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Edited Transcript of MGGT.L earnings conference call or presentation 26-Feb-19 9:30am GMT

Full Year 2018 Meggitt PLC Earnings Presentation

Dorset Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Meggitt PLC earnings conference call or presentation Tuesday, February 26, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Wood

Meggitt PLC - CEO & Director

* Louisa S. Burdett

Meggitt PLC - Executive Director & CFO

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Conference Call Participants

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* Andrew Edward Humphrey

Morgan Stanley, Research Division - VP

* Charles J Armitage

Citigroup Inc, Research Division - Head of European Aerospace & Defense Equity Research and Director

* Gordon Hunting

* Harry William Freeman Breach

MainFirst Bank AG, Research Division - Research Analyst

* Jaime Bann Rowbotham

Deutsche Bank AG, Research Division - Research Analyst

* Jeremy David Bragg

Redburn (Europe) Limited, Research Division - Research Analyst

* Michael J. Tyndall

HSBC, Research Division - UK MidCap Equity Analyst

* Nick Cunningham

Agency Partners LLP - Managing Partner

* Rami Yehuda Myerson

Investec Bank plc, Research Division - Analyst

* Robert Alan Stallard

Vertical Research Partners, LLC - Partner

* Sandy Morris

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Anthony Wood, Meggitt PLC - CEO & Director [1]

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Okay, good morning, everybody, and thank you very much for coming this morning. A warm welcome to the 2018 Full Year Results for Meggitt PLC.

Over the next hour, you'll hear that it's been a landmark year for Meggitt, in which our team delivered a strong set of results. The pace of our strategy implementation is accelerating with several important milestones delivered and more opportunities emerging. We're on plan with our operational transformation, with 2019 set to be another pivotal year for the group. And we remain confident in our ability to deliver the targets we set for both margin and cash improvement by 2021, a theme that we'll also talk about at the Capital Markets Day that we plan to host in May.

But before we get started, I'd very much like to introduce our new CFO, Louisa Burdett, who joined Meggitt last year and picked up the baton from Doug Webb with effect from the very 1st of January. And for those that haven't met her before, I'd comment that she joins us as a very experienced CFO with a proven track record, particularly in businesses with a strong pedigree in innovation and technology. And I'm absolutely delighted that she joins us now at Meggitt. So welcome, Louisa.

So to kick us off, please note the following cautionary statement. I'm assuming you read quickly.

So 2018 was indeed a landmark year for Meggitt, a year in which growth accelerated significantly, thanks to a strong performance by our team and the sustained improvements that we've made in technology and innovation, strengthening our positions in attractive markets. Organic orders increased by 12% with a book-to-bill of 1.08x. And organic revenue growth was also strong at 9%, underpinned by our growing installed base, which now stands at over 71,000 aircraft. This was ahead of our expectations and ahead of 2 previous upgrades earlier in the year, reflecting strong end-market momentum.

It was also pleasing to see the growth accelerate, but there's more to do as we target improvements in both margin and cash generation. Underlying operating profit was up 4% to GBP 367 million with a margin of 17.7%, reflecting short-term headwinds, offset by the strong momentum from our strategic initiatives, including the deployment of the Meggitt Production System. With over 2/3 of our facilities worldwide now in the later stages of the program, it continues to unlock further operational benefits across the business. It's also enabled us to turn the corner operationally at our composite sites during the second half of 2018.

Free cash conversion of 63% reflects the strong performance in a year where we invested in inventory to accelerate growth, but also to build buffers to derisk both our site consolidation plans and, to some extent, the uncertainties around Brexit disruption, as well as reducing significantly the deficit in our U.S. pension schemes by some GBP 30 million. As a result, we're recommending a full year dividend of 16.65p, an increase of 5%, reflecting our continued confidence in the prospects for the group.

As I've previously outlined, our strategy is focused on 4 priorities, targeting to increase organic growth and deliver on the medium-term targets that we've set for both margin and cash, and we continue to make progress on all 4 fronts. We've completed our immediate portfolio reshaping actions to reduce our exposure to noncore businesses. And we now have 72% of our revenue in attractive markets with strong positions where we'll continue to focus investment on differentiated technology and on improving our competitiveness.

We've also built stronger relationships with customers and secured a number of transformational wins. And the recent $750 million, 10-year, long-term agreement with Pratt & Whitney to supply advanced engine composites is an excellent example of this, significantly increasing our relevance to customers in the engine sector.

We're also ahead of plan on 2 of the targets we set out at our 2017 Capital Markets Day, and we're on track with the other 2 as well. But in 2018, we delivered a 2% year-over-year reduction in purchased costs and delivered on our plans to reduce our global factory footprint by 20%, relative to the 2016 baseline that we set. And this progress, together with the continued deployment of the Meggitt Production System, remains very much the backbone of our operational improvement journey and also key to delivering our medium-term financial targets.

And in culture, our new customer-aligned organization took effect from the 1st of January, with very talented leadership teams now in place to deepen our relationships, accelerate growth, but also to better leverage the benefits of operating as a much more integrated group. This important change for Meggitt has been very much underpinned by the deployment of our High Performance Culture program, which continues to go from strength to strength.

I'll talk more about progress in each area later. But for now, I'll hand you over to Louisa, who'll talk you through the numbers in more detail. Louisa?

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Louisa S. Burdett, Meggitt PLC - Executive Director & CFO [2]

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Thank you. Thank you, Tony, and good morning, everyone. I'm absolutely delighted to be part of the Meggitt team and to be delivering a good set of results today.

I'm going to start with a review of the income statement, focusing on the underlying numbers and on organic growth. Organic orders grew by 12% with particularly strong growth in our Civil Aerospace business of 16% and a book-to-bill of 1.1x, reflecting large orders such as those for our composites on the GTF engine and from Wizz Air for our A321neo brakes.

Revenue of GBP 2.08 billion grew 9% organically, slightly ahead of our expectations, which we upgraded through the year. And after the effects of currency and divestment, revenue grew 4% on a reported basis.

Operating profit increased 4% on both the reported and on organic basis to GBP 367 million, resulting in an operating margin of 17.7%. Finance costs were broadly flat at GBP 32 million. And as we anticipated, our underlying tax rate decreased to 21% following the U.S. tax reforms that were enacted at the end of 2017. And taking all of that into account, our underlying EPS increased by 7% to 34.2p per share.

So turning to the next slide and just looking at the revenue numbers in a little bit more detail. Organic revenue growth of 9% reflected strong performance in each of our end markets. So working down the left-hand chart, our Civil OE revenue grew by 6% organically as a result of the increased content that we have on growing platforms such as the A320neo and the 737MAX, together with the return to growth in business jet OE, which was up 20%.

Civil Aftermarket grew 8% with strong underlying performance that's supplemented by distributor stocking associated with the Proponent and Aviall agreements that were signed in late 2017. Growth was strong on large jets such as the A320, the 737, the 777 and the 787 platforms, but it was lower in regional and business jets, which grew 6% and 4%, respectively.

