Melrose Regulatory News (MRO)

MELROSE INDUSTRIES PLC

UNAUDITED RESULTS

FOR THE SIX MONTHS ENDED 30 JUNE 2023

Trading ahead of expectations, upgraded outlook, share buybacks to be commenced early

Melrose Industries PLC ("Melrose", the "Company" or the "Group"), an Aerospace Engines and Structures Group, today announces its interim results for the six months ended 30 June 2023 ("the Period").

Highlights

Melrose Group - at constant currency3

Trading ahead of expectations - upgraded guidance

Half year results

Earlier shareholder returns

New Investor Event - Engines

Management changes

By division - at constant currency3

Engines

Structures

Demerger of GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen

Upgraded guidance for 2023 full year (assuming US $ = 1.25 average exchange rate for the year)

Group

Simon Peckham, Chief Executive of Melrose Industries PLC, today said:

"We are delighted with these results and the outlook for Melrose. Whilst there is still work to do, the business is very capable of producing over £1 billion of EBITDA and providing excellent returns for shareholders. This is further demonstrated by the confidence to start early the share buyback programme. Chris, Geoff and I are pleased to hand over to Peter and Matthew to continue the great performance achieved by Aerospace, and to guide this handover during the coming months and into 2024. Melrose shareholders own a truly special business, with rapidly increasing profits, exceptionally strong long-term cash flows and a disciplined shareholder focused approach to capital."

1. Described in the glossary to the 2023 Interim Financial Statements

2. Results for the period ended 30 June 2022 have been restated for discontinued operations and the one for three share consolidation

3. Like-for-like growth is calculated at constant currency against 2022 results and excludes businesses being exited

ENDS

Enquiries:

Investor Relations:

Chris Dyett

+44 (0) 7974 974 690

ir@melroseplc.net 

Montfort Communications: +44 (0) 20 3514 0897

Nick Miles

+44 (0) 7739 701 634

miles@montfort.london

Charlotte McMullen

+44 (0) 7921 881 800

mcmullen@montfort.london

CHAIRMAN'S STATEMENT

I am pleased to report a strong set of interim results for the six months ended 30 June 2023 (the "Period"), which have underpinned the confidence in making an upgrade to the full year results. Furthermore, as we have evolved into being a long-term aerospace group in line with previous announcements, we are providing details and timing about the intended executive management changes scheduled for the first half of next year to take this exciting new strategy forward.

RESULTS FOR THE CONTINUING GROUP

These results include statutory revenue for the Group of £1,633 million (2022: £1,364 million), an adjusted operating profit of £159 million (2022: £45 million) and a statutory loss before tax of £62 million (2022: £314 million). This includes solely the Aerospace business, post PLC costs, as a result of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses being demerged from the Group on 20 April 2023 and therefore being treated as discontinued in these results for accounting purposes.

Further details of these results are contained in the Finance Director's Review.

TRADING

The Aerospace business has performed well during the Period. The industry-leading Engines division has exceeded its margin guidance and continues to demonstrate exceptional profit growth and long-term cash flows. The design-led Structures division continues to improve and deliver on its strong positions on excellent platforms.

CASH AND SHARE BUYBACK PROGRAMME

These interim results demonstrate increasing confidence and strong progress, with upgraded profit guidance and with net debt reducing towards 1x EBITDA by the end of 2023 (prior to share buybacks). With profits rising fast, and with restructuring already well-advanced to realise the Aerospace business's full potential, your Board is confident to commence early its share buyback programme, at the beginning of October 2023, starting with a £500 million buyback over 12 months, and being well placed to continue thereafter while keeping leverage well within the previous guidance.

DIVIDEND

Your Board has declared an interim dividend of 1.5 pence per share, which will be paid on 20 October 2023 to shareholders on the register at the close of business on 15 September 2023.

DEMERGER OF GKN AUTOMOTIVE, GKN POWDER METALLURGY AND GKN HYDROGEN

The demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses from the Company into Dowlais Group PLC ("Dowlais") completed on 20 April 2023 as scheduled (the "Demerger"). This transaction marks the successful transformation of these businesses whilst under Melrose ownership, enabling them to continue as a standalone automotive-focused group listed on the London Stock Exchange.

Prior to the Demerger, the Company undertook a one for three consolidation of the existing Melrose ordinary shares after 6:00 p.m. on 19 April 2023. Admission and dealings in the new Melrose ordinary shares on the London Stock Exchange commenced at 8.00 a.m. on 20 April 2023, and there are now 1,351,475,321 Melrose ordinary shares of 160/7 pence in issue.

