Melrose Industries PLC (MRO) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Simon Peckham. I'm the Chief Executive of Melrose. My job here is to do a short introduction to our Investor Day on Powder Met and on GKN Automotive. I very much hope that the next 2 hours will be informative and helpful for everyone, and we look forward to going through this process with you. The first person speaking will be Peter Oberparleiter. There will be a break. And then he'll be followed by Liam Butterworth. And finally, Geoff Martin will draw together the themes and do a conclusion and then we'll have a Q&A session. Since 2003, Melrose has a strong track record of buy, improve, sell. Today is only really about the improve part of what we do in connection with two of our larger businesses that we obviously acquired with GKN. We're going to report to you on progress on those businesses and show you what can be achieved -- what has been achieved in our ownership in what has been some quite interesting times. There will be no new trading information today. We've very recently announced our trading statement before the AGM. You should not -- you should look at that as basically what we have to say on trading. It would be rude though not to mention Aero. I don't want anyone to think by not mentioning it, we're avoiding it anyway. Aero is trading exactly as we said in our recent trading statement. And we very much look forward to a good year overall for all of our businesses. GKN Automotive and Powder Met are both very high-quality businesses with leading market shares in what they do. Both can grow profitably ahead of their markets. And both have operating margin targets, which I think are both achievable and we're well in progress to deliver it. We only require partial market recovery to 2018 to achieve those margin targets. If you think we're going to get better than that, the margin targets will also improve. Both businesses are also excitingly positioned to start making a difference in some of the climate change issues we've got in the world today. We are part of the solution to those problems, not part of the problem. Thank you very much, everyone. I'll now hand over to Peter.

I'm delighted to begin the opportunity to talk to the financial community after almost 1 decade. I'm really enjoying sharing with outside people the progress we are making on sinter and on powder but also sharing some insights on the new technologies. We are working on hydrogen systems and additive manufacturing. The GKN Powder Metallurgy is the global leader in PM, not just in size but also in technology and digital adoption. There's a clear path to bring the business, which is already above industry standards, to 14% operating margin. 2/3 of the business already perform over that level. We are operating in times of change, in times of transformation. Especially in the automotive market with electrification, there are quite a few challenges. Already a few years ago, we prepared the plan which helps us to overcome this challenge and turn it into an opportunity. I'm going to show a bit later what we mean by gaining market share organically. But we already have some good evidence that the plan is working. And when we look to the first quarter of this year, where we are outperforming the market, something you are able to see already in the Melrose trading statement. Incremental growth is going to come from the new technologies. Two technologies: on one side, additive manufacturing; on the other side, hydrogen storage systems, which both start with powders placed in high-growth markets. But I'm going to come back to that later. All this is led by a very experienced team, 6,600 people working for PM globally. What you see here is the executive team, let's present myself for a moment. I'm Italian citizen living in the north of Italy, in the Dolomites. I'm 30-plus years working for GKN, other than 3 years, from 2009 to 2012, always in Powder Metallurgy. The business is organized in 4 business units. These are run by COOs. Only the smallest one, the most recent one, Hydrogen, is run by myself. I try to help in the launch. The business is globally supported by functional leaders in finance. We have a very strong Brazilian guy, we have an Italian CTO and we have a German CHRO. PM, GKN Powder Metallurgy, the world's #1 powder metallurgy business. It's formed about -- there are 4 business units, 2 core ones, 2 new ones. Let's start with the Powders. Powders, global #2, 300,000 tons of powder on a yearly basis, 24% global market share. GKN Sinter Metals, the parts business, by far, the biggest business in the portfolio, global #1. We do 11 million parts a day. Each part -- each car on Earth has on average 30 parts of our production in. And we have a 17% global market share. For the time being, we are organized into OneSinter and nonperforming. OneSinter is the, by far, bigger part. One performing -- nonperforming is just 3 plants left. One of those, we announced the closure. It's a transmission plant in Canada. The other one, we signed a sale agreement beginning of this month. And there is a third one left, where we try to transfer some of the good products from the Canadian plant. These 3 plants, or mainly the 2 plants we are selling and closing, are very heavy ICE. And that will help to get less ICE exposure. Additive manufacturing and hydrogen systems, I'm coming back in the end, are 2 high-growth businesses, where the last one, we have been able to announce only 10 days ago. Refocusing to OneSinter. Let me start in the middle. The green, the dark green and the dark gray, it's more than 80% of the business, are really good business, performing at very good levels, continuous improvement businesses. Nonperforming businesses, these businesses, which already dropped from 21% in '18 to 16% in '20, are, as I said before, the 3 plants, where one, we are going to close; one, we have already sold. So by the end of the year, we will be, for sure, in single digit on the nonperforming and it won't take much longer to have dark gray everywhere. Important to mention here are two things. One is the margin differential between OneSinter and nonperforming. And the other one is really the impact Additive will have. In the near future on the business, it will be 10% plus of the total business by 2030. On Hydrogen, it's too early to commit, but it's potentially going to be huge. Let me now explain how the plan works, where we try to grow through winning market share. Starting in the middle, reduction of ICEs, according to IHS and data forecasting agencies, is worth about 1% to 2% decline. That's somehow balanced