Defence revenue grew by 10% with cash flowing to us from the increased budgets in the U.S., particularly in retrofit fuel tanks and parts for the F-35. And in Energy, we returned to growth after a challenging few years, with organic revenue up 19%, principally driven by the strong recovery at Heatric.

So the next slide highlights the key drivers of our underlying operating margin of 17.7%. In summary, the headwind from our composite sites and the growth of free-of-charge costs is offset by the growing financial contribution from our strategic initiatives and the lower new production -- new product introduction costs. So I'll talk through the main components of the margin, working from left to right.

The first orange bar represents the full year margin impact of our extended learning cost at MPC, which reduced to 1.5% from 2.2% at the half year, and Tony is going to take you through the operational recovery and the outlook for our engine composites business later in our presentation. This MPC headwind has been largely offset by a 130 basis points improvement from the execution of our strategic initiatives, and that's shown in the first green bar.

Excellent results delivered by our team include 2% savings in direct purchase costs; productivity improvements at 2/3 of our sites, which are now in the advanced stages of the Meggitt Production System; and some benefits from volume leverage. We also gained 40 basis points of improvement from lower NPI now that production has begun on the majority of the new platforms.

The next orange bar on the chart shows the impact of continued strong demand for our free-of-charge parts. And as you'll have heard before, this is one of our lowest risk investments, reflecting the growth in our installed base that will drive aftermarket for decades to come. However, this investment is a short-term drag on our margin, and it's marginally higher than we had anticipated this time last year, and that's just due to the strong growth in new business jet and civil engine programs.

Just for completeness, the other margin contributors are shown on the slide, including benefits from FX and the disposal of margin-dilutive businesses, offsetting unfavorable mix, which reflects faster revenue growth in Defence than in Civil Aftermarket. Overall, we're very pleased with the progress we've made during the year. And as you'll hear from Tony later, we remain confident in delivering our 2021 target to improve margin by 200 basis points.

On the next slide, performance by division. As you can see, each of our divisions grew revenue on an organic basis. And I'm just going to pick out some of the notable trends by working down the gray boxes on the right-hand part of the chart.

So starting with Braking Systems, we grew revenue organically by 1%. Margin of 31.8% reflects 3 drivers associated with the continued renewal of our installed base: a headwind from free-of-charge brakes, growth in spares on the younger aircraft such as the A220 and lower demand for the oldest aircraft in the fleet.

In Control Systems, organic growth was strong at 13% with good performance in Civil Aftermarket, enhanced by the distributor stocking arrangements that I talked about earlier.

Revenue grew 16% at Polymers & Composites, driven by strong demand on Leap GTF and F135 engines and for our fuel tanks in polymers. As expected, operating margin in this division declined from 7.1% at the end of 2017 to 1.5% in '18. And we'll talk later about the operational improvements in MPC and our focus to translate these into financial improvements in 2019 and beyond.

In Sensing Systems, strong margin growth reflects operational efficiencies and lower NPI. This offsets the significant increase in free-of-charge content on new civil platforms and an unfavorable end-market mix where lower-margin defense business is driving much of the revenue growth.

And finally, in Equipment Group, revenue increased by 12%, reflecting recovery at Heatric, strong performance in Defence systems and margin-accretive divestments.

Briefly on the next slide, as you know, we adopted a new customer-aligned organization from the 1st of January in order to build closer relationships with our customers and drive greater efficiencies across the group. We provided you with an overview of the change and half year numbers in December last year, and this slide is providing a high-level reminder about what's in each of our new divisions, together with the pro forma estimate of total revenue and margin for the 2018 financial year.

Turning to cash on the next slide where we have taken 2 decisions in the year, which have impacted cash flow but are good for our business. First of all, our inventory turns have increased from 2.5x to 2.7x, reflecting the good progress that we've made towards our target of 4 turns by 2021. However, our year-end inventory is GBP 38 million higher than last year as we built buffer stocks to firstly derisk a number of planned site consolidations and to mitigate any Brexit uncertainty. The second decision we took was a one-off payment of GBP 30 million into the U.S. pension schemes to reduce the deficit, which has the additional benefit of being allowable against our 2017 U.S. taxable income.

And just before moving off this slide, it's briefly worth noting the GBP 12 million cash outflow relating to operation exceptionals towards the bottom end of that slide, which was highlighted. It was basically higher than anticipated at the half year, and this is simply because we had a delayed receipt of GBP 21 million that we had expected in December related to the sale of land linked to our move to Ansty Park, and that cash payment was received in January.

On the next slide, our strategic initiatives are already contributing to improvements in cash performance. The left-hand chart highlights that inventory turns at 2.7x has enabled us to avoid an incremental GBP 43 million investment to sustain the growth that we have delivered this year.

On the right-hand chart, in green, you can see that our capitalized development costs have declined from a peak of GBP 81 million in 2015. We expect development cost to remain at about this level in the near term, barring any major new program launches.

Staying on that right-hand chart, in black, our cash spend on CapEx in 2018 has decreased modestly to GBP 72 million. Despite these underlying improvements, our near-term cash conversion will be tempered by investments in new facilities. We have made meaningful infrastructure commitments which underpin an uptick in investment in 2019, which we're illustrating in the shaded black guidance range on the right-hand chart.

The key project is Ansty Park, a state-of-the-art manufacturing campus, which is due to open in early 2020 and which will offer excellent opportunities for our group. Modern equipment, redesigned manufacturing cells and synergies from co-locating teams will enable us to improve output and productivity. And we'll be rolling up 4 existing sites into this Ansty Park development, which will also drive efficiencies given the costly overhead required to run aerospace facilities.

So briefly, to conclude from me on the next slide, a quick look at the debt on the balance sheet. On the left-hand side, our pension scheme deficit has reduced as a result of changes to discount rates, a small reduction in U.K. inflation assumptions and continued deficit reduction payments, which included that GBP 30 million that I referred to earlier.

On the right-hand side, we're changing the way that we disclose our gearing ratio. Net debt-to-EBITDA now includes operating leases under IFRS 16, which we adopted early this year. And the ratio on this basis decreased from 2.4x to 2.3x. We have previously disclosed this on a covenant basis, which adjusts for GAAP and exchange rates. And on this basis, net debt-to-EBITDA is 1.8x, down from 1.9x last year, which represents significant headroom against our covenants, which are not to exceed 3.5x. The balance sheet, therefore, remains strong.

And on that positive note, I will hand you back to Tony.

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Anthony Wood, Meggitt PLC - CEO & Director [3]

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Thanks. Well, thank you, Louisa. And before I outline the progress we're making on executing our strategy, I'd like to start with an overview of the dynamics in our end markets and obviously starting with Civil OE. It was another strong year for large jet deliveries, which grew by 6%. Our production rates, particularly on the new narrowbodies, ramped up throughout the year and finished strongly. In contrast, however, deliveries of regional jets were down by 11%, and super midsized and large cabin business jets were down by 7%.

