Melrose Industries PLC · LSE:MRO
Melrose Industries — H1 2020 Earnings Presentation
37 slides from Melrose Industries's earnings presentation, Sep 3, 2020
Slide 1: Melrose Industries PLC Half Year Results & Update
Buy Improve Sell Strictly private and confidential GKN eDrive Nortek StatePoint® Melrose Industries PLC Half Year Results & Update Six months ended 30 June 2020 3 September 2020 Buy Improve Sell
Slide 2: Contents
Contents 1 Highlights 2 Melrose track record 3 The results 4 Improved banking terms and headroom 5 Business update 6 Appendices Buy Improve The revenue and profit numbers included in this presentation are shown in round millions. Margins are calculated using unrounded numbers Sell 1
Slide 3: Highlights
Buy Improve Sell Highlights Strong cashflow plus decisive restructuring actions 2
Slide 4: Highlights
Highlights Adjusted1 results Statutory results 2020 2019 2020 2019 Continuing operations £m £m £m £m Revenue 4,359 5,875 4,121 5,573 Operating profit/(loss) 56 541 (581) 8 Profit/(loss) after tax (32) 332 (560) (131) Diluted earnings per share (0.7)p 6.8p (11.5)p (2.8)p Group ▪ The Group made an adj
Slide 5: Highlights, continued
Highlights, continued ▪ Investment in ground-breaking, energy efficient technology has been maintained, including electric and hydrogen powered aircraft technology; eDrive automotive systems; advanced 3D printing capabilities; and Nortek Air Management’s revolutionary StatePoint Technology® ▪ Whilst
Slide 6: Melrose track record
Buy Improve Sell Melrose track record We have generated significant value in tough times before Buy Improve Sell 5
Slide 7: Melrose: a successful track record in tough and good times
Melrose: a successful track record in tough and good times Nortek Air Management: Strong performance FKI: Successfully managed in a downturn improvement ➢ In the 2008/09 downturn, despite a 23% sales drop, a ➢ Increase in adjusted1 operating margin 4.3 ppts c.2.6x return on equity was achieved on FK
Slide 8: Melrose: GKN has strong value potential
Melrose: GKN has strong value potential Margin targets Actions needed to achieve targets ➢ Aerospace (revised) – to allow for 10% Another 2% new market dynamics ▪ Further efficiency savings to 3% of total cost base1 ➢ Automotive (unchanged) – achievable on lower sales than 10% previously planned Onl
Slide 9: Melrose: GKN has strong value potential
Melrose: GKN has strong value potential Swift reaction to COVID-19 Melrose track record on acquisitions → achieving planned savings faster ▪ Total cost savings for 2020 on >£1.5bn Efficiency savings achieved over Melrose ownership track (mostly volume related) approaching 20% ▪ Average of all previo
Slide 10: The results
Buy Improve Sell The results Behind the headline numbers, much is being achieved Buy Improve Sell 9
Slide 11: Reconciliation between statutory and adjusted results
Reconciliation between statutory and adjusted1 results Cash Continuing operations spent in £m Total H1 2020 Statutory operating loss (581) Amortisation of intangible assets acquired in business combinations 263 - Asset write downs, mainly in Aerospace, due to COVID-19 179 - Restructuring costs 99 95
Slide 12: Cash generation in the period: very strong
Cash generation in the period: very strong Free cash flow Reconciliation of opening to closing net debt2 Cash flow from continuing operations Group Reconciliation of net debt2 Group £m 2020 £m 2020 Adjusted EBITDA1 287 Net debt2 brought forward (3,283) Lease obligation payments (38) Net cash flow fr
Slide 13: Cash management: robust cash generation actions
Cash management: robust cash generation actions Free cash flow in H1 Cash flow from continuing operations £m Q1 2020 Q2 2020 H1 2020 Q1 2019 Q2 2019 H1 2019 Working capital1 inflow/(outflow) (183) 434 251 (198) 139 (59) Net capital expenditure1 116 58 174 105 126 231 Capital expenditure to depreciat
Slide 14: Segmental results: trading is improving post Q2 lockdowns
Segmental results: trading is improving post Q2 lockdowns Adjusted1 results Sales vs last year July/August Continuing operations Operating Operating Continuing operations Q1 year on Q2 year on year on year £m Revenue profit/(loss) margin % year growth2 year growth2 growth2 Aerospace 1,580 54 3.4% Ae
Slide 15: Improved banking terms and headroom
