Melrose Industries PLC (MRO) Earnings Call Transcript & Summary

Hello, everyone, and welcome to Melrose half year results for 2026. The last 6 months have been a busy and an important period for the group as we've continued to execute our growth strategy as a leading global aerospace technology business. We've maintained our positive momentum against the backdrop of strong civil and defense demand. Now before we get started, I'd like to welcome Ross McCluskey to his first set of results as Melrose CFO. We're delighted to have Ross on board and leading strongly right from the start. We delivered a good first half performance with continued growth in revenue and profit. We also maintained our increasing cash trajectory with a strong year-on-year improvement in free cash flow. The markets we serve continue to evolve and the underlying demand story remains compelling. On the civil side, order backlogs are at record levels with production ramping up and the aftermarket continues to perform strongly. In defense, ongoing conflicts and geopolitical uncertainty is driving up spending commitments and stimulating the rapid development of emerging technologies. In May, we had an incident at our Garden Grove facility in California. This site is a global market leader in the production of aerospace acrylic products and the issue involved the storage of an associated chemical. And most importantly, the incident was managed carefully with no reported injuries or contamination, and we're working hard with regulators now and our customers to resume full production in a safe and timely manner. I'll come back to this in more detail later. More broadly, I'm encouraged by the progress we're making in the areas we're investing for future growth. We've identified target opportunities where we have proprietary technology and a clear opportunity to win, particularly in engines additive and in defense uncrewed vehicles. So stepping back, our technology is in demand, both from existing positions and emerging opportunities. We are navigating challenges along the way, but we have a clear path to unlocking value within Melrose. It's about execution, and this is where our focus remains. Let's turn now to some highlights from the first half. From a financial perspective, we delivered a 10% increase in revenue, and that top line growth translated into a 16% improvement in operating profit to nearly GBP 350 million. We also generated a GBP 67 million year-on-year improvement in free cash flow relative to last year. Operationally, our priority is always to keep our people, the flying public and our armed forces safe. In the first half, we had a 25% reduction in total incident rate, and this means safety incidents are now down over 65% over the last 3 years. As we've said previously, our inventory levels are higher than we would like due to supply chain issues, and we're addressing this systematically. In the first half, we reduced DIO by 7 days. And finally, we improved productivity by a further 230 basis points in the first half. Our operational improvements are being driven by our lean operating model that we call the brilliant basics. This model is becoming increasingly embedded across our business and is central to delivering production ramp-up successfully and profitably. And I'll give some examples of this in action shortly. From a commercial perspective, we've had a busy first half. This includes expanding our engine fan blade repair business in San Diego, which is serving a growing installed fleet. This builds on our recent investments and reinforces our position in an attractive and growing aftermarket. In defense, we're participating broadly across a range of emerging uncrewed programs. This includes BAE Systems Collaborative Combat Aircraft, Brontanax, that was unveiled at the Farnborough International Air Show last week and where we're deeply involved in both design and production. And finally, additive fabrication, our breakthrough technology that helps address forging and casting constraints within the industry. And here, we've continued to make good progress, including development work with Pratt & Whitney on the F135 program. Before we get further into the H1 results, it's important that we cover the incident at Garden Grove. For context, our Garden Grove facility is a global leader in the production of aerospace transparencies, including fighter jet canopies and passenger cabin windows for civil aircraft. We have proprietary technology and know-how built up over 60 years, and we produce a significant proportion of the world's aerospace-grade acrylic. We've invested significantly in the site alongside the U.S. government who've underpinned this with a $150 million expansion to double our F-35 output. Now at the end of May, we had a thermal incident within one of the storage tanks for the MMA chemical we use in our acrylic production process. To ensure safety, production was immediately halted and the local emergency services evacuated nearby residents and businesses. Over the course of 5 days, we worked alongside local agencies to contain the risks, and I'm released to say there were no reported injuries, contamination or leaks. As the diagram at the bottom of this slide shows, our Garden Grove site operates in 2 connected parts. First, we make the base acrylic using MMA and our proprietary production technology. We then take that base acrylic and form, laminate, coat and assemble it into canopies and windows. We've been working very closely with regulators and with the full support of our customers and the U.S. government to restore operations safely. The manufacturing site reopened in July with now around 500 employees back at work producing transparencies for customers using existing material and third-party sourced acrylic. In parallel with this, we're working hard to restart the base acrylic production, and we have some important weeks ahead. Our work here is being done in close cooperation with the regulators as well as customers and the U.S. government who recognize the strategic importance of the site's production within the U.S. industrial base. Beyond the formal regulatory approvals required, we'll give the local community safety reassurance, and we're also exploring some form of compensation for the disruption caused by the evacuation. We're also addressing a range of ongoing legal cases regarding the incident. Now we're making progress here with managing the situation across multiple stakeholders. However, there are still uncertainties about the timing of acrylic production restarting, wider regulatory and legal costs and our insurance coverage is under review. So with all this in mind, we have paused the current share buyback until the situation is clearer. So let me now hand over to Ross to take us through our H1 results in more detail.