Turning next to the Civil Aftermarket where market conditions have been favorable. Air traffic has grown comfortably above the long-run average of 6%, and this has led to record low levels of retirements and unusually strong growth in utilization of regional jets, which reached double digits in the later parts of last year. Business jet usage, however, was much more modest.

In Defence, our exposure to the U.S. DoD continues to grow and now represents 73% of our revenue. Spend on both new plug programs, and particularly the F-35 and fleet readiness on the older platforms, has driven strong demand for OE parts, spares and retrofits.

And in Energy, despite the falling oil price and challenging dynamics in the large gas turbine market, oil and gas CapEx grew by 10%. And growth in renewables saw an increasing demand for small frame gas turbines.

Turning then to our strategy, where this slide serves as a reminder of the 4 priorities we're pursuing to deliver our targets for both margin and cash improvement by 2021. And the slides that follow highlight some of the excellent progress we've been making.

Starting with the progress in repositioning our strategic portfolio. We've used this 4-box chart before to demonstrate our intent to move more of our business to the top right-hand corner where we're able to combine strong competitive positions in highly attractive markets. We've completed our immediate program to refocus our portfolio and materially reduced our exposure to noncore industrial, medical and automotive markets. This also includes the sale of a small business in France that we've announced this morning and expect to close in April this year.

As a result, we've increased our exposure in the top right-hand quadrant to 72%. That's up 6% since our Capital Markets Day in 2017 and up 3% since this time last year. Our focus since has been on enhancing our core business. For example, in energy condition monitoring, we've improved our competitive position by reorganizing our sensing division to create a dedicated energy value stream and investing in its service and support capability. We've also achieved the highest safety certifications required to enable us to win our first projects in the oil and gas segment where there's excellent opportunity to grow our share further.

And looking forward, we'll continue to prioritize the actions that will further enhance our portfolio, most notably improvements in competitiveness through the continued deployment of the Meggitt Production System, but also expanding our portfolio of differentiated technology and through carefully targeted bolt-on acquisitions.

I'd like to take you through 2 case studies, which really demonstrate the progress we're making through ongoing investment in innovative technology, and these are really excellent examples of what enabling the extraordinary in our vision really means. Managing thermal loads is a critical challenge for our engine customers as they seek to deliver dramatic improvements in fuel efficiency on the next-generation engines. The thermal management requirements on these next-generation, ultra-high bypass ratio engines marks a step change for the entire engine industry.

Our applied research in thermal systems is enabling Meggitt to address this challenge with a system that's capable of this dramatic improvement in performance but at a significantly smaller size and weight compared to existing designs. We're making excellent progress, and we are on track to sustain our position as one of the leading manufacturers of thermal systems on those next-generation engines.

Our investment in novel technologies, however, also incorporates a lot of manufacturing innovations such as our multiaxial composite compression moulding technology. This proprietary process has enabled us to deploy composite materials capable of operating in high temperatures ideally suited to engine applications. And it was very much capabilities like these that were critical to winning that recently announced order of $750 million with Pratt & Whitney to provide composites for both the F135 and the F119 engines.

Meggitt is a technology company with innovation at its heart, and these and other examples I could have shared with you this morning really do underpin my confidence in expanding our portfolio and building a foundation for growth over the coming decades.

Turning next to customers where momentum continues to build across the business in each of our aerospace, defense and selected energy markets. Over the last 2 years, we've made great progress in building a platform for partnerships with our major customers. Long-term agreements with the likes of United Technologies, Boeing, Airbus and GE has enabled us to position Meggitt for some transformational wins that enable us to enter new markets, but also to introduce new technologies and better secure our long-term future. In a market that's continually looking for fewer and more capable suppliers, we remain a highly relevant provider of differentiated technology that's becoming easier to do business with, thanks to our new customer-aligned approach.

Our aftermarket capability, now a fully fledged division as Services & Support, also continues to develop at pace. A key focus in 2018 has been the launch of our SMART Support packages, which is enabling us to move to more durable, long-term partnerships with our major customers. SMART Support enables us to tailor longer-term arrangements with our customers, closely aligning the services we provide with their operations.

This slide highlights some of the excellent examples of agreements we've secured during the year, such as a new business -- such as new business with airlines, including Delta, Emirates and Air France; and multi-year agreements with MRO providers such as SR Technics and Turkish Technic. Such success is critical to ensuring we're well positioned to maximize the aftermarket opportunity we've created through the significant increase in content that we've secured on these next-generation platforms.

The chart on the right-hand side of the page is an update actually of an exhibit that we shared back in our 2015 results, designed to show how our aftermarket portfolio is changing over time. Due to our success on the next-generation aircraft, our aftermarket fleet has become significantly more exposed to younger aircraft that will go on to drive growth for decades to come. And during this time, revenue from the oldest aircraft in the fleet has remained broadly steady at around GBP 80 million per year, with price broadly offsetting the volume attrition that we're seeing as aircraft like the 767, the 747 and, to some extent, the MD80 start to retire. As we look forward, we would expect this trend to continue as aftermarket demand for the new narrowbody aircraft continues to accelerate in the early 2020s.

Turning next to competitiveness where we're ahead of plan on 2 of the 4 operational targets we set out at our 2017 Capital Markets Day, and we're pleased that the others also remain on track. The first is our ambition to rationalize our global footprint by 20% by 2021, which we achieved in 2018 with the final closure of our Maidenhead facility. Since 2017, we've reduced our footprint by 11 sites, that's 12 this morning, and now have clear line of sight to further rationalization with an additional 8 sites currently preparing for closure across the next 3 years.

We've developed a very capable central team to implement this program, and I'm delighted with the progress that we've made in a short space of time, enabling us to increase our consolidation opportunity by 2021. A key enabler of this consolidation is the significant expansion of our low-cost manufacturing capacity in Vietnam, China and also in Mexico, together with investments in larger centers of excellence such as the state-of-the-art composites facility that we opened in August last year in San Diego and also Ansty Park, which is scheduled to open in early 2020.

We've also achieved our target to reduce direct purchasing cost by 2% per annum, and there remains much more to do as we expand our activity in this area in 2019 onwards. We've taken an increasingly center-led approach to our purchasing activity, and it's great to see the results of this effort starting to bear fruit. As you can see on the slide, we've reduced the number of suppliers we buy from by 9%. We've increased the average size of our purchase transaction by 26%. But most importantly, we're contracting now nearly half of our purchasing with preferred suppliers across the group.

The case study on the right outlines 2 examples of category strategies and how we're deploying them to reduce purchased costs. And as you can see, we've aggregated around $15 million worth of electronics purchasing with one of our preferred suppliers, which delivers around 20% savings per annum. We've also moved over $20 million of our machining supply to low cost, generating 10% savings in 2018 alone. This represents only 15% of our current machining spend, so there's much more opportunity to come over the coming years.

There's also much work -- more work that can be done to increase the scope and the savings from our centralized purchasing approach. And as such, we remain confident we'll sustain savings of at least 2% per annum in the medium term.

