Melrose Industries H1 2026 Earnings Report

Melrose Industries EPS Results

• Actual EPS: GBX 17.80
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Melrose Industries Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Melrose Industries Announcement Details

• Quarter: H1 2026
• Date: 7/31/2026
• Time: Before Market Opens
• Conference Call Date: Friday, July 31, 2026
• Conference Call Time: 4:30AM ET

Melrose Industries (LON:MRO), together with its subsidiaries, provides aerospace components and systems to civil and defence markets in the United Kingdom, rest of Europe, North America, and internationally. The company operates through two segments, Engines and Structures. The Engines segment offers structural engineered components; parts repair; and commercial and aftermarket contracts to engines original equipment manufacturers. The Structures segment provides civil and defence air frames, including lightweight composite and metallic structures; and electrical distribution systems and components to airframe original equipment manufacturers. The company was formerly known as New Melrose Industries PLC and changed its name to Melrose Industries PLC in November 2015. Melrose Industries PLC was founded in 2003 and is headquartered in London, the United Kingdom.

Melrose Industries H1 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Strong first-half performance: Constant-currency revenue rose 10% to nearly £1.9 billion, operating profit increased 16% to £347 million, margins expanded to 18.5%, and EPS grew by more than 20%.
• Positive Sentiment: Engines led growth with revenue up 19% and profit up 21%, supported by 23% original-equipment growth, mid-teens aftermarket growth, stronger repairs activity, and continued expansion of the GTF, GEnx and V2500 programs.
• Negative Sentiment: The Garden Grove incident halted acrylic production and reduced first-half revenue by £16 million and profit by £9 million. Management expects approximately £6 million of monthly revenue, profit and cash impact in the second half, plus £25 million–£30 million of additional exceptional costs, while legal, regulatory, compensation and insurance outcomes remain uncertain.
• Negative Sentiment: Melrose has paused its £175 million share buyback until there is greater clarity on Garden Grove-related liabilities, although management emphasized that the program has been paused rather than cancelled.
• Positive Sentiment: Excluding Garden Grove, full-year 2026 guidance was reiterated for revenue of £3.75 billion–£3.95 billion, operating profit of £700 million–£750 million and underlying cash flow of £150 million–£200 million. Management remains confident in its longer-term path to £600 million of free cash flow in 2029, helped by production ramps, aftermarket growth, RSP cash generation and the GTF becoming cash-positive in 2028.

Presentation

[Peter Dilnot, CEO at Melrose]

Hello everyone. Welcome to Melrose Half-Year Results for 2026. The last six months have been a busy and an important period for the group as we've continued to execute our growth strategy as a leading global aerospace technology business. We've maintained our positive momentum against the backdrop of strong civil and defense demand. Before we get started, I'd like to welcome Ross McCluskey to his first set of results as Melrose CFO. We're delighted to have Ross on board and leading strongly right from the start. We delivered a good first-half performance with continued growth in revenue and profit. We also maintained our increasing cash trajectory with a strong year-on-year improvement in free cash flow. The markets we serve continue to evolve, and the underlying demand story remains compelling.

[Peter Dilnot, CEO at Melrose]

On the civil side, order backlogs are at record levels with production ramping up and the aftermarket continuing to perform strongly. In defense, ongoing conflicts and geopolitical uncertainty are driving up spending commitments and stimulating the rapid development of emerging technologies. In May, we had an incident at our Garden Grove facility in California. This site is a global market leader in the production of aerospace acrylic products, and the issue involved the storage of an associated chemical. Most importantly, the incident was managed carefully with no reported injuries or contamination, and we're working hard with regulators now and our customers to resume full production in a safe and timely manner. I'll come back to this in more detail later. More broadly, I'm encouraged by the progress we're making in the areas we're investing for future growth.

[Peter Dilnot, CEO at Melrose]

We've identified target opportunities where we have proprietary technology and a clear opportunity to win, particularly in engines additive and in defense uncrewed vehicles. Stepping back, our technology is in demand both from existing positions and emerging opportunities. We are navigating challenges along the way, but we have a clear path to unlocking value within Melrose. It's about execution. This is where our focus remains. Let's turn now to some highlights from the first half. From a financial perspective, we delivered a 10% increase in revenue, and that top-line growth translated into a 16% improvement in operating profit to nearly GBP 350 million. We also generated a GBP 67 million year-on-year improvement in free cash flow relative to last year. Operationally, our priority is always to keep our people, the flying public, and our armed forces safe.

[Peter Dilnot, CEO at Melrose]

In the first half, we had a 25% reduction in total incident rate. This means safety incidents are now down over 65% over the last three years. As we've said previously, our inventory levels are higher than we would like due to supply chain issues, and we're addressing this systematically. In the first half, we reduced DIO by seven days. Finally, we improved productivity by a further 230 basis points in the first half. Our operational improvements are being driven by our lean operating model that we call the Brilliant Basics. This model is becoming increasingly embedded across our business and is central to delivering production ramp-up successfully and profitably. I'll give some examples of this in action shortly. We've had a busy first half. This includes expanding our engine fan blade repair business in San Diego, which is serving a growing installed fleet.

[Peter Dilnot, CEO at Melrose]

This builds on our recent investments and reinforces our position in an attractive and growing aftermarket. In defense, we're participating broadly across a range of emerging uncrewed programs. This includes BAE Systems' collaborative combat aircraft, Brontanax, which was unveiled at the Farnborough International Air Show last week and where we're deeply involved in both design and production. Finally, additive fabrication, our breakthrough technology that helps address forging and casting constraints within the industry. Here we've continued to make good progress, including development work with Pratt & Whitney on the F135 program. Before we get further into the H1 results, it's important we cover the incident at Garden Grove. For context, our Garden Grove facility is a global leader in the production of aerospace transparencies, including fighter jet canopies and passenger cabin windows for civil aircraft.

[Peter Dilnot, CEO at Melrose]

We have proprietary technology and know-how built up over 60 years, and we produce a significant proportion of the world's aerospace-grade acrylic. We've invested significantly in the site alongside the U.S. government, who've underpinned this with a $150 million expansion to double our F-35 output. At the end of May, we had a thermal incident within one of the storage tanks for the MMA chemical we use in our acrylic production process. To ensure safety, production was immediately halted, and the local emergency services evacuated nearby residents and businesses. Over the course of five days, we worked alongside local agencies to contain the risks, and I'm relieved to say there were no reported injuries, contamination, or leaks. As the diagram at the bottom of this slide shows, our Garden Grove site operates in two connected parts. First, we make the base acrylic using MMA and our proprietary production technology.

[Peter Dilnot, CEO at Melrose]

We take that base acrylic and form, laminate, coat, and assemble it into canopies and windows. We've been working very closely with regulators and with the full support of our customers and the U.S. government to restore operations safely. The manufacturing side reopened in July, with now around 500 employees back at work producing transparencies for customers using existing material and third-party-sourced acrylic. In parallel with this, we're working hard to restart the base acrylic production, and we have some important weeks ahead. Our work here is being done in close cooperation with the regulators, as well as customers and the U.S. government, who recognize the strategic importance of the site's production within the U.S. industrial base. Beyond the formal regulatory approvals required, we'll give the local community safety reassurance, and we're also exploring some form of compensation for the disruption caused by the evacuation.

[Peter Dilnot, CEO at Melrose]

We're also addressing a range of ongoing legal cases regarding the incident. We're making progress here with managing the situation across multiple stakeholders. However, there are still uncertainties about the timing of acrylic production restarting, wider regulatory and legal costs, and our insurance coverage is under review. With all this in mind, we have paused the current share buyback until the situation is clearer. Let me now hand over to Ross to take us through our H1 results in more detail.

[Ross McCluskey, CFO at Melrose]

Thanks, Peter, and good morning. I'm delighted to have the opportunity to talk about my first set of interim results as Melrose CFO, having joined the group in early May. We have delivered a good set of results in the first half, with revenue, profit, and cash in line with our expectations pre the impact of Garden Grove. Group revenue grew by 10% on a constant currency basis, led by a strong performance in the Engines division. Group operating profit was up 16% to GBP 347 million, driven by positive revenue growth and the continued focus on operational and efficiency improvements underpinned by our Brilliant Basics program. This enabled us to deliver a 50 basis points increase in H1 margin to 18.5%, while EPS improved by over 20% versus the same period last year.