BOARD MATTERS

Given Melrose has transitioned into a long-term aerospace group, the Company believes that this is the right time to begin evolving the executive management team to progress the changed strategy. Christopher Miller our Executive Vice-Chairman, and Simon Peckham our Chief Executive, who have each served the Company since it was founded in 2003, and Geoffrey Martin who joined as Group Finance Director in 2005, have overseen the successful execution of the Company's 'Buy, Improve, Sell' strategy. Christopher, Simon and Geoffrey have expressed their intention not to stand for re-election at the Company's Annual General Meeting in 2024, leaving behind a highly successful record of shareholder value creation.

The Board has nominated Peter Dilnot to oversee Melrose to realise the next chapter of development of the Aerospace business, and to be appointed Chief Executive from 7 March 2024. This will allow an orderly transition with the benefit of Peter's continued insight and stewardship, having served as Melrose Chief Operating Officer since 2019, during which time he also served as CEO of GKN Aerospace on an interim basis.

Peter will be joined by Matthew Gregory, whom the Board has nominated for appointment as Group Finance Director of Melrose from 7 March 2024. Matthew brings further continuity to the Company's transition, currently serving as the Chief Financial Officer of GKN Aerospace.

Separately, during the Period, Funmi Adegoke resigned as a non-executive director of the Board with effect from 16 June 2023 following a promotion within Halma PLC. We thank Funmi for her contributions to the Company and are pleased to have welcomed Gillian Elcock, who was appointed to the Board as a non-executive director with effect from 21 June 2023. Gillian has extensive investment research experience including several years covering aerospace and defence as an analyst at Putnam Investments and Insight Investment, with two engineering degrees from MIT and an MBA from the Harvard Business School.

STRATEGY AND PURPOSE

Since being founded in 2003, Melrose has created significant shareholder value through its 'Buy, Improve, Sell' strategy. Following completion of the Demerger, Melrose has now changed strategy to being purely an aerospace business, and thus will now report publicly as two divisions: Engines and Structures. The Board has already confirmed that it will not seek to undertake another acquisition of an unrelated industrial business or, in the near term, a material aerospace business.

For the next few months the focus is to complete the current restructuring plans. These are well underway and are expected to be largely complete by the time of the 2023 preliminary full year results announcement in March next year. As part of this strategy, Aerospace is continuing to invest heavily in sustainable technology as it pursues its mission to be a highly trusted and sustainable aerospace partner in the sky.

OUTLOOK

The Board is confident of achieving its upgraded full year expectations.  In Engines, our RRSP portfolio looks towards continued market growth and an upcoming lucrative aftermarket phase. Operational efficiencies and the benefit of ongoing restructuring means that we expect full year 2023 to show an excellent improvement in performance, with the Aerospace business positioned for further profitable success over the coming years.

Justin Dowley

Non-executive Chairman

7 September 2023

CHIEF EXECUTIVE'S REVIEW

It has been a busy period, with the successful demerger of the Dowlais businesses allowing full focus on executing the remaining restructuring plans for Aerospace, as a standalone business. Aerospace continues to perform strongly, with restructuring projects well underway and on track to be materially complete in the near future, unlocking the full potential of this great business.

The business's adjusted operating margin more than doubled compared to the prior period to 10.7%, representing good progress towards its 2025 operating margin guidance of 17-18% as outlined during the Capital Markets Event in May 2023. This has allowed an upgrade to 2023 expectations, predominantly focused on Engines, with further volume recovery and improvements to come.

Supported by continued strong momentum and market recovery underpinned by robust demand, the outlook for the Aerospace business is very positive and we remain confident in its prospects and ability to perform well in 2023 and beyond. Aerospace's technology is embedded on the world's most successful, highest volume platforms. This progress is supported over the medium-term through ongoing business improvements, as well as the increase in flight hours and narrowbody production in civil and growing defence budgets driving demand for military platforms.

Inflationary pressure and global supply chains continue to provide some challenges which are expected to continue into 2024, but the business continues to manage these and has been able to fully offset all additional costs.

Building on its commitment to developing best in class sustainable technology solutions that will assist in moving the aviation sector into the era of more sustainable air travel, the business continues to progress the technological advances made on the successful H2Gear project. Aerospace signed a partnership agreement with Embraer at the 2023 Paris Air Show, laying the path to flight testing a zero-emissions liquid hydrogen propulsion system. The business also advanced its Additive Manufacturing leadership, introducing its largest Additive Manufacturing cell at the new Global Technology Centre in the US.

