Senior plc (SNR) Earnings Call Transcript & Summary

Okay. Welcome back to the second part of the morning where we will be focusing on the future of Senior plc as the market-leading pure-play fluid conveyance and thermal management business. Over the next hour or so, I will talk about delivery of our strategy, explain what we mean by fluid conveyance and thermal management. And by the way, we love an acronym in the industry. So you'll see that referred to as FCTM throughout this presentation. I'll describe our operating structure, our technology, products and capabilities. I'll talk about the competitive landscape and how we earn the right to win as well as how the senior operating system is helping us to achieve our goals. We're setting out new and improved financial targets today, and Bindi will describe those, and importantly, how they will be achieved and she will also talk about our updated capital allocation policy. Then I'll wrap up this session, leaving plenty of time for Q&A. We can trace our roots as a company back to the 19th century, but Senior has been a recognized fluid conveyance and thermal management business since its incorporation in 1933, as Senior Economizers Limited, followed by its listing on the London Stock Exchange in 1947. An economizer is basically a heat exchanger that helps products such as boilers to be more efficient and reduces pollution. With almost a century of relevant experience, we can genuinely claim to be experts in this field. FCTM is very relevant for today's challenges, and vital if we are to continue the transition to a lower carbon economy as we surely must. This presentation will help explain how we're going to capitalize on that expertise to deliver value for our shareholders. This is not a new strategy we're presenting today, it's about delivery of the strategy that we've been articulating for some years. I will admit that external factors such as the 737 has taken longer to get to this point than we would have liked. So thank you to our investors for sticking with us. We are going to do our level best to ensure your loyalty is rewarded. I'll start by repeating where we are with regard to the strategic review process for our Aerostructures business. As some of you in the auditorium or watching online may not have attended our results presentation earlier this morning. Senior is committed to a sale of our Aerostructures business, and we are making good progress. There's good buyer interest. We are now at an advanced stage of a sale process with a small number of parties and negotiations are progressing positively. We're focused on completing the sale process and maximizing value for shareholders, and we'll update the market in due course. Therefore, we are positioning Senior as the market-leading pure-play fluid conveyance and thermal management business. We have truly differentiated products with rich background and foreground intellectual property, coupled with expert design and manufacturing know-how. We have a good track record of outgrowing the structurally resilient end markets in which we operate. So we are well positioned for top line growth. Margins have been improving in recent years, but there is so much more to come. That will be driven by better pricing and a relentless focus on improving operational efficiency. We've always been a cash generator business, even delivering positive free cash flow during the dark years of COVID when sales plummeted during the global lockdowns. As a pure-play FCTM business, cash generation will be even stronger. We have set new and improved medium-term financial targets as shown on the right-hand side of this slide, and Bindi is going to describe those in detail later. They are realistic, achievable and will deliver sustained profitable growth and returns, which will generate enhanced value for shareholders. Having previously merged Jet and Ketema in Southern California and AMT and Damar in the Pacific Northwest, we have 5 operating businesses across our 7 locations in our Aerostructures portfolio. These are the businesses that we are selling. It's a sizable divestment at 28% of 2024 group sales. Last year, it had an operating loss of GBP 6.5 million. And in 2023, the operating loss was GBP 11.1 million. However, these are not bad businesses. On the contrary, Senior has been a good steward of our Aerostructures business. The factories are well capitalized with great people in prime locations and with an excellent customer base. As aircraft production volumes increase, they will be profitable starting from this year with good top line growth. However, they are noncore to Senior's fluid conveyance and thermal management strategy, and there's a significant opportunity cost of continuing ownership. We want to put all of our energy, time and resources into our Aerospace and Flexonics FCTM businesses. And you can see why from this slide, on the left is Senior today and on the right is Senior's FCTM revenue, profits and margins. Immediately, you can see the increased profits and margins high single digit in Aerospace and the group with Flexonics already at double digit. This illustrates the high quality of our FCTM businesses. And just to comment on the higher margin in 2023 for Aerospace, this included the one-off benefit from retrospective inflationary cost recoveries, which resulted in higher Aerospace and group margin. As we'll go on to explain the overall trajectory, we'll be steadily upwards from here. As a pure-play FCTM business, we have greater competitive differentiation with strong underlying fundamentals that is borne out of our engineering expertise. We focus on designing bespoke products, subsystems and systems, providing innovative solutions for our customer-specific and often challenging requirements. The markets in which we operate, aerospace and defense, the heavy-duty truck and off-highway segments of land vehicles, power and energy, and adjacencies such as medical and semiconductor equipment lend themselves well to our core competencies and are structurally resilient. Geographical presence is important, and I will explain why in a couple of slides' time. Here, I'm showing the difference in our end market exposure with and without Aerostructures' in our portfolio. On the right-hand side, you will see the split based on 2024 revenue. Aerospace and defense is still the single most important market at 47% of FCTM revenues. Of that, Civil is almost 2/3, Military close to 1/3 and Space at 2% represents a good growth opportunity. Land vehicle is 27% of our FCTM revenues. And while we have some excellent profitable niche positions in passenger vehicle, it's the heavy-duty truck and off-highway segments that we really focus on where our engineering expertise is highly valued. Power and energy sales were 18% of FCTM revenues and that includes our excellent Pathway business in Texas. When we consider the split of product categories for FCTM, we can see it's a broad range from high- and low-pressure ducting systems through to fluid control, emission control and industrial process control. What you don't see on here now are build-to-print structural assemblies and machine components for airframe and gas turbine engines. Those are part of our Aerostructures portfolio. In the interest of time, I've included the customer revenue breakdown and Aerospace platform sales split in the appendices, excluding Aerostructures and you'll find them on Slides 45 and 46. If we remove the Aerostructures locations, you can see that we still have excellent global coverage. We firmly believe we need to have a strong presence in our primary home markets, with the U.S. being the largest evolve, the logic of that seems even more relevant today for obvious reasons. Equally, with world-class facilities in India, South Africa, China, Mexico and the Czech Republic, we have options for low-cost manufacturer if our customers acquire that. And of course, some of those markets are huge in their own right. I've had interesting discussions with some investors around our operating structure and the number of sites that we have. This has evolved, in fact, it has been transformed over the last 10 years. In 2015, we had 35 businesses. Today, we have a more simplified and streamlined business. These are our FCTM