Melrose Industries PLC (MRO) Earnings Call Transcript & Summary

Hello, everyone, and welcome to our aerospace Investor Event. I'm Peter Dilnot, Chief Operating Officer of Melrose. The video you've just seen should have given you a taste of the breadth and depth of GKN Aerospace. It's a very high-quality business benefiting from strong structural market growth, excellent technology and an advantaged position. We are excited about GKN Aerospace's prospects and the promising opportunity it provides for all stakeholders, including, of course, the compelling equity story for investors. Our objective with this event is to bring GKN Aerospace to life for you. We'll provide greater insight in detail than ever before covering our technology, commercial and platform positions, financial performance and our future targets. To do this, I will highlight the Melrose investment case. I'll then hand over to David Paja, CEO, GKN Aerospace; and Matthew Gregory, CFO, GKN Aerospace, to cover our premium engines division. David and Matthew will then go through our leading Structures division, followed by sustainability and longer-term technology development. Finally, Geoff Martin, Melrose CFO, will cover cash flow and capital allocation. So let's get started with what makes GKN Aerospace so special. Essentially, the business is a unique Tier 1 technology supplier. This means it designs, builds and certifies its own proprietary technology that is embedded directly into aero engines and aero structures. Our technology is highly valued and extensive. We have established positions on all the world's most successful, highest-volume aircraft today, including Airbus and Boeings ranges plus leading military platforms such as the flagship F-35 fighter jet. This means that every time one of these high-volume aircraft is built, our technology is included. And when the industry is ramping up as it is right now, that leads to strong growth ahead. Over 70% of our revenue comes from sole-source positions, which highlights both the quality of our engineering and of our earnings. Our innovation is evidenced by 650 global patent, and we're adding to that number all the time with focused investment in technology to make today's aircraft more efficient and tomorrow is more sustainable. Our premium engines business is at the heart of value creation from here. We have a unique portfolio of life of program contracts called risk and revenue-sharing partnerships with all the major aero engine manufacturers. We've been with them every step of the way, developing engines together over many years and following the investment phase, these engines are now entering the profitable and cash-generative aftermarket phase. Indeed, through these contracts, we earn a share of aftermarket and profit and cash on the majority of engines that are flying today, including those powering 100% of legacy narrow-body planes. So every time one of these aircraft, as an engine shop visit or other maintenance, we earn associated income. This is about timing, and we're now receiving returns after years of technology and financial investment. Going forward, this also means that 85% of future engines profit will come from the aftermarket, and the cash flows are exceptional given the up to 30-year lifetime of each engine, the fact that there are 35,000 of them flying today and that more will be produced in the years ahead. Indeed, our future cash flows totaled GBP 20 billion from these contracts alone. These headline stats give you a sense of the quality of this business. We also have significant positive momentum right now. The market has recovered faster than expected even 12 months ago, let alone shortly after the pandemic. Global flying hours are now set to match 2019 pre-pandemic levels during the course of this year and to grow structurally thereafter. Since the beginning of COVID, we've been busy transforming the business. We've restructured operations, sharpened the portfolio and made productivity gains. There's still more to do and deliver most acutely over the next 12 months, but returns are feeding through already. This is demonstrated by our recent guidance for 2023, which shows GKN Aerospace close to previous peak profit margins despite much lower sales volumes. This means we are committing to doubling profits from 2022 to '23, and we then expect profit to double again from 2023 to '25. This is driven by 3 factors: first, structural market growth, where the extra volume drops through to profit healthily given our leaner operations. Second, the exceptional contribution from our engines aftermarket exposure. And third, the full benefits of all of our improvement actions coming through. Now I will explain and quantify the impact of all these profit levers today, and for the first time ever, we'll do so at a divisional level. So let's get into that now. We have 2 market-leading aerospace divisions, engines and structures. Our engines division designs makes and certifies structural engineered components at the heart of aero engines. GKN technology is deeply integrated into the designs of all major engine manufacturers. Indeed, engines are often developed jointly through the RRSP contracts I've outlined already. Our Engines division also supplies components under commercial contracts, and we're investing heavily in growing our global aftermarket repair capabilities. This division is on track to generate GBP 1.3 billion revenue in 2023 at 22% operating margin to nearly GBP 300 million in profit. Although engines represents only 40% of GKN Aerospace in terms of sales, it delivers over 80% of profits. This is an exceptional business, and there is strong profitable growth, margin expansion and cash generation to come in the years ahead. Our Structures division has deep design, manufacturing and certification capability covering a range of critical aerospace components and systems. This serves all leading civil airframe OEMs with a concentration on Airbus and also major military primes. The division is increasingly focused on design to build which means we work closely alongside the airframers to integrate our technology directly into their aircraft. In 2023, we're on track to generate GBP 2.1 billion revenue and GBP 60 million of operating profit. Going forward, we have a clear plan to expand margins significantly and grow the business where we're advantaged. The combined revenue of around GBP 3.4 billion in 2023 will be up 15% over 2022. Operating margins are set to be above 10% with operating profit coming in at around GBP 350 million, nearly doubling versus the prior year. This reinforces the positive momentum we have. And again, there's much more to come. Indeed, we believe all this stacks up to an excellent investment proposition. The equity case from Melrose is compelling. It's based on a rewarding mix of 4 core value drivers, strong structural market growth, a huge engines aftermarket coming through, multiple profit growth and an ability to make regular share buybacks over time. In terms of the market growth, the reality is that the aerospace industry is struggling to keep up with demand. There's a big gap between the aircraft and engines that airlines want and what they can actually get. In illustration, as a result of the pandemic and the Boeing 737 MAX issues, there are around 2,500 planes that should have been made over the last 4 years, which weren't. That's a big hole to fill. So OEMs are ramping up fast, and we'll continue to do so for years to come given the huge backlogs. For example, the A320 family has an order book of around 7 years, and the F-35 is taking production slots into the 2030s. The engines aftermarket is a huge source of value going forward. Our portfolio of RFPs is just entering the profitable aftermarket phase, so the timing is good. Our work is also largely done when an engine is produced. So our aftermarket RRSP revenue is highly profitable. And this leads through to this extraordinary GBP 20 billion lifetime net cash inflow. Now in addition to the engines aftermarket, we will benefit from other parts of both divisions growing strongly, plus we have restructuring and further business improvements to complete. Put together, this results in multiple profit growth from here onwards. Finally, we have a strong balance sheet today. And by year-end, our leverage ratio should be just over 1x. This will reduce further as our heavy restructuring phase completes in the next 12 months and as profits increased substantially going forward. This gives us the cash headroom to buy back 5% to 10% of market capitalization from 2024 onwards. I'll now just close with our all-important 2025 targets. These targets are a significant upgrade compared to current market consensus and our previous guidance. They're also comprehensive and specific. For our premium engine division, we expect the combination of RRSP aftermarket profits, market growth and our improvement actions to increase operating margins from 22% to 28%. Revenue is targeted to grow from GBP 1.3 billion in 2023 to GBP 1.8 billion in 2025, which represents compound annual growth of 17%. It reached through to GBP 500 million of operating profit in 2025. And as we will highlight today, these are really high-quality earnings. For our design-led Structures division, we expect the combination of civil market ramp-up plus our ongoing portfolio and business improvement actions to increase margins from 3% to 9%. As a result, the division's operating profit is targeted to reach GBP 200 million by 2025. Put together, we expect Aerospace to be a GBP 4 billion business, generating GBP 870 million EBITDA by 2025. Our overall operating margin target is 17% to 18%, and this would result in total operating profit of around GBP 700 million. And as I've said, there is further profitable growth to come beyond 2025 too. So I'll now hand over to David to take us through each division in turn, starting with engines. [Presentation]

