Meggitt : 2020 Interim Results (Release)

8 September 2020

Meggitt PLC

2020 Interim results

DEFENCE ROBUST AS GROUP RESPONDS TO CIVIL AEROSPACE DOWNTURN

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 unaudited interim results for the six months ended 30 June 2020.

Tony Wood, Chief Executive, commented:

"The Meggitt team remains focused on protecting the safety of our people, serving our customers and communities, and building on our strengths, and I want to thank all of my colleagues for their hard work and dedication over the last few months.

We had a very challenging second quarter in which we acted fast, executed well operationally and took action to position the Group for the recovery in civil aerospace. Our first half performance was impacted by the ongoing effects of COVID-19 in our civil aerospace business driven by the unprecedented reduction in global air traffic activity. Our defence business continued to perform strongly and represented 43% of the Group's revenue in the period. Overall, we made very good progress on those elements within our control, including our targeted cost and cash preservation actions as well as resizing the Group as we look ahead to 2021. Despite the disruption caused by COVID-19, we have continued to execute against our strategic priorities and these remain our focus for the second half.

We are still working through a difficult and uncertain COVID-19 environment, and while it's too early to precisely predict the trajectory of the return to prior levels of activity in civil aerospace, we continue to focus on ensuring that the business is well positioned to benefit from the recovery. Based on the effective actions we've taken to strengthen liquidity and the resilience of the Group, underpinned by our diverse end market exposure and strong market positions, we believe we are well placed to benefit from the recovery and to continue the transformation of Meggitt to deliver long-term, profitable growth."

Summary

•  Performance of the Group reflects the unprecedented impact of COVID-19 on the civil aerospace sector, with revenue slightly ahead of our guidance in our 2 July trading update

•  Group organic revenue down 13% with a robust performance in Defence, where revenues grew 7%, more than offset by significantly lower revenues in Civil Aerospace and Energy where revenue was 27% and 6% lower respectively

•  Underlying operating profit was 37% lower at £102m (H1 2019: £161m)

•  Statutory operating loss of £349m (H1 2019: profit of £91m) largely as a result of non-cash impairment of intangible assets and other asset write downs

•  Rapid and decisive action taken by the Group on areas within its control to reduce cost, protect cash and resize the Group's cost base; on track to deliver cash savings of £400m to £450m for the full year

•  Free cash outflow of £122m (H1 2019: inflow of £49m) largely offset by cash inflow of £110m from the sale of Training Systems

•  Net debt of £1,000m (FY 2019: £911m) including adverse foreign exchange movement of £65m

•  Robust liquidity position with headroom of £856m on committed facilities; access to additional liquidity via Bank of England's and HM Treasury's CCFF (total funds available up to £600m); extended maturity of our debt with a forward start on our RCF to September 2022; ratios of net debt:EBITDA of 1.8x and interest cover of 14.1x, well within covenant limits

•  Continued progress on key strategic initiatives including sale of Training Systems, new customer contract wins and further consolidation of our global footprint

•  The Board recognises the importance of the dividend to its shareholders, but has taken the prudent decision not to pay an interim dividend in order to retain cash within the Group, manage net debt levels and preserve flexibility

•  The recovery in civil aerospace remains sensitive to spikes in COVID-19 cases, creating near term uncertainty about the pace and shape of a recovery. As a result, and recognising that there could be a range of outcomes in our civil business in the last four months of the year, our guidance for the Group for the full year remains suspended. For cash, as a result of a proportion of inventory reduction moving into 2021, we now expect to be broadly free cash flow neutral for the full year.

Meggitt PLC

2020 Interim results

Group first half performance

Change

£m

H1 2020

H1 2019

Reported % Organic1 %

Orders Revenue Underlying2

882 1,193 (26) (31)

917 1,071 (14) (13)EBITDA3 Operating profit Profit before tax Earnings per share (p)

156 212 (27) (27)

102 161 (37) (36)

86 145 (41) (40) 8.7 14.7 (41)

Statutory

Operating (loss)/profit (Loss)/profit before tax

(349) 91

(368) 73

(Loss) / earnings per share (p)

(44.3) 7.3

Free cash flow Net cash flow Net debt Dividend (p)

(122) 49

(19) (37)

1,000 1,124

- 5.55

Enquiries

Tony Wood, Chief Executive

Louisa Burdett, Chief Financial Officer

Mathew Wootton, Vice President, Investor Relations Jessica Barrett, Investor Relations Manager 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 interim results at 9am BST today available on the Meggitt websitehttp://www.meggittinvestors.com.Copies of the presentation will be available.