with the volume increase in the time from '19 to '30 forecasted by the same agencies. And what we try to deliver is a 2% to 3% through winning market share. And I'm going to explain that in more detail on the next slide. So all this together leads to it about 2% CAGR in the period I mentioned before on the base business plus the growth we get from the high-growth businesses, 20% CAGR on Additive. And we already discussed Hydrogen, which potentially is huge. That's the sinter market. You see very, very fragmented. GKN is the biggest player in there. There's a lot of Japanese coming next to us. And these guys, we don't see really that much in the market. But the figure to focus on is the 40% others. These are the guys which struggle to cope with technology, with digitization, with sustainability. And these are the guys who will exit the market. Well, natural consolidation without acquisition is taking place. We can build on our strengths to make that happen. We are global. We have competitive advantage in digital but also through unique production assets, including in-house software. What gives us a lot of comfort on that journey is that out of the GBP 350 million we plan to win through from '19 through 2030, we are already 1/3. So in 2.5 years, we won 1/3 of what we need to accomplish in 12 years. Let me spend a word on the content per vehicle. 14 kilos on the ICE vehicles, which is going to grow by a bit on the hybrid vehicles and is then about half in the electric vehicles. But that's going to increase once volumes come in because PM is a technology which is very competitive on higher volumes. Let us look to the split of sales between ICE and transmission and on the other side, other car parts and industrial. The current split is 53% against 47%. With the actions we took by selling our noncore business in Pennsylvania and closed in Canada, by the end of this year, we expect the ratio to almost reverse. Summarizing, we have a very robust medium-term outlook. You see at the bottom, the line, that's the growth of the market. We are very, very convinced that we can outgrow the market. On top of that, we have Additive with a CAGR of 20%. And in this, we don't consider potentially very high-growth of Hydrogen. On the revenue side, today, we need to continue to have growth ahead of the market. The future will give us more growth through the new technologies. On the profitability, we are reaching our target of 14% in the next years and then maintaining or even increasing that level in the years to come, supported by the new technologies. A really exciting future in front of us. As most of you probably aren't an insider in Powder Metallurgy, let me go a bit deeper in some details about our business. Let's start with the history. It was bought by GKN in 1967. Before the end of the millennium, there were two major acquisitions in the U.S., which made out of the business -- a real business within GKN. Then the next decade was really used to consolidate and to bring it up to speed. After me coming back to PM in 2013, we started on business development. We were a good business at that time, and we concentrated on hydrogen storage and on additive manufacturing. And luckily, these two areas are now high-growth areas. With Melrose coming in, in 2018, the business gained a lot of autonomy. And we started really to focus on restructuring, refocusing the business but also to start investing into the future. I think a lot of evidence was the expansion in Mexico, we started in 2019: the acquisition of Forecast 3D in California, we did in the end of '19, beginning of '20; but also the refocus and the restructuring, which was enforced in that years. We went back to OneSinter in the end of 2020. And the most recent highlight is the launch of our Additive -- or Hydrogen business only 10 days ago. Let me talk briefly about the revenue breakdown. Automotive is 2/3 of the business. The rest is equally split between industrial and Powders. To mention here that Powders is just -- the external part of Powders, 45% of the powder we sell internally. On the segments, the biggest segment is Sinter, where, as discussed before, the nonperforming is still 60%, going to shrink through our disposal of one plant and the closure of the other plant. And Additive is still quite small. On geography, I think, a quite fair distribution with a bit heavy Americas but India or Asia coming bigger. The only thing to mention here is that Sinter, mentioned at 17%, through our policy of gaining market share organically, we will be above 20%. We are supported by around 3,000 happy customers. You see there who's who on the screen. It's OEMs and peers. In powders and in sinter, what we are proud of is the customer concentration, where in powders, we are below 40%, top 5, and in sinter, below 30%. And that's not very usual in our markets. There's a long-standing customer relationship with all our customers. We are the most global business in this sector. We are present in the Americas, in Europe. And in Asia, in the main countries, China and India, we have plants. And we are in Latin America, in Brazil and with the most recent plant in Mexico. 29 sites, still 29 sites, 2 sites going away, 1 being sold, 1 being closed. As already said, 6,600 people, out of them, 400 engineers. Let me explain very quickly the process, why Powder Metallurgy. PM is a net shape product. So you put powder in and you get a shape out. The better you mold this, the better product, that makes it very competitive. Very low waste or no waste, there's no distractive process. In a way, it's the first additive process with very, very high precision. The first two steps you see here are done in the powder area, so producing the powder and mixing the power, putting in the ingredients you need to produce the components. The core step in sinter is the compaction, where you get out a net shape green product. It gets solid through sintering and then you need to add, in some cases, finishing operations. On the products, powders, not just steel, but also powder for additive manufacturing and hydrogen systems. On automotive, products for ICE and transmission, but many other products also for non-ICE, for body chassis, for electric systems in the car. And a variety of industrial products in many sectors, to mention here just 2, the valve plates for compressors and the filters. We do historically a lot for ESG. Our products are 100% from recycled materials. And again, 99% possibly to be recycled. That's in the base business. But in the new businesses, through additive manufacturing but especially through hydrogen storage, we think we are going to