Melrose Industries H2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 6, 2025

There are 11 speakers on the call.

Operator

Well, hello, everyone, and welcome to Melrose twenty twenty four results. It's great to see so many of you here in London with us, and I know we've got lots of others on the webcast too. So welcome to you all, and thanks for joining us. Now this is actually our third set of results as a focused aerospace technology business. 2024 was a busy and successful year for us, and we've got good momentum going into 2025.

Operator

And clearly, we're going to cover lots of that shortly. But importantly today, we're also announcing new five year targets. These are built on our clear plans for our repositioned Aerospace group, and they also reflect our confidence and our excitement about where we're going to take Melrose from here. So running order today is I'll give some highlights on all of this upfront, and then Matthew will do 2024 and 2025 before I return to talk in more detail about these five year targets. Let's just get started with some headlines.

Operator

Firstly, as I said, we delivered a strong performance in 2024 with profit at the top end of expectations against a backdrop of what we all know has been a difficult time in the industry with supply chain challenges. This progress continues with our positive momentum into 2025. And this year, we're going to complete our multi year transformational restructuring program and will also deliver substantial free cash flow. Now on the five year targets, these include good revenue growth, primarily from the market ramp up, significant further margin expansion and ongoing step ups in cash generation, so lots of value to unlock. Some highlights specifically on 2024 include this 42% increase in profit to million.

Operator

This was delivered despite lower than expected revenue growth due to these reduced production rates. So our margin expansion was the result of business improvement actions reading through and positive aftermarket mix. Operationally, our priority is always safety and quality. And in 2024, I'm proud to say that we delivered an 80% reduction in lost time accidents and further improvements in quality too. This is important.

Operator

We also took steps to grow our business for the future, including expanding capacity on existing platforms such as the F-thirty five, as well as investing in engines capability such as our breakthrough additive fabrication technology, which we're going to talk through in more detail later. And finally, our ongoing portfolio rationalization is now largely complete with the successful sale of three non core businesses, including two to Boeing. Twenty twenty five is all about further delivery and the execution of our plans. We'll see another step up in profit and margins and we'll complete our extensive restructuring program and deliver improved productivity on our restructured, leaner operating base. Most significantly though, we will reach an inflection point on cash with recent one timers dropping away and moving from cash outflow in 2024 to more than $100,000,000 positive free cash flow post interest and tax this year.

Operator

So, lastly, a word here on our five year targets, which we think reflect the excellent potential in the group. From a top line perspective, we're targeting high single digit CAGR leading to billion of revenue by 2029. In terms of margin, we'll continue to see expansion up to 24% plus from the impacts of volume, positive mix and our business improvement initiatives reading through. And this will lead to at least billion operating profit and most excitingly, a greater than 20% CAGR in EPS over the next five years. Finally, cash.

Operator

Our target is million post interest and tax, and this is certainly not the peak with cash generation continuing to increase into the next decade. So with that as an introduction, I'll hand over to

Speaker 1

Matthew. Thank you, Peter, and good morning, everyone. It's great to be here with you all to talk about the business's strong performance with profits at the top end of our guidance from November. At a headline level, the group revenue has grown 11% on a like for like basis, which was very much led by the performance of the Engines division. Group operating profit has taken another stride forward, growing 42% to million as a result of the revenue growth and the impact of our restructuring and business improvement programs.

Speaker 1

Margins continue to grow, up 400 basis points to 15.6%, with both divisions continuing to grow margins strongly. And logically, EPS has also grown significantly, up 45% to 26.4p. So a strong set of results with profit at the top end of our guidance and continuing our trajectory to the twenty twenty five targets set out two years ago. Turning to Slide 10. I do have a slide for each division coming up.

Speaker 1

But at a headline level, you can see that while both divisions delivered revenue growth, our performance is very much driven by the continued strong performance of the Engines division, which was up 26%. Structures growth was dampened by the ongoing supply chain challenges being experienced in the sector and the specific customer destocking and production rate changes that our business has faced. This, alongside the weaker dollar impact of around million, resulted in overall revenue falling slightly short of expectations. However, margins continue to grow strongly in each division due to the buoyant engines aftermarket as well as the impact of restructuring and our business improvement programs. Engines has beaten its margin target one year earlier than planned, and Structures continues its good progress towards the 2025 targets.

Speaker 1

And a result of this better performance and despite an FX headwind of around million, we were able to deliver operating profit at the top end of our expectations. So let's dig a little deeper into the performance of each division. Turning to engines on Slide 11. Revenue growth was robust at 26% up, driven by strong aftermarket performance across all of our subsectors as well as good OE growth. Aftermarket revenue was up 32% in the year.

Speaker 1

Within this, we saw a particularly strong performance in our Swedish military business, which was up 74%, driven by the higher level of support required for the upgrade of the Gripen RM12 engine. In addition, during the year, this business signed a multiyear agreement with Sweden's FMV to explore the propulsion requirements for future fighter systems. And our technology helped propel the Ariane six rocket during its inaugural launch in July. Our aftermarket repair business continued to grow, up 18% on last year, driven by the higher number of certified parts for both LEAP and GTF that are able to go through our facilities as well as our Malaysia facility being online for a full year. We expect this growth to continue as we've now opened our new $55,000,000 1 hundred and 50 thousand square foot state of the art repair facility in San Diego.

Speaker 1

The final contributor to our aftermarket growth was the performance of our RRSP business, which was up 30%. And the RSP revenue included GBP $274,000,000 of variable consideration. On the other side of the engines business, OE grew 19% in the year, and this was driven by stronger GTF volumes and a higher spare engine ratio as well as increased revenue on GE engines. And we also saw good commercial wins on the OE side of the business with a decade long agreement with Safran to supply shafts for the LEAP 1A variant, and we expect this agreement to expand to the LEAP1b variant in 2025. Operating profit grew 40% to million, and margins at 28.9 have beaten our 2025 target of twenty eight percent one year early.

Speaker 1

And this strong margin reflects the growth in the highly profitable aftermarket business, the improvements in productivity and quality as well as the read through from restructuring projects in this division. So a very strong performance from the Engines division with further growth and improvements to come. Turning to Structures on Slide 12. After taking account of the three businesses that were sold in the year, the division delivered revenue growth of 3%. The civil side of the business grew 1%, and this was impacted by well publicized customer destocking and rate changes during the year, which was driven by sector wide supply chain issues.