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: 616348

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.

  Meggitt PLC

  2020 Interim results

MARKET CONTEXT

The outbreak of COVID-19 and subsequent lockdowns across the globe, caused a significant and unprecedented reduction in commercial air traffic in the first half, particularly in the second quarter when global air traffic, as measured by RPKs, was down 90% with up to 60% of the global fleet grounded in April. Load factors in the second quarter were 50% compared with 83% in the comparative period. Looking ahead, IATA's latest forecast is for air traffic to be 63% and 36% lower than 2019 levels in 2020 and 2021 respectively, reflecting a gradual recovery as lockdowns are eased and passengers return to flying.

As a result of the severe slowdown across civil aerospace and the expectation that a recovery to 2019 activity levels is likely to take a number of years, demand from operators for new build aircraft softened, with Airbus and Boeing deliveries down 50% and 71% respectively for the six months to the end of June. Deliveries of regional and business jets in the first six months of the year were down 46% and 24% respectively. In response to the lower demand for aircraft, OEMs have reduced their production rates accordingly, a key driver of our OE revenue.

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 remains sensitive to spikes in COVID-19 infection rates and the potential for lockdowns and other measures such as post flight quarantining. Accordingly, the recovery in passenger numbers has been slow with global RPKs down 94% in April improving to down 80% in July, compared with the same period in 2019.

Although activity in domestic markets has started to come back, especially in regions where the outbreak was first seen, such as China, international air traffic has remained at extremely low levels, down 97% in the second quarter.

Within civil aerospace, the extent to which different platform categories have been affected has varied, with global business jet utilisation down 51% in the second quarter compared with down 90% for the wider global commercial fleet.

In June, business jet utilisation had recovered to 75% of the levels seen in 2019 and in July this had risen to 83%.

While the defence sector has not been immune from the effects of COVID-19, spending in the US and overall defence activity levels have remained robust in the first half, a trend reflected in our own business following a strong performance in 2019.

In energy, both supply and demand side factors led to volatility in the oil price moving from $57 in January to a low of $21 per barrel in April. While the oil price has increased off its lows ($43 per barrel on 7 September), this has dampened capital expenditure levels and delayed projects across the oil and gas sector.

Looking to the recovery in civil aerospace, most industry commentators expect air traffic to return to 2019 levels by around 2023 (IATA forecasting 2024) and production rates to recover to pre-COVID-19 levels by 2024/25.

Within any recovery, with business jet activity having already recovered to over 80% of 2019 levels, we expect regional jets and narrow bodies to recover next as short haul routes are restored, with wide body levels coming back last reflecting a change in consumer attitudes towards long haul, including business travel. Beyond the recovery period, the drivers supporting air traffic growth over the long term remain in place with IATA forecasting a growth rate in passenger journeys of 3.7% per annum over the next 20 years.

With diverse end market exposure, including a strong Defence business representing 43% of the Group's revenue in the first half, and having refreshed our aftermarket annuity with strong content on the latest platforms, we are well positioned to benefit from the recovery in civil aerospace.

OUR RESPONSE TO THE CRISIS

Leveraging our experience of navigating previous downturns and through close communication with our customers and supply chain, the Group moved quickly to create a base case for planning purposes and adjusted production levels early in the second quarter accordingly. We have subsequently fine-tuned our scenario as new data has become available. Alongside this, and incorporated into our scenario planning we have taken a series of decisive actions on areas within our control in response to the crisis focused on reducing costs, protecting cash and resizing the business:

•  Safeguarding our people - our number one priority and the focus of our COVID-19 crisis management committee has been 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.