Buy Improve Sell Improved banking terms and headroom Gives the flexibility if required over the medium-term to improve the businesses Buy Improve Sell 14
Slide 16: New terms agreed with banking syndicate
New terms agreed with banking syndicate Increased Group committed facility headroom ▪ Strong cash management in the period increased the headroom on the committed banking facility to c.£1.175 billion, excluding over £300 million of cash in hand Banking covenants for future periods 31 December 30 Jun
Slide 17: Business update
Buy Improve Sell Business update Significant improvement underway Buy Improve Sell 16
Slide 18: Working Capital
Working Capital Further Implemented COVID-19 response Structural actions opportunity • Implementing lean manufacturing to • Rigorous review of likely customer demand improve factory flow and quality Inventory • Reduced buffer stock and order quantities • Reducing supplier lead-time +++ • Tight purch
Slide 19: GKN Aerospace
GKN Aerospace 36% of Melrose1 Revenue by market Revenue by product type Revenue by destination 1 Civil (63%) 1 Airframes (67%) 1 North America (64%) 2 Defence (37%) 2 Engines (33%) 34 2 Europe (31%) 2 2 3 Asia (4%) 2 4 RoW (1%) 4 RoW (1%) 1 1 1 Buy Improve 1. Based on adjusted 2020 revenue for all c
Slide 20: Aerospace: highlights
Aerospace: highlights 2020 Adjusted1 £m results Growth2 Revenue 1,580 (18%) EBITDA 134 (52%) EBITDA margin % 8.5% -6.0 ppts Operating profit 54 (73%) Operating margin % 3.4% -6.7 ppts Highlights ▪ Aerospace markets significantly impacted by COVID-19 since March 2020 ‒ Civil businesses hit by lower O
Slide 21: Aerospace: COVID-19 response restructuring
Aerospace: COVID-19 response restructuring FTEs at Approach Country Status Jan 2020 • Direct headcount lowered rapidly in Q2 due to demand ▪ Build on new “One Aerospace” USA 5,450 organisation structure • Indirect and overhead reorganisation underway • Consultation conducted on site by site basis ▪
Slide 22: Aerospace: operations and technology
Aerospace: operations and technology Operational improvements ▪ New global operations structure implemented effective 1 January 2020 ▪ Major lean manufacturing excellence programme commenced, albeit more focused on COVID-19-related issues in H1 ▪ Sustained gains in quality and delivery despite chall
Slide 23: GKN Automotive
GKN Automotive 35% of Melrose1 Revenue by product type Revenue by destination 1 Driveline (71%) 1 Europe (36%) 34 2 All Wheel Drive (25%) 4 2 North America (33%) 3 eDrive (2%) 3 3 Asia (28%) 2 1 4 Cylinder Liners (2%) 4 RoW (3%) 1 2 Buy Improve 1. Based on adjusted 2020 revenue for all continuing bu
Slide 24: Automotive: highlights
Automotive: highlights 2020 Adjusted1 £m results Growth2 Revenue 1,541 (37%) EBITDA 44 (82%) EBITDA margin % 2.9% -8.5 ppts Operating loss (64) (136%) Operating margin % (4.2%) -11.7 ppts Highlights ▪ Significant disruption from COVID-19 in second quarter, leading to H1 sales decline of 37% versus p
Slide 25: Automotive: positive trajectory
Automotive: positive trajectory Early signs of market improvement Ongoing active margin management ▪ Drop-through margins in first half at 27% with profit impact Region % sales Comments limited to contribution from lost sales • Factory closures from March, all reopened by ‒ Direct labour flexed and
Slide 26: Automotive: advantaged long-term technology position
Automotive: advantaged long-term technology position ▪ Global leader in powertrain agnostic technology offering full driveline systems capabilities ▪ Benefitting from transition to electric mobility with increased content per vehicle ▪ Electric vehicle programme launches remain on track through COVI
Slide 27: GKN Powder Metallurgy
GKN Powder Metallurgy 9% of Melrose1 Revenue by market type Revenue by destination 1 Automotive (65%) 1 North America (43%) 3 4 2 Industrial (19%) 2 Europe (34%) 3 3 Hoeganaes Metal 1 3 Asia (17%) Powder (16%) 4 RoW (6%) 2 1 2 Buy Improve 1. Based on adjusted 2020 revenue for all continuing business
Slide 28: Powder Metallurgy
Powder Metallurgy 2020 Segment % sales Comments Adjusted1 £m results Growth2 • Attractive margins with advantaged technology Precision 50% • Growing sales and share Revenue 396 (32%) • More commoditised products EBITDA 33 (68%) Structural 32% • Exiting unattractive contracts EBITDA margin % 8.3% -8.