Speaker 1

The business just element of this business continued to see good growth during the year. And on the commercial side, we secured a contract renewal with Airbus for the full wiring package for the A220, and production is well underway at our new Electrical Wiring Center of Excellence in Chihuahua, Mexico. Revenue was stronger in Defence, up 7%, where increased build rates and improved commercial terms read through in the year. And we now see 61 of the portfolio being sustainably priced, up from 42% last year with good momentum to reach our 85% target by the end of twenty twenty five. Commercially, Defence secured customer investment of more than GBP 100,000,000 to double its F-thirty five Canopy production capacity in Garden Grove, California, extending our participation into the 2030s.

Speaker 1

Margins continue to improve despite the slower ramp up with the impact of pricing, business improvement, restructuring and the sale of lower margin businesses dropping through. Operating profit grew by 32% to million, and margins grew from 5.1% to 7.2%, an increase of two ten basis points. So despite the volume and supply chain challenges, the business continued to grow profits and margins strongly in the year with line of sight to the 2025 margin target of nine percent. So having talked about the businesses individually, I think it's worth a quick recap on Slide 13 of our progress towards the 2025 margin targets that we set out two years ago. For engines, we set a target a margin of 28% for 2025, which we've exceeded this year.

Speaker 1

And the strong performance has been driven by the aftermarket performance and mix effect over the past two years as well as the division fully delivering on its business improvement initiatives. The final part of our margin growth comes from the growth in our Part Repair business, which is well on track. So good performance from engines with more to come in 2025. For Structures, we set a margin a target margin of 9% for 2025, and we've grown from our original 2023 guidance of 3% to 7.2% in 2024. The Defence portfolio and repricing activities are very much on track, and business improvements are also reading through.

Speaker 1

Now the Civil ramp up was a key part of our margin improvement target. And whilst this is reading through in part, we're not getting the full effect as volumes remain constrained. This is a challenge, but we've already delivered margin improvements in line with our plans and are confident that the further margin improvement is achievable. And we remain committed to delivering 9% margin for 2025. So having talked about the divisions, let's talk about the numbers below the operating profit on Slide 14.

Speaker 1

Now we put the details of all of our adjustments to operating profits in the appendix as normal. Net financing costs are million, which largely reflects the interest on bank loans with an average cost of 5.7%. The ETR for the year is lower than expectations at 20.1%, and this was due to recognition of certain tax assets in Malaysia and Sweden. And the combination of all the above shows EPS at 26.4p, a growth of 45%. And as a result of that strong performance and progress in the year, a final dividend of per share is proposed, increasing the full year dividend to a total of per share.

Speaker 1

So let me now turn to our cash performance for 2024 on Slide 15. Our cash performance is in line with expectations with operating cash before CapEx at million and free cash flow before interest and tax at million. We consider this a robust performance given the challenging operating environment. Turning to working capital. You can see that we've split out the impact of the movement in unbilled work done to give full transparency as to how this impacts our results, and this was very much in line with our expectations.

Speaker 1

Trade working capital in the second half of the year was good, particularly in the context of the challenged supply chain, and this reflects the seasonality of the business, which we expect to continue. And for those that want it, you'll be able to see the details of the factoring position, which ended the year at million in the appendix of the presentation. Just a quick update on the Powder Metal issue. We saw around million impact coming through in 2024. This is a little over half the amount that we guided to at the start of the year but does reflect the direct activity from Pratt and Whitney.

Speaker 1

CapEx was million and represents 1.1x depreciation, and this includes our net investment in Additive Fabrication in Sweden and also the completion of our repair center in San Diego. Looking at restructuring, we're now very much at the back end of our restructuring work, and we expect these to complete during 2025. From a cash perspective, the cost was million, which is below the million cost guided earlier in the year. And our guidance remains that we expect the completion of these projects in 2025 to cost between million and million. Moving on to the share buyback program.

Speaker 1

This continues. We completed the previous million share buyback program by the September 2024 as planned and commenced our million program in October. Total spend in 2024 was million, and the million program is due to be completed by March 2026. Net debt ended the year at GBP $1,321,000,000,000 and leverage at 1.9x, and this was in line with our expectations, slightly helped by the timing of the share buyback program. So let me finish off with a couple of slides which update our guidance for 2025.

Speaker 1

So let's talk about the P and L first on Slide 16. Given the continued supply chain challenges that are affecting the whole aerospace industry and the recent announcement specific to the platforms of our largest customer, Airbus, it should be little surprise that we are tempering our revenue guidance for 2025. Regarding to revenue from March to million, which at the midpoint represents like for like growth of around 7%. Given the strength of our aftermarket business and the delivery of our business improvement plans, we are guiding to Aerospace operating profit of between million and million. And at the midpoint, this represents profit growth of around 25% and is in line with the target we set out at our Capital Markets Day in 2023.

Speaker 1

The midpoint margin of greater than 19% exceeds the target we set out in 2023 by 1%. At the divisional level, we expect engines to maintain strong growth rates just into double digit territory, driven by continued strength in aftermarket. And operating profit guidance is million to million, and this includes variable consideration of around million at the midpoint. We expect margins to be greater than 32%, well ahead of our original target. The Structures division is expected to deliver low- to mid single digit revenue growth on a like for like basis.

Speaker 1

And as I mentioned earlier, the division's growth is impacted by the constrained volumes from a major customer that is affected by continuing supply chain challenges. However, the Structures division is expected to make continued good progress on margins in 2025 through the further impact of restructuring and business improvement, and we expect margins to be around 9% this coming year. Operating profit is guided at million to million. Now at this point, I should talk about tariffs and the impact that this may have on the business. We do have product that now attracts a higher rate of tariffs on imports into The U.

Speaker 1

S. A, particularly from Mexico. Obviously, we've been monitoring the situation, and it says that the overall impact on the group for this year would not be material. We've seen that the tariffs have been implemented this week, but it's unclear how long this will last, whether they'll continue to apply to all of our products in aerospace and also ultimately who will pay for these additional costs. So given that the situation has been dynamic since the start of the year, we've not included this in our guidance.

Speaker 1

And depending on the impact on the Aerospace sector, we'll update as we go through the year. And I would point out that the impact to us has been reduced due to the fact that certain contracts require the customer to pay any duties and the fact that we have a distributed global footprint. Moving down the P and L for 2025. I'd expect absolute net interest costs to increase, reflecting the continuation of the share buyback and the fact that cash generation of this business will continue to be back end loaded in the year. For 2025, the interest rate for gross bank debt is expected to be around 5.4%.

