Meggitt : 2020 Full-year results (Release)

4 March 2021

MEGGITT PLC - 2020 Full Year results

Strong execution on strategy with the Group well placed for the recovery

Meggitt PLC ("Meggitt" or "the Group"), a leading international engineering company specialising in high performance components and sub-systems for the aerospace, defence and selected energy markets, today announces audited results for the twelve months ended 31 December 2020.

Tony Wood, Chief Executive, commented:

"Our focus throughout 2020 and as we move into 2021, continues to be ensuring the safety and well-being of our people, protecting our sites, serving our customers and communities and executing our strategy. I want to thank all of my colleagues for their hard work and dedication in helping us navigate our way through the year.

Faced with a reduction in activity and demand in one of our core markets, 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.

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. 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."

Operational and strategic highlights

• • Introduced measures to ensure the well-being of our people and safe operations at all our global sites

• • Rapid and decisive action taken to reduce cost, protect cash and resize the Group

• • Continued progress on key strategic initiatives:

  • o Completed the streamlining of our portfolio with the sale of our Training Systems business

  • o Addition of 14 SMARTSupport® contracts, securing further market share in the aftermarket

  • o Further reduction in global footprint, now 34% below 2016 levels

  • o Investment in operational capability with the opening and fit out of our new campus in Ansty Park, UK

  • o Accelerated our existing sustainability strategy under our People, Planet and Technology framework

Financial summary

• • Performance of the Group reflects the impact of COVID-19 on the civil aerospace sector

• • Group revenue of £1,684m down 22% on an organic basis, with a robust performance in defence, where organic revenue grew 4%

• • Underlying operating profit 53% lower at £191m (FY 2019: £403m)

• • Statutory operating loss of £297m (FY 2019: profit of £325m) as a result of the non-cash impairment of intangible assets and other asset write downs

• • Successful delivery of in-year cash savings of £450m

• • Positive free cash flow of £32m (FY 2019: £268m) and reduction of £138m in net debt to £773m (FY 2019: £911m)

• • Ratios of net debt:EBITDA of 2.2x and interest cover of 9.8x at 31 December, well within covenant limits

• • Robust liquidity position with headroom of £908m on committed facilities of £1,537m at 31 December

• • Extended maturity of our debt with a forward start on our RCF to September 2022; and raised $300m in USPP market in November 2020

• • In light of ongoing challenging and uncertain market conditions, the Board has recommended not to pay a final dividend for 2020

Outlook for 2021

• • While the rollout of vaccines is expected to ease lockdowns and drive a gradual increase in air traffic activity, we anticipate the trends seen in civil aerospace during the second half of 2020 are likely to continue in the first half of 2021, with recovery weighted more towards the second half of the year. Conditions in our defence and energy end markets are expected to remain robust in 2021. Assuming no further disruption to normal operations during the year as a result of additional lockdowns, in 2021 we expect the Group to generate:

  • o Revenue broadly in line with 2020;

  • o An increase in underlying operating profit versus 2020; and

  • o Positive free cash flow.

Meggitt PLC

Group full year performance

Orders

Revenue Underlying2

Statutory

Free cash flow4 Net cash flow5 Net debt Dividend (p)

Change
2020	2019
£'m	£'m	Reported %	Organic1 %
1,547.1	2,468.4	(37)	(38)
1,684.1	2,276.2	(26)	(22)
EBITDA3	296.9	507.3	(41)	(40)
Operating profit	190.5	402.8	(53)	(50)
Profit before tax	159.5	370.3	(57)	(55)
Earnings per share (p)	16.5	37.3	(56)
Operating (loss)/profit	(297.3)	325.3	(191)
(Loss)/profit before tax	(334.0)	286.7	(217)
(Loss)/earnings per share (p)	(40.4)	28.8	(240)
31.9	267.8	(88)
136.0	205.7	(34)
773.0	911.2	(15)
-	5.55

Enquiries

Tony Wood, Chief Executive

Louisa Burdett, Chief Financial Officer

Mathew Wootton, Vice President, Investor Relations Meggitt PLC

Tel: [phone]

Nick Hasell, Managing Director Dwight Burden, Managing Director Alex Le May, Managing Director FTI Consulting

Tel: [phone]

Analyst presentation

There will be a live webcast of the 2020 Full Year results at 9.30am GMT today, available on the Meggitt websitehttp://www.meggitt.com/investors/. Copies of the presentation will be available.