You'll hear my presentation today about the quality of our 2 divisions, Engines and Structures. How we plan to achieve our 2025 profit margin target, and our long-term potential beyond 2025, including our role in helping to decarbonize the industry. I'll start with Engines. This is an exceptional division entering a highly profitable aftermarket phase. We are on track to deliver 28% operating margin by 2025, and we are strongly positioned for next-generation platforms. I will cover each of these points in detail today. So let me start with a brief snapshot of the business. As you can see at the bottom of the page, we are a long-term partner to engine OEMs such as Pratt & Whitney, GE, Safran, Rolls-Royce, providing critical component design and manufacture and also supporting the fast-growing engine repair and maintenance business. In addition, we provide maintenance, repair and overhaul services in defense. Our sales of GBP 1.3 billion are well balanced, whether you look at end markets, customers or business models. This makes us resilient. More importantly, half of our sales come from aftermarket, which, as Peter mentioned, will deliver more than 85% of Engine's profit by 2025. I mentioned partnerships because trust is critical in engines, given the complexity of the technology. We have had a successful partnership with the Swedish Air Force for 90 years. Having supplied fighter engines to them since 1930, where the engine OEM for their Gripen fighter jets RM12 engine. We're also a long-term partner with engine OEMs, such as Pratt & Whitney, GE, Safran and Rolls-Royce, with relationships spanning as much as 40 years. As you heard in the video from Shane Eddy, President of Pratt & Whitney, these partnerships are stronger than ever today, which puts us in a great position going forward. There are more than 100 component suppliers into engine programs, but just a handful are strategic partners, and we are one of them. Partnerships bring significant advantages for both sides. Engine OEMs share investment, risk and returns with their strategic partners over the lifetime of the program through agreements called risk and revenue-sharing partnerships. So what enables us to be a strategic partner? We combined world-class technology capability in design, testing and complex manufacturing with long-running relationships built on decades of trust and financial stability. These are difficult to replicate and represent a substantial barrier to entry. Our technology is critical to an engine's performance throughout its lifetime. As an example, the engine mount structures that you see on this slide, not only keep the engine on the wind, they are also key for its durability and fuel efficiency. We continually optimize the aerodynamic design throughout the life of the program to ensure we deliver the absolute best engine efficiency. Most of our portfolio is composed of nonrotating parts which, unlike rotating parts last the entire life of the engine. Nevertheless, we are entitled to a share of aftermarket profit through our risk and revenue-sharing partnership agreements. These partnerships give our Engine's division a strong foundation. They represent 55% of sales, but we also have a range of other business models, which makes us very resilient. Defense partnerships with governments give stability through the cycle as well as system-level capability because we actually manage the engine performance and upgrades through its lifetime. Repair gives us additional access to the aftermarket and commercial contracts round up our portfolio, providing volume and economies of scale, complementing our partnerships. Our parts are on 47,000 or 90% of active engines today, and this will go to 70,000 by 2030. The average age of our engines in service is 13 years, which is around half the typical life of an engine, so they have a long profitable phase ahead. Our engine portfolio is well balanced across narrow-body and wide-body with content on 90% of engines and with risk and revenue-sharing partnerships on 74%. We're the only partner with RRSP contracts on both the best-selling engine in commercial aviation, the CFM56 and the V2500, which together powered all the legacy narrow-body fleet. These accounted for 50% of all flight hours last year. As you heard earlier, we expect our Engine division to grow sales at 17% a year to GBP 1.8 billion by 2025. I will explain the main drivers over the coming slides. We also plan to expand profit margin from 22% to 28% delivering industry-leading returns. We have 3 key levers to deliver this 600 basis point margin expansion. First, profit growth from risk and revenue-sharing partnership contracts as flight hours recover after the pandemic. Second, profit growth from strategic investments in repair and defense partnerships, along with volume recovery in commercial contracts. And third, savings from restructuring and productivity initiatives that are already well underway. I'll talk more about each of these levers in turn, starting with risk and revenue-sharing partnership contracts. [Presentation]

RRSP contracts give us an entitlement to aftermarket profits, even though most of our parts last the entire life of the engine. Our RRSP portfolio is at the most attractive stage in terms of profit generation with reduced risk after years in service even for the younger engine programs. A typical engine program has a lifespan of 40 to 50 years after it enter service. It takes 15 years and several billion pounds to research and develop a new engine. Once launched, production typically runs for 15 to 20 years. And during this time, the program turns cash positive. The majority of the cars is made in the later part of the engine life the aftermarket, which may last for up to 30 years. Given the economics of engine programs, with all the profit coming after 15 years of heavy investment, engine OEMs invite strategic partners to share risk and return. So each partner takes its percentage share of investment and profit. This percentage often reflects the value of the parts that each partner provides. Given that our work is mostly done once we ship our parts, the aftermarket phase is especially profitable for us with low in-house operational risk. Our 19 RRSP contracts are in different stages of the engine life cycle, but 17 are already generating cash and the other 2 will in the next 5 years. You can see from the slide, the top 6 programs that generate more than 90% of our future RRSP cash flows with a good balance of mature and new engines. With 17 of our 19 programs already in the cash generative phase, we are at an inflection point. Flight hours are set to grow at around 9% a year until 2025. Global flight hours reached 95% of pre-COVID levels last month. And for the first time since COVID, narrow-body flight hours were above 2019 levels. All regions are driving the improvement with China a main contributor. This growth in flight hours drives growth in shop visits, which in turn drives the aftermarket. This will generate exceptional cash and profit in years to come. Most aftermarket cash flows are generated when engines go for scheduled maintenance at shop visits. There are typically 3 or more shop visits during the life of an engine in service with 5 to 10 years in between and different levels of overhaul. Even our more mature RRSP engines, CFM56 and V2500 still have the vast majority of shop visits in front of them. As an example, almost half of the CFM56 engines in the field have not yet seen their first shop visit. So let's take a look at some of the contracts underpinning our future cash flow. As I said earlier, we're the only RRSP partner on both the CFM56 and V2500 engines, which power all legacy narrow-body aircraft. These aircraft delivered half of all 2022 global flight hours. These engines are proven in terms of reliability. And with aircraft production lost during the pandemic, they will see strong utilization in the coming years. Turning to wide-body aircraft. We have partnerships on Trent XWB, with Rolls-Royce and GEnx with GE. These engines are just entering the aftermarket phase with years of positive cash flow to come. With China reopening, we expect flight hours in wide-body to make a rapid recovery. Finally, the Engine platform that will deliver cash flow for us over the next decade, the GTF engine. We have a partnership with between 4% and 7% of the GTF engine program, depending on which variant. The Pratt & Whitney 1100 for the Airbus 320, the 1500 for the Airbus 220 or the 1900 for the Embraer