Senior plc (SNR) Earnings Call Transcript & Summary

Well, good morning, and welcome to Senior plc's 2023 Full Year Results Presentation. Thanks for making the effort to get here to the Deutsche and Numis offices in London, and indeed, thanks to Numis for hosting us this morning, and a warm welcome for those of you joining remotely. In terms of our agenda this morning, I will briefly cover the highlights; Bindi will run through and comment on the results; and then I will give an update on markets, strategy and outlook. Senior has delivered a year of strong trading performance and profit growth with significant momentum across both of our divisions. Our Flexonics division performed well in 2023 with double-digit margins and strong growth in both Land Vehicle and Power & Energy. Momentum is building in our Aerospace division. We've achieved a diversified position across key civil and defense aircraft platforms and are benefiting from increasing aircraft build rates, which will lead to higher sales in 2024 and beyond. Supply chain issues are improving as anticipated, and we expect further improvement as 2024 progresses. The order book is robust and growing. Our book-to-bill was a healthy 1.14. Spencer Aerospace as an integrated business within the Senior is going well, with revenues increasing over 50% year-on-year and order book visibility supporting further strong growth in 2024. Financially, we continue to trend positively with significant improvements in return on capital and earnings per share and a healthy balance sheet. Bindi will cover the details of this in a few moments. Reflecting this improved performance and our future prospects, the Board is pleased to recommend a final dividend of 1.7p, bringing the full year dividend to 2.3p per share, a 77% increase from last year. So before I talk about markets, strategy and outlook, I will hand over to Bindi to take us through the financial results.