locations and of these 19 operating businesses, 11 are design and manufacture and 8 are manufacturing only. Five sites make FCTM parts that are designed by our engineers at our Crumlin South Wales design and technology center, including Crumlin itself. So those as the ones in light blue. We have Flexonics global marketing teams drawn from the operating businesses and aerospace customer relationship managers representing the entire group, which ensures that we are joined up in our sales and business development efforts. We never compete against each other. Our executive team on board very actively manage our portfolio to ensure we are best placed to maximize returns for shareholders. Since 2015, we have sold or closed many businesses, which were noncore or underperforming and merged operating businesses to provide stronger leadership and improve operational efficiency. Clearly, this year, when we sell our Aerostructures business, that number will be well over 20 over a 10-year period. In the same period, we've made only 2 acquisitions, Steico Industries and Spencer Aerospace, both strong fluid conveyance companies. I know there was an eyebrow too raised when we announced the Spencer acquisition. Some of you may have been a little skeptical about the business case. Well, in the first 2 years, Spencer has grown 135%. Operating profit margin run rates are now in the teens and continuously improving. It has also opened the door to our broader standard part strategy, which I will cover later on. We're not about to abandon our diligent and cautious approach to acquisitions. They must meet our strategic and financial criteria. But while we have other capital allocation priorities, which Bindi will describe later, we do see opportunity for bolt-on value accretive M&A to complement the good organic growth we anticipate. The next few slides describe what it is that we actually make in our FCTM businesses. You may be relieved to hear that I'm not going to step through every part describing the application and function. Rather, the key message here is that we have a broad range of capabilities and products. While some of those like low-pressure ducting are unique to one business, others are complementary. Take high-pressure ducting, for example, not only do we make the large and small diameter tubes and ducts that are required to make these systems, we also now make the hydraulic fittings, couplings, flanges and clamps that are required to connect the system and interface to the aircraft. Underneath the product categories, you will see where we design and make the products and who some of the key customers are. You'll also notice that some of the products look remarkably similar regardless of the end application. So a control actuator for our aerospace applications looks just like a pin lift actuator for a semiconductor equipment application. And that theme extends to our Flexonics products, where many of the products look just like their aerospace counterparts. We thrive on providing solutions to our aerospace and broader industrial customers, who need high reliability parts to operate in hostile environments, whether that's a high altitude, coping with extremes of bleed air heat from an aero engine inside a 15-liter heavy duty truck engine or in the heart of a nuclear reactor. Products we design to manufacture operate from the deepest parts of the ocean floor to the far reaches of outer space. I would confidently say that no other fluid conveyance and thermal management company has the breadth of product offering that Senior does, from highly engineered standard parts to complete high and low-pressure ducting system. On the left of this chart are examples of our standard parts. The Spencer acquisition was a breakthrough event and we're using that as a springboard to organically develop our standard parts offering. Our Spencer, California and Ermeto, France colleagues are working together to extend the range of hydraulic fittings, which we offer and to reach markets that Spencer would not have penetrated on their own. Below the fittings, you'll see a picture of flanges. This similarly humbled product has a lot of engineering in it. And in recent years, an extreme shortage of parts has been a real supply chain issue for many customers, including Senior as we use many of these flanges with our own high-pressure duct product. So we took a decision to develop our own alternative. We invested in the capital, made and qualified parts with support from customers and have now secured our first contracts with deliveries starting next year. As we move across the page, you will see examples of our custom design bespoke products. The X-59 is the Lockheed and NASA quiet supersonic jet demonstrator. This squeeze duct was additively designed and printed by our brilliant engineers at SSP in Burbank, California. And on the right are examples of increasingly complex designs. As we move on to the second page here, we continue to see increasing complexity and higher level assemblies, such as the pathway designed and built expansion joints. On the right are examples of our complete system design capability. This system design expertise helps our product design ability greatly. And the other thing to note is many, in fact, most of our products are solving both fluid conveyance and thermal challenges at the same time. I'm often asked, what percentage of our sales are related to fluid conveyance and what percentage of sales are thermal management. In fact, it's the confluence of these 2 capabilities that help differentiate us. For example, even our leading battery cooling technology for high-end land vehicle applications, relies on more than just thermal management expertise, its the way we route the cooling fluid through the structure that is part of our secret sauce. We've demonstrated excellence in creating new products and solutions that face extremes of temperature, pressure, leakage risk with the highest reliability demands. At the heart of many of these amazing products is our bellows technology. A bellow is a zero leakage dynamic seal capable of a great range of motion rather rudimentary demonstrated in the slide here, it's not a slinky toy. Without them, some products simply would not function or at least not reliably or not for long. They are needed in petrochemical plants, medical devices, hermetically sealed pneumatic actuators for all manner of aerospace and defense applications. And Senior is the best company in the world when it comes to designing and making bellows, no one does bellows smaller, bigger or better. The tiny edge-welded bellow on the left is made at Senior Bellows in Massachusetts, the giant expansion joint for the petrochem industry on the right has 2 enormous bellows in it. It's designed to made a pathway in Texas, everything is bigger in Texas. Our bellows technology expertise is one of the reasons why we win. It's not the only one. I already talked about our unparalleled breadth of offering. We're able to offer customers what they genuinely need not just what we want to sell, we have various competitors, of which this is only a subset, but none match our complete offering. And it isn't just our technology that helps us win. Customers appreciate our operational performance, high levels of quality, on-time delivery, speed to market, our financial stability and our sector-leading sustainability credentials. Things sometimes go wrong. And in that event, customers appreciate our responsiveness and agility to help them out of a spot. If you tour our facilities, you will find world-class factories with fantastic engineering labs and a skillful and committed workforce managed by very strong leadership teams. It's a combination of these factors that help us stay in front of the competition. One example of this was our award last year from Deutsche Aircraft for the Bleed Air System and EBU for their exciting D328eco aircraft. In addition to all the factors I just mentioned, it was the collaboration between our SSP and Bird Bellows businesses to jointly develop the system and manufacture it in the U.K. close to the customers' German facilities that help secure the contract. Okay. I'm now going to hand over to Bindi on our new financial targets that we are publishing today.