Thanks, Peter, and good morning. I'm delighted to have the opportunity to talk about my first set of interim results as Melrose CFO, having joined the group in early May. We have delivered a good set of results in the first half with revenue, profit and cash in line with our expectations pre the impact of Garden Grove. Group revenue grew by 10% on a constant currency basis, led by a strong performance in the Engines division. Group operating profit was up 16% to GBP 347 million, driven by positive revenue growth and the continued focus on operational and efficiency improvements underpinned by our Brilliant Basics program. This enabled us to deliver a 50 basis points increase in H1 margin to 18.5%, while EPS improved by over 20% versus the same period last year. We delivered positive free cash flow in the first half of GBP 30 million, resulting in the maintenance of our leverage ratio at 1.8x EBITDA. This positive cash position was achieved despite a net cash outflow from factoring in the first half. Our results in H1 were impacted by the Garden Grove incident in late May. Group revenue and profit was GBP 16 million and GBP 9 million lower, respectively. But adjusting for this impact, we would have delivered revenue growth of 11% and operating profit growth of 19%. Turning to Slide 7 and focusing on our Engines division. We are pleased by the performance of engines in H1 with broad-based growth across the product lines. Revenue was up 19% with OE accelerating to 23% and aftermarket continuing at the mid-teen levels we saw in 2025. As you can see, we provided some additional clarity on the drivers of our revenue growth. Our civil RRSPs grew by 18% with notable growth in the GTF, GenX and V2500 platforms. Within this, variable consideration increased to GBP 206 million, in line with our full year expectations of GBP 340 million to GBP 380 million. We have continued to make commercial progress in our RRSPs as seen with the recent agreement with Pratt & Whitney to include low-pressure compressor wings on the 1,500 and 1,900 engine platforms. Government partnership growth of 29% was strong, primarily driven by work on the RM12 engine for the Gripen, including the delivery of the first upgraded engine to the Swedish Armed Forces as part of the enhanced performance program. This reinforces our position as a core strategic partner for the FMB. Repairs continues to perform well with growth of 27%, supported by higher fan blade volumes and with the recent contracts announced with Rolls-Royce and Pratt & Whitney, providing additional opportunities to grow share. Our site in Johor, Malaysia delivered a particularly strong H1, while our San Diego site completed its first repair of a highly engineered blisk component, demonstrating its strong technical capability. It should be noted that we are lapping a period of tariff disruption for our repairs business in H1 2025. We delivered positive operational leverage in the first half with profit growth of 21% and margin expansion of 40 basis points, up 100 basis points, excluding variable consideration. So overall, a strong performance from the Engines division. Turning to Airframes on Slide 8. Reported revenue grew by 4%, while profit declined by 1%. Adjusting for Garden Grove, growth would have been 6% and 13%, respectively. Defense grew strongly, up 14%, driven by the F-35, C-130 and NH90 and the benefits of work done to ensure the portfolio is sustainably priced. Defense continues to develop commercial opportunities underpinned by positive momentum in NATO members spending commitments. And later in the presentation, Peter will talk about opportunities we are developing across both our Engines and Airframes business for uncrewed vehicles where we continue to work with a number of partners. On the civil side of the business, revenue was marginally lower than 1%. This was primarily driven by a reduction in customer inventory, notably on the A320 platform. Growth in wide-body benefited from good momentum from the A350, while business jet revenue was solid despite ongoing supply chain challenges. We also made progress securing additional aftermarket opportunities, particularly in U.S. Margins for airframes demonstrated solid progress on an underlying basis, improving by 50 basis points, excluding Garden Grove. And again, our Brilliant Basics program has contributed to margin expansion as evidenced by our H1 productivity improvement of 3 percentage points and 12% improvement in the cost of quality. We've also made progress in improving the productivity at one of our Netherlands manufacturing sites. Overall, end market demand remains buoyant with Airbus and Boeing recording over 1,300 new orders in the first half. And we are also encouraged by the double-digit percentage increases in H1 deliveries from both, demonstrating some gradual easing of the broader supply chain challenges. This bodes well for an improved civil outlook into H2 2026 and beyond as the volume ramp builds. Let's move on to our cash performance for H1 on Slide 9. We are pleased to report a positive free cash flow performance in H1 of GBP 13 million, representing a GBP 67 million improvement versus the same period in prior year. Importantly, this was achieved despite a reduction in our factoring balance, which resulted in a net cash outflow of GBP 15 million in H1. Pre-factoring, our cash flow in the period would have been positive GBP 28 million, and I will come back to our approach to factoring shortly. Our year-on-year improvement in cash was driven by a number of key factors, namely improvements in underlying profit generation, the anticipated reductions in GTF, PMI payment and restructuring cash spend and a net