Melrose Industries Earnings Call Highlights Margin Momentum

Melrose Industries Plc ((GB:MRO)) has held its Q4 earnings call. Read on for the main highlights of the call.

Melrose Industries’ latest earnings call struck an upbeat tone, with management highlighting strong execution across its core aerospace businesses and a decisive turn into consistent cash generation. While supply chain friction, GTF-related cash drag and some site-level issues still weigh on near-term cash flow, management argued that margin gains, cash discipline and clear 2026 and 2029 targets leave the group well positioned.

Broad-Based Revenue Growth and Margin Expansion

Group revenue grew 8% on a like-for-like basis to about £3.8bn, powered by higher volumes and better mix in Engines and steady growth in Airframes. Operating profit jumped 23% to £647m, lifting the adjusted margin to 18%, up 240 basis points year-on-year, and earnings per share rose 25% to 32.1p, underscoring the earnings leverage embedded in the portfolio.

Cash Generation Turns Positive

Melrose delivered positive free cash flow after interest and tax of £125m, a roughly £200m improvement on the prior year and ahead of its commitment to exceed £100m. Management framed this as a key inflection on the path to its 2029 cash ambitions, even as working capital and programme timing continue to create lumpiness between halves.

Engines Division Powers Ahead

The Engines business continued to outperform, with revenue up 15% as original equipment sales grew 16% and aftermarket rose 14%. Operating profit surged 27% to £520m, driving a segment margin of 31.9%, supported by robust RSP and repair momentum, including around 20% RSP revenue growth and a 22% rise in variable consideration to £324m.

Airframes Progress Anchored by Defense

Airframes revenue increased 3% like-for-like, with strength in defense, which grew 15%, offsetting a 2% decline in civil due to supply chain constraints. Operating profit climbed 10% to £156m and margin improved to 8% from 7.2%, helped by contract wins such as the Anduril partnership and follow-on C-130J and Typhoon awards that enhance backlog visibility.

Transformation, Safety and Operational Gains

The company has largely completed its multiyear footprint rationalisation, cutting its site count from about 50 to around 30 while upgrading capabilities. Safety performance improved a further 32% in 2025, contributing to an approximately 80% reduction in accidents over three years, and better quality and productivity have underpinned the recent step-up in margins.

Capital Returns and Balance Sheet Discipline

Melrose proposed a final dividend of 4.8p, taking the full-year payout to 7.2p, up 20%, and announced a new £175m, 12-month share buyback to follow the existing £250m programme. In total, the group has returned more than £1bn to shareholders in three years, while maintaining net debt at £1.4bn and leverage at 1.8x EBITDA, comfortably within its 1.5–2x target range.

Strategic Technology and New Platforms

Management highlighted continued progress in additive fabrication, with a proprietary production approach now moving through industrialisation with several OEMs and explicitly embedded in the 2029 financial plans. Melrose is also gaining traction in military uncrewed systems, supported by awards and partnerships such as its work with Sweden’s defence procurement agency and Anduril, adding optionality for future growth.

Supply Chain, Tariffs and Operational Bottlenecks

Industry-wide supply chain strain continued to constrain civil OEM builds, weighing on Airframes civil volumes and limiting upside despite strong end-market demand. Management also warned that evolving tariff regimes, alongside a productivity shortfall at a Dutch site that has clipped division profitability by a mid to low single-digit percentage, could still disrupt the otherwise solid 2026 trajectory.

GTF and Powder Metal Issues Still Drag Cash

The GTF programme remains a cash headwind, with Melrose expecting net outflows to continue until inspections are completed in 2027, after which the programme should turn cash positive in 2028 at group level. The powder metal issue cost £68m of cash in 2025, with 2026 impact guided down to about £50m and total exposure still expected to stay within the previously indicated £200m envelope.

Working Capital, Factoring and Interest Costs

Receivable factoring rose to £396m as programme ramps and growth shifted cash receipts, while inventory was deliberately built to protect customer deliveries, temporarily trapping cash and leaving arrears above management’s comfort zone. Net financing costs were £132m and cash interest is guided around £130m in 2026, a meaningful drag that will persist while buybacks continue and cash generation remains back-weighted.

Forward Guidance Signals Confidence Despite Frictions

For 2026, Melrose guided revenue to £3.75–3.95bn, implying about 10% like-for-like growth at the midpoint, with operating profit of £700–750m and a margin around 19%, supported by Engines profit of £565–595m at roughly 33% margin and high single-digit growth in Airframes. Free cash flow after interest and tax is expected at £150–200m, net debt is set to remain within the 1.5–2x leverage range, and management reiterated bold 2029 targets of roughly £5bn revenue, margins above 24% and £600m of free cash flow, even as they flag ongoing supply chain, tariff and GTF-related cash headwinds.

Melrose’s earnings call painted a picture of a business that has largely completed its structural overhaul and is now converting operational progress into higher margins, rising earnings and growing shareholder distributions. While supply chain issues, GTF and working capital dynamics still cloud the near term, management’s detailed remediation plans and reaffirmed 2029 ambitions suggest further upside if execution stays on track and industry conditions do not materially deteriorate.