Thank you. David. Good morning. I will take you through our new and improved medium-term financial targets for our fluid conveyance and thermal management business, describing the key elements supporting our confidence in delivering them. We set out new medium-term financial targets, which will deliver consistent value creation for all our stakeholders. Group operating margins are expected to expand from under 5% in 2024 to at least double digit in the medium term with Aerospace margins increasing to at least mid-teens and Flexonics margins in the 10% to 12% range. Seniors business model is intrinsically cash generative, and we expect our operating cash conversion to be greater than 85% through the cycle. Return on capital employed, ROCE has been the one financial target we've previously set publicly. That was to achieve a minimum 13.5%. Today, we're increasing that ambition, aiming to realize ROCE of 15% to 20% in the medium term. These targets are underpinned by maintaining a strong balance sheet. In light of the current debt environment market, our leverage target remains unchanged. As many of you know, we aim to keep net debt to EBITDA between 0.5 and 1.5x. These medium-term financial targets are supported by an expectation of mid-single-digit organic revenue growth through the cycle. Implicitly, that means we aim to outgrow our key end markets by 50% through the cycle. Let's consider the growth in the key markets of aerospace and defense, land vehicles and power and energy. Air traffic is forecast to continue to grow as incomes increase, especially in developing markets in Asia. Demand for new aircraft is forecast to grow 3% to 4% CAGR, driven by growth in air traffic and ongoing fleet replacement to introduce more efficient aircraft and engines. Defense remains a priority for the U.S. and has increased in importance for other countries given the constantly evolving geopolitical situation, with defense spending forecast to grow 2% to 3% per annum. Overall, therefore, aerospace and defense market is expected to grow around 3% to 4% CAGR. We are well positioned to benefit from this market with growth in our diversified product portfolio and especially the attractive positions we hold across the newest generation of civil and defense aircraft platforms. Global land vehicle markets covering both commercial on and off-highway and passenger vehicles typically grows at 2% to 3% per annum through the cycle. The increase in vehicle production is driven by GDP led growth in transport volumes. This market continues to face tightening emissions regulations. And with our proprietary fluid conveyance and thermal management products, Senior is ideally placed to take advantage of the need for more fuel-efficient internal combustion engines and the opportunities afforded by the transition to low carbon and clean energy solutions. Power and energy markets grew at around 2% per annum driven by economic growth and urbanization. Projected increases in global energy usage will be met by both renewable and conventional power generation. Senior is a market leader of complex fluid systems and products used within industrial, petrochemical and power generation sectors, and we are well positioned to grow our nonfossil fuel business, building on our existing renewables and nuclear energy customer base. Bringing this all together, we expect mid-single-digit organic revenue growth through the cycle from growing market and market share gains as evidenced by our book-to-bill track record. Moving on to our margin targets. Let's start with aerospace. The chart on the left shows the historic pre-pandemic OP margins achieved by Aerospace and separately, the Fluid Systems businesses. Aerospace margin, including Aerostructures was 10.6% in 2018, dropping to 1% during the pandemic and reached 4.6% in 2024. Fluid Systems margin was 14.6% in 2019 and 9.4% in 2024. As David noted earlier, the 10.5% margin in '23 included the one-off benefit from retrospective inflationary cost recoveries, but we expect the trajectory to be steadily upwards from here. Our medium-term target is for Aerospace margins without Aerostructures to climb to the mid-teens. The 3 key drivers delivering this improvement are pricing, volume and operational efficiency. And I'll explain in the next few slides why the progress on these 3 elements provides confidence in achieving our targets. As you can see from the chart, half of the expansion in aerospace margin is coming from better pricing. The good news is that the majority of this improved pricing is already contractually agreed. As production increases, we will see a multiplier effect from better pricing with higher volumes. We've developed a systemic value-based pricing methodology and trained our business leaders and front end of the business staff in how to approach cooperative pricing discussions seeking to achieve a win-win outcome for all parties. As I mentioned, much of our LTA pricing has already been negotiated. Others need to be completed and bear in mind that a good chunk of our business that is spot priced where we can keep prices current on an ongoing basis. We will maintain our pricing and return on capital discipline. This may mean at times taking difficult decisions to exit or not renew certain products or contracts which do not meet our returns requirement. And then we would fill that freed up capacity with better margin work. Improved pricing is a significant contributor to Aerospace margin expansion and with the progress made so far on this, we will see margins increasing as volumes increase. We will also reap the benefits from increased capacity utilization as aircraft build rates increase over the medium term. For example, the A320 increasing from 57 to 75 per month in 2027. Margins will also benefit from broadening our standard parts product portfolio organically, as David described earlier, establishing Senior as a significant supplier of fluid conveyance standard parts, including fittings, flanges, couplings and clamps across our Spencer, Ermeto, Calorstat and Bird Bellows businesses. Growth opportunities also arise from increased diversification into space, defense and adjacent markets and from capitalizing on our metallic and nonmetallic additive manufacturing design expertise and manufacturing capacity, which affords an opportunity to develop novel product designs that are optimized for different characteristics such as weight, performance parameters and physical envelope. David is now going to cover margin expansion through operational efficiency and Senior's high performing operating system.

