Senior plc (SNR) Earnings Call Transcript & Summary

Good morning, 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 would 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 GBP 2 million or 0.3% of group sales. And we purchased approximately GBP 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've 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 multiyear 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 that, over the past couple of years, we've played a stellar defense given all of the challenges we have faced, but it's -- 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 will 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 0 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 achieved 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 described Senior as a trailblazer driving the transition towards a sustainable net 0 future. On the social side, our big new initiative in 2021 was the launch of our global employee engagement survey, with an excellent participation rate of 81%, which for a manufacturing company where many people do not have instant access to e-mail is a high level. We have now implemented improvement plans across our operating businesses based on feedback and focusing on those areas that matter most to our employees. And we plan to run the survey every 18 months, with the next one being in September this year. We have some fantastic community engagement projects around the world in 2022, and you will see some case studies in our sustainability report. We've donated GBP 200,000 to UNICEF to fund COVID-19 vaccinations. And the value of our contribution was the 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 he said, and I quote, yes, "I will always remember 2021 as the year that the private sector went above and beyond for UNICEF. And I'm so pleased to count Senior as one of the companies who stood with us as we took on this historic endeavor." From a governance perspective, we have refreshed and updated our code of conduct and delivered a personal copy to every employee in the appropriate language. And to accompany in the training, we have rolled 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 our annual report, you will be able to read about the extensive work we are 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 are 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; and some of the hardest-to-decarbonize sectors in which we operate, whether that be aerospace, 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 are 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 on 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.

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 GBP 1.9 million, an improvement of GBP 4.3 million despite not having 8 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 0.17p. We continued to manage working capital efficiently and generated robust free cash flow of GBP 14 million. This, together with the proceeds from the divestment of Connecticut, meant we reduced net debt, excluding leases, to GBP 79.9 million at the end of 2021, a GBP 50 million improvement from a year ago. The group's net debt-to-EBITDA ratio improved to 1.9x. And the group's headroom on committed borrowing facilities increased to GBP 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 GBP 734 million in 2020 to GBP 658.7 million in 2021. Excluding unfavorable currency impact of GBP 36 million, revenue from the Aerospace division decreased by GBP 59 million. And Flexonics revenue grew by GBP 20 million. Excluding sales from Connecticut, which was divested in April '21, Aerospace revenue on an organic basis declined by GBP 33 million, down 7%. Civil aerospace revenue decreased by GBP 44 million, down 15%, reflecting aircraft production rates remaining lower in 2021 compared to pre-pandemic levels. Defense revenue increased by GBP 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 GBP 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 GBP 19.6 million, up 43%. Sales to other truck and off-highway regions, primarily Europe and India, increased by GBP 7.6 million. And sales to passenger vehicle markets increased by GBP 6.3 million. As expected, revenue from power and energy markets decreased by 12% in the year as customer demand continued to be impacted by the pandemic. Senior's sales to oil and gas markets decreased by GBP 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 continued to be deferred by customers. The chart on this page bridges adjusted operating profit from GBP 3.7 million in 2020 to GBP 6.1 million in 2021. In Aerospace, adjusted operating profit increased by GBP 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 GBP 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 GBP 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 more efficient business. We delivered savings of GBP 50 million in 2021, an increase of GBP 14 million compared to 2020. A net P&L restructuring income of GBP 4.4 million was recognized in the year. This included GBP 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 GBP 46.7 million, GBP 6 million lower than initially forecast. The cumulative cash outflow has been GBP 19 million, GBP 10 million lower than initially forecast. And we delivered savings of GBP 4 million in 2019; GBP 36 million in 2020; and GBP 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 and tax charges. Net finance costs decreased by GBP 1.9 million to GBP 8 million mainly due to lower borrowing costs, including the repayment of the $20 million private placement note in October 2020. A tax credit of GBP 2.6 million was recognized on the group's adjusted loss before tax of GBP 1.9 million. The tax credit was higher, as we benefited from enhanced R&D deductions and capital expenditure in the U.K. 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 GBP 21.2 million. This comprises a gain of GBP 24.2 million from the divestment of Connecticut and costs of GBP 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 GBP 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 GBP 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 GBP 21 million was 0.6x depreciation excluding IFRS 16. As previously advised, our operating businesses are already well capitalized and prepared for growth. CapEx in '22 is expected to be slightly below depreciation. Payments for interest, tax and pension contributions in excess of service costs totaled GBP 18.4 million. After GBP 3 million net cash outflows from restructuring and legal claims and GBP 47 million net cash inflow from corporate undertakings, mostly the proceeds from the divestment of Connecticut, the group generated net cash inflow of GBP 58 million in 2021. We further strengthened the balance sheet during 2021. And at December, the group had liquidity headroom of GBP 208 million under its committed borrowing facilities, an improvement of GBP 51 million from a year ago. Net debt before lease liabilities was GBP 79.9 million at the end of '21. And the group's net debt-to-EBITDA ratio improved to 1.9x, comfortably within normal covenant limits. In April, we refinanced the U.S. revolving credit facility of $50 million and extended its maturity to June 2023, so at the end of 2021, Senior had committed facilities of GBP 288 million with a weighted average maturity of 3 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 market, strategy and outlook.