Thank you, David. Good morning. Senior delivered strong trading performance in 2023, maintained a healthy balance sheet and continued investment in future growth. Revenue grew 14% on a constant currency basis. Margins increased to 4.8% and adjusted operating profit increased by 61%. Adjusted profit before tax increased by 91% to GBP 38.3 million, and adjusted earnings per share increased to 10.28p including 2.54p from release of provisions for uncertain tax positions, which will not repeat in 2024. The group recorded free cash inflow of GBP 15.5 million. Net debt, excluding capitalized leases, was GBP 132 million, after taking into account the second payment for the acquisition of Spencer Aerospace. Our balance sheet remains healthy with net debt EBITDA of 1.6x. With improved profitability, return on capital employed increased by 240 basis points to 7.1%. I will now take you through the key elements of the group's trading performance in 2023. Looking at divisional performance on a constant currency basis, Flexonics revenue grew by 18%. Revenue from Land Vehicle markets increased 23%, driven by both increased market and customer demand as well as market share gains for both commercial and passenger vehicles. Sales to the North American truck and off-highway market increased 11%. Our sales to other regions, primarily Europe and India, went up 33%, and sales to passenger vehicle markets grew by 43%. Our strong sales in land vehicles were aided by production increases on recently won contracts. Good momentum continued in the group's Power & Energy markets as sales increased by 11.6%. Sales to oil and gas customers increased by GBP 13 million, up 32%, benefiting from increased upstream activity as well as growth in downstream maintenance and overhaul. We also benefited from increased sales into nuclear customers. Aerospace revenue increased by 11.5%. Civil Aerospace sales had the strongest growth, up 21%, reflecting higher aircraft production rates with both single-aisle and wide-body platforms contributing to the growth. Revenue from the defense sector grew 8.5%, primarily from increased demand for our product on legacy platforms and higher aftermarket. A number of our aerospace businesses supply product to adjacent industrial markets. Revenue from these markets decreased by GBP 19 million because of reduced demand from the semiconductor equipment market. Now moving on to benefit to profit from this increasing demand. In Flexonics, adjusted operating profit increased by 48% to GBP 37.5 million, and the adjusted operating margin increased by 220 basis points to 10.8%. This significant improvement in profitability reflected volume-related operating leverage across our Flexonics businesses as well as benefits from price increases, which more than offset inflationary cost increases. In Aerospace, adjusted operating profit increased by 33% to GBP 27 million, and the adjusted operating profit margin increased by 70 basis points to 4.4%. Negotiated price increases helped offset the impact of inflationary cost increases. We anticipate that inefficiencies largely caused by certain supply chain challenges would temporarily dampen volume-related drop-through benefits. Overall, Aerospace trading performance has been in line with expectations whilst absorbing the significant impact of the Thailand supplier fire and other supply chain issues in 2023. Inflation and continued investment in information security resilience were the main factors increasing central costs by GBP 2 million. This shows the reconciliation of adjusted operating profit to the statutory reported profit for the period. It also highlights our interest and tax charges. Net borrowing costs increased by GBP 3.1 million to GBP 10.2 million due to higher interest rates on variable rate debt and higher levels of indebtedness compared to last year. We expect these costs to increase in 2024, reflecting higher indebtedness and continued high interest rates. IFRS 16 interest charge on lease liabilities increased to GBP 2.9 million due to higher interest rates. And for the same reason, we benefited from net finance income from pension plans increasing to GBP 2.1 million. Towards the end of 2023, we simplified our Americas legal entity ownership structure. As part of this exercise, we reassessed provisions for estimated uncertain tax positions. As a result, provisions of GBP 7 million and associated interest of GBP 3.5 million were released in 2023. This benefit will, therefore, not repeat in 2024. Excluding these provision releases, the adjusted tax charge was GBP 2.8 million, which was lower than expected as the benefit of some tax incentives, R&D in the U.S. and CapEx in the U.K. as well as the geographical mix had a positive impact on 2023's effective tax rate. Looking ahead to 2024, we currently expect the group's effective tax rate on adjusted profit before tax to return to a more normal level of around 22%. In terms of reconciling adjusted profit to statutory reported profit, we recognized net P&L restructuring costs of GBP 5.6 million and GBP 0.1 million site relocation costs. Corporate undertakings include GBP 3.2 million of costs primarily associated with potential divestment activities. The rest of the items from -- excluded from adjusted profit measures related primarily to the acquisition of Spencer Aerospace, GBP 4.4 million under corporate undertakings, including unwinding of discount on deferred and contingent consideration and GBP 2.2 million for amortization of intangible assets from acquisition. We delivered free cash inflow of GBP 15.5 million. With demand growing and mitigations taken against supply chain disruption, working capital cash outflows were GBP 27.6 million, of which GBP 24 million related to increase in inventory and GBP 20 million to increase in receivables, partly offset by GBP 16 million increase in payables. Receivables were higher as a result of revenue growth. The increase in inventory reflected planned investment to enable us to meet the strong increase in demand and to protect against supply chain disruption. Working capital was 16.7% of sales. We are likely to see an increase in working capital over the coming year to support the growth in Aerospace. Capital expenditure of GBP 35.2 million was 0.9x pre-IFRS 16 depreciation. For 2024, CapEx is expected to be slightly above pre-IFRS 16 depreciation. We're prioritizing new investment in growth projects where contracts have been secured, important replacement equipment for current production and in