provides path to commercialisation Airbus ‘Wing of Tomorrow’ ▪ Joint development programme with Airbus ▪ Target next-generation Airbus aircraft Key milestones ~£450k WoT content expected per ▪ Supported from two Global Technology Centres ▪ 2018: GKN Aerospace joined program
Slide 41: Unlocking the opportunity from electric aircraft market
Unlocking the opportunity from electric aircraft market Global partnerships GKN system-level capability Positioned to capture opportunity ▪ Integrated fuselage and electrical distribution ▪ Supporting multiple electric aircraft customers system across US, UK and Europe: ‒ Eviation Alice preparing fo
Slide 42: Refocused Defence business, prioritising design-to-build
Refocused Defence business, prioritising design-to-build 42
Slide 43: Refocused Defence business on design-to-build
Refocused Defence business on design-to-build 2021 revenue Landing gear Other Strong position today Core Products Transparencies ▪ F-35 content of $2.5m per aircraft Integrated Integrated structures Transparencies Electrical structures ▪ Key supplier to full range of US fighter distribution £640m pl
Slide 44: Strong position on the leading defence platforms
Strong position on the leading defence platforms $bn US Department of Defence base budget Defence market remains healthy 850 ▪ US defence budget is the same size as the next 11 CAGR ~2% global defence budgets combined1 800 Actual ▪ Steady growth in US budget forecast, with ongoing global tension exp
Slide 45: Flagship platform: Lockheed Martin F-35
Flagship platform: Lockheed Martin F-35 World’s dominant fighter platform 156 1 annual F-35 ▪ Platform in ramp-up and delivery phase build rate to ▪ Total annual F-35 market value above $15bn end 2030 ▪ F-35 a critical platform for the US and 14 other ally countries $2.5m GKN Aerospace Enabled by GK
Slide 46: Initiatives to develop a leading Defence business
Initiatives to develop a leading Defence business Site optimisation Commercial optimisation Exploit technologies ▪ Reduce from 9 to 7 Defence-focused sites ▪ Increase market share in differentiated ▪ Increase R&D % of sales from 1% to 3% ▪ Leverage National Champion positions in products: wiring, co
Slide 47: Sustainable operations paving a route to net zero
Sustainable operations paving a route to net zero 47
Slide 48: Operating in an environmentally sustainable way
Operating in an environmentally sustainable way Covers Global strategy >30% of all employees 1. Integrated reporting 2. Technology portfolio alignment 3. Five sustainability workstreams 4. Local sustainability champions Our Dutch and Swedish manufacturing footprints are 5. Clear targets and timeline
Slide 49: Fostering a safe, diverse and engaged culture
Fostering a safe, diverse and engaged culture Safety1 Diversity & Inclusion Engagement Defined culture principles 50% 500+ 500,000+ Serious increase in Employee training hours hazards Resource completed solved vs Group (ERG) in 2021 members Lost time 2021 250% increase in Minor training hours in 202
Slide 50: Ensuring an ethical supply chain
Ensuring an ethical supply chain 20%+ Risk reduction in ▪ Due diligence Assessment suppliers from 2019 to 2021 ▪ Ethos of ‘doing the right thing’ Sign Code of ▪ Safeguarding human rights Conduct ▪ Protecting environment ▪ Adopt REACH1 compliance Onboarding ▪ Ensures adherence to conflict mineral law
Slide 51: GKN Aerospace technology enabling the route to net zero
GKN Aerospace technology enabling the route to net zero Range Future propulsion GKN Aerospace position Electric engine fan development Battery electric & electrical distribution expertise H2GEAR £54m H2 fuel cell H2 electric development H2JET H2 combustion H2 combustion development project Core tech
Slide 52: Exploring hydrogen propulsion for a sustainable future
Exploring hydrogen propulsion for a sustainable future H2GEAR ▪ £54m collaboration1 project to develop & test H2 fuel cell propulsion system by 2026 ▪ Led from Global Technology Centre in Bristol ▪ Fuel cell converts hydrogen into electricity, delivering 1MW to power aircraft ▪ Scaled to power sub-r
Slide 53: Conclusion
Buy Improve Sell Melrose Conclusion 53
Slide 54: Conclusion – higher potential
Conclusion – higher potential Leading Tier 1 supplier in the aerospace industry ‒ highly resilient market position ▪ Product on over 90% of commercial aircraft1 with entrenched customer relationships ▪ 95% of revenue from industry leading positions2 ▪ For >70% of revenue GKN Aerospace is the single
Slide 55: GKN Aerospace – higher potential
GKN Aerospace – higher potential 55
Slide 56: Closing remarks from the Melrose CFO
Closing remarks from the Melrose CFO ▪ GKN is responding to the trusted Melrose model as well as any previous deal ▪ Macro pressures hide the true improvements made ▪ Aerospace has the highest potential equity return of all the GKN businesses ▪ Its strategy is set and its management team is in place