So the third leg of our aerospace drive for improved margins is operational efficiency. Whether it's our best business or the business with the biggest performance opportunity, every operating business is deploying continuous improvement techniques. Our Senior operating system provides the tools and processes to our teams across Senior to implement proven best practice techniques to lean out processes and help improve margin and cash generation. I'll talk more about this in the next slide. Earlier, I showed how we have simplified our operational footprint. Clearly, when we divest Aerostructures, this will streamline the organization further. And as Bindi already said, we always align head count to revenue. Where appropriate, we will continue to transfer labor from intensive high cost -- sorry, labor-intensive work from high-cost country to lower-cost country. This has worked well for us in the past and will continue to do so. It's not always the right decision though and it may be that the greater use of automation is a better option in some situations. Often, we call this Cobotics, where we have robots and people working together on the same product line. Anyone who's been to our aerospace Bird Bellows or Flexonics Olomouc facilities in the Czech Republic, will have seen some good examples of that. The journey back to mid-teens margins from our sub-10% 2024 result has commenced in earnest. In fact, 5 of the 7 aerospace FCTM businesses are already at double digit and another one will be double-digit this year. The Seventh business has further to go but it has a granular plan, and we are confident it will make up ground quickly over the next few years, benefiting from what Bindi has already highlighted, especially price and operational efficiency. Coming back to the Senior operating system or SOS as we abbreviate it. And by the way, a number of people have said to me, "Oh, do you want to call it that, does not infer there's an emergency?" Well, I happen to like the sense of urgency it instills. So we're sticking with it. SOS has a number of elements embedded within it, but foremost amongst these is lean manufacturing. Like Danaher, GE, Ford, Nike, Caterpillar, our lean manufacturing system is directly descended from Toyota, who pioneered lean with the Toyota production system. Our operational excellence lean toolkit, has 7 primary tools to expose and eliminate waste with 4 secondary tools used depending on the nature of the process. Tools are taught and used in team-based Kaizen events and standardization of the tools allows for acceleration of training and regular use increases effectiveness so much for the theory. So we have many instances of Kaizen events yielding fantastic results across our business. One recent success story is a Senior Aerospace BWT in the U.K. BWT were successful last year and winning AS1591 flexible ducting, which is another standard product from a major OEM after their existing supplier let them down. Demand surged tenfold within 6 months because of the great job we were doing. In response, a dedicated Kaizen team comprising lean experts, production operators and manufacturing engineers established a specialized manufacturing cell. By systematically addressing the most time-intensive production steps, the team successfully reduced cycle times by nearly 50%, ensuring the company met increased demand without compromising efficiency or quality. This is a great example of our commitment to lean manufacturing enables us to remain agile, scale operations efficiently and drive sustainable cost reductions. Not all businesses are as advanced in the deployment of lean as BWT are, so this represents a great opportunity for improvement actions across Aerospace and Flexonics' divisions. Bindi, back to you.

