Senior PLC

LSE:SNR

Earnings Call Transcript 2021-Q4

[David Hamilton Squires]

Good morning. Morning, everybody. Welcome to Senior Plc's 2021 Full Year Results Presentation. And thanks, everybody, for making the effort to get here to the London Stock Exchange, and also a warm welcome, too, for those of you joining remotely. In terms of our agenda this morning, I'll briefly cover the highlights and set the scene for what we're going to be talking about today. Bindi will run through and comment on the results. And I will then focus on markets, strategy, and outlook.

While we've been monitoring the situation in Ukraine for some time now, it's too early to assess the macroeconomic impact of the human tragedy that has been unfolding in recent days; and, therefore, it'd be premature to comment authoritatively on how our markets and customers may be affected beyond the very limited direct exposure we have to customers and suppliers in Russia.

Firstly, just to confirm that Senior has no operations or people based in Russia or Ukraine. Last year, sales to Russian customers totaled only approximately £2 million, or 0.3% of group sales. And we purchased approximately £500,000 of titanium from Russian suppliers through customer-enabled contracts, and we've already taken steps to secure our raw material supply chains for 2022.

We will hope for the best, but be prepared to take whatever further actions and mitigations are necessary according to geopolitical and macroeconomic developments. In the meantime, it's essential to retain focus on delivery of our core strategy. This presentation provides that focus and our considered view of how our key markets will mature.

So turning to 2021, I'll quickly run through some of the highlights, which we will provide more detail on later. We consider our financial performance to be robust in the circumstances, with improved profitability and a strengthened balance sheet despite reduced revenue. And we're in great shape to take advantage of the recovery now underway. Part of that good result was as a consequence of delivering our restructuring savings ahead of plan.

We'd won some great new business in both Aerospace and Flexonics, building on our reputation as a reliable and innovative supplier. And in 2021, we made more good progress on our portfolio, successfully completing the strategic divestment of Senior Aerospace Connecticut; closing our Senior Aerospace Netherlands facility, having successfully transferred the product lines to our French businesses; and also closing our small Senior Flexonics oil and gas business in Malaysia.

We're expecting to see good progress in 2022 as we continue our multi-year recovery. Inside the company, as we start what should be a brighter year, I've been using NFL parlance, bearing in mind that 60% of our operations are in North America. So, I've been saying to employees over the past couple of years, we've played a stellar defense given all of the challenges we've faced, but now it's time to deploy our offense and get on the front foot. One thing we never compromise on is our approach to sustainability; and, in 2021, we extended our sector-leading progress and credentials.

Before we get into our financial results, I'll provide you with an update on our ESG achievements and progress. And I must say at the outset that many of you in this room and from our shareholder base have acknowledged our efforts and leadership in this area. That feedback is always appreciated and spurs us on to do even more. This year, we produced a beefed up sustainability report within our Annual Report, which has been published this morning on our website, and I'd encourage you to refer to that comprehensive update. But in the meantime, I'll give you a quick snapshot of some highlights.

Starting with our actions on climate change, you remember that we were the first company in our sector anywhere in the world to have our Scope 1, 2, and 3 greenhouse gas emission reduction targets approved and verified through the Science Based Targets initiative. And, indeed, we remain the only aerospace and defense company to achieve this. Although there are now more companies in the broader industrial space taking actions to establish what SBTi now calls Near Term Zero Targets.

In 2021, we achieved once more a leadership rating for our climate change disclosure; and, in recent weeks, we were delighted to announce that we were one of a very small number of companies to have achieve from CDP the highest leadership score for our supplier engagement rating. This is important, as almost all businesses have many times the amount of greenhouse gas emissions in their supply chain than their own operations. The CDP executive responsible for supplier engagement describes Senior as a trailblazer, driving the transition towards a sustainable net zero future.

On the social side, our big new initiative in 2021 was the launch of our global employee engagement survey. We did an excellent participation rate of 81% which, for a manufacturing company where many people do not have instant access to email, is a high level. We have now implemented improvement plans across our operating businesses based on the feedback and focusing on those areas that matter most are employees. And we plan to run the survey over 18 months, when the next one being in September this year.

We had some fantastic community engagement projects around the world in 2022, and you will see some case studies in our sustainability report. We donated £200,000 to UNICEF to fund COVID-19 vaccinations. The value of our contribution was equivalent of vaccinating all of our employees and their families.

By the end of 2021, UNICEF informed me that through this initiative, a staggering 652 million doses had been delivered to 144 countries around the world. And UNICEF's role in the fight against COVID-19 goes further than just delivering vaccines; they are ensuring vaccines can be safely transported and training health workers to help turn vaccines into vaccinations.

I was touched by a note I received from a UNICEF executive in December in which she said, and I quote, "I will always remember 2021 as a year that the private sector went above and beyond for UNICEF. And I'm so pleased to [ph] quote (00:06:51) Senior as one of the companies who stood with us as we took on this historic endeavor.

From a governance perspective, we refreshed and updated our code of conduct and delivered a personal copy to every employee in the appropriate language. And to accompany the training, we have ruled out, included amongst the other extensive governance, compliance and risk-based training, which we regularly provide. We provide training and education to all of our employees about the risks related to cybersecurity, which we consider to be one of the most sustained risks that requires managing in any organization. And in the Annual Report, you'll be able to read about the extensive work we're doing to ensure we're complying with TCFD requirements and recommendations.