E2. The A320 aircraft uses both GTF and LEAP engines, and we are using industry assumptions to assess the share of GTFs. GTF has proven to be the most fuel efficient option for longer ranges on the Airbus 320 family. After 6 years in service, engine performance and durability are well understood. There were some initial teething issues with this engine, which is not unusual, but design improvements are being progressively introduced, and there is a clear path to improve the time on wing. We expect these engine programs to turn cash positive in the next 5 years. With future upgrades for robustness and further fuel economy gains, this platform will generate decades of profit and cash. This slide summarizes the expected cash flow from our RRSP portfolio over the remaining life of the programs. Matthew will go into more detail later, but I would like to highlight a few points. The total expected cash flow amounts to GBP 20 billion, up from our guidance of GBP 18.5 billion last year. Given the relative certainty of our cash flow, this translates to GBP 5.5 billion of net present value, if you take a discount rate between the cost of debt and the cost of capital. And these programs represent just 55% of our Engines division and 20% of GKN Aerospace sales. So our portfolio of RRSP contracts is a fantastic asset at the heart of our Engines division, entering the highly profitable aftermarket phase. That covers our risk and revenue sharing partnerships. I'll turn now to our second lever, growth in repair, defense partnerships and commercial contracts. I'll start with repair. We're seeing a certain demand for engine repair driven by 3 trends. First, the number of shop visits is increasing as trouble recovers. Shop visits are projected to grow at 10% per annum up to 2025. Second, service cost are mostly covered by OEMs in today's business models. So they are promoting a strategy of repair rather than replace for components such as fan blades. At the same time, repair capacity reduced substantially during COVID as some smaller shops went out of business, and it is very hard to create new capacity. This is where we see a great opportunity, and we have been investing heavily to capture it. We are not starting from scratch in repair. We have been repairing engine parts for 80 years. But today, this represents just 10% of our sales in engines. We leverage the manufacturing technology capabilities from our engines OEM business to repair fan blades, fan disks and engine cases. Over decades, we have developed a customer base with more than 500 customers, including airlines, engine OEMs and independent maintenance and repair shops. We also have all certifications required by European, U.S. and Chinese Aviation safety agencies. These take 2 to 3 years to obtain given the safety critical nature of repair operations. 75% of our repair sales come from fan blades. This is the core of what we do and we expect this to grow more than 25% per annum over the next 2 years as we bring more capacity online with proven technology and customer relationships. We have invested heavily in automation and digital tracking of parts through our factories to be able to increase repair volumes in an efficient way. In recent years, we have clearly stepped up our ambition in repair. Under Melrose ownership, we have invested GBP 65 million with the aim of doubling repair sales by 2025. Specifically, we have expanded our site in Sweden, we are relocating and expanding our site in the U.S., and we have launched a new repair site in Malaysia to serve Asia locally. In parallel, we're growing our repair offering to include integrally bladed rotors, which will become an increasingly important part of our sales given their high value. Overall, we see an addressable opportunity of GBP 4.5 billion by 2030, which will drive a lot of further growth after 2025. Our other growth initiative is government partnerships in defense. As I mentioned earlier, we have 90 years of partnership with the Swedish Air Force with engine OEM responsibility. Today, this represents 10% of our engine sales. As engine OEM for the RM12, we are responsible for full management of the engine program. This includes the uptime of the Gripen engine fleet for Sweden, the Czech Republic, Hungary, Thailand and South Africa. Our engineers monitor the key parameters of an engine in the air in real time. And through proprietary technology, we can predict and then carry out engine maintenance on the ground. Every day, the Air Force in each of these countries relies on us to keep the fleet ready for action. With the ongoing war in Ukraine and a drive for more domestic military capability in other countries, our partnership with the Swedish Air Force is set to grow rapidly in the next few years. The RM12 engine will soon be replaced by the RM16, and we will continue our OEM level of responsibility. RM16 support will generate GBP 1.5 billion of revenue for GKN. We will also benefit from a GBP 15 million investment in additional engine testing capability at GKN, funded by the Swedish government. Looking further ahead, our role as Swedish national propulsion champion put us in a unique position. We are already contributing to multi-country partnerships such as the Global Combat Air Program, GCAP which is a next-generation fighter jet developed by the U.K., Sweden and Italy. 25% of our sales in engines come from commercial contracts in defense and civil applications. Half these sales come from the F135 engine that powers the F-35. We're a key supplier to this program, which is a critical platform for the U.S. and 14 other allies. We have 650,000 pounds of content per engine, including ducts, cases, shafts and electrical distribution. I'd like to turn now to the third lever of our margin expansion plan in engines. Business improvement. Although the bulk of recent site optimization has taken place in structures, engines has also undergone a substantial footprint transformation. By the end of 2023, we'll have sold or closed 4 sites, relocated programs between sites to create dedicated product centers of excellence and exited multiple non-core programs. This will leave us with 9 world-class product-focused sites, including the 3 repair sites I mentioned earlier. This footprint optimization is already delivering substantial savings that Matthew will cover later. And we are also investing to make our processes more efficient and productive with 3 main initiatives. First, we are improving production flows. By shifting to centers of excellence, each underpinned by lean principles, we're seeing lead times improve by more than 20% on key products. Second, we are increasing automation. The best example is our fan blade business, where automation is key to growing our output 25% this year and next. And third, we are investing in digitalization to make all our machines connected and allow them to operate 24/7 without supervision. So that covers our 3 profit growth drivers. I'd like to turn now to technology, where our expertise is a key differentiator. Engines is a long-cycle business. So we have to think about technologies that will change the game for decades to come. Additive fabrication is one of these. It's a disruptive technology that will transform our supply chain and have really exciting sustainability benefits. Through additive fabrication, we are leveraging 20 years of technology development to replace complex castings and forgings with alternative fabricated and welded structures. We see the potential to replace 30% of all our purchase parts over time. This will result in massive improvements in quality, inventory and sustainability. It has taken 20 years to get to this point. Our additive manufacturing technology leverages our long experience in welding and is based on laser metal deposition. This is a process in which a laser beam is pointed at a wire, fed by a robot. As the robot moves along the desired geometry, it deposits the melted material in layers. You can build complex geometries layer by layer like this. Following years of research, we launched the first parts with additive content in 2008. These were regular casts with additive manufactured flanges on top, and they are flying today. Since then, we have continued to advance the technology. Later this year, we will launch the first load-bearing engine part built through a combination of fabrication and additive manufacturing. We see this as a tipping point within the industry, which opens up fantastic opportunities going forward. An important element in this journey has been our partnership with and recent bolt-on acquisition of Permanova, a leader in laser welding systems. Let me explain the benefits of this technology using the part that we are ready to launch as an example. The mound ring, you can see here is a critical part of the GTF engine that powers Airbus 220 and Embraer E2. It supports the engine and transmits the loads imposed by the engine to the aircraft structure. The part has a diameter of 2 meters and is made from titanium. Today, this part starts as a forging produced in the U.S., weighing 440 kilograms. That's nearly half a ton. It is then shipped to Sweden and machine down to 50 kilograms with the final geometry and tolerances. With