[Ross McCluskey, CFO at Melrose]

We delivered positive free cash flow in the first half of GBP 30 million, resulting in the maintenance of our leverage ratio at 1.8x EBITDA. This positive cash position was achieved despite a net cash outflow from factoring in the first half. Our results in H1 were impacted by the Garden Grove incident in late May. Group revenue and profit were GBP 16 million and GBP 9 million lower, respectively, and adjusting for this impact, we would have delivered revenue growth of 11% and operating profit growth of 19%. Turning to slide seven and focusing on our Engines division. We are pleased by the performance of Engines in H1, with broad-based growth across the product lines.

[Ross McCluskey, CFO at Melrose]

Revenue was up 19%, with OE accelerating to 23% and aftermarket continuing at the mid-teen levels we saw in 2025. As you can see, we've provided some additional clarity on the drivers of our revenue growth. Our civil RRSPs grew by 18%, with notable growth in the GTF, GEnx, and V2500 platforms. Within this, variable consideration increased to GBP 206 million, in line with our full-year expectations of GBP 340 million-GBP 380 million. We have continued to make commercial progress in our RRSPs, as seen with the recent agreement with Pratt & Whitney to include low-pressure compressor vanes on the 15 and 1900 engine platforms.

[Ross McCluskey, CFO at Melrose]

Government partnership growth of 29% was strong, primarily driven by work on the RM12 engine for the Gripen, including the delivery of the first upgraded engine to the Swedish Armed Forces as part of the enhanced performance program. This reinforces our position as a core strategic partner to the FMV. Repairs continued to perform well with growth of 27%, supported by higher fan blade volumes and with the recent contracts announced with Rolls-Royce and Pratt & Whitney providing additional opportunities to grow share.

[Ross McCluskey, CFO at Melrose]

Our site in Johor, Malaysia, delivered a particularly strong H1, while our San Diego site completed its first repair of a highly engineered blisk component, demonstrating its strong technical capability. It should be noted that we are lapping a period of tariff disruption for our repairs business in H1 2025. We delivered positive operational leverage in the first half with profit growth of 21% and margin expansion of 40 basis points, or 100 basis points, excluding variable consideration. Overall, a strong performance from the Engines division. Turning to Airframes on Slide eight, reported revenue grew by 4%, while profit declined by 1%. Adjusting for Garden Grove, growth would have been 6% and 13%, respectively. Defense grew strongly, up 14%, driven by the F-35, C-130, and NH90 and the benefits of work done to ensure the portfolio is sustainably priced.

[Ross McCluskey, CFO at Melrose]

Defense continues to develop commercial opportunities underpinned by positive momentum in NATO members' spending commitments. Later in the presentation, Peter will talk about opportunities we are developing across both our Engines and Airframes business for uncrewed vehicles, where we continue to work with a number of partners. On the civil side of the business, revenue was marginally lower than 1%. This was primarily driven by a reduction in customer inventory, notably on the A320 platform. Growth in wide-body benefited from good momentum from the A350, while business jet revenue was solid despite ongoing supply chain challenges. We also made progress securing additional aftermarket opportunities, particularly in EWIS. Margins for Airframes demonstrated solid progress on an underlying basis, improving by 50 basis points, excluding Garden Grove.

[Ross McCluskey, CFO at Melrose]

Again, our Brilliant Basics program has contributed to margin expansion, as evidenced by our H1 productivity improvement of 3 percentage points and a 12% improvement in the cost of poor quality. We've also made progress in improving the productivity at one of our Netherlands manufacturing sites. Overall, end market demand remains buoyant, with Airbus and Boeing recording over 1,300 new orders in the first half. We are also encouraged by the double-digit percentage increases in H1 deliveries from both, demonstrating some gradual easing of the broader supply chain challenges. This bodes well for an improved civil outlook into H2 2026 and beyond, as the volume ramp builds. Let's move on to our cash performance for H1 on slide nine. We are pleased to report a positive free cash flow performance in H1 of GBP 13 million, representing a GBP 67 million improvement versus the same period in prior year.

[Ross McCluskey, CFO at Melrose]

Importantly, this was achieved despite a reduction in our factoring balance, which resulted in a net cash outflow of GBP 50 million in H1. Pre-factoring, our cash flow in the period would have been positive GBP 28 million. I will come back to our approach to factoring shortly. Our year-on-year improvement in cash was driven by a number of key factors, namely improvements in underlying profit generation, the anticipated reductions in GTF PMI payment and restructuring cash spend, and a net neutral working capital position versus outflow in H1 prior year. It should be noted that we did benefit from an unexpected timing acceleration of some customer receipts at the end of June, worth about GBP 20 million-GBP 25 million. Within H1, we incurred exceptional cash costs of GBP 5 million in relation to the Garden Grove incident.

[Ross McCluskey, CFO at Melrose]

On a net basis, our cash impact resulting from Garden Grove was actually a net positive GBP 7 million, with an operational working capital unwind more than offsetting the incurred cash costs. I'll come back to our outlook for H2 for Garden Grove shortly. Capital expenditure was up slightly versus prior year to GBP 52 million. We continue to anticipate an acceleration of spend in H2 on CapEx, in line with our full-year guidance of GBP 120 million-GBP 140 million. Net interest and tax increased by around GBP 7 million versus prior year due to higher cash interest costs. The GTF payment of GBP 27 million was in line with our full-year guidance of GBP 50 million.

[Ross McCluskey, CFO at Melrose]

We continue to expect to resolve this issue within the GBP 200 million envelope advised to us by Pratt & Whitney. Just as a reminder, our underlying cash generation is seasonally weighted towards H2. Turning to page 10, you can see the bridge to our net debt number of GBP 1.53 billion as of the end of June, equivalent to 1.8x net debt to EBITDA, which is down from 2x at this time last year. Our period-end leverage sits well within our stated leverage policy of 1.5x to 2x EBITDA. During the first half, we have returned around GBP 130 million to shareholders, GBP 60 million of which was with dividends, with the rest coming from our share buyback programs.

[Ross McCluskey, CFO at Melrose]

The previous GBP 250 million program was completed in Q1, and GBP 12 million of the current GBP 175 million program has been spent. As communicated in our announcement this morning, we have paused the GBP 175 million program until we achieve greater clarity on the impact of Garden Grove. As I mentioned, I'd like to take the opportunity to address our approach to factoring.

[Ross McCluskey, CFO at Melrose]

Importantly, we continue to believe it represents an efficient source of capital for the group. In terms of future guidance, we are clarifying that we will cap the growth in our year-end balance to be no more than the growth in group annual revenue, excluding the impact of FX. To aid understanding, we are now providing a guidance range of our full-year expected balance based upon the group's growth outlook. To enhance our disclosure clarity, our cash flow presentation will now split out movements pre- and post-factoring, and you saw this on our previous slide. I've also included an additional slide in the appendix, which provides a further bridge of our factoring balance between cash and FX. Now, turning our attention to the Garden Grove incident. Peter has already spent some time discussing what has happened; I will now address the financial split between operational and exceptional impacts.

[Ross McCluskey, CFO at Melrose]

Operationally, our H1 impact was a negative GBP 16 million on revenue, GBP 9 million on profit, and positive GBP 12 million on cash. Given the uncertainty regarding the timing for full resumption of site acrylic production, we are guiding to a monthly run rate impact for H2. Based on anticipated levels of activity, we expect the site to deliver at around about 50% of its normal monthly revenue, which will impact the top line by around about GBP 6 million per month. We expect this to fully flow to profit and cash, given we are operating with higher production costs from bought-in acrylic and a change in business mix towards repair. The actual site-level cash impact for H2 will depend upon the timing of full production opening and the rebuild of WIP and working capital.

