Melrose Industries - Trading update 6th March 2025
The company reported annual profits at the top-end of expectations, and raised its dividend by a fifth.
For the year to 31 December 2024, revenue was up 6 per cent to £3.5bn on engines segment growth of over a quarter. Adjusted operating profit rose 42 per cent to £540mn.
Management anticipates some potential volatility in the year ahead due to geopolitical pressures, but sees these as no more than short-term headwinds that will soon abate. However, the short-termism of the market has seen the shares marked down today on this note - maybe another buying opportunity?
The investment thesis is still very much in place and long-term growth lies ahead. The company set out new five-year targets for annual revenue of around £5bn, adjusted operating profit of at least £1.2bn and free cash flow after interest and tax of £600mn.
In terms of operating profit, if these targets are achieved, we are looking at 17.3% CAGR over the next 5 years. I would be happy with that, yet these targets are almost certainly conservative, so achieving more is likely. This is a robust business with a unique business model and some core commercial advantages (read the full analysis to understand more).
The market reaction following the the Trading Update yesterday looks over done.
Summary of the earnings call:
1. Positives for Melrose Industries PLC
Strong Financial Performance in 2024
- Profit at the top end of expectations despite industry challenges
- 42% increase in profit to £500 million
- 11% revenue growth on a like-for-like basis, led by the Engines division
- Margins continued to grow, up 400 basis points to 15.6%
- Earnings per share (EPS) grew significantly, up 45% to 26.4p
Engines Division Performance
- Engines revenue grew 26%, driven by strong aftermarket performance
- Aftermarket revenue was up 32%, with particularly strong performance in the Swedish military business
- Engines operating profit grew 40% to £290 million, and margins beat the 2025 target of 28% one year early at 28.9%
Structures Division Progress
- Margins continued to improve, growing from 5.1% to 7.2%
- Operating profit grew by 32% to £70 million
- Secured a contract renewal with Airbus for the full wiring package for the A220
- Secured customer investment of over £100 million to double F-35 Canopy production capacity
Future Outlook
- Positive momentum into 2025, with another step-up in profit and margins expected
- Extensive restructuring program to be completed in 2025, delivering improved productivity
- Reaching an inflection point on cash, moving from cash outflow in 2024 to over £100 million positive free cash flow in 2025
- Confident in achieving the 5-year targets set out two years ago
- Europe ramping up defense spending means that the military division of Melrose is highly likely to benefit.
2. Negatives for Melrose Industries PLC
Revenue Shortfall
- Overall revenue fell slightly short of expectations, primarily due to supply chain challenges and customer destocking in the Structures division - but revenue was still up 11% and margins improved
- Weaker dollar impact of around £30 million also contributed to the revenue shortfall - this is beyond the control of the company and invariably mean reverting over time
Structures Division Challenges
- Structures division revenue growth was dampened by ongoing supply chain challenges and customer destocking/production rate changes. In response, Melrose is employing a more capital-light approach to expanding its Structures business. For example, in the case of the F-35 Canopy program, Melrose secured funding from the U.S. Government and its customer Lockheed Martin to build a factory to double its production capacity, rather than using its own capital upfront. Concurrently, Melrose has been exiting businesses in the Structures division that are non-core and not profitable, in order to focus on a more streamlined and higher-margin portfolio.
Melrose's Additive Fabrication technology is a strategic priority for the company as it aims to address critical supply chain challenges in the aerospace industry, reduce costs and lead times, and improve the sustainability of its manufacturing processes. It's a a "revolutionary new way to manufacture structural components". The technology enables Melrose to "replace very expensive castings and forgings by thin metal structures with key features built on through Additive." This can deliver a "70% reduction in overall material use" and "substantial lead time reduction." Melrose has a clear roadmap to generate millions in incremental profit by 2029 through the commercialization and scaling of its Additive Fabrication technology.