As you've seen, the extended learning curve costs at Meggitt Polymers & Composites were a drag on margin in 2018, offset by good performance across the broader business. In the second half, we achieved significant improvements in both yield and rate, as shown in the graph, for one of the 4 key part types that we produced at our Erlanger facility in the States. There's much more that we need to do to build on these improvements and support our customers in continuing the ramp-up.

The improvement in performance across all 4 key part types, as shown on the bottom left of the slide, is improving through the doubling of manufacturing yields, increasing second half output by fourfold and growing Erlanger revenue by almost 30% in 2018. And that was a really encouraging start for us.

There are a series of levers that will enable us to translate this into financial benefit in 2019. The improving standard work in our production processes will further improve yield and reduce scrap costs, enabling us to release the expensive contract labor that's been required to achieve the near-term increases in volume and support customers. These improvements in our output and the confidence they're providing to our customers will enable the transfer of high-volume production to our recently expanded low-cost facility in Mexico.

Given the good progress we've made to date and the experienced team that we now have in place to deliver our plan, we remain confident in our ability to progressively improve margins throughout 2019.

But just as significantly, we believe our success in overcoming these challenges means we'll build on an already strong position in one of the fastest-growing segments in aerospace. Composites really does present a significant opportunity to improve aero-engine performance, given the ability of composites to replace metallic components at a comparable strength, but with a material reduction in both weight and cost. Advances in materials and process technology also means that composites are increasingly becoming more viable in hotter sections of the engine.

The industry landscape, however, remains immature and very fragmented. There are many providers eager to compete in this rapid growth market. There are actually very few with the scale and the breadth of capability and proprietary manufacturing technology that Meggitt is able to offer the major OEMs, as shown on this slide.

And our fourth and final priority is culture where, as you've heard, our High Performance Culture program is enabling us to accelerate the pace at which we execute our strategy. We've now rolled this program out to over 2,000 leaders across the business and plan to accelerate the deployment in 2019 given its success to date in continuing our journey to become an integrated group.

Our improving employee engagement, strong health and safety performance and the smooth transition, most importantly, to our new customer-aligned organization are all excellent examples of the near-term impact that our focus on HPC is having. The new management teams for Airframe Systems, Engine Systems, Services & Support and Energy & Equipment have been in place since the beginning of the year, and the early signs of the impact that our HPC work is having in support of this are very encouraging. It's making Meggitt a simpler business to do business with and provides access to the complete suite of capabilities through one clear and consistent interface for each of our major customer groups.

So looking at the outlook for 2019 and starting with Civil OE, where we expect organic revenue to grow by 4% to 6% in anticipation of another good year for deliveries on large jets where we've increased our content by as much as 250%. Strong growth in large jets is likely to be offset by more challenging conditions in business jets and regional jets.

In the Civil Aftermarket, we expect revenue to grow by 3% to 5%, with large jet growth challenged by the tough 2018 comps, which were flattered by one-off stocking related to our distributor agreements that we signed late in 2017. In business and regional jets, which account for around half of our Civil Aftermarket, we expect modest growth in utilization, particularly in regional jets where traffic was unusually high during the second half of 2018.

In Defence, we expect the trajectory on DoD spending to continue to be a benefit to Meggitt with growth of 4% to 6% in 2019, with further growth in F-35 deliveries and demand for retrofit fuel tanks allowing us to outperform the market as a whole despite lower growth outside of the U.S.

And in Energy, our progress in repositioning our condition-monitoring business, together with underlying demand for valves and PCHEs, will enable us to continue growing with revenue of between 0 and 5% anticipated in 2019 despite a particularly strong comparator of 19% growth in 2018. So in aggregate, this underpins our guidance of overall organic growth for the group of between 3% to 5%.

So turning then to margin where the progress we've made in 2018 underpins our confidence in delivering our 2021 target to grow margins by 200 basis points. In 2019, we expect underlying operating margin improvement of between 0 and 50 basis points. We're on plan with our purchasing savings and continue to see efficiencies building through the deeper deployment of the Meggitt Production System and reducing new product introduction costs. We expect these tailwinds to continue into 2019. Together with gradual financial improvement at our composite sites, we expect progressive margin expansion, partly offset by headwinds associated with the ongoing growth of our installed base.

Share gains on growing new aircraft platforms mean our OE revenues are likely to grow ahead of our higher-margin aftermarket revenue in the short term. And this growth in demand will also see increased volumes of free-of-charge hardware given the content we have on the Leap engine, new business jets and the A220, where the outlook for deliveries is now somewhat improved under Airbus' ownership.

Given they are linked with the growth in our installed base, these headwinds are fundamentally a good thing as they will drive future aftermarket growth and improve our return on capital over time. But in the short term, they are a drag on margins.

As we look out to 2020 and 2021, we expect the pace of fleet renewal to slow, in parallel with the ongoing delivery of our operational transformation and sustained improvement of our composite sites. As such, we expect the pace of margin improvement will be back-end loaded, very much as we've previously indicated.

To provide more detail on this improvement journey and demonstrate our confidence in delivering the 2021 targets for both margin and cash, we plan to host a Capital Markets Day here at (inaudible) on the 8th of May. We very much look forward to seeing you all then.

So in summary, 2018 was a landmark year for Meggitt. We've significantly accelerated the rate of organic growth to 9% and grown underlying operating profit to GBP 367 million even with a near-term headwind in engine composites. We've strengthened our relationships with customers, and we've completed our near-term program of divestments.

We're meeting our 2021 targets to rationalize our footprint and deliver purchasing cost reduction. And we've launched our new customer-aligned organization to accelerate long-term growth with a very capable team in place to deliver on our plan to become one of the very best providers in aerospace, defense and selected energy markets. And we've grown our installed base to now over 71,000 aircraft, thanks to our portfolio of differentiated technologies. Meggitt really does remain a business with tremendous potential.

And so on that note, I'd like to take your questions. But as always, could you wait for a microphone and state the name of your organization that you represent.

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Questions and Answers

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Anthony Wood, Meggitt PLC - CEO & Director [1]

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So [Jess], first question, Nick.

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Nick Cunningham, Agency Partners LLP - Managing Partner [2]

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Nick Cunningham, Agency Partners. Looking at your cash flow outlook, the GBP 120 million delta in your inventory turn from 2018 to 2021, you've done 80 already, you're going to 200. If you look at the upper end of your CapEx planned, that's GBP 106 million of delta in '19 and '20. So does that say that, effectively, the CapEx could absorb the cash benefits, if you like, of the program that you're undertaking? And if you look beyond just those 2 metrics to the overall cash flow, what's cash conversion going to look like over the 3 years -- the remaining years of the program? And where do you see net debt going? And if I could just ask a very connected one, really, but on the profit side, what sort of giveback do you project within your 200 basis point margin improvement in terms of pricing and beyond the known FoC effects and maybe higher R&D within the program?