neutral working capital position versus outflow in H1 prior year. It should be noted that we did benefit from an unexpected timing acceleration of some customer receipts at the end of June worth about GBP 20 million to GBP 25 million. Within H1, we incurred exceptional cash costs of GBP 5 million in relation to the Garden Grove incident. On a net basis, our cash impact resulting from Garden Grove was actually a net positive GBP 7 million with an operational working capital unwind more than offsetting the incurred cash costs. And I'll come back to our outlook for H2 for Garden Grove shortly. Capital expenditure was up slightly versus prior year to GBP 52 million, and we continue to anticipate an acceleration of spend in H2 on CapEx, in line with the full year guidance of GBP 120 million to GBP 140 million. Net interest and tax increased by around GBP 7 million versus prior year due to higher cash interest costs. And the GTF payment of GBP 27 million was in line with our full year guidance of GBP 50 million, and we continue to expect to resolve this issue within the GBP 200 million envelope advised to us by Pratt & Whitney. And just as a reminder, our underlying cash generation is seasonally weighted towards H2. Turning to Page 10. You can see the bridge to our net debt number of GBP 1.53 billion as of the end of June, equivalent to 1.8x net debt to EBITDA, which is down from 2x at this time last year. Our period-end leverage sits well within our stated leverage policy of 1.5x to 2x EBITDA. And during the first half, we have returned around GBP 130 million to shareholders, GBP 60 million of which was dividends with the rest coming from our share buyback programs. The previous GBP 250 million program was completed in Q1 and GBP 12 million of the current GBP 175 million program has been spent. As communicated in our announcement this morning, we have paused the GBP 175 million program until we achieve greater clarity on the impact of Garden Grove. And as I mentioned, I'd like to take the opportunity to address our approach to factoring. Importantly, we continue to believe it represents an efficient source of capital for the group. In terms of future guidance, we are clarifying that we will cap the growth in our year-end balance to be no more than the growth in group annual revenue, excluding the impact of FX. To aid understanding, we are now providing a guidance range of our full year expected balance based upon the group's growth outlook. And to enhance our disclosure clarity, our cash flow presentation will now split out movements pre and post factoring, and you saw this on our previous slide. I've also included an additional slide in the appendix, which provides a further bridge of our factoring balance between cash and FX. Now turning our attention to the Garden Grove incident. Peter has already spent some time discussing what has happened, and I will now address the financial split between operational and exceptional impacts. Operationally, our H1 impact was a negative GBP 16 million on revenue, GBP 9 million on profit and positive GBP 12 million on cash. Now given the uncertainty regarding the timing for full resumption of site acrylic production, we are guiding to a monthly run rate impact for H2. Based on anticipated levels of activity, we expect the site to deliver at around about 50% of its normal monthly revenue, which will impact top line by around about GBP 6 million per month. We expect this to fully flow to profit and cash given we are operating with higher production costs from bought in acrylic and a change in business mix towards repair. The actual site level cash impact for H2 will depend upon the timing of full production opening and the rebuild of [indiscernible] and working capital. From an exceptional perspective, we incurred GBP 13 million of P&L costs in H1 from the initial response, recovery and advisory costs, GBP 5 million of which was paid in cash in H1. For H2, we currently anticipate additional exceptional costs of between GBP 25 million and GBP 30 million. This excludes the impact of any potential legal, regulatory or compensation scheme processes, nor does it include the potential for any insurance-related recoverability. We are closely monitoring the situation, but given the uncertainty that persists, we have made the appropriate decision to pause our current buyback program until we have greater clarity. We will, of course, provide further updates as appropriate. Turning to our outlook for 2026 on Page 12. At a group level, we are reiterating our full year guidance for the current year, excluding the impact of Garden Grove I just outlined. We continue to expect robust revenue growth in 2026, driven by OE volume ramp and the strength of the aftermarket. We are guiding to revenue from between GBP 3.75 billion to GBP 3.95 billion, which at the midpoint represents like-for-like revenue growth of circa 10%, in line with our H1 performance. This revenue growth continues to be weighted towards engines. We are guiding to a pre-Garden Grove operating profit of between GBP 700 million and GBP 750 million. And at the midpoint, this represents profit growth of 16%, again, in line with our H1 delivery. Underlying cash flow is expected to be in the GBP 150 million to GBP 200 million range. So to wrap up, we have delivered a good performance in H1 while managing through the Garden Grove situation from May. Revenue and profit both grew by double-digit percentages with margin expansion and positive free cash flow. While the precise impact of Garden Grove are difficult to quantify at this stage, we have taken steps to provide additional financial flexibility. And with that, I will hand back to Peter.