give a big help to making world a bit greener. You see we have KPIs on the environment, which are showing in the right direction. As already said, people is the most valuable assets we have got, and we take care that these people are involved in their communities. We have had people with special activities and communities on a yearly basis with the Hearts of Gold award. Health and safety is very close to us. And we are especially keen on our near-miss reporting and have performance through the years above industry standards. That was about a bit more detail about our PM business. But let's move now into showing what the bottom line is going to be. 2020, as in most other businesses -- or in all other businesses, was a very difficult year with decline in sales, 18%, a sharp drop, especially in the first half on operating margins. The only highlight we were able to perform through a very, very tight cash control is a cash performance, a cash conversion on EBITDA of pre-CapEx, cash flow of more than 150%. What we did in these months a year ago was really to immediately react. We had shutdowns in almost all our plants and we reacted quickly. We focused on restructuring, on refocus and winning business where other people were struggling. That's led us in being very successful second half to reach an 8-plus percent margin. It was a really good base for this year. And again, if you have seen the Melrose trading statement, we state that we are already better in margin than prepandemic in the first quarter. Let me now go through the walk to the target margin of 14%. If we start from the 8.3% of last year, second half last year, we see another 1.5%-plus just as a carryover from the actions we did last year. The actions we already launched, not fully performed, but everything is already launched in the refocusing and restructuring, and I'm going to talk about that a bit late on the next slide, will perform another 2%-plus. And we got some help through the recovering volumes to a partial market recovering -- recovery. All this will lead to our target of 14%, which we are able to reach in the next years. Let me now focus a bit on what we do on both refocusing and restructuring. Refocusing will give us about GBP 25 million of benefits, where 30% we already realized. Restructuring, we will get GBP 24 million benefits, where 80% have been realized. Just a few actions we took. One is the closing of two plants already in '18 and '19 in the U.S. The other one is streamlining in Europe. And the last one I'm going to mention is the announcement of the closure of our Canadian transmission plant. On the restructuring, we started working on global ways of working, on global processes already a few years ago, supported by digital tools. We call it Office 4.0. That led that we were able to release quite a bit of resources. That led into being able to reduce the headcount by 400-plus people, which is about 25% of all fixed labor. Summarizing, we delivered GBP 27 million already. On top of that, we are going to deliver GBP 22 million in the near future. And important to understand that it's all on actions we already launched. Basically, we just need to execute. So far, we have been discussing the core technologies with good prospects into the future, good growth but also very good profitability. Let's now move into the new technologies, additive manufacturing and hydrogen storage systems, both starting with powders, which is our DNA, where we are good at. And let's just poke into these new worlds. Additive manufacturing. If you look to the slide, you just see a completely different world, completely different applications. Let's start with the application, Syng. It's a new generation sound system, where we produce the main part. We do already 10,000 pieces a year. It's a Californian startup. For this space, we do products development with Pangea Aero. That's nozzle for rockets for the commercial space. And then a very exciting products we are developing in Germany with Kueppers Solutions, where by adding additive manufactured parts, you are able to improve the performance of a burner by up to 20%, saving a lot of CO2. And there's a huge market, 300,000 -- 300 million burners actually on Earth, which could be partially retrofitted. Let's talk about the partners, very proud on us working together with HP. We have a partnership established 2 years ago, where we are developing binder jetting. EOS, another OEM in the laser area, is also partnering with us. Look to the customers, which are completely different customers. There are some known customers in automotive but many new customers in many different areas. Additive manufacturing is going to grow very strong. External analysts talk about 20%-plus CAGR. That leads our business to be at the level of 10% share in the business by 2030 just through organic growth. The market progression from prototypes, which was up until yesterday, currently into production into mass production to end solutions, where you order by mouse click your new sneakers and your [ third ] piece. That's the process we see. That's the 3D process. Other than the printing process, it's in our DNA. We do powder metal, we do 3D design and we have first-class production systems. On top of that, as said before, we developed with the largest OEM, with HP and EOS, the processes for implementation and production of the printers. We are one of the -- we are already one of the leading players in 3D. With our 65 printers globally in 5 locations, we are one of the bigger ones. We also offer many different materials out of our U.S. material plant. So the history of additive manufacturing started in 2013, where we started developing in Germany, the parts, in the U.S., the materials. In 2020, with the acquisition of Forecast 3D in California, we added an important piece. Now we have 5 manufacturing sites ready to go into and to step-up starts this year. But going on forward next year, we will be fully digitized and offer many solutions to our customers. Serving local markets globally. That's the key in additive manufacturing. You see the current footprint. The difference between the current sinter business and the additive manufacturing business is really that you don't need all skills in all remote locations. You design and develop the product centrally, and you then just send out through the buyer through the web into the location you want to produce and rather [ low skills ] are needed there. Let us move now to our youngest baby, to hydrogen storage systems. In a minute, we show a video. But let me explain on this slide the products we have got. We have the MINI product at the left, then MEDI product in the middle. Both these products are systems comprising electrolyzer storage and fuel cell, so from power for electric power to go to electric power. The system at the right, at the left is a maxi tank, which contains -- it's just storage, which contains 260 kilos of hydrogen, which allows an average British household to run for 1.5 years. [Presentation]