Speaker 1

Guidance for ETR is 21% to 22, and this is still very much weighted towards the Swedish tax rate but will depend on the precise balance of profits during the year. Now as a final point, just a reminder that the above numbers are Aerospace numbers. In addition to this, the PLC costs are anticipated to be around million, broken into operating costs of million and a noncash LTP cost of million in the year. Now these LTP costs were previously charged below the line, but with the change in our strategy, it's appropriate that they get put into operating profit. Once we're through the 2025 year, which had specific aerospace targets attached to it, we will revert to a more conventional approach of including the PLC costs within our guidance.

Speaker 1

So with all that, from a P and L perspective, it's very pleasing to be able to guide operating profit directly in line with the targets we set out in 2023. Now my final slide, Slide 16, relates to our cash guidance for 2025. As shown on the graph, 2025 will be an inflection point for the group, and we're guiding to positive free cash flow after interest and tax that is in excess of million. Now this is the first time Melrose has guided on an absolute basis, and it reflects us now reporting as a conventional aerospace company. We've given the P and L guidance on the previous slide and also an indication of the impact of variable consideration on the P and L.

Speaker 1

Trade working capital is expected to grow in relation to revenue growth at around 13% of sales, and we're not anticipating that supply chain performance will improve significantly during the year. In addition to this, we expect Powder Metal issue to have around a million impact in 2025. Now we remain confident that the total cost of Melrose of resolving this issue will still be around million, as advised by Pratt and Whitney. So the remainder will flow through 2026 and into 2027. We expect CapEx for 2025 to be between one and one point one times depreciation, and this includes our net £25,000,000 investment in Additive Fabrication Technology.

Speaker 1

As a reminder, cash tax at million is lower than the P and L charge due to carried forward losses, and the cash tax cost will increase in absolute terms for 2025 but will still be very low compared to the P and L charge as we continue to utilize historic losses. And we expect cash tax to be around 4% of the adjusted profit after tax before tax, sorry. So we expect cash tax to be around 4% of the adjusted profit before tax. Now when you combine all of this with the restructuring cash guidance of GBP 40,000,000 to GBP million that I've already given, we'd expect leverage to be below 2x EBITDA, in line with our capital allocation policy. So to repeat, free cash flow after interest in tax is guided at in excess of GBP 100,000,000.

Speaker 1

This cash flow will be weighted to the second half of the year, in line with historic Melrose seasonality. And as such, free cash flow will be negative in the first half. So to conclude from my side, the business has performed well in 2024. And despite continued supply chain challenges. And for 2025, we expect the business to deliver on the profit target we set two years ago.

Speaker 1

And in addition, 2025 will be the year that substantial cash will be generated, an important inflection point on our way to our longer term targets that I'll now hand over to Peter to talk about.

Operator

Thanks, Matthew. And let's now look further out and unlocking the promising potential of Melrose. We're very well placed as a leading Tier one technology company. And of course, this has been reinforced by all the repositioning work we've done over the last few years. We've got a diversified portfolio covering Civil and Defense, and we also have Engines and Structures.

Operator

And importantly, of course, not just the OE side of the business, but access to that lucrative aftermarket. And indeed, our technologies are on over 100,000 flights every day. And you name a major platform and we're on it with GKN Technology and over 70% of those positions are sole source. And if you look at the Structures business today, we're now the largest independent player in the market with global reach and local presence in The U. S, Europe and Asia, and this is important with world events.

Operator

In engines, we have our unique portfolio of RSPs, which gives us this entitlement to long term cash flows over the full life of the engines. These contracts cover an unparalleled 70% of all flying hours globally. So every time one of those engines goes into a shop visit, we get returns. And longer term, we have our breakthrough technologies, particularly around additive fabrication and our position on next generation engines. So this all provides a strong foundation for growth.

Operator

We also have a clear and consistent growth strategy, which simply put is based around three core elements. First, delivering growth from our existing positions Second, expanding in selected target opportunities. And third, participating in next generation of aircraft. But to be clear though, 90% of the plan we're presenting today is driven from this first element. We think this is important and a reassuring point.

Operator

Effectively, as production ramps up and the aftermarket continues to grow, we step up in sync because of the established positions we have, both in OE deliveries, but also through aftermarket activities. At the same time, we are on track with growing our business by gaining share and capturing new opportunities where we're advantaged and we can generate attractive returns. This is well underway already as we have traction with additive fabrication, advanced air mobility, new military uncrewed vehicles and civil growth in China. And finally, we will continue to play our part with next generation aircraft and also engines for the longer term, and this includes work on both of the leading narrow body next generation engine developments and work with Airbus on sustainable wings for next generation of single aisle. Now those strong foundations and our linked strategy for growth enable us to present our five year targets with conviction.

Operator

So let's start on the revenue side. This, as I say, is predominantly driven by the platforms we're on. And we've assumed that by the time we get to 2029, the targeted build rates for the industry will be met. Now clearly, there is some question mark at the rate at which OEMs will get there, but we're confident that these rates will be achieved within five years given the record order backlogs on both the civil and the defense side. We're also assuming that flying hours will continue as the industry predicts with the resulting aftermarket growth coming to us.

Operator

And this all reads through to high single digit compound annual growth rate in revenue through to 2029. In terms of operating profit, we expect a 17% plus CAGR to take us to over billion with margins in excess of 24% for the group. The key drivers here are that volume drop through, ongoing efficiency and commercial excellence and the positive mix from strong ongoing aftermarket growth. To be clear, the operating profit target includes million of variable consideration from our engines RSP portfolio. Now that operating profit growth plus the reducing interest costs will give us a CAGR in EPS of greater than 20% over the next five years.

Operator

And this excludes the benefits of further buybacks beyond the current program. Our target for free cash flow is million after interest and tax with further growth beyond. So let's get into that important cash bridge in more detail. This slide highlights the drivers to million free cash flow over the next five years. The overarching point here is that the sources of cash are increasing and there is a decrease in the one time uses of cash.

Operator

On the sources side, we have cash coming from the growth in operating profit. And this is from both divisions including the non RSP part of engines. The second element is the RSP portfolio maturing giving good growth from Gen X and XWB and contributions from the legacy V2500 and CFM56. Our current uses of cash will reduce at different rates over the period. The GTF program itself is currently consuming cash at this stage of its development cycle as it was expected.

Operator

Going forward, we and our partners are increasingly confident that the GTF will be a highly successful engine family, especially with the imminent launch of the new Advantage variant. So the program is on track to turn cash positive in 2028 as originally anticipated. We also expect the GTF powder metal headwinds to fall away in 2027 and the conclusion of our restructuring program at the end of twenty twenty five. During this period, we'll also be driving an improvement in trade working capital, especially given it's above the level that we would want or expect given all the supply chain challenges we have right now. There are some other cash items which are included in the appendix.