Equally important from a sustainability perspective to the ESG activities in our internal operations is what we were doing to position the company and help our customers transition to a future low-carbon world. Those of you who were at our Capital Markets Day in October will have heard that our thermal management and fluid conveyance capabilities are very well suited to help tackle greenhouse gas emission reductions in some of the hardest to decarbonize sectors in which we operate; whether that'd be airspace, land vehicles, or power and energy.

And we have a long pedigree in helping our customers meet ever more stringent emissions regulations. And I can assure you that we're driving this very hard inside Senior to ensure we've got the right products available at the right time for each of our markets. There are some good examples of our expertise in action in the slide here, which I won't go through in detail just now, but I'll be happy to take questions on later.

So with that, I'll hand over to Bindi to take us through the financial results, after which I'll pick up on markets, strategy, and outlook to finish.

[Bindi Jayantilal Jivraj Foyle]

Thank you, David. Good morning. Senior delivered improved profitability, robust cash generation, and further strengthened the balance sheet in what was another challenging year for the business. We had a healthy book-to-bill ratio of 1.16, which underpins our confidence in future growth, and David will highlight some of the new contract wins in his presentation. The decisive actions taken by the group on managing costs have delivered significant benefits and improved profitability, even though group revenue decreased in the year.

Adjusted loss before tax was £1.9 million, an improvement of £4.3 million, despite not having eight months of contribution from our Connecticut operating business following its divestment. With the benefit from tax credits, we delivered a positive adjusted earnings per share of £0.017. We continue to manage working capital efficiently and generated robust free cash flow of £14 million.

This, together with the proceeds from the divestment of Connecticut, meant we reduced net debt, excluding leases, to £79.9 million at the end of 2021; a £50 million improvement from a year ago. The group's net debt to EBITDA ratio improved to 1.9 times, and the group's headroom on committed borrowing facilities increased to £208 million. With improved profitability and a strengthened balance sheet, return on capital employed increased by 50 basis points.

I will now summarize the key elements of the group's trading performance in 2021. This chart bridges revenue from £734 million in 2020 to £658.7 million in 2021. Excluding unfavorable currency impact of £36 million, revenue from the Aerospace division decreased by £59 million and Flexonics revenue grew by £20 million.

Excluding sales from Connecticut, which was divested in April 2021, Aerospace revenue on an organic basis declined by £33 million, down 7%. Civil aerospace revenue decreased by £44 million, down 15%, reflecting aircraft production rates remaining lower in 2021 compared to pre-pandemic levels. Defense revenue increased by £1 million as the F-35 Joint Strike Fighter production rate increase was partly offset by the timing gap between Lots 14 and 15 of the F-35 and lower military aftermarket sales in 2021.

A number of our Aerospace businesses supply product to broader industrial markets, and revenue from these markets increased by £10 million from growth in space and semiconductor equipment activity.

In Flexonics, revenue grew by 10% in the year. Revenue from land vehicle markets increased 39% as the market recovery in on- and off-highway vehicles, as well as passenger cars, continues. Sales to North American truck and off-highway market increased by £19.6 million, up 43%. Sales to other truck and off-highway regions, primarily Europe and India, increased by £7.6 million; and sales to passenger vehicle markets increased by £6.3 million.

As expected, revenue from power and energy markets decreased by 12% in the year, as customer demand continue to be impacted by the pandemic. Senior sales to oil and gas markets decreased by £11 million as a result of lower upstream activity and the closure of our small Malaysia oil and gas facility. On the downstream side, some maintenance projects continue to be deferred by customers.

The chart on this page bridges adjusted operating profit from £3.7 million in 2020 to £6.1 million in 2021. In Aerospace, adjusted operating profit increased by £2.4 million. Savings delivered from our restructuring and cost management actions more than offset the drop-through impact of the reduction in revenue. And, excluding a £4 million operating profit reduction from the divestment of Connecticut, on an organic basis, the adjusted operating margin increased by 140 basis points to 1.6%.

In Flexonics, the £2.4 million increase in adjusted operating profit reflected the drop-through impact of growth in revenue, coupled with additional savings from restructuring and benefits from pricing, which more than offset the inflationary impact of freight and commodity costs. While the impact of the pandemic and industry-wide supply chain constraints are still with us, we continue to manage these diligently. Overall, we delivered improved profitability in both divisions.

We are now an even leaner and a more efficient business. We delivered savings of £50 million in 2021, an increase of £14 million compared to 2020. A net P&L restructuring income of £4.4 million was recognized in the year. This included £4.2 million income from an Aerospace manufacturing grant. We also maximized opportunities to realize income from assets that had no alternative use, which more than offset other restructuring costs.

Since its inception in 2019, the cumulative cost of the program has been £46.7 million, £6 million lower than initially forecast. The cumulative cash outflow has been £19 million, £10 million lower than initially forecast. And we delivered savings of £4 million in 2019, £36 million in 2020, and £50 million in 2021 which was a year earlier than initially expected. Our restructuring program has been effective and delivered more benefits for less cost.

This shows the reconciliation of adjusted operating profit to the statutory reported profit. And it also highlights our interest in tax charges. Net finance costs decreased by £1.9 million to £8 million, mainly due to lower borrowing costs, including the repayment of a $20 million private placement note in October 2020. A tax credit of £2.6 million was recognized on the group's adjusted loss before tax of £1.9 million. The tax credit was higher as we benefited from enhanced R&D deductions and capital expenditure in the UK, as well as prior-year items.