https://www.investis-live.com/meggit/6021220249aa2a0e00daf86a/epad

A live dial-in is available. Please use the below details to join:

UK: 0800 640 6441

UK Local: 020 3936 2999

Global: [phone]

Passcode: 242805

Cautionary Statement

This Results Announcement contains forward looking statements with respect to the financial condition, results of operations and businesses of Meggitt PLC and its strategy, plans and objectives. These statements are made in good faith based on the information available at the time this announcement was approved. It is believed that the expectations reflected in these statements are reasonable but they may be affected by a number of risks and uncertainties that are inherent in any forward-looking statement and which could cause actual results to differ materially from those currently anticipated. Meggitt does not intend to update these forward-looking statements. Nothing in this document should be regarded as a profit forecast. This report is intended solely to provide information to shareholders and neither Meggitt PLC nor its directors accept liability to any other person, save as would arise under English law.

• 1 Organic numbers exclude the impact of acquisitions, disposals and foreign exchange.

• 2 Underlying profit and EPS are used by the Board to measure the trading performance of the Group as set out in notes 6 and 11.

• 3 Underlying EBITDA represents underlying operating profit adjusted to add back depreciation, amortisation and impairment losses.

• 4 Free cash flow is used by the Board to measure the underlying trading cash performance of the Group as set out in note 26.

• 5 Net cash flow represents the movement in net debt in the year, adjusted to exclude new lease liabilities entered, exchange differences and other non-cash movements.

  Meggitt PLC

MARKET CONTEXT AND CONDITIONS

Civil Aerospace

The outbreak of COVID-19 and subsequent lockdowns across the world caused a significant and unprecedented reduction in commercial air traffic in 2020, with global air traffic, as measured by RPKs and ASKs down 65.9% and 56.5% respectively for the full year 2020, compared with 2019 levels.

While positive signs started to emerge at the end of the second quarter with airlines gradually increasing capacity and future flight schedules, particularly in domestic markets, the level of air traffic and customer demand remained highly sensitive to subsequent spikes in COVID-19 infection rates, the imposition of new lockdowns and other measures such as post-flight quarantining. Accordingly, the recovery in global passenger numbers plateaued in the fourth quarter with global RPKs and ASKs ending the year for the month of December down 69.7% and 56.7% respectively, showing only a slight improvement from September's figures down 72.0% and 60.8%.

While all regions have been adversely affected, there have been variations in the extent of traffic reductions as follows: Asia Pacific down 62%; Europe down 70%; and North America down 65%. There has also been a difference between domestic and international air travel, reflecting the closure of international borders at certain times during the year, with domestic traffic down 49% in 2020 compared with international traffic down 76%. In some domestic markets, notably China and Russia, traffic levels recovered in 2020 to be in line with or slightly above 2019 levels.

Within civil aerospace, the extent to which different platform categories have been affected has also varied, with global business jet utilisation down 21% in the year compared with down 48% for the wider global commercial fleet (which comprises large and regional jets). In the month of December 2020, business jet utilisation had recovered to 95% of the levels seen in December 2019 reflecting its attraction to air travellers as an alternative to commercial flights.

As a result of the severe slowdown across civil aerospace, demand from airlines and operators for new build aircraft significantly reduced in FY 2020, with Airbus and Boeing deliveries down 34% and 59% respectively. Deliveries of regional and business jets in the year were down 46% and 21% respectively. In response to the lower demand for aircraft, airframe and engine OEMs significantly reduced their production rates during the year, a key driver of the Group's OE revenue.

In the first two months of 2021, high infection rates across many countries, border closures and lockdowns have held back the recovery and resulted in the continuation of low overall levels of air traffic activity and passenger numbers. However, against this backdrop, the development and rollout of vaccines globally over the last few months has been encouraging and underpins a positive outlook for the continued recovery in civil aerospace, with the expectation that lockdown restrictions will be eased and passenger confidence returns particularly in the second half of 2021. With overall business jet activity having recovered strongly, ending 2020 close to prior year levels, we expect regional jets and narrow bodies to recover next as short haul and domestic routes are restored, with wide body levels coming back last reflecting a change in consumer attitudes towards long haul, including business travel.

Looking further ahead, most industry commentators now expect air traffic to return to 2019 levels by around 2023/2024

(IATA forecasting 2024) and new aircraft production rates to recover to pre-COVID-19 levels in 2024 /2025. Beyond the recovery period, we firmly believe that the drivers supporting air traffic growth over the long term remain in place with IATA forecasting a growth rate in global passenger journeys of 3.7% per annum over the next 20 years.

