Senior plc (SNR) Earnings Call Transcript & Summary

Hello, and welcome to the Senior plc Post-Close Trading Update Call. My name is Courtney, and I'll be your coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] And I will now hand you over to your host, David Squires, Chief Executive Officer, to begin today's conference. Thank you.

Good morning, everyone. Thank you very much for joining the call this morning. I'm with Bindi Foyle, our Group Finance Director; and Gulshen Patel, our Director of Investor Relations. It's a short post-close trading update today that I will just go through very quickly and then, of course, I'll be happy to answer any questions. And I guess, this seems a prelude to our interim results, which is only 3 weeks away on the 2nd -- Monday, the 2nd of August. So this post-close trading update is for the 6 months ended June '21. So the period is the first half of this year. And actually, trading in the period has been ahead of management expectations. In Aerospace, our sales are modestly ahead of expectations if you compare it to the equivalent period in the prior year. And please remember that, that was -- part of that was pre-COVID and also included a full 6 months of Senior Aerospace Connecticut. Our sales are anticipated to be around 21% lower on a constant currency basis. Flexonics, by contrast, the sales in the period are expected to be in line with our expectations and with growth of around 6% compared to prior year on a constant currency basis. And there, we've seen some growth from the recovery in heavy-duty truck and off-highway markets being partially offset by the continued decline in oil and gas. And we did also close our small Senior Flexonics business in Malaysia, which primarily focused on oil and gas as well. In the period, our group sales, therefore, are likely to be 13% lower on a constant currency basis than the equivalent period in the prior year. Again, just reminding you that, that was partly pre-COVID and also included the full 6 months of Senior Aerospace Connecticut. Pleasingly, I set out in the market update section of our announcement a couple of weeks ago, which was our defense document in relation to the bid from private equity on the 22nd of June. We said that the group's end markets are showing clear signs of recovery, and I'll refer you back to that document. And also, of course, we'll give a full update on our market at the interims on the 2nd of August. From a financial perspective, the group's cash performance has again been robust with a net cash inflow of GBP 61 million. Net debt at the end of June is expected to be around GBP 71 million, and that excludes capitalized leases of GBP 76 million. And our headroom on our committed borrowing facilities has increased by GBP 58 million since December to around GBP 215 million. From an outlook perspective for 2021, just a reminder about the assumptions that we've been using and these are little changed. The first one, production volumes for civil aerospace will be lower in 2021 than '20 and that's based on the public announcements from our end customers, both aircraft and engine OEMs. But we also recognize that there are varying levels of inventory in the different tiers of the supply chain and that may affect just how quickly markets will recover or how certain products will recover. The good news, I think, was that based on the most recent public updates from Airbus and Boeing, single-aisle production rates are expected to pick up towards the end of this year and into '22. So we're really pleased to see that announcement from Airbus, in particular, a few weeks ago. Defense markets are anticipated to remain stable. And heavy-duty truck and passenger vehicle markets, we expect to continue to recover this year. And finally, power and energy, well, getting closer to the recovery there, we feel, probably the end of this year and the start of next year. So in our 23rd of April 2021 trading update and indeed our full year results presentation, we stated that we continue to expect overall group performance to be broadly similar to 2020 prior to adjusting for the impact of the divestment of Senior Aerospace Connecticut. Well, now despite the well-publicized headwinds associated with freight and commodity costs and with the semiconductor supply chain challenges for our land vehicle customers, as well as the divestment of our Senior Aerospace Connecticut business, we now actually expect overall group performance for 2021 to be slightly ahead of our previous expectations. And then looking further ahead, and we'll talk much more about this at our interims, we have this differentiated offering in fluid conveyance and thermal management. We continue to invest in low-carbon and advanced manufacturing technology. We've got a great global footprint. We've got a very strong track record and commitment to the highest ESG standards. And we've got very -- and we're very well positioned in attractive in diverse end markets. So that gives the Board confidence that we will continue to make good progress as the recovery continues. And finally, as I've already mentioned, in addition to the 2nd of August interim results, which we'll be providing a full market strategy update at, we're also going to host a Capital Markets Day in October and we'll -- Gulshen will come back with the full details of that when we've got that organized. The theme will be our fluid conveyance and thermal management strategy, and we look forward to going through that in detail with you then. So that's the brief post-closing update. Very happy to -- Bindi and I are very happy to take questions just now on that.

