Melrose Industries Plc · LSE:MRO
Melrose Industries — Investor Day (October 2023)
33 slides from Melrose Industries's investor day presentation, Oct 17, 2023
Slide 1: Engines Investor Event
Engines Investor Event 17 & 18 October 2023
Slide 2: Disclaimer
1 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 presen
Slide 3: Team and introductions
2 Team and introductions Peter Dilnot Matthew Gregory Joakim Andersson Russ Dunn CEO CFO President, GKN Engines CTO
Slide 4: Event overview
3 Event overview Context Event objectives > Melrose evolved into a focused aerospace > To showcase in more detail the full quality of the business post-demerger in April Engines business by: > Aerospace Capital Markets Event outlined – Bringing the breadth and depth of capability to compelling organ
Slide 5: Key messages
4 Key messages GKN Engines has OEM-level capability and responsibility for selected engines which 1 gives more technical and commercial advantages than normal for a Tier 1 supplier Leading independent Tier 1 partner to all major engine OEMs with lucrative and 2 diverse RRSP1 portfolio, providing bal
Slide 6: Overview
> GKN AEROS! Overview
Slide 7: Aerospace overview: unique Tier 1 technology supplier
6 Aerospace overview: unique Tier 1 technology supplier Established positions on >70% >650 ALL insert revenue from sole source global patents of the world’s high icon? positions2 granted volume aircraft1 Engines RRSP4 >85% aftermarket entitlement on £20bn future Engines 100% future cash flow profit
Slide 8: Aerospace overview: two market-leading divisions
7 Aerospace overview: two market-leading divisions Structures Engines Customers Engine OEMs Airframe OEMs Structural engineered components; parts repair; Lightweight composite and metallic structures; Technology commercial and aftermarket contracts electrical distribution systems; components End mar
Slide 9: Aerospace overview: 2025 targets significantly underpinned
8 Aerospace overview: 2025 targets significantly underpinned Engines Structures Differentiated technology IP, growing Deep design and manufacturing aftermarket and RRSPs entering ‘sweet spot’ capability; embedded OEM positions £1.8bn revenue £2.2bn revenue £580m EBITDA £290m EBITDA £500m operating p
Slide 10: Exceptional engines business
9 Exceptional engines business First supplier of GKN components power Target margins additive 90% >30% insert of all global flights 1 post 2025 fabrication icon? in serial production RRSP contracts cover Only global player on both 17 out of 19 RRSPs in aftermarket 70% next-gen ‘sweet spot’ of all gl
Slide 11: Unique position in the value chain as strategic partner to the OEMs
10 Unique position in the value chain as strategic partner to the OEMs OEM customers Strategic partners1 OEM customer / strategic partners > OEMs need strategic partners to develop and fund new programmes > Strategic partners contribute design, technology, risk sharing and financing > Only a handful
Slide 12: Key messages
11 Key messages > Exclusive supplier of military engines to Swedish government for over 90 years 1 OEM-level capability > Integrated design understanding across full engine system > Portfolio entering ‘sweet spot’ of highly profitable aftermarket phase RRSPs portfolio with all 2 major engine OEMs >
Slide 13: Exceptional business attributes
12 Exceptional business attributes Structurally Diversified, Defensible Strong Long-term Barrier to growing established technical customer relevance entry demand position advantage, IP pull 30yrs+ 1 OEM-level capability RRSPs portfolio with all 2 major engine OEMs Proprietary GKN 3 breakthrough tech
Slide 14: Unique value proposition
13 Unique value proposition > Defence knowledge transfers to civil 1 OEM-level capability > Full systems understanding helps customers > Integration knowledge improves GKN parts performance > Surge in aftermarket demand/profit coincides with our RRSPs hitting ‘sweet spot’ RRSPs portfolio with all 2
Slide 15: Multiple business models provide a balanced Engines portfolio
14 Multiple business models provide a balanced Engines portfolio Sales Sales Sales Sales 55% 10% 10% 25% Civil RRSP partnerships Government partnerships Repairs Commercial contracts Provides entitlement to Unique, system-level capability Significant growth opportunity Balances profile of portfolio a
Slide 16: RRSPs: portfolio and mechanics
15 RRSPs: portfolio and mechanics
Slide 17: RRSPs: strong aftermarket demand
16 RRSPs: strong aftermarket demand + Flying hours above pre-pandemic levels and structurally growing + OEM new build rates constrained by supply chain with record order backlogs + Legacy aircraft working for longer, requiring ongoing aftermarket support + Shop visits and LLP1 replacements forecast
