Senior plc (SNR) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Senior plc's 2020 Full Year Results Presentation. Hopefully, it won't be too long before we can once again host you at the London Stock Exchange. But in the meantime, I trust that the webcast will be an effective alternative, and we do appreciate you making the effort to join. Bindi and I are in our head office in Rickmansworth; and our Chairman, Ian King, is joining in from home. Jennifer Ramsey, our Director of Investor Relations, is also participating and will be curating the Q&A session at the end of the presentation. In terms of our agenda this morning, I will briefly cover the highlights and talk about our response to the extraordinary conditions that we've all been facing for the past year. Bindi will run through and comment on the results, and I will then focus on markets, strategy and outlook. It goes without saying that the coronavirus pandemic has had a profound impact on our markets, our customers and, therefore, our company. All of our personal and business lives have been turned upside down over the past year, and the effects will be felt for years to come. Perhaps because we have a joint venture in Wuhan, in Senior, we very quickly realized the personal and business threat that this coronavirus carried. We stealed ourselves for what was to come and quickly worked out what our priorities needed to be, determined to ride out the storm and navigate our way to calmer waters for the benefit of all our stakeholders. For the past year, we've been dealing with urgent issues almost every hour of every day. But we've also been mindful to keep focused on what is truly important for the long-term success of our business and our stakeholders. Bindi and I look forward to explaining today and in discussions to follow what we have done and continue to do to keep the business healthy and trying to take advantage of the recovery to follow. In a moment, I will explain more about the measures we've taken to mitigate and contain the impact of COVID-19. Suffice to say that we remained operational at all 30 of our sites, in the 4 continents and 13 countries in which we are located, and the best-in-class health and safety practices, which we have in place have helped ensure that none of our employees have been seriously ill. To the chaos of the pandemic, there have been some bright spots. We delivered strong free cash flow of GBP 46.5 million, with healthy liquidity, demonstrating the resilience of our business, even in the most demanding of circumstances. Bindi will explain how we were able to achieve that excellent result. Our restructuring program is on track and delivering the target savings with further benefits to be delivered this year. The 737 MAX has been recertified and returned to service in many regions around the world, and we can now look forward to production ramping back up on that important program in the years ahead. Strategic progress continued on our portfolio, and we announced the divestment last Friday of Senior Aerospace Connecticut. I will cover more on this later. ESG remains a very high priority for Senior, and we've not allowed the pandemic to distract us from our progress on this front. We continue to lead the industry in our sustainability commitments under the first company in our sector anywhere in the world to have our greenhouse gas emissions reductions targets approved by the science-based targets initiative. I will talk more about this in a moment. We've been able to effectively contain the direct effects of COVID-19 on our operations. Health and safety is always the first priority in Senior. It is deeply embedded in our culture. And those of you who have visited any of our sites will know this to be the case. So our call-to-action in the face of the impending threat from COVID-19 was quickly, calmly and effectively answered. We set up a coronavirus oversight committee, which I chair, meeting daily with an emphasis on rapid decision-making, the focus being on employee health and welfare and business continuity, which has allowed unwavering support to customers, suppliers and other stakeholders. Like a number of businesses in our sector, we stepped up to support health care providers. We have supplied parts for ventilators for many years. So of course, those were in demand, but we also used our know-how and capability to design and make hundreds of thousands of items of PPE kit for hospitals, care homes, medical practices and numerous small businesses who were all facing severe shortages of vital predictive equipment. We took decisive action on business sustainability and continuity by extending and broadening our restructuring program. And as I already mentioned, this is on track and delivering the expected benefits. Those of you who have followed us for some time will know that ESG is at the very heart of our decision-making and has been since I joined the company almost 5 years ago. In Senior, we put safety and ethics first in our Board meetings, executive meetings and business reviews. Our regular all employee briefs always start with the dialogue on safety and integrity. Values, which are at the very core of the company. This has stood us in good stead as we have tackled the COVID-19 crisis head-on. In Senior, we have a real focus on behavioral safety as we know that most incidents are caused by unsafe actions as opposed to unsafe conditions. And when the pandemic hit, we worked with the call center to add the coronavirus module to our essential behavior safety program. We have a strong commitment to the high standards of ethics across the company. This is enshrined in our code of conduct that every person in the company from Chairman to shop floor has practical training on a regular basis. In our 2020 code of conduct training, we incorporated the module on cybersecurity, which is especially precedent given the number of employees we have had working from home. We've also added a module on unconscious bias to support our commitment to diversity and inclusivity. On that front, Senior continues to be an active participant in the Hampton-Alexander Review and 30% Club, both of which focus on gender diversity on boards and senior leadership teams. Currently, women represent 43% of our Board Membership and 38% of our Executive Committee. More recently, the 30% Club set new 2023 targets for ethnic diversity in Senior teams, which our Board and Executive Committee already meet. But we're not being complacent. Greater diversity remains a strong focus for us in our succession planning. In terms of our commitment to the environment, hopefully, you will all see that we are demonstrating through our actions, not just words, how important this is to our Board and indeed to all of our employees. Senior is committed to supporting the Paris Agreement on climate change. In March this year, for the second year running, we announced that we've been awarded a leadership rating of A- from the globally recognized CDP, still the only U.K. company in our sector to achieve a leadership rating. Last July, Senior became the first company worldwide in the Aerospace and Defense sector to have its scope 1, 2 and 3 greenhouse gas emissions targets independently verified and approved by the science-based target initiative. The SBTi defines and promotes best practice in science-based target setting and independently assesses company's targets. Our verified targets from our operations are consistent with reductions required to limit climate warning to 1.5 degrees C, the most ambitious goal of the Paris Agreement and in line with the ambition to achieve net zero. Our products directly contribute to a cleaner environment. For years, we have pioneered the development of products for exhaust systems that prevent toxins being released to atmosphere. We supply numerous parts in renewable energy applications, and we are rapidly developing thermal management solutions for stationary power applications and electric land vehicles as the world accelerated to move from the internal combustion engine to zero-emissions products. I'll talk more about the strategic importance of electrification later in the presentation. Before I hand over to Bindi, I'll quickly set the scene by talking about the disruption that the pandemic has had in our end markets. I'll deal with the easy one first. Defense markets have remained robust. Our exposure is dominated by the U.S. market, which has seen growth. And you will see later that has helped us report increased sales in that sector. Aviation and therefore, Civil Aerospace are a different matter with massive reductions in air traffic as a consequence of government lockdowns and movement restrictions. I'll talk more about this, but suffice to say, the recovery will take a number of years and the specific shift is probably dependent on a variety of factors, especially how quickly vaccines are deployed across the globe. Land vehicle markets, whether that be commercial vehicles or passthrough vehicles slumped in 2020, but we do anticipate that recovering this year, especially in our important heavy-duty truck sector. And given the 2 charts at the top, it is not surprising to see the one on the bottom right. Oil and gas products consumption has plummeted as air and land travel greatly reduced. We expect it will be 2024 before we see meaningful recovery in upstream oil and gas activity. This severe disruption directly influence the way in which we ran the business last year. And that seems an appropriate point to hand over to Bindi to take us through the financial results, after which I will pick up on markets, strategy and outlook to finish.