Defence

While the defence sector has not been immune from the effects of COVID-19, spending in the US (which represents over 70% of our annual defence revenue) and overall defence activity levels remained robust in 2020, a trend reflected in our own defence business. For fiscal year 2020, defence spending in the US was up 6%, with spending in RDT&E and procurement both up 12%, with good outlays for major fixed wing and rotary platforms including F-35, KC-46A, F-15EX and AH-64. In January 2021, the US DoD budget of $696bn for fiscal year 2021 was approved, broadly in line with the level of outlays in 2020, providing a supportive backdrop over the short to medium-term.

Energy

In energy, both supply and demand side factors led to volatility in the oil price moving from $57 per barrel in January to below $20 per barrel in April. While the oil price subsequently increased off its lows, trading in a range of $37-$49 per barrel in the second half, this dampened overall capital expenditure levels and delayed certain projects across the oil sector during the year, while LNG and renewables project capex remained robust.

Meggitt PLC

FAST AND EFFECTIVE ACTION IN RESPONSE TO THE CRISIS

Leveraging our experience of navigating previous downturns in civil aerospace and through close communication with our customers and supply chain, the Group moved quickly to implement a revised demand scenario for planning purposes and adjusted production levels early in the second quarter. During 2020, we took a series of decisive actions in areas within our control in response to the crisis, focused on reducing costs, preserving cash and resizing the business:

• • Safeguarding our people - our number one priority and the focus of our COVID-19 Crisis Management Team has been, and continues to be, to ensure the safety of our employees, where we have followed local government and health authority guidelines as they relate to safe working practices at our sites. These measures have included the introduction of social distancing, provision of personal protective equipment, variations in working patterns including split shifts, enhanced cleaning regimes and providing the necessary tools and support for those employees able to work from home.

• • Supporting the community - in response to COVID-19, our employees and sites have supported their local communities in the regions where we operate around the world. In the UK, we were part of the Ventilator UK Challenge with responsibility for programme management of the consortium's production of an additional 13,000 ventilators to help patients hospitalised with COVID-19 fight the disease. We have also had numerous examples of employees at our sites leveraging their capabilities to produce a wide range of personal protective equipment for key workers and employees.

• • Business continuity - the majority of our manufacturing facilities remained open during the year to support our customers in the critical markets that we serve in defence, energy and in aerospace for repatriation of citizens and transport of food, freight and medical supplies. As part of the US national response to COVID-19, we were granted $15m in funding under the CARES Act from the US Department of Defense to sustain critical industrial base capability for military grade fuel bladders at our Rockmart, US facility.

  Throughout the year, the majority of our employees continued to work at our sites while adhering to enhanced procedures relating to personal protection and cleaning, with the remainder either working from home or on furlough. We have remained agile and reacted to changes in lockdown restrictions on a regional basis allowing more office-based employees to return to work safely where possible. We have also supported our suppliers through supplier financing programmes and increased their awareness of local government support schemes during the year.

• • Reducing costs, protecting cash and resizing the Group - in April we announced a series of actions to help the Group navigate the crisis and enable us to deliver substantial cash savings in the year. These actions were based on our scenario planning exercises incorporating the most likely impact on the Group's revenue and cash flow in 2020 and expectations on the timing of the recovery:

  • 1. Reducing costs - cancellation of all pay rises, pay reductions for the Board of Directors and Executive Committee and material cuts in discretionary spend including travel;

  • 2. Protecting cash - in addition to the cost measures, we have also preserved cash through targeted reductions and deferral of certain cash expenditure including: capital expenditure; absolute reduction in inventory levels; and the cancellation of the final dividend for 2019 and interim dividend for 2020; and

  • 3. Resizing the Group - having taken action to reduce variable costs, including accessing furlough schemes and reducing temporary labour, we took the difficult decision to reduce the size of our global workforce to ensure that our internal capacity across our civil aerospace business reflects the reduction in demand. As at the end of December 2020, our total global headcount was 26% lower (including the sale of our Training Systems business) than the end of 2019.

As a result of the hard work and focus of our global teams to deliver our in-year cash savings, the Group generated £31.9m of free cash flow which was slightly better than our expectations at the time of our half year results. The free cash inflow, combined with proceeds from the sale of Training Systems, meant the Group ended the year with net debt of £773.0m, £138.2m lower than 2019, testament to the Group's focus on tight management of the balance sheet during the most challenging of times.

Meggitt PLC