additive fabrication, we start from a much slimmer forged ring, weighing 120 kilograms. Then we add flanges on top through laser metal deposition. As a result, we reduced the material used by around 70% and eliminate 2.5 tons of CO2, while also improving the quality of the product. This is a game changer, a first in industry. The part is now approved by Pratt & Whitney to enter production before the end of the year. Having the capability to develop a part like this is unique to GKN Aerospace and it is very hard to replicate. Three key factors have made the qualification of this part possible. First, our ownership of the design through an RRSP contract and our ability to certify changes. Second, our additive fabrication technology developed over 20 years; and third, the manufacturing systems technology capability laser and robot that we acquired through Permanova. We're now planning to invest GBP 80 million over the next few years to extend this capability to other components as fast as possible. We already have multiple commercial agreements in place and have created a separate business unit inside our Engines division to accelerate this. With the potential to replace 30% of the castings and forgings we buy today over time and with big improvements in sustainability, we're really excited about this technology which will have a significant impact from 2025 onwards. Additive fabrication is a great example of the technology that makes us a strategic partner to engine OEMs. It is why we are already engaged early on in the demonstrator phase of the 2 most prominent next-generation narrow-body engines, the next-generation GTF for Pratt & Whitney and the new rise for CFM International, a joint venture between GE and Safran. Both engines plan to achieve a 20% reduction in fuel burn and CO2 emissions compared to their predecessors, whilst also being certified for the use of sustainable fuels. So you can see from these developments, how our Engines division is playing a critical role in the decarbonization of aviation, positioning us well for future growth after 2025. Let me turn it over now to our CFO, Martin, [ Gregory ] sic [ Geoffrey ], to look at the engine financials and show you how this all adds up to our 2025 margin target.

Thanks, David, and good afternoon, everyone. I'm going to take you through the division's financials so you can get a better feel for how our targets are grounded in and backed up by detailed plans. So let's start by putting them in the context of our historic performance. For the sake of simplicity, all the figures you see today have been translated at USD 1.25 to the pound. Looking at this detailed table. You can see that this year, we expect engines to deliver revenues of GBP 1.3 billion, reaching precoded levels and margins of 22%, exceeding 2019 by 4 percentage points. By 2025, we expect revenue of GBP 1.8 billion through continued growth of the division. We're also expecting operating profit to grow by 72% to GBP 500 million. And margins to reach 28%, an increase of 6 percentage points from 2023. The profit that can be attributed to aftermarket will exceed 85%. So you can see the division we have now is stronger than that of 2019. And by 2025, we're on track to deliver industry-leading margins. This is a very good quality business. We told you that we expect margins to increase from 22% to 28%. So how do we achieve that? Well, David has explained that we have 3 main levers for growth in the Engines division. And I want to show you how each lever drives margin improvement and by how much. The main driver is growth in our RRSP program, which contributes 2/3 of the uplift or 4 percentage points. We have a very strong portfolio of RRSPs with engines on most major platforms. This portfolio will continue to mature over the coming years and move further into the aftermarket stage of each program. This part of the cycle is very profitable, as you know, and margins will rise each year. The second driver is growth in other parts of our engines business, delivering an increase of 1 percentage point. In particular, we've invested significantly in our repair capacity and have outlined how this revenue stream will double over the next 2 years. Our repair business is a profitable aftermarket activity and will drive up overall margins. And this is amplified by the fact that our particular niche of the repair market also delivers superior profitability. The third driver of higher margins is our business improvement program. Our engines division has become more efficient in recent years and will continue to do so. We expect productivity improvement to deliver GBP 30 million of annual savings to the bottom line. In addition, the engines business is well advanced on its restructuring programs, and this will generate annual savings of GBP 35 million. After taking into account the savings already delivered in 2023, business improvement delivers an increase of 1 percentage point to margins. And putting all this together, we have a clear path to deliver a 6-percentage point improvement over the next 2 years, leaving engines with industry-leading margins of 28% by 2025. So given the importance of RRSPs to the Engines division, I'm going to spend some time to get into the detail, explaining their value for GK and Aerospace. First, let's talk about what this graph represents. We have 19 RRSPs of varying size and construct. In the initial stages, we contribute our share of the cost of both developing and manufacturing an engine. We then receive our share of the cash stream that flows once the engine is on the wing and goes into the aftermarket stage. For each RRSP, we generate a detailed forecast based on an industry view of demand. This extends over the life of an engine, taking into account the development costs, the product cost, warranty costs, aftermarket costs as well as volume and price estimates. As you can imagine, we take a cautious view of these forecasts and rest assured, these graphs have been independently reviewed and verified. The graph shows our share of all 19 RRSPs, up to the 2060s. Total cash flow from our portfolio is expected to be GBP 20 billion, which when discounted is a net present value of GBP 5.5 billion. We used a discount rate of 7.5%, which is between the cost of debt and the Melrose aerospace cost of capital. This rate reflects a balance between a lower level of risk since the contracts are already underway, but also the potential volume risk in the estimates. This graph really demonstrates that we are at an inflection point for our portfolio. The time is right. We currently have 17 of our 19 RRSPs in the cash generation phase. These engines are already on the wing and progressing through to the maintenance and shop visits. At this point, any risk to the success of an engine and therefore, cash flow is reducing as each program works its way through scheduled shop visits and becomes more predictable and reliable. The remaining 2 RRSPs that are cash negative turned positive within 5 years, at which point, we'll have our whole portfolio generating cash for the business. We're also showing where future cash flow comes from. Starting at the bottom of the mountain, the dark green shows the cash flow from future sales of engines, again, based on industry demand estimates. We then show the cash flow coming from the aftermarket of the current fleet in bright green, but the bulk comes from the aftermarket for future sales. This raises 2 points. First, as I mentioned before, these charts are constructed based on industry forecasts, with an appropriate element of caution. However, we all know that the industry has grown consistently over the last 50 years and order books are extremely strong, which gives comfort to the level of future cash expected from our RRSPs. Also, we're on these engines by contract, so can't be replaced. Second, you can see a vast difference between the cash generated from the initial sale of the engine and that from the aftermarket. And this is very much in line with the experience of OEMs and that most of the value from developing engines comes from the aftermarket. And as we said repeatedly, we are in the aftermarket phase. And just to be clear, the relative size of the cash generated from the aftermarket compared to OEM engines isn't reflective of revenue ratios, but is driven by the significantly higher contribution of the aftermarket business. And it's not just cash that rises in the aftermarket phase, it's also profit. Profit and cash naturally balance over the life of the program. But because we correctly recognize profit based on work done and our parts last the life of the engine, some profit comes ahead of cash in the early years. We work hard to keep profit as close to cash as possible by recognizing profit conservatively. But naturally, some of our work is complete before the RRSP program has built the end customer. This is our unbilled work done. So a good part of our cash mountain is actually cash due from work already completed, which is an incredibly strong position to be in and makes cash flow predictable, too. It's precisely the opposite of having received lots of cash advances for work not yet done. Jeff will talk later about how Melrose's overall