Thank you, David. Good morning, everyone. It's fundamental when you face such external challenges and impacts on your end market and indeed the very way you work, the emphasis is focused on liquidity and cash flow. It is reassuring that in these circumstances, Senior has delivered a strong cash performance in 2020. I'll cover the other metrics later, but let's start with cash. Throughout this period, as always, we are focused on generating free cash flow and responded promptly to counteract the effects of the pandemic on the business. As a result of strong controls in our operating and capital expenditure as well as reductions in working capital, we delivered strong free cash flow of GBP 46.5 million. After cash outflows primarily for restructuring, legal claims and disposal activities and after accounting for currency and lease movements, net debt including capitalized leases, was GBP 205.9 million at the end of December 2020, a GBP 24 million improvement from a year ago. Liquidity headroom on committed borrowing facilities was GBP 157 million at 31st December 2020, and the group's net debt-to-EBITDA ratio was 2.8x, which was comfortably within covenant limits and even within our pre relaxed covenants. As you would expect, in these circumstances, revenue, profit, earnings per share and return on capital employed all declined in the period. I should cover the impact on revenue and profit at a divisional level in the next slide. We recognize the importance of the dividend for our shareholders. However, in the current operating environment, the Board has taken the decision not to recommend the payment of a 2020 final dividend. I'll now summarize the key elements of the group's trading performance in 2020. The chart at the top bridges revenue from GBP 1.1 billion in 2019 to GBP 734 million in 2020. Revenue in the Aerospace division decreased 37% as a result of the ongoing impact of COVID-19 and the 737 MAX. The quarterly comparison to prior year is shown on the right-hand box. And on a sequential basis, Q2 was 20% lower than Q1. Q3 was 18% lower than Q2, and Q4 grew 11% over Q3. The most significant reduction came from Civil Aerospace, which decreased over 50% as civil aircraft and engine OEMs reduced production rates as many airlines cut capacity, retired older aircraft and look to defer deliveries of new aircraft. Further disruption was caused by our customers' temporary production closures and rebalancing of inventory throughout the supply chain. Defense sales increased 6.5%, primarily due to the ramp-up of the Joint Strike Fighter, the CH-53K and higher demand for other defense products, a number of our Aerospace businesses supply product to broader industrial markets. Growth in space and semiconductor activity mostly covered the decline elsewhere. And overall, there was only a GBP 4 million reduction in revenue. In Flexonics, the expected cyclical declines coming into the year were further exacerbated by the impact of COVID-19 with many of our customers temporarily shutting production facilities and reducing output once reopened. This resulted in Flexonics sales decreasing by 23.5% in 2020. The quarterly comparison to prior year is shown on the right-hand box. And on a sequential basis, Q2 was 20% lower than Q1. Q3 was 1% lower than Q2 and Q4 grew 10% over Q3. The performance in the second half of the year benefited from improved conditions in land vehicle markets compared to the first half of the year partly offset by continuing weakness in the oil and gas sector. Revenue from land vehicle markets decreased 26%, reflecting lower end market demand. With sales to the North American truck and off-highway market down 28%. Revenue from power and energy markets decreased by 21% in the year as customer demand was impacted by the pandemic. The huge decline in air and land travel contributed to an excess of crude oil supply. And as a consequence, the mothballing of some upstream capacity. Downstream activity was lower as some maintenance projects were deferred by customers. The chart at the bottom of the page bridges adjusted operating profit from GBP 89.4 million in 2019 to GBP 3.7 million in 2020. The substantial savings from our restructuring program couldn't, of course, fully mitigate the volume reduction from these unprecedented exogenous events. But we are pleased with the progress and the revised cost base going forward. Despite the challenges in some of our core markets, both Aerospace and Flexonics divisions were profitable in the year. This slide reconciles adjusted operating profit to the statutory reported profit for the period. It also highlights our tax and interest charges. Net interest payable decreased by GBP 1 million to GBP 9.9 million due to lower lease liability costs. And repayment in October 2020 of the $20 million private placement mode. The tax credit of GBP 2.7 million was recognized on the group's adjusted loss before tax of GBP 6.2 million. This equates to an adjusted tax credit rate of 43.5%. But bear in mind that percentages are more sensitive when amounts are relatively small. The group benefited from the recognition of prior year adjustments arising from the U.S. CARES Act. In terms of reconciling adjusted profit to statutory reported profit, the following items are excluded from the adjusted profit measures for 2020. Amortization of intangible assets from acquisitions of GBP 7.7 million. Goodwill impairment and write-off of GBP 134.3 million. As noted in our half year results, an impairment of GBP 110.5 million was recognized relating to the goodwill allocated to the Aerospace structures cash-generating unit, reflecting the significant impact of COVID-19 on the short to medium-term outlook for the Civil Aerospace sector. Goodwill of GBP 23.8 million was written off in respect of the decision to close our Aerospace business in the Netherlands and our small oil and gas Flexonics business in Malaysia. These noncash charges reflect the significant impact of COVID-19 in the Civil Aerospace and oil and gas markets. We recognized a restructuring charge of GBP 39 million, and I will talk more about this in the next slide. Costs associated with disposal activities for the potential divestment of our Aerospace structures business, which we stopped with the onset of the pandemic were GBP 4.6 million. And the related tax credit on all the above items was GBP 30.6 million. The restructuring program, which commenced in the second half of 2019 has been further adapted through the course of 2020. Restructuring activities include the alignment of headcount to anticipate demand, further efficiency improvements leading to overhead reductions, combining the management of our Aerospace Structures and Fluid Systems divisions to form 1 Aerospace division and the closures of our Aerospace operating business in the Netherlands and our small oil and gas Flexonics business in Malaysia. We've also assessed critically any inventory or asset exposures where customers have reduced demand and see storages on certain programs. The main element of the restructuring charge relates to reducing group headcount. Between June 2019 and December 2020, group headcount has reduced by 27%, with Aerospace down by 31% and Flexonics then by 17%. Reflecting these actions, a restructuring charge of GBP 39 million was recognized in 2020. With some activities continuing into 2021, a charge of around GBP 2 million is currently anticipated to be incurred in '21. Cash outflow in respect of these activities was GBP 15 million in 2020 and approximately GBP 11 million cash outflow is expected for 2021. These restructuring activities have delivered cumulative savings of GBP 36 million to the end of 2020. Cumulative savings are expected to be around GBP 45 million by 2021 and will increase to around GBP 50 million from 2022. The program is on track and delivering the expected benefits. Now on to cash. We're focused on generating strong free cash flow and responded promptly to the effects of the pandemic on the business. As a result, we delivered strong free cash flow of GBP 46.5 million. We saw a GBP 32.3 million inflow from changes in working capital. This reflected our relentless and effective focus on working capital management as we aligned to reduce activity levels in some of our end markets. We introduced a group-wide initiative focusing on inventory reduction with identified inventory champions in each operating business, ensuring every business has the right tools to define detailed inventory reduction plan and the responsibility to deliver on them. Net capital expenditure of GBP 26.3 million was 0.6x depreciation, excluding IFRS 16. That compares to spend of GBP 64 million in 2019, which was 1.4x depreciation. As previously advised, we are now passed the peak investment phase and can expect future capital investment to be at more normal levels. However, in the near term, we are striking a careful balance between conserving cash and ensuring our businesses have the investment required to position them for recovery and growth. Payments for interest, tax and pension cash contributions in excess of service costs totaled GBP 19.1 million in 2020. This was a reduction of GBP 6 million compared to 2019. After GBP 23.3 million of cash outflow from restructuring, legal claims and disposal activities, the group generated net cash inflow of GBP 23.2 million in the year. In the period impacted by exogenous events, this was a strong cash performance. I shall now highlight the key movements in the group's balance sheet since December 2019. The reduction in noncurrent assets is primarily related to recognizing impairment and write-off of goodwill, as I described earlier. Lower business activity as a result of COVID-19, together with our focus on working capital, has led to the reduction in net current assets. The reduction in other long-term liabilities is mainly attributed to a reduction in deferred tax liabilities related to the impairment of goodwill. Net debt before these liabilities was GBP 129.4 million at the end of 2020. Our lending covenants are currently based on frozen GAAP, and therefore, they are calculated on a pre-IFRS 16 basis. Additionally, to remove any currency impact, both net debt and EBITDA are translated into pound sterling at average exchange rates. The group's net debt-to-EBITDA ratio was 2.8x at 31st December, 2020, which was comfortably within covenant limits and even within our pre relaxed covenants. As well as delivering a strong cash flow performance in 2020, we have increased our financial flexibility. At 31st December, 2020, the group held committed borrowing facilities of GBP 286.5 million, and had headroom of GBP 167 million under these facilities. In July, we refinanced the U.S. revolving credit facility of $50 million and extended its maturity to June 2022. In October, we repaid a $20 million private placement note on maturity. The weighted average maturity of the group's committed facilities at the end of 2020 was 3.8 years, with none repayable in 2021. We have agreed appropriate covenant relaxations with all our lenders through 31st December, 2021 to provide financial flexibility. Our expensive scenario testing based on a variety of end market assumptions, while taking account of appropriate cost reduction and cash preservation mitigating actions shows that the group has sufficient liquidity headroom under its committed facilities and will comply with all covenant measures through the 3-year period assessed. Senior has strong liquidity and stable finance arrangements. The group has been resilient through the pandemic and is positioned for recovery. We were proactive in delivering a strong cash performance in the face of significant disruption to our end markets. Our restructuring program is effective and delivering the expected benefits and both divisions were profitable in the year. We have agreed appropriate covenant relaxations with all our lenders to provide flexibility through 2021, and we have strong liquidity with stable finance arrangements. And we will continue our focus on cash, striking a careful balance between conserving cash and ensuring our businesses have the investments required to position them for recovery and growth. Thank you, and I will now hand back to David to cover markets, strategy and outlook.

