Melrose Industries PLC, UK, has announced its financial results for the year ended December 31, 2020, reporting that group trading was at the top end of management expectations throughout the second half of 2020.
Statutory revenue for the Melrose Group of £8,770 million was reported, down from £10,967 million in 2019. The group made an adjusted operating profit of £340 million in 2020. The statutory operating loss was £338 million; of the £678 million adjusting items, only £178 million were cash items, almost all related to restructuring. Savings from restructuring projects underway in its GKN divisions are expected to improve the 2021 trading performance by approximately £125 million.
Adjusted free cash generation was £628 million, 6% higher than 2019, prior to £172 million of restructuring costs. The strong cash generation resulted in group net debt reducing by over £400 million (13% of net debt) to £2.85 billion at the end of 2020 (31 December 2019: £3.3 billion).
GKN Powder Metallurgy
In 2020, GKN Powder Metallurgy was streamlined into three divisions: Sinter Metals – a manufacturer of precision automotive components and components for industrial and consumer applications spread across its Precision and Structural segments; Hoeganaes – a manufacturer of metal powder, with manufacturing facilities in North America, Europe, and China; and Additive – a manufacturer of Additive Manufacturing parts, both metals and polymer, and materials for prototypes.
After a strong performance during the first quarter of 2020, the coronavirus (COVID-19) pandemic caused significant disruption throughout the rest of the year reports the group. By the middle of March 2020, production across the GKN Powder Metallurgy business was forced to cease in almost all countries. This presented a number of unprecedented challenges throughout the business and its key endmarkets. GKN Powder Metallurgy met those challenges by implementing a renewed focus on tight resource management, characterised within the business’s operations by flexible work patterns and restructuring programmes to match the new demand levels.
Such operational initiatives sat alongside a strong focus on preserving cash, resulting in a conversion rate before capital expenditure of 156% for the year, including strong and well-controlled working capital management, and reducing capital expenditure. The positive impact of the business’s strict financial and operational control during 2020 was reflected in reductions in productive inventory days by 25%, and approximately a 33% reduction in overdue receivables. This focus strengthened the business’s foundations and enabled GKN Powder Metallurgy to continue to provide customers with strong support free from disruption they required during uncertain times.
With the second quarter of 2020 characterised by these initial responses to the pandemic, the third quarter transitioned towards a quick recovery, with the final quarter of the year seeing a 7% revenue increase compared to the final quarter of 2019, requiring management to cope with some capacity constraint issues. New business wins during the year reached £150 million on an annualised basis, particularly targeted to better margin sinter metals production.
Full year adjusted operating profit margin of 4.3% is a combination of close to break even in the first half and a strong recovery in the second, with the fourth quarter margins above 8%. Despite the trading challenges GKN Powder Metallurgy continued to invest in its technology, integrating its Forecast 3D acquisition into its Additive segment and broadening the range of products to include non-metal. 2020 also saw the first prototype production of its new sustainable metal hybrid hydrogen storage system. Initial market interest is said to look promising and this will become a key focus and potential source of growth in the mid term future.
As a result of COVID-19, the global automotive industry experienced a 17% decline in light vehicle production compared to 2019. The GKN Automotive division saw all its global operational facilities closed for varying durations throughout the year. GKN Automotive sales declined 19% year on year. With the exception of China, this sales decline was consistent across all regions. The market rebound in China in the second half of the year resulted in an annual drop in sales of only 4% compared to 2019.
Fourth quarter sales for GKN Automotive overall were 8% higher year on year, reflecting an encouraging return in demand levels towards the end of 2020. Despite the revenue challenges resulting from COVID-19, GKN Automotive’s operating performance was robust. Disciplined execution of cost reduction initiatives and a focus on key operational levers, resulted in an adjusted operating profit margin of 6.5% for the second half of the year.
In 2020, the Driveline division increased its focus on new-energy vehicles and significantly expanded its product range to further strengthen its industry-leading position. It executed thirty-six new programme launches and implemented operational efficiency initiatives whilst managing the operational challenges of COVID-19. In parallel, the team secured over £4 billion of lifetime revenue in new contracts. Its expertise in high performance shafts is said to be in high demand in electric vehicle production, meaning it is well placed to benefit from the growth in electric vehicles.
Driveline components are already enjoying an equivalent market share in hybrid and electric vehicles as they do in their existing markets based on its differentiated market leading technology in this growing sector.
At the start of the year, GKN Automotive announced a strategic collaboration with global power electronics specialist Delta Electronics Inc. This partnership is expected to enhance ePowertrain’s existing capabilities and accelerate the time to market for innovative eDrive systems. Eight eDrive systems were launched for four global OEMs, over ten brands and thirteen different PHEV and BEV models in the year. The business also completed its first phase of in-house eMotor industrialisation.