[Operator Instructions] The first question in queue comes in from the line of Dominic Convey calling from Numis.

I guess there's been a lot of focus around the so-called friction costs and the headwinds that you've flagged in the statement this morning. A couple of things, if I may. One, have you -- can you quantify the drag in the first half for us? And I guess what I'm really keen to hear is the phasing of that, whether Q2 was actually worse than Q1? And how you think about these costs heading into the second half, whether you're confident that they're leased or when we look at some of the freight rates, it looks actually as though they're continuing to go the wrong way?

Yes. Good to hear from you. Yes, I think -- so in terms of those headwinds. Firstly, the semiconductor supply chain issues, just a reminder, those don't affect us directly because we don't really buy semiconductor devices. It's our land vehicle customers that do. So there, it's more a question of their production being impacted. You'll have seen, for example, the Jaguar Land Rover announcement this week about how it's affecting their production and that's pretty typical for our land vehicle customers, whether it's on the truck side or the -- on the passenger vehicle side. With regard to your specific question around freight and other commodity, it's an ongoing issue. I think as I always say to my team, in a sense, this is a good problem to have because it's showing that we've moved from a sort of a demand-constrained model in our land vehicle markets to a supply-constrained market because of this big [ bounce ] really that we've seen on the heavy-duty truck side and other land vehicle market. So that's partly what's at the root of this. So every day, our operations teams are dealing with issues. They're very good at it. So we're managing to keep up with what our customers require. Steel strip and steel castings have been one of the commodities that we need to manage very carefully. There are some signs it's getting a little bit better we heard last week, but this will be an ongoing issue throughout the year, we feel. And the freight, yes, I think freight is going to be an issue that needs to be managed for quite a while. Sea freight, in particular, has been affected, and that's something that our teams will manage every day. I anticipate we'll see a similar sort of thing happen in Aerospace towards the end of the year when the inflection there happens. So it's not fundamentally undermining the performance of the business because we're coping with it very well, and in many cases, we'll be able to pass these costs on to our customers. Sometimes we can, sometimes we can't. So I don't want to overstate the drag that it has had in our results in the first half, really just drawing attention to the fact that despite these headwinds, we're actually managing it very well and our performance has continued to improve. And we don't see that as being any different really in the second half of the year compared to the first half of the year.

Are you able to give us a ballpark figure at all, perhaps yourself or Bindi for that, correct?

No, no. Rather not do that, Dom. I'm saying some of the cost we can pass on to customers and others we may absorb a little bit. But that's all in our guidance.

Okay. And just one quick further question for me. Clearly, it's been a crazy sort of 12, 18 months. So year-on-year comps are quite difficult. Can you just give us a little bit of color around what your expectations are for sequential growth or otherwise for each of the 2 divisions in the second half? And finally, just whether you expect Aerospace to now be profitable for the full year?

Well, again, we'll go through this in much more detail at the interims, I would suggest. But the toughest comp, in a sense, has been this first 6 months because the first 3 months of last year, most -- certainly all of January, all of February and most of March or much of March, where -- so before we really start getting affected by COVID. So this past 6 months undoubtedly has been the toughest comp. And therefore, on a year-over-year basis, we'd expect the second half of the year to be an easier comparator than the first half. And we can see with single-aisle rates, especially picking up towards the end of this year and into next year, you'd expect a bit of momentum there towards the end of the year, but it is really towards the end of the year. So that's kind of the projection of travel into next year. Of course, therefore, we'd expect continued good progression and we'll talk much more about that at our interims as well. So we think we've turned the corner. We're turning the corner now. We've already turned the corner on Flexonics. And we'd expect towards the end of this year, the corner to be turned on Aerospace as well based on what Airbus and Boeing and the engine OEMs are seeing. So that's probably our broad direction of travel, and we'll be happy to talk more about that during the interims. And by then, of course, we'll have seen the announcements from Airbus and Boeing on their first half as well. So I think it'd be wise to wait until we see that before we give more detail.