Thank you, Bindi. So let's turn our attention to markets. In 2020, Aerospace represented 72% of the group's revenues and Flexonics was 28%. Not surprisingly, our exposure to civil aircraft has decreased to 42% from 56% of group revenue compared to 2019. Defense has grown in real terms and as a proportion of group sales increasing to 22% from 13% of group revenue. Line vehicle revenue has increased to 12% of sales from 11% despite the divestment in 2019 of our Flexonics businesses in Blois, France, and São Paulo, Brazil, which were both pass-through vehicle-oriented businesses. Power and energy increased to 16% from 14% of group revenue because of the proportionately steeper decline in Civil Aerospace revenue. From a customer perspective, we supply to a very good spread of blue-chip companies across our Aerospace and Flexonics divisions. Rolls-Royce and Boeing remain our 2 largest customers, though it should be remembered that a proportion of sales to these customers are defense and in the case of Rolls-Royce, power and energy. With increased defense sales, Lockheed Martin and our third largest customer and Raytheon Technologies are also prominent from the merger between Collins and Raytheon. I always like to highlight the sales to Boeing and Airbus on a derived basis that is to see total sales, including direct to the aircraft primes as well as taking account of engine sales and sales to Tier 2 customers. This is where we see the biggest change. Five years ago, we were 70% Boeing and 30% Airbus. In 2019, we were close to 50-50 but in 2020, we saw 65% Airbus and 35% Boeing with the Airbus A320neo program being the single largest for Senior. Clearly, this was partially as a consequence of the 737 MAX situation. In time, we would expect the ratio to become more balanced again. Cummins, Caterpillar and Schlumberger remain our largest customers on the Flexonics side. As I said at the time of our half year results, we are all familiar with previous so-called Black Swan events affecting civil aviation, the first Gulf war, 9/11, SARS, the global financial crisis, all had an impact. Nothing, however, prepared us for what we've seen in the past 12 months as waves of COVID-19 spread around the globe. And governments have responded with lockdowns on movement control orders. The travel industry has been massively affected with demand for travel down 66% in 2020 compared to 2019 according to IATA. Most commentators think it will be 2023 or even 2024, before past year numbers fully return to 2019 levels. Vaccine deployment will surely help confidence, but the sooner we see a joined up cross-border approach, the better. Like many, I have a long-held conviction that Aerospace is a long-cycle business, 40 years of empirical evidence confirms this. There is a strong need and desire to fly. While video conferencing has helped us all work reasonably effectively during lockdown, it is a poor substitute to being on the ground, and I predict business travel will start to pick up strongly when it is safely accessible. Similarly, while holidaying at home is very enjoyable, people will tire of stay occasions, and would want to travel further afield. This is particularly true for the growing and middle classes in Asia which is predicted to be one of the strongest drivers of air traffic growth over the next 15 years. In Senior, we have always planned for long-term air traffic growth of around 4% CAGR. Our view is that this is still what we are likely to see in the long term, but of course, the next few years will not be where we all thought that we would be before this crisis. The lower operating cost and better sustainability of new aircraft on which Senior has significant content will be more important than ever. And therefore, we are well positioned to benefit from the recovery as it takes shape. In Senior, we have 13 operating units that have content on the 737 MAX platform or LEAP-1B engine, supplying to multiple customers, including Boeing, Spirit, GE and Safran. So we were very pleased to see the aircraft being recertified by many authorities around the world and returning to service. As we previously discussed, the result in ramp-up in production will be paced by recovery in end markets, the burn down in stored aircraft inventory and for the broader supply chain, the rebalancing of inventory through this year. However, we were pleased to hear Boeing confirming in recent weeks an increase to rate 31 per month in 2022 and further increases thereafter to correspond with market demand. With an order backlog in excess of 3,200 aircraft, the 737 MAX remains a very important program. Senior has good content on the aircraft, and we will benefit as deliveries and production recommence an increase. Overall, our focus for defense is very much on the U.S. market, with defense spending is as high as the next 10 countries combined. And see these production volumes reach meaningful levels for sustained periods, which in due course, will also generate good aftermarket sales for our fluid conveyance products. We've been actively pursuing further work in this sector, therefore. For example, our high-pressure ducting products that are on the Boeing Saab T-7A Red Hawk program. So it's good to see this U.S. Air Force trainer aircraft entering production now. 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 are commonly known, which protect the environment by reducing emissions. We had expected demand to fall in 2020 and indeed it did in the first half of the year, but we were encouraged to see some recovery at the end of last year, and that is continuing into 2021. 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. This visual on the right of the chart shows our view of how powertrains will develop over time. The larger the fund, the greater the demand. There has been a marked acceleration of all-electric for lighter classification vehicles and we are working diligently to manage this transition and ensure that we've innovative products ready for market at the right time and at the right cost. We see hydrogen fuel cells as a more realistic low-carbon alternative for heavy-duty trucks, and that also plays to our strengths. Our other most important Flexonics market is power and energy. I'm sure you're all aware of the slump in demand for oil and gas products brought on by the lockdown restrictions implemented by governments around the world. And the subsequent decline in air and land vehicle travel. We saw some mothballing of capacity last year. And while the supply excess of oil barrels per day over demand is significantly reduced, we do not anticipate any meaningful recovery in the sector until economic activity levels pick up around the world. In the medium term, we are well positioned to