[Ross McCluskey, CFO at Melrose]

From an exceptional perspective, we incurred GBP 13 million of P&L costs in H1 from the initial response, recovery, and advisory costs, GBP 5 million of which was paid in cash in H1. For H2, we currently anticipate additional exceptional costs of between GBP 25 million-GBP 30 million. This excludes the impact of any potential legal, regulatory, or compensation scheme processes, nor does it include the potential for any insurance-related recoverability. Given the uncertainty that persists, we have made the appropriate decision to pause our current buyback program until we have greater clarity. We will, of course, provide further updates as appropriate. Turning to our outlook for 2026 on page 12. At a group level, we are reiterating our full-year guidance for the current year, excluding the impact of Garden Grove I just outlined.

[Ross McCluskey, CFO at Melrose]

We continue to expect robust revenue growth in 2026, driven by OE volume ramp and the strength of the aftermarket. We are guiding to revenue from between GBP 3.75 billion-GBP 3.95 billion, which at the midpoint represents like-for- like revenue growth of circa 10%, in line with our H1 performance. This revenue growth continues to be weighted towards engines. We are guiding to a pre-Garden Grove operating profit of between GBP 700 million and GBP 750 million, and at the midpoint, this represents profit growth of 16%, again in line with our H1 delivery. Underlying cash flow is expected to be in the GBP 150 million-GBP 200 million range. To wrap up, we have delivered a good performance in H1 while managing the Garden Grove situation from May. Revenue and profit both grew by double-digit percentages, with margin expansion and positive free cash flow.

[Ross McCluskey, CFO at Melrose]

While the precise impacts of Garden Grove are difficult to quantify at this stage, we have taken steps to provide additional financial flexibility. With that, I will hand it back to Peter.

[Peter Dilnot, CEO at Melrose]

Thanks, Ross. I'll now talk about the longer-term outlook and the progress we're making executing our growth strategy. Let's start by briefly touching on our markets. The headline message here is that the structural growth drivers remain very strong. Indeed, the challenge for the industry is not demand, but supply. On the civil OE side, backlogs have continued to grow in H1, with encouraging orders for wide bodies as well as the A220. The major OEMs are now targeting strong build rate increases every year to the end of the decade, and this will drive growth in both our civil airframes and engines businesses. Engine flight hours, which drive our aftermarket business and our RSP portfolio, have also remained strong. The conflict in Iran and increasing jet fuel prices have raised concerns about potential aftermarket reductions in 2027 and beyond.

[Peter Dilnot, CEO at Melrose]

However, flying activity has been resilient, and the outlook remains positive, especially given constrained shop visit capacity. Our RSPs give us good exposure here, as we have an aftermarket entitlement on over 70% of global flying hours. Defense largely speaks for itself. We're continuing to see increasing commitments across NATO, particularly with a greater proportion of European nations' GDP being allocated, as well as further investment in the U.S. This is benefiting our existing platform positions, such as the F-35 and Gripen, both in OE and the aftermarket, as well as driving rapid developments in uncrewed vehicles and missiles, which are attractive growth markets for us going forwards. Stepping back, demand is our friend, and our focus is on executing our strategy to capitalize on our position in these growing markets.

[Peter Dilnot, CEO at Melrose]

As many of you know, we have a clear and consistent growth strategy, which is built around the three waves shown on this slide. The first is delivering growth from our existing platform positions. We have embedded technology on all the world's leading aircraft, and as production rates increase and the aftermarket continues to expand, we will grow alongside our customers. Around 90% of the value we'll create over the next few years will come from these existing positions. The second wave is expanding in targeted new opportunities where we have differentiated technology and a clear right to win. We're deploying capital selectively in these areas, such as additive fabrication, and around 10% of our financial plan to 2029 is driven by these opportunities. The third wave is positioning the business for the next generation of aircraft.

[Peter Dilnot, CEO at Melrose]

Here, our technology continues to be in demand in both civil and defense programs, creating opportunities for growth over the longer term. Three clear waves to create value. Let's now turn to the first and most important of these, delivering growth from our existing platform positions, starting with Engines. Engines' strong performance in the first half was driven by continued growth on our core programs, including the GTF, GEnx, and XWB, together with the ongoing cash contribution from our portfolio of 19 RSPs. In H1, we expanded our scope within the GTF program, and more broadly, we're encouraged by the reduction in GTF AOGs, the GTF Advantage entering service, and progress with the Hot Section Plus upgrades. We remain confident that the GTF program will become cash-positive for us in 2028.

[Peter Dilnot, CEO at Melrose]

We've continued to strengthen the business operationally and commercially, including new multi-year repair agreements with both Rolls-Royce and Pratt & Whitney, and we're expanding our blade manufacturing capacity in North Charleston to support future growth in advanced engine components. We're facing significant demand growth in engines, and it's essential that we deliver the ramp-up successfully for all stakeholders. The key to this is our lean operating model, which we call the Brilliant Basics. This focuses on the core elements of operational excellence, daily management, breakthrough delivery, and problem-solving. Our approach is gaining traction and is driving improvements in quality, delivery, inventory, and productivity. We're also applying the Brilliant Basics in cooperation with our customers and supply chain partners. A great example of this is working alongside GE at our Tallassee facility, where we manufacture GEnx fan cases for Boeing 787.

[Peter Dilnot, CEO at Melrose]

We ran three Kaizen events at the heart of the operation, and these delivered a 90% reduction in inspection times, improved yield in the core composites workflow, and a roadmap for increased autoclave throughput. You can see us in the photo in front of one of them here. This event underpins the planned production ramp-up from around five cases per week today to around 10 cases per week in the years ahead. More broadly, we're investing heavily in production capacity and automation to increase our build rates for the GEnx, XWB, and GTF, ensuring we're ready to support the strong OE ramp-up of these important engines. Going forward, we'll therefore benefit from increasing engine production rates, growing aftermarket activity, and higher RSP cash generation from newer engines entering shop visits where we have a greater share. Let's turn now to airframes. The story here is similar in many respects.

[Peter Dilnot, CEO at Melrose]

Unprecedented civil and defense backlogs provide a long runway for future growth, especially as we're now the world's largest independent airframes business. Industry production rates are increasing, although they're still constrained by supply chain issues. In the first half, we continued to invest in capability, capacity, and automation across our full portfolio of aerostructures, wiring transparencies, landing gear, and ice protection systems. We're increasingly leveraging our global footprint to serve customers locally and cost-effectively too. For example, in the first half, we progressed our global hub for wiring in Mexico, and we started producing glass windows in China for the aftermarket. Operationally, I'm encouraged by the progress we've made in the Netherlands in recent months. Following the production transfers we discussed at the full-year results, output and productivity have improved significantly.

[Peter Dilnot, CEO at Melrose]

As with Engines, these improvements are being driven by Brilliant Basics, and a good example here is Hoogeveen, where we've applied our lean tools to supplier quality management. By working systematically with our problem-solving approach, we've achieved an 80% reduction in customer issues linked to supplier parts, driving both better delivery performance and lower costs. Looking beyond the first half, the opportunity remains clear. Our focus is on converting record order backlogs into profitable growth and increasing cash flow, expanding our participation in the aftermarket, and continuing to drive operational improvements through lean, digitalization, and AI. Alongside this existing platform growth, we're also progressing the second wave of our strategy: investing in targeted new opportunities. Let's now turn to that. A good example of our new opportunities is the Defensive Unmanned Aerial Vehicles market, or DUAVs.

[Peter Dilnot, CEO at Melrose]

This is a rapidly evolving market given the changing nature of warfighting that we've seen in Ukraine and Iran. It's a dynamic and growing market, and it's attractive for us as we have three distinct routes to market that leverage GKN Aerospace capabilities. The first is on the airframe's side, where we're building on our established strength in advanced composites and structures. We're participating across a range of national programs and platform sizes with a combination of deep engineering design capability and our production capabilities in key NATO sovereign nations, including the U.K., the U.S., the Netherlands, Sweden, Norway, and Germany. Examples here include Anduril's Thunder program and BAE's Brontanax program, which I mentioned earlier. The second path is on the engines' side.

[Peter Dilnot, CEO at Melrose]

Here, we're developing a range of engines for uncrewed applications, starting at the lower end of the thrust range and building on our established capability as the engine OEM for the European Gripen fleet. In the center of this slide is what is effectively a new market for us, combining our airframe and engine capabilities to deliver integrated systems and establish us as an integrated OEM player in this field. The flagship development here is our work with the Swedish FMV to bring a one-way effector platform to market. This vehicle will take flight next year. Put together, we're addressing a range of sophisticated operational needs by leveraging GKN's technologies and capabilities. Another example of where we're investing significantly is Engine's additive fabrication.

