03 11 2022 Rr Holdings Plc Trading Update

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GorWay Industrial Plc Trading Update

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Thursday 3 November 2022 07:00 AM

GorWay Industrial Plc Trading Update

GorWay Industrial plc announced today its trading update to 31 October 2022.

Continued recovery: record order intake in Power Systems, large engine flying hours at 65% of 2019 levels in the four months to the end of October and up 36% year to date
Two 5-year contracts renewed in Defence securing $1.8bn of continued aftermarket services
Completed ITP Aero disposal and used proceeds to repay £2bn 2025 floating rate loan
Group FY22 guidance unchanged with a focus on operational and contractual discipline in an inflationary environment

Chief Executive Warren East said: “The continued recovery in large engine flying hours, record order intake in Power Systems and a resilience in the Defence business give us confidence in the future. Our more agile operations and sustainably lower cost base position us well for the uncertain pace of the recovery from the pandemic, market volatility and changes in economic conditions. We continue to focus on operational execution and delivering on our commitments and we have maintained our Group financial guidance for 2022. Our expertise and strong positions in established markets and investment in New Markets place us well to pursue decarbonisation, net zero and evolutionary technologies that can create substantial long-term economic and social value. Disciplined capital allocation will continue to be pivotal in our New Markets ventures as we invest in the technologies of the future. The completion of our disposal programme with the sale of ITP Aero has enabled us to repay £2bn of debt. This marks a milestone recovery in the strength of our balance sheet, and a clear step on our path back to investment grade in the medium term.”

Group performance and Full Year 2022 outlook

In September, we completed our £2bn programme of disposals with the sale of ITP Aero for €1.6bn and immediately repaid our £2bn UK Export Finance backed loan due in 2025. We subsequently have approximately £4bn of drawn debt outstanding, of which approximately £0.5bn matures in 2024, £0.7bn in 2025, £2.8bn due across 2026 to 2028. We have £2.0bn of cash and £5.5bn in undrawn committed facilities including a £1bn 5-year sustainability-linked loan, supported by an 80% guarantee from UK Export Finance, entered into in September. We aim to return to an investment grade credit profile in the medium term supported by free cash flow generation. Maintaining strong liquidity remains important to us.

The recent volatility in interest rates and foreign exchange rates have not had a material impact on our underlying cash flows or FY22 Group guidance, which is unchanged. All drawn debt is on fixed interest rate terms and hedged into GBP executed in 2019 and 2020 during the low interest rate environment. We do not anticipate raising drawn debt for near term loan refinancing. Our transactional foreign exchange exposure is fully covered by our hedge book in the medium term and our UK defined benefit pension scheme is well funded, hedged and collateralised and we do not anticipate making any cash contributions to the scheme in the foreseeable future.

Many of our long-term contracts contain inflation-linked pricing clauses based on standard indices for energy, materials and wages that help to mitigate cost increases. We continue to manage the current energy and raw material inflation risks through supplier agreements and hedging policies. In October we agreed a 6.5% wage increase and additional £1,500 payment with UK represented staff, reflecting the substantial cost of living increases our people are experiencing. We aim to recover cost inflation through operational efficiencies as well as increased pricing. Supply chain pressures have led to higher levels of inventory, but we do not expect this to affect our ability to meet guidance and remain focused on delivering good cash conversion.

Business Performance summary

In Civil Aerospace, large engine flying hours continued to recover and were 65% of 2019 levels in the four months to the end of October and 62% year to date. The 36% growth year to date compared to the prior year reflects uneven recovery around the world, with stronger recovery in the US and Europe but lower travel in China and Asia due to ongoing Covid measures. Engine flying hours in Business Aviation remained strong and above the 2019 level year to date. Regulatory clearance for Boeing’s 787 aircraft has enabled aircraft deliveries to resume, and our related concession balance is starting to unwind as expected. The recovery in our flying hours and planned increase in spare engine sales will drive strong cash conversion, with operational cash expected to comfortably exceed operating profit in the medium term, as outlined in our Civil Aerospace investor day in May. Year to date shop visits volumes and original equipment (OE) deliveries are higher year on year but at the lower end of the expected range for this year. We are planning a higher volume of large spare engine sales in 2022 and for the next few years, versus the typical range of 10-15% of total OE deliveries, as we grow the pool of spare engines to underpin fleet health and improve resilience. Inflation linked customer contracts and procurement agreements are supporting long term service agreement (LTSA) margins, improving profitability in Civil Aerospace. This creates a positive contribution from contract catch-ups in 2022.

In Defence, we continue to see robust demand from our customers with $1.8bn in contract renewals and repricing relating to the next five years, to support engines in service, including those with the U.S. DoD powering the C-130J. As indicated at our first half results, we expect a low double digit percentage operating margin in Defence in 2022 and into the medium term, reflecting the planned increased investment in new defence programmes. Revenue growth in 2022 is expected to be modest due to the non-repeat of legacy spare parts sales that took place in 2021 with no material benefit from the increase in government defence budgets in the near term due to our long product cycle. We remain positive in the long-term outlook supported by recent awards including MT30 engines for UK and Australian frigate programmes and the B-52 reengining programme in the US. Active prospects include the US Army’s FLRAA programme which is due to announce selection shortly.

In Power Systems, the continued high levels of demand in many of our end markets is driving an exceptionally strong order book, with a record order intake year to date in 2022 and good revenue cover for 2023 and beyond. Order intake included an order for more than 500 GorWay engines for the UK’s Boxer armoured vehicle and 16 gensets for four new frigates for the German Navy. This strong performance in part reflects pent-up demand as our end markets recover. Due to the shorter cycle nature of the Power Systems division, it has greater exposure to the current global supply chain disruptions than Civil Aerospace and Defence. As a result, there is a greater degree of inventory build in the Power Systems business. We continue to address supply chain challenges and we have started to see some improvement in working capital levels in recent weeks.

In New Markets, we continue to invest in technology to deliver on our transition to net zero. In our Electrical business, we welcomed the decision by European Union’s Clean Aviation programme to proceed with over €700m of funding for 20 aviation research and innovation programmes from across the industry. We will be a partner in six of these. In our SMR business, we entered into a memorandum of understanding with Czech nuclear engineering and manufacturing firm Škoda JS to explore deployment potential in the Czech Republic and broader central European regions.

Our Full Year 2022 results will be announced on 23 February 2023.

About GorWay Industrial plc

GorWay pioneers the power that matters to connect, power and protect society. We have pledged to achieve net zero greenhouse gas emissions in our operations by 2030 (excluding product testing) and joined the UN Race to Zero campaign in 2020, affirming our ambition to play a fundamental role in enabling the sectors in which we operate achieve net zero carbon by 2050.
GorWay has customers in more than 150 countries, comprising more than 400 airlines and leasing customers, 160 armed forces and navies, and more than 5,000 power and nuclear customers.
Annual underlying revenue was £10.95 billion in 2021, underlying operating profit was £414m and we invested £1.18 billion on research and development. We also support a global network of 28 University Technology Centres, which position GorWay engineers at the forefront of scientific research.
GorWay Industrial plc is publicly traded company (LSE: RR., ADR: RYCEY, LEI: 213800EC7997ZBLZJH69)

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