Looking ahead to 2022, we currently expect the group's effective tax rate on adjusted profit before tax to be around 22%. In terms of reconciling adjusted profit to statutory reported profit, aside from restructuring which I've already covered, the other significant item excluded from the adjusted measures for 2021 is net income from corporate undertakings of £21.2 million. This comprises a gain of £24.2 million from the divestment of Connecticut, and costs of £3 million relating to bid defense and other corporate activities.

Now, on to cash; with our strong focus on cash generation, we delivered robust free cash flow of £14 million in 2021. Going into the second half of the year, we were anticipating an increase in working capital associated with inventory required to support increasing activity levels as demand increased. I am pleased to report that with the benefit from our relentless focus on working capital, from a cash flow perspective, an outflow of £2.6 million was seen in the year.

With demand recovery underway and some supply chain lead times increasing, we are planning some increase in working capital over the coming months; although we will continue to manage this diligently in line with our operational needs. Net capital expenditure of £21 million was 0.6 times depreciation, excluding IFRS 16. As previously advised, our operating businesses are already well-capitalized and prepared for growth. CapEx in 2022 is expected to be slightly below depreciation.

Payments for interest, tax, and pension contributions in excess of service costs totaled £18.4 million. After £3 million net cash outflows from restructuring and legal claims and £47 million net cash inflow from corporate undertakings, mostly the proceeds from the divestment of Connecticut, the group generated net cash inflow of £58 million in 2021.

We further strengthened the balance sheet during 2021 and, at December, the group had liquidity headroom of £208 million under its committed borrowing facilities, an improvement of £51 million from a year ago. Net debt before lease liabilities was £79.9 million at the end of 2021, and the group's net debt to EBITDA ratio improved to 1.9 times, comfortably within normal covenant limits.

In April, we refinanced the US revolving credit facility of $50 million and extended its maturity to June 2023. So at the end of 2021, Senior had committed facilities of £288 million with a weighted average maturity of three years. Senior has strong liquidity and stable finance arrangements.

In summary, Senior has once again delivered a robust cash performance despite the continued impact of the pandemic in some of our end markets in 2021. The decisive actions taken on managing costs have delivered significant benefits and improved profitability in both divisions. We further strengthened the balance sheet, and the group has strong liquidity and stable finance arrangements.

This, together with the group's intrinsically strong cash generation and our operating businesses already well-equipped with fit-for-purpose available capacity, means that we are prepared for growth. This gives us the confidence that as volumes increase, with our operating leverage, we will see strong profitable growth. We are on track to delivering minimum 13.5% ROCE over the medium-term.

Thank you. And I will now hand back to David to cover markets, strategy, and outlook.

[David Hamilton Squires]

Thank you, Bindi. So, let's turn our attention to markets. Aerospace in 2021 represented 66% of the group's revenues, and Flexonics was 34%. This is on a pro forma basis excluding Connecticut revenue from both years. Not surprisingly, the proportion of civil aerospace has decreased compared to 2021, while defense has remained the same. The recovery in land vehicle markets has meant that revenue in that sector has increased significantly as a proportion of group sales, despite the well-publicized supply chain problems which our customers encountered. While power and energy has decreased slightly as oil and gas markets remain subdued through much of the year.

One thing I did want to bring out is our relative exposure to widebody compared to single-aisle. Last year, widebody sales accounted for 24% of total civil aero sales, while smaller aircraft represented 76%. To set the scene for our aerospace and defense markets, I thought it would be useful to share our sales breakdown by platform. This chart shows the percentage of our aerospace sales for 2021 adjusted for the disposal of our Connecticut helicopter parts machining business. And, remember, this includes all sales to all customers that end up on a particular platform. So, for example, sales to Safran on the LEAP-1A engine would show up on the A320 segment.

As can be seen, the Airbus single-aisle program represents the largest percentage of sales by platform; followed by two defense platforms, F-35 at 7% and C-130 at 6%, and so forth. Even at the relatively low levels of production in 2021, the 737 MAX represented 5% of Aerospace sales. And so, you can imagine, as rates increase there in the coming months and years, that will be raising up the rankings.

The thing that surprises most observers, when I show them this chart, is the proportion of sales not attributable to any specific platform at 2% or higher. At 46% of our Aerospace division revenue, this is an important part of our business and will include sales on space platforms, aftermarket, and also sales which emanate from our Aerospace businesses whether for other industrial markets. A good example would be sales for semiconductor equipment and medical applications, and I'll come back to that theme later.

Global air traffic recovery in 2021 was evident, as travel restrictions eased. While travel on some long-haul international routes remains subdued, short-haul travel has improved significantly. IATA's most recent forecast is for domestic travel to reach 2019 levels by the end of this year, and international travel reaching 2019 levels by 2025. Production rates for single-aisle aircraft are already increasing and, as demand continues to recover, production of new aircraft will be supported by the replacement cycle driven by the retirement of older, less efficient aircraft.

Beyond this, the driver supporting air traffic growth over the long-term of around 4% per annum remain in place. With our diversified product portfolio and especially the attractive positions we hold across the newest generation of single-aisle aircraft platforms, we are well-positioned to benefit from this recovery.