Now on to Flexonics. As you can see from the chart, historic margins have been sub-10% for 5 of the last 7 years. Specific actions taken by us have led to delivering double-digit margins in 2023. And maintaining this when land vehicle markets were softer, as demonstrated by our performance in 2024. Actions taken by us include divesting the underperforming French automotive Blois and Brazil Flexonics businesses in 2019. And diversifying our heavy-duty truck geographic exposure by winning market share in Europe. You will also recall we took GBP 50 million of cost out across the group during COVID, and a portion of this was in Flexonics. And as markets have recovered, we have not added all of the indirect costs back. So with our leading technology, operational excellence and our global marketing setup, whereby products are developed in our design centers and manufactured in our cost-competitive locations, we have outgrown end markets. So looking ahead, we expect to sustain 10% margin even in the down cycle with opportunity to deliver up to 12% margins in the medium term. This will be through outgrowing our end markets, allowing for appropriate investment to realize this growth as well as maintaining price and cost discipline. Group adjusted operating margin was 8.5% in 2018, dropped to 0.5% in 2020 and has gradually increased back to 4.8%. With the Aerospace and Flexonics margin targets I've already described and aligning central costs to the broader SG&A across the group to revenue, group margins are expected to expand to at least double digit in the medium term. We always scrutinize overhead to ensure it is proportionate to our activity level, and this remains a key focus area with the aim of maintaining central costs between 2% to 2.5% of revenue. Overall, from a group perspective, the key drivers delivering margin expansion are pricing, volume and operational efficiency. Seniors business model is intrinsically cash generative. Even in challenging times, we have generated good cash. We have renewed our focus on improving working capital efficiency, capitalizing on the benefits lean manufacturing yield as well as better aligning our sales inventory and operations planning, known as SIOP. This will increase inventory turn, which in turn frees up cash. We will continue to take a disciplined approach to investment in capital expenditure. Our Fluid Systems and Flexonics businesses have a lower capital intensity compared to structures and targeted investment in growth projects backed by secured customer contracts in support of our revenue ambitions will deliver profitable growth. Over the medium term, capital investment is expected to be 1.1x depreciation, reflecting our expectations of top line growth. We're confident the business will deliver greater than 85% operating cash conversion through the cycle. We're increasing our ROCE target from the previously stated 13.5% to achieving 15% to 20% in the medium term. This will be driven predominantly by growth in absolute profit, outweighing some increase in capital employed from the organic investment I just spoke about. With an IP-rich fluid conveyance and thermal management portfolio, driving margin expansion and profitable growth with lower capital intensity, we're confident in delivering significantly increased returns on capital. Our capital allocation policy aims to position the group's portfolio to maximize returns with optionality for investment in growth and shareholder returns. From an organic perspective, we will continue to invest 2% to 3% of revenue into R&D. And capital investment is expected to be 1.1x depreciation over the medium term in support of outgrowing our end markets and improving cost efficiency. We will continue to follow a progressive dividend policy reflecting earnings per share, free cash flow generation, market conditions and dividend cover, maintaining earnings cover of 2.5 to 3.5x. And we will maintain a strong balance sheet by targeting net debt to EBITDA of between 0.5 to 1.5x. This leaves us with optionality to return excess cash to shareholders and to invest in value-accretive bolt-on M&A., maintaining a disciplined approach to product -- to additions to our portfolio. Thank you. And I will now hand back to David for his closing remarks.