cash flow increases substantially over the coming years, and some of this is for work already done. In addition, our margins increase over time. This is again the result of the fact that our parts typically last the life of the engine. And so once the engine is on the wing, we incur very little additional cost from the aftermarket. This means that our profit share from the RRSP is recorded as revenue with minimal additional costs. And this is a reflection of our position in the engine program and results in very high margins. The final point I'd make on this slide is that our chart here does not include the impact of investing in more RRSPs in the future. However, due to the technical strength of our Engines business, we fully expect to participate on future engine development programs. And as David mentioned earlier, we're already well positioned on 2 next-generation demonstrators, the next generation of GTF and CFM RISE. We expect the next phase of engine launches to start around 2035. So any product development in these would only begin to impact cash flows from around 2030 onwards. Our expectation is that we would invest around 10% of the total GBP 5.5 billion net present value in next-generation engines. This would obviously also yield further future cash flow, extending the mountain out to the right and upwards. But that means that 90% of these huge cash flows are retained by the business and are not required for internal reinvestment, even if we are successfully placed on both the 2 new engines being developed. These are, of course, just estimates, but I wanted to give you a sense of how things could develop as you start looking out over the next 10 years. I think it's worth giving some more detail on our business improvement plans, which is the third element of our margin growth. We expect to complete our commercial and restructuring activities within the next 12 months. And you can see here that they are already well advanced. Restructuring projects relate to work stream rationalization in the Nordics and site restructuring in the U.S. As you heard earlier from David, operational excellence improvements are progressing well and will continue through to 2025, delivering annual savings of GBP 30 million. Overall, the division is on track for GBP 75 million of savings and benefits, of which, half will be delivered this year. Finally, I'd like to talk about how we manage inflation. This chart shows a 75% of Engines contracts by revenue offer us a good level of protection. A small proportion of revenues comes from contracts with enabled parts. This is where customers negotiate prices and terms with major suppliers. So any cost increases are passed fully on to them. But most of our protection comes from escalation clauses, which allows us to increase prices to customers based on specific indices. We deal with the remaining contracts through negotiation, and it's fair to say that overall, we have fully covered the impact of inflation in the Engines division, which is a good result given the current environment. So that brings our presentation on engines to a close. [Presentation]

I'm going to talk now about our Structures division. This is a high-quality global structures business with substantial design capabilities and embedded positions on the most important industry platforms. We are on track to achieve a profit margin of 9% by 2025 with double-digit profit beyond that. And we are at the forefront of developing the most relevant technologies for the path to net-zero emissions, which gives us a strong position for the future. Again, I'll start with a brief snapshot of the business. We have an enviable position across market segments and customers. 2/3 of our sales are in civil, 1/3 in defense. Our revenues are well balanced across narrowbody, wide-body, business jets, fighter jets, and rotorcraft, with narrow-body being our largest segment at 25% of the total. We serve every major civil and military customer with Airbus and Lockheed Martin, who make the F-35, representing 45% of sales. Our component and system expertise is founded on our OEM heritage from Fokker, which we acquired in 2015 and which has a history of designing aircraft for over 100 years. This OEM capability makes us a partner of choice for all major airframe OEMs globally. There are tens of composite and machining suppliers in the aerospace industry, but we play a different role for many given our super Tier 1 capability. Many component suppliers build customer-owned designs and have limited value. We are at the opposite end of the spectrum. We design, certify and build products, which makes our relationships more embedded. We are further sharpening our program portfolio to focus on differentiated design-to-build positions across both civil and defense. As a result, we are exiting multiple unprofitable programs. By 2025, 80% of our sales in structures will be design-to-build and 50% as a Super-Tier 1 with full validation and certification responsibility. Our Super-Tier 1 status is underpinned by the strength of our research capability. We are at the heart of the U.K., Netherlands and U.S. aerospace, academic and technology ecosystems. We lead some of the most important multi-company research programs in the fields of lightweight materials and electrification, and we have substantial access to government funding. Our product portfolio is perfectly positioned for a sustainable future. 90% of our sales are aligned with our customer's path to zero emissions. That's because our lightweight solutions help make aircraft more efficient and our electric distribution systems enable electrification of onboard hydraulic actuation systems, which saves fuel. We also provide differentiated technology in transparencies and landing gear systems. We are on every major aircraft in the industry, with strong positions on Airbus A320, Lockheed Martin F-35 and Gulfstream G650, which are all in very high demand. Our content per aircraft is higher on wide-body platforms, such as the A350 or B787, which have been more impacted by COVID. If the market recovers faster than expected, and there are signs it could, this would be very positive for us. There are different drivers and opportunities in Civil and Defense. Our Civil segment has strong design positions in wings, empennage and electrical systems across the most coveted platforms in the industry. The consolidation of our industrial footprint will be completed over the next 12 months, and we will be well-positioned for profitable growth as volumes increase. We are also ready for the future as a result of our investment in China and our early engagement in next-generation aircraft. So our Civil segment is ready for growth. By contrast, in Defense, we are undergoing a complete portfolio overhaul. We are repricing existing business to recover inflation and manage mispriced contracts as well as exiting some unprofitable programs. We have a great position on the F-35, and we're expanding our design-to-build content on new and existing platforms. We expect sales in Structures to increase roughly in line with the market at a rate of 6% per annum to GBP 2.2 billion by 2025. The Civil market is growing in double digits, but this is partly offset by slower growth in Defense and business jets. Our profit margin will grow from 3% this year to 9% in 2025, with further potential for margin expansion beyond that as the wide-body market continues to recover. Our confidence in achieving this margin is driven by: first, growth in Civil volumes as travel recovers, driving demand for new aircraft; second, repricing for inflation and exiting low-margin programs in Defense; and third, consolidating our industrial footprint and improving productivity. I'll speak about each one in turn, starting with Civil volume growth. Civil demand looks well placed to remain strong in the foreseeable future as global travel recovers. Civil OEM deliveries are forecast to grow 12% per annum over the next 2 years. Narrow-body is leading the recovery and new aircraft deliveries will be back to pre-pandemic highs in 2024. By contrast, wide-body deliveries are not expected to return to pre-pandemic levels until later in the decade, although recent signs are encouraging. As you can see on the left here, order backlogs will remain strong for some time despite the expected increase in aircraft production rates over the next 2 years. Demand is particularly high for the A220, A320, B737 and B777. All OEMs are planning substantial acceleration in monthly production rates between now and 2025 with the A320, in particular, growing substantially above prior record levels. In 2025, Airbus expects a monthly production rate of 74 A320s compared to 45 now and 59 in 2019. This is good news given that our sales to Airbus are 4x that of Boeing. Our content in civil structures is focused on 3 areas: wings; empennage, in other words, the tail section; and electrical distribution. Let me tell you a bit more about each area. Wings represent 45% of our total sales in Structures. We have a Tier 1 relationship with Airbus on wings that spans decades. As you heard in the video, this relationship is led by our site in the U.K. where Airbus also has their center of excellence