sustainability related items. The GBP 1.4 million pension contributions relate mainly to our U.S. plan. Remember we are no longer paying contributions to the U.K. plan. We will continue funding our U.S. plans and currently estimate 2024 contributions being at a similar level to 2023. Payments for interest and tax totaled GBP 18.5 million. Below free cash flow, after payments of dividends and acquisition of shares by the employee benefit trust as well as restructuring cash outflows, we were broadly cash neutral. Overall, the group's net cash outflow of GBP 25.5 million was therefore primarily for investing in the acquisition of Spencer Aerospace with payment of the deferred consideration due on the anniversary of the acquisition. Based on Spencer's performance in the year, we expect to pay the first earn-out amount of around GBP 10.5 million in March 2024. The group's net debt-to-EBITDA was 1.6x in December '23, and we had liquidity headroom of GBP 142 million under our committed borrowing facilities. In November, we extended the maturity of the GBP 115 million U.K. RCF out to November 2027. And in February 2024, we issued new $50 million private placement notes carrying interest at 6.26%, maturing in February 2030. These actions mean the current weighted average maturity of the group's facilities is over 3 years. Senior has a healthy balance sheet with strong liquidity. In summary, Senior delivered strong trading performance in 2023, maintained a healthy balance sheet and continued investment in future growth. This is reflected in the group's ROCE increasing by 240 basis points to 7.1%. Looking further ahead, we're on track to deliver our stated ROCE target of at least 13.5%. The proposed final dividend reflects the Board's confidence in the group's improved performance and future prospects. 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 2023, Aerospace represented 64% of the group's revenues and Flexonics was 36%. We had strong growth across our core markets. Civil aerospace is now 42% of the group, and there is plenty more growth in that sector to come as production continues to increase to meet the very strong demand for new aircraft. Our land vehicle and Power & Energy businesses grew strongly, reflecting increased demand for heavy-duty truck, off-highway, passenger vehicle and upstream and downstream oil and gas products. Defense has also grown in absolute terms but was flat as a proportion of overall group sales due to the stronger growth in other sectors. As anticipated, our other aerospace markets declined overall due to the cyclical reduction in semiconductor equipment sales, which most people expect has now dropped with growth expected to resume towards the end of this year. On the Civil Aerospace side, we have excellent positions on all single-aisle and wide-body platforms, which will continue to grow strongly as long-haul travel and short-haul demand levels have recovered well. The industry is having to deal with the impact of Boeing's most recent series issue on the 737 MAX. Safety is of paramount importance in the aviation and aerospace sectors. And anyone who has visited our factories will know that in Senior from shop floor to boardroom safety always comes first. From a business perspective, the 737 MAX is an important platform for us, but in 2023, it represented only 6% of group sales, testimony to our strategic drive to broaden and derisk the portfolio. I've included a separate slide on the 737 MAX situation. So we'll talk about this in more detail in a few minutes. Looking at more detail at the markets, we'll start with Flexonics and firstly look at land vehicles, which covers truck, off-highway and passenger vehicles. For this market, we sell a range of proprietary products to major OEMs, in particular, our exhaust gas recirculation coolers, or EGR coolers as they are commonly known, which protect the environment by reducing emissions. And we have tremendous opportunities for our thermal management products such as battery cooling and inverter heat sinks for electric vehicles. Demand in 2023 was very strong, with significant increases in sales across all vehicle categories in North America, Europe and India. On heavy-duty truck, we outperformed end markets due to production increasing on recent contract wins. We also saw strong demand from our off-highway and passenger vehicle customers. We anticipate demand in 2024 will moderate. And while, as you can see from the chart, ACT are forecasting a drop in heavy-duty market production in '24, it is less pronounced than when I last showed the chart at the half year, and I would not be surprised to see that forecast continuing to improve. Really, it will depend on the broader macroeconomic backdrop in North America and Europe. Our EGR cooler expertise means that we are well positioned for other applications which need innovative thermal management and fluid conveyance solutions, notably battery and electronics cooling for electric vehicles. And the level of bids and product development activity in this area is continuously increasing, and we've secured our first production contracts, which augurs well for medium and long-term success in these markets. Our other most important Flexonics market is power and energy, where we supply into upstream and downstream oil and gas customers and are keenly involved in the transition to clean energy. Markets continue to grow in 2023 with good order intake, particularly from our downstream customers, including repair, overhaul and replacement work for Senior's pathway business. While we may see some destocking from our upstream customers in '24 following high levels demand in 2023, we anticipate another year of strong demand for our downstream products. In the medium term, we're well positioned to grow our non-fossil fuel business, building on our existing renewables and nuclear energy customer base, including the nascent small module reactor or SMR sector, where we involved in active bids and design work for North American customers. Moving on to Aerospace. This chart shows the percentage of our Aerospace division sales for 2023 by platform and helps to set the scene for our aerospace and defense markets. The proportion of group as opposed to division revenue is shown in the breakout box on the right. And remember, this includes all sales to all customers that end up in a particular aircraft. 