Operator

But hopefully, this provides a helpful route map to the higher level of free cash flow. And to be clear, we have excellent visibility on each of these drivers. Now we set out our capital Now we set out our capital allocation policy in August and we're outlining it again today as a reminder of the clear prioritization. Our first priority is investing in the health of the business. This includes automation projects and growth opportunities with a focus naturally on the engines division.

Operator

New opportunities in structures will typically be capital light with primarily customer funding. Now given this model, we expect CapEx to be in the range of one to 1.2 times. And for clarity, this does include the Additive Fabrication CapEx we've announced previously. Balance sheet will remain strong through the period with leverage between 1.52 times while targeting investment grade metrics over time. We would expect for leverage, if you put this together, to naturally reduce through the period given the improving profit and the cash generation dynamics in the years ahead.

Operator

And this provides opportunities for further returns to cash in cash, sorry, to our shareholders, both through the ordinary dividend as well as potential further share buybacks. Now we'll consider this based on an assessment of our free cash flow and leverage each year with our next decision point in March 2026. We think this capital allocation policy provides a valuable element of our overall equity case. So that's the overall group story. Let's now go into each of our divisions.

Operator

In engines, you can see the target here over the five year period is high single digit growth on the top line. This is driven not only by increasing build rates, but of course, the aftermarket reading through. Operating margins will continue to expand from where we are today to mid- to high 30s. And this is driven particularly by the aftermarket, including variable consideration from our RSP portfolio. The Structures business will continue to grow at around mid single digits, driven by the increase in production rates.

Operator

Our margin target now goes well beyond the 9% we've guided to for this year, and we can see a clear trajectory to get this business to low teens margins. Both these businesses are uniquely positioned with proprietary technology and diversified portfolios. In engines, there's much focus on our RSP portfolio and rightly so. But it's really important to recognize that about half our engines business sits outside of these RSPs. This includes commercial contracts where we have long term agreements to supply military and civil customers on an original equipment basis.

Operator

We have government partnerships, which are performing particularly well because they're defense related. And we have our expanding parts repair business, which is meeting the growing demand for aftermarket parts. And again, this is where we've invested our shareholders' capital for growth. Turning to our Structures business, this is a design led business with deep technical capability. We're not a manufacturing business that builds to print.

Operator

We embed our technology onto our customers' platform and we do that in four core areas in wings and in other aero structures with deep OEM relationships, particularly with the likes of Airbus and with The U. S. Defense Primes. We have a leading global Electrical Distribution business, which is clearly set for growth given the proliferation of electrics on aircraft. And finally, our Advanced Transparency business serving civil and defense customers.

Operator

Now we're going to talk a little bit more about growth in each of these businesses in turn, but let's start with our most exciting investment for the future and that's Engines Additive Fabrication.

Speaker 2

You

Operator

So as you've just seen, this technology is a revolutionary new way to manufacture structural components, which is at the heart of what we do. But the key reason why it's so in demand is because it addresses supply chain shortages, which in some cases with forgings and castings is actually gating the production rate of aircraft. Now we're the only company to have certified structural aerospace parts flying on engines today, and our task therefore is to now certify more parts. And we've got a very long list of opportunities, and we're working through these in partnership with all the major OEMs. We're also working on the industrialization side.

Operator

And as you may have got a sense from that video, it's a modular approach. We don't need to build very large factories in one go. You can create a module, which consists of robots, our proprietary software and the appropriate tooling. We're able to replicate these advanced manufacturing cells, and our plan is to build capability to start with in our existing factories and then time alongside our OEM customer facilities. We've got some great traction here and it's only increasing over time.

Operator

Our target is to generate million of incremental profit by 2029, and we've got a clear roadmap to make that happen. So finally, a word on our expansion in Structures, which is underway and is typically employing a more capital light approach. An example of this is the F-thirty five Canopy, where we've been asked by the U. S. Government to increase our production.

Operator

We're delighted, of course, to be able to do that, but not using our capital upfront. So in discussions with the U. S. Government and in close partnership with our customer, Lockheed Martin, we've secured funding to be able to build a factory to double our capacity. And on the back of that, we'll have a ten year contract to supply this important operational fleet.

Operator

Now a very different example, but uses the same sort of approach is our expansion in the China civil industry. This is going to represent a significant part of the global aerospace market in the years ahead, so an important play for us. We're working here through a local for local strategy with much of the capital funding coming from our local JV partner, Comec. So hopefully, here you've got a sense of a clear growth strategy based on established positions plus appropriate degree of ambition around new technologies. We believe this all leads up to a compelling equity case.

Operator

Our business sits in a structurally growing market. We're well placed with established presence on all the world's leading aircraft, and we have this unique portfolio in engines with an entitlement to the aftermarket for decades to come. Beyond this structural position of where we sit, we're a business and a team with a track record and real momentum around business improvement and making sure we get the very best from our assets in terms of productivity and cash generation. And coupled with our new opportunities that are coming through in the future and today, we're very well placed. Now I'm not going to repeat the targets again.

Operator

They're out there for you to see. What I can say is all our focus is on delivering these targets and positioning for the longer term because these are not the peak. And with that, we'll open to questions. Thanks. Sam, should we start with you?

Speaker 1

Just wait for a moment.

Operator

Sorry. Just a second. If you could just introduce yourself, that would be helpful. Thanks. Can we hear that?

Operator

I'd like to hear you, Sam, I think.

Speaker 3

Hello. There we go. Sam Burgess, Citigroup. Thank you very much, Peter and Matthew. Couple of questions, if I may.

Speaker 3

Firstly, as we think about the growth of free cash flow from 2025 to 2029, should we expect the relative divergence between profit and cash driven predominantly by that variable consideration to progressively narrow, meaning free cash flow is going to grow substantially faster than profit over the period and then overtake profit on those RRSPs in the 2030s? Second question, clearly, million of mid term free cash flow, a very big number. How confident do you feel in that number? And would you say you've baked any conservatism into that? And then finally, would the benefit to you of your additive investments potentially look like higher RRSP share or engines?

Speaker 1

Shall I cover off the point about RSPs first and then talk about that? So look, we've made this clear in our RSP brochure. We expect that the unbilled work done asset will grow while we continue to build, particularly the GTF engines because that is how the mechanism works and that will be up to the late 2030s. But we do expect that gap to narrow. So you're quite right, we're expecting the cash to grow sort of on that in that particular faster than the buildup of the unbilled work done asset over time.