grow our non-fossil fuel business, building on our existing renewables and nuclear energy customer base. We will continue to be vigilant for the effects of the pandemic on our markets and customers and respond accordingly. I'd like to change tack now and talk about progress with strategy. There's no doubt that throughout the last year, the pandemic has meant that our priorities with health and safety, liquidity and cash preservation, along with business continuity. However, we've also continued to focus on strategy implementation, especially in the key areas that will help us to emerge strongly as the recovery takes shape. At our last Capital Markets Day in May 2019, we highlighted 2 key technology themes, one with structures with other being fluid conveyance and thermal management. Our strategy for our structures business is straightforward. We have a well-equipped global footprint, including excellent manufacturing facilities in Southeast Asia. Our focus is on filling our existing capacity with work that meets our returns criteria. For some years, we have been diversifying into defense space and highly engineered industrial work. And this is now accelerating given what is happening in the civil aero sector. For example, we're providing chassis and thin-skin assemblies for satellite applications. That said, there are also opportunities in the civil aero space as customers look for suppliers like Senior who are financially stable and of strong operational performance. Most of our R&D and product development efforts are for our fluid conveyance and thermal management businesses, which span our Aerospace fluid systems and Flexonics divisions. These products and subsystems come in all shapes and sizes, but share common underpinning technology. Typically, we are responsible for the design as well as manufacture of these products and their strong intellectual property content. On this slide, you can see some of the highly engineered fluid conveyance and thermal management products that we supply to 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 core proprietary technology, servicing diverse and attractive end markets is a core element of Senior's go-forward strategy. Earlier, I spoke about the great work we're doing to reduce greenhouse gas emissions in our own operations and those of our suppliers. The products which we already supply and which we've had in development, also contribute to reduce carbon. In thermal management, our intellectual property can be used to prolong battery life, a key determinant of electric and hybrid vehicle economics. Having already commenced production of our 70-kilowatt battery cooler, our first electric vehicle application, we have various development projects and multiple bids underway with a variety of battery manufacturers and land vehicle OEMs. In addition to vehicle applications, we are also working with customers on future cooling solutions for stationary power storage and building on our strong legacy of work with renewable energy projects such as solar farms. From an Aerospace perspective, our technology and products are entirely compatible with sustainable fuels. We are now bidding, designing and prototyping parts for electric e-vehicle companies and participating in important research and technology projects for commercial Aerospace, hydrogen and zero emissions projects. While production sales for many of these developments are some years away, it is important that we're involved at the outset as the world transitions to a lower carbon economy. We will continue to focus on proprietary technology development as it is vital to our medium and long-term success. In addition to our technology and product development activities, under the central plan of our strategy is portfolio optimization. In recent years, you have seen several businesses being divested as part of our prudent growth strategy. Last year, we closed our small Aerospace facility in South Carolina and announced the closure of our small Flexonics oil and gas business in Malaysia as well as the closure of our Aerospace business in the Netherlands. In the case of the latter, we are transferring manufacturing to a very capable French Aerospace businesses, and that's progressing to plan. On Friday, you will see the announcement on the divestment of our Senior Aerospace Connecticut business. SAC is the only operating business in Senior, whose primary focus is build-to-print parts for the rotary sector. It's a good business with a talented workforce, but we feel that it is better placed as part of a bigger helicopter precision machining business. The divestiture is consistent with Senior's strategy to review the overall portfolio of our businesses and evaluate the strategic fit within the group. In 2020, Senior Aerospace Connecticut generated revenue of GBP 36 million and operating profit of GBP 5 million. The gross proceeds will be approximately GBP 53 million and the net proceeds will be used to further strengthen Senior's balance sheet and provide greater flexibility for the group to operate within its capital deployment framework. So let me finish by talking about the outlook for Senior. In 2020, we demonstrated our resilience through the pandemic and took action to ensure our business is lean and fit. That is standing us in good stead as we get underway this year. For 2021, let me firstly be clear about our assumptions. Similar as these volumes will actually be lower in 2021 compared to 2020. That is simple math based on the announced production rates from the OEMs. We expect defense markets to remain stable. We saw some recovery in land vehicle markets towards the end of last year, and we expect that to continue this year. However, we're not expecting the oil and gas sector to recover before 2022. Clearly, there's still some uncertainty given the unpredictable nature of the pandemic. But based on these assumptions, we would expect overall group performance of this year to be broadly similar to 2020. Looking further ahead, we remain confident that in the medium term, our differentiated offering in fluid conveyance and thermal management products, our investment in low-carbon and advanced manufacturing technology, our global footprint, our strong track record and commitment to the highest ESG standards and our positioning in attractive and diverse end markets will help to ensure that we merge strongly as the recovery starts to take shape. With that, we will open the floor for any questions, which Bindi and I will be delighted to answer. Jennifer is going to curate the Q&A. So just give me a second, Jennifer will give us our first question as I know that some of you have sent in a number during the presentation here. Jennifer, do we have our first question?