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 continues to represent the largest percentage of sales by platform. As mentioned, I have a separate slide on the 737 MAX situation, which I'll go through in a moment. Sales of our parts and equipment to wide-body platforms, including the Boeing 787, Airbus A350 and A330 have grown and will continue to do so based on our customers' planned build rate increases over the next few years. The F-35 and C-130 aircraft remain our largest defense platforms. I show this chart regularly. So most of you will be familiar with the high proportion of sales not attributable to any specific platform at 1% or higher and 38% of our Aerospace division revenue, this is an important part of our business and will include sales on space platforms, aftermarket and also sales which emanate from our aerospace businesses but are for adjacent industrial markets. So a good example would be sales for semiconductor equipment and medical applications. The January 6 Alaskan Airlines 737 MAX incident where the fuselage plug blew out mid air was a shocking event and thankfully no one was seriously hurt. It could've been very different. The fallout from the incident will take time to finally settle. So what does that mean for Senior? Well, in 2023, the program represented just 6% of group sales. Boeing has confirmed the production of the 737 MAX increased from 31 aircraft a month in H1 2023 to 38 aircraft a month by the end of 2023. Rates will not increase beyond this level until approved to do so by the Federal Aviation Administration, the FAA. Boeing has previously said that they plan to increase 737 production to 50 per month over the 2025-2026 time frame. During the pause and the expansion of 737 MAX production, Boeing has said that they will maintain the current master schedule, which for some suppliers maybe above rate 38 per month to avoid disruptions to the supply chain and support future production increases once authorized by the FAA. That would include schedules for the majority of Senior's direct sales to Boeing. At rate 38, the average rate of production will be higher in 2024 than in 2023. Even if we continue the rate 38 all year therefore, it follows that Senior's MAX sales will increase year-on-year. The situation is fluid and we will closely monitor information coming from Boeing and FAA on this matter. The chart on the left of this slide shows that air travel has recovered very strongly from the pandemic dip. Revenue passenger kilometers or RPKs increased by 37% and have now reached 94% of 2019 pre-pandemic levels. Domestic passenger traffic surpassed 2019 RPKs during the year, reaching 104% of 2019 levels, while international passenger traffic has reached 89% of pre-pandemic levels. IATA expects demand for air travel to double by 2040, with passenger numbers expected to increase by 3.9 billion. Asia Pacific will contribute more than half of the forecast growth supported by favorable demographics and growth in household incomes. As demand continues to increase, airlines want new aircraft and demand is further supported by the replacement cycle driven by the retirement of older, less efficient aircraft. Given the climate challenge and high fuel costs, the imperative for efficiency has never been greater. And with our diversified product portfolio and especially the attractive positions we hold across the newest generation of single-aisle and wide-body aircraft platforms, we are well positioned to benefit from this market growth. The 2 charts on the right show our expectation of average monthly production rates for all aircraft types combined. So based on what our customers have announced, supplemented by our own estimates. For Airbus, that includes the A220, A320, A330 and A350; and for Boeing, it includes the 737 MAX, B767, B777 and B787. And let's just remind ourselves what the aircraft OEMs have said. On single-aisle, Airbus reiterated at the recent results call that for the A320 family, they intend to ramp up to monthly production rate of 75 per month sometime in 2026. On A220, Airbus has said they plan to increase to rate 14 by 2026. On wide-body, for the A350, Airbus confirmed their increased target rate of 10 per month in 2026. And similarly, they reported on A330, the rate would increase to 4 per month in 2024. For Boeing, I've already talked separately about the 737 MAX. Boeing continued to plan for the 787 production rate, which is currently at 5 per month, to increase steadily to 10 per month in the 2025-'26 time frame. We expect that production of the 767 will continue a rate of 3 per month, and the first delivery of the 777X is still expected in 2025 with the production of the past year freighter versions on the 777 continue at current levels. The Aerospace supply chain has started to improve, and we expect further progress throughout 2024. The volume of parts shortages and specific supply chain challenges has reduced considerably. However, there are still some challenges on certain material and component categories that are affecting some of our operating businesses in common with the whole industry. One of the most significant supply chain challenges in 2023 that we've previously highlighted was the fire at one of our key suppliers in Thailand. Our team in Thailand proactively managed the consequences of the fire to help customers and [ this fire ] in question to the very best of their ability. Nonetheless, the fire had a significant effect on planned growth and performance in our Thailand business. And it was to the credit of our other aerospace businesses, that they stepped up to ensure we met our expectations for the division as a whole. Progress with the factory rebuild at our supplier is continuing apace and should be near completion by the end of Q1, although as previously advised, it will be well into the second half of 2024 before requalification of their parts from the new factory will allow return to normal operations. Thereafter, we are confident that Thailand will see rapid growth as they have a compelling value proposition that our customers are keen to take advantage of. It's easy to become preoccupied with the supply chain challenges, but the real story here is a strong long-term growth in air traffic and the continuing increases in build rates. This is great news for the whole industry. Overall, our focus for defense remains very much in the U.S. market, where defense spending is almost as high as the next 10 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. Long-established programs such as C-130 and P-8 remain important revenue drivers for Senior, but of course, F-35 is the largest