[Peter Dilnot, CEO at Melrose]

At its core, this proprietary technology is about creating a new way of manufacturing structural components, and we've developed a proprietary manufacturing capability that provides an alternative approach for a range of components. Put simply, we're able to manufacture and assemble complex structural components in new ways. As part of the solution, we use our patented laser wire deposition technology, which is attracting substantial interest across the industry. Here, we print structural components using robots and lasers to melt titanium or superalloy wire in inert gas chambers. We produce near-final- form parts, which are then machined to use with very high buy-to-fly ratios. Today, we're the only company with a certified additive-manufactured structural part on commercial aircraft engines, namely the GTF fan case mount ring. We're now working on expanding the portfolio by gaining more certifications and with some good momentum in the pipeline in H1.

[Peter Dilnot, CEO at Melrose]

We're also now producing 100% of that GTF fan case mount ring using additive, and we're working on improving productivity, reducing cost, and proving repeatability at scale. We're exploring a modular factory approach that would enable us to rapidly scale production wherever it's needed. This is technology that is in demand today and will become increasingly important for the future. It strengthens our position on existing platforms, expands our scope with customers, and creates attractive opportunities for the longer term. This brings me to the final wave of growth, the next generation. This slide shows that we're already deeply embedded across many of the programs that will shape the future of flight within both civil and defense. On the civil airframes side, we're working closely with customers on the next generation of single-aisle aircraft.

[Peter Dilnot, CEO at Melrose]

This builds on our expertise in advanced composite structures, where we already manufacture some of the world's largest load-bearing components. Programs such as the Wing of Tomorrow and SusWingS are defining future aircraft design with developments such as folding wings, coupled with new materials and manufacturing methods. In civil engines, we're the only design partner positioned on both current and next-generation single-aisle engine development programs. That's the CFM RISE and Next-Gen GTF. We're also involved with the Rolls-Royce UltraFan, plus longer-term EU projects in hydrogen electric propulsion. Across these programs, we're leveraging our expertise in advanced composites, lightweight structural component design, and, of course, additive fabrication. On the defense side, we're involved in the next generation of combat aircraft through programs such as GCAP, alongside opportunities in missiles and canister systems.

[Peter Dilnot, CEO at Melrose]

In defense engines, we're building on our established position supporting the Gripen fighter fleet while also developing propulsion technologies for the next generation of uncrewed platforms and future combat aircraft with partners including Pratt & Whitney and GE. We are playing an influential role across our markets, and we're doing this as a design-led tier one partner alongside our customers and also often with government support. These next-generation opportunities are important for long-term growth. This covers the three waves of our strategy, and I'd now like to turn to how all this contributes to growing cash flow. As we've said before, there are three key drivers of our free cash flow. These are clear and consistent. The first is growing operating profit. You've heard us talk about the production ramp, the continued growth of the aftermarket, our operational improvement programs, and our expansion into new areas.

[Peter Dilnot, CEO at Melrose]

Growing profit in our core business, combined with strong cash conversion, remains a foundation of our free cash flow story. The second is our RSP portfolio. Today, 17 of our 19 RSP programs are cash generative, and as those engine fleets continue to mature and move further into their aftermarket phase, the associated cash generation will continue to increase. The third is the GTF. As we've discussed, the program remains in its investment phase today, but we expect it to become cash-positive in 2028. As the fleet matures and GTF Advantage penetration increases, the program will become an increasingly important cash contributor. It's also worth stepping back and looking at what drives the RSP cash generation more broadly. In the near term, we'll benefit from continued growth of our newer engine programs, the GTF, GEnx, and Trent XWB.

[Peter Dilnot, CEO at Melrose]

As those fleets grow and shop visit volumes increase, our higher program shares on these engines will provide a growing contribution to aftermarket cash flows. At the same time, the mature engine fleets continue to generate valuable aftermarket cash flows through extended in-service lives before slowly declining late in the decade. We're already investing in the next-generation engines and expect this to ramp up steadily in the early 2030s, pending any decisions we make on future RSPs. All of these drivers underpin our confidence in the path to GBP 600 million of free cash flow in 2029, with cash generation continuing to grow thereafter. In closing, it's fair to say it's been a busy and important first half for us. We've maintained positive momentum with our financial performance, particularly with improved H1 operating cash flow.

[Peter Dilnot, CEO at Melrose]

The incident at Garden Grove has been challenging, and while we've made progress, there are uncertainties for us to navigate carefully from here. That said, we have a clear strategy to capture market growth and expand our technologies. We're therefore confident of unlocking value from Melrose, and our focus remains on executing our plan with grip and determination. With that, we'll open to questions.

[Operator]

Good morning, everyone, and welcome to the Melrose half-year results call. We shall now start today's Q&A session. To ask a question, please press the star followed by one on your telephone keypad now. If you change your mind, please press the star followed by two to remove yourself from the question queue. When preparing to ask your question, please ensure your device is unmuted locally. The first question today comes from Sam Burgess of Goldman Sachs. Your line is now open. Please go ahead.

[Sam Burgess, Analyst at Goldman Sachs]

Great. Thank you very much, and good morning, both. Thanks for the presentation. Firstly, for Peter, thanks for the update and talking about the next generation of engines. I think I'm right in saying you're on the demonstrator for the next generation. How confident do you feel on the prospect of those being RSP structures? Secondly, for Ross, if that's okay, of the additional GBP 25 million-GBP 30 million of exceptional costs expected in the second half, how much is likely to be cash paid in FY 2026 rather than later periods, if you've got any sense or visibility on that? Thank you.

[Peter Dilnot, CEO at Melrose]

Morning, Sam. Thanks for the questions. I think Next-Gen's a pretty exciting development for us. As you've suggested, we're on both the current Next-Gen development programs, which is the next-gen GTF and CFM RISE, and we also have been historically involved with the UltraFan, and indeed there's some discussion about exactly what might happen with that going forwards as it relates to single-aisle as well. From our perspective, we're involved, we're in demand, and we're uniquely placed across all of those platforms. I think what's going to happen as we go forward is clearly there's an intersection with those engines and the airframes that they sit on. The key thing for us is that we're involved in all of them. I think there's a question mark also about, as you mentioned, which is whether or not they're going to be RSPs.

[Peter Dilnot, CEO at Melrose]

I think we need to make a decision when the time comes about whether or not we want to be involved in the RSPs, at what extent on a number of engines, or go harder on one. The key thing is we're involved, we're shaping it, and our technology is very much in demand. Choices to come, I think, and right now getting going, supporting the customers with those developments in an evolving market.

[Ross McCluskey, CFO at Melrose]

Sam, just to pick up your second question in terms of exceptional costs. Just to be clear, all of these costs in terms of exceptionals are cash costs, so there's no asset write-downs or anything of that nature in that GBP 25 million-GBP 30 million worth of guidance. In essence, I would expect all of that to be a cash cost in H2. There'd be a bit of payment terms that manifest itself into 2027. Of course, you've got the unwind of the cash costs versus the P&L charge for the exceptionals in the first half of the year. More generally, we would expect to have some exceptional costs for Garden Grove in 2027. We're not providing any particular guidance on that at this stage, but we will, in due course, of course, come back to that particular point.

[Sam Burgess, Analyst at Goldman Sachs]

Great. Thank you very much. That's really helpful.

[Operator]

Thank you. The next question comes from Ian Douglas-Pennant of UBS. Your line is now open. Please go ahead.

[Ian Douglas-Pennant, Analyst at UBS]

Yes, thank you for taking my call. Welcome, Ross. The first question I have is on payables, please. Could you just help us understand the driver behind the significant increase that we see in the first half of this year, the GBP 89 million cash inflow that we see from receivables and payables? Was there an underlying driver behind that? The second question is on the buyback. You highlight Garden Grove as a GBP 30 million-GBP 65 million cash issue for this year. Why does that mean that you have to fully cancel the GBP 175 million buyback, that the scale of the two things seems a little different there? Maybe you can help me square that difference. Thirdly, on factoring.