Yes, we do. Yes. So quite a nice wide question is here. When are you expecting Civil Aerospace to recover to 2019 levels?

Good question. So I think let's start with the market driver, which is all about passenger numbers. So I think most commentators are expecting air passenger numbers to recover to their 2019 levels, pre-COVID levels by 2023, maybe 2024. Although we do expect things to start picking up fairly quickly once people feel safe to fly. We've seen that in China with domestic travel up. We've seen strong bookings in Europe for this summer when people think it's going to be safe to fly. And we talk by the end of this year, we'll start to see business travel picking up as the vaccine rollout takes place. And hopefully, the pandemic comes under control. But it's going to be a few years for passenger number all the way back to their pre-COVID levels. Then if we think about that in aircraft production terms, maybe a year or so behind that for single-aisle. So if you listen to Airbus and Boeing, they might talk 24, 25 for their single-aisle rates and wide-body, which is more dependent on the long-haul international routes, probably sometime behind that in fact. So I think the good news is this is probably a trough year for Civil Aerospace volumes, and we should start to see increasing production and increased sales towards the end of this year and certainly into next year and then hopefully steadily back towards those '19 levels in the years ahead.

So following on from that, is there any further color that you can give on the potential for market share capture in Aerospace as we exit the pandemic? And do you have an updated view on when surplus inventory might be burned through within Aerospace and by the Aerospace OEMs?

Yes. So let me answer the second one first. I think it varies a little bit depending on where you are in the supply chain. Whether you're suppling directly to the OEMs, you're the aircraft manufacturers or the engine manufacturers or to T2 or even lower depending on the platform, frankly, and what demand looks like. So I think we'll see a steadily improving picture throughout this year. The 737 MAX has the most inventory. Remember, Boeing had a large stock of inventory, part to the desert that we knew about. And I think companies like Spirit have got quite a lot of fuselages that publicly they've talked about. And I think we saw Safran and GE about the LEAP-1B engines also having significant levels of inventory. So I think those elements will take much of this year to burn through for the 737 MAX. So maybe by the end of this year. For other things a little bit earlier, we could expect some more balance in inventory maybe coming into the second quarter, I think, for other programs, but it really does vary depending on where we are. We've kind of taken that into account when we've been thinking about our assumptions and guidance. And then remind me of the first half of the question, Jennifer?

Yes. It was in terms of what's the potential for market share gain with Aerospace?