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 remained subdued through much of the year. One thing I did want to bring out is our relative exposure to wide body compared to single aisle. Last year, wide body 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'd be useful to share how our sales break down 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 2 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 coming months and years, that will go racing 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 in space platforms, aftermarket and also sales which emanate from our aerospace businesses but are 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 drivers 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 trajectory to achieve a monthly rate of 65 by summer 2023. Airbus is still assessing with suppliers rates beyond 65. Similarly, Boeing stated on their recent earnings call that the 737 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 wide-body 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 5 per month to around 6 per month by early 2023. For the A330 family, production will increase from 2 per month to almost 3 per month at the end of 2022. Boeing continues to address 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 5 per month over time. And production of the 767 will continue at a rate of 3 per month. And Boeing have said that the 777 and 777X combined production rate will increase from 2 to 3 per month, with the first delivery of the 777X anticipated in late 2023. Overall, our focus for defense is very much in the U.S. market, where defense spending is almost as high as 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 U.S. defense, as there is broad bipartisan support in the U.S. 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 expecting to increase production over the next 2 years. And then there are newer growth programs that will become important for us. For example, our high-pressure ducting products are on the Boeing-Saab T-7A Red Hawk platform, which is the new U.S. 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 U.S. volumes. Sales on 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 the 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-design medical products; and structural assemblies for space satellites, which are built in Senior Aerospace AMT in the Seattle urea. 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 and in particular our exhaust gas recirculation coolers or EGR coolers as they are 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 will be at the end of 2021, with a return to growth [ in ] '22. 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 nonfossil 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 at our Capital Markets Day last October, where we spoke in depth about our strategy and technology, so this is a quick refresher. We highlighted 2 key technology themes. One was fluid conveyance and thermal management, which in 2021 represented 2/3 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 U.K. 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 2 lean years. We're also winning new work for low-orbit satellites. And 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 work for our U.S. 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 the 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 the environment. To focus on product offerings for the transition to a 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 by 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 0 environment. In addition to our technology and product development activities, [ another ] 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 have 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 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 have secured for our Aerostructures business. And as their core market recovers, as I've said before, that provides the group with strategic optionality. We are keen to expand our fluid conveyance and thermal management businesses. As I've shown, there is much we're doing organically, and as our balance sheet strengthens, we will be able to consider value-enhancing M&A activity. Our acquisition heat map, 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 would be worthwhile setting out our priorities for this year. We are confident that we've turned the corner, and we will see growth this year. We're taking all of 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 have 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 2 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 now that recovery is underway in our core markets. The Board anticipates good progress in 2022 in line with previous expectations as we continue the multiyear recovery back to pre-COVID levels of performance. We remain committed to delivering a strong recovery across our 2 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.

It's Andrew Douglas from Jefferies. 3 questions, please, the usual 3. 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 very nicely ]. Just in terms of your ability to kind of rehire some of the people that you've -- you let go over the last kind of couple of years and how confident you are on that front. Secondly, on the Senior Operating System, clearly you've done 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 [ still kick on ] from in here? And then last but by no means 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, 6, 9 months, whether that's changed at all; and how you're thinking about M&A in the future?