Slide 18: RRSPs: engine lifecycle
17 RRSPs: engine lifecycle 1 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 - Define engine - Produce engine - Fleet management requirements - Meet req
Slide 19: RRSPs: GKN unique portfolio
18 RRSPs: GKN unique portfolio Light Heavy Turns cash High profit and cash investment investment positive CFMI RISE PW1500G/1900G GEnx P&W GTF next-gen PW1100G-JM Trent XWB CFM56 V2500 Fundamentally Only RRSP Only global player excellent engine Widebody in partner on both on both next-gen platform w
Slide 20: RRSPs: unique portfolio and position
19 RRSPs: unique portfolio and position Structural demand increase Engines in aftermarket ‘sweet spot’ Unusual harvesting period Returns Light Heavy Turns cash High profit and cash investment investment positive Next-gen x 2 Aftermarket 19 x RRSPs OE Aftermarket >2019 levels in 2023; strong structur
Slide 21: RRSPs: aftermarket mechanics
20 RRSPs: aftermarket mechanics Illustrative example of programme partners with 5% share GKN: OEM parts typically last life of Partner X: supplies OEM parts that need aftermarket engine; limited aftermarket work replacement 5% share of 5% share of Supply of programme programme replacement aftermarke
Slide 22: RRSPs: cash mountain
21 RRSPs: cash mountain > Calculated using industry forecasts with Net present values conservative assumptions £m GKN Engines RRSP net cash inflow1 of future expected cash flow5 > 17 programmes now in cash generation 750 phase; remaining two programmes turn cash Actual £5.5bn positive in next five y
Slide 23: Financial trajectory
GKN AERO: Financial trajectory
Slide 24: Multipronged strategy to deliver full business potential
23 Multipronged strategy to deliver full business potential 2025 Engines revenue Governmental partnerships Civil RRSP 2023 Engines revenue partnerships 3 Business improvement Governmental Repairs partnerships Civil RRSP partnerships 2 Growth Repairs initiatives £1.8bn £1.3bn 1 RRSP Commercial market
Slide 25: On track for 28% operating margin in 2025, over 30% beyond
24 On track for 28% operating margin in 2025, over 30% beyond 35 Operating margin % 2%+ 30%+ 28% 30 1 RRSP portfolio continues to mature and is ~1% ~1% Further ~4% improvement entering highly profitable aftermarket phase 24% Business 2023 Growth improvement 4 25 upgrade initiatives 3 Revenue from re
Slide 26: Clear momentum to achieve margin targets
25 Clear momentum to achieve margin targets Gap to target narrowed by a third Strong trajectory on margin expansion Operating margin % Operating margin % ~4% 28% ~4% 28% 24% ~2% 24% ~8% 22% 18% 16% 4% Original 2023 Upgraded Gap to Reinforced 2019 2020 2021 2023 2025 2023 outperformance 2023 2025 202
Slide 27: GTF
2 GTF GKN AEROSPA‘
Slide 28: GTF situation overview
27 GTF situation overview Situation > GKN Engines has long-standing positive relationship with P&W and RRSP partners through multiple engines including highly successful V2500 > GTF is fundamentally an excellent engine with leading architecture and fuel economy, plus a long order backlog > GTF has e
Slide 29: GTF implications
28 GTF implications Melrose impact Market consequences > GKN has 4% share on PW1100G > MRO shop capacity and spare parts challenges > Based on RTX guidance potential cash cost to Melrose is c.£200 million, but it should not > Legacy engines fly longer with potentially be assumed these are all progra
Slide 30: Architecture for the future
29 Architecture for the future 2 stage high pressure 3 stage low pressure turbine Geared turbofan compressor 8 stage high pressure 3 stage low pressure > Ultra-efficient, light-weight, low-speed fan compressor turbine Gear > Low pressure compressor and low pressure turbine speed optimised Convention
Slide 31: GKN Aerospace RRSP content on GTF
30 GKN Aerospace RRSP content on GTF PW1500G/ PW1900G PW1100G (24k) (30k) ● Fan spacer √ ● LP shaft √ ● Fan case mount ring √ ● Firewall √ √ ● Intermediate case √ √ ● Turbine exhaust case √ √ GKN makes structural components that last life of engine 4% share on PW1100G, 7% share on PW1500G/PW1900G
Slide 32: PW1100G evolution
31 PW1100G evolution Block D – key improvements to date GTF Advantage Greater capability Hot section durability Advanced hot section Reduced operating temperature Expanded rotating part lives Seamless integration External component reliability Oil system sealing Durability focused improvements Futur
Slide 33: PW1100G engine outlook
32 PW1100G engine outlook > >15,000 engines expected, majority of which will be GTF Advantage engine GTFA > Market leading fuel efficiency makes GTF valuable, especially for longer range A320 usage and A321XLR Source: AWIN, Airbus Global Market Forecast with share estimates Extremely strong demand f