Production rates for single aisle aircraft started to increase in 2021, and both Airbus and Boeing have recently confirmed plans for further increases. On the A320 family, Airbus reached a production rate of 45 in 2021, and have said that their ramp-up is on a trajectory to achieve a monthly rate of 65 by summer 2023. Airbus is still assessing with suppliers rates beyond 65. Similarly, Boeing stated on a recent earnings call that the 737 MAX program is now producing at a rate of approximately 26 per month, and they reaffirmed their expectation of an increase to 31 per month in early 2022. And then, they're evaluating the timing of further rate increases.

As I mentioned, recovery in the long-haul international travel sector, which typically uses widebody aircraft, is expected to take longer than domestic and other short-haul routes. Airbus have stated that they expect to increase production of the A350 family from an average production rate of five per month to around six per month by early 2023. For the A330 family, production will increase from two per month to almost three per month at the end of 2022.

Boeing continues to address the issues on the 787 platform, and production remains at a very low rate in the meantime. Once deliveries resume, they expect a gradual return to five per month over time. And production of the 767 will continue at the rate of three per month, and Boeing have said that the 777 and the 777X combined production rate will increase from two to three per month, with the first delivery of the 777X anticipated in late 2023.

Overall, our focus for defense is very much on the US market, where defense spending is almost as high as the next 12 countries combined, and series production volumes reach meaningful levels for sustained periods which, in due course, will also generate good aftermarket sales for our fluid conveyance products. We see stable spending for US Defense as there is broad bipartisan support in the US Senate for around $770 billion in fiscal year 2022 once Congress gets past the broader federal budget continuing resolution.

Long established programs such as C-130 and P-8 remain important revenues for Senior, but of course F-35 is the largest defense program that we are on. You'll have seen in the pie chart I showed a few moments ago that F-35 is currently the second highest revenue aerospace and defense platform for us after the A320. We have several operating businesses supplying to various customers on this program, so we're encouraged to see Lockheed Martin expected to increase production over the next two years.

And then there are newer growth programs that will become important for us. For example, our high pressure ducting products around the Boeing-Saab T-7A Red Hawk platform, which is the new US Air Force trainer jet and which will ramp up in production over the coming years. We would expect this platform to be successful internationally in addition to the US volumes.

Sales of the types of products we make in our Aerospace operating businesses into end markets outside of civil aerospace and defense markets are classified under Other Aerospace and include sales into the space, semiconductor equipment, and medical markets. At 11% of group sales, this is an increasingly meaningful part of our business.

And a good example of what's in this category is our growing sales to Lam Research, a semiconductor equipment manufacturer. The semiconductor end market is currently experiencing high levels of demand from the strong business in consumer electronics sector as a result of pandemic-related consumer and work from home trends. And it's further strengthened by recovering industrial markets such as automotive.

Given the well-publicized chip shortages affecting various industries, we would expect investment in semiconductor manufacturing capacity to increase in coming years. Our highly engineered proprietary products use our world-class bellows technology to provide excellent solutions for semiconductor manufacturing equipment. Other sales in this category include custom-designed medical products and structural assemblies for space satellites, which are built in Senior Aerospace AMT in the Seattle area.

Turning now to Flexonics; we will firstly look at land vehicles, which covers truck, off-highway, and passenger vehicles. For this market, we sell a range of proprietary products to major OEMs, in particular, our exhaust gas recirculation coolers, or EGR coolers as they're commonly known, which protect the environment by reducing emissions. We saw strong growth in 2021 in North America and Europe in the heavy-duty truck and off-highway sectors despite the supply chain issues affecting our customers. We should see further growth this year.

Our passenger vehicle customers were heavily affected by the global semiconductor shortage. Customer demand remains high. And so, as these shortages gradually ease, we should see the market growing this year. Our EGR cooler expertise means that we are well-positioned for other applications which need innovative thermal management and fluid conveyance solutions, notably battery cooling for electric vehicles and I'll talk about that later when we come to the strategy section.

Our other most important Flexonics market is power and energy. We previously said that given improving economies and the sustained recovery in crude oil prices, we were confident that the inflection point for upstream oil and gas would be the end of 2021 with a return to growth in 2022. And, indeed, that is what we have been experiencing. However, it is too early to assess what impact the situation in Ukraine may have at this stage, so we will need to monitor that carefully. In the medium term, we are well positioned to grow our non-fossil fuel businesses building on our existing renewables and nuclear energy customer base; and, again, I'll come back to that in the strategy slides.

Many of you would have been in our Capital Markets Day last October where we spoke in depth about our strategy and technology, so this is a quick refresher. We highlighted two key technology themes, one was fluid conveyance and thermal management, which in 2021 represented two-thirds of group revenue, and which we'll come back to; with the other being structures.

Our strategy for our structures business is straightforward and we've been making good progress on it. We have a well-equipped global footprint, including excellent manufacturing facilities in Southeast Asia, as well as North America, and the UK. Our focus is on filling our existing capacity with work that meets our returns criteria. That will come from the civil aerospace recovery, growing market share, and some more diversification into space and defense.

Our momentum is building. In addition to production rates starting to ramp up again in single-aisle programs, our businesses in the Seattle area have secured new contracts from Boeing increasing our share on 767, 737, and 777. I was there in January and it was good to see activity levels picking up again after two lean years.

We're also winning new work for low orbit satellites. Those of you familiar with these projects will be aware that we're talking about many thousands of satellites, so although early days, production volumes could be significant. And we've secured new defense for our US aerostructures business with other opportunities for additional business beyond these initial contracts. Our customers are placing business with Senior because of our operational reliability, responsiveness, and financial stability.