[Ian Douglas-Pennant, Analyst at UBS]

Can I just confirm with this clarification in your plan here: does that reflect a change in the plan itself, or are you just helping us understand better what your original plan was? Within the 2029 guidance, should we assume something like GBP 75 million of factoring in that GBP 600 million number? Thank you very much.

[Ross McCluskey, CFO at Melrose]

Okay. Are they in there for me? All right, thanks, Ian. Let me deal with the buyback question first if I can. Look, what we sought to do today in terms of clarifying, quantifying the impact of Garden Grove, you can see our H1 and H2 impacts. As we mentioned in the statement today as well, the impact of any potential regulatory investigations or indeed civil litigation is uncertain, right? As a result, given that, we're taking the appropriate decision to pause, right? Pause is the appropriate word rather than cancellation, Ian. Once we have got clarity, we'll come back and revisit that at the right time. Secondly, if I come back to factoring.

[Ross McCluskey, CFO at Melrose]

Look, I think there was potentially some ambiguity about how we've guided in the past, and I just wanted to be very clear in terms of how we're going to approach it and how I want to guide through it going forward. In essence, our factoring balance at the year-end will grow by no more than the revenue growth of the business. Implicitly, that was within the financial guidance that the team had given already for 2026. There's no change to the GBP 150 million-GBP 200 million range off the back of that clarification, nor indeed is there any change to the impact that that would have on the 2029 cash guidance either. I think, therefore, for GBP 75 million for 2029, of course, that will depend upon the revenue growth that you see in your model in that particular year. I'll leave that to you to assess.

[Ross McCluskey, CFO at Melrose]

Effectively, the growth in 2029 would be commensurate to the growth in revenue that you put into your model for that particular year. As for payables, there's no particular change in strategy on that. There's a timing point as ever. Big cash flow is within this industry, particularly at the half-year end. It has been very much business as usual interpretation on that movement in payables.

[Ian Douglas-Pennant, Analyst at UBS]

Thank you very much; apologies for using the right word. I should have said pause, as you say. Thank you.

[Ross McCluskey, CFO at Melrose]

Thanks.

[Operator]

Thank you. The next question is from David Perry of JPMorgan. Your line is now open. Please go ahead.

[David Perry, Analyst at JPMorgan]

Yes. Good morning, Peter and Ross. I've got three questions, please. First one, just on Garden Grove, if either of you wants to take this. Just the insurance. I know you're probably in negotiations; it's probably sensitive, but is there any color you can give on what a typical insurance policy covers, which elements of the various costs you may incur? The second one is for Ross. I know you've only been there two months, and frankly, you've probably been firefighting a bit on Garden Grove, but just curious, any first impressions you've got on the finance function, or anything you think you could do differently or improve? For you, Peter, please, the organic growth was very strong in defense in both engines and airframes. Can you just speak to that a little bit in each division?

[David Perry, Analyst at JPMorgan]

Just pull out which specific things are driving that level of organic growth and the sustainability in each division. Thank you.

[Peter Dilnot, CEO at Melrose]

Do you want to go first, [inaudible]?

[Ross McCluskey, CFO at Melrose]

Yeah, sure.

[Ross McCluskey, CFO at Melrose]

[inaudible] Why don't I go first? Look, yeah. Thanks, David, first of all for the question. As you say, it's been a pretty active first, not even quite yet, three months, actually.

[Peter Dilnot, CEO at Melrose]

Yeah.

[Ross McCluskey, CFO at Melrose]

within the business. What I would say is very much what I've seen since I've been here has absolutely validated the choice that I made to join the company during the course of 2025. It's a great team. It's a fantastic business. We've got two very strong sub-components of the Melrose business, which really are in very attractive market end spaces with plenty of roadway and roadmap ahead of them. Look, as you heard from Peter already, the drivers of growth that we forward are accelerating over the course of the coming years. Candidly, from a finance perspective, I'm actually really delighted by the team that I've inherited from Matthew, with a lot of very strong people technically within the central team, as well as within my divisional resource.

[Ross McCluskey, CFO at Melrose]

As ever, there's opportunities for us to get better, but it's a very strong, solid foundation in our finance team. One thing I think we have sought to do, hopefully as part of today's presentation, is just be clearer on a few areas and just be more precise. What we're doing, clearly on the cash flow reporting and spelling out factoring, is just a small example, and we'll look to try and refine and hopefully improve on that going forward as well. That's what I would say on that. Why don't I take insurance as well?

[Peter Dilnot, CEO at Melrose]

Yeah.

[Ross McCluskey, CFO at Melrose]

David, look, you kind of mentioned already, clearly a very active and dynamic situation within Garden Grove. As a multi-jurisdictional business in multiple markets, we have a range of different insurance policies that are in place that cover a number of different exposures. All of our insurance companies and providers have been notified of the incident, and we're working with them. As you'd expect me to say at this stage, until we've got full clarity on the situation, our insurance remains under review, which is exactly what we said today.

[Peter Dilnot, CEO at Melrose]

Defense. Yeah. Good morning, David. Just on the defense side, you're right. It's a very strong and encouraging performance in both businesses. I think the key thing is it's broad-based, and it's on our existing platforms. Specifically on airframes, that's obviously the F-35, as well as the European platforms coming through. It's partly volume. Also, as you know, we've been working very hard on getting this portfolio where it needs to be. There's some impact of price reading through as well on that. On the engines' side, it is the continuation of supporting, in particular, the Gripen jet. As you may recall, we are the sole provider for the Gripen fleet in terms of propulsion.

[Peter Dilnot, CEO at Melrose]

We look after that as it runs, not only in terms of new production, but also in terms of what is a very busy aftermarket for obvious reasons, given what's happening to the east of the continent right here. The other point I'd say about the defense business in Engines is we've got a heavy position on the F135 with Pratt & Whitney, and you've heard some news about that, as well as actually the ducts business where we make a whole range of structural components, frankly, for pretty much all of the world's fighter fleet. Broad-based, very much right now, the existing platforms are reading through with increased demand.

[Peter Dilnot, CEO at Melrose]

I think as we see going forwards, we'll get more of a mix shift towards some of these new developments, which we touched on today, and of course, you've seen more broadly with very rapidly developing technologies, particularly around uncrewed, and we're excited about the role we'll play in that.

[David Perry, Analyst at JPMorgan]

Thank you. Very clear.

[Operator]

Thank you. The next question is from Aymeric Poulain of Kepler Cheuvreux. Your line is now open. Please go ahead.

[Aymeric Poulain, Analyst at Kepler Cheuvreux]

Thank you very much for taking my question. It also relates to the pause on the buyback program. When would you think you'll be in a position to know if you are able to resume that buyback program? Or, looking at the various growth initiatives that you highlighted, are you also thinking about a change of capital allocation priorities, maybe more geared to reinvestment behind this new growth initiative rather than financial engineering, if I can call it like that? Looking at the 2029 target and beyond, you mentioned also your interest in participating in all the major next-generation aircraft and engines. What would be the size of the R&D development investment requirements beyond 2029 on those, please?

[Peter Dilnot, CEO at Melrose]

Do you want to get the first one, and I'll go on next-gen?

[Ross McCluskey, CFO at Melrose]

Yeah, sure. Just first of all, in terms of capital allocation policy and prioritization. If we think about prioritization, the way we first look at it is investment in the business, ordinary returns to shareholders, and share buyback. That's the kind of priority as we look at it. Certainly from, as we said to you today as management, the guidance that we've given for capital spend this year is between GBP 120 million and GBP 140 million. That will be good acceleration versus what we spent in prior years. We're very much open to making sure we're spending the right amount of money in the right place, both from the maintenance perspective and in supporting the future growth in the business as well. That is, and will always remain, our top priority. In terms of the buyback itself and the timing of that, it's very much a TBC.

[Ross McCluskey, CFO at Melrose]

Part of that may depend on the status of the compensation fund. What I would say is that the extent to which litigation does happen in the U.S. does tend to be a relatively midterm issue for companies to deal with. Of course, as we go through, things will become clearer, and I can give as much guidance as possible in due course.