The next question comes in from the line of Jolyon Wellington calling from Peel Hunt.

Can I ask about inventory in the supply chain, please? Clearly, that will have a short-term impact this year. Just wondering, do you have an expectation as to how much your revenue growth would sort of lag the sort of recovery in end markets due to the excess inventory in the supply chain so through the second half of 2021, please?

Yes. I probably won't become over fixated with that. And of course, very difficult to give a specific number because we operate at multiple parts of the supply chain. So in some cases, we're supplying directly into Boeing and Airbus on the civil aerospace side. Sometimes we're spying directly into Safran, GE, Rolls-Royce, Pratt & Whitney, all the engine guys. Sometimes we're supplying into the big integrators like Spirit, for example, GKN. And other times, we're a level below that in the supply chain. So that's really why we've had this comment in for some time. We just recognize that throughout that supply chain, there would be different levels of inventory. We literally have thousands of parts going on single-aisle aircraft, for example. So we studiously go through what that means for us and that's a part-by-part, business-by-business basis. But broadly speaking, as markets pick up, so will our sales. So we'll see a direct correlation there. We're just advising. It's not necessarily an exact -- you can't do the exact mathematics on that because of that. But rest assured, as sales pick up -- as production levels pick up in Airbus and Boeing and the engine guys, so would our sales.

Okay. That's great. And then maybe another way of asking the question there would be sort of how long would you expect it to take before your sales rate sort of matches the industry production rates?

Yes. Well, in some cases, we're there already. So we provide line of sight almost on daily basis and in some businesses, certainly, on a weekly basis. So that's already the case. And we've already seen quite a bit of inventory coming out of the system. In other cases, it might take a few more months for that just to wash through.

Okay. That's good. So not too long there. And then just on the cost base just looking through to the recovery, when you start to see civil aerospace build rates coming back, do you need to put sort of more cost back into the system? Just wondering just in terms of margins, how much operating leverage you get to the quite substantial potential uplift in sales you're going to get over the next couple of years?

Well, so I'll answer it in 2 ways. Firstly, let's think about capital investment. So we are already capitalized for much higher run rates in civil aerospace than we are currently at. So if you think back to pre-pandemic, we were already at rate kind of 63 for Airbuses. Airbus, we were about a run rate 60 and heading up a bit. So we already have all the equipment in place for that. And on Boeing, of course, pre the MAX grounding, we were at rate 57. Boeing, we were at rate 50 -- about to enter rate 57. So we don't need a lot of capital investment, that's the good news. We're well capitalized. We've always said we'll need to take some direct labor back, of course. We reduced our direct labor head count by quite a bit over the past year necessarily so. And we will definitely need to hire shop floor workers back, technicians, machinists as those rates pick up. And that's underway already. Many of our businesses are hiring just now just as they've been in Flexonics for some time, we've been hiring direct labor. But we have taken the time during the last year to really work hard on our process efficiencies. So it's not necessarily a one-for-one replacement. We would expect to be more lean and efficient coming out at the end of this. And certainly, on the indirect side, that's also true. We really made sure that we've done a lot of process improvement work. So that means while good drop-through in margins, I think we'd probably rather wait until our interims and then Bindi can step through that in a bit more detail in terms of our operating leverage and what we expect. But yes, as sales come back, we'll see good operating leverage.

The next question comes in from the line of Harry Breach calling from Stifel.