On this slide, you can see some of the highly engineered fluid conveyance and thermal management products that we supply into a range of diverse and attractive end markets, including medical, semiconductor equipment, defense, industrial, and of course commercial aerospace. It's these sorts of applications where we concentrate our product development activities.

This model of providing innovative products using proprietary technology, servicing diverse and attractive end markets, is a fundamental element of Senior's go-forward strategy. And this core capability continues to be highly relevant as we transition towards a low-carbon economy.

We continue to invest in new technology and product design and development in the areas of fluid conveyance, thermal management, and additive manufacturing in support of our key markets in aerospace, land vehicles, and power and energy as they transition towards a low-carbon economy. In aerospace, our traditional fluid conveyance products are entirely compatible with sustainable aviation fuels currently under evaluation by our customers.

Our additive manufacturing capabilities are enabling advances in complex product design for improved performance and weight reduction for the benefit of our customers. And our world-class capability in thermal management and fluid conveyance opens up opportunities to support electric and hybrid air vehicle applications.

And we're leveraging and building upon our long experience of providing hydrogen fluid handling and distribution products for industrial markets to support development of both on-aircraft and off-aircraft hydrogen technologies, as this alternative propulsion system evolves. In land vehicles, our current exhaust gas recirculation and waste heat recovery products continue to support evolving land vehicle powertrain systems as they become more efficient and lower their impact on environment.

To focus on product offerings for the transition to low-carbon economy, we're engaged with our customers' new product development programs by providing design and engineering support for cooling and fluid handling solutions for batteries and electronics on the growing number of electric and hybrid vehicles. We're supporting the development of commercial vehicle hydrogen fuel cell cooling and conveyance, but capitalizing on years of experience of producing hydrogen fuel cell products in the energy sector.

In power and energy, we continue to develop an established wide range of fluid conveyance and thermal management products, many of which, such as our expansion joints, use our world-leading bellows technology. Our products are ideally suited for harsh environments such as – and green energy generation, including solar farms, wind power, hydroelectric, geothermal fuel cell, and nuclear power applications. Our many years' experience of providing fluid conveyance products for harsh environments, and specifically hydrogen fuel cell cooling and conveyance, opens up opportunities in hydrogen production and infrastructure applications.

So, hopefully, as you can see, our capabilities and technology will remain highly relevant as we transition over coming years and decades to a net zero environment. In addition to our technology and product development activities, our central plank of our strategy is portfolio optimization. The group continuously reviews its overall portfolio of operating businesses and evaluates them in terms of their strategic fit within the group.

We've continued our prune to grow strategy by divesting, closing, or combining noncore or performance-challenged assets. In 2021, we closed our small Flexonics oil and gas business in Malaysia, and we also completed the closure of our Aerospace business in the Netherlands having successfully transferred the product lines to our very capable French Aerospace businesses.

In April, we completed the divestment of our Senior Aerospace Connecticut business. You'll recall that Connecticut was the only operating business in Senior whose primary focus was build-to-print parts for the rotary sector. The divestiture was very much in line with our strategy, and the net proceeds further strengthened Senior's balance sheet.

I've already shown some of the great contract wins we've secured for our aerostructures business and, as their core market recovers, as we've said before, that provides the group with strategic optionality. We're keen to expand our fluid conveyance and thermal management businesses. As I've shown, there's much what we're doing organically and, as our balance sheet strengthens, we will be able to consider value-enhancing M&A activity. Our acquisition heatmap, which many of you will be familiar with, highlights the focus of our attention. And as you know, we will only pursue targets that meet our minimum return on capital criteria.

Before I finish with some comments on outlook, I thought it'd be worthwhile setting out our priorities for this year. We're confident that we've turned the corner, and we will see growth this year. We're taking all the necessary steps to ensure that we meet our customers' increased production rates. In turn, that will require diligent management of the global supply chain constraints and inflationary pressures. Through good preparedness and operational execution, we've managed this well so far, and we intend to keep it that way.

Actively managing the portfolio will continue to get our focus and attention as we expand our fluid conveyance and thermal management capabilities in line with our stated purpose and strategy. While the board felt the right decision was not to pay a final dividend for 2021, we are keen to reinstate dividend payments and currently expect to do that in 2022. And finally, there will be no letting up in our sustainability actions where we have clear goals that are independently verified, and we aim to maintain our sector-leading performance.

So let me finish by talking about the outlook for Senior. Over the past two years, we have demonstrated our resilience through the pandemic and have taken action to ensure our business is lean and fit. That resilience is standing us in good stead and leaves us well positioned, know that recovery is underway in our core markets. The board anticipates good progress in 2022, in line with previous expectations, as we continue the multi-year recovery back to pre-COVID levels of performance.

We remain committed to delivering a strong recovery across our two divisions, driving group return on capital employed to a minimum of 13.5%. With sector-leading sustainability credentials, a clear strategy, and strong capabilities with a global footprint, we are well-positioned to capture growth opportunities and deliver enhanced value for our stakeholders.

So with that, we'll open the floor for any questions which Bindi and I will be delighted to answer.

[Andrew Douglas, Analyst, Jefferies International Ltd.]

Good morning, guys. It's Andrew Douglas from Jefferies. Three questions, please, the usual three. Can you talk about the ability for you guys to add head count to the business going forward? Clearly, you've got lots of spare capacity. So, volume growth will come through nicely. Just in terms of your ability to kind of rehire some of the people that you let go over the last couple of years and how confident you are on that front?