[Peter Dilnot, CEO at Melrose]

Great. Specifically on the next-gen point and around future RSPs and investment. I'll go back really to the first question that Sam asked around the development here. We're really very much in demand in the next generation, and we're pleased to be playing a role in all of the current programs, which are, again, next-gen GTF and CFM RISE, and they're also involved with the UltraFan and have been historically. We're broad-based, and we're very unusual in that respect, being the market leader in lightweight structural components in pretty much all the flying fleets. The starting point is that our technology's in demand. The market and the next generation's single-aisle architecture is very much in debate at the moment in the industry, as you know. Of course, there's this intersection between airframes as well, particularly if you go for the open fan rotor.

[Peter Dilnot, CEO at Melrose]

That will evolve. The key thing for us is that we're on all of the engine programs that matter. We're pleased to be leaning in. We are investing right now in maintaining that position and working with those customers; it will evolve. I think what will happen is, by the time we get to the 2029 and 2030 time frames, there'll be greater clarity. Then we will decide, as Melrose, as to where we play based on the market at the time, also based on whether or not we want to go, as I said, deep on one engine, perhaps do two engines, and at what percentage share as well. I think we've got great optionality. Our technology is in demand; we will do what is in the interest of our shareholders at the time as the market evolves.

[Peter Dilnot, CEO at Melrose]

We're in a great position on next-gen and are excited to play our role. I would also say, actually, that we're playing a role on the airframe side as well in terms of next gen, which we talked about. All to follow, but all to play for.

[Aymeric Poulain, Analyst at Kepler Cheuvreux]

Okay. Thank you.

[Operator]

Thank you. The next question comes from Benjamin Heelan of Bank of America. Your line is now open. Please go ahead.

[Benjamin Heelan, Analyst at Bank of America]

Morning, guys. Thank you for the question. I've got a few. First of all, Peter, could you talk a little bit about the A350, where you are in production, and how you're seeing that play out into the second half? You probably saw that last week Airbus commented they were considering raising production. I think they'll end up doing it, what would that mean for you? How much investment do you think you would have to put in to get to 16, 17, or 18 a month on the A350, and how could we think about that? Secondly, you talked about the GIDS Turbo fan. Sorry, the GTF program is turning positive from a free cash flow perspective in 2028. Could you frame that a little bit? How negative is it now? Could you help us size a little bit that inflection?

[Benjamin Heelan, Analyst at Bank of America]

A lot of the kind of questions that we've had from people this morning have been around looking to 2029 and that GBP 600 million. I think there were clearly some concerns that that would come under pressure. Can you talk a little bit about your conviction with that and your big building blocks of getting there? Thank you.

[Peter Dilnot, CEO at Melrose]

Thanks. Good morning to you, Ben. Firstly, on the A350, I think it's a good story, isn't it? I mean, the production rates have been constrained by the supply chain. Airbus themselves talked about particularly the center fuselage and some of the challenges coming out of the back of Spirit. It's great that the demand is there; we're starting to see read-through in production. We've got a long way to go in terms of building into those rates with what we're at at about six or so today, aren't we? The first step is to make sure that we step up to the initial rate, which was rate 12, which was the original guidance. We're absolutely ready to do that and well-positioned to support Airbus with that, looking forward to doing so.

[Peter Dilnot, CEO at Melrose]

I think much above rate 12, 13, and those sorts of rates are going to require further investment in terms of our facilities. I think that holds true across the broader industrial base. As we move towards those targets towards the back end of the decade, we'll obviously be working very closely with Airbus to make sure we're ready. It's a positive story on A350, an important platform for us going forward. As you know, we've a deep composite technology on that platform. In terms of the GTF, the first thing I'd say about the GTF is that we're seeing some really encouraging progress. You've probably picked up the AOGs as a result of the PMI issue. They're down 25% year-on-year. That's a function of availability of spare parts as well as turnaround times as well.

[Peter Dilnot, CEO at Melrose]

That part of the program is going well, and as you know, we've given guidance specifically to effectively the costs of that program, effectively putting the PMI right, and those are tailing away into next year. More broadly than that, the program is still in a phase of development. We've got the GTF Advantage now coming into service, the first of those engines going to Airbus as we speak, and the Hot Section Plus will also upgrade the performance. In fact, the target here is to double the time on the wing with a combination of those two things. As we play forward on the GTF, you're getting a number of factors. You're getting the AOG costs coming down. You're getting the development costs to come down.

[Peter Dilnot, CEO at Melrose]

Most importantly, you're also getting paid-for shop visits by the program being replaced by cash-generative and profitable shop visits being paid for by customers. That inflection of all those drivers is coming through as we'd expect, and I'd say we're ahead of where we expected on the AOG in particular. That inflection point happens in 2028. As you know, we've never guided to that, and nor should we do so given the fact we're a program share partner. The GTF is encouraging for us and an important part of our future cash flows going forwards. Finally, on the GBP 600 million, Ben, I think the key thing here, as I said in the presentation a few minutes ago, is that the underlying drivers for that free cash flow increase are a significant increase from where we are absolutely intact.

[Peter Dilnot, CEO at Melrose]

That's the growing operating profits, the RSPs, and the GTF that we've touched on. I think it is fair to say that there are some moving pieces within that relative to what we originally set out a couple of years ago. We've clearly got some headwind around FX as we sit here today. The build rates have been sticky. On the other side, you've obviously got defense demand, and clearly we've had some encouraging news on the aftermarket from our OEM customers recently. In the round, we can see absolutely those drivers coming through and are confident of that GBP 600 million free cash flow target.

[Benjamin Heelan, Analyst at Bank of America]

Very clear. Thank you.

[Operator]

Thank you. The next question comes from Stephan Klepp of BNP Paribas. Your line is now open. Please go ahead.

[Stephan Klepp, Analyst at BNP Paribas]

Yeah. Hi. Good morning, gentlemen. I'm going to be boring. I have three follow-ups on things that we just discussed a little bit before. Let's go to Garden Grove and the operational impact. You have been the primary source, not a sole supplier. Do you see that the second source of canopies, particularly for the F-35, is taking market share? Do you think that if that's the case, it would be temporary and you can win that back? The second question would be with regard to the free cash flow and the target of GBP 600 million. Can you help us a little bit with the direction of travel over the next years?

[Stephan Klepp, Analyst at BNP Paribas]

We understand the drivers, I think, but can you help us as well with a quantification of the direction of travel for what would be like 2027, 2028, and 2029? Is it V-shaped, U-shaped, S-shaped, or linear? I don't know. I leave that to you. Then the last point. If I look at your balance sheet and your cash generation in the last two years, can you remind us why you had share buybacks in the first place, please?

[Peter Dilnot, CEO at Melrose]

Maybe I'll start with the last question, if I may.

[Stephan Klepp, Analyst at BNP Paribas]

Yeah, please.

[Peter Dilnot, CEO at Melrose]

It's historic, your question there. At the end of the day, we have been very clear and confident, and we remain so, about the cash generation of this business. If you think about staying within a guidance range of the leverage that we have, we step forward with a share buyback to demonstrate real confidence of the cash coming through, and we retain that confidence. We have the balance sheet to do it. We believe it was a good use of our capital to do that and a very good signal about, as I say, that confidence in our cash trajectory. That remains absolutely the case, and I think what Ross has outlined here is an appropriate decision just to put that on to pause pending what we've talked about in Garden Grove. Let's be clear.

[Peter Dilnot, CEO at Melrose]

We've got a capital allocation policy, which we've again reinforced today. First and foremost, investing in the business. Secondly, ordinary returns, and then the share buyback. If cash is a bit under pressure with uncertainty as we've got with Garden Grove, it's a natural place and a sensible place for us to pause that buyback. That hopefully gives you the context. As it relates to the GBP 600 million, again, I'll sort of give a view then. You may or may not want to sort of add to that, Ross. In terms of the shape, what we've said is that we're going to get consistent operating profit growth. That's going to come through, as we've seen.