Thanks, Bindi. I'm excited about our future prospects as the market-leading pure-play fluid conveyance and thermal management business. In Senior, we have great people, outstanding and differentiated technical capabilities, exciting products and a wonderful customer base who trust us to deliver. We operate globally in our prime home markets and with world-class cost-competitive options. Bindi has described our new medium-term financial targets, which we are confident of achieving. In turn, that should provide sustainable, profitable growth and returns and generate enhanced value for our shareholders. So that concludes the presentation. We've rattled through it, we thought we'd leave plenty of time for Q&A. So with that, we'll open to the floor.

It's Andy from Jefferies. I've got 4 questions, but 2 are small, 2 are slightly bigger picture. On the contracts that you guys have on your FCTM business, it looks like you've done a cracking job on pricing. Can you just remind us how long are the average contracts for the Aerospace business going forward? And how often do you negotiate price? Because -- Aerospace business done, the prune-to-grow strategy is largely there? Or is there 1 or 2 more things that you can be doing? And then just 2 points of clarification. The targets you set out, I'm assuming they're all organic. So I anything from an M&A perspective, could move them higher. And are you able to quantify medium term? I'm assuming 4 to 5 years, but I do want to make a false assumption.

Yes. Okay. I'll deal with the first one on pricing. So we got a mixture of contracts. Some of our fluid systems, many of our really big systems are life of program. So once you're in, you're in. We had to reset pricing because of the huge inflationary pressures that came on over the past couple of years. So even though we had long-term pricing in place, we approached our customers, and we had very sensible discussions with them because we needed to, and those are now in place. So after that, we go back to variation in price clauses. So we get index-linked increases. So that's a portion of them. Others, typically U.S. defense contracts, take C-130, I think the next contract is 5 years long that we just renewed that. That comes in, in April. So that's based off probably U.S. DoD approved pricing techniques. So naturally, again, with all the inflation that's been there, that was a significant price increase. So that's another portion of the contracts. But then there's a whole swath where we price annually or spot price based on market conditions, if you like. So that's what we call value-based pricing. And we make sure that we're giving a fantastic offer to our customers in terms of what the product does. But equally, given the design expertise goes into it, we expect to be appropriately rewarded for that. And then there's aftermarket. So we don't have a huge amount of aftermarket in our business. But the after we do it is all in fluid conveyance and thermal management. So it will be a slightly higher proportion now. And typically, that's priced on an ongoing basis, maybe off a price peak where you're regularly increasing pricing. So it's a bit of a mixed bag, but what we don't have is a very large -- typically, we don't have nearly as many large 3- to 5-year fixed price contracts that we've had in structures in the past. I will say all the structure stuff, by the way, we've also been repricing. So as long as it's part of our company, it's going to do a lot better. Prune to grow, I nicked that term from Sandy Cutler, when I used to work at Eaton. He likes to say that good companies do continue to look at their portfolio and when necessarily sell off. So you've seen we've done a lot of that over the past 10 years and there might be 1 or 2 bits left to go. But yes, the majority of it is done, but it's an ongoing process. So we need to make sure that our operating businesses are really performing well and they continue to remain core. I mean Brazil is a good example, one time, Brazil was a fantastic business. When the markets collapsed in Brazil, 9, 10 years ago, it made no sense to remain there because it was a bleed on cash and profit. So we'll keep looking at these things on the ongoing basis. But yes, a lot of it's done. Do you want to talk about the targets?

And just on prune to grow, I mean, we continually look at our businesses from an operating margin and a return on asset perspective as well as its strategic fit within Senior. So that's always an ongoing exercise. Targets, yes, they are all organic on an organic basis. And medium term, I mean, you said it yourself, you're kind of -- most analysts, I think, think 4 to 5 years.

It's Richard Paige from Deutsche Numis. Three again, please. That historical context in terms of margins on the FCTM business in Aerospace, I thought it was interesting, 14.6% in '19. And then -- just the -- could you give a bit of more clarity or a bit more detail around the variety of range of margins within the businesses themselves, please, around that time because -- hearing ones -- the context where we are today is just how that has transitioned over time, please? In terms of the complete offering across a set of your product, could you maybe give a bit more opportunity -- the potential size of that opportunity around there, please, and how you've done that? I assume Spencer's been quite a big play in that field. And then on Flexonics, the sustenance of a 10% margin in a downturn. Is that relating to the -- your cost base that you've got a much more flexible cost base relative to history? And just give a bit of context around that, please?