I hope you enjoyed the movie. And as the green energy isn't always produced when it's needed, storages are needed. I put here the main storages which are currently in use: batteries, high-pressure hydrogen storage and you see the low-pressure storage from GKN. If we benchmark on safety, recyclability and duration, we see that our storage is, by far, the lowest risk. The hydrogen is absorbed into the powder and is just released through a chemical process by reducing temperature. Also, it's 100% recyclable. And we see already a 15 years' lifetime considering very, very low loss of capacity. The heart of the system is powders, as we said. Again, we start with powders, which we produce internally. We press pellets and we put these pallets into a cartridge, which is very safe, 100% recyclable, and we consider the most reliable system in the market. What are the use fields? There's a lot of demand in the outside world. After talking to many people, we now concentrate on micro grids and residential buildings, where we sold already systems into Switzerland and into Germany. And we keep developing the best use of those systems with these partners. Transportation, which we have good programs in Canada. And a very hot topic is power backup on data centers but also on antennas. We are in contact with the California Energy Commission to really work on introducing clean hydrogen as alternative for diesel backups. And certainly, autonomy for remote places like in Australia, in the U.S. and in Norway to have a system which gives you the energy you need for your house without a grid is vital. We have partners we work with but open for new partners. We have 4 demonstrators already in place and 11 more to come this year. How do we move forward? This year is the launch, the market launch we had 10 days ago, with a lot of interest from the global community. We have 3 products. The 2 systems in the beta version, the MEGA system. For next year, we optimize these products. We already have a capacity of 100 systems able to be produced. But the real scaleup, we only expect in 2023. We are working with partners on a global base and still selecting partners to get in shape -- in good shape globally. For the time being, we focus on Europe, the Americas, Australia and Canada, but ready to move into India and China as we have good presence there. The big question, which is always asked, is about the market, how big is the market? We said in the beginning that the green energy isn't used when it is performed, when it is produced. So we need storage. Just to show the target of the European Union, they would like to move from 1 gigawatt installed electric power in '19 to 40 gigawatts in 2030. On top of that, they would like to have 1 million tonnes green hydrogen produced in '24, leading to 10 million tonnes in 2030. I think that's growth we can absorb. It's funded, so the opportunities are endless and we expect a big growth. That brings us already to the conclusions. We are a global market leader in powder metallurgy with a growth plan. We have a clear path to 14%. I hope I have been able to give you comfort on that one. We have already a 2/3 of our sales delivering above 14% margin. The growth plan we have for the core business through gaining market share gives us a lot of comfort because of what we already achieved. We achieved already 1/3 in 2.5 years of what we need to achieve in 12 years. So very, very confident to deliver this sales plan for the base business. On top of that, as mentioned before, a 20% CAGR on the additive business. And yes, that work seems already endless on Hydrogen. But let's find out what it is in reality. That brings us to the new technologies, where we are lucky to be through our powder. The base for all is powder in 2 markets which are really exciting but also full of growth and full of potential. In Additive, but especially through hydrogen systems, we also can give a contribution to making the world a bit safer, a bit greener and help the world to survive a bit better. Thank you.

Hello. It's a real pleasure to be able to talk to you today about GKN Automotive. My name is Liam Butterworth. I'm the CEO of GKN Automotive and have been with the company for just over 2.5 years. I'm really excited to share with you some of the great progress we are making with our transformation and the exciting outlook we have for the company. There's 4 key messages that I'd like you to take away from today's presentation. Firstly, we're the clear #1 in drive systems. And there's a massive gap between ourselves and our nearest competitor. Secondly, we're transforming the business. We now have a clear line of sight to over 10% operating margins with only a partial market recovery. Thirdly, there is structural growth in our core business. And that's regardless of the powertrain mix. And fourthly, electrification offers a huge growth channel that we're well positioned to capture as we've been actively developing our capabilities for several years. Last time we spoke to you was in 2019. And now we would like to update you where we stand against the four major promises we made back then. Operational performance. We said we would achieve 10% margins with limited growth. We're now saying we can get there with lower sales in 2018 due to us finding much more opportunity than we originally planned with our Full Potential transformation plan. We said we'd focus on profitable growth, and we've been actively protecting driveline market share, eliminating onerous programs and selectively growing our eDrive position. And we also said we'd invest in electrification. We've invested over GBP 200 million in eDrive R&D over the last 4 years. We've signed a collaboration agreement with Delta Electronics. We've established a software center in India. And we've developed and launched our e-motor that's now launched on several programs. And all this has resulted in winning a fully integrated 3-in-1 system with a major German OEM. And finally, we've completely refreshed the leadership team. As I just said, we've changed the leadership team of this business. And the new team in place now brings over 150 years of automotive industry experience. And we've hired some outstanding talent: Markus Bannert, who runs