Further details are set out in the divisional reviews below.

ENGINES

The Engines business made excellent progress during the first half. This was driven by strong market growth underpinned by the performance of its diverse portfolio of 19 RRSPs, which are set to generate approximately £20 billion in net cash flow in the future. These gains were reinforced by positive momentum from target growth initiatives and the benefits of business improvements.

During the Period, like-for-like revenue was up 19% versus 2022 with aftermarket growth of 46% reflecting increased flying hours and above market contribution from RRSP contracts entering their lucrative aftermarket phase. Adjusted operating margins improved 8.6 percentage points to 24.5%. Encouragingly this first half performance is ahead of previous full year guidance of 22% and moving further towards the 2025 guidance of 28%. The first half margin expansion was driven by increased aftermarket RRSP profits, global spares business expansion and operational improvement - including restructuring projects delivering positive returns.

Good progress was made with growth initiatives, including global spares ramp-up, additive manufacturing capability, and commercial contracts. The repair business grew by 21% in the first half and the Malaysia fan blade repair centre gained its CAAC certification opening up the China and Asia markets. Additionally, factory preparation is underway for a new state-of-the-art dedicated engine component repair centre in California. Additive manufacturing for structural engine components has accelerated with a multi-year £40 million investment in new production capabilities in Sweden, while commercial progress continues with all major engine OEMs to insert GKN Additive technology into existing engine designs. The business is also extending its OEM supply agreements, such as an important 10 year extension that has recently been signed with Pratt & Whitney for the production of F135 engine ducts.

Inevitably the development of engines is an ongoing process and recently Pratt & Whitney announced there was a manufacturing process issue affecting PW1100G engines. The production of powdered metal parts continues, and Pratt & Whitney will continue to deliver both new engines and new spares across all product lines. We are confident that the PW1100G engine will be highly successful and have always taken a conservative approach to its commercial development. Whilst there will be short-term issues for some customers, we are confident that there will be many years of success to come.

The substantial reshaping of the Engines manufacturing footprint is on track. Production has now ceased at the Manchester, US plant and all other restructuring moves are expected to be largely complete in the next four months. As a result of restructuring over the last three years, Engines operations will be concentrated into nine global manufacturing sites with the consolidation of key product lines into highly productive Centres of Excellence. In parallel there have been operational gains in productivity and quality with the number of 'escapes' (quality issues reaching customers) down 33% in the first half of this year. Despite the industry's supply chain challenges, the business has sustained high levels of on time delivery.

We are confident that with ongoing market recovery, RRSP portfolio contribution and operational momentum, the Engines business has the potential to achieve above 30% operating margins post 2025.

STRUCTURES

The Structures business continued to make good financial and operational progress in the first half. The ongoing ramp-up in Civil production volumes and the successful actions to reshape the Defence portfolio give promising momentum into the second half of the year. This was underpinned by further progress on restructuring and operational gains with improved quality and lower arrears despite industry supply chain issues.

During the Period, like-for-like revenue was up 18% versus 2022 with Civil growth of 24% reflecting higher OEM production rates, particularly with Airbus, Boeing and Gulfstream. Defence revenue increased by 6% (excluding work being exited) in line with the associated programme demand. Adjusted operating margins improved by 3.6 percentage points to 2.5% from a loss making position in the first half of 2022. This first half performance is in line with the expected 3% margin for the full year and demonstrates positive momentum towards the full recovery of the business as volumes ramp up. The first half margin expansion was driven by Civil volume increases, improving quality of earnings in Defence and operational improvements - including the positive impact of restructuring projects.

There was a record number of orders for new aircraft in this Period with particularly strong new demand from Asia. OEM production rates remain constrained by supply chain and operational issues, so order backlogs are currently at record levels of over 12,000 aircraft. For illustration, the A320 range is now scheduling slots into 2029. The Structures business has established positions on all major aircraft and is successfully ramping up at pace while sustaining operational standards. During the Period, quality improved further with the number of 'escapes' (quality issues reaching customers) reducing by 44% versus 2022, and customer arrears also improved by 31%.