Okay, so firstly, thank you, Andy. Firstly, on head count, yes. I mean we're hiring again, which is the good news after the last couple of years. And I won't say it's easy, but actually Senior has done pretty well. One example, when I was at our AMT business in Seattle that does a lot of the big structures work for Boeing -- they rehired 84 people this year. Rehired, so these are people who have come back to Senior. They were -- they've gone out to smaller machine shops and they were delighted to come back and join Senior. We're seen as a good employer. So across the world really, we are now hiring people. And 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 we've actually been there ]. We're quite encouraged, when we did our quarterly business reviews a few weeks ago, to hear that the numbers we're talking about in terms of hiring are manageable. Chicago was one of the areas that was difficult. That's now improved. And once you get beyond North America and the U.K.: 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 AMT ] 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 technically we launched that back in 2015, '16, 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 to generate cash even while sales are going backwards is because of the Senior Operating System. [ It's 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 adding 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 will 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 the third was on M&A pipeline, yes. 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 [ announce and start ] making acquisitions, but we've done quite a lot of work in the background. We monitor our targets. They're very much around the fluid conveyance and thermal management space. We'd look at things that are relevant now and also relevant as technology changes, and there are 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 embarking upon it, but we do see value-enhancing bolt-on M&A as a -- supplementary to organic growth and helping our overall returns for our stakeholders.

Chris Leonard from Crédit Suisse. 2 questions, if I could, looking first at Aerostructures and the good orders you received there in 2021. When do you think you will start to consider the potential for a strategic disposal here? And is there any sort of time line on when we can first see 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 pull that mix slightly higher for the structures element in the business? And then the second question, if you can 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?

Okay. So I'll address the first 2, and Bindi can talk about capacity and just give me a break. And then so I think, on the Aerostructures, look. Our strategy that we laid out for a couple of 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 [ slide ahead and the ] momentum in Aerospace, the big [ flash ] machines at the bottom [ and ] the new [ moldings ] 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. And if you just look at the recovery rates in the Aerospace: There is some recovery this year. And of course, Airbus has said they're going to be at rate 65 by next year, so we'd really want to see sales and profits picking up, but we'll -- the Board considers that on an ongoing basis. I think, on the rates increase, yes, it's true that Aerostructures should increase sales fairly rapidly over the next 2 years, particularly as those single aisle rates come back. You saw the -- you saw on the pie chart there what -- the biggest platforms, where they've got a lot on the MAX. They've got a lot on 320, but we've got a lot on the fluid systems side as well in those aircraft, so it doesn't just apply to structures. Our commercial aerospace business in the -- on the fluid side will also increase. We've got some great products on single aisle and business jets and regional, yes, and wide body. And so it's good for both, those increasing rates. Do you want to comment on capacity?

On 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 can -- 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 few years, we will still expect to see CapEx at a sort of -- I mean, in '22, 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.

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

It's Harry Philips with Peel Hunt. 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 -- or you're operating as a buffer, if you like? Or are they taking inventory off you? And therefore, any pull forward in production rates sort of has a lag coming back on to yourselves. And then secondly, and I should know the answer to this, but your sort of aftermarket content within Aerospace: Just obviously it's part of that 46%, as you suggested, but would it justify a little sort of segment in its own right?

Unfortunately, not yet, on the aftermarket one. It's a very small percentage of our sales, but it's, of course, good from a 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, yes, but no, it's very small [ today ]. And yes, on the heavy-duty truck side: Well, we -- I mean we're delivering constantly to the likes of Cummins and Daimler several -- 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. They're taking everything that they can get, frankly, so -- but they are more constrained by other supply chain factors and semiconductor shortages, less so than the passenger vehicle guys, on the trucks side, but nonetheless, it has affected them. So we're looking forward to another year of growth this year. I think we put the growth levels in there that ACT have published. And we did have -- 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.

Just one final, supplementary just in the context of the trucks. 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 costs out of their broader supply chains and what have you?