our Driveline business, coming from Hella; Dirk Kesselgruber, who runs our ePowertrain, coming from Schaeffler AG and TRW and brings extensive systems engineering expertise with him; and recently, Shaoling Qiu, who's running our China business. And finally, we have a culture of decision-making focused really on flawless execution. Let me share with you now why I'm so excited about the growth potential of this business. This slide shows how we see the market evolving and how this supports the growth outlook for the company. The backdrop to our forecast is vehicle production growing at 1% -- 1.3% CAGR between 2019 and 2030. I think it's important to note that the CAGR starting from 2020 would have shown much higher growth rates. We then segmented the market according to the two main business units and modeled how we see those segments growing over the same period. The Driveline market, we see an overall CAGR which is close to vehicle production. And that's driven by 2 factors. One is a gradual decline in propshafts as we see electric vehicle platforms no longer requiring a propshaft, being offset by growth in sideshafts due to higher content per vehicle on battery electric vehicles. The ePowertrain market, we see an overall CAGR of 10%. And that's driven by 3 factors, the level of OEM outsourcing, and we've assumed that will be in the region of 50% by the end of the decade. Secondly is the mix between eDrive systems and components, which I'll elaborate on later in the presentation. And a slight decline in all-wheel drive, some of which migrates to eDrive, such as part lock in differential units. The beauty of our business when we combine the structural growth in both segments and our growing capability, eDrive, gives us a high level of confidence that we can grow our revenue at 2x vehicle production whilst being selective to maintain double-digit margins. Ultimately, this allows us to achieve long-term profitable growth, and let me tell you how. Our transformation journey has really been operated into two phases. Phase 1 has really been about focusing on the cost base, cleaning the portfolio and investing in the future. And this momentum means we now have a clear line of sight to double-digit margins without the full 2018 market recovery. And the second phase is really now about accelerating growth by leveraging the capabilities we put in place but also maintaining highly disciplined to sustain double-digit margins. So before we go into any more details, I thought I'd share a brief overview of the history of this great business. [Presentation]

So let me start by giving you an overview of the business. We work with everyone and have done for many years, where we're operating with over 90% of the world's global OEMs. We have content on a huge proportion of vehicles globally, where 1 in 2 cars today have our sideshafts fitted. And we're the undisputed market leader in sideshafts, where we have 2x the market share of our closest rival. Overall, we have a healthy, balanced business in terms of product, customer and propulsion mix. Product-wise, our Driveline business is 72% of revenues; all-wheel drive, 25%; and eDrive, 2%. But we obviously see this picture shifting dramatically over the coming years. From a customer standpoint, no single customer represents more than 15% of our revenue. And most importantly, propulsion mix, the final chart shows how the propulsion mix of our products will evolve from 2019 to 2025. This chart reflects how we're taking more than our fair share of content on electric vehicle platforms. For example, in 2025, 15% of sales in our order book will be generated from content on battery electric vehicles, whereas they currently forecast to represent 13% of global production. This chart looks at our business from a regional perspective. And as you can see, it's very well balanced across all four regions. And as we've already mentioned, we work with all the major global OEMs and most importantly most pure EV players. And as an illustration of how we've grown with the new OEMs, I will share with a leading pure EV player, we'll grow from 0 to 35% over the next 2 years. We have a broad manufacturing footprint, becoming increasingly more balanced between customer proximity and best cost. As part of our transformation program, rotating to best cost countries, reducing supply chain complexity and regionalizing installed capacity. We've also been expanding our technical centers, where most recently, we've established our software center in Bangalore, India, with our partner, Tata Technologies. We also thought it would be appropriate to have a slide focusing on our China business. We have a long-standing 50-50 joint venture with Hasco, which has been there for over 30 years. And in fact, GKN was the first Western Tier 1 automotive supplier to establish a joint venture in China. We have over GBP 1.2 billion in sales. And again, we have a very strong market share in sideshaft to over 40%. We also have a growing position in eDrive and a well-balanced mix of customers between the global and local OEMs. Now I'd like to turn to sustainability. As we know, it's a key focus for us and all of our stakeholders. We consider our contribution from 2 angles: the impacts on our industry and the impacts on our business. Firstly, we enable electrification across the industry. We work with more than 90% of the global OEMs and have done so for more than 30 years with a focus on electrification for the past 19 years. Secondly, we're investing in technologies that deliver material and weight reductions to enable our customers to meet their fleet CO2 targets. Each of our eDrive units in the market today are the result of more than 4 years of customer collaboration in order to develop the most efficient technological solutions possible. In terms of the impacts on our business, operating responsibly and sustainably has been a core part of our DNA for a very long time. We have an ethos of environmental improvement and set ourselves challenging annual energy and waste savings goals. We have a strong social compass, treating our people fairly, investing in them through training and helping them support their local communities. And I've been absolutely humbled by the way our people around the world have responded to the COVID crisis, giving their time, supply and equipment and PPE. And a great example of this was the Ventilator U.K. Challenge, where our people were working around the clock to support this initiative. And ultimately, we have the trust of our customers, where it's now part of normal business with all our customers. For example, Daimler are now requesting all of their suppliers to sign up to being carbon-neutral by 2039 in order to tender for any new contracts. As the pace of change accelerates, we know the importance of measurement for all our stakeholder groups. In 2021, we have committed to bringing all the elements we've just discussed together into a single cohesive sustainability strategy and road map. It will be ambitious yet actionable, aligned with the views and goals of our people and our stakeholders. Most importantly, it will be uniquely ours. So I'm incredibly excited to put more structure around all of the incredible efforts that this business is already making. I'd now like to talk you through a brief summary of our financial performance and trajectory. In 2018, we were a GBP 5 billion company with 7.3% operating margin. 