There was also positive progress with commercial initiatives in the first half. In Defence, the repricing and portfolio work accelerated with around 25% of the renegotiations planned by 2025 being successfully concluded in the last few months. There is also momentum on exiting non-core work with production handovers well underway, particularly in the US. In Civil, a new contract was signed with Airbus extending A220 wiring supply from our global centres in Turkey, China and Mexico. Agreements have been reached with Joby and Supernal, leading players in the emerging electric air mobility market, covering composite structures and electrical distribution systems. The China JV with COMAC is also moving forward with initial work packages agreed for the new site which is on track to be operational during the first half of 2024.

The extensive restructuring programme within Structures is nearing completion following three years of activity. The resulting operational footprint will be 24 global sites largely focused on design to build programmes. In the first half, the Netherlands consolidation project has delivered major milestones ahead of plant closures later this year. Selected work is also being moved from the US to our growing Mexico facility with all key projects underway. The ongoing industry supply chain challenges continue to be navigated without impact for key customers, however they caused internal operational issues in the first half, including reduced productivity in some sites. We would expect an improvement in the second half and into 2024.

The ongoing structural ramp-up in Civil production, coupled with positive momentum on improving the Defence portfolio and delivering operational gains, gives us confidence that Structures is on track to achieve its target 9% margin in 2025 with further expansion potential thereafter.

OUTLOOK

The Engines business continues to de-risk its progress towards achieving 28% margins in 2025 and then above 30% margins post 2025, with the market recovery continuing to accelerate, and bolstered by strong long-term platform positions and business improvements. The business is in a strong position to benefit from the opportunity in parts repair, with its expanding certified global repair capability in key strategic locations. Over the medium to long-term, the business is primed to pursue leading positions on next generation platforms, with ongoing efforts to scale up its disruptive additive fabrication technology, and expand its partnerships with leading civil engines manufacturers and air forces. We look forward to explaining this full potential in more detail at the new Engines Investor Event in October this year in Sweden.

Continued growth within the Structures business remains underpinned by very strong demand and growing backlogs, giving a positive near-term outlook led by narrowbody. Flight hours are returning strongly, with OEM deliveries ramping up fast to address the continued backlog of orders in civil, with spending increasing in defence. The business is well placed on all key platforms, and on track to achieve its target 9% margin in 2025, with civil volume ramp-ups driving growth, and the defence portfolio repricing and rationalisation well underway. Longer-term prospects are supported by ongoing footprint consolidation and quality improvements which are progressing well.

MANAGEMENT CHANGES

We have announced today that Geoffrey and I will be stepping down as Chief Executive and Group Finance Director respectively on 7 March 2024. Together with Christopher, Executive Vice-Chairman, we will also step down from the Board at the next AGM. It has been a very enjoyable 20 years, and we would like to thank all the people both within and outside Melrose who have contributed to Melrose's journey. We are very pleased to leave the business in such great condition to be taken forward by a talented management team led by Peter and Matthew. We believe that Melrose has a very exciting future as one of the world's leading aerospace companies.

Simon Peckham

Chief Executive

7 September 2023

FINANCE DIRECTOR'S REVIEW

The demerger of the Dowlais Group of businesses ("Dowlais"), comprising GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen completed on 20 April 2023 (the "demerger").  Dowlais contributed approximately two thirds of the adjusted revenue and adjusted operating profit of the Group in 2022, and, in accordance with IFRS 5, is shown as discontinued in these Condensed Interim Financial Statements, leaving Aerospace as the only business remaining in the Group.

Following the demerger, it has been deemed appropriate to report Aerospace as two separate operating segments, namely Engines and Structures, alongside the corporate cost centre.

MELROSE GROUP RESULTS - CONTINUING OPERATIONS

Statutory results:

The statutory IFRS results are shown on the face of the Income Statement and show revenue of £1,633 million (2022: £1,364 million), an operating loss of £18 million (2022: £281 million) and a loss before tax of £62 million (2022: £314 million). The diluted earnings per share ("EPS"), calculated using the weighted average number of shares in issue during the Period, were a loss of 3.0 pence (2022: loss of 16.8 pence).

Adjusted results:

The adjusted results are also shown on the face of the Income Statement. They are adjusted to exclude certain items which are significant in size or volatility or by nature are non-trading or non-recurring, or are items released to the Income Statement that were previously a fair value item booked on an acquisition. It is the Group's accounting policy to exclude these items from the adjusted results, which are used as an Alternative Performance Measure ("APM") as described by the European Securities and Markets Authority ("ESMA"). APMs used by the Group are defined in the glossary to the Condensed Interim Financial Statements.