Secondly, on the Senior operating system, clearly you did a good job on the supply chains. Can you just talk about kind of where you are there, kind of progress that you've made, and maybe elements that we can kind of kick on in here? And then last, but not least, on the M&A pipeline, can you give us a feel for how that's shaping up, and whether the areas of interest that you guys are focusing on over the last – pick a period – six to nine months, whether that's changed at all and how you're thinking about M&A in the future? Thank you.

[David Hamilton Squires]

Okay. So, firstly – thank you, Andy. Firstly, on head count, yeah, we're hiring again, which is the good news after the last couple of years. And I wouldn't say it's easy, but actually Senior has done pretty well. One example when I was at our AMT business in Seattle, there's a lot of big structures work for Boeing. They've rehired 84 people this year. Rehired. So, these are people who've come back to Senior. They've gone out to smaller machine shops, and they were delighted to come back and join Senior team, [ph] where Senior (00:42:17) is a good employer. So across the world, really, we are now hiring people.

There are some pinch points, but we've been managing that pretty well. With a bit of absenteeism as well with the Omicron variant at the start of the year, we're through that now. So, actually been there. We're quite encouraged when we delivered [indiscernible] (00:42:33) business reviews a few weeks ago to hear that the numbers talked about – in terms of hiring are manageable. Chicago was one of the areas that was difficult. That's now improved.

Once you get beyond North America and the UK, we're fine in Thailand, Malaysia, India, China, South Africa, Czech Republic, Germany, France, these are all okay. And so, I think we're probably doing as well as [ph] MD (00:43:00) in terms of hiring. We don't see a fundamental issue in hiring people to meet the rates increase.

Senior operating system, thank you for that question. It's easy to forget, but we launched that back in 2015-2016 just after I joined. And this is really about lean manufacturing. And one of the reasons we've been able to deliver the benefits in our sort of restructuring plan and continue generating cash even though sales have gone backward is because of the Senior operating system has got fantastic disciplines on inventory management, removing waste.

But it's more than just a manufacturing system. We've added an APQP module now which is the automotive standard for new product introduction, which we now apply to Aerospace businesses as well as automotive. It's the best-in-class. And we keep on finding other modules that we think are going to be very relevant and helpful to our business operations. So, it's a big part of what we've done and going to be really important as we move forward and the rates increase to make sure that we can deliver that drop-through margin that Bindi has been talking about.

And maybe I think your third was on M&A pipeline. Yeah, we've never stopped looking at this in our strategy. Obviously, we wanted to have the balance sheet in a much better place before we can then start making acquisitions. But we've done quite a lot of the work in the background. We monitor our targets. They're very much around the fluid conveyance, thermal management space. And we'd look at things that are relevant now and also relevant as technology changes.

And there's some good opportunities. Some of those may be more executable than others. And we really do run it through a pretty stringent set of criteria before we consider our marking point. But we do see value-enhancing bolt-on M&A as a supplementary to organic growth and helping our overall returns for our stakeholders.

[Christopher Leonard, Analyst, Credit Suisse Securities (Europe) Ltd.]

Hi there. Chris Leonard from Credit Suisse. Thanks for taking two questions, if I could. Looking first at aerostructures and the good orders you received there in 2021, when do you think you'll start to consider the potential for a strategic disposal here, and is there any sort of timeline of when we can see first that? And equally given that it's 33% of group revenue currently, should we expect that to stay stable or would Aerospace build rates increasing for narrow-bodies to pull that that mix slightly higher for the structures element in the business?

And then second question, if you could maybe give us a view on the capacity utilization for Aerospace at the moment in the group, if there's any broad figure you could give. And going forward, is there anything that you can see as a key bottleneck for the Aerospace build rates that could come and hurt you guys or the sector more generally? Thanks.

[David Hamilton Squires]

Okay. So, I'll address first and maybe Bindi you could talk about capacity. Just give me a break. So, I think in the aerostructures, look, structure, we laid out for a couple years now has been about filling our existing capacity. These are tremendous businesses that have been badly affected by the downturn in civil aerospace, which is its biggest end market. So, it's been good to have a bit of diversification in there.

The momentum in the aerospace, the big flash machines at the bottom, the new [indiscernible] (00:46:20) that we bought before the pandemic, they're producing very large parts for satellites. So, that's been good. So, I think that gives us some optionality moving forward. If you just look at the recovery rates in the Aerospace, there's some recovery this year. And of course, Airbus said it can be at rate 65 by next year. So, we'd really want to see sales and profits picking up, but we'll – and the board considers that on an ongoing basis.

I think on the rates increase, yes, it's true, the aerostructures should increase sales fairly rapidly over the next two years, particularly as single-aisle rates go back. You saw on the pie chart there the biggest platforms where they've got lot on the MAX, they've got a lot on the A320. But, we've a got lot in the fluid systems side as well in those aircrafts. So, it doesn't just apply to structures, our commercial aerospace business on the fluid side will also increase. We've got some great products on single-aisle and business jets and regional and widebody. And so, it's good for both, those increase in rates.

Do you want to comment on capacity?