for wings. Since 1994, we have produced key components for the wings of A320 and other aircraft in Bristol, mostly metallic parts. Since 2015, we have also produced parts of the A350 wing, mostly in composite material, which marks a turning point for sustainability. We are now working with Airbus on future concept of a composite wing for the A320. This is part of their Wing of Tomorrow initiative, which aims to meet the challenge of creating much lighter wings with a much faster production cycle for next generation of fuel-efficient aircraft. We expect this to double our content per aircraft. Our technology and our U.K. footprint are significant differentiators in wings. We have a fantastic electrical distribution business with a unique design-to-build capability, a global footprint and a top 3 market position. It represents 15% of our sales in structures, and it serves multiple OEMs from 5 global sites, 4 of them in low-cost locations. We are one of a handful of super tier suppliers in electrical systems with the capability to design full aircraft systems. Once the electrical system is designed by us, it is more difficult to be displaced. This capability is becoming critical as electrical systems become more complex with the shift from hydraulic to electric actuation and as we see the down of fully electric flights. We're the leader in empennage technology for the tail section of business jets, which represents 10% of our sales in structures. We play a Super-Tier 1 role with full design, testing and certification capability across all major business jet platforms in the industry. And we use this role as a platform for innovation on new materials and manufacturing concepts. This capability has already attracted big interest from advanced air mobility customers who need suppliers with this type of end-to-end design capability. As I mentioned earlier, we have invested heavily in China to capture the opportunity as their market develops. We've been in China as a wholly owned company for 25 years, and China amounts to 5% of our sales in Structures. Two years ago, we signed a JV with COMAC, the Commercial Aircraft Corporation of China, and AVIC, the Aviation Industry Corporation of China. This JV positions us to benefit from the COMAC C919 and ARJ21 ramp-up in the years to come. We're building a brand-new site that will be ready in 2023 and the order book is filling up quickly. This is a measured and appropriate way to address the China for China growth opportunity. Let me turn now to the second driver of margin improvement. Defense repricing and rationalization. The defense market is growing globally, driven by the geopolitical context. The U.S., where defense spend is more than the next 10 countries put together, is increasing spend by 3% per annum. Other mature countries are under pressure to meet their commitment to spend 2% of GDP on defense, which is resulting in a sizable increase in budgets. F-35 continues to be in high demand, and the global fleet will be more than 1,300 aircraft by 2025. As I said earlier, we're undergoing a complete overhaul of our Defense portfolio, where 15% of our sales in undifferentiated make-to-print work to focus on higher value design-to-build programs. Also, we are methodically repricing contracts as they come up for renewal to adjust for the impact of inflation or to manage contracts that have been mispriced in the past. We have already sustainably priced 25% of our defense sales. And by 2025, we will have fully repriced 85%. We're confident in our ability to reprice because most negotiations are underway. More than half the work is design-to-build positions and an even higher percentage is sole-sourced. Contracts in defense typically set a fixed price for 2 to 5 years. At the end of this period, there is an opportunity to reprice based on actual cost. To give you an example, we're about to start bidding lots 18 and 19 of the F-35 for deliveries starting in 2025. All prices are being adjusted for inflationary costs. The vast majority of our defense programs will have repricing windows before 2025. And as I just mentioned, we have embedded design positions in more than half of them. As I said earlier, the U.S. has by far the largest global military budget. We are already positioned today with design-to-build content on next-generation U.S. defense programs. We're designed in on V-tails for General Atomics MQ-9B drone platforms entering in service in 2024. We have been down-selected by Bell to supply GKN-designed composite structures on the V-280 vertical lift aircraft that will replace the Blackhawk fleet over the coming decades. And we are also engaged as a design partner with Northrop Grumman on additive manufacturing for large structural parts for next-generation air dominance aircraft. This is a U.S. Air Force initiative with the aim of developing a futuristic stealth fighter together with drones that can fly and fight alongside. We also expect our additive manufacturing technology to make its way into the future European fighter jet platforms, GCAP and FCAS. Our design-to-build content in defense will reach 70% by 2030 and continue to grow beyond. National interests play a key role in defense as countries require minimum local manufacturing content when they place new defense orders. Our footprint in the U.K. and Netherlands is a key asset to win new business. And this is why 46% of our F-35 sales come from these 2 countries. We are already liaising with national governments and U.S. primes to ensure that we are best positioned for next platform awards. Turning now to the third lever to achieve our 2025 profit margin, restructuring and operational excellence. By the end of 2023, we will have reduced the number of sites in Structures to 24. This is a 40% reduction from 2018 when we have 40 sites. We will achieve this through a combination of divestitures and closures, which we expect to be largely completed over the next 12 months. These site consolidations will not result in any loss of capacity, which could hamper our ability to support the volume ramp-up; in fact, quite the opposite. We are creating centers of excellence, investing in new equipment and reducing manufacturing cycle times. But it's not just about footprint. Historically, we have had a very uneven operational performance across our structure sites and a high cost of poor quality. Over the past 3 years, we focused on improving quality at all levels. So far, we have managed to reduce the total number of quality escapes by 75% and cut our cost of poor quality, which includes scrap and rework by 1/3. We're targeting further improvements by 2025 to become the most trusted partner in Structures. So having covered our 3 profit improvement levers, let me turn now to technology. Our Structures technology is at the heart of decarbonizing the industry. So let me show some examples. I mentioned before that the wing on the A350 is in composite material. So it's proportionately lighter than the A320 wing, which is still mostly metallic. This is about to change for the next generation, thanks to our world-leading thermoset technology. The biggest challenge for narrow-body wings is to produce large and complex composite parts at high volume and low cost. This requires a complete rethink of the manufacturing process, eliminating oven processes and developing modular, highly automated manufacturing cells. This is precisely what we have done at our global technology center in Bristol in partnership with Airbus. We are already delivering parts close to production maturity level, ready for next-generation aircraft. This new manufacturing technology not only improves sustainability in the air by reducing the aircraft weight, it also saves 80% of energy and emissions in the manufacturing process on the ground. We have also established a leadership position in thermoplastic materials, which can be shaped into geometries, which are difficult to achieve with traditional composite materials. Thermoplastics have the advantages of being easily shaped with heat. They can be welded and they are recyclable. They're ideal for complex thin wall structures such as aircraft tails or fuselage. We are already accelerating the deployment of this material in business jet and helicopter tails. We have also led an EU-funded consortium that has developed the largest fuselage assembly in thermoplastic to date, saving 10% of weight, 1 ton, and 20% of cost. Last but not least, our Super-Tier 1 capability in electrical distribution will play a key role in the future of flight. Our ability to efficiently integrate the electrical system and handle new requirements such as greater power or voltage make us a partner of choice for companies such as Supernal or Archer, whether it is for electric vertical take-off and landing vehicles, battery electric flights or hydrogen propulsion. In summary, our Structures division is a high-quality, design-led business positioned on the right platforms and the right technologies for the future. As we focus its portfolio and reduce our footprint, the division is ready to thrive as volumes come back. I'd now like to hand over to Matthew again to talk about financials in Structures and the consolidated GKN Aerospace numbers.