The Melrose Board considers the adjusted results to be an important measure used to monitor how the businesses are performing as they achieve consistency and comparability between reporting periods when all businesses are held for the complete reporting period.

The adjusted results for the Period show revenue of £1,633 million (2022: £1,364 million), an operating profit of £159 million (2022: £45 million) and a profit before tax of £134 million (2022: £9 million). Adjusted diluted EPS, calculated using the weighted average number of shares in issue in the Period of 1,404 million (2022: 1,455 million), were 7.5 pence (2022: 0.2 pence).

The following tables shows the adjusted results for the Period split by reporting segment:

The adjusted revenue for Engines of £608 million (2022: £484 million) shows constant currency growth of 19% over 2022, with operating profit of £149 million (2022: £77 million) giving an operating margin of 24.5% (2022: 15.9%), an increase of 8.6 percentage points.

The adjusted revenue for Structures of £1,025 million (2022: £880 million) shows like-for-like constant currency growth of 18% over 2022, (13% including businesses being exited), with operating profit of £26 million (2022: loss of £10 million) giving an operating margin of 2.5% (2022: -1.1%), an increase of 3.6 percentage points.

Corporate costs of £16 million (2022: £22 million) included £15 million (2022: £19 million) of operating costs and £1 million (2022: £3 million) of costs relating to a divisional cash-based long-term incentive plan.

Tables summarising the reconciliation of statutory results to adjusted results by reportable segment are shown in note 3 of the Condensed Interim Financial Statements, with a Group table shown below.

RECONCILIATION OF STATUTORY RESULTS TO ADJUSTED RESULTS

The following table reconciles the Group statutory operating loss to adjusted operating profit:

Adjusting items to the statutory operating loss are consistent with prior periods and include:

DISCONTINUED OPERATIONS

Discontinued operations in the Period includes the demerged businesses; GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen.

In accordance with IFRIC 17, the Dowlais businesses were distributed from the Melrose Group at a fair value, calculated using the opening traded share price on 20 April 2023, being £1.46. This valuation resulted in a loss on disposal of £1.0 billion.

Costs relating to the demerger of the Dowlais Group totalled £64 million, of which £6 million were accrued at 31 December 2022. This charge is offset by a non-cash contribution of £19 million in the form of a one per cent shareholding of Dowlais Group PLC equity being retained by the Group. In addition £152 million was recycled from the translation reserve in respect of these businesses.

Discontinued businesses contributed £1,582 million to revenue and achieved statutory operating profit of £32 million for the period of the year under ownership.

TAX - CONTINUING OPERATIONS

The statutory results for the Period show a tax credit of £22 million (2022: £70 million), arising on a statutory loss before tax of £62 million (2022: £314 million). The Group Income Statement current underlying adjusted tax rate is approximately 21% (2022: 67%). During the Period, the continuing businesses paid tax of £15 million (2022: £8 million).

SHARE CONSOLIDATION AND NUMBER OF SHARES IN ISSUE

To enable both Melrose and Dowlais to initiate at appropriate pricing levels, a one for three share consolidation was performed by Melrose on the eve of the demerger, which resulted in the number of shares in issue reducing from 4,054 million to 1,351 million. Shareholders then received one Dowlais share for every post-consolidation Melrose share they held.

In accordance with IAS 33, the one for three consolidation is applied to all periods in these Condensed Interim Financial Statements. The weighted average number of shares used for basic earnings per share calculations was 1,351 million (2022: 1,455 million), and when including the number of shares expected to be issued from the Melrose equity-settled share plan, the weighted average number of shares used for diluted earnings per share, was 1,404 million (2022: 1,455 million).

LONG-TERM INCENTIVE SCHEME

The Melrose 2020 Employee Share Plan, ("the MESP"), rewards the performance of certain senior management by issuing them Melrose shares, as described in the Directors' Remuneration Report in the 2022 Annual Report.

As a result of splitting the Melrose Group, certain adjustments to the MESP were approved by shareholders, which preserved the rights of the participants of the plan. The first adjustment was to reflect the demerger by allocating the invested capital between the continuing Melrose Group and Dowlais. Second, recognising that the timelines of both the demerger and the crystallisation date of the MESP coincided, the performance period of the MESP was extended by one year. Finally, to recognise the platform already prepared for the Dowlais businesses whilst part of the Melrose Group, the invested capital in the GKN Automotive business and the GKN Powder Metallurgy businesses formed the basis from which the creation of further value in Dowlais will be rewarded up to 31 May 2025, in a separate parallel Melrose Automotive Share Plan ("the MASP").