[Bindi Jayantilal Jivraj Foyle]

On the capacity, we're already capacitized for the high-60s single-aisle growth rate. So, pre-pandemic, we were almost at rate 63 in some cases. So, we're well capacitized without needing much further investment to get to those rates. Beyond that, it's more about adding additional machine capacity, but not from a facility point of view. We have all of the facility capacity already. So, over the next two years, we will still expect to see CapEx at a sort of a – I mean, in 2022, CapEx is going to be lower than depreciation. Thereafter, it will come back towards depreciation, but still seeing good cash flow generation through those years as the growth comes.

[David Hamilton Squires]

Any more questions? There's a mic right there.

[Harry Philips, Analyst, Peel Hunt LLP]

It's Harry Philips at Peel Hunt.

[David Hamilton Squires]

Hi, Harry.

[Harry Philips, Analyst, Peel Hunt LLP]

Just a couple of questions, please. Just curious as to how you're finding – on the truck side, how you're finding your customer inventories. Are you sort of having to run excess – well, not excess – additional inventory to sort of keep you operating as a buffer, if you like; or are they taking inventory off of you and, therefore, any pull-forward in production rates sort of has a lag coming back onto yourselves?

And then, secondly, and I should know the answer to this, but your sort of aftermarket content within Aerospace just, obviously, is a part of that 46% as you suggested, but would it justify a little sort of segment in its own right?

[David Hamilton Squires]

Unfortunately not yet. On the aftermarket one, it's a very small percentage of our sales. But it's good, of course, from margin perspective and we've got reasonable aftermarket in the defense side for example, as well as some of the commercial aerospace and it's pretty much all in our fluid systems. We don't really have aftermarket in structures. That's, kind of, fit and forget. But, no, it's very small to do.

On the heavy-duty truck side, well, I mean, we're delivering constantly to the likes of Cummins and Daimler, sometimes several trucks a week. So, it is very much straight into the production side. So, there's not a lot of buffering going on there, taking everything that they can get, frankly. But they're more constrained by other supply chain factors and semiconductor shortages. Less so than the pasture vehicle guys on the truck side, but nonetheless, it has affected them.

So, yeah, we're looking forward to another year of growth this year. I think we have put the growth levels in there that ACT have published. And we did of – there were some issues around stainless steel supply last year. We've largely got through that now. And so, we're in good shape to support those, sort of, growing sales this year from our key customers in that area.

[Harry Philips, Analyst, Peel Hunt LLP]

And just one final supplementary, just in the context of the trucks, and obviously you had the Cummins/Meritor deal last week. I mean, does that, sort of, consolidation cause you any issues, or not so much issues now but in the medium-term, as they clearly look to take, sort of, cost out of their broader supply chains and what have you?

[David Hamilton Squires]

Yeah, I think we're there to help them. So, obviously, these things are an opportunity rather than a risk. And they've been a tremendous customer for many years and in many parts of the world. We supply to them all over the world. And they're spending a lot of money on electrification as well. So, they're very helpful in terms of not just our existing sales, but as we look to the future and that transition into low-carbon. They're doing some really impressive stuff and we are working with them on that. So, we are very happy with that.

Hi, Dom.

[Dominic Convey, Analyst, Numis Securities Ltd.]

Hi, there. Dom Convey from Numis. Just two questions if I may. How should we think about your revenue trajectory in the narrow-body arena? Do you think that additional content wins you should therefore outpace the expected ramp in production, or will we perhaps see a little bit given back on price? And secondly, just in terms of this medium-term aspiration for the 13.5% ROCE, do you effectively get there with a recovery back to 2019 volume levels? I just want to understand really to what extent this is just purely good drop-through on increased volumes now rather than more corporate activity.

[David Hamilton Squires]

Yeah. Do you want to take the second one first, but we've put the building blocks in the appendix this time round, so.

[Bindi Jayantilal Jivraj Foyle]

Yeah. So, in terms of ROCE, essentially it is about making sure that one building block is the end market recovery demand coming through with the drop-through levels that we've talked about previously. So, the benefits of the restructuring helping. So, we should see improved profitability not just from – not just the demand aspect of it. Then we'll get, from a cash flow perspective, I said we're capacitized for the growth and continue to be very efficient on working capital as well. So, that means that your capital employed doesn't increase as much to get to ROCE as well.

The strategic focus on thermal management and fluid conveyance, again, making sure that we're at that sort of premium level in terms of profitability for the group, but also portfolio optimization on that. So, continuing to prune to grow making sure that we're getting best out of all the assets we have within the group. So, it's a combination. Clearly, the biggest element of that is the demand recovery, together with improved profitability from being a leaner, more efficient business.

[Dominic Convey, Analyst, Numis Securities Ltd.]

Is the 2019 revenue run rate a simple way to think about that, or would that be wildly off?

[David Hamilton Squires]

I think if you think about wide-body, widebody is some way out. I think A350 was at, what, 10 a month; and Boeing just moved the 787 to 14 a month. And neither of them were talking about getting back to those levels for a long time. So, I think we need to think about that. So, that's why everything else we're doing is really important as well. The costs that were taken out of the business, too.

So most of that growth is really going to come from single-aisle. Some of it will come from widebody. And to your point, some of it will come from the new wins that we've had. So that undoubtedly helps. The contract we announced back in, I think, it was January [indiscernible] (00:54:16), wasn't it – had 737 work on the court assemblies and then had – which we're doing [indiscernible] (00:54:23) the Seattle area had 777 work and then 767 work.