Yes. So I think I mentioned the last time we talked that we're still -- we're bidding for quite a lot of new work. And some of our competitors, some of our peers perhaps haven't fared quite so well as we have, perhaps somebody able to look after their balance sheet quite as well, probably because we've got more diversity in their own markets and their businesses. Some of those are closed factories, 1 or 2 have closed down. And so we're actively working with customers on hopefully winning some of that work. And -- as and when we can announce that, we would do so, don't necessarily expect a big lift of this year because it does take some time to get things into production, of course, if it happens. But we're optimistic we will pick up some work on the structure side. And also on the Flexonics side, to be honest, we're already seeing some examples where our strong operational performance and our strong financial performance means that some of our bigger Flexonics customers would like to rely on us more compared to some other people.

Question to free cash flow, a very strong free cash flow has been observed. And the question is, are there any one-offs in terms of working capital? And what amount might we need to invest in the business as the supply chains start to normalize?

So first of all, we are pleased with our free cash flow performance and particularly getting working capital down, which, as I said, part of it is due to the reduction in activity levels but there is a permanent benefit as well from our inventory focus, where we've got inventory champions across the group, working with all of our businesses, making sure underlying processes are more efficient from sales, inventory, all the way through purchasing. So that we can capture some of that benefit on a more permanent basis. Having said that, within working capital, we also had a benefit of about GBP 9 million in 2020 from government schemes where they were indirect and direct taxation deferrals out into 2021, 2022. So some of that was a benefit in 2020, and it will, therefore, be a headwind in 2021. And in terms of inventory levels, it really depends on the pace of recovery as we exit 2021 into 2022. So at the moment, based on that recovery profile, we would expect some inventory build up as we exit 2021 but you can be rest assured, we will continue to manage our working capital as efficiently as we have demonstrated in 2020.

Okay. Have you seen any material change in set values on the key civil programs? Have there been any volumes that you've exited due to lower pricing or unattractive margins?

Well, Chris, we did talk about this back in 2019. But since then, no real significant change. You get the usual few ups and downs. Some of it's currency related, but no real significant changes since we last talked.

In terms of our Aerospace, Aerospace used to be around a circa GBP 800 million revenue business with double-digit operating margins. What levels of revenue margins are possible in Aerospace, for example, in 2023, assuming the MAX and narrow bodies recover as expected, but wide body sale at low rate. What taking into account the possible higher market share as well as cost savings, where might you be in operating margins?

Yes. That's a great question. And we've modeled lots of different outcomes. I think the first thing to say is, as volumes recover, with the cost we've taken out the business, we will see a strong drop through. Our focus is very much on return on capital employed. We have not changed the medium-term objective that we laid out very clearly at the Capital Markets Day, which was 13.5% return on capital employed post-IFRS 16, so about 15% pre-IFRS 16. So managing our cash is truly important but so is making sure we improve margins. So I'm not going to put a specific number on the margins but those businesses, which have got a lot of proprietary intellectual property are inherently strong margin businesses. And we fully expect as volumes recover, that, that will start to contribute to a good recovery in our overall business and as sales recover, we'll see good drop-through margins and moving towards those medium-term ROCE targets we talked about. Like when it really does depend on the pace of the recovery. So I think that's something we need to have an ongoing dialogue about, but we're very confident that we will get there.

And when you look at the Aerospace profitability in 2021, what progress are you thinking about. You've guided to lower volumes year-on-year, but what's the benefit from the restructuring within Aerospace in terms of 2021 or 2020? And are you assuming any higher growth in defense, given your position on the F-35?

Yes. I think for Defense, we see that as being pretty stable this year. Civil Aerospace, as I mentioned, if you look at the core assumptions, that's going to be down. And there's no escaping that because you just do the math on the programs that have been announced, then Airbus and Boeing and the engine guys will be making fewer engines this year than they did -- sorry, fewer products than they did last year. So we've got to look after that. That's why the restructuring was so important, frankly. So of course, that will take some cost out and will help to offset some of that lower sales. And then on a Flexonics perspective, we'll get some benefit from the ongoing recovery in land vehicle, particularly heavy-duty truck. But we had no help from oil and gas, which is probably going to be the lowest year this year to be honest, and won't be '22 until we see that recovery. So if you take all of that into account, that's why we're guiding on broadly similar performance to last year. And from '22, we'd expect to start improving again.

On the 737 MAX, what are your assumptions around production? And what are your assumptions for shipset value as well in 2021?

So with shipset value, no big changes there compared to what we discussed before. Bearing in mind that some of the contracts we did not renew back at the end of '19 were on the MAX. And we're glad we didn't given what's happened. That was because it didn't meet our returns criteria, remember. So -- but still really good content on the MAX. I'll just caution on volumes for this year. As I've already mentioned, there is a lot of inventory in the system on the MAX, both at Boeing and at Spirit with the engine producers and also further down the supply chain. So we're not expecting any significant increase in production volumes this year compared to last year. Now by the time we go into quarter 4, we do expect to be starting to ramp up a bit because Boeing have said that in '22, and they said early '22, they expect to be up at rate 31 from a production perspective. So that would mean by the end of this year, we'd be having to gear up for that. So that would give a lot of momentum coming into next year on the MAX. But for this year, we should think about that being not dissimilar to last year, frankly, when we think about all the inventory in place.

Now we've seen the divestment of Senior Aerospace Connecticut. Should we be expecting the divestment of other build-to-print businesses and what's left in the portfolio?

So I think Senior Aerospace Connecticut, we just think about why did we divest that business? Well, we were approached. We weren't actively marketing it, but been in our mind for a while that it was our only helicopter build-to-print structures business. And the company that has bought it, PCX, they're only 26 miles away from our factory in Connecticut, they're about twice our size. And it just made a lot of sense to put those businesses together. I think it will be a very powerful grouping and the helicopter structure is something that we couldn't have done on our own. So those Defense. And I like the business, and it's been growing, and it's got a very capable leadership team. It made a lot of sense strategically to sell that particular business. We're not in a hurry to sell off other good assets in the business. That's not the plan. Our focus in our structures business was to fill our existing capacity. And as the volumes come back, we'll see that business improving. On the other hand, we've also done what I call prune to grow, and that's more tidying up, things are noncore or businesses that are underperforming. You saw some more of that last year with our oil and gas business in Malaysia and the small Aerospace business in the Netherlands, which we'll get some benefits, some good benefits by moving production to our French businesses. That gives us some scale moving forward. So we will continue to look at our portfolio under the criteria that we've employed now for a number of years. Is it core and does it provide the necessary returns? And the Board will take the actions as appropriate.

