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01 February 2018 11:45 Download the pdf

Trading update

Melrose is today providing a trading update ahead of its audited 2017 preliminary results.

  • Melrose confirms trading in 2017 was in line with management expectations
  • Nortek trading has been transformed more comprehensively and faster than envisaged at the time of the acquisition; underlying operating profits at constant currency are up approximately 50% compared to last year of $241.0 million and approximately 65% up on the full year prior to acquisition of $220.1 million1,2
  • Nortek’s underlying operating margin3 increased to approximately 15%, an increase of more than 5 percentage points
  • The well-publicised structural change in the global gas turbine market has led to Brush commencing employee consultations today in relation to the intended closure of its Dutch turbogenerator facility and the downsizing of its turbogenerator production in the UK

Simon Peckham, Chief Executive of Melrose said:

“Changing the culture and direction of Nortek by freeing it from the restrictions of a centralised group structure, when combined with our investments at the rate of approximately 2x depreciation, has resulted in this exceptional improvement in performance in a very short space of time. Over the years, in businesses spanning many different industry sectors from automotive to consumer products and from aerospace to security, the Melrose team’s widespread experience and expertise has continued to deliver exceptional results. We have no doubt this approach would also be successful at GKN.”

Nortek

The Nortek businesses have built on a promising start under Melrose ownership to have an outstanding 2017. Having just completed its first full year in the Melrose group, underlying operating profit is up approximately 50% compared with 2016, which itself benefited from four months of Melrose improvements. Nortek has also achieved operating margins of approximately 15%, being the original three to five year aim at the time of the acquisition and an improvement of more than 5 percentage points. The business has been extremely successful in converting this strong performance into cash, with a cash conversion rate under Melrose ownership of over 100%.4

This improvement has been driven by the hard work of the Nortek operational management teams, freed from the restrictions of the formerly centralised group structure to implement the necessary improvement programmes funded by Melrose planned investments equal to approximately 2x depreciation. The full benefits of these investments are still unfolding alongside further improvements planned for 2018 as Melrose looks to maintain the pace of change in order to deliver further value for shareholders.

The following are examples of these ongoing improvement programmes:

  • Global HVAC - A strengthened and refocused management team under the incumbent CEO is currently spending £9 million to upgrade the key US production facilities in Tualatin and Oklahoma City, which will improve productivity and enable the production of state-of-the-art custom air handling products for the healthcare and data centre markets, with the full benefits expected to flow from 2018 onwards. This has been matched by significant investment in the R&D centre in Saskatoon, Canada, focused on new product development and process improvements that are pivotal to the success of the production plants. A detailed product profitability review has led not only to the exiting of approximately 12% of low margin divisional sales, but has also provided the business with a better understanding of its cost base and enabled a more informed approach to tendering.
  • Air Quality and Home Solutions (AQH) – A new CEO with significant large customer experience has been installed and the distraction of the loss making European business of Best Italia S.p.A has been removed by selling it to a suitable home within Electrolux in July 2017. Now streamlined and refocused, AQH is part way through optimising a previously fragmented production footprint. This involves a site consolidation in Canada and increased production at the Hartford, USA headquarters, made possible by an ongoing £16 million investment to upgrade Hartford’s plant and equipment, including automated lines and laser welders, and a consolidation of the entire warehousing operation into the main facility. An in-depth product portfolio review has supported the continued refreshing of the product range, with a number of new product launches due in 2018.
  • Security and Smart Technology - The opening of the new Carlsbad, USA headquarters in April 2018 will complete the consolidation of the Nortek Security and Control, Core Brands and GTO businesses under one management team. This includes a significant investment to upgrade their research and development capabilities. The consolidation strengthens the core team under the incumbent CEO and refocuses the business on profitable channels, improving the product mix to take advantage of customer changes in the market. This has been supported by significant investment in tooling for new products such as Nova and the further development of the leading Elan platform.
  • Ergotron - Already a high margin business on acquisition, Melrose has made further investments focused on supporting expansion projects long sought-after by the existing management team. These include growth in e-commerce and the APAC and European markets, as well as a restructuring of the Tualatin, USA production facility and further development of Ergotron’s market leading ‘WorkFit’ and medical cart products.