2018 to 2019 margin expansion despite lower sales illustrates the initial result of our Full Potential transformation program. 2020 was obviously an extraordinary year, where we lost 19% in sales. So our focus shifted to protecting our people, working with customers and suppliers and safeguarding the financial health of the company. And the year resulted in a 5.5% drop in our margin but still profitable and with cash conversion of 153% and lower than 30% decremental margins. The second half of 2020 performance reflected our ability to ramp back up effectively and achieve 6.5% operating margin despite carrying some inefficiencies due to short-term ramp-up costs. We also took the opportunity to push forward with some cost reduction initiatives during the pandemic, which I'll talk more about shortly. But the most significant outcome from this last year has been how we closed and then ramped up 50 facilities around the world with minimal disruption by working seamlessly with customers, suppliers and protecting our employees. This page maps out how we see our path to 10% operating margin. Firstly, 2018 is there as a reference. As we stated 2 years ago, we would get to 10% margins with limited growth. 2020 was obviously a tough year with full year profit of 2.2%. So we therefore took the opportunity to accelerate our Full Potential transformation program. And you can see the results appearing with the second half operating margins at 6.5% from an annualized sales level of GBP 4.5 billion. So how do we get from that point to 10%? It's all around our Full Potential program for which we have a very healthy pipeline. And that's going to bring between 250 and 300 basis points of margin expansion and, secondly, a limited market recovery, which we see will bring in between 100 to 150 basis points of margin expansion, assuming a 30% drop-through. We're therefore highly confident in our ability to achieve 10% operating profit with only a partial market recovery. We want to give further clarity on the detail of our Full Potential initiatives and why we feel confident of the 250 to 300 basis points of margin expansion. Our program is in 3 main categories: procurement, operations and fixed costs. And all the values you'll see on the slide are clearly defined and scoped projects, the majority of which are fully in-flight and delivering. So we're very confident about the associated values that we will see. Now I wanted to put all of this into context of the market. We all see this industry changing dramatically. In over 30 years in the industry, this is the biggest transformation I have ever seen. Everyone is aware of the 4 mega trends reshaping our industry: connectivity, autonomous, shared mobility and electrification. Out of the 4 mega trends, electrification is clearly accelerating as COVID has forced OEMs to prioritize their investments. This has been amplified by regulations becoming increasingly stringent around the world, including more recently the U.S., and higher consumer acceptance and demand due to increased choice and performance of models. There's also a more concerted push to accelerate electrified fleets by traditional OEMs and the continual emergence of new EV players. And all of this makes us super excited about the opportunity electrification brings for the future. This chart shows how global vehicle production will evolve between 2019 to 2030 and the associated mix of propulsion technologies. The trend is coupled with ICE and therefore not fully apparent. But mild hybrid is showing some short-term growth. But we see this clearly as a bridging technology that the OEMs are using to seek lower CO2 targets. From 2025 onwards, we see hybrid platforms growing from 11% to 15% of production. But again, we view this as a bridging technology to full EV. We see pure electrified platforms growing from 2% in 2019 to 21% in 2030, that being over 20 million vehicles. However, as you can imagine, forecasts are continuously changing. And this just means that the opportunity grows for us. As discussed on the previous slide, we're continuously seeing an acceleration of BEV penetration. And the chart on the left shows how 2 years ago, the forecast for 2030 was 13% BEV penetration. The most recent forecasts have been upgraded to 21%. And this doesn't take into account the numerous bold OEM statements that have been seen in recent months, all of which indicate that BEV penetration will be closer to 30% by 2030. So before we move on to talk about the impact this has on the dynamics of our business, we wanted to show you a short video on how our portfolio will evolve. [Presentation]

This is a very important slide in that it shows the impact electrification will have across our portfolio. The page shows the share of sales in 2019 and relevance of each product across each electrification stage. We'll go into details later. But at a high level, it's only a small proportion of our portfolio that is adversely affected by electrification, that being our propshaft business and some of our all-wheel drive components. However, any adverse effect on our portfolio is more than compensated by the significant growth opportunity resulting from electrified vehicle platforms. Here, we illustrate why we are so excited by the opportunity electrification offers us. The chart shows the content per vehicle opportunity that electrification represents across both 2-wheel drive and 4-wheel drive platforms. There's a range of content values depending on the drivetrain architecture. So starting at the lowest, we have between GBP 100 and GBP 400 of content, where there's 2 sideshafts and some all-wheel drive components, moving up to the highest with GBP 3,000 of content, where we can see 4 sideshafts and two EDUs. If you take the midpoint of those ranges, we expect a content value increase of between 3 to 5x