defense program that we are on. We have several operating businesses supplying to various customers on this program, so we're encouraged to see Lockheed Martin confirming target levels of production of 156 aircraft per year over coming 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. The U.S. Air Force is now in the intensive flight test phase, after which it will ramp up in production over the coming years. We'd expect this platform to be successful internationally in addition to the U.S. volumes. Sales of the type of products we make in our Aerospace operating business into adjacent markets outside of the civil aerospace and defense markets are classified under other aerospace and include sales into the space, semiconductor equipment and medical markets. At 8% of group sales, it's a meaningful part of our business. Sales have dropped in this segment due to the cyclical downturn in semiconductor markets, which affect our sales to semiconductor equipment customers, but we would expect that market to pick up again towards the end of this year as the cycle improves post trough. Space has become an increasingly attractive market with the exponential growth in low-orbit satellites as a consequence of programs like SpaceX's Starlink and Amazon Kuiper. And with all the satellite requirements, naturally there's a huge increase in requirements for launch vehicles, too. Our sales are growing in this sector, where we provide, for example, structural parts and cryogenic valves. Moving on to strategy. I first want to talk about Senior's company purpose. This time last year, I introduced you to our refreshed company purpose. It seems to have been very well received by customers, investors and employees. As a reminder, our purpose is, we help engineer the transition to a sustainable world for the benefit of all of our stakeholders. And we do this by using our technology expertise and fluid conveyance and thermal management to provide safe and innovative products for demanding applications in some of the most hostile environments and by enabling our customers who operate in the hardest-to-decarbonize sectors to transition to low carbon and clean energy solutions. And by staying at the forefront of climate disclosure in action by ensuring our own operations achieve our net-zero commitment. Sustainability is the central theme of our purpose, our strategy and indeed our technology road map. Importantly, therefore, we're making great progress as an organization in terms of our own sustainability actions. With regard to our actions on climate change, we remain on track to deliver our 2025 near-term Scope 1, 2 and 3 greenhouse gas emission reduction targets, which in 2020 were approved and verified through the Science Based Targets initiative. In October, we were delighted to have our long-term net-zero targets approved and verified by SBTi, who commended us for our ambitious goal to reduce absolute Scope 1, 2 and 3 greenhouse gas emissions by 90% by 2040 from the 2018 base year. That keeps us in the vanguard of companies taking real and decisive action to reduce greenhouse gas emissions within our own operations and through our supply chain. And in February, we were pleased to announce that for the second year running, we were one of a small number of companies to have been awarded the prestigious A rating from CDP for our climate disclosure and actions, and we were also rated A by CDP for the work we're doing with suppliers on climate. Active portfolio management is something our Board continuously focuses on, evaluating our operating businesses in terms of their strategic fit in order to maximize group operating efficiency and optimize value for shareholders. In that context, we have some excellent aerostructures businesses with robust order books, good content across all the important growth platforms and which are getting stronger as build rates increase. However, they don't necessarily fit with our fluid conveyance and thermal management and strategic focus, and therefore, we continue to explore strategic options for those businesses, which includes potential divestment. I know you wouldn't expect me to give a running commentary on commercially sensitive issues, but our strategic intent is clear, and we will take the right time to make the right decision based on the value we will deliver for our shareholders and other stakeholders. In the meantime, our focus remains on growing revenue and improving performance in those businesses. The integration of Spencer Aerospace, which we acquired in November 2022, has been progressing very well. Sales were up over 50% in 2023 compared to 2022 and order intake supports further strong growth expected this year. We continue to pursue multiple new business opportunities, both in Spencer's traditional North American home markets, and in Europe, where there's already a successful collaboration with our French aerospace business, Ermeto. So let me finish by talking about the outlook for Senior. Overall, the Board anticipates good growth for the group in 2024, in line with its expectations. Momentum is building in our Aerospace division. We've achieved a diversified position across key civil and defense aircraft platforms and are benefiting from increasing aircraft build rates, which we expect will lead to higher sales in 2024 and beyond. Supply chain issues are improving as anticipated, and we expect further improvement as 2024 progresses. Beyond this, we can expect Aerospace performance to continue to improve in 2025 as production rates increase, supply chain continues to improve and additional contractually agreed price rises take effect. Our Flexonics division performed well in 2023 with double-digit margins and strong growth in both Land Vehicle and Power & Energy. In 2024, we expect to maintain good performance with land vehicle market demand normalizing to more typical levels and continuing robust demand in our downstream oil and gas business. Looking further ahead, we remain on track to achieve our stated group ROCE target of at least 13.5%. Our strategy in positioning an attractive and structurally resilient core markets, active portfolio management, combined with our sector-leading sustainability credentials and highly relevant technical capabilities, provides confidence of continuing performance improvements across our Aerospace and Flexonics divisions, enhancing value for our stakeholders. So with that, we'll open the floor for any questions, which Bindi and I would like to answer. Yes, Andy.