 

The Board believes that these and other ongoing investments will enable Nortek to continue to build on the success achieved to date to deliver further improvement for the benefit of shareholders.

Brush

As flagged in Melrose’s full year 2016 results announcement on 2 March 2017 and again in the interim 2017 results announcement on 31 August 2017, the Brush Turbogenerator business (which represented less than 5% of the Melrose Group revenues for 20165) is facing significant structural market changes. These have been caused by worldwide environmental policy which has triggered a fall in volumes in the gas turbine market of over 60% from its peak in 2011. This in turn has resulted in Brush’s turbogenerator sales falling from 122 units in 2016 to a forecast for 2018 of approximately 50 units.

This has meant that every aspect of the Turbogenerator business has been under review. With no material change in these market conditions expected in the foreseeable future, Brush has commenced consultations with employees today in relation to restructuring its Turbogenerator business to reflect the reduced levels of activity.

This restructuring involves the intended closure of the turbogenerator production facility at Ridderkerk, Netherlands and the transfer of its 4-pole turbogenerator production to the facility in Plzen, Czech Republic, while the factory in Changshu, China has already been closed. In the UK, Brush has entered into consultation with its workforce about the future of 2-pole turbogenerator production at the Loughborough, UK facility, which accounts for approximately half the workforce at the site. The 520-strong workforce employed at Brush’s other UK sites in the transformers, switchgear and mobile generator businesses remain unaffected.

The cash cost of these restructuring items is estimated to be £40 million and is expected to be materially complete by the end of 2018. This is expected to mitigate the current £12 million annual losses of the Turbogenerator business and align it to the new market conditions. The carrying value of the business has been reduced to £300 million. The Board continues to be fully committed to supporting Brush and its management team in emerging from these adverse market conditions so as to be positioned to have the best possible long-term future.

Melrose’s Chairman Christopher Miller said:

“We expect continuing strong performances at each Nortek division and are delighted with the progress we have made so far. There is more to go for. Nortek will also benefit from recent favourable tax changes announced in the US.

Brush, albeit a very small part of the Melrose portfolio, is a different story. We are doing all we can to support the business and its management team in tackling extremely adverse market conditions to be positioned for the best possible long-term future.

Meanwhile we are working hard on our proposal to merge the business and shareholder interests of GKN with Melrose to create a manufacturing powerhouse worth in excess of £10 billion today. The merger would create one of the largest companies in the UK and advance the fortunes of GKN’s divisions, employees, customers and pensioners across the piece. We believe it’s an exciting prospect for both sets of shareholders and that our long-term track record, with Nortek as just the most recent example, is clear proof of the transformation we can make at GKN.”

Enquiries:


Montfort Communications 
+44 (0)20 3514 0897

Nick Miles / Charlotte McMullen  
+44 (0)7973 130 669 / +44 (0)7921 881 800

 


 

Notes to the trading update

1 This statement has been provided on an underlying operating profit basis consistent with the current accounting policies of Melrose, which are in accordance with IFRS, adjusted for constant currency at the 2016 average exchange rates for the comparison to 2016 and at the 2015 average exchange rates for the comparison to 2015. The principal exchange rate is GBP:USD and the average rates applied to calculate growth in underlying operating profit on a constant currency basis are 1.3554 for 2016 and 1.5284 for 2015. The average GBP:USD exchange rate for 2017 is 1.2888.

Underlying operating profit excludes items which are significant in size or volatility or by nature are non-trading or non-recurring, or any item released to the Income Statement that was previously a fair value item booked on acquisition. These items include acquisition and disposal costs, restructuring and transformation charges, which include the losses incurred within closed businesses in the year of closure, and amortisation of intangible assets acquired in business combinations.

2 For the purposes of Rule 28 of the Code, this statement constitutes a profit estimate (the "Profit Estimate"). The Profit Estimate, the assumptions on which it is based, and the reports from Deloitte LLP (acting as reporting accountants for Melrose) and Rothschild and RBC Europe Limited (acting as financial advisers for Melrose, together, the “Financial Advisers”) as required by Rule 28.1 of the Code are set out in the Appendix to this Announcement.