due to electrification. So before I provide you with more detail on each of our product lines, this page summarizes the impact of the market trends on our portfolio. In our Driveline business, we will see a very gradual decline in propshafts, more than offset by growth in sideshafts. And for our ePowertrain business, a slight decline in our all-wheel drive portfolio is more than offset by the significant growth opportunity from eDrive systems and components, as we've just illustrated. However, we must state that the higher growth in eDrive naturally has some margin dilution due to bought-in content. Therefore, our strategy is to manage growth and margin tradeoff to always ensure we're maintaining 10% operating margins. As I've already mentioned, our business is structured around two business units: Driveline, comprising of sideshafts and propshafts; and ePowertrain, comprising of all-wheel drive and eDrive portfolio. I'd now like to take some time to go through each segment with you to highlight the impact of electrification. Starting with Driveline and our sideshaft business, which is the long-standing powerhouse and foundation of the company. It's currently our largest segment at 59% of 2019 sales. And in this area, we are the undisputed global leader with a market share double that of our closest competitor. We've achieved this leadership position due to having the broadest portfolio able to cater to any vehicle and with over 7,000 active part numbers. We have a global footprint where we can produce any product in any region and years of history as the partner of choice for our customers to solve their driveline technology needs. Electrification is set to have a favorable impact on sideshafts for 2 main reasons: the number of sideshafts due to more all-wheel drive platforms in the future; and secondly, the size of the sideshaft and CV joint will increase due to the higher torque and size requirements on battery electric vehicles. We therefore see the market for sideshafts increasing slightly ahead of vehicle production at around 2% CAGR until 2030, using 2019 as a starting point. As I just mentioned, we have the historical advantage in this field. We have a long-standing history of innovation. And we will remain #1 as our engineers are obsessed with constantly evolving the portfolio to satisfy the needs of our customers. We have over 354 active patents. And it's clear from our customer standpoint, we are the go-to partner. We're also globally competitive, thanks to the tremendous scale that we have. And EVs represent a different set of technological challenges, such as noise vibration and harshness, weight and torque, which are different to those seen on ICE platforms. The proof point for our continued leadership is a response from the market, where our technology is already widely implemented across many electrified platforms. The results of our continuous innovation in this product segment are illustrated on this chart. We're already enjoying a high market share across all electrification stages. And our mid-term plan gives us confidence that we will achieve over 40% share across all segments without compromising profitability. Now let me talk to you about the second part of our Driveline business, propshafts. Propshafts is the one segment in our portfolio that will be adversely impacted by full electrification. This business currently represents around 13% of our revenues. As with sideshafts, we have a great market position with a very profitable and cash-generative business that we will continue to selectively invest in over the coming years for ICE and hybrid applications. Also, we have a broad portfolio of 800 part numbers and 130 active patents. In the mid-term, we actually see an increase in the market value up to around 2025, after which point, it will slowly decline as we see more BEVs on the market. Now let me talk to you about our ePowertrain business, which has 2 product segments: all-wheel drive and eDrive. Our all-wheel drive business has 2 main product groups: power transfer units and final drive units. It represents GBP 1.2 billion of sales in 2019, around 25% of our business. Our capability is built upon our expertise in components and subsystems and control software. This means we have the ability to provide a fully calibrated, turnkey, all-wheel drive system to our customers with outstanding efficiency and NVH performance. And this drivetrain system capability is a key differentiating factor to support our customers as they transition to eDrive. Our all-wheel drive portfolio is impacted by electrification, albeit only moderately as we see many of the components and subsystems migrating into eDrive solutions. Our strategy, therefore, is to selectively invest in the business whilst leveraging the technology foundation to support growth in eDrive. And the final segment I want to talk to you about is our eDrive business, which I'm incredibly excited and optimistic about. The beauty of our position in the eDrive market is that we can operate in either the component or system space, enabling us to adapt to the dynamic and evolving needs of our customers. Our eDrive portfolio represents around GBP 100 million of revenue, which currently makes it a minor part of the business. But we'll experience explosive growth over the coming years as the market transitions to electrification. This is not a new segment for us. We have a long history, having already delivered over 1.5 million systems and over 300 active patents. And over the course of the next slides, I'm going to explain to you how we've carefully invested in this space and how we believe we have the capabilities to be well positioned for the future. Our view of the market is it will see a growth of between 20% to 30%, depending on the level of outsourcing and whether the needs of our customers are for components or full systems. There are 2 reasons we are convinced we will be successful in eDrive. Firstly, the core of an efficient eDrive system is the gearbox and how it performs in terms of NVH, weight and efficiency. We have extensive expertise due to our all-wheel drive capabilities. And a good example of this is the gear tolerances in an eDrive gearbox are approximately 10 times that of a conventional gearbox due to the extreme NVH and efficiency requirements. This provides us with the optionality to operate as a Tier 1 or Tier 2 component expert. Secondly, we have a full eDrive system capability by integrating our gearbox components with an e-motor and inverter, which clearly offers significantly higher growth potential. And the advantage of our position is that we can be