The IFRS 2 charge in respect of the MESP was calculated on inception in 2020 and charged over a three year period. It is unimpacted by the amendments described above and for the period ended 30 June 2023 the IFRS 2 charge, shown as an adjusting item, was £7 million (2022: £8 million). The charge in respect of the MASP was £1 million (2022: £nil).

CASH GENERATION AND MANAGEMENT

Adjusted free cash flow for the continuing Group in the Period was an outflow of £65 million (2022: £82 million), after net interest and tax spend of £49 million (2022: £45 million), but before restructuring spend of £53 million (2022: £15 million).

An analysis of free cash flow is shown in the table below:

During the Period, the working capital movements in the continuing Group were consistent with revenue growing by 15%, with inventory levels growing by 10%, £53 million, and net receivables and payables growing by 6%, £116 million. The working capital performance is expected to be stronger in the second half of the year than the first because of the seasonality trends of the Aerospace business.

Capital expenditure in the Aerospace business in the Period was £40 million (2022: gross capital expenditure of £25 million net of £9 million received from the disposal of a property). Capital expenditure in Aerospace represented 0.7x (2022: 0.4x) depreciation of owned assets.

Restructuring spend in the Period was £53 million (2022: £15 million).

In the continuing Group, net interest paid in the Period was £34 million (2022: £37 million), net tax payments were £15 million (2022: £8 million) and ongoing contributions to defined benefit pension schemes were £2 million (2022: £2 million).

The movement in net debt (as defined in the glossary to the Condensed Interim Financial Statements) is summarised as follows:

1 Includes £16 million of demerger related costs unpaid at 30 June 2023, reversed through non-cash movements

Proforma opening net debt of £487 million for the continuing Melrose Group is calculated after adjusting the closing net debt at 31 December 2022, of £1,139 million, for: the payment of demerger related costs of £62 million; bank facility arrangement fees of £11 million; the cost of fully securing the benefits of all members of the GKN UK Pension Scheme Number 4 in advance of an expected buy-out process, of £45 million; the second interim dividend for the year ended 31 December 2022 of £61 million; and the net debt that Dowlais inherited on inception.

Group net debt at 30 June 2023, translated at closing exchange rates (being US $1.27 and €1.16), was £553 million (31 December 2022: £1,139 million), after a free cash outflow from the continuing Group of £118 million, described above, net favourable foreign exchange movements of £29 million, and other non-cash movements of £23 million. 

For bank covenant purposes the Group's net debt is calculated at average exchange rates for the previous twelve months, to better align the calculation with the currency rates used to calculate profits, and was £572 million.

The Group net debt leverage on this basis at 30 June 2023 was 1.5x EBITDA compared to a proforma opening leverage of 1.8x EBITDA (31 December 2022: reported 1.4x EBITDA).

PROVISIONS

Total provisions at 30 June 2023 were £275 million (31 December 2022: £611 million).

The following table details the movement in provisions in the Period:

The net charge to the Income Statement in the Period for continuing operations was £56 million, including £32 million relating to restructuring activities and £18 million relating to employer's tax payable on equity-settled compensation schemes. These two items are both shown as adjusting items and included in the adjusting items section discussed earlier in this review.

During the Period, £13 million was utilised against loss-making contract provisions in Aerospace and £52 million of cash was spent against provisions with £40 million relating to restructuring activities.

Net provision movements relating to property, environmental & litigation and warranty in Aerospace were not material in the Period.

The net movement on provisions in the Period within Dowlais was £24 million, with £344 million of provisions leaving the Group on demerger.

PENSIONS AND POST-EMPLOYMENT OBLIGATIONS

Melrose operates a number of defined benefit pension schemes and retiree medical plans across the Group, accounted for using IAS 19 Revised: "Employee Benefits".

The values of the Group plans were updated at 30 June 2023 by independent actuaries to reflect the latest key assumptions and are summarised as follows:

At 30 June 2023, following the demerger of Dowlais, the total plan assets of Melrose Group's defined benefit pension plans has reduced to £1,055 million (31 December 2022: £1,941 million) and total plan liabilities to £1,144 million (31 December 2022: £2,429 million), a net deficit of £89 million (31 December 2022: £488 million).

The GKN UK Group Pension Schemes (Numbers 1 and 4) are the most significant pension plans remaining in the Group, and are closed to new members and to the accrual of future benefits for current members.