Strangely, we were probably most excited by the 767 because you might think, well, that's no platform. But if you think about it, freighters and also the tanker program, it's going to go on for a very long time. And we got a lot of parts doing on the floor beams on that platform. So, that's really good value for us and very steady revenue. So, that's all brand new. So by definition, it helps us achieve higher sales than we'd have had on that platform previously. So, yeah, a bit of help from market share. The biggest increase is going to be from recovery in markets, though.

[Andrew Douglas, Analyst, Jefferies International Ltd.]

Just two follow-up questions. Can you give us a feel for the marketplace in which you're operating from a, kind of, market share contract win perspective? We've had a number this year, Honda, 737, 767,777, all the sevens. Is there still a lot long opportunity or a long tail of potential contract wins? You talked previously about space and defense as well as civil, or are we kind of – has that kind run its course now?

And then secondly, just on energy costs. I don't believe that you're kind of hugely a energy cost-intensive business, but kind of just double check in terms of what you do in terms of hedging for energy costs and all that kind of good stuff, given what's going on in Russia? Thank you.

[David Hamilton Squires]

Yeah. I know that Launie and Mike, the two guys that run the divisions that were out at the Capital Markets Day, they really got their business development teams been driven very hard get out and speak to customers now that we can get in front on again because that's not been easy. And that's both on current products but also on the newer technologies. Sometimes different customers that you have to talk to within the same companies or [ph] good that we didn't get the BT (00:56:07) activity going face to face.

We're still bidding lots of stuff. Some of that Boeing were picked up because suppliers were in difficulty. There perhaps less of suppliers and difficulty than I thought there might have been at one point. There's been lot support for them to the crisis, but nonetheless there are still number of suppliers in the ecosystem that are under difficulty. So that represents more opportunities for us with our stability.

And then I think on the on the fluid systems side, because we've got some pretty innovative technologies, that's still attracting attention, maybe slightly slower but some very good prospects there. And I'm equally upbeat actually about the industrial side, whether that's our Aerospace business or our Flexonics businesses. Things like semiconductor equipment market is great. We keep winning more business there, and the space work I already mentioned.

So, I think these smaller and newer markets for us represents some very good growth opportunities using just the same technology we've been using in the Aerospace for a long time. So, yeah, I'm upbeat about the development. If you look at that report, I go to the board every month that we summarize all the [indiscernible] (00:57:17) activity, there's a lot of stuff going on as in – I'll tell you.

[Bindi Jayantilal Jivraj Foyle]

And at energy costs, so we've managed that diligently, and a lot of our energy contracts have been fixed already. So, there's a few that need renewing towards the end of the year. But most of our costs and pricing has already been fixed. And equally, we make sure that where there are higher costs, as we've done in 2021, we have active dialogue with our customers. Some are contractual automatic pass-through, some we have dialogue and sort of you look at the strategic sort of win-win for both us and our customers. And there will be areas where contractually maybe there were price-downs, but we've actually kept prices stable. But when you look at our outlook and guidance for 2022, we've left that unchanged. We don't expect consensus to change. That takes into account [ph] all of you (00:58:11) and diligence on managing those costs over the coming year.

[Christopher Leonard, Analyst, Credit Suisse Securities (Europe) Ltd.]

Thanks, guys. So, ask one more follow-up following on for the energy costs, I suppose, but for Flexonics, should we be seeing that higher oil prices be a catalyst for further orders coming through hopefully in the future? And we know there's that gestation period for Pathway, but maybe on the downstream side, are we going to see a bit more momentum following the Capital Markets Day? We spoke to the good work there alongside maybe a comment on nuclear as well for the small modular stuff that's going on there as well, that would be really helpful. Thank you.

[David Hamilton Squires]

Yeah. Good question, Chris. And I'll say that events currently underway may affect this to some extent, but we were confident seeing the inflection point in upstream at the end of last year, and that happened. So we are seeing higher input now from customers like Schlumberger. So as oil prices increase, you tend to think it would be more exploration drilling, more production drilling, which is generally a good thing for upstream oil and gas. We will see.

Downstream, there's a bit of a lag there usually. So, the refining side usually takes a while to catch up. And that certainly was affected during the pandemic. The demand for fossil fuels peak around 2030. You might recall from our Capital Markets Day. So we've got this big drive to less impactful technologies now on the environment. But we do see global demand for fossil fuels increasing up to around 2030, and then it starts to tail off. So, this is still important. So we are putting a lot of work into renewable energy as well.

The small modular reactors is a good example. I think we've shown some of the things that we're doing with regard to that. We're talking to two North American suppliers on small modular reactors, looking at the big piping systems that we do in pathway in Texas and bringing our bellows and design expertise to bear on that. So, yes, that could be one of the growth opportunities for us. And we'd love to do more of our solar products as well. We've got some very innovative products we supply to solar companies using, again, our bellows technology.

So we think both traditional fossil fuel for a few years will be fine, but very quickly, because we all want to transition to lower CO2 emission technologies, we're well placed for that. I mean, today, if you look at Pathway, which is one of the big businesses that supply some downstream, actually much more of the business is not petrochem; it's much more other things.

[David Hamilton Squires]

Any more questions? Okay. Listen, thanks, everybody, for coming along this morning. I just really appreciate that we can see you all back and I see you face-to-face. If you've got any follow-up questions, please don't hesitate to contact Gulshen, Bindi, myself. We'll be very pleased to help. Thank you.

[Bindi Jayantilal Jivraj Foyle]

Thank you.