Andrew Douglas from Jefferies. Three questions to start with. On Spencer, just going back to the slide on Spencer, 50% growth is clearly a hell of an outcome. Can you just talk about what's driving that because that's exceptional growth. And what is it that you're doing that means you can keep on growing that in '25 and I'm assuming '26? Semicon, clearly that's an important part of your other aerospace business. Can you just talk about why you're expecting recovery in the second half? Is that what your customers are telling you? Or is that more of a market view? And we're seeing some of your customers, particularly Airbus, already ramp up -- already staff-up for a ramp-up in '24, '25, '26. Can you just talk about how you guys are doing on that front? How easy is it to find labor? I'm assuming it's easing a little bit. And how do you manage that? Do you staff-up in advance? Or do you kind of do it slightly differently?

Okay. So starting with Spencer. So the key thing about the hydraulic fluid fittings market is to get more and more product qualified. It's like a conveyor belt of product. So we knew when we bought Spencer that they were in the middle of doing that. They had a lot of product already qualified on the 737 platform and product qualified on the 787 platform, and that's continued. And what they didn't have was access to European markets, particularly. So that's an area we've been helping them on. We don't anticipate a huge sales into Europe for a couple of years, but we've already won our first orders. But really, it's the growth in the home markets that's been propelling the sales, both to OEMs but also to third-party customers who use these products. So it's all about that conveyor belt. It's one of the key metrics we look at every business review, how many more products that were qualified. The demand is there. It's a supply-constrained environment. So the more products we qualify, the more we would sell, and we knew that when we bought them. So -- and it's a relatively new company who -- if we get our performance right in terms of quality and on-time delivery, which we are, we know that the customers will be placing more orders. So we'll see very strong growth again this year because of that. But that's what's behind it. And then as we get into future years, it's really sales with and through Ermeto in France and getting more products qualified on to European platforms. I think on the semicon side, yes, we probably see fourth quarter [indiscernible] fourth quarter for the turn in that market. And for us, it's not so much semiconductor itself. It's the equipment that goes into the plant. So the Chips Act in Europe as well as in America helps because we're going to fit out all those new plants. Our customers [indiscernible] Lam Research and both the market information we're seeing but also what the customers are saying all points to kind of quarter 4 for that market turning and increasing. So that will be important for us. And then staffing is good. I'm trying to give Bindi one to answer here -- we can ask. Do you want answer staffing.