Thanks, Ross. I'll now talk about the longer-term outlook and the progress we're making executing our growth strategy. Let's start by briefly touching on our markets. The headline message here is that the structural growth drivers remain very strong. Indeed, the challenge for the industry is not demand, but supply. On Civil OE side, backlogs have continued to grow in H1 with encouraging orders for widebodies as well as the A220. The major OEMs are now targeting strong build rate increases every year to the end of the decade, and this will drive growth in both our civil airframes and engines businesses. Engine flight hours, which drive our aftermarket business and our RSP portfolio have also remained strong. The conflict in Iran and increasing jet fuel prices has raised concerns about potential aftermarket reductions in 2027 and beyond. However, flying activity has been resilient and the outlook remains positive, especially given constrained shop visit capacity. Our RRSPs give us good exposure here as we have an aftermarket entitlement on over 70% of global flying hours. Defense largely speaks for itself. We're continuing to see increasing commitments across NATO, particularly with a greater proportion of European nations GDP being allocated as well as further investment in the U.S. This is benefiting our existing platform positions such as the F-35 and Gripen, both in OE and the aftermarket as well as driving rapid developments in uncrewed vehicles and missiles, which are attractive growth markets for us going forward. So stepping back, demand is our friend, and our focus is on executing our strategy to capitalize on our position in these growing markets. As many of you know, we have a clear and consistent growth strategy, which is built around the 3 waves shown on this slide. The first is delivering growth from our existing platform positions. We have embedded technology on all the world's leading aircraft. And as production rates increase and the aftermarket continues to expand, we will grow alongside our customers. Around 90% of the value we'll create over the next few years will come from these existing positions. The second wave is expanding in targeted new opportunities where we have differentiated technology and a clear right to win. We're deploying capital selectively in these areas, such as additive fabrication and around 10% of our financial plan to 2029 is driven by these opportunities. The third wave is positioning the business for the next generation of aircraft. Here, our technology continues to be in demand in both civil and defense programs, creating opportunities for growth over the longer term. So 3 clear ways to create value. Let's now turn to the first and most important of these, delivering growth from our existing platform positions, starting with engines. Engines strong performance in the first half was driven by continued growth on our core programs, including the GTF, GenX and XWB, together with the ongoing cash contribution from our portfolio of 19 RRSPs. In H1, we expanded our scope within the GTF program. And more broadly, we're encouraged by the reduction in GTF AOGs, the GTF Advantage entering service and progress with the Hot Section+ upgrades. We remain confident that the GTF program will become cash positive for us in 2028. We've continued to strengthen the business operationally and commercially, including new multiyear repair agreements with both Rolls-Royce and Pratt & Whitney, and we're expanding our blade manufacturing capacity in North Charleston to support future growth in advanced engine components. We're facing significant demand growth in engines, and it's essential that we deliver the ramp-up successfully for all stakeholders. And the key to this is our lean operating model, which we call the Brilliant Basics. This focuses on the core elements of operational excellence, daily management, breakthrough delivery and problem solving. Our approach is gaining traction and is driving improvements in quality, delivery, inventory and productivity. And we're also applying the Brilliant Basics in cooperation with our customers and supply chain partners. A great example of this is working alongside GE at our Tallassee facility, where we manufacture GEnx fan cases for Boeing 787. We ran 3 Kaizen events at the heart of the operation, and these delivered a 90% reduction in inspection times, improved yield in the core composites workflow and a road map for increased autoclave throughput. You can see us in the photo in front of one of them here. This event underpins the planned production ramp-up from around 5 cases per week today to around 10 cases per week in the years ahead. More broadly, we're investing heavily in production capacity and automation to increase our build rates for the GEnx, XWB and GTF, ensuring we're ready to support the strong OE ramp-up of these important engines. Going forward, we'll therefore benefit from increasing engine production rates, growing aftermarket activity and higher RRSP cash generation from newer engines entering shop visits where we have a greater share. Let's turn now to Airframes. The story here is similar in many respects. Unprecedented civil and defense backlogs provide a long runway for future growth, especially as we're now the world's largest independent airframes business. Industry production rates are increasing, although they're still constrained by supply chain issues. In the first half, we continued to invest in capability, capacity and automation across our full portfolio of aero structures, wiring transparencies, landing gear and ice protection systems. We're increasingly leveraging our global footprint to serve customers locally and cost effectively, too. For example, in the first half, we progressed our global hub for wiring in Mexico, we started producing glass windows in China for the aftermarket. Operationally, I'm encouraged by the progress we've made in the Netherlands in recent months. Following the production transfers we discussed at the full year results, output and productivity have improved significantly. As with engines, these improvements are being driven by Brilliant Basics. And a good example here is Hoogeveen, where we've applied our lean tools to supplier quality management. By working systematically with our problem-solving approach, we've achieved an 80% reduction in customer issues linked to supplier parts, driving both better delivery performance and lower costs. Looking beyond the first half, the opportunity remains clear. Our focus is on converting record order backlogs into profitable growth and increasing cash flow, expanding our participation in the aftermarket and continuing to drive operational improvements through lean, digitalization and AI. Now alongside this existing platform growth, we're also progressing the second wave of our strategy, investing in targeted new opportunities. So let's now turn to that. A good example of our new opportunities is the defense uncrewed aerial vehicle market, or DUAVs. This is a rapidly evolving market given the changing nature of war fighting that we've seen in Ukraine and Iran. It's a dynamic and growing market, and it's attractive for us as we have 3 distinct routes to market that leverage GKN Aerospace