During the Period, the Group commenced a process to buy-out the GKN UK Group Pension Scheme Number 4. The first stage of the process, purchasing a buy-in policy which fully secures all members' benefits, was completed in the Period, resulting in assets and liabilities of £416 million being recorded equally at 30 June 2023. The buy-out process is expected to complete in the first half of 2024.

At 30 June 2023, the GKN UK Group Pension Scheme Number 1 had gross assets of £593 million (31 December 2022: £628 million), gross liabilities of £644 million (31 December 2022: £667 million) and a net deficit of £51 million (31 December 2022: £39 million).

Other pension schemes in the Group include US pension plans which are generally funded schemes and closed to new members. At 30 June 2023, these US pension plans had a net deficit of £25 million.

A summary of the assumptions used are shown in note 11 to the Condensed Interim Financial Statements.

FINANCIAL RISKS AND UNCERTAINTIES

The principal financial risks and uncertainties faced by the Group include liquidity risk, finance cost risk, exchange rate risk, contract and warranty risk and commodity cost risk. The nature of these risks in relation to the Group are explained in detail on pages 35 to 37 of the 2022 Annual Report, a copy of which is available on the Company's website, www.melroseplc.net.

Further explanations and details of the strategic risk profile of the Group, which includes non-financial risk, are set out on pages 40 to 48 of the 2022 Annual Report.

EXCHANGE RATES USED IN THE PERIOD

Exchange rates used for currencies most relevant to the Group in the Period were:

The Group policy on foreign currency risk is explained on page 36 of the 2022 Annual Report.

The following table shows an indication of a full year impact of a 10 percent strengthening of the US Dollar and the Euro, if they were to strengthen in isolation against all other currencies, on the re-translation of adjusted operating profit into Sterling:

In the first half of the year, the Group incurred a 5% translational foreign exchange gain on adjusted operating profit compared to the same period last year.

The impact from transactional foreign exchange exposures is not material in the short-term due to hedge coverage being approximately 90%.

The Group utilises its multi-currency banking facility and cross-currency swaps, where relevant, to maintain an appropriate mix of debt in US Dollars, Euros and Sterling. The hedge of having debt drawn in US Dollars and Euros protects against some of the Balance Sheet and banking covenant foreign exchange translation risk. A 10 percent strengthening in either the US Dollar or Euro would have had the following impact on debt as at 30 June 2023:

LIQUIDITY RISK MANAGEMENT

The Group's net debt position at 30 June 2023 was £553 million (31 December 2022: £1,139 million).

The Group entered into new committed bank facilities that became effective on completion of the demerger and fully replaced the existing bank facility. These new facilities consist of a multi-currency denominated term loan and multi-currency denominated revolving credit facilities that mature in April 2026. The Group also has the option to extend, for up to two one-year periods, US $550 million, £300 million and €300 million of the revolving credit facilities. Details of the new facilities and amounts borrowed as at 30 June 2023 are shown below;

As at 30 June 2023, the term loan was fully drawn and there was £0.1 billion of drawings on the multi-currency committed revolving credit facility. Applying the exchange rates at 30 June 2023, the headroom equated to approximately £1.1 billion.

In addition to the headroom on the multi-currency committed revolving credit facility, at 30 June 2023 cash, deposits and marketable securities, net of overdrafts, in the Group amounted to £20 million (31 December 2022: £292 million), whilst drawings on uncommitted borrowing facilities amounted to £58 million (31 December 2022: £nil).

At 30 June 2023, capital market borrowings held by the Group consisted of an outstanding value of £130 million of a bond due to mature in May 2032, with a current coupon rate of 4.625%.

The committed bank funding has two financial covenants, being a net debt to adjusted EBITDA covenant and an interest cover covenant, both of which will be tested half-yearly in June and December, with the first testing date for the net debt to adjusted EBITDA and interest cover covenants being the periods ending 31 December 2023 and 30 June 2024 respectively.

The Group net debt to adjusted EBITDA covenant test level is set at maximum of 3.5x from the first testing date and the interest cover covenant is set at a minimum 4.0x from its initial testing date.

FINANCE COST RISK MANAGEMENT

The policy of the Board is to fix approximately 70% of the interest rate exposure of the Group.