And if I can add to David's point there with Senior Aerospace Connecticut, from a proceeds point of view, we see using the proceeds to give us that flexibility in our strategic actions around fluid conveyance and thermal management. So it helps to give us that broader flexibility over time as well.

That's the perfect point to the next question, actually, on Fluid Systems. And I'm asking, what -- can you remind people of what, what are the attractive positions that you have in Fluid Systems? And what are the opportunities in your pipeline? Would you consider at any time inorganic growth?

Yes. So our fluid conveyance thermal management products cater for a wide range of attractive end markets. I think in our presentation, I showed some of that. Back in the half year results, I showed an example of one of our businesses, metal bellows, which is up there in Boston, one of our very best businesses. That sits in our Aerospace group. But actually, their biggest customer last year was a semiconductor equipment company, Lam Research, where we do a lot of outstanding work with product development. So on the Aerospace side, it's high-pressure and low-pressure ducting work, for example, it's a lot of barrels and valves. On the Flexonics side, it's EGR coolers that go into heavy-duty trucks and off-highway vehicles as well as parts of vehicles, it's battery cooling for electric vehicle applications. It's parts that go into solar wind farms. So a wide variety of end markets. And on the Aerospace side, it applies equally to the Defense side as it does to the simulator space site. So it's a great set of products. And there are some more adjacencies that we feel that we can look at as well. And the biggest product you see on that chart, I think I showed 2 products together. One is the size of an American dime, that's a tiny little edge weld at bellow. And it goes inside the valve made by metal bellows in Boston. The giant product where all the people standing in front of it next to it is -- it goes into refining application. That's our pathway business in Texas. So 2 -- and half of those are our core proprietary bellows products, even though they're vastly different in scale. On the -- if you look at the back of our pack here, you'll see our usual acquisition framework. And in there -- and if you were to be doing acquisitions, it would certainly be in the areas of supporting fluid conveyance and thermal management themes. And it's on the land vehicle side, much more likely to be around electrification and it's a low-carbon technologies for the future. So yes, we will remain vigilant for opportunities in that sphere.

And could you talk about opportunities in regional business jet as well?

Yes. No, it's got a really good portfolio. And regional bizjet, medium to large size business jet, especially is our sweet spot. And it was down last year, but not down quite as much as a large commercial market. If you've been following what volume [ bearer ] have been saying and then people like Gulfstream, sales have been holding up reasonably well. That will continue to be an important market for us moving forward. And particularly on the low-pressure ducting side, BWT, the Macclesfield are world leaders in low-pressure ducting for those type of aircraft. And as some of those newer aircraft come into production, we expect to see some sales picking up there as well. So it's not a massive part of our business, but it's a significant one for us. It's a core proprietary product and very good systems we supply there.

Okay. Moving on to some future technologies. Can you expand upon the progress made with the battery and fuel cell technology in the year? And as part of your focus on thermal management, why are you so confident that you have the right technology for these evolving markets?

Yes. It's a fantastic question. I mean the reason we're so confident is because we have decades of experience. A lot of people think this is new. But fundamentally, we're talking about heat exchangers. We're talking about cooling. If you think about what you need to cool a very hot battery pack, whether that's on a land vehicle or potentially on 100-seater commercial aircraft, an air taxi, as it's called. You need fantastic heat management properties and you need ways to cool the battery all of which take fluid, whether it's air, gas or liquid cooling. That is our DNA. That's what we've done for a decade. So that's why I'm very confident that we're in the right place of the future. Trying to make sure that we don't get too excited because this is a long-term play. You'll have seen the pace of change in electric vehicles and sold diesel in Europe this year, but it's still a relatively low number, but it will increase. And of course, for a core market, which is heavy-duty truck, diesel is going to last much longer. It's not suddenly going to swap to battery in the same time scale as past your vehicle. In fact, what we see there is probably hydrogen fuel cells as being what will help heavy-duty trucks to reduce their carbon emissions. The first step there will be much more efficient diesel engines, maybe going from a 15-liter to a 12-liter. So specifically, on the land vehicle side, we've established a global marketing team to develop hydrogen opportunity. So that's looking at advancing solutions with fuel cell developers and OEMs and hydrogen handling, fuel cell and electrolyzer construction, fuel cell plates, valves and compensators,as well as thermal management and cooling. And on the aircraft side, we are participating in hydrogen and zero-emission aircraft, [ RNT ] projects. So for example, we're leveraging our space-based design and manufacturing expertise of complex ducting and end fittings, advancing wind propulsion in their cell integration concepts for emerging aircraft design. So we're successfully getting some grants from French government, for example, and we're working on those of a green aircraft for the future. So there's some exciting things happening. It's accelerating. But also managing the transition out of our more traditional supplies into these newer ones that are going to be very important. And that -- that's what takes a lot of our time as well, but some very good progress there. On the clean energy side, we've got battery cooling for station power applications as well. So that's battery farms, if you like, for on -- for nonvehicle applications. And we have supplied bells and hoses to solar farms for many years. And of course, we would hope, and that would continue to increase. So just a few examples. And not to forget our advanced manufacturing metal bellows [indiscernible] what it's doing is reducing weight. So we can take traditional gimbal product in Aerospace, which would be a heavy construction probably made from casting and we can 3D print, that's kind of a lattice arrangement. So really taking a lot of weight out, which in turn helps aircraft and engine producers to be more fuel efficient. So we would hope that maybe later on this year, we might be able to run another Capital Markets Day if circumstances allow. And these are some of the themes that we'll develop in more detail.

Actually, a follow-on question from here. What sort of timescale are we talking about? And when do you think it's going to be achievable in terms of seeing your benefit from the energy transition?

