Faced with the impact of a very difficult year it is interesting to observe two very different strategies in action. One, Meggitt has through a very difficult year shown grit, determination and is planning and readying itself for recovery in the future while the other Melrose has decided to go a very different route by driving for cash generation.
That the impact from C-19 has hit both companies very hard and that what has occurred because of the pandemic was beyond the control of either company can hardly be argued. Ironically, in different forms, both are engaged in aerospace, a huge global industry that has been devastated as a result of C-19 but one that all of us know deep down will eventually recover. There was little that either company could do to prevent the seriousness of C-19 impact on their respective P&L’s save taking fast and decisive actions to limit damage wherever they could, battening down of hatches whilst readying themselves for eventual recovery whenever that might emerge.
Meggitt told investors this morning that having swung into reporting of pre-tax losses of £334m for last year (FY2019 £286.7m) after booking higher costs on reduced revenues that it wasn’t paying a final dividend for the year due to the challenging and uncertain market conditions stemming from the pandemic. Without doubt in my view the decision not to pay a final dividend is the right one to take. Far better that the company conserves cash and ensures that from a financial and operating perspective, it is ready for the recovery when it comes.
The Coventry based engineering company which specialises in the aerospace, defense and energy markets said that it expected revenue in the current year FY2021 to be broadly in line with those of FY2020 and importantly, that it expects an increase in underlying operating profit versus those recorded for FY20 adding also that it believed “it was well-placed to benefit from the recovery in civil aerospace and deliver long-term, profitable growth”.
Revenue declined to £1.68bn (FY2019 £2.28bn) and that the preferred measure of underlying operating profits which strips out exceptional one-off items was down 53% to £191m for FY2020 compared with the £402.8m profits reported for FY2019.
In the executive statement Meggitt CEO Tony Wood said that “Faced with a reduction in activity and demand in one of our core markets [aerospace] we acted fast, executed well operationally and took decisive action while positioning the Group for the recovery in civil aerospace. While our full year performance has clearly been impacted by the ongoing effects of COVID-19, it also reflects the resilience and diverse nature of the Group, including the mitigating impact of our defence and energy businesses”.
Mr. Wood added that “The roll-out of vaccines, coupled with significant pent-up demand to travel, provides a supportive backdrop for the recovery in civil aerospace in 2021, although this positive development is likely to take time to feed through into growth in global flight activity and the aftermarket” and that “based on the significant progress we’ve made over the last four years to transform the Group, the effective actions we’ve taken in 2020, diverse end market exposure and leading market positions, we are well placed to benefit from the recovery and to continue to deliver long-term profitable growth.”
Meggitt is doing the right thing and whilst the recovery in aerospace is bound to be slow its other business areas are holding their own. There isn’t anyone I know who doesn’t believe that the aerospace industry won’t bounce back in a couple of years’ and Meggitt is placing itself to be ready for when that recovery shows.
Birmingham based Melrose is regarded as a ‘turnround specialist’ following a raft of acquisitions in recent years and that included GKN, not only reported statutory operating losses of £338m for FY2020 and a pre-tax loss before tax £536m (FY2019 profit of £106m) on revenues down 20% to £8.77bn but rather surprisingly, that it was going to RESTART dividend payments.
Melrose reasoned its decision to restart paying of a dividend to shareholders as being based on the fact that although senior management had seen no signs yet of recovery in its important former GKN aerospace market, because it had ‘gone for cash’ and had apparently generated record cash flows during the year whilst continuing to invest in the businesses, it clearly believed resumption of dividend payments to be in order. Sorry, but I for one am not impressed. Given the serious situation faced by Melrose and many other companies impacted by C-19 globally, conservation of cash and its use to modernise and invest in the business should be the primary strategy of any company thinking about its employees, future growth and success.
Melrose also said that it had reduced the GKN pension deficit that it inherited with the acquisition and as mentioned above, that it is now running businesses for cash. That may sound attractive to some investors of course but to me it also points to expectations of more disposals and closures in the months and years ahead.
Whilst the increase in cash generation may be considered worthy as also is the corresponding decrease in net debt to £2.85bn last year, I rather imagine that real investment in the business has probably also been squeezed despite the company saying that it was continuing to invest in its businesses.
I am of course both old and wise enough to remember the result of conglomerate style engineering businesses being run for primarily cash and to use that horrible old cliché, sweating of assets or what some people prefer to call, assets stripping.
GEC is a perfect example – one that for many years was the UK’s largest engineering company and which for thirty years and more was run on the basis of cash generation being a primary requirement. Starved of investment in the various subsidiary businesses, many of which lost out to emerging and far more efficient competition that had invested in new ideas, new techniques and been prepared to take risk by investing in their own future there is, outside of the former aerospace electronics and maritime businesses which were sold off, very little left today of what GEC used to be in respect of telecoms and other important business activities. BTR and Siebe are two other similar examples and that ironically merged as a last resort to form Invensys.
Is this the way that GKN’s large and important global automotive and aerospace activities are now to be treated by Melrose – drained of cash and struggling for investment? I certainly hope not but with each factory closure announcement (a few weeks ago the company announced the closure of its largest driveline product business in the UK at Erdington, Birmingham) what else am I to think?
CHW (London – 4th March 2021)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785