Melrose Industries PLC (LON:MRO) reported a large loss for the first half of 2020 and said it was making “significant” job cuts to its aerospace business even though trading has improved in recent months.
Statutory pre-tax losses swelled more than fourfold to £560mln for the owner of automotive and aerospace engineer GKN and ventilation and cooling specialist Nortek in the first six months of the year.
Underlying operating profits shrank to £56mln from £541mln a year ago as revenue fell by 27% to £4.4bn.
But the FTSE 100-listed group said, “trading over the summer months has been at the higher end of the board’s expectations, particularly in automotive and key Nortek markets”.
It also highlighted £213mln of free cash flow generation in the period and, having recently arranged tweaks to its banking arrangements, said it expects around a further £300mln of efficiency improvements in working capital in coming months, with other restructuring projects “well underway” to improve underlying performance by over £100mln next year.
“More cost-saving projects are to come and there are substantial margin improvement opportunities across the GKN businesses,” the company said, adding that consultations are already underway with GKN Aerospace employees as a “significant reduction in the worldwide workforce is inevitable in the second half of the year”.
The group said its board saw “some early signs of recovery in certain geographies” for automotive and with Nortek’s demand remaining robust, although the aerospace business still faces much market uncertainty.
Although a dividend is felt to be inappropriate in light of the “importance of retaining cash within the group” to ensure net debt of £3.4bn is kept under control whilst also funding the necessary restructuring of the group, looking out to 2021 and beyond, the board insisted the future is “likely to bring acquisition opportunities”.
Confirming that the market still loves to hear about job cuts even in the face of looming mass unemployment, Melrose shares rose 13% to 113.11p on Thursday morning, though they are still at less than half the level where they started the year.
Analyst Nicholas Hyett at Hargreaves Lansdown said: “That coronavirus has hit Melrose hard is no surprise – its automotive and aviation markets have always been very cyclical and many factories shut down altogether at the peak of the pandemic. However, managing industrial businesses through difficult market conditions is what the Melrose team pride themselves on, and despite the shocking fall in profits there’s actually a fair bit of good news.”
He said the balance sheet work in recent months gives the board considerable financial headroom to play with, which will be much needed as a sustained recovery in aerospace looks unlikely in the near term, with redundancies bringing upfront cash costs.
“It’s hard to overstate the hurdles ahead, but the nitty gritty of improving efficiency is what Melrose’s management team does best and that should provide some reassurance in the longer term,” Hyett concluded.
–Adds shares and broker comment–