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Anthony Wood, Meggitt PLC - CEO & Director [3]

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Okay. A few questions in there on both the cash side and the profit side. Perhaps, I'll start, Nick, and then I'll hand to Louisa with a bit more color perhaps on the cash side. I mean, certainly, in the near term, we're softening on investment in R&D. We're now down to a sort of 5% to 7% of sales range as opposed to the peak of about 10%. And we're moving a lot of that cash investments into the industrialization phase, as I've indicated over the last couple of years. So that the CapEx is tempering our cash flow over the next few years. But we're still very committed to delivering, and we're on plan effectively for delivering the inventory improvement for the GBP 200 million by 2021. So I think even with all the various moving parts in there, we're rock-solid on the delivery that we're looking for. But I don't know if you want to add on the cash side.

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Louisa S. Burdett, Meggitt PLC - Executive Director & CFO [4]

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Yes. I think if we look at sort of '19 for a start, we have signaled that our CapEx is going to go up because of the investment in our buildings but if you think about the fact that we've had some one-off tailwinds in '18. So the way I look at it is in '19, we're going to have an uptick in CapEx, which will be helped to -- be offset by the lack of a pension payment. Essentially, we've also got some cash in deferred from December into January, which will help offset the operational cash. But as we move into 2020, we're still going to have quite a high burden on CapEx, some over -- some outlay in site expenditure, but also just general operational capacity, particularly around investment to support the A321 commercial bid. And then it starts to come off again in 2021 when actually the stock turns will start to really help our cash conversion. So I think you'll probably see the tempering word, but we'll really start to see the cash flow coming through in 2021. In terms of the impact on net debt, again, I think that investment will curtail our ability to reduce leverage in the short term. But clearly, again, as we come through the back end of that period, we'll be seeing some more opportunity there.

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Anthony Wood, Meggitt PLC - CEO & Director [5]

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I think on the margin side, the one thing about aerospace at the moment is that the order book is pretty solid, and we got pretty good visibility certainly on the OE side. So a lot of those conversations about pricing have been had as part of the launch of those new programs. So that's not to say that customers don't always have ambitions as we have on our supply chain to do an even better rift. But I think I'm not going to disclose commercial conversations with any specific customer, but that's manageable I think within the scope of the sort of the ongoing improvements in competitiveness that MPS is driving, for instance, being able to offset that sort of pressure. But a lot of the material decisions are multiyear agreements with pricing for the future, pretty good visibility. Yes? Question in the center.

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Robert Alan Stallard, Vertical Research Partners, LLC - Partner [6]

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Rob Stallard from Vertical. You listed on one of your charts, don't know which page it was, but basically 28% of your revenues could be considered noncore. Of that 28%, how much is sort of fixable? And how much you're may be considering to dispose in the future? And then secondly, maybe to follow up on Nick's question on the cash flow. I think it was GBP 38 million of buffer inventory that you built up at the end of this year for Brexit and site relocation. How much of that do you expect to unwind assuming there's no Brexit Armageddon this year with the site facility changes being sorted out?

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Anthony Wood, Meggitt PLC - CEO & Director [7]

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Maybe if I pick up on portfolio. We've completed our immediate sort of portfolio reshaping actions. I mean, we continue to review our portfolio. There's a lot of benefit still to come. I mean, I think Louisa said it in her piece that 2/3 of the Meggitt sites, 44 sites as there are today, are through the sort of green and later stages of the Meggitt Production System. So there's a tremendous drive across the group, a lot of it in those composites business system, mature MPS and increase our competitive position. So a lot of that will, by virtue of the work that we're doing on those businesses, move them across to the right-hand side of the chart. And I'm not going to get into picking the separate pieces. But I've stood here before a couple of years ago and said 80% plus is sort of where I'd like the business to be, and we're very much on track for that. So more to come through MPS and some other work that we're doing on trying to bolt certain parts of those businesses together. On the inventory side, yes, GBP 38 million worth of buffer largely to support growth. But obviously, we've got a lot of site consolidation activity. Ansty Park is a big project. We've got about 100 people dedicated to that project based up in Coventry. And they're not just managing the physical build of the factory and the re-layout of the various work streams, they're also managing the park transitions and the inventory buffers to make sure we keep customers safe. There's a GBP 4 million to GBP 5 million worth of that GBP 38 million that's around Brexit. So it's a relatively modest amount. It's about a month's worth of inventory on our sort of U.K. to European trading line. But in terms of how much of that unwinds, a lot of that activity continues through 2019. We don't start the real population of the Ansty Park facility until the first quarter of 2020, so we're going to be carrying that for a little while. Brexit, you tell me. We'll burn it off as soon as we know the outcome. But we're certainly staying put for the time being. Yes, one over to the right here.

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Jeremy David Bragg, Redburn (Europe) Limited, Research Division - Research Analyst [8]

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Jeremy Bragg from Redburn. Question, if I may, on the margin, please. 0 to 50 bps of year-on-year improvement. Last year, in 2018, you saw a number of upgrades to organic revenue growth, but not really to margin. And I'm really just trying to get a feel for how conservative that 0 to 50 bps is. What could result in you coming in at the lower end of the range or beating it? And if you do come in at the lower end of the range, does that affect any of your confidence on 2021 targets, please?

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Anthony Wood, Meggitt PLC - CEO & Director [9]

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So to sort of answer the last question in reverse, if I can. The last question is, very confident in our 2021 targets for the 200 bps margin improvement. In terms of what goes into that sort of north of 50, the way that I sort of think about it is that there's 4 friends, there's 4 tailwinds which are sort of structurally within that where we've got good control, and it's largely within the business and the team's control. Growth is clearly our friend. We are getting operational leverage through our different facilities. I think we are showing that a center-led approach to purchasing delivers for us and we're very pleased with the progress that, that team are making. So that journey continues. The composites turnaround and recovery, we've got some very good indicators from the back half of 2018 that roll into 2019 and give us some confidence that, that continues to come. And the reduction in new product introduction cost is also something that structurally we've controlled. On the flip side, then clearly, the growth of free-of-charge equipment is a good thing in the long term. But we are seeing slightly better fortunes and accelerating volumes, particularly the A220 under Airbus' ownership. And there's some headwind from D&A, but largely, again, we can guide fairly accurately, we do know what that is. So we are guiding for margin expansion within that 0 to 50 bps range, and that's the opening batting position. Yes, sir, the gentleman at the back.

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Gordon Hunting, [10]

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Gordon Hunting from Fiske. Please, could you say whether you have anticipated growing demand for composites and, therefore, have capacity if civil helicopters, following the Leicester City tragedy in Agusta Westland with the Chairman on board, mandates that there's a retrofit for burst-proof fuel tanks?