China continues to be a key strategic market for GKN Automotive, through its 50% interest in the long-standing joint venture, Shanghai GKN HUAYU Driveline Systems (SDS) with local partner HASCO. One of the first parts of the business to feel the effects of the pandemic; it also benefited from the strong, early recovery of the Chinese market, limiting SDS sales reduction for the year to 4% whilst still implementing operational improvement measures.
Following a reorganisation in 2019, the GKN Aerospace division is structured according to its three core customer markets: Civil Airframe, Defence and Engines. Improvements in 2019 meant that the business made a strong start to the year, with performance comfortably in line with expectations until mid-March. The impact of COVID-19, and in particular the widespread introduction of global travel restrictions, had a swift and material impact on the business.
Along with the rest of the aerospace sector, GKN Aerospace experienced a rapid decline in sales which included a reduction of approximately 50% across its Civil Airframe and Civil Engines markets in the second quarter that persisted for the rest of the year. Although partially offset by the refocusing towards the Defence business, which experienced 8% sales growth across the year, 2020 was reported to be an extremely challenging year for GKN Aerospace overall.
In order to mitigate the impact of such a significant market decline the business quickly implemented strict cash management measures and with a focus on control over inventory achieved a cash conversion before capital expenditure of 328%. As soon as it became apparent that the COVID-19 impact was not going to be temporary, GKN Aerospace undertook appropriate production rescheduling to rebalance the business with its new commercial and operating environments. This meant a reduction in the workforce during 2020.
Together, these initiatives have been critical to the business achieving a relatively small adjusted profit for the year and will be of considerable benefit during 2021, even without any recovery in the aerospace market. In parallel, the business continued to implement its ‘One Aerospace’ global model, which was introduced in 2020 to further integrate and streamline business operations in order to create a much leaner operating model.
The onset of the COVID-19 pandemic brought into sharp focus the health, safety and protection of the GKN Aerospace workforce and the communities in which it operates. In close cooperation with public authorities, the business rapidly took decisive action to ensure that employees could continue to operate safely throughout the pandemic. Business planning was refocused on mapping the expected future impact of COVID-19 across the organisation, its customers and supply chains. The business also made a material contribution to its local communities, manufacturing PPE within a number of its facilities and performing a leading role in the UK’s award-winning Ventilator Challenge Consortium, which produced more than 13,000 life-saving ventilators.
Despite uncertain commercial markets, GKN Aerospace’s continued progress and investment in technology led to several landmark achievements in 2020. Critically, it strengthened its position as a key partner to both existing major blue-chip OEMs and small-scale start-up customers to create the next generation of sustainable aircraft.
Civil Airframe continued its development of the Wing of Tomorrow with the National Composites Centre and initiated a new collaboration with Eviation to design and manufacture the wings, aircraft tail and electrical wiring systems for Alice, a ground-breaking regional electric aircraft.
In Engines, GKN Aerospace’s Additive Manufacturing capability has led to the introduction of lighter and more efficient fan case mount rings, leading to a reduction of 20% in emissions and additionally has accelerated the inaugural flight testing of light-weight, recycled thermoplastic components with Bell on the V-280 Valor helicopter. It has commenced the development of H2Gear, a new hydrogen propulsion system for a zero emissions aircraft.
In 2021, GKN Aerospace will also commence full operations at its flagship £32 million Global Technology Centre in Filton, UK, to work in partnership with the business’s existing Global Technology Centres in the USA, Sweden and the Netherlands. Throughout the year, GKN Aerospace further cemented its strategic position in the Asian market, which is benefiting from a relatively faster recovery after the initial wave of the COVID-19 pandemic.
In addition to the establishment of two wholly owned production sites, one for windows in China and the other for engine components in Malaysia, GKN Aerospace also entered into a new strategic joint venture with a COMAC subsidiary to manufacture advanced aerostructures in Jingjiang, Jiansu Province, China. The 80,000 m2 facility in Jingjiang will be GKN Aerospace’s first aerostructures JV in China, and offers the opportunity to become an important part of local supply of advanced aerostructures in the region.
Justin Dowley, chairman of Melrose Industries PLC, stated, “Whilst the COVID-19 crisis has had a major detrimental effect this year, Melrose has generated record cash flows and continued to invest to improve our businesses. All of this positions the group well for a good recovery and strong performance in the future. Amidst these difficult conditions, Melrose has also managed to significantly reduce the £1 billion GKN UK pension scheme funding deficit that we inherited at the time of acquisition.”