Slide 29: Nortek Air Management
Nortek Air Management 13% of Melrose1 Revenue by business Revenue by market Revenue by destination 1 HVAC (58%) 1 Residential (59%) 1 North America (89%) 2 AQH (42%) 2 Commercial (41%) 2 3 2 Europe (9%) 3 Asia (2%) 2 2 1 1 1 Buy Improve 1. Based on adjusted 2020 revenue for all continuing businesses
Slide 30: Nortek Air Management: highlights
Nortek Air Management: highlights 2020 Adjusted1 £m results Growth2 Revenue 550 (7%) EBITDA 91 (5%) EBITDA margin % 16.5% +0.3 ppts Operating profit 71 (11%) Operating margin % 12.9% -0.5 ppts Highlights ▪ Performing well with sales down only 7% in the first half, despite COVID-19 challenges ‒ Retai
Slide 31: Nortek Air Management: end market overview
Nortek Air Management: end market overview % H1 Segment Products Market drivers (US) Channel dynamics Nortek position sales Residential • #1 in US in range hoods • Residential HVAC • New house builds and bath fans systems • Retail (largely DIY) • Home improvements • #1 in manufactured • Manufactured
Slide 32: Other Industrial
Other Industrial 7% of Melrose1 Revenue by business Revenue by destination 1 Security & Smart 1 North America (64%) 4 3 Technology (37%) 3 2 Europe (20%) 2 Ergotron (36%) 3 Asia (12%) 1 3 Brush (27%) 2 4 RoW (4%) 1 2 Buy Improve 1. Based on adjusted 2020 revenue for all continuing businesses Sell 31
Slide 33: Other Industrial
Other Industrial 2020 Adjusted1 £m results Growth2 Revenue 292 (21%) EBITDA 25 (56%) EBITDA margin % 8.6% -6.7 ppts Operating profit 18 (63%) Operating margin % 6.2% -6.8 ppts Brush ▪ Strong H1 order intake and promising order book for products and services ▪ Benefitting from significant restructuri
Slide 34: Appendices
Buy Improve Sell Appendices 33
Slide 35: Pensions: despite COVID-19, deficits have reduced
Pensions: despite COVID-19, deficits have reduced UK defined benefit schemes 30 June 2020 £m UK Deficit at 31 December 2019 (420) Deficit at 30 June 2020 (398) Reduction in deficit 22 ▪ The UK defined benefit deficit of £398 million has reduced from £420 million at December 2019 despite a £253 milli
Slide 36: Foreign exchange → forward looking
Foreign exchange → forward looking H1 2020 H1 2019 FY 2019 Exchange rates USD EUR USD EUR USD EUR Average rates 1.26 1.14 1.29 1.15 1.28 1.14 Closing rates 1.24 1.10 1.27 1.12 1.33 1.18 Income Statement volatility – Translational impact Balance Sheet volatility Impact on adjusted1 operating profit o
Slide 37: Banking facilities
Banking facilities Banking facilities Interest Facility At 30 Maturity £m size June 2020 date ▪ Approximately 70% of interest exposure fixed Bonds on projected gross debt 2022 5.375% unsecured bond 450 450 September 2022 ▪ Significant committed facility headroom 2032 4.625% unsecured bond 300 300 Ma