Thank you, David. As we did for engines, let's start with the targets for our Structures division and put them in the context of our historic performance. The detailed table here shows that unlike Engines, Structures remains below pre-COVID revenue levels this year, even after adjusting for noncore business that we're exiting, and this has an impact on margins. In 2023, we expect to deliver GBP 2.1 billion of revenue and margins of 3%. However, we expect volumes to continue ramping up over the next couple of years. And when noncore business is excluded, by 2025, we expect to hit pre-COVID revenue levels. When we reach this level, we expect our business improvement initiatives to drive margins up 6 percentage points to 9%. This reflects a good level of turnaround by the time the industry gets back to pre-COVID levels of revenue with more growth and margin expansion to come after 2025. David has covered the 3 growth levers in the division, and that we expect to improve margins by 6 percentage points from 3% to 9%. I want to explain how we do that. The main driver of margin expansion is volume growth in the civil market, which generates half our targeted increase, 3 percentage points. Global air travel continues to rise and for April, it was 95% of pre-COVID levels. OEM deliveries are expected to grow at a compound annual growth rate of 12% through to 2025, which nets to 7% when the business jet sector is taken into account. We already have the capacity to satisfy this demand, so we expect a good drop-through to profit from this volume growth. The second margin driver comes through our Defense business, which accounts for an uplift of 2 percentage points in our plan. As David said earlier, we'll be working to exit noncore business and reprice our Defense portfolio over the coming years. By 2025, we expect to have repriced around 85% of our core business. This repricing will largely flow to the bottom line. The third driver of higher margins is our business improvement program where we expect to drive a similar level of financial benefit from Structures as we do from Engines. The division has significant restructuring programs in both the Netherlands and the U.S. And these specific projects are expected to yield annual savings of around GBP 20 million. In addition to this, operational excellence projects are expected to deliver a further GBP 15 million. Overall, taking into account the benefit already delivered in 2023, we are expecting margin expansion of around 1 percentage point to come from restructuring and operational excellence. Putting all this together, we can see a clear path to the 6 percentage point improvement that we have laid out for the next 2 years, resulting in 9% margins by 2025 with the promise of more to come. I'd like to give you more detail on our business improvement initiatives. As with engines, the Structures division is very well progressed. Our commercial plans are well-defined and ready to roll into action, particularly at the point where new defense contract packages get renewed. Our site restructuring plans are well advanced, and we expect them to be complete within the next 12 months. We continue to make operational improvements through to 2025, and they are already well underway. Overall, Structures will deliver around GBP 70 million of annual savings, with around 1/4 of this already delivered in the P&L this year. As an aside, you'll note that the combined savings of GBP 70 million in Structures and GBP 75 million in Engines that I mentioned earlier, equals the GBP 145 million of benefits identified at last year's Capital Markets Day. So finally, let's turn to how we manage inflation in the business. The situation in Structure is different from that of Engines. On the first pie chart, you can see that overall, just under 60% of our revenue is with contracts where we have a reasonable level of protection. Within this 60%, we have a much larger element of protection coming from enabled parts than in engines. This is where we're not involved in negotiations with suppliers as our customers do that themselves with any cost increases passed fully on to them. The remainder comes either through escalation clauses or where we have a fixed price with a supplier. Looking at the second pie chart, you can see a breakdown of the remaining 40%, which we manage by negotiation, and this is weighted toward defense. As we've previously said, defense contracts tend to be rebid every 2 to 5 years. So if any one-off negotiations are unsuccessful, then we're able to deal with this at the rebid stage. But it's important to note that even with the current inflation levels, we've been successful in offsetting inflation through our protection measures, together with specific productivity improvements. So we talked about the 2 divisions separately. I now want to pull this together to give our view of GKN Aerospace in 2025. As a result of all the actions you've heard about today, the group is on track for GBP 4 billion of revenue and very strong margins of 17% to 18%. Operating profit is expected to almost double this year and then double again to reach GBP 700 million by 2025. Later on, Jeff will talk about Melrose cash flow dynamics. However, you'll see that I've included some operational cash metrics to help you understand how this level of growth affects GKN Aerospace's cash flow. Looking at our investment profile first. We're restructuring the footprint to generate production efficiencies, create technological centers of excellence and move production to low-cost areas. But just to be clear, once this is complete, we will still have the capacity to reduce our targeted revenue growth. Investment levels were logically reduced during the COVID downturn, but we expect capital expenditure to return to more normal levels of 1 to 1.2x depreciation from this year onwards. From a working capital perspective, we've been working hard to drive more efficiency, and the completion of our restructuring projects within the next 12 months will drive inventory out of the system. Looking forward, as you'd expect, we will continue to manage working capital metrics. But for modeling purposes, I'd expect working capital to be around 13% of sales. Finally, given that the aerospace industry is primarily contracted in U.S. dollars, I thought that it was worth making a few comments on foreign exchange. There's a lot of detail on this slide, which you can peruse at your leisure, but the key points I'd like to make are: First, from a transactional perspective, our main currency payers are U.S. dollar to euro and U.S. dollar to British pound. As you'd expect, we have a hedging policy that seeks to deliver a level of certainty with respect to our currency flows and takes account of the long-term nature of the contracts in our business. Second, we look at this regularly and take a progressive approach to hedging our exposure. Third, we use normal financial instruments to do this, mainly forward contracts, nothing out of the ordinary here. And fourth, the environment is currently favorable to our existing hedge rates. Of course, this means that for the amounts we've hedged, these are at rates higher than the current rates, but this has all been factored into our numbers. We've also given you a ready reckoner to help assess the impact of potential changes to exchange rates for translation purposes. We've used USD 1.25 to the pound in this presentation. And for example, a $0.01 change in the dollar equates to an impact on profit of around GBP 3 million. The same change in the euro equates to an impact of around GBP 1 million. So with that, I'm now going to hand you back to David to talk about sustainability.