selective and flexible in the way we partner with our customers, therefore, ensuring profitable growth. The main point I want to stress here is how due to the strength of our portfolio and structural growth of our core business, we are not forced to pursue an unprofitable eDrive growth strategy to protect the future of the company. To assure our success as an integrated eDrive system supplier, we've been extremely thoughtful in developing the capabilities in each of the 5 necessary building blocks: the gearbox, e-motor, inverter, software and systems integration. The foundation for any eDrive system is the gearbox and the mechatronic integration and associated control software. Our all-wheel drive heritage has demonstrated our engineering capabilities across all of these disciplines. And secondly, we've been organically expanding our capabilities in e-motors, inverters and software. We've recently launched a system with our own proprietary e-motor. And we've expanded our software capabilities and we now have over 300 software engineers globally. And finally, we formed a technology collaboration with Delta Electronics as our manufacturing partner for e-motors and as our technology partner for the design, development and manufacture of inverters. We believe our smart approach to this strategy ensures we maintain the flexibility to drive continued profitable growth for this business. The result of our capability development means that we now have a fully comprehensive offering for integrated eDrive systems: a gearbox with best-in-class NVH and system efficiency; our own proprietary e-motor launched and in the market; and a global inverter collaboration with Delta Electronics, complemented by our own internal capabilities, including our Formula E partnership with Jaguar Racing; and advanced software expertise, including full ASPICE and TISAX compliance; and the ability to leverage our long-standing mechatronics integration capabilities. Our conviction that this is the right strategy has recently been confirmed by the award of a fully integrated 3-in-1 eDrive system by a leading German OEM. And this isn't the only recent success we have to talk about. GKN Automotive is not a newcomer to this space. We've been supplying eDrive components since 2002 with over 1.5 million systems in the market to date. I hope you found our update to be very informative as to the great progress we are making and the exciting outlook for the company. As a reminder, we are the global undisputed leader in drive systems, and we're very confident we'll remain so for the foreseeable future. We have a clear line of sight to 10% operating profit and our passion for cost control, continuous improvement and portfolio management means we will sustain this for the long term. The structural growth in our core business, regardless of propulsion technology, means that we can be selective about how and where we grow. And we are well positioned for electrification, thanks to the outstanding capability platform we've established. So we have a clear and simple strategy and are very confident in our ability to execute it. We're extremely excited about the future prospects of the company. Thank you very much.

Hello, everyone. I'm Geoff Martin, the CFO from Melrose. And I'd like to give some closing remarks. First of all, thank you, Liam and Peter, for laying out 2 clear and powerful strategies. Today, it was about the longer term, not short term. But you will have seen from our recent trading statement that we are very pleased with the start to the year. But looking further out, across a period that will encompass a lot of change in the auto market, we wanted to explain that change and explain that both our businesses are well positioned to gain. But first of all though, some housekeeping. All the market forecasts you will have seen in the presentations today are based on market experts. They're not our internal forecasts. They show the growth in auto production and the move to electrification. And we have applied those forecasts to the GKN and Powder Met product mix. The growth numbers we've used are from 2019 to 2030. We thought that was a good starting point. But of course, the auto market has not yet recovered to 2019 levels. So if you're starting from today, then the growth rates will be bigger. For example, the 1.3% increase we've talked about for the car production would be over 2% per annum if you started today. And it's worth remembering that when you're interpreting Liam and Peter's statements on growth. Well, that's the housekeeping done. So now I'd like to summarize some key messages. The Melrose strategy, buy, improve, sell. As Simon said in his introduction, today is about the improve side of that strategy. And when we're talking about improving the businesses, we often discuss the margin gain potential as Melrose has a very strong track record of improving margins. And Liam and Peter laid that out for you clearly today. The improve side is going very well and we are well progressed. There's a clear path laid out for GKN Auto to get to 10%-plus margins, and the word plus has been added today to show that 10% is not the ceiling; and Powder Metallurgy to get to 14% margins. We're about 2/3 of the way through the work that needs to be done to achieve those. But the value creation story is much bigger than just margins. The buy part of the Melrose strategy is about buying good businesses with strong market shares and excellent long-term positioning, and today explained that a longer-term growth through electrification, which is very good and cash-generative. And it's boosted importantly by engineering technology, of which GKN is a clear leader. We often don't explain this enough. But I think today, you could see it for yourself. This technology and this extra growth boosts value. And also, it's good for our impact on the environment and our customers' impact on the environment. And that's a double win for Melrose shareholders, in fact, all Melrose stakeholders. It's a triple win if you add in the margin growth, too. The growth that Liam outlined was that GKN Auto can grow at more than double the market rate for vehicle production. You can choose the starting point you want. And Powder Metallurgy can outpace the market, too. It's clearly gaining market share, which you can see from our trading update. And it's gaining that share in premium segments. So we are well placed to deliver substantial value, which is also crucial when we come to the sell part of Melrose's strategy. I hope you've enjoyed today. And we're about to go into a live Q&A session in a few moments. Thank you very much.