capabilities. The first is on the airframe side, where we're building on our established strength in advanced composites and structures. We're participating across a range of national programs and platform sizes with a combination of deep engineering design capability and our production capabilities in key NATO sovereign nations, including U.K., U.S., Netherlands, Sweden, Norway and Germany. Examples here include Anduril's Thunder program and BAE's Brontanax program, which I mentioned earlier. The second part is on the engine side. Here, we're developing a range of engines for uncrewed applications, starting at the lower end of the thrust range and building on our established capability as the engines OEM for the European Gripen fleet. Now in the center of this slide is what is effectively a new market for us, combining our airframes and engines capabilities to deliver integrated systems and establish us as an integrated OEM player in this field. The flagship development here is our work with the Swedish FMV to bring our one-way effector platform to market. This vehicle will take flight next year. So put together, we're addressing a range of sophisticated operational needs by leveraging GKN's technologies and capabilities. Another example of where we're investing significantly is engines additive fabrication. At its core, this proprietary technology is about creating a new way of manufacturing structural components for gas turbine engines, both in aerospace and in industrial gas turbines. The availability of large-scale, sophisticated forgings and castings is an industry constraint, and we've developed a proprietary manufacturing capability that provides an alternative approach for a range of components. Put simply, we're able to manufacture and assemble complex structural components in new ways. As part of the solution, we use our patented laser wire deposition technology, which is attracting substantial interest across the industry. Here, we print structural components using robots and lasers to melt titanium or super alloy wire in inert gas chambers. We produce near final form parts, which are then machined to use with very high buy-to-fly ratios. Today, we're the only company with a certified additive manufactured structural part on commercial aircraft engines, namely the GTF Fan Case Mount Rings. We're now working on expanding the portfolio by gaining more certifications and with some good momentum in the pipeline in H1. We're also now producing 100% of that GTF Fan Case Mount Rings using additive, and we're working on improving productivity, reducing cost and proving repeatability at scale. We're exploring a modular factory approach that would enable us to rapidly scale production wherever it's needed to. Now this is technology that is in demand today and will become increasingly important for the future. It strengthens our position on existing platforms, expands our scope with customers and creates attractive opportunities for the longer term. And this brings me to the final wave of growth, next generation. This slide shows that we're already deeply embedded across many of the programs that will shape the future of flight within both civil and defense. On the civil airframe side, we're working closely with customers on the next generation of single-aisle aircraft. This builds on our expertise in advanced composite structures where we already manufacture some of the world's largest load-bearing components. Programs such as the Wing of Tomorrow and SuSWINGS are defining future aircraft design with developments such as folding wings, coupled with new materials and manufacturing methods. In civil engines, we're the only design partner positioned on both current next-generation single-aisle engine development programs. That's the CFM RISE and Next-Gen GTF. We're also involved with the Rolls-Royce UltraFan plus longer-term EU projects in hydrogen electric propulsion. Across these programs, we're leveraging our expertise in advanced composites, lightweight structural component design and, of course, additive fabrication. On the defense side, we're involved in the next generation of combat aircraft through programs such as GCAP alongside opportunities in missiles and canister systems. In defense engines, we're building on our established position supporting the Gripen fighter fleet while also developing propulsion technologies for the next generation of own crew platforms and future combat aircraft with partners, including Pratt & Whitney and GE. So we are playing an influential role across our markets. And we're doing this as a design-led Tier 1 partner alongside our customers and also often with government support. These next-generation opportunities are important for long-term growth. So this covers the 3 waves of our strategy, and I'd now like to turn to how all this contributes to growing cash flow. As we've said before, there are 3 key drivers of our free cash flow. These are clear and consistent. The first is growing operating profit. You've heard us talk about the production ramp, the continued growth of the aftermarket, our operational improvement programs and our expansion into new areas. Growing profit in our core business, combined with strong cash conversion remains a foundation of our free cash flow story. The second is our RSP portfolio. Today, 17 of our 19 RSP programs are cash generative. And as those engine fleets continue to mature and move further into their aftermarket phase, the associated cash generation will continue to increase. And the third is the GTF. As we've discussed, the program remains in its investment phase today, but we expect it to become cash positive in 2028. As the fleet matures and GTF Advantage penetration increases, the program will become an increasingly important cash contributor. It's also worth stepping back and looking at what drives the RSP cash generation more broadly. In the near term, we'll benefit from continued growth of our newer engine programs, the GTF, GEnx and XWB. As those fleets grow and shop visit volumes increase, our higher program shares on these engines will provide a growing contribution to aftermarket cash flows. At the same time, the mature engine fleets continue to generate valuable aftermarket cash flows through extended in-service lives before slowly declining late in the decade. We're already investing in the next-generation engines and expect this to ramp up steadily in the early 2030s, pending any decisions we make on future RSPs. All of these drivers underpin our confidence in the path to GBP 600 million of free cash flow in 2029, with cash generation continuing to grow thereafter. So in closing, it's fair to say it's been a busy and important first half for us. We've maintained positive momentum with our financial performance, particularly with improved H1 operating cash flow. The incident at Garden Grove has been challenging. And while we've made progress, there are uncertainties for us to navigate carefully from here. That said, we have a clear strategy to capture market growth and expand our technologies. We're, therefore, confident of unlocking value from Melrose, and our focus remains on executing our plan with grip and determination. And with that, we'll open to questions.