Yes. I think we'll see some small benefits now. On the land vehicle side, we're talking middle of this decade to end of the decade. On the aircraft side, there may be a 100-seat all-electric aircraft by 2030. The time scales for large commercial aircraft using hydrogen, for example, probably 2035. So -- but if we're not participating now in these programs, we won't be on it when the time comes.

Okay. Switching tax slightly to the dividend. What do you need to see to reinstate the dividend? Are there any particular operating metrics that would drive the decision? Is it simply a better visibility on your end-market outlook?

Well, I think we write-down our policy to that some years ago, and it's not changed. Now our objective is to pay a progressive dividend. And obviously, that's not going to be possible this year because of external factors. The things we look at are, yes, certainly, end-market conditions, free cash flow. We look at our dividend cover as well. So we take all of that into account when the Board has the discussion of what the appropriate dividend is to pay. So we will start paying a dividend as soon as we are able to in those conditions I'd like to do it, and we're looking forward to doing that.

Question here on book-to-bill ratio. In 2019, the book-to-bill was around 1.05x. And just a question, how should we think about that in 2020 and going into 2021?

Well, it was a bit distorted last year, of course, Bindi, wasn't it? Because of the sales.

Yes. And also because of the changes in production rates as well that the OEMs have announced as well. So it's not a representative measure in a year that's been impacted by significant exogenous events.

So I think that's why we didn't put it in the pack, to be honest, it's kind of a meaningless number. The time we get to the half year this year, what we've done in the first half of the year, I think then we can have a more meaningful discussion on it.

When you talk about overall performance for 2021 as being broadly similar to 2020, what should we assume? Is that the case of free cash flow or is that -- what is it in terms of profitability or revenue?

Yes. Well, I think I've laid out the assumptions from a market perspective. So I think one can understand what we're gaining from a revenue perspective there. I'm not going to give the profit forecast. So the circumstances are still rather uncertain. So we've tried to be as helpful as we can by guiding to broadly similar performance to last year. Bindi, you might want to say a little bit on cash flow and some of the things that might affect how this year will run.

So on cash flow, I mean, actually, it was one of the earlier questions we had. I mean, overall, we will continue our focus on cash preservation and making sure at the same time, we are able to invest in research and development, just as we did in 2020, but also growth programs and make sure our businesses are positioned for recovery. But in terms of working capital, we did have a one-off GBP 9 million benefit in 2020, and some of that does flow out in 2021 because of some of the government benefits where they just extended the time lines to pay. Some of our customers paid early. So some of the Defense contractors that paid on net 0 terms in 2020. It would be great if they continue doing that throughout 2021. But at some point, I'm sure that will normalize as well. And very cognizant of working capital as we make sure we prepare for the recovery that comes into 2022 and making sure we're investing in that. So -- and then the other area is on restructuring. So I highlighted in my presentation that we do expect GBP 11 million of restructuring cash outflow in 2021 as well. So we will continue our focus. I mean our business is fundamentally cash generative. We will continue that focus. Capital expenditure continues to be at lower levels at the moment and then allowing for growth thereafter, back to more normal levels. And just a little bit of shifting in working capital given the benefits we got in 2020.

And does the 2021 guidance account for an extension to the U.K. furlough scheme?

We've got a very modest amount of people on furlough in the U.K. currently. So it's not a significant driver.

How is your business in the downstream oil and gas and aftermarket revenue? How are you -- how is that doing and how are you seeing that into 2021?

Downstream, yes. So -- and of course, this is mainly our pathway business in Texas. I should say actually, oil and gas is only 30%, 40% of that business also supplies into other power and energy markets, such as nuclear and renewables. So it seems down a bit last year, but it's still a great business. Remember, we've got a lot of aftermarket in there carrying out spares and repairs. There's been a little bit of a long jam because our excellent field engineers are based in Tennessee and other parts of the U.S., haven't been able to travel overseas. So we have customers in, for example, India and the Middle East, who are very keen for us to get out there and we're -- we've got people going out there and quarantining. So we can go and do urgent repairs and maintenance in some of their facilities. The thing that has suffered is the really big capital projects, which I seem to be talking about forever since I got here, we were just trying to get confident about those happening this year. And of course, they've moved back. So I think we'll trend along at a decent level this year in that business. It's still very profitable and an important contributor at our Flexonics business, but no dramatic growth this year, it would be another year of consolidation.

Looking at the covenant waiver, are there any restrictions that we should be aware of in relation to the covenant waiver?

Nothing out of the ordinary, no.

Okay. What is a normalized -- what sort of level should we be thinking about in terms of free cash flow conversion? If you're thinking about free cash flow as a percentage of adjusted net profit, what would you think it should be in a normalized situation for the group?

So we would -- that will depend on the profile of the group and what's happening in the future. I mean in -- from a going-forward point of view, when we see the recovery come through, we will have some investment in working capital to make sure that we set up in position for the recovery. But from a CapEx point of view, as you said, we are past the peak investment phase. We are well capacitized in areas and making sure that there is a little bit of capital investment as we win new programs, so they'll be customer-specific [indiscernible], but that will bring it back to more normal levels. So we should be benefiting in terms of the CapEx, the depreciation. I always caveat that with subject to a big new win that may require more specific capital expenditure and working capital. We manage our working capital very efficiently, and that's been demonstrated over the past few years and particularly so in 2020 and we will continue to do that. So we should see good free cash flow conversion as we position for the recovery as well.

Now there's a subsequent event note on the divestiture of Senior Aerospace Connecticut. But what can you tell us about the revenues in 2020 for the Boston business that you have been transferred to the facilities in France?

It's relatively small. So not significant. And remember, the sales are transferring, so they're not going to disappear. Those really not have a significant effect on revenue.

Okay. And that actually concludes our questions.

Okay. Great. Well, listen, thank you very much, everybody, for participating. We do appreciate it. This year, we'll -- as we did last year, we'll try and keep the markets updated as events unfold and as the year develops, that's our commitment. So we look forward to speaking with you on a regular basis. Thank you very much.

Thank you.