Yes, I think we're there to help them. So obviously these things are an opportunity rather than a risk. And we -- they've been a tremendous customer for many years in many parts of the world. We supply to them in -- 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 are doing some really impressive stuff and we're working with them on that. So we're very happy with that. Dom...

Dom Convey from Numis. Just 2 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 giving back on price? And secondly, just in terms of this medium-term aspiration for the 13.5% ROCE, do you effectively get there with the recovery back to '19 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.

Yes, do you want to take the second one, first? But then we put the building blocks in the appendix, didn't we, this time around, so...

Yes, yes. So in terms of ROCE, I mean, the -- 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, as 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 -- and portfolio optimization on that. So continuing to prune to grow, making sure that we are 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.

It -- is the '19 revenue run rate a simple way to think about that, or would that be wildly off?

I think, if you think about wide body: Wide body is some way out.

Yes.

I think A350 was at, what, 10 a month. And Boeing just moved the 787 to 14 a month, so -- and [ either of them weren't 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 that we're doing is really important as well, the costs that we've taken out of the business to -- so most of that growth is really going to come from single aisle. Some of it will come from wide body. 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 [ close ], wasn't it?

Yes.

Had a 737 work on the quad assemblies. And it had -- which we do at Damar in 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 an old platform, but if you think about it, [ the freighters ] and also the tanker program -- it's going to go on for a very long time. And we've got a lot of parts, doing all 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 wouldn't have had on that platform previously. So yes, a bit of help from market share. The biggest increase is going to be from recovery in markets, though.

Just 2 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 7s. Is there still a long opportunity or 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 of run its course now? And then secondly, just on energy costs, I don't believe that you're a kind of hugely energy cost-intensive business, but kind of I'll just double check in terms of what you do in terms of hedging for energy costs and all that kind of stuff given what's going on in Russia.

Yes, I know that, Launie and Mike, the 2 guys that run the divisions that were at the Capital Markets Day, they've really got -- their business development teams have been driven very hard to go out and speak to customers now that we can get in front of them 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 company, so good that we can get the BD activity going face-to-face. We're still [ building ] lots of stuff, some of that [ building ] what we picked up because suppliers were in difficulty. And there are perhaps less of suppliers in difficulty than I thought there might have been at one point. There's been a lot of support for them through the crisis, but nonetheless, there are still a number of suppliers in the ecosystem that are under difficulty, so that represents some opportunities for us with our stability. And then I think, on the fluid systems side, because we've got some pretty innovative technologies, that's still attracting attention. Maybe slightly slower burn, but there are some very good prospects there. Equally upbeat actually about the industrial side, whether that's of 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 represent some very good growth opportunities using just the same technology we have been using in Aerospace for a long time. So yes, I'm upbeat about the development. If you look at the report I give to the Board every month so that we summarize all the BD activity, there's a lot of stuff going on, [ as in -- it will tell you ].

And then 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 in -- 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 our view and diligence on managing those costs over the coming year.

Can I just ask one more follow-up following on for the energy costs, I suppose? But for Flexonics, should we be seeing that -- the higher oil prices be a catalyst for further orders coming through, hopefully, in the future? And we know there's that gestation [ for ] pathway, but maybe from 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.

Yes. No, good question, Chris. And obviously 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 our customers like Schlumberger. So as oil prices increase, you tend to think there'll be more exploration drilling, more production drilling, which is generally a good thing for upstream oil and gas. And 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 peaks around 2030. You might recall from our Capital Markets Day. So we 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 ] North American suppliers on small modular reactors looking at doing 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 [ and ] fossil fuel for a few years, [ what we find ], but very quickly, of course, we all want to transition to those sort of lower-CO2-emission technologies and we're well placed for that. I mean today, if you look at pathway, which is one of our big businesses that supplies in the downstream, actually much more of the business is not petrochem. It's much more other things. Any more questions? Okay, listen. Thanks, everybody, for coming along this morning. It's really appreciated. It's good to see you all back in the -- in LSE face-to-face. If you've got any follow-up questions, please don't hesitate to contact Gulshen, Bindi or myself. We'll be very pleased to help. Thank you.

Thank you.