Inventory Days Improvement
- Inventory days improvement is likely to come through in 2027-2029, as the supply chain stabilizes and the business ramps up. As Melrose's business continues to ramp up, the company expects to gain more predictability in its factories and manufacturing processes. This increased predictability and operational efficiency will allow Melrose to further optimize its inventory levels and drive down inventory days. It is shifting its focus from restructuring to "continuous improvement" initiatives, which include using lean manufacturing approaches and operational efficiency programs.
Trading update for the four months from 1 July 2024 to 31 October 2024
All numbers are calculated at constant currency
Peter Dilnot, Chief Executive Officer of Melrose said:
"It's encouraging that we remain on track to deliver on our full year expectations, despite the industry-wide supply chain challenges. This reflects the strength of our businesses and the balanced position we have with our aftermarket offsetting original equipment headwinds. As we move into 2025, we enter a period of significant and sustained growth in our cash flow for many years ahead. I am confident that Melrose's established capabilities, technology leadership, and unique position on the world's leading aircraft and engines will create substantial value in the future."
Revenue was up 7% on the same period in 2023, with Engines, up 17%, showing strong progress driven by aftermarket revenues, and Structures growing at 1%.
Importantly, the Group expects its cash flow position to improve significantly next year and to deliver substantial free cash flow in 2025 (post interest and tax). The Group's cash flow is poised to grow materially beyond this as a result of the completion of its restructuring programmes, the resolution of the GTF powder metal issue, all RRSPs generating cash and the continuing growth of the Group's profits.
The company continues to apply excess cash to the repurchase of shares to reduce its equity financing and to benefit remaining shareholders, each of whom will enjoy an increase in their ownership share as a result.
These repurchases are strategic and undertaken when management believes that the stock is trading below its intrinsic value, so this form of capital allocations suggests that management share my opinion that this stock is currently attractively priced (as argued in the analysis to which this comment is appended).
For me this continues to be a buy-and-hold type of investment (not for short-term speculators, but a great opportunity for long-term intelligent investors). This is not investment advice and should not be relied upon as the basis for your investment decisions, please do your own due diligence.
Melrose Industries - Trading update 6th March 2025
The company reported annual profits at the top-end of expectations, and raised its dividend by a fifth.
For the year to 31 December 2024, revenue was up 6 per cent to £3.5bn on engines segment growth of over a quarter. Adjusted operating profit rose 42 per cent to £540mn.
Management anticipates some potential volatility in the year ahead due to geopolitical pressures, but sees these as no more than short-term headwinds that will soon abate. However, the short-termism of the market has seen the shares marked down today on this note - maybe another buying opportunity?
The investment thesis is still very much in place and long-term growth lies ahead. The company set out new five-year targets for annual revenue of around £5bn, adjusted operating profit of at least £1.2bn and free cash flow after interest and tax of £600mn.
In terms of operating profit, if these targets are achieved, we are looking at 17.3% CAGR over the next 5 years. I would be happy with that, yet these targets are almost certainly conservative, so achieving more is likely. This is a robust business with a unique business model and some core commercial advantages (read the full analysis to understand more).
The market reaction following the the Trading Update yesterday looks over done.
Summary of the earnings call:
1. Positives for Melrose Industries PLC
Strong Financial Performance in 2024
- Profit at the top end of expectations despite industry challenges
- 42% increase in profit to £500 million
- 11% revenue growth on a like-for-like basis, led by the Engines division
- Margins continued to grow, up 400 basis points to 15.6%
- Earnings per share (EPS) grew significantly, up 45% to 26.4p
Engines Division Performance
- Engines revenue grew 26%, driven by strong aftermarket performance
- Aftermarket revenue was up 32%, with particularly strong performance in the Swedish military business
- Engines operating profit grew 40% to £290 million, and margins beat the 2025 target of 28% one year early at 28.9%
Structures Division Progress
- Margins continued to improve, growing from 5.1% to 7.2%
- Operating profit grew by 32% to £70 million
- Secured a contract renewal with Airbus for the full wiring package for the A220
- Secured customer investment of over £100 million to double F-35 Canopy production capacity
Future Outlook
- Positive momentum into 2025, with another step-up in profit and margins expected
- Extensive restructuring program to be completed in 2025, delivering improved productivity
- Reaching an inflection point on cash, moving from cash outflow in 2024 to over £100 million positive free cash flow in 2025
- Confident in achieving the 5-year targets set out two years ago
- Europe ramping up defense spending means that the military division of Melrose is highly likely to benefit.