3 Underlying operating profit as a percentage of revenue.

4 Defined as operating cash generated before capital expenditure as a percentage of EBITDA. EBITDA is defined as underlying operating profit before interest, tax, depreciation and amortisation.

5 Based on annualised revenues to include Nortek for the period prior to ownership.

 

PROFIT ESTIMATE

1. General

(a) Today, Melrose published a trading update. The statement below included in the trading update constitutes a "profit estimate" for the purposes of Rule 28 of the City Code.

“Nortek trading has been transformed more comprehensively and faster than envisaged at the time of the acquisition; underlying1 operating profits at constant currency are up approximately 50% compared to last year of $241.0 million and approximately 65% up on the full year prior to acquisition of $220.1 million2 ”

  1. Underlying operating profit excludes items which are non-trading or non-recurring, or any item released to the Income Statement that was previously a fair value item booked on acquisition including acquisition and disposal costs, restructuring and transformation charges, which include the losses incurred within closed businesses in the year of closure, and amortisation of intangible assets acquired in business combinations.
  2. Adjusted for constant currency at the 2016 average exchange rates for the comparison to 2016 and at the 2015 average exchange rates for the comparison to 2015. The principal exchange rate is GBP:USD and the average rates applied to calculate growth in underlying operating profit on a constant currency basis are 1: 1.3554 for 2016 and 1:1.5284 for 2015. The average GBP:USD exchange rate for 2017 is 1.2888. (the “Profit Estimate”).

(b) As required by Rule 28.1(a) of the City Code, Deloitte LLP, Melrose's reporting accountants, and the Financial Advisers have each prepared a report in respect of the Profit Estimate. Appendix 1 contains Deloitte LLP's and the Financial Advisers' reports on the Profit Estimate.

2. Basis of preparation and principal assumptions

The Profit Estimate is based on:

  • the unaudited interim results of Melrose for the 6 months ended 30 June 2017; and
  • the unaudited management accounts of Melrose for the 6 months ended 31 December 2017.

The Profit Estimate has been prepared on a basis consistent with the current accounting policies of Melrose. Given that the period to which the Profit Estimate relates has been completed, there are no other principal assumptions underpinning the Profit Estimate.

 

APPENDIX 1

Part A

Report on the Profit Estimate from Deloitte LLP

The Board of Directors
on behalf of Melrose Industries PLC
11th Floor
The Colmore Building
20 Colmore Circus Queensway
Birmingham
B4 6AT

N M Rothschild & Sons Limited
New Court
St Swithin’s Lane
London EC4N 8AL

RBC Europe Limited
Riverbank House
2 Swan Lane
London
EC4R 3BE

1 February 2018

Dear Sirs

Melrose Industries PLC

We report on the statement (the “Statement”) set out in the Melrose Trading Update dated 1 February 2018 (the “Announcement”) to the effect that:

“Nortek trading has been transformed more comprehensively and faster than envisaged at the time of the acquisition; underlying operating profits at constant currency are up approximately 50% compared to last year of $241.0 million and approximately 65% up on the full year prior to acquisition of $220.1 million”

This Statement has been made in the context of disclosure in the section titled “Profit Estimate” of the Announcement setting out the bases of belief supporting the Statement.

This report is required by Rule 28.1(a) of the City Code on Takeovers and Mergers (the “City Code”) and is given for the purpose of complying with that rule and for no other purpose.

Responsibilities

It is the responsibility of the directors of the Company (the “Directors”) to prepare the Profit Estimate in accordance with the requirements of Rule 28 of the City Code on Takeovers and Mergers (the “Takeover Code”). In preparing the Profit Estimate, the Directors are responsible for correcting errors that they have identified which may have arisen in unaudited financial results and unaudited management accounts used as the basis of preparation for the Profit Estimate.

It is our responsibility to form an opinion as required by Rule 28.1(a) of the Takeover Code as to the proper compilation of the Profit Estimate and to report that opinion to you.

This report is given solely for the purposes of complying with Rule 28.1(a)(i) of the Takeover Code and for no other purpose. Therefore, to the fullest extent permitted by law we do not assume any other responsibility to any person for any loss suffered by any such person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with Rule 23.2 of the Takeover Code, consenting to its inclusion in the Announcement.