Thank you, Matthew. To wrap up today's session, I will explain our holistic approach to sustainability, the topic which is at the core of our mission. We have 3 priorities in sustainability. First, to improve today's technology in aircraft; second, to develop new zero-emission technology; and third, to operate in a sustainable way across our divisions. The aerospace industry is committed to net-zero emissions by 2050 and has a clear road map. I have already talked about what we are doing to make current technology more efficient, where 85% of our R&D spend is focused. So let me talk now about our work on zero-emission flights. Zero-emission flights are those powered by hydrogen or batteries. We are spending 15% of our R&D budget to make these technologies work. Battery electric technology will enable new forms of mobility for short-range travel. We expect battery electric aircraft to fly in the late 2020s, and we are deeply engaged with leading advanced air mobility companies such as Supernal, Vertical or Archer. Our approach to this market is to build on our Super-Tier 1 capability across wings, empennage and electrical distribution to be selective in our partnerships and to request upfront customer funding for engineering. We have already secured multiple contracts. On hydrogen electric, we're leading a U.K.-based consortium with the aim of developing a ground demonstrator by 2026, and we're making great progress. Our technology is unique with electric motors and electrical networks operating at cryogenic temperatures. We want to extend this technology to aircraft with 100 passengers and a range up to 4,000 kilometers. This solution has the potential to replace flights that today generate 60% of the industry's total CO2 emissions. We expect this technology to enter into service in the 2030s. Our approach to sustainability goes beyond products and technology and looks at how we operate. We put our employees and communities at the center of our priorities. Beyond keeping employees safe and engaged, we strive to force diversity because we believe it makes an impact and to give back to communities where we operate. For example, in the U.K., we promote careers in science, technology, engineering and mathematics by sending our people into schools as ambassadors. We have also set out ambitious sustainability targets and have recently signed our commitment to science-based targets. We're proud of the improvements that we have achieved over the past 2 years with a 29% reduction in energy intensity and 11% reduction in water intensity, but there is much more to come. Given the progress already made, we'll be updating our targets in the coming months. So in conclusion, I hope you now have a deeper understanding of the quality of our 2 divisions. Our Engines division has a portfolio of RRSPs that will generate profit for years to come, together with GBP 20 billion of cash over the life of the programs. And we expect it to deliver a margin of 28% by 2025. In our Structures division, 80% sales will be Super-Tier 1 or Tier 1 by 2025 based on our ability to design, certify and build products and the quality of our research. We expect to grow margins to 9% by 2025 and double-digit beyond. We have a clear and realistic plan to reach our targets. We are playing a critical role in decarbonizing the industry, supporting the development of next-generation aircraft, which positions us well for the future. Thank you very much. I would like to hand over now to Geoff Martin, the CFO of Melrose.

Good afternoon. I'm going to talk about what this means for Melrose shareholders. I'll start with the free cash flow that can be achieved. I'll then combine this with our balance sheet and capital allocation strategy. And this will demonstrate that shareholders are in a very good position. This slide shows the free cash flow as a percentage of revenue, the free cash flow margin. It is calculated pre-interest and before tax. And this allows comparisons to businesses with different leverage strategies and avoids distortion from our share buyback guidance. For reference, the unlevered post-tax numbers are about 2 percentage points lower. We have another 12 months of further restructuring to do and the percentages include these remaining costs. Consequently, free cash generation this year at 2% of revenue is naturally lower. As the restructuring period comes to an end, the expected free cash generation grows 7x in absolute terms. And Melrose 2025 free cash flow margin of 12% reflects this. A conversion of 70% on the Aerospace margin. Naturally, around half of the conversion gap comes from Melrose plc-related costs and funding the strong sales growth. The balance is due to expected timing differences on profit as some work is done upfront with aftermarket cash coming later. The cash conversion is kept high by good working capital management and being conservative about when we recognize profit. And of course, cash equals profit over the life of the contracts. This is demonstrated by the expected long-term free cash margin of 15% rising to over 20%, an industry-leading performance. This confirms we have an exceptionally good long-term embedded cash profile, which is relatively predictable. Few businesses generate this amount of cash consistently over decades. Let's turn now to the overall Melrose strategy and appropriate use of capital. The Board believes the best route to creating shareholder value is to maximize the quality of our Aerospace business and not dilute it with the acquisition of an industrial business. This simplified strategy allows Melrose to fully invest in Aerospace and have significant surplus monies to consistently buy back shares. Net debt leverage should end this year a little over 1x, but we would be comfortable up to 2.5x given the healthy long-term cash profile. So what does all this mean for our shareholders? Well, in short, the creation of significant surplus capital. This will allow a progressive dividend policy and additional rewards on top. We will be able to buy back 5% to 10% of our market capitalization for many years to come. This can start after the restructuring phase and from 2024 onwards. The first few years of share buybacks come from leveraging the increase in profits, while still staying well within our guidance of up to 2.5x. Longer term, the buybacks come from the decade-long cash generation, and we are on the cusp of this. In a nutshell, shareholders today can reap the rewards from decades of hard work and investments already made. Engines contracts usually make a decent commercial return over their 50-year life, but a shareholder today can enjoy the very lucrative second half of those contracts without the more painful first half. And this remains true even when winning new positions on new engines that get developed. And the investment for that is expected to be a fraction of these embedded cash flows with 90% of the cash mountain retained. This is an excellent place to be, and this is a key part, potentially the key part of the investment case. And now to the conclusion. This slide simplifies the detailed profit bridges that David and Matthew have discussed. There is plenty of evidence to show the aerospace market is recovering. This recovery explains over 80% of the anticipated Engines profit growth, 50% of Structures and 70% of the total. The remaining expected profit increase comes from further restructuring improvement projects that largely complete within the next 12 months, for which we have a strong track record of delivery. And this would take the total margin improvement of 8 percentage points to a very similar level to the 6 to 9 percentage points achieved on previous Melrose deals. So to summarize the investment case we have outlined today, aerospace is a market with strong structural growth. We are poised to benefit from the cash flow and profitability of the engines aftermarket. This means profit should virtually double this year and double again by 2025, giving the capacity for regular buybacks from 2024 onwards. In short, Melrose can deliver the 3-card trick of strong top line growth, multiple profit increases and consistent share buybacks. We have said this business can make GBP 1 billion of EBITDA within the next few years. We are on track to make GBP 0.9 billion by 2025, which suggests this can be achieved soon after. So I hope it is clear that aerospace is one of the best businesses Melrose has ever owned, if not, the best. Before we finish, I'd like to make one final comment. We have clearly disclosed a lot of new information since the demerger, especially for the engines aftermarket, which drives huge value. We have given you this detail so that everyone can value this business based on full disclosure. Our job from today is to push on and deliver in order to maximize full value. That is exactly what we will do.