•  Supporting the community - our employees continue to support their local communities in the regions where we operate in response to COVID-19. 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.

Meggitt PLC

2020 Interim results

•  Business continuity - the majority of our manufacturing facilities remained open during the first half to continue 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 national response to COVID-19, we were granted $15m in funding under the CARES Act from the US Department of Defence to sustain critical industrial base capability for military grade fuel bladders at our Rockmart, US facility.

  Throughout the second quarter, 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. As lockdowns have progressively eased, we are continuing the process of enabling employees to gradually return safely to the workplace where it is safe to do so. We have also supported our suppliers through ePayables schemes and increasing their awareness of local government support schemes.

•  Reducing costs, protecting cash and resizing the Group - in April we announced a series of actions to help the Group navigate the crisis which will help to deliver substantial cash savings in the year. These actions reflect a series of base case assumptions incorporating the most likely impact on the Group's revenues and cash flow this year and over the next five years:

  • 1. Cost reduction - cancellation of all pay rises, pay reductions for senior employees and material cuts in discretionary spend including travel;

  • 2. Protect cash - in addition to the cost measures, targeted reductions in capital expenditure against our previous guidance in February 2020; achieving absolute reduction in inventory levels; and the cancellation of the final dividend for 2019; and

  • 3. Resize the Group - having already 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 by around 15% to ensure that our internal capacity across our civil aerospace business reflects the reduction in demand and positions us appropriately as we enter 2021.

As announced in our July trading update, we have made good progress executing our action plan. The reduction in our global workforce is substantially complete representing a reduction of 18% at the end of the half compared with the end of December 2019. As a result of the early actions taken in the first quarter, we also anticipate being able to derive higher savings than originally planned from reducing our discretionary operating costs.

Notwithstanding this, reducing inventory is taking longer than first anticipated, reflecting a degree of variation in demand signals across the extended supply chain and as customers consume buffer stocks in parallel with adjusting their own end market demand. After a slow start, we are making steady progress in this area and while we continue to anticipate delivering good levels of cash saving from this initiative in the second half, some of the benefits will now move into the first quarter of 2021. This is also the key driver of our assumption that the Group will now be free cash flow neutral for the full year. Despite this, we still anticipate being able to deliver cash savings in 2020 of between £400m and £450m in line with our target range set out in April.

BASE CASE AND DOWNSIDE SCENARIOS

In light of the unprecedented downturn in civil aerospace and associated reduction in revenue, and as noted in our RNS announcement on 6 August 2020, the Group has modelled the following two scenarios: a 'base case' which the business is performing in line with and which we are using to run the Group; and, given the inherent uncertainty over the extent and pace of recovery in the Group's civil aerospace markets, a 'downside case' for planning purposes, in the event that we move significantly away from the trajectory of the base case, covering the period to 31 December 2021.

Base case

Our base case scenario assumes civil aftermarket and OE levels recover progressively from a low point in Q2/Q3 2020, with no subsequent global lock down as a result of a 2nd wave of COVID-19. An increasing return of passenger flights is anticipated with a progressive increase in the fourth quarter of 2020 feeding into civil revenue, with RPKs returning to pre-COVID-19 levels in 2024 in line with the most recent IATA outlook data. Civil OE deliveries, which reflect the emerging build rates from the Group's customer base, remain below 2019 levels until the end of the five year forecast period in 2025. The base case assumes continued robust funding of defence expenditure, particularly by the US government, and that energy and other markets are not materially impacted by COVID-19 over the five year forecast period.

Downside case to 31 December 2021

In the downside case, further waves of COVID-19 infection occur globally impacting passengers' ability and confidence to resume travelling, with an effective vaccine not widely available during the period and a reduction in consumer discretionary expenditure due to recession. Weakening RPKs are assumed to result in production build rates for OEM deliveries to airlines being depressed further. Additionally, as a result of the wider impact of a more prolonged pandemic, higher levels of government borrowing lead to defence spending being constrained. Energy and other markets remain depressed as the weaker economic environment results in reduced investment in oil and gas markets.

Meggitt PLC

2020 Interim results