2. Negatives for Melrose Industries PLC
Revenue Shortfall
- Overall revenue fell slightly short of expectations, primarily due to supply chain challenges and customer destocking in the Structures division - but revenue was still up 11% and margins improved
- Weaker dollar impact of around £30 million also contributed to the revenue shortfall - this is beyond the control of the company and invariably mean reverting over time
Structures Division Challenges
- Structures division revenue growth was dampened by ongoing supply chain challenges and customer destocking/production rate changes. In response, Melrose is employing a more capital-light approach to expanding its Structures business. For example, in the case of the F-35 Canopy program, Melrose secured funding from the U.S. Government and its customer Lockheed Martin to build a factory to double its production capacity, rather than using its own capital upfront. Concurrently, Melrose has been exiting businesses in the Structures division that are non-core and not profitable, in order to focus on a more streamlined and higher-margin portfolio.
Melrose's Additive Fabrication technology is a strategic priority for the company as it aims to address critical supply chain challenges in the aerospace industry, reduce costs and lead times, and improve the sustainability of its manufacturing processes. It's a a "revolutionary new way to manufacture structural components". The technology enables Melrose to "replace very expensive castings and forgings by thin metal structures with key features built on through Additive." This can deliver a "70% reduction in overall material use" and "substantial lead time reduction." Melrose has a clear roadmap to generate millions in incremental profit by 2029 through the commercialization and scaling of its Additive Fabrication technology.
Inventory Days Improvement
- Inventory days improvement is likely to come through in 2027-2029, as the supply chain stabilizes and the business ramps up. As Melrose's business continues to ramp up, the company expects to gain more predictability in its factories and manufacturing processes. This increased predictability and operational efficiency will allow Melrose to further optimize its inventory levels and drive down inventory days. It is shifting its focus from restructuring to "continuous improvement" initiatives, which include using lean manufacturing approaches and operational efficiency programs.
TRADING UPDATE, 18th November 2024
Trading update for the four months from 1 July 2024 to 31 October 2024
All numbers are calculated at constant currency
Peter Dilnot, Chief Executive Officer of Melrose said:
"It's encouraging that we remain on track to deliver on our full year expectations, despite the industry-wide supply chain challenges. This reflects the strength of our businesses and the balanced position we have with our aftermarket offsetting original equipment headwinds. As we move into 2025, we enter a period of significant and sustained growth in our cash flow for many years ahead. I am confident that Melrose's established capabilities, technology leadership, and unique position on the world's leading aircraft and engines will create substantial value in the future."
Revenue was up 7% on the same period in 2023, with Engines, up 17%, showing strong progress driven by aftermarket revenues, and Structures growing at 1%.
Importantly, the Group expects its cash flow position to improve significantly next year and to deliver substantial free cash flow in 2025 (post interest and tax). The Group's cash flow is poised to grow materially beyond this as a result of the completion of its restructuring programmes, the resolution of the GTF powder metal issue, all RRSPs generating cash and the continuing growth of the Group's profits.
The company continues to apply excess cash to the repurchase of shares to reduce its equity financing and to benefit remaining shareholders, each of whom will enjoy an increase in their ownership share as a result.
These repurchases are strategic and undertaken when management believes that the stock is trading below its intrinsic value, so this form of capital allocations suggests that management share my opinion that this stock is currently attractively priced (as argued in the analysis to which this comment is appended).
For me this continues to be a buy-and-hold type of investment (not for short-term speculators, but a great opportunity for long-term intelligent investors). This is not investment advice and should not be relied upon as the basis for your investment decisions, please do your own due diligence.