Can I just touch on a couple of small things. Firstly, David, looking back over the calls over the last sort of year, you've spoken a bit about number of work packages being relet or potentially re-sourced by OEMs. Can you give us your sort of sense of any awards you might win, how you see the pipeline developing on that? Secondly, just I'm sure you've probably looked at the monthly MAX delivery numbers as much as we do and they haven't been -- frankly, they haven't been that strong, at least over the first 5 months of this year. Let's see what the June number is. So admittedly, the pace of the ramp is up to Boeing and it may be very back end-loaded. But what I'm wondering is in terms of MAX inventory in the system, has it come down as fast as you would have expected if we turn the clock back to the beginning of this year because, for me, it just seems that maybe Renton is not ramping maybe as fast as we thought, but it's hard to tell, obviously, because we cannot see the parking numbers. Maybe final thing to think about. Just in terms of disposals, I remember with Connecticut, I believe you said you were approached by a third party in relation to that one. How do you see sort of disposals, third-party interest in parts of your business, not referring to our large friends who recently communicated, but more individual disposals. Can you give us any sort of feeling or a sense for that, please?

Okay. So let me deal with the MAX one first and I'll come back to the other 2, Harry, for me. So on MAX, I think -- if you have a look at the presentation we set out a couple of weeks ago in the context of our defense document, Slide 12 and there, we tried to give some color to what Boeing and Airbus have been saying on rates. So you can see that on the -- and we'll repeat this as well in our interims. You can see that on the MAX really very low levels of production so far this year. And as you rightly say, probably even lower for us because of that inventory in the system. It's not any different than we expected. I would say it's absolutely in line with what we were expecting. So we're seeing the inventory level start to come down at Boeing in terms of finished aircraft, which is great. We're seeing inventory levels start to come down at Spirit in terms of the fuselages that they have. And those guys will give an update, I'm sure, with their next quarterly results, and therefore, we can start to see our inventory reducing as well at the same time. The real inflection point comes at the end of this year as they're getting ready to ramp up to that rate 31 and then we'll see the remaining inventory coming up pretty quickly. So that's really much in line with our expectations there. And the same is true to an extent on Airbus, although, of course, they've maintained a steady drumbeat of production throughout, and it's now starting to ramp up. Just on the pipeline side, yes, still busy and active with business and ongoing encouraging discussions with our customers. Of course, once you win stuff, we then have the job persuading to let us make an announcement. And -- so we're working very hard, both in trying to win new business and then trying to make sure we can announce what we've won as well, but still positive and upbeat about our ability to compete in the post-COVID world. As it were, we're -- as you can see from our balance sheet and our cash position, we're undoubtedly stronger than many of our peers or many of the people that we are competing with and that has not gone unnoticed by our customers. I can tell you they see that as very valuable to have a reliable source of supply and one that continues to deliver on time to really good levels of quality. On the disposal side, yes, it wasn't a complete arbitrary, the Connecticut disposal. I think as we set out why for us, that was a strategic disposal. We saw it as noncore to the long-term future. Obviously knew that helicopter build-to-print and [ machining ] business is a great business, but I think PCX who bought it already have those types of assets, so it was a good sale. And listen, we've got a lovely portfolio of businesses. I'm sure people will be interested in them. But we're -- our focus is on growing our business and delivering value for our shareholders, not picking off individual assets to sell. Our prune to grow will continue. So where we've got noncore or performance challenged assets, of course, we'll continue to look at tidying up the portfolio there. That's -- we've been doing that for several years, and that will continue.

And can I just follow up just on the work package wins. Maybe another way to throw light on it would be to say when you next hopefully share some shipset values with us, do you think there might be any sort of material changes on any programs or probably about the same?

Any new wins that we have that are material, we would certainly announce them, Harry. We'll obviously try and get our position to announce those.

Okay. That'd be great. Validates this business, this story.

We currently have no further questions in the queue. [Operator Instructions] Okay. And we do have one last question coming through from the line of Jeremy Bragg calling from Redburn.