Operator

Yes. Indeed, and actually, the variable consideration grows significantly slower than the underlying profit in the business as well over the planned period, which is important. So I mean, you asked about the conservatism on the targets. Perhaps the best way to say that is, firstly, we're not going to step up and make commitments to targets unless we've got a clear line of sight to do that. That's the first and most important thing.

Operator

But I think to get underneath that, we're pretty confident about the onetime uses of cash. Restructuring is in our control. That is going to end this year, and that's obviously a significant change. And similarly, the GTF Powder Metallurgy issue is well trailed and looks well under control. So that's the two parts of the uses of cash as is the GTF program nicely on track.

Operator

I think the most variable bit, if you will, is in the top two lines, which are conditional on build rates as the for the overall operating profit. And we've taken the industry build rates. Interesting, I was asked this morning whether or not the full weight of potentially defense spending increasing over this period is in the numbers, and arguably, it's not. But at the same time, we do need to step up as we'd expect on the civil side. And then the RSP side, which is throwing off cash from the aftermarket is clearly contingent upon flight hour growth.

Operator

So we're confident in these targets overall. And we're not going to put things out there that aren't doable and we've got very good line of sight on. But hopefully, that gives you a sense. I'd say this the uses are clear and we know what those are. There is clearly execution both up and down on the profit growth, but we feel confident about it.

Speaker 3

Thank you. You. Sorry, just the final one was the Additive investments whether that might look like a higher RSP.

Operator

Yes, I'm sorry. So I mean, I think on that one around the RSP, I think you asked whether or not we might get a position on the RSPs. Is that what you mean with the next generation? So the answer to that is yes. It's really interesting.

Operator

The Additive Fabrication has, very broadly speaking, two elements to it. The first is what we're doing is we're taking stuff that's being made today by forgings and castings where there's a supply chain issue, right? And what we're doing is we're producing that with this new method. And that protects the supply chain, but also it's obviously a lot in demand with OEMs given where we are on supply chains more broadly. And that in itself is a very profitable opportunity for us.

Operator

It's near term. It's not something that's going to we're going to have to wait for. And that's frankly where that 50,000,000 of incremental profit is. So that's what that's based on. But Sam, you asked a very good question, which is what does that mean.

Operator

And what we're finding is we're in huge demand actually across all OEMs for the next generation. And I would be very surprised if there is an opportunity for what's called designing for additive. So you take the technology and you design something that only can be made that way. And I think we will have the opportunity whether or not we choose to take it to play take a bigger share on engines going forward because of this technology. But what we presented today is based on the near term, and that's frankly just making stuff for this new technology.

Operator

So next question. I think should we go yes.

Speaker 4

Yes. David Perry at JPMorgan. Can I ask three as well? Yes. So first one, the free cash flow of six twenty nine million pounds as you make clear, is post interest and tax, which is good.

Speaker 4

But if we look at it sort of at a trading level pre interest and tax, I'm just curious roughly how much roughly is it going to be the RRSPs and how much all the other businesses that were on that good slide you had, the non RRSP engines, the structures? Second question is the Aerostructures margin that you're guiding to is very good. It's probably stronger than a lot of Aerostructures companies think they can achieve. So I just wondered if you could sort of say what's behind that. And then my third one is Slide twenty two.

Speaker 4

Someone's had fun with the colored bars there. And I'm just intrigued about the GTF RRSP in 2028 because it's about three or four different shades of color there as it moves from red through to green. So I'm just like, so what magnitude of delta are we going to see on that program in 2028, please?

Speaker 1

So it's like I'll take the first one and the third one, if that's okay. And then you can take the point about the structures margin. So look, we haven't broken out the RSP versus the non RSP at this stage. We've obviously done our plan from the bottom up. We've given you the divisional split.

Speaker 1

We've given a lot of information as to how the business has built up from there. But to be honest, we're not going to give sort of additional guidance on that. We think we've given huge amount of transparency in these numbers, particularly to where the business was previously, but we're not going to go much further than that. On the Page 22, yes, good question. And clearly, we're obviously looking at forecast.

Speaker 1

We're looking at the partnership forecast as well. So that's where we get the confidence that that the GTFO will move into positive cash in 2028. This is I think this is a real challenge for us. This information is commercially sensitive, and we can't tell people what the existing level of development spend that is going through the GTF and how that moves. Because by doing that, we would then be effectively giving a forecast for the other members of the partnership, two of which are quoted, RTX and MTU as well.

Speaker 1

So that is the challenge we face here. We feel we've given a huge amount of building blocks to take you through the reduction in the drags on cash. But unfortunately, that's the one piece that we can't give out. But you're right, a lot of time was spent looking at those colors, a lot of time.

Operator

That's great that it's acknowledged

Speaker 5

and recognized.

Speaker 1

Thank you, yes.

Operator

David, let me just I'll just add one thing, if I may, on Matthew's answer about the RSPs. Because I think the for the GTF, effectively, what you've got here, you've got two sides of the coin. You've got, effectively, the development costs that are ongoing. And as I've said, the GTF advantage looks in great shape going forward and the continued development and commercialization of that. And then that's obviously offset by the cash generative shop visits as that fleet gets flying.

Operator

And that's the trade off there. As a partnership, we're confident that that's on track. And I'd just add actually that the inflection point for the GTF becoming cash positive to us was always around 2028. I think probably the depth of the investment is has been somewhat higher, but the shape of it has remained intact. And then you asked about Structures, an interesting question.

Operator

I mean, the first thing I'd say is that we have spent a huge amount of time and effort to reposition the Structures business where we are design leaders. And that includes, frankly, people look quite a lot of our revenue and our revenue line in Structures at the moment. And you can see that we're exiting businesses that are non core and not profitable and wouldn't generate cash over time. So what we're left with is portfolio where we own the design rights, where we frankly invest a huge amount to work alongside our customers and embed our positions on their platforms. The margins we make, we've also repriced to get appropriate value, and that's reading through.

Operator

We've been clear about that in defense with our plans to do that and we're on track to get those repriced. And frankly, defense U. S. Defense, some of it is open book and it's expected there is a threshold there of around 12%. So it's consistent with that as well.

Operator

But look, we make no bones about it. We're aiming to have the highest quality structures business based on our technology. And that's the work that we've been doing.

Speaker 6

Ian? Thanks very much. Yes. Ian Douglas Penance at UBS. Your CapEx commentary, you'll forgive me, I don't have your H1 slides in front of me, but I think it's different to what you said at H1, where you're now saying one to 1.2 times including the additive manufacturing CapEx.