In addition to the fixed coupon payable under the £130 million bond discussed above, the Group uses financial derivatives to fix a portion of the cost of its committed bank facility. At 30 June 2023, 74% of debt has a fixed interest rate consistent with the Group policy and the maximum rates the Group will pay on the fixed portions of its US Dollar and Euro bank debt are 3.4% and 3.0% respectively. The bank margin on the Group's committed bank facility is currently in the range of 1.3% to 1.55% depending on which of the facilities are being utilised.

The Group's cost of drawn debt for the year is currently expected to be approximately 5.3%.

GOING CONCERN

As part of their consideration of going concern, the Directors have reviewed the Group's future cash forecasts and profit projections, which are based on market and internal data and recent past experience.

The Group has modelled a reasonably possible downside scenario against future cash forecasts and for this reasonably possible downside scenario, the Group has sufficient headroom to avoid breaching any of its financial covenants and would not require any additional sources of financing throughout the forecast period.

The Directors recognise the challenges in the current economic environment, including high levels of inflation and challenges in supply chains and the Group is actively managing the associated impacts on trading through a sharp focus on pricing, productivity and costs. In addition, the Group's cash flow forecasts consider any impacts from further economic factors such as rising interest rates.

The macroeconomic environment remains uncertain and volatile and the impacts of the economic factors discussed above could be more prolonged or severe than that which the Directors have considered in the Group's reasonably possible downside scenario.

However, the Group's current committed bank facility headroom, its access to liquidity, and the sensible levels of bank covenants in place with lending banks, allow the Directors to consider it appropriate that the Group can manage its business risks successfully and adopt a going concern basis in preparing these Condensed Interim Financial Statements.

Geoffrey Martin

Group Finance Director

7 September 2023

CAUTIONARY STATEMENT

This announcement contains forward-looking statements. These statements are made in good faith based on the information available up to the time of the approval of this announcement, and should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information. Accordingly, readers are cautioned not to place undue reliance on any such forward-looking statements. Subject to compliance with applicable laws and regulations, the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this announcement. 

This announcement has been prepared solely to provide information to shareholders to assess the Company's strategies and the potential for those strategies to succeed, and neither the Company nor its directors accept any liability to any other person save as would arise under English law.

NO OFFER OF SECURITIES

Nothing in this announcement constitutes an offer of securities for sale in the U.S. Securities may not be sold in the U.S. absent registration or an exemption from registration.

RESPONSIBILITY STATEMENT

We confirm to the best of our knowledge:

By order of the Board

Simon Peckham Geoffrey Martin

Chief Executive Group Finance Director

7 September 2023 7 September 2023

INDEPENDENT REVIEW REPORT TO MELROSE INDUSTRIES PLC

Conclusion

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated statement of cash flows, the condensed consolidated balance sheet, the condensed consolidated statement of changes in equity and related notes 1 to 13.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2023 is not prepared, in all material respects, in accordance with United Kingdom adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Basis for Conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom (ISRE (UK) 2410). A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with United Kingdom adopted International Financial Reporting Standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with United Kingdom adopted International Accounting Standard 34, "Interim Financial Reporting".

Conclusion Relating to Going Concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for Conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed.

This Conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410; however future events or conditions may cause the entity to cease to continue as a going concern.

Responsibilities of the directors

The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

In preparing the half-yearly financial report, the directors are responsible for assessing the group's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditor's Responsibilities for the review of the financial information

In reviewing the half-yearly financial report, we are responsible for expressing to the company a conclusion on the condensed set of financial statements in the half-yearly financial report. Our Conclusion, including our Conclusion Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our report

This report is made solely to the company in accordance with ISRE (UK) 2410. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Deloitte LLP

Statutory Auditor

London, United Kingdom

6 September 2023

Melrose Industries PLC

Condensed Consolidated Income Statement

(1) Results for the period ended 30 June 2022 and the year ended 31 December 2022 have been restated for discontinued operations (see note 2). 

(2) Defined in the summary of significant accounting policies (see note 2).

Melrose Industries PLC

Condensed Consolidated Statement of Comprehensive Income

Melrose Industries PLC

Condensed Consolidated Statement of Cash Flows

(1) Results for the period ended 30 June 2022 and year ended 31 December 2022 have been restated for discontinued operations (see note 2).

As at 30 June 2023, the Group had net debt of £553 million (31 December 2022: £1,139 million). A definition and reconciliation of the movement in net debt is shown in note 12.

Melrose Industries PLC

Condensed Consolidated Balance Sheet

Melrose Industries PLC

Condensed Consolidated Statement of Changes in Equity