Yes. Okay. So this is where I get into trouble, Bindi. Just a bit far enough where she can't kick me. The range of margins, if you go back historically quite wide. And I think I'm on record of saying that our very best businesses in the group are right up there with the very best industrial businesses like Halma, Spirax-Sarco in terms of the margins they generate. So you know where they are. That's our very best businesses. Other business back in '19 in Fluid Systems, yes, they weren't all at that level, somebody visited our Ermeto and Calorstat sites early last year -- in June last year. And Xavier, who runs those businesses with the [indiscernible] and Ermeto just done an outstanding job in getting those from much lower margins into regularly performing in double digits. So one example where we made progress since '19 despite all the headwinds that were there. So now the range is closing. I said we've got one business that is not yet in double digits this year, all the others will be. But give us a few years, and that will be, and we'll see it steadily improving. So that's one of the reason why we're so confident about those margins that we're predicting, getting back up to those mid-teens levels. I think -- do you want to comment on the downturn, Bindi?

In Flexonics, from a margin perspective, I mean, we said this a few years ago, we really looking at the cost base in our Flexonics businesses and our aim was to make sure that even in the down cycle, we can maintain double-digit margins, which you can see we've done in 2024. In fact, we increased margins to 11%. But ways we've done this is making sure we're taking advantage of the global market teams where design is in likes of in making sure costs are aligned to revenue as well and actively diversifying geographically, particularly in heavy trucks. So we have more of a presence in European heavy truck and not whereas previously, we were very much North America reliance. So some of those active actions taken by us selling our loss-making French automotive business in 2019 is another reason. So all these actions give us that confidence that we can maintain minimum 10% in a down cycle with upside in other years.

And additional things, [ Bartlett ] business, which is our biggest Flexonics business for revenue, a lot more of the product now gets built in Saltillo than in Illinois. You can ask me about tariffs after that. Terms are FOB, so the customers to pay any import duty if that does come to bear. So again, that gives us a bit more flexibility in the cost base. So we got stung and if you think back to just after I joined the company, '16 was it, it was an industrial recession and really got stun, you couldn't cost out quickly enough, and we said never again. So we've taken quite a lot of steps in the intervening years to make sure that we've got much more flexibility in the cost base. If you think about those emissions control regulations when they come in, truck grows probably a couple of percent per annum 2%, 3% through the cycle. At times, it can go down 40%, 50%, if there's an emissions regulation change. So you need to have that flexibility to enable to cope that. Then it will bounce straight back up again once we get through the emissions change. So all that -- that's all gone into our thought processes and trying to design the organization structure to give it that stability and make it -- future-proof it really for events like that. And then yes, in terms of the scope. Well, its a big market for fluid conveyance and thermal management, look, we are -- there's lots of different parts to it. That's the other thing. So obviously, who's your main competitors. You can see from the chart to put up on the right to win chart, we're really competing across a whole range of areas, which I believe is one of our strengths. So you really have to segment it quite carefully to understand what the TAM and the SAM is. And we do that. We've got a very good analyst here today, [ Adrian ], up at the corner, who helps us really study all that. If you take standard parts as an example, one of the reasons we wanted to go into this market, partly companies I worked for before did a lot of these standard parts and I used to run the Fuel Systems division, it was all fancy and really good stuff. My colleague ran the fluid conveyance division, we disparagingly called them the plumbers, but they need all the money. So I've been very keen to get into fluid conveyance standard parts for some time. And the Spencer acquisition is one of the few remaining companies that allowed us to make that breakthrough investment. And then now really adding in our own organic capabilities. And what we're finding is customers have been disappointed by the existing supply sources. They really like us because we perform with quality and on-time delivery. So quite hard to get a number, but the total available market is probably a few hundred million dollars for that, and we're starting from a very low level. So I'm not saying we're going to get 90% or anything, but we can capture a good chunk of that. It gives you an impression of sort of the organic growth you might have through that sort of business where we want to focus our efforts when we sell structures, which takes a lot of our time and attention our cash, it's a good business, but fluid conveyance standard parts, better business. And by the way, these are sold to OEMs. They're sold to distributors, they're sold to Tier 1 indicators. They're sold through aftermarket. So there's an ongoing sort of demand for them through the cycle. Hopefully, that answers your question. Any more questions? Investors are like to ask questions, although you may prefer to that in our one-to-one sessions later on this week.