Speaker 6

I thought before it was that number plus, but maybe you could correct me if I'm wrong. And apologies again, I don't have the slides in front of me. Second, on your inventory reduction plans to 2029, clearly your inventory levels are high. Can you give us an idea of how much you believe you can reduce inventory levels by, when you think you can reduce inventory levels by? And then just quickly confirm that in '22 your assumption is in 2029 versus 2028 inventory days are flat, please?

Speaker 6

Thank you.

Speaker 1

Yes. Let me cover off that one, both of those. So yes, we did give indications of the one to 1.2 times within our additive fabrication expenditure of £300,000,000 I think there's two things that have really developed since that conversation. One is the fact that we know more about it. So we're now sort of factoring in sort of much more up to date view of how much we think it's going to cost.

Speaker 1

The other thing is we're getting subsidies. We're getting grants to help us with this technology, particularly in Sweden as well. And you've seen we made an announcement around sort of million investment and actually that's sort of the million grant coming on. So when you take those into account, we're now feeling like we can absorb those together. In terms of the inventory, we'd probably say there's around million of inventory, sort of too much in the supply chain.

Speaker 1

It's difficult to see when that directly comes out. We're not saying that we would that the inventory days are going to be flat in '28 to '29. So we still see some improvement coming through. The improvement is likely to come through sort of '27, '20 '8 and then through still coming through '29. But it's a combination of sort of working through the supply chain, but also Peter talked about our sort of lean model, our Brilliant Basics model, actually the operational efficiency that will continue to come through the business as the as both the business ramps up and sorry, as the supply chain stabilizes and the business ramps up and we can get more predictability coming through the factories.

Operator

I think I'd just build on that to say I think there's two separate parts to it. And the first is we're actually just we've got excess because of the supply chain and that manifests itself in two ways. Firstly, we end up with deliberately making sure we got the right materials. So that's raw materials in the factory. And then the other thing is if we're waiting for parts, you've got quite a lot of work in progress.

Operator

So part of this unlock is actually just having a supply chain that is more robust. And I think, frankly, that will take time to work through. But the other bit and I think it's really important actually, Matthew, what you've just said, which is we're moving away now with Melrose, away from sort of restructuring to drive margin expansion into what I would describe as continuous improvement. So that's using approach which will be more consistent with Danaher, something that's in my own background or indeed what GE are doing with their cockpit work. But it's driving operational improvement, which links to both productivity and inventory as we work through flow.

Operator

And there's more opportunity to do that now, of course, because we've got a restructured cost base. We've got the right platforms with the right operating. And frankly, that is an important part of our margin expansion and cash generation going forward.

Speaker 6

And just quickly, any other anticipated changes in the other working capital lines, please?

Speaker 1

I don't think so. I think we talked about that. No, not at that point, no.

Operator

Can I ask you a

Speaker 7

couple of questions on structures? So where are you now on destocking? And when I look at that mid single digit growth over the next five years, it does seem quite low relative to some of the production ramps. So can you just highlight what's kind of involved in that? And then the 50,000,000 profit on Additive Manufacturing, can you talk about what that revenue opportunity could be in 2029?

Speaker 7

That would be great. Okay.

Operator

So on the structure side, you're right about the destocking. And that's primarily been because we have effectively been building at the higher rate, which hasn't been achieved, and it's particularly acute. And we've been public about that on the 03/20, the A320. And that's working its way through. And obviously, we're in very close discussions about that with our customer.

Operator

And similarly, we're just working through what's happening on the A350. I mean, you know the market very well, Ben. So that's all reading through. What we've done over the planned period, though, just straightforwardly, is we have taken the target build rates, which, as you know, for example, on the 03/2075, and said, look, that's going to be achieved by 2029, all being well, it will be achieved very significantly before that. So that's how we've assumed it.

Operator

And if you play that out, we've probably smoothed it a bit, which is why you've got that mid single digit. And then if we accelerate a bit, we'll have that.

Speaker 1

Let me just talk specifically about that. Can I just caveat this by saying we do run the business, but there are two things we spend a lot of time on? One is those colors that David talked about. The other one is the definitions of sort of mid and high and low single digit. In the structure side, as Peter said, it's sort of mid to high single digits.

Speaker 1

So it is very much in line. As you look at those other ramp up rates, it's very much towards that end of it. So I just point that out to you, yes.

Operator

There you go.

Speaker 1

There you go. And then on the

Operator

revenues for Additive? Yes. On the revenues for Additive, we deliberately haven't guided that for a couple of reasons. One is because we're working with our OEM customers, so we don't want to sort of effectively give out our margin aspirations on this. But also because some of the operating profit that will read through for us is actually effectively reduced cost from our own supply chain because what we're doing is replacing forgings and castings in some cases with what we're producing internally.

Operator

So the net impact on the P and L is that $50,000,000 but we've been quite thoughtful around what we've guided here for those two reasons. But we're very confident we'll see that reading through and that's what's in these numbers. Yes? Does that make sense? Thanks.

Operator

I think the other point on the structures, by the way, is obviously on the defense. We've just taken the defense expectations on before any of the latest developments.

Speaker 5

Mark Fielding from RBC. Yes, a couple of questions, maybe three. Just the first one, in a typical analyst, you give us twenty twenty five and 20 20 nine. I'm going to ask you about the shape in between. But from the comments you've made, obviously, we know about GTF.

Speaker 5

Working capital seems slightly later loaded. But is there anything else to think about just the shape of that cash flow progression over the period? And how much it ramps later on versus the current $100,000,000

Speaker 1

I think I'd say the I mean, look, we recognize that sort of 2028 and 2029 start to be the real sort of clean years. Obviously, the operating sort of profit, the normal business will grow in sort of in line with the way that we've talked. But yes, those drags, and it's what we tried to do with that Slide '22, so you know that drag of restructuring, that goes away fully in 2026. The PMI goes away fully sort of by the end of 'twenty seven. The GTF turns cash positive in 2028.

Speaker 1

So that's as far as we can go. And again, we get this challenge on the commerciality there.

Speaker 5

And specifically on the Additive Manufacturing, following on from Ian's question. So what do you actually think versus that $300,000,000 comment before? What do you think is going to be your net CapEx now actually over the next five years on Additive? Is it therefore substantially lower than that in terms of your spend?

Operator

No. I mean, we've looked at what we can get from funding point of view. It will be broadly in that direction, but what we've done and I think an important message today when we looked at our CapEx over the five year plan period is we're deliberately placing bets, if you will. And Additive Fabrication is where we're going to invest more heavily and capital light on the structure side with a couple of examples out there. So what we've done with inside and hopefully it makes it cleaner actually for everyone in terms of what we're going to spend on CapEx going forwards, we traded off those things.