Basis of Preparation of the Estimate

The Profit Estimate has been prepared on the basis stated set out in the section titled “Profit Estimate” of the Announcement and is based on:

  • the unaudited interim results of Melrose for the 6 months ended 30 June 2017; and
  • the unaudited management accounts of Melrose for the 6 months ended 31 December 2017.

The Profit Estimate is required to be prepared on a basis consistent with the current accounting policies of Melrose.

Basis of opinion

We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included evaluating the basis on which the historical financial information for the year to 31 December 2017 has been prepared and considering whether the Profit Estimate has been accurately computed using that information and is consistent with the accounting policies of the Group.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Profit Estimate has been properly compiled on the basis stated.

However, the Profit Estimate has not been audited. The actual results reported may be affected by required revisions to accounting estimates due to changes in circumstances or the impact of unforeseen events and we can express no opinion as to whether the actual results achieved will correspond to those shown in the Profit Estimate and differences may be material.

Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in jurisdictions outside the United Kingdom, including the United States of America, and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices. We have not consented to the inclusion of this report and our opinion in any registration statement filed with the SEC under the US Securities Act of 1933 (either directly or by incorporation by reference) or in any offering document enabling an offering of securities in the United States (whether under Rule 144A or otherwise). We therefore accept no responsibility to, and deny any liability to, any person using this report and opinion in connection with any offering of securities inside the United States of America or who makes a claim on the basis they had acted in reliance on the protections afforded by United States of America law and regulation.

Opinion

In our opinion, the Profit Estimate has been properly compiled on the basis stated and the basis of accounting used is consistent with the accounting policies of the Group.

Yours faithfully

Deloitte LLP

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom.

Deloitte LLP is the United Kingdom affiliate of Deloitte NWE LLP, a member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”). DTTL and each of its member firms are legally separate and independent entities. DTTL and Deloitte NWE LLP do not provide services to clients. Please see www.deloitte.com/about to learn more about our global network of member firms.

 

 

 

Part B

Rothschild and RBC report on Deloitte LLP’s Report on the Profit Estimate

The directors of the Company (the “Directors”)
Melrose Industries PLC
11th Floor
The Colmore Building
20 Colmore Circus Queensway
Birmingham
West Midlands
B4 6AT

1 February 2018

Dear Sirs,

We refer to Deloitte’s Report on the Profit Estimate, the bases of belief thereof and the notes thereto (together, the "Profit Estimate"), for which the Directors are solely responsible under Rule 28 of the City Code on Takeovers and Mergers.

We have discussed the Profit Estimate (including the assumptions and sources of information referred to therein), with the Directors and those officers and employees of Melrose who prepared the unaudited financial results and unaudited management accounts for the year ended 31 December 2017. The Profit Estimate is subject to uncertainty as described in this Announcement and our work did not involve an independent examination or verification of any of the financial or other information underlying the Profit Estimate.

We have relied upon the accuracy and completeness of all the financial and other information provided to us by, or on behalf of, Melrose, or otherwise discussed with or reviewed by us, and we have assumed such accuracy and completeness for the purposes of providing this letter. We have also reviewed the work carried out by Deloitte and have discussed with them the opinion set out in their letter of 1 February 2018 addressed to the Directors and ourselves.

We do not express any opinion as to the achievability of the profit estimate identified by the Directors of Melrose.

This letter is provided pursuant to our respective engagement letters with Melrose solely to the Directors in connection with Rule 28.1(a)(ii) of the Code and for no other purpose. We accept no responsibility to Melrose or its shareholders or any person other than the Directors in respect of the contents of, or any matter arising out of or in connection with, this letter. No person other than the Directors can rely on the contents of this letter, and to the fullest extent permitted by law, we exclude all liability (whether in contract, tort or otherwise) to any other person in respect of this letter, its results, or the work undertaken in connection with this letter, or any of the results that can be derived from this letter or any written or oral information provided in connection with this letter, and any such liability is expressly disclaimed except to the extent that such liability cannot be excluded by law.

On the basis of the foregoing, we consider that the Profit Estimate, for which the Directors are solely responsible, has been prepared with due care and consideration.

Yours truly,

 

N M Rothschild & Sons Limited
RBC Europe Limited