Can you hear me okay?

Yes, Jeremy.

So I had a couple of questions. Firstly, this is probably me being dense, but I wondered if we could actually sort of drill into the source of the beat itself or the reason why you've upgraded because I can see that Aerospace is modestly better, as you say, than you were expecting and Flexonics is in line. But then, at the group level, you're obviously expecting quite a lot better profit than you were once you adjust for the fact that the prior guidance excluded the disposal and the new one included, et cetera. So I just wondered if you could sort of drill into that a little bit more. Is it Flexonics' margins? Is it cost? And then the other question, please. Sorry, probably one for you, David, is about Airbus' rate increase in rate 70 and potentially 75. And I had a few questions around that and I'm sure you might say that you'd rather wait until the CMD, but I just wanted to kind of get a view on what that means for you in terms of your profits in '22, '23, et cetera? And also what investment you might have to make to get there? And finally, a cheeky one, whether you think rate 75 is a sensible rate?

Okay. So just on this year, again, of course, Bindi is going to go through our half year results and we'll do our usual discussion on sales and profits for each of the divisions there and so probably not appropriate to drill into it on a post-closing update. But suffice to say, look, we worked really hard on our cost savings, really hard. And I think a couple of -- we've previously advised we're on track to deliver the cost savings there. So that's just something that's in our DNA. We do it all the time. So we're pleased with our progress on cost. I'm pleased with the modest increase -- modest increase on sales. So combination of those is good for us and I'm sure that will continue, and we'll go through much more of that at the interim. Just on the Airbus rates. Fantastic to see Airbus' confidence and the structural growth drivers in end markets. We share that confidence. We're already seeing where people can fly, they will fly. In North America, domestic travel is really getting back towards normal levels. All our U.S. colleagues report to us when they fly, the planes are really busy. IATA, they expect to be back to 105% of passenger numbers by 2023. So it's a much more upbeat picture than perhaps some of the [ new ] merchants were talking about. Last year, I think we're all pretty fed up with virtual working. So we are confident in the structural growth drivers for Aerospace. And I think that's why Airbus has come out and given this positive and proactive update on the rates. They want their supply chain to be ready and not be caught on the hop when that inflection point comes towards the end of this year. We will be ready, and we're already capitalized, as I said, for rate up to around 60, 65. I think if you look at what they said and we've, again, put that out on Page 12 of the document, we -- the presentation that we issued a couple of weeks ago and we'll repeat this at the interims, those rates are -- the 70, 75 isn't till '24 and '25, that's what Airbus said. So they're running scenarios for '24 and '25. We see that as upside. We're confident that we'll get up to that rate 64 in 2023. We think the data supports that from independent forecasters and from -- and this is assuming we get through the pandemic and the vaccination rollout happens around the world, we think that's good to plan on that basis. The 70, 75 are what-if scenarios. Now we've done this before. You may remember a couple of years ago, Airbus, we were already talking about running scenarios at that level. So we know what we need to do if we're going up to rates 70 and 75 and we have no concerns about capacity. At a certain point, you need to buy a few more machines and hire some more labor, but it's doing more of the same. So we're very confident should Airbus require us to go to 70, 75 that, that's what will happen. I think much will depend on the propulsion system guys, the engine guys at that level. And so we will take our lead from the primes, both Airbus and CFM International in the case of the LEAP-1A. So -- but we'll be ready for all that, and we look forward to it. But even at the current trajectory, Airbus said that's going to give us tremendous sales growth again over the next few years.

It's very helpful.

That was the final question in the queue. So I shall turn the call back across to yourself, David, for any concluding remarks.

Well, listen, thanks, everybody for joining. Good discussions. We look forward to getting into much more depth in 3 weeks on Monday and then a follow-up to that. So look forward to continuing the dialogue. Thank you very much, indeed, and bye for now. Have a good weekend, everybody.

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