Good morning, everyone, and welcome to the Melrose Half Year Results call. [Operator Instructions] The first question today comes from Sam Burgess of Goldman Sachs.

Firstly, for Peter, thanks for the update and talking about the next generation of engines. I think I'm right in saying you're on the demonstrator for the next generation. How confident do you feel on the prospect of those being RSP structures? And then secondly, for Ross, if that's okay, of the additional GBP 25 million to GBP 30 million of exceptional costs expected in the second half, how much is likely to be cash paid in FY '26 rather than later periods, if you've got any sense of visibility on that?

Sam, thanks for the questions. And I think next-gen is a pretty exciting development for us. As you suggested, we're on both the current next-gen development programs, which is the Next-Gen GTF and CFM RISE. And we also have been historically involved with the UltraFan. And indeed, there's some discussion about exactly what might happen with that going forward as it relates to single aisle as well. So from our perspective, we're involved, we're in demand, and we're uniquely placed across all of those platforms. I think what's going to happen as we go forward is clearly, there's an intersection with those engines and the airframes that they sit on. And the key thing for us is that we're involved in all of them. I think there's a question mark also about, as you mentioned, which is whether or not they're going to be RFPs? And I think we need to make a decision when the time comes about whether or not we want to be involved in the RFPs, at what extent on a number of engines or go harder on one. The key thing is we're involved, we're shaping it and our technology is very much in demand. So choices to come, I think, and right now, getting going, supporting the customers with those developments in an evolving market.

And Sam, just to pick up your second question in terms of exceptional costs, just to be clear, all of these costs in terms of exceptionals are cash costs. So there's no asset write-downs or anything of that nature in that GBP 25 million to GBP 30 million worth of guidance. And in essence, I would expect all of that to be a cash cost in H2. There will be a bit of payment terms that manifested itself into 2027. But of course, you've got the unwind of the cash cost versus the P&L charge for the exceptionals in the first half of the year. I mean, more generally, we would expect to have some exceptional costs for Garden Grove in 2027. We're not providing any particular guidance on that at this stage, but we will, in due course, of course, come back to that particular point.

The next question comes from Ian Douglas-Pennant of UBS.

Welcome, Ross. So the first question I have is on payables, please. Could you just help us understand the driver behind the significant increase that we see in the first half of this year, the GBP 89 million cash inflow that we see from receivables and payables. Was there an underlying driver behind that? The second question is on the buyback. So you highlight Garden Grove as a GBP 30 million to GBP 65 million cash issue for this year. Why does that mean that you have to fully cancel the GBP 175 million buyback that the scale of the 2 things seems a little different there? Maybe you can help me square that difference. And thirdly, on factoring, can I just confirm with this clarification in your plan here, does that reflect a change in the plan itself? Or are you just helping us understand better what your original plan was? And within the 2029 guidance, should we assume something like GBP 75 million of factoring in that GBP 600 million number?

Okay. I think -- all right. Thanks, Ian. So let me deal with the buyback question first, if I can. So look, what we thought to do today in terms of clarifying and quantifying the impact of Garden Grove, you can see our H1 and H2 impact. As we mentioned in the statement today as well, the impact of any potential regulatory investigations or indeed civil litigation is uncertain, right? And as a result, given that, we're taking the appropriate decision to pause and pause is the appropriate word rather than cancellation, Ian. And once we have got clear clarity, we'll come back and revisit that at the right time. Secondly, if I come back to factoring. Look, I think there was potentially some ambiguity about how we've guided in the past. And I just wanted to be very, very clear in terms of how we're going to approach it and how I want to guide to it going forward. So in essence, our factoring balance at the year-end will grow by no more than the revenue growth of the business. Implicitly, that was within the financial guidance that the team had given already for 2026. So there's no change to the GBP 150 million to GBP 200 million range off the back of that clarification, nor indeed, is there any change to the impact that, that would have on the 2029 cash guidance either. I think the number you put out there for GBP 75 million for 2029, of course, that will depend upon the revenue growth that you see in your model in a particular year. So I'll leave that to you to assess. But effectively, the growth in '29 would be commensurate to the growth in revenue that you put into your model for that particular year. As for payables, there's no particular change in strategy on that. It's a timing point as ever, big cash flows within the, particularly at the half year-end. So it has been very much business as usual interpretation on that movement in payables.