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Anthony Wood, Meggitt PLC - CEO & Director [11]

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So I don't want to comment on a specific worthiness investigation because that continues. But one of our capabilities is ballistic fuel tanks largely for the military market today, which we provide out of our U.S. facility. So certainly technology we're very familiar with in the military market. It's for others to decide in the regulatory environment whether there's a change there. In terms of growing demand for composites more widely, then, absolutely. We have customers knocking on the door on a regular basis for our composite capability. At the moment, we're working through obviously a lot of growth. It's already in the business. So certainly, engine composites even stronger than the growth we're seeing in polymers. We saw about 33% growth in our Erlanger facility in the States last year alone, and that could have been a lot bigger. We're sort of working through ramp-up on the existing programs.

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Jaime Bann Rowbotham, Deutsche Bank AG, Research Division - Research Analyst [12]

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Jaime Rowbotham from Deutsche Bank. I just wondered, is there still appetite at Meggitt for bolt-on M&A? My impression had been that in areas like sensing, test and measurement, control systems you might be keen to add inorganically to the group. Is it that there are no appropriately priced opportunities? Or are you feeling a bit more balance sheet constrained?

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Anthony Wood, Meggitt PLC - CEO & Director [13]

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So we're very disciplined. We've got a very clear set, sort of between Louisa and myself and the strategy teams, on the criteria that we look for. We are looking for high-quality technology out there. We're able to develop a lot of technology ourselves organically, as we've shown, I think. But certainly, prices and multiples are improving. The challenge is really finding those high-quality assets that fit. We know the marketplace, and we scan the horizon fairly thoroughly. Pricing last year was clearly something that we were thoughtful about. We have plenty of other things on our plate, and organic growth was strong. But no, we do continue to look. And I think we'll see how the market evolves. But certainly, on the pricing environment, it's looking more attractive in the coming months. Yes, a couple of questions here. Rami.

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Rami Yehuda Myerson, Investec Bank plc, Research Division - Analyst [14]

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Rami Myerson from Investec. Two questions. One, regarding the composites business. So 150 basis point negative margin in 2018. Is the expectation that continues to lose some of the margin money in 2019? Or do you expect a positive delta in that loss or lower loss in 2019 and then subsequently in 2020?

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Anthony Wood, Meggitt PLC - CEO & Director [15]

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So I mean, certainly, we exited 2018 with a better run rate and a better cost rate, yield and scrap on most components. And there's 4 big key part types that really do drive the profitability, certainly, in engine composites. The other piece of the puzzle that I talked about at the midyear was that the fuel tank business, we hired over 300 people that all had to be trained. So that was another drag. And I wouldn't forget that piece of the business as well, which has also exited the year. We've got a good team in place that trained, and they're now delivering at rate on some of those U.S. fighter platforms. But in the composites business, we're going to see progressive improvement. There are a few key milestones that we've got to deliver this year. One big milestone is clearly the move to low cost on some of those civil parts in that portfolio where we built the facility, we've started to introduce the equipment and we're going through the early stages of first article and customer approval and such. So I'd expect to see that as a step reduction in our cost base in the second half of the year. So it's very much a progressive improvement. But we've got a lot of confidence from the improvement we saw in the last 6 months of last year that really does translate into a better position in 2019.

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Louisa S. Burdett, Meggitt PLC - Executive Director & CFO [16]

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And just building on Tony's point, I think it's implicit, but it is definitely a second half-weighted recovery particularly because a lot of it is driven by that transfer to low cost, which is going to be in the second half of the year.

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Anthony Wood, Meggitt PLC - CEO & Director [17]

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Sort of a double whammy in that transfer isn't it? Because there's a lower-cost labor in Mexico, but it's also the ability to release quite a lot of contract labor that we've had to bring in to hold rate on the big programs.

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Rami Yehuda Myerson, Investec Bank plc, Research Division - Analyst [18]

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Just if I understand correctly, it should be a positive tailwind to...

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Anthony Wood, Meggitt PLC - CEO & Director [19]

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Yes, that's why I've included it in 1 of the sort of 4 tailwinds underneath that 0 to 50, the question that came from over here.

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Rami Yehuda Myerson, Investec Bank plc, Research Division - Analyst [20]

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And then on aftermarket, it feels like wheels and brakes grew slower than the other aftermarket in 2018, which of course, has mix implications as we saw in MABS margins. Going to 2019, do you expect wheels and brakes to continue to grow slower than other aftermarket? Do you expect that to accelerate?

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Anthony Wood, Meggitt PLC - CEO & Director [21]

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On the revenue side, it's sort of slightly perverse that the business is growing because it's refreshing its installed base. But because it's free-of-charge equipment, you don't see it in the revenue line. So -- but basically, a story of an OE business that's growing faster than the aftermarket at the moment as they renew the fleet. But we do expect that margin to improve progressively over time as that equipment gets used and then the aftermarket opportunity starts to arrive. But are we going to answer that? No? Yes, several questions. Harry on the center?

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Harry William Freeman Breach, MainFirst Bank AG, Research Division - Research Analyst [22]

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Harry Breach from MainFirst. Just 2 maybe, Tony, both on aftermarket. There've been many indicators showing an economic slowdown in recent months. Have you guys seen any impact in terms of your aftermarket? Any behavioral changes if we were to strip out the restocking effects last year? I know month-to-month can be volatile, but maybe you look at it on a trailing 12-months basis, any run rate change? And then a different but related aftermarket one. I think aircraft retirements, particularly large commercial, saw a significant rise up in 2018. What I'm wondering is whether you're seeing anything in the surplus markets for used material that's starting to come through maybe an effect on one of your products or if that's not really tangible?

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Anthony Wood, Meggitt PLC - CEO & Director [23]

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So a couple of questions there. Maybe I'll lead and, Louisa, jump in if there's things you want to add. Certainly, on the broader aftermarket trends, our numbers last year were flatted by, I was going to say about 1%.

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Louisa S. Burdett, Meggitt PLC - Executive Director & CFO [24]

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1%.

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Anthony Wood, Meggitt PLC - CEO & Director [25]

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Something like that. So the 8% growth overall, there's about 1% of that that's the benefit of the distributor stocking agreements. There's a lot of people flying still. So even though RPKs are probably not going to be quite as strong as they were last year, certainly in terms of some of the opening trends, the ability to -- the demand line certainly looks pretty solid. You relate that to the supply line, we had less aircraft retirements last year than I think we've ever had, certainly as far back as my data points go, I think, 547 or something like that -- it was just less than 550 aircraft that got parked, about 1.6% of the fleet. So a very small position, which actually benefited us clearly. Now I think on the regional jets, I don't expect that to continue. I think you'll start to see some regional jets that were put on either higher usage or brought out of the desert and put back into usage. I think you'll see some of those starting to be retired again this year as the new aircraft start rolling off the production lines in Boeing and Airbus at higher rates. But as far as surplus goes, I mean, the market is still incredibly tight. It will ease over time. But certainly, we've not seen, and we have a dedicated team actually based up in Coventry that participate in all the various auctions for that equipment. And we're seeing very little Meggitt equipment out there on the surplus market at the moment still. Sandy -- or maybe one here just because you're closer to the microphone, and then Sandy.