Operator

The investment in Additive, given the opportunity, is it will continue at broadly the pace that we've talked about, which is roughly GBP 50,000,000 a year. The only other thing I would add to that is that we are getting it's very much in demand for customers. So quite I mean, over the five year period, bluntly put, I would be disappointed if we're not in a different stage in terms of some of the customer funding for some of this stuff as well. But what we've outlined today is what is in our line of sight in terms of what we can commit to with the investment we've made.

Speaker 5

Yes. Because I was going to be my one follow-up was, obviously, it was a five year plan, which would be coming to an end in 2029. The CapEx guidance is pretty stable in that sort of one to 1.2 times. Is that because you foresee continuing that investment in the future in that area? Or is there other investment things you're thinking about in the business?

Operator

I mean, on additive fabrication, as I say, it'll be just interesting to see how where we get to with our customers because if we start building modules, if you like, or factories adjacent to theirs, quite how that will be funded is work that we'll be doing. But clearly, we'll be making sure we're delivering value for customers, but also being smart with capital for our investors. I think if you look out beyond that, Martley, the reality is that, that is when into the 2030s where next generation engines will kick in. And I think we're very well placed, very much in demand actually with all the major programs to play in that. And that's clearly the cost of being in that position on those development programs is absolutely in here.

Operator

But if we were to ramp up with a new RSP, for example, that's something that we'll come back to you. But that's seven years away. So we're positioning for that, and we will make a decision as a board and guide the market accordingly.

Speaker 5

And, Thomas, last follow-up question. In terms of the you talked about the GBP 50,000,000 of profit and how that was the opportunity in terms of the replacing existing forgings, etcetera. But to be clear, that's not the end of the opportunity for that either, is it? There's a lot of runway on that side too.

Operator

Yes, there is. And not just in Additive Fabrication, but beyond what we've got in our pipe. The key challenge at the moment, just straightforwardly, is we've got this long list of opportunities with the OEMs and frankly prioritizing that based on not just the technology, but also commerciality and what the customer needs are. So and in some cases, it's about providing resilience to the supply chain. It does take a while.

Operator

It's two years to get certified, broadly speaking, on these parts. It gets faster as you've done more. And we're in that position, and that's part of the defensive position or the, if you like, the IP that we have.

Speaker 1

Tara?

Speaker 8

Mark Davies Jones from Stifel. Can I just go back to one of the defense exposures, particularly in engines? Clearly, given the state of the world, that Swedish exposure should be quite beneficial, but it sounds like you had some specific drivers in 2024, which drove a very strong year there. So what are you thinking about that for the next year or two?

Operator

Yes. So you're right, Mark, around our position. We are the effectively, we're responsible for running the engines on the operational fleet for the Gripen, not just actually run by the Swedish Air Force, but the other air forces around the world that do that. And we've just been super busy. Those aircraft are busy to the east of this continent, and they look set to do so.

Operator

I mean, for that to continue, I mean, there's a broader question mark about our defense position, and I'd just reiterate that we are we've got established positions on all the major platforms, which many of which are in The U. S, but are actually bought by European nations, such as the F-thirty five, which is clearly part of U. K, Germany, Italian, Dutch defense. And so that position is strong. And then, of course, we've got European defense, which is an industry we need to step up and develop.

Operator

And clearly, as you'd expect, we're working with the likes of BAE and others in Europe to do that as well. But you're right to pull out Sweden. It's a bit of a jewel in the crown and it's an important position. It's been busy and I think it will continue to be busy.

Speaker 8

I guess that was the question. We're not coming off a sort of elevated base.

Operator

I think if you look at Defence, Spencer, I think and look at the world around us, which is clearly changing very rapidly, but everything we see in here and you see as well is that defense spending, particularly in Europe, is going one way.

Speaker 4

Thank you.

Operator

Lots

Speaker 9

It's Richard Page from Deutsche Numis. Just two for me please. A seminal moment in the absence of the cash mountain, but if I looked at the last version and I compared the sort of '24 number to the '29, the RSP cash flows look to improve sort of $250,000,000. Is that a relevant number still? And secondly, cash tax, I've noticed it's low and looks to be remaining low out to 29,000,000.

Speaker 9

Could you just remind us of the tax losses and their endurance, please?

Speaker 1

Yes. So look, on the cash mountain, yes, we can't sort of get rid of what we put out there before. We feel that we are not putting that back out there again. We're not going to give sort of specific cash mountain numbers. It hasn't changed significantly.

Speaker 1

It was 22,000,000,000 before it's 22,000,000,000 now. So we're not really commenting specifically on that. I suppose what we've done is we've just given you absolute numbers. First time in Merlin's history, we give absolute cash numbers. I think on the second question, on the cash tax, Yes, I mean, we've got some big losses in U.

Speaker 1

S, Netherlands, particularly U. K. They go out for a while. I think the challenge is that you can't actually utilize, particularly like in The U. K, you can only use 50% of the losses each year.

Speaker 1

So that's why we tried to give you a five year outlook and to sell it from 4% PBT to 7% PBC. So it does grow and you can sort of plug that into the model. But yes, we've got some quite long as you'd expect in Aerospace, we've got some long life deferred tax assets there. Yes, we're comfortable we're going to recover them. If you look at the other U.

Speaker 1

K. Sort of big Aerospace players, you'll see exactly the same sort of thing. But yes, we tried to give a guidance and say, look, it's not going to be like million like it was in million. It is going to grow, but we gave you some maths to try to help you work it through.

Operator

Richard, can I I'll just add something more structured to that, if you will? Not certainly not. Okay. Matthew looking really, really worried now. No, don't worry.

Operator

On the broader point about actually what we're reporting, I mean, we're looking at this very straightforwardly as trying to be as open as possible as what we are. And so yes, you make a point about the cash mountain, but here you've got Mario for the first time talking about variable consideration, guidance splitting out the movements on the working capital as well and with factoring and nothing. So we are trying to explain the mechanics of the business, how we're running the business, the decisions we're taking with transparency in a way that makes sense for investors to understand our business. So I hope that you recognize that there's more disclosure here rather than less. David.

Speaker 4

Yes. Sorry to be annoying and come back. But I think it's an important question. I mean, all the feedback I get from investors is the news or transparency is fantastic starting with the accounting booklet and how much you've laid out today that we never had before. I guess the bit I struggle with a little bit and I think the investors I talked to are struggling with a bit, just how you landed on the 500 number for 2029.

Speaker 4

I think it would just be helpful if you could give a bit of color on why that is the number.

