Not surprisingly, whilst Meggitt confirmed that first quarter 2020 performance in its defence and aerospace activities had been ahead of the comparative period in 2019, like most other companies that engage in the civil aerospace sector, it too has seen a softening of business in this sector over recent weeks in respect of both revenue and forward order book.
Strong growth in defence with revenue up 15% on the comparable period last year has more than offset softer performance in civil aerospace and energy but the most important aspect of Meggitt’s latest trading statement is the speed at which the company has already taken action to mitigate negative circumstances of COVID0-19 on the business, including reduction of cash expenditure and cost base.
Meggitt confirmed this morning that COVID-19 is expected to result in a significant reduction in demand across the civil aerospace business throughout 2020 in both Original and Aftermarket equipment as airline customers scale back activities to reflect the massive reduction in global air traffic.
With IATA’s latest forecast predicting losses across the global airline sector totalling at least $314 billion and this equating to carriers 2020 passenger revenue being down 55% on 2019 the necessity for all companies engaged in OE and AM equipment to do what they can to mitigate anticipated sharp falls in revenue is very clear and Meggitt has been sensible to take the quick action that it has.
Meggitt’s plan is based on the company having modelled a number of different scenarios for planning purposes – these based on a combination of actual and anticipated customer demand signal changes and external industry forecasts, including those of IATA. In the statement to shareholders, Meggitt says that it has assumed that demand remains robust across its defence business (this sector represented 36% of Group revenues in 2019) and of which over 70% of revenue is derived from the USA.
Working closely with government with whom the company has enjoyed an excellent relationship and support, in order to mitigate the reduction of demand in respect of civil aerospace activities Meggitt’s plan to reduce variable costs has included accessing the Governments furlough schemes where these are applicable and in reducing temporary labour.
Realising the need to retain flexibility as demand patterns develop over the coming months, the company has however taken the difficult decision to reduce the global workforce size by around 15%, subject to ongoing consultation in the regions in which the company operates. This action is intended to ensure that internal capacity across the civil aerospace businesses reflects reduction in demand whilst also positioning the company in what is considered to be an appropriate position in which to enter 2021.
In addition, Meggitt is implementing other measures to reduce its operating cost base including a freeze on all new hiring; removal of annual salary increases for all employees; material cuts in operating costs; and, for the second half, reducing fees for our Non-Executive Directors and salaries for our CEO, CFO and Executive Committee by 20%.
In addition, cash specific actions include significant reductions in capital expenditure and inventory and, as already announced, cancellation of our final dividend payment for 2019. In total, successful implementation of combined measures planned is anticipated by the company to reduce cash expenditure by around £400m to £450m in 2020.
VentilatorChallengeUK and Other Thoughts…..
Meggitt is one of seventeen companies currently engaged in Ventilator Challenge UK, a consortium that was set up in March this year in order to build 20,000 ventilators for the NHS at a rate of 1,500 per week.
Since I wrote two weeks ago on the difficulty that Aldershot based respiratory life-support equipment manufacturer Cam Lock had in getting already approved respiratory equipment suitable for ICU operatives through the complicated acquisition process, I have had countless requests for updates on where we are in relation to the supply of ventilator, PPE and other equipment required urgently by the NHS.
In relation to VentilatorChallengeUK I can at least tell you that the news is very good and that Penlon, a company that was previously producing around 12 ventilators per week, is now in full production meeting an order from the government for 15,000 ventilators based on its existing Prima ES02 model while similarly, Smiths Group which would typically have produced maybe around 40 ventilators a week prior to the COVID-19 crisis is now in full production meeting a government orders for 5,000 of its ParaPac ventilator. None of this would have been possible without the help that other members of the VentilatorChallengeUK consortium has already and will continue providing.
Outside of military respiratory and life support breathing systems which, within the concept of aviation medicine, has long been a specialist area of concentration for me, I do not consider myself being more knowledgeable than anyone else in respect of medical ventilators and life support equipment, COVID-19 testing, vaccine development or indeed, on any specific form of PPE equipment required by the NHS. Thus, I have so far stayed out of the fray on most of this and will, for the most part I guess, continue to do just that.
That said, looking longer term I do sincerely hope that the UK will have learned lessons that failing to maintain sufficient levels of sovereign capability (I am talking here in respect of PPE) has exacerbated the COVID-19 crisis. It is probably time that we rethought the whole process of supply and logistics. The military have and are providing exceptional levels of support to the NHS but I can be in little doubt that longer term we need to rethink the process of health equipment supply and logistics – meaning from who and where we buy from and on how we deliver it to our hospitals.
In its search to throw more bricks at an already difficult enough situation for the government to handle I note that BBC Newsnight in its infinite wisdom has gone out of its way to interview Severin Schwan, CEO of Roche. Not surprisingly Mr. Schwan gave the BBC exactly what they were hoping by suggesting that “the UK had underinvested in healthcare over many years” adding that “the cooperation and the partnership with the government is excellent, but you can’t fix the infrastructure in a couple of weeks. I mean, if there is too little investment over many years into the health care system, then it’s simply not possible to ramp up as fast as you would wish in such a challenging situation.”.
All this may or may not be true but, given the huge size of the cost of the NHS to taxpayers and one look at what the NHS is doing every day for those in its care, for a large foreign company from which the NHS buys many of its pharmaceutical products from to suggest that the UK had not invested sufficiently in the NHS is at this particular time as unhelpful as it is probably unwarranted.
Back to ventilator manufacturing and in respect of this we are indeed very fortunate to have companies such as Penlon and Smiths Group – both companies having a long history of designing and manufacturing sophisticated medical life support systems and equipment for the NHS.
We are very fortunate too that all members of the VentilatorChallengeUK consortium (listed below) have so very quickly stepped up to the plate providing as they have, the various elements of expertise including necessary component production so quickly. Important also is that many of these companies are producing and selling components and equipment on a cost basis at no profit to themselves.
The overall problem or should I better say weakness in the UK, is that we have failed to plan for any eventuality of a situation like COVID-19 occurring. Fifty and sixty years ago when the fear then in the ‘Cold War’ was of the possibility of nuclear attack, crude though much of it was, we did plan for such an eventuality. Back then we had the Civil Defence Service which apart from supporting home defence included National Hospital Reserve Service and Auxiliary Fire Service
Of course, someone, somewhere is to blame but I share the view that we should not blame the current government for the problem that we have in respect of shortage of PPE and other equipment. Indeed, as Air Chief Marshall Sir Mike Graydon wrote in response to an article published in the Sunday Times by Matthew Syed on April 12th (his response letter being published in that newspaper this past Sunday) and in which he said:
This is the age of ‘me, me, me’- should be required reading for all political commentators on TV and radio, the BBC to the fore. When I hear one recognise that our lack of preparedness for a pandemic stems from short termism and financial imprudence across government and society over decades, then sanity may be on the horizon. In the meantime, stop blaming today’s politicians with unrelenting venom and look in the mirror,
For the record, members of the VentilatorChallengeUK consortium are:
Airbus, BAE Systems, Ford Motor Company, GKN Aerospace, High Value Manufacturing Catapult, Inspiration Healthcare Group, Meggitt, Penlon, Renishaw, Rolls-Royce Aerospace, Siemens Healthineers and Siemens UK, Smiths Group, Thales, Ultra Electronics, Unilever, UK-based F1 teams: Haas F1, McLaren, Mercedes, Red Bull Racing, Racing Point, Renault Sport Racing and Williams.
CHW (London – 23rd April 2020)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785