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Charles J Armitage, Citigroup Inc, Research Division - Head of European Aerospace & Defense Equity Research and Director [26]

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Charles Armitage, Citi. 0 to 50 basis points increase in '19, you got 200 to do. Presumably, the big -- so that's 75 in the next couple of years, 75 to 100 per year in the next couple of years. Presumably, one of the big things is free-of-charge parts diminishing. What move, what drives you going from a relatively small increase to really much larger increase? And I suspect it's free-of-charge. And can you just talk through how that moves and why it moves and so forth?

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Anthony Wood, Meggitt PLC - CEO & Director [27]

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Yes. Well, firstly, it's not just free-of-charge, but free-of-charge is one area. And free-of-charge is goodness, albeit we remain committed to that 200 basis points by 2021. So we do expect to see, certainly, in excess of another 30 basis points of free-of-charge headwind, if you like, in terms of just volume increases this year. There's a few other things going on underneath that. I mean, the Meggitt Production System, as we get into those other sites and move those through, that clearly is a big self-help area in terms of improving margin. Certainly, the composites turnaround is very much within our focus. And all the data points I've already given where we're starting to feel much more confident about the ability to improve margins in that business, which is a big piece of underpinning the overall. And purchasing, as I've explained previously, purchasing is a very big piece. We buy about GBP 1 billion a year. Of that, about 70% of it is direct purchasing where we're getting good traction. That's where the 2% is focused. Indirect purchasing, very much a frontier that we're starting to accelerate on as we're getting more confident and we built the capability centrally. So I think there's a number of themes there that having got to this point, we're now building a more resilient business that can then go out and start to deploy in some of these other areas. And those are the things that underpin that margin confidence.

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Louisa S. Burdett, Meggitt PLC - Executive Director & CFO [28]

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The other thing that's worth mentioning that underpins that uptick in '20 and '21, particularly at the back end, is the site consolidation. So we're really pleased that we have closed and moved a number of sites. But arguably, they are the smaller ones. And some of the heavier lifting is going on in the back-end of the guidance period. So some of those benefits are just going to take a little bit of time to kick in.

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Charles J Armitage, Citigroup Inc, Research Division - Head of European Aerospace & Defense Equity Research and Director [29]

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The double-edged question. Free-of-charge parts, 40 basis points last year, 30 basis points this year. You say -- as you say, it's a good thing, but when does it start flattening out?

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Anthony Wood, Meggitt PLC - CEO & Director [30]

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It's a question I've been asked by the press about 3 times this morning, really, in terms of what calls the cycle, where our OE rate. I mean, if you base it on current plans for the drivers of the industry, the Boeings and the Airbuses, then there's good visibility out to about 2021. And then after then, we'll see exactly how long rates continue. But -- so I can tell you the visibility that we've got, the conversations we're having with those platform guys, there's many other things that go into it. But I think, certainly, for the next 3 years, we're going to see rate increases. We're seeing those again this year. But towards the back end of the period, 2021, we're going to start to see, I think, more of a move towards the aftermarket. A lot of that equipment we put out there, for instance, will start to come into its maintenance interval in that period. And one for Sandy, I think.

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [31]

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We could coordinate this and then [Jess] we'd have to run around and get lots and lots of exercise. You've had the highbrow stuff, now I'm going to go agricultural as usual. This free-of-charge thing kind of hacks me off because the pain in the neck has been we were only incurring GBP 30 million if you go back 7 or 8 years. And now we're heading up towards a GBP 90 million or even GBP 100 million. And the joyous outcome would be actually that we just go GBP 100 million, GBP 105 million, GBP 110 million, GBP 115 million, GBP 120 million. Do you try and talk -- after the ramp is over, actually try and make sure we don't just come back down or level off? I mean, is that actually in the strategy?

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Anthony Wood, Meggitt PLC - CEO & Director [32]

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Yes. So we are absolutely growing market share on wheels and brakes as we refresh the portfolio, which is where the most significant piece of free-of-charge goes. But really, going back, as you did, a few years ago, 6, 7 years ago relative to where we are today and where we're going to be going forward, wheels and brakes is a much smaller piece of Meggitt today than it was 6 or 7 years ago. It's less than 20% today. So actually, it's the rest of the group where the free-of-charge model really doesn't exist. It's a little bit in our sensing business. Most of that business actually is growing and becoming a much more significant piece of the group. So wheel and brakes continues to grow. The installed base is going to refresh. But we've got a great strength in the other 80% of the group, more than 80%, that we're feeling pretty good about. And we're organically growing both sides of the portfolio, and it's that other 80% that's offsetting some of that FoC even though we expect that to continue.

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [33]

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All right. And I suppose the barb that was attached to that question was, are we going to keep trying on doing things like A321neo? Or is that really just not a priority?

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Anthony Wood, Meggitt PLC - CEO & Director [34]

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No, I mean, we've invested in the program. We've got great technology. I think the tempering piece of that is, I've always said, we have a good business case with about a 10% market share, and that was on last year's volumes. So the volumes expected this year are actually better than they were this time last year when I said that. But on last year's volume, about 10% of the fleet is sufficient for us to deliver a good business case. If we're able to deliver more than 10%, that can become a really exciting business case for us with even better returns.

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [35]

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It's just this narrow focus on free-of-charge, if you know what I mean, there's just more to it. Really tedious. I remember Doug used to tell me everything I wanted to know. If we -- yes, I lie.

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Anthony Wood, Meggitt PLC - CEO & Director [36]

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Doug was much more gentle.

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [37]

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If I go back to Rami's point, the 1.5% thing from Polymers & Composites is on the group revenue, GBP 31 million. If I add that back into Polymers & Composites, I get to GBP 37 million, and that's a 9-ish percent margin. Is that really all just the loss we're making? Because one would like to think, eventually, you could work it up to some sort of positive margin. Is it just a loss? Or does it actually take us back to our target margin on what's happening or being made in Erlanger?

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Anthony Wood, Meggitt PLC - CEO & Director [38]

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Want to comment on that one?

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Louisa S. Burdett, Meggitt PLC - Executive Director & CFO [39]

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The '18 movement?

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [40]

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The what?

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Louisa S. Burdett, Meggitt PLC - Executive Director & CFO [41]

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Sorry, I didn't quite understand.

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [42]

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Sorry, I told you I was stupid. The 1.5% drag on the group revenue is GBP 31 million of profit. If I take the GBP 31 million and add it to the GBP 6 million that Polymers & Composites make, you get GBP 37 million notionally of EBIT on 390-ish. Now I'm just double checking that the 1.5% is all the loss, Rami's terminology, and doesn't allow us to get back to some target margin, if you see what I mean? In other words, is the GBP 31 million all loss? Or is it half loss and half trying to get to the profit we should be making?