And apologies for using the wrong word. I should have said pause as you say.

The next question is from David Perry of JPMorgan.

I've got 3 questions, please. First one, just on Garden Grove, if either of you wants to take this. Just the insurance, I know you're probably in negotiations is probably sensitive, but is there any color you can give on what a typical insurance policy covers, which elements of the various costs you may incur? Second one is for Ross. I mean, I know you've only been there 2 months, and frankly, you've probably been firefighting a bit on Garden Grove. But just curious, any first impressions you've got on the finance function, anything you think you could do differently or improve? And then for you, Peter, please, the organic growth was very strong in both -- in defense in both engines and airframes. Can you just speak to that a little bit in each division, just pull out which specific things are driving that level of organic growth and the sustainability in each division?

Do you want to go first?

Yes, sure, I will go first. Yes, thanks, David, first of all, for the question. And as you say, it's been a pretty active first -- not even quite yet 3 months actually within the business. So look, what I would say is very much what I've seen since I've been here has absolutely validated the choice that I made to join the company through the course of 2025. It's a great team. It's a fantastic business. We've got 2 very strong subcomponents of the Melrose business, which really are in very attractive market and spaces with plenty of runway and road map ahead of themselves. And look, as you heard from Peter already, the drivers of growth that we see are very much intact as we push forward to accelerating over the course of the coming years. Candidly, from a finance perspective, I'm actually really delighted by the team that I've inherited from Matthew with a lot of very strong people technically within the central team as well as within my divisional resource as well. So as ever, there's opportunities for us to get better, but it's a very strong solid foundation in our finance team. One thing I think we have sought to do, hopefully, as part of today's presentation is just be clearer on a few areas and just be more precise. So what we're doing clearly on the cash flow reporting and spreading out factoring -- it's just a small example, and we're looking to try and refine and hopefully improve on that going forward as well. So that's what I would say on that. [indiscernible] insurance as well.

So David, look, you kind of mentioned it already, clearly, a very active and dynamic situation within Garden Grove. As a multi-jurisdictional business in multiple markets, we have a range of different insurance policies that are in place that cover a number of different exposures. All of our insurance companies and providers have been notified of the incident, and we're working with them. As you'd expect me to say at this stage until we've got full clarity in the situation, our insurance remains under review, which is exactly what we've said today.

Defense?

David, just on the defense side, you're right, it's very strong and encouraging performance in both businesses. I think the key thing is it's broad-based and it's on our existing platforms. So specifically on airframe, that's obviously the F-35 as well as the European platforms coming through. It's partly volume, but also, as you know, we've been working very hard on getting this portfolio where it needs to be. So there's some impact of price reading through as well on that. And on the engine side, it is the continuation of supporting, in particular, the Gripen jet. As you may recall, we are the sole provider for the Gripen fleet in terms of propulsion. So we look after that as it runs not only in terms of the new production, but also in terms of what is a very busy aftermarket for obvious reasons, given what's happening to the East of the continent right here. So the other point I'd say about the defense business in engines is we've got a heavy position on the F-135 with Pratt & Whitney, and you've heard some news about that as well as actually the DUCs business where we make a whole range of structural components, frankly, for pretty much all of the world's fighter fleet. So broad-based, very much right now, the existing platforms reading through with increased demand. And I think as we see going forward, we'll get more of a mix shift towards some of these new developments, which we touched on today. And of course, you've seen more broadly, we're very rapidly developing technologies, particularly around uncrewed, and we're excited about the role we'll play in that.

The next question is from Aymeric Poulain of Kepler Cheuvreux.

It also relates to the pause on the buyback program. When would you think you'll be in a position to know if you are able to resume that buyback program? Or looking at the various growth initiatives that you highlighted, are you also thinking about a change of capital allocation priorities, maybe more geared to reinvestment behind this new growth initiative rather than financial engineering, if I can call it like that. And looking at the '29 target and beyond, you mentioned also your interest in participating in all the major next-generation aircraft and engines. What would be the size of the R&D development investments requirements beyond the 2029 on those, please?

Do you want to get the first one on next-gen?

Yes, sure. So just first of all, in terms of capital allocation policy and prioritization. So if we think about prioritization, the way we first look at is investment in the business, ordinary returns to shareholders, share buyback. So that's the kind of the priorities as we look at it. Certainly, from -- as we sit here today as management, the guidance that we've given for capital spend this year is between GBP 120 million and GBP 140 million. That will be a good acceleration versus what we spent in prior years. And we're very much open to making sure we're spending the right amount of money in the right place, both from a maintenance perspective as well as supporting the future growth in the business as well. So that is and will always remain our top priority. In terms of the buyback itself and timing of that, look, very much TBD. Part of that may depend in terms of the status of the compensation funds. What I would say is that the extent to which litigation does happen in the U.S. does tend to be a relatively midterm issue for companies to deal with. But of course, as we go through, things will become clearer and I can give as much guidance to that in due course.