[Peter Dilnot, CEO at Melrose]

We've talked about the build rates, the aftermarket going through, and the RSPs as well. There'll be more of an uptick as we get the new engines coming through. The big inflection point is the one that we've just talked about and Ben asked about, which is the GTF. That means that it is backend- loaded because you go from being effectively cash negative in 2027 to being cash positive and then increasingly cash positive going forwards. Beyond that, it's a sort of linear progression from here. Steady growth in our cash flows with that step up as the GTF comes across. The only other factor, of course, is what we've got as it relates to Garden Grove, which we'll come back and guide on that.

[Stephan Klepp, Analyst at BNP Paribas]

Yeah.

[Peter Dilnot, CEO at Melrose]

Finally, on the Garden Grove side, look, we are a cornerstone provider to the F-35. I think that's evident from the fact that the U.S. government has invested $150 million alongside us to double our capacity. We've got proprietary capability, which includes, in particular, not just the acrylic production but also coating. What we're doing right now is working very closely hand in glove with the U.S. government and the JPO to make sure that we're able to support the fleet. That does mean we're doing more repairs, but we are the cornerstone provider for that with our proprietary technology, and we're very much in demand. The key thing is how we get this site up and running again safely and in a timely manner. Frankly, the U.S. government is providing outstanding support to us in that regard.

[Stephan Klepp, Analyst at BNP Paribas]

Super. Thank you so much.

[Operator]

Thank you. The next question is from Joe Orchard of Rothschild & Co Redburn. Your line is now open. Please go ahead.

[Joe Orchard, Analyst at Rothschild & Co Redburn]

Yes, good morning. Thank you for taking my questions. The first one is on Garden Grove. Does restarting full production there require a single approval from the various regulators who are working together? Or do you need separate sign-offs effectively from each regulator individually? The local healthcare agency as well as the Environmental Protection Agency, for example. My second question is on aftermarket growth within engines, which was 15%. I believe that engine OEMs have reported growth a little bit higher than that in the first half of this year. They're sort of 20%-30%, is what we've seen elsewhere. Are there any particular reasons why that H1 growth might be a little softer at Melrose and within Engines?

[Peter Dilnot, CEO at Melrose]

So I think on the Garden Grove one, it's a fairly straightforward answer. There are multiple regulators involved here at a federal, state, and local level, and we're working very closely with all of them. I have to say, the intensity and the operational grip and focus of the team have been very strong and will remain so to make sure we're managing all stakeholders. It is multifaceted, to be straightforward about it. We're working with them all. Frankly, that's one of the reasons why we can't be more specific about the startup timing. The point about the aftermarket, I think, is interesting. Clearly we are an RSP partner. Therefore, the cash flows sometimes are not exactly aligned with the timing of our customers in terms of their performance. And we're obviously going to see continued progression in the second half.

[Peter Dilnot, CEO at Melrose]

I think the other thing I would say just very specifically is that clearly we have a broad portfolio, but the one engine that we're not on from an aftermarket perspective is the LEAP, which I think had a particularly strong performance in the first half, if you look at GE and Safran's results. What we can say clearly is we've got embedded positions on all of these engines, and the aftermarket growing and performing strongly in terms of shop visits, scope, and profitability is good news for Melrose, and it'll come through.

[Joe Orchard, Analyst at Rothschild & Co Redburn]

Okay. Thank you. Very clear. Thanks.

[Operator]

Thank you. The next question is from Charles Armitage of Citi. Your line is now open. Please go ahead.

[Charles Armitage, Analyst at Citi]

Yes, good morning. Garden Grove again. Can I just sort of make sure I've got it right? What I'm trying to do is work out what the bucket of contingent cost might be. It was five days. There were no leaks, no contamination, and no injury. Presumably, there was an exclusion zone around. Any idea how big that was or how many people were involved? It seems to me that the potential buckets of contingent costs would be compensation for five days of being mucked around, lost earnings or something, required extra oversight, and potentially penalties for letting it happen in the first place. I'm trying to figure out whether there's a path for anyone to claim long-term harm. Any comments on any of that?

[Ross McCluskey, CFO at Melrose]

Sure. Let me take that. Good morning. Look, in terms of the incident itself, if you take the market reports at the time, the estimate is somewhere between 50,000 and 60,000 people were evacuated from the vicinity of the facility over the Memorial Day weekend period. That in essence is the disruption that has been caused by the incident. As far as the compensation program that we are considering and debating is very much around making sure that we help to put the community right for some of the costs in which were incurred as part of that. One example, for instance, would be individuals who took out a hotel during that period of evacuation. Obviously, they've incurred out-of-pocket expenses. As Peter said, we've been operating within the Garden Grove community for decades. We're an important part of that community.

[Ross McCluskey, CFO at Melrose]

We employ over 500 people on the site as well, and we want to be doing the right thing for them, not just for today, but for tomorrow and the many years thereafter as well. Look, I'm not going to go through the specific parts of potential kind of compensation program or indeed litigation because they are live, complex, and multifaceted. Some of the points that you raised are perfectly valid to be considering as part of the overall situation as we look to resolve it.

[Charles Armitage, Analyst at Citi]

Okay. Thank you.

[Operator]

Thank you. The next question is from Ian Douglas-Pennant of UBS. Your line is now open. Please go ahead.

[Ian Douglas-Pennant, Analyst at UBS]

Thank you very much. I have got another one on Garden Grove, please, but it is a slightly different angle. Are there any kind of longer-term strategic, I guess, takeaways from this issue? Is there a review of other facilities to make sure that something similar couldn't happen there? Does this have implications for the CapEx budget going forward? Thank you.

[Peter Dilnot, CEO at Melrose]

Ian, thanks for your additional question here. I welcome the opportunity to address it, actually. Look, the first thing is, as we have outlined, the most important priority for us is safety and ensuring that we operate the right way, and indeed, we are pleased with the performance we have had and the improvements we have driven in this regard, demonstrably over the last few years. The other piece, I would say, is from a CapEx perspective: our first priority is always investing in the business, and a good chunk of our CapEx every year is related to maintenance. Specifically in Garden Grove, actually, we have invested fairly heavily in this site, over GBP 25 million over the last few years. The point is that, yeah, we have had an incident here. We need to step back and look at it and learn from it.

[Peter Dilnot, CEO at Melrose]

Indeed, as you would expect, what we have done immediately is have a review of our processes, anything that is similar across our global estate. That work is complete. We will redouble our efforts, making sure that we are staying right on top of this. As we sit here today, what we can say is that we do not expect any major uplift in our capital programs as a result of this incident, because we operate safely, in line with the law and the regulation. This is an unfortunate incident. We can, of course, learn from it, and we will learn from it. I do not think it takes us off course or indeed raises questions more broadly about what we have invested in and the business that we build and how we run it.

[Ian Douglas-Pennant, Analyst at UBS]

Thank you very much.

[Operator]

Thank you. The next question is from Mark Fielding of RBC. Your line is now open. Please go ahead.

[Mark Fielding, Analyst at RBC]

Hi, thank you. Sorry, I feel actually awful just laboring with another Garden Grove question; I just wanted a couple of clarifications. First one, when we think about the future cash profile, the implication is, with the comments you made on the first-half cash, that there was about a GBP 20 million working capital unwind benefit. I assume we have to model that reversing as you restart production, just to check that we get in the right place in the future?

[Ross McCluskey, CFO at Melrose]

Yeah. That's correct, yes. There will be a rebuild of WIP, and also, typically, the canopies in particular that we produce for the F-35 are multi-month, right? As we get back into a full kind of new canopy production mode, there will be a build-up of working capital again, yes.

[Mark Fielding, Analyst at RBC]

Perfect. Then, in terms of the acrylic, is there any issue in the wider market? I mean, you say you're a key provider around acrylic availability. I suppose in that context, in the GBP 6 million per month cost, can you give some sense of the scale of how overhead recovery is, I assume, a big part of that, but how big is the sort of impact of having to buy in acrylic?

[Peter Dilnot, CEO at Melrose]

Just in terms of the acrylic market overall, I think it's fair to say, in the supply chain and aerospace overall, at the moment, things are tight. I think we all know that, and it's actually constraining production, not specifically around acrylic, but around many factors. The whole industry is in a cross-defense, and civil is clearly needing to ramp up. Therefore, straightforwardly, acrylic does fall into that category of where there is a shortage of capacity if something happens like this. We are a very significant producer of acrylic to the global market.