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Anthony Wood, Meggitt PLC - CEO & Director [43]

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No, I mean, the MPC business is a mixture of polymers and engine composites. We've got one particular challenged site where there's a big recovery program and turnaround in place. We've had a progressive improvement already in our polymers business and the fuel tanks, particularly in Rockmart. In aggregate, we expect that business to improve this year progressively and that we're certainly going to exit 2019 in a much stronger position. And that confidence is built on some really important milestones that we've delivered in 2018. So I don't know whether that quite answers your question, but...

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [44]

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No, I think I'm being too clever for myself even. I mean, brutally simplistic, eliminating the GBP 31 million drag gets us to a 9% margin in Polymers & Composites. Is there then an ambition to get back into the mid-teens? Or is that simply not practicable with the new mix?

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Anthony Wood, Meggitt PLC - CEO & Director [45]

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No.

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Louisa S. Burdett, Meggitt PLC - Executive Director & CFO [46]

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No.

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Anthony Wood, Meggitt PLC - CEO & Director [47]

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I mean, the one thing that I'm sure of is that with the number of knocks we're having on the door for our engine composite business, that we've got an opportunity to technology at a price into the engine sector in a much more significant way than we've done thus far. We're tempering that, clearly, because we've got enormous rate increase on the engine programs, particularly that we're working on those facilities today. I think we'll be building. I'm confident we're going to be building on the basis of some of the things we've done last year, an engine composite business that actually is one of the standout businesses in the sector in terms of the capability we're building, and the margin opportunity will follow. So I think engine composites, absolutely, there are other engine composite businesses out there that are showing potential but at a much smaller scale to deliver margins in the mid-teens.

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Sandy Morris, Jefferies LLC, Research Division - Equity Analyst [48]

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I should quit when I'm behind. But just very brutally, we've gone from 300 Leap in 2017 to 1,100. This is deliveries. I know you'll be ahead in 2018. And we're heading off to 2,100 or something in theory. You've still got a hell of a ramp underway to be above, depending on your share on Leap, to be contemplating moving it to Mexico already, haven't we?

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Anthony Wood, Meggitt PLC - CEO & Director [49]

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Yes, the Leap parts actually don't move to Mexico. It's other customers' parts that move to Mexico on the other engine programs. The Leap part is actually a much more automated manufacturing process that stays in the United States. So that's a good question, but -- and largely as a result of that, that was a pre-agreed with the customer on that program. Yes, sorry, next second question -- actually, the first question here as well.

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Nick Cunningham, Agency Partners LLP - Managing Partner [50]

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I'm slightly confused about the Defence guidance because you quote some 3% growth in the underlying U.S. market. I think that's because you're including O&M because procurement should be growing like double digits given the last few years of budgets. And I thought your revenues would be closer to procurement than to O&M. Have I got that wrong?

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Anthony Wood, Meggitt PLC - CEO & Director [51]

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No, we take our D&T and O&M as the main budget lines where we see F-35 and fuel tanks and such. That's where we see the main spend items. So that's where the 3% comes from, and we're growing it about double that just because of the platforms we're on in 2019. That's how...

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Nick Cunningham, Agency Partners LLP - Managing Partner [52]

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So fuel tanks go in CR&M budget because they're retrofit, is that what it is?

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Anthony Wood, Meggitt PLC - CEO & Director [53]

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Yes, exactly. So there's a question over here and then one at the back.

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Michael J. Tyndall, HSBC, Research Division - UK MidCap Equity Analyst [54]

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It's Mike Tyndall from HSBC. Just one from me. If I think back to this time last year, if I'm not wrong, you guided revenues broadly the same sort of growth, maybe a bit softer than what you've given today.

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Anthony Wood, Meggitt PLC - CEO & Director [55]

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2 to 4.

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Michael J. Tyndall, HSBC, Research Division - UK MidCap Equity Analyst [56]

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2 to 4, yes. And you delivered 9 in the end. Is the reason that you're going 3 to 5 partially because of that high base? Or is there something that you see today that makes you a little less optimistic than what we saw in 2018?

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Anthony Wood, Meggitt PLC - CEO & Director [57]

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There's a higher base, which is the one reason for notching it up. I mean, really, when you look at our commercial jet exposure, it's the regional jets, which is the one that I think of all of the areas is probably going to be a bit softer this year, and that's going to pull us back a little bit, certainly on the OE deliveries and also the aftermarket was flat at last year somewhat. So regionals business jet OE looking okay, still quite anodyne in the aftermarket. So it's really that that's tempering. The larger jets, I think we've got reasonably good line of sight on. But that's what's causing us to land at the 3 to 5. At the back.

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Andrew Edward Humphrey, Morgan Stanley, Research Division - VP [58]

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It's Andrew Humphrey, Morgan Stanley. Just a couple of margin and then maybe one on energy, if I may, and this might be sort of slightly kind of rearranging earlier questions. You've obviously kind of split out in some detail the benefit of strategic initiatives for margin in 2018. Can you tell us whether that's likely to be a similar level for '19 or substantially different? And then secondly, on margin, you obviously called out the potential effect of -- or you mentioned kind of some of those planes that have been dragged out of the desert, potentially going back. We've been talking about the effect of MD80s and the like on the margin of the braking systems business for a while. Can you maybe talk about what's factored into the plus 0 to 50 bps there in terms of the guidance on those older aircraft, particularly for brakes? And then on Heatric, obviously, you've seen a very strong revenue performance in 2018. My impression is that the 2019 guidance assumes that sort of stays flat at that relatively elevated level. Is that a sort of placeholder? And how much visibility do you have on that either way?

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Anthony Wood, Meggitt PLC - CEO & Director [59]

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I'll sort of work through those in reverse order then, it's easier to remember them. So on the energy side, yes, you're right, I mean, Heatric did grow very strongly last year, nearly doubled actually in terms of revenue from about GBP 20 million to up to about just shy of GBP 40 million, I think, GBP 37 million, yes. So very strong in revenue. And we're expecting less growth this year, which is wrapped up within that 0 to 5, I think. A little bit of anxiety again back at around the oil price and just the general sector on that one. So similar to 2018, but not roaring on to the extent that it has in '18. As far as retirements go in brakes, I mean, we're tracking that closely. But I think we're going to see a similar year unless you get some watershed of retirements. We're not expecting that. We're expecting a very progressive sort of retire all or some of the older regional jets, particularly, and some of the ongoing retirement patents that were more akin to what was happening before 2018 sort of kicking in again, just slower retirements on a month-by-month basis of the MD80s. And as far as getting into sort of splitting out that margin guidance on specific drivers, I'm not going to get sort of held on specific targets on different areas. But purchasing is a big piece of our confidence and the opportunity there, together with the other areas of continuing to deploy the Meggitt Production System and some of the benefits that we're now guiding on NPI. I mean, we are very much through the big investment phase on new programs. And we're going to be managing towards a slightly lower band, the 5 to 7, which is still a pretty healthy level for a business like Meggitt, more in line with the long-run trend of the sort of investment we're making in technology. But hopefully, that gives you some flavor.

Any final questions? No? Thank you all very much. Thank you for coming. Thank you.