Yes. I mean, generally, we're in good shape in terms of recruitment and retention, and our global footprint also helps. So there are some pockets, Southern California, for example, where it continues to be a tougher recruitment market there, but even there we are actually in decent shape. And I know Jane Johnston with our HR functions are doing lots of innovative things as well to retain talent and attract talent into the businesses. Obviously, as rates continue to ramp up, we will need to continue to work harder to make sure we are fully capacitized from a labor perspective.

And we get pretty good forward visibility from the customers. Obviously, a lot of discussions going with Boeing around the MAX situation, but also with Airbus around their planned increases, knowing people on the ground in Toulouse, making sure we're fully understanding what's happening, and we'll get the recruitment going in advance, but we won't take the people in until we need them. Yes, Dom.

Dom Convey from Deutsche and Numis. Just a couple of questions on Aerospace to start with. I guess, it'd be helpful just to get a sense as to where you think we are now relative to 2019 run rate. Secondly, you mentioned in the statement about these contractual price increases coming through. So I wonder if you could give us a little bit more color, I guess, specifically how material they were as the component of the growth last year? And to what extent the future improvements are simply catching up on previous cost increases or trying to hold the line on margins? And then final question for me. Just remind us, if you would, the time line for the 13.5% return on capital employed target.

Yes. So firstly, on the relative 2019. So that chart where we show total build rate, if you break that down, let's start with single-aisle. So back in 2019, Airbus were already at rate 60 on single-aisle. We were at rate 63, which was what we're about to ramp to. So they're not there yet. They're probably -- most people think they're around rate 50 and they'll be obviously going from there to rate 75 by 2026. So by '26 we will be above where we're in '19 but not yet. And the A350 was what, 9, 9.5 a month, I think, back in '19. So they're talking about rate 5 and then going up to rate 10. So eventually, we will get beyond -- slightly beyond where they were in '19. But again, it's a couple of years out for that. 330 is not dissimilar. And 220 was kind of new. So the volume that comes through on that is more than it would have been back in '19. So you're probably looking at '25 before Airbus get back to their volume they were at in '19, in aircraft production terms, not the past due numbers. And then Boeing. So Boeing maybe talk about not just pre-pandemic, but pre MAX crisis when the fleet was grounded, they were at rate 52, and we were ready at rate 57. So rate 38 is great. It's much better to where it's been, but still some way to get back to those peak levels, and we would see 2026 -- '25, '26 for Boeing getting back to rate 50. The 787 was -- it actually just moved to rate 14 of pandemic going from 12 to 14. So now down at 5, it's going to increase to 10. And then the 777 is going to up to 4 a month pretty soon. That's roughly where it was pre-pandemic. Had been higher historically. So what all that says is we don't actually get back to peak volumes until 2026, which is one of the -- but we can see all that progressing. You look at the order books, they're at record levels, supporting that growth. So that's why we see really strong growth coming through in civil aerospace over the next few years. I think on the pricing one and Bindi may talk about the ROCE one, pricing, looking forward, we already have concluded some negotiations with customers where they are happy, we are happy. Some of those price increases landed last year, some of them this year, some of them cutting in '25. We even have first price increases negotiated for '26. So that will all help our aerospace margin recovery. And Bindi, maybe just want to mention on pricing versus inflation last year and our ROCE target.

Yes. I mean just in terms of pricing, we had a little bit of catch-up from prior year by only about GBP 0.5 million of extra benefit in 2023 compared to '22, but overall, price increases offset inflationary cost increases by about GBP 6 million total. And then on the ROCE target, we first -- post the pandemic, we talked about our -- reiterated our 13.5% minimum ROCE target back in 2021. And at that time, we said medium term, meaning around 4 to 5 years. So really what -- and we're comfortable with that time frame. So really, it's kind of aiming for that by the end of 2025.

Me again. 2 more. Can you talk about the M&A pipeline? And also, I guess, in absolute numbers in there, what you're looking at maybe compared to 12 months ago and anything of decent size. And then just on working capital to sales. You said in the presentation that working capital will be going up to support growth. I get that. What's the sales -- working capital sales target maybe on a 2-, 3-year view from 16.7% last year?

Shall I take that first?

Sure.

On working capital, we were at 16.7% for the full year, which is kind of where I said at the time of the half year result. It will be around that sort of level again in 2024, but beyond that, and really, we need the supply chain to get back to a normalized level. But our medium-term target remains 15% and then driving it further.

M&A, we did include our acquisition heat map, I think it's on Slide 37, you'll see it in the appendices there, which kind of points to those sorts of things that will be most interesting from an acquisition perspective. That, of course, is fluid conveyance, thermal management-type businesses that have got strong intellectual property, of the right size. So yes, we maintain an active pipeline. And sometimes these things may not be executable for some time, but we try to keep in touch with the owners and make sure that there's a good dialogue going there, just as we did with Spencer. It's not an immediate priority for us. We, of course, are pleased that we've integrated Spencer well into the business. We've talked about our portfolio reshaping activities. And of course, some investors will want to see what we're thinking about in terms of capital allocation, where acknowledge that return to capital to shareholders is important as well. And the Board would look at all of that at the right time. Any more questions? Okay. Thank you very much. Really appreciate you coming along, and we look forward to continuing the dialogue.

Thank you.