Great. So specifically on the next-gen point around future RSPs and investment, I mean, I'll go back really to the first question that Sam asked around the development here. We're really very much in demand in next generation. We're pleased to be playing a role in all of the current programs, which again Next-Gen GTF, CFM RISE and they're involved also with the UltraFan and have been historically. So we're broad-based, and we're very unusual in that respect being the market leader in lightweight structural components in pretty much all the flying fleet. So the starting point is that our technology is in demand. The market and the next-generation single-aisle architecture is very much in debate at the moment in the industry, as you know. And of course, there's intersection between airframes as well, particularly if you go for the open fan rotor. And that will evolve. The key thing for us is that we are on all of the engine programs that matter. We're pleased to be leaning in. We are investing right now in maintaining that position and working with those customers. And it will evolve. And I think what will happen is by the time we get to the 2029, '30 time frame, there will be greater clarity. And then we will decide as Melrose as to where we play based on the market at the time and also based on whether or not we want to go, as I said, deep on one engine, perhaps do 2 engines and at what percentage share as well. So I think we've got great optionality. Our technology is in demand, and we will do what is in the interest of our shareholders at the time of the market evolves. But we're in a great position on Next-Gen and are excited to play our role. And I would also say actually that we're playing a role on the airframe side as well in terms of Next-Gen, which we talked about. So all to follow, but all to play for.

The next question comes from Benjamin Heelan of Bank of America.

I've got a few. First of all, Peter, could you talk a little bit about the A350, where you are on production, how you're seeing that play out into the second half? And you probably saw that last week, Airbus commented they were considering raising production. I think they'll end up doing it. But what would that mean for you? How much investment do you think you would have to put in to get to [ 16, 17, 18 ] a month on the A350 and how we could think about that? Secondly, you talked about the geared turbofan -- sorry, the GTF program turning positive from a free cash flow perspective in '28. Could you frame that a little bit? How negative is it now? Could you help us size a little bit that inflection? And then a lot of the kind of questions that we've had from people this morning have been around '29 and that $600 million. And I think there was clearly some concerns that, that would come under pressure. Can you talk a little bit about your conviction on that and how are the big building blocks of getting that?

So firstly, on the A350, I think it's a good story, isn't it? I mean the production rates have been constrained by supply chain. Airbus have themselves talked about, particularly the center fuselage and some of the challenges coming out of [indiscernible]. And so I mean it's great that the demand is there, but we're starting to see read through in production. And we've got a long way to go in terms of building into those rates with what we're at about 6 or so today, aren't we? So the first step is to make sure that we step up to the initial rate, which was rate 12 was the original guidance. We're absolutely ready to do that and well positioned to support Airbus with that, looking forward to doing so. I think much above rate 12, 13, those sorts of rates is going to require further investment in terms of our facilities. And I think that holds true across the the broader industrial base. And as we move towards those targets towards the back end of the decade, we'll obviously be working very closely with Airbus to make sure we're ready. But it's a positive story on A350, an important platform for us going forward. And as you know, we have a deep composite technology on that platform. In terms of the GTF, I mean, the first thing I'd say about the GTF is that we're seeing some really encouraging progress. You probably picked up the AOGs as a result of the PMI issue. They're down 25% year-on-year, and that's a function of the variability of spare parts as well as turnaround times as well. So that part of the program is going well. And as you know, we've given guidance specifically to effectively the cost of that program, the -- effectively putting the PMI right, those tailing away into next year. More broadly than that, the program is still in a phase of development. We've got the GTF Advantage now coming into service. The first of those engines going to Airbus as we speak and the Hot Section+ will also upgrade the performance. In fact, the target here is to double the time on the wing with a combination of those 2 things. So as we play forward on the GTF, you're getting a number of factors. You're getting the AOG costs coming down, you're getting the development costs come down. But most importantly, you're also getting paid for shop visits by the program being replaced by cash generative and profitable shop visits being paid for by customers. So that inflection of all those drivers is coming through as we'd expect, and I'd say we're ahead of where we expected on the AOG in particular. So that inflection point happens in 2028. As you know, we've never guided to that and nor should we do so given the fact we're a program share partner. But the GTF is encouraging for us and an important part of our future cash flows going forward. And then finally, on the GBP 600 million, Ben, I just -- I think the key thing here, as I said in the presentation a few minutes ago, is that the underlying drivers for that free cash flow increase, a significant increase from where we are, are absolutely intact. So that's the growing operating profits, the RSPs and the GTF that we've touched on. I think it's fair to say that the -- there are some moving pieces within that relative to what we originally set out a couple of years ago. We've clearly got some headwind around FX as we sit here today. The build rates have been sticky. But on the other side, you've obviously got defense demand. And clearly, we've had some encouraging news on the aftermarket from our OEM customers recently. So in the round, we can see absolutely those drivers coming through and are confident of that GBP 600 million free cash flow target.