[Peter Dilnot, CEO at Melrose]

What we're doing right now is in conjunction with our customers, and we're working very closely with them, if there is acrylic available in the market, we're sourcing that, or they are sourcing it, and then we are processing that, and we're up and running, shipping tranparencies to our customers now using inventory that we've either got in or WIP we've got in our own facilities. Of course, we do this at Luton as well here, or where we can do it is we buy it from third sources. That will continue, but the key thing is, in order to make the volumes that we want and need for our customers, we do need to get the main facility of making acrylic up in Garden Grove up and running. That's been our focus. We are working very closely with the regulators.

[Peter Dilnot, CEO at Melrose]

We've got a path forwards to do that safely and in a timely manner. We need to do that in order to meet customer demand. We support many different aircraft here, and that's our responsibility going forward. By the way, we're confident that we'll be able to do that and resume production. It's a question of when.

[Ross McCluskey, CFO at Melrose]

Look, when we think about the financial impact and the GBP 6 million for the second half of the year monthly based upon the timing of production resumption, there's a few factors going on there. First of all, as you said, from an overhead perspective, we have kept all of our team, right, within the site for a number of reasons. One, it's the right thing to do. Two, it means that we are able to respond very quickly as soon as we get MMA production back up and running to get back going again. That's an important consideration. In terms of why we're seeing the full drop-through into profit from the GBP 6 million impact on revenue, there's two drivers there. One of which is the increased costs associated with buying in acrylic from elsewhere.

[Ross McCluskey, CFO at Melrose]

The second aspect is because of the mix that we're doing as well, the business is changing. Of course, as we've mentioned, we're moving away from producing new canopies to repairing existing canopies that have been damaged in the past, through their life of use. Both of those drivers are having an impact on the GBP 6 million. You can imagine commercially, I'm not going to go into the split between the two of those, but that's the key driver.

[Mark Fielding, Analyst at RBC]

Thank you. If I could just ask one longer-term question, it's in terms of obviously it's very encouraging for you that you're basically on all 2/3 if we include Rolls-Royce's next-gen platforms. I just suppose about a comment on the sustainability of being on all three, both from a competitive standpoint of whether those partners are happy with that. Secondly, in the end for you, a financial requirement that would be needed at the point that we get to the development of that next-generation engine.

[Peter Dilnot, CEO at Melrose]

Indeed. As we've said, the market is evolving. We're not exactly sure; I don't think anyone is exactly sure what the shape will be, whether it be two or three engines that will ultimately come to market. The key thing for us is that our technology is in demand. We're the global market leader in lightweight structural components and on pretty much all engines that are out there today. I think our additive fabrication is something that is particularly interesting to our OEM partners here, because it's not only about security of supply and moving away, in some cases, away from forgings and castings, but frankly, you can design components differently if you use additive fabrication, and that's very much part of the development discussion.

[Peter Dilnot, CEO at Melrose]

I think in terms of the competitive position between the platforms, that's not for me, obviously, to discuss here, but I think it's driven by technology. If we're providing something that is important to each of those programs, that's a good place to be. I think that the final point really comes back to almost the original question about what this means for us going forward. I imagine that we're going to have a decision to make or a series of decisions to make at Melrose about what next-generation single aisles we get into and on what basis, whether that be with RSPs or more on a more traditional kind of straightforward supply basis. We will play that as it comes forward.

[Peter Dilnot, CEO at Melrose]

Right now, there is very much demand for our technology. We'll make decisions as the market evolves with shareholders' interests at the center of that. Those decisions, I think, will need to be made towards the back end of this decade. The key thing I'll come back to again is we're around the table, more than that. We've got sleeves rolled up working on the next-gen single-aisle and are excited about the developments, whether that be open fan rotor, ducted, two- or three-engined. In whichever way the market evolves, we will be involved.

[Mark Fielding, Analyst at RBC]

Great. Thank you.

[Operator]

Thank you. The last question today comes from Cameron Ogilvie of Morgan Stanley. Your line is now open. Please go ahead.

[Cameron Ogilvie, Analyst at Morgan Stanley]

Yeah. Hi, Peter, and hi, Ross. Thanks for taking these last questions. I'm sorry, I will come back just to Garden Grove, just with fewer clarifications on my side. I do understand that the timing is very uncertain because of regulatory approval. Do you have any visibility about meeting dates with authority and regulators that prove easy to clear the production side and so to restart the production? If you can give any details about where you are in your negotiation and even the milestone that you can share with us, just to improve the visibility. That's the first question. The second one is just I would like to come back on the potential impact on guidance and the GBP 6 million monthly impact on operating profit and cash.

[Cameron Ogilvie, Analyst at Morgan Stanley]

Do you see any mitigating action that could offset the impact on the guidance, or should we take this GBP 6 million monthly impact as a base case? The last question is just on the additive fabrication progress. Do you have any color on your CapEx plan? Is this still in line with your initial expectation? Do you see any room to move forward the industrialization phase? Thank you so much.

[Peter Dilnot, CEO at Melrose]

I'll go first, shall I, with the—

[Ross McCluskey, CFO at Melrose]

Yeah, sure.

[Peter Dilnot, CEO at Melrose]

In terms of the regulator, look, Cameron, we can't give any further guidance here. We're involved in these processes. What I can tell you is that we've got clear path plans to basically start production again by making some adjustments and some additional safety and protocols, et cetera. We're working through it. We're confident we've got some plans that will enable us to start. At the same time, they need to go through the regulator, and there's obviously legal processes going on as well. I'm sure you'll understand that we can't give any more detail in terms of the timing.

[Peter Dilnot, CEO at Melrose]

What we've tried to do today is explain the impact, say we're working at pace, and as soon as we get anything more from the regulator in terms of certainty of when we can start, we will come back and discuss that with the market and obviously update the market. Not much more we can say on that particular point, except to say we're all over it. Safety first. It is dependent, clearly, on wider processes. Did you want to get the guidance one?

[Ross McCluskey, CFO at Melrose]

Yeah, I will do. Look, in terms of the guidance and the GBP 6 million, that is our net number, i.e., taking into consideration all of the dynamics that are at play at the moment, including our mitigants, as well as how we're redeploying the team as well. That's our net number for the monthly run rate.

[Peter Dilnot, CEO at Melrose]

We'll just finish on additive fabrication, and I'm pleased to have the opportunity to talk about it because this is technology I've alluded to as it relates to next-gen single-aisle. It's actually also in demand, not only in terms of aerospace, but increasingly actually in industrial gas turbines, which are obviously very much in demand because of the data center market, amongst other things. This is a technology that has the potential and is indeed already in some cases displacing traditional forgeries and castings, which is a very constrained market, and in many ways is gating production. We are undergoing the further development of this technology in terms of its certification and in terms of its industrialization, and I touched on that. Relative to the economics of this, there's no great change to what we've said before. We have made a commitment.

[Peter Dilnot, CEO at Melrose]

This is something that will generate a net positive impact of GBP 50 million in 2029; we're on track with that. They say that impact will come from penetration of the technology, so that's new business for us using this technology, as well as actually savings as we insource components that we're currently buying in a constrained market. No change to the guidance, but some very encouraging progress, as we've announced today and in recent press releases.

[Cameron Ogilvie, Analyst at Morgan Stanley]

Thank you very much.

[Operator]

Thank you. With that, this concludes today's Melrose half-year results call. Thank you all for joining. Have a great weekend, and you may now disconnect your lines.

Participants

Analysts

• Peter Dilnot, CEO at Melrose
• Ross McCluskey, CFO at Melrose
• Sam Burgess, Analyst at Goldman Sachs
• Ian Douglas-Pennant, Analyst at UBS
• David Perry, Analyst at JPMorgan
• Aymeric Poulain, Analyst at Kepler Cheuvreux
• Benjamin Heelan, Analyst at Bank of America
• Stephan Klepp, Analyst at BNP Paribas
• Joe Orchard, Analyst at Rothschild & Co Redburn
• Charles Armitage, Analyst at Citi
• Mark Fielding, Analyst at RBC
• Cameron Ogilvie, Analyst at Morgan Stanley