Operator

For variable consideration?

Speaker 4

Yes, for 2029.

Operator

Well, it's based on assumption. I mean, let's just step back on variable consideration, which is it is effectively as an engine gets shipped, we recognize the profit. And it's therefore a very small proportion of the aftermarket profit, 10% to 30% as you know. And that is our assessment of the engines that we'll be shipping at that time attract variable consideration. So it's based primarily on that.

Operator

I don't know if you'd add anything.

Speaker 1

Absolutely. That's exactly the answer is that we you're looking at the OE build rates and your our barrel consideration is directly related to that. So I think we've got a roughly sort of 10% CAGR, depending where we land, for 25% for those sort of four years. And we're showing we've got a high single digit revenue growth rate. So I think it's really sort of mathematically worked through in that way.

Speaker 1

We felt it was important to really give people that number. Obviously, focus but a lot of the focus is, yes, it's focused on profit, but also it doesn't affect the cash. That's a separate conversation.

Operator

And again, the key point here is the variable consideration is growing in profit terms less than the rest of the business from here, which goes to the point about cash as well.

Speaker 10

John Mounsey, BNP Paribas. Just a follow-up there to David's question. And you touched on it there in your answer. So 500,000,000 of variable consideration 2029. I looked at the booklet at length when it was published.

Speaker 10

There's two forms of accounting, I think. One of them you alluded to 10% to 30%. I'd say 10% is quite a small proportion of profit, 30% is getting up there. Why 10%? Why 30%?

Speaker 10

What leads to it being either 10% or 30% or something in between? And does it change over time on each RRSP? Or once you pick it, it's still there? That section of there was a few words that did a lot of heavy lifting in the booklet. And in the end, I didn't really understand why it's 10 or why it's 30.

Speaker 1

So just a step back, yes, when we're obliged to recognize this contractual entitlement to the aftermarket at the point that we ship the OE engine. There's a lot of sort of water to go under the bridge as those engines fly, and we've seen development of those is up and down. So we make sure we're very prudent in the amount of aftermarket that we recognize. So that's where we're saying it's a 10% to 30% of the available number. It is different per RSP, and we've come with a range that is not sort of so precise that we're giving you a spreadsheet, but it's enough to indicate to everybody it is a low proportion of the available aftermarket, and it takes again a potential risk.

Speaker 1

And I can say we are absolutely categoric with auditors, old and new, that we are very prudent in this respect. Our accounting is very prudent. How it develops, what we've got to understand and we've seen this this year is that you can't be prudent forever, right? At some point, you have to recognize all of the aftermarket that that engine, each individual engine is entitled to. So over time, we have to release that prudence, and we sort of you can call it catch up, you can call it sort of change in our assumptions.

Speaker 1

But over time, we are sort of releasing that prudent in a very sort of slow way. So you would expect again, if you look at the life of the engines over the sort of late 20s into the 30s, the prudence levels will reduce because the engines will have been flying for ten, fifteen years. And there's not the level of risk related to them is much lower. So sorry, there's quite a long winded answer to your question. It won't stay the same.

Speaker 1

It will gradually the print on each RSP will be considered on its own merits, will gradually get sort of less prudence, and that's where we have this change in assumption number. But it's going to take a long while for that to come through. So that's all we can really say on that, I suppose.

Speaker 10

So listening to you, is that an accountant's way of saying when the engine program is young, it's near 10%? And after the engine program is getting a bit older, the engines flying, we have some visibility, it moves towards 30%.

Speaker 1

Yes. Yes. That it we as the engines get more reliable, much longer term, we don't need and we can't take as much prudence as we go through. But yes, we are very prudent at the moment.

Operator

Thank you.

Speaker 1

Thanks. Glad you read the booklet though. Thank you.

Operator

Great. Very good. Well, we appreciate all the questions in the room. There's been lots. Should we just go to see whether or not we've got any on the webcast?

Operator

We have got them. So I don't know how they come through, but let's go to those now.

Speaker 2

We have a question from Amariq Balin of Kepler Cheuvreux. As a point of clarification, the GBP $500,000,000 variable configuration is a sales or EBIT contribution on 29e. When looking at the GBP $600,000,000 FCF, does that include CapEx over DA one time? And if so, what decline is non variable consideration, working capital savings and interest cost reduction assumptions? Do you also assume by 2029 some R and D investments to absorb FCF FCF or are these investments planned for later in the 2030s?

Speaker 2

As you say that interest assumed to fall into 2029 E to reach 29 E FCF of GBP 600,000,000 GBP, does that mean that a new share buyback in 26E will be less likely to assure sufficient deleveraging?

Speaker 1

Well, I

Operator

think we're going to have to try and I think we're going to have to try and break this down. We've got the transcript because it didn't come through particularly clearly at this end, I'm afraid. I don't know, Matthew, you said.

Speaker 1

I'll give a go. So the million variable considerations will go through sales and EBIT. That's the way we account for the variable consideration. CapEx to depreciation is one to 1.2 times. I think it's one to 1.2 times in 2029.

Speaker 1

The low cash tax, we're saying, ends up being around 7% of PBT in 2021. That's in the back of the book, actually. There's quite there's some extra sort of guidance in there. The in terms of working capital assumptions, I think we've covered that off with the conversation with Ian beforehand. We are expecting the supply chain issues to be resolved, and we expect that we would continue to get sort of efficiency in working capital, particularly around inventory.

Speaker 1

And the interest costs, well, again, we are not guiding specifically on the cash points in between '25 and '29. So that's really for people to think about that. I think in terms of the R and D, we think that the and Pete maybe want to add some more on this is that 2029 is still before the point of time of which new engines will go into their higher cash consuming phase. And all of this is sort of excludes anything on the new the significant on the new engines. We will be having R and D at the current level, which is around sort of 3%.

Speaker 1

And we will be continuing to invest in the development in our engines business, but it will be at the current sort of level that's going through the P and L at the moment. So there are not significant R and D increases planned in our number, and we wouldn't expect that to be either.

Operator

I think there was one other question in there, if I remember, just because it was at the end, which was around assumptions on buybacks. So what we've got on in terms of the cash is it's free cash flow. So we have got obviously, this year's guidance includes the completion of our current program. But beyond that, the $600,000,000 does not include any buybacks. Okay.

Operator

And we've had lots of questions here. Is there anything else from if not, we are significantly over time. So I think we'll wrap. Can I thank you all for being here for the attention and all the questions? Good to see you.

Operator

Thank you.

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Earnings Conference Call
Melrose Industries H2 2024
00:00 / 00:00