It's Andrew at Peel Hunt again. Just a couple of conceptual ones, if I may. Maybe first on Flexonics. You've talked about kind of supporting both markets, ICE and electric vehicles in that. There was clearly a period of time kind of running up to 2019 where you had CapEx below depreciation, there's a degree of which the capital base was running quite lean on that. You've also talked about putting investment into the business. I wonder if you could talk about, say, the next 5 years in terms of the shape of the capital base, are we needing to catch up on any investments in any part of this? How does that investment split out between those 2 parts? And I'll come back on one on Aerospace.

Good question. There's no looming massive capital injection required for what's in the plan that Bindi has presented here. That's the good news. We've been quite -- and similarly on the R&D side, we invest about 2% to 3% of sales per annum, and we'll continue at that level as a mechanical engineering company, that's about right. If you were -- and my background was electronics companies and then if you aren't investing at least 6% and probably 8% to 10%, then you were going to fall behind. That's not the case in mechanical engineering. I think specifically on EV, look, if we were chasing mass volume passenger vehicle, continuous flow ovens, that's a big investment. That's not what we're doing. Yes, we've got some wonderful niche applications. We announced the contract with the Italian mark sports car, not like to name them. We actually do that in Crumlin in sort of a small industrial setup. And we just -- that is slightly more than Crumlin for larger ovens, but not continuous flow because we're looking at battery cooling for all electric heavy-duty vehicle, which is space on that one. So we're focused on the lower volume, higher value end of the market, which means we'll build vast factories to make all the cooling plates and everything. So that's -- it's where we are in the process. And it's a lot of the same kit to be honest, that we already have. In Flexonics, if we win a big production program, we'll also need to invest in the specific tooling and maybe the specific equipment for that, but a big investment would be $4 million or $5 million, just to put it in perspective, that would be a big investment. So it's one of the things we love about our fluid conveyance and thermal management business is they're not particularly capital-intensive. There will be times when we have to invest a bit more. It will go up and down. But by and large, these are capital-efficient businesses. Anything you want to add to that, Bindi?

Adding to that, I mean, I'd say through the cycle, CapEx will be 1.1x depreciation. It may mean in a particular year, it could be 1.2, 1.3x. And then in another year, it could be 0.7 or 0.8x depreciation, but it balances out. And in Flexonics, in particular, you have to PPAP the products that go through qualification testing on the equipment about a year before it comes into production. And if you look at lead times of machines and everything, so there is a bit of a cycle in when you start your investment, we make sure that we're agreeing appropriate payment terms to make sure the cash profile of that investment kind of matches up with the revenues coming in. And as David said, this has proven out equipment. It's not sort of very specific stuff that can only work on one contract. It is more generic, but it's always backed up by contract wins.

And this year, actually, we are making investment in our Crumlin design technology center, which is in South Wales. And there they're designing lots of brilliant products so it's -- I love going there. We're actually moving site at the moment to a newer slightly larger site. The old one was -- we need to get the old one for space reasons -- and listen, so we will have a beautiful new design technology center, designing products that have been made around the world, both conventional ICE and also new EV, so we should organize an investor and analyst visit to that site when it's opened perhaps later on this year. I think you'll be very impressed by it.

Maybe following up on one on Aerospace then. If I look at the margin bridge that you presented between FY '24 and medium term, there's clearly a big chunk there that's pricing. You've obviously talked a lot in the short term about the renegotiations that have happened and kind of have phased in, are continuing to phase in this year. But personally, I was surprised by the proportion of that margin uplift that pricing represents as opposed to, say, operating leverage when volumes normalize at key OEMs, Airbus continues to increase production levels. What does that bake in, I think, is the question. We know this is an industry that has historically operated quite keenly on pricing. Is this a -- not to sort of second guess what customers are saying, but this appears to be kind of quite a collaborative phase that we're going into in terms of customers recognizing they need to get the supply chain back up and running, maybe operate in a slightly more collaborative way than has been the case previously.

Yes, obviously, there's very good collaboration across the aerospace industry. There's been lot of soul searching at certain companies for understandable reasons. And the emphasis on having financial stability and continuity of supply is of paramount importance now. So that's one thing. But from the stuff we're making in fluid systems, this is our design. We own the intellectual property in the main, most of it and that allows us to have proper value-based discussions with our customers on an ongoing basis. If you build to print, there's a lot more competition there, it's a slightly different discussion, but even that's moved on from where it used to be. There is now a premium on continued supply, quality, on-time delivery. And that's why our structures businesses are winning more and more from Boeing, from Airbus, from Spirit from GKN and others because they appreciate that. And they're providing value, think about where our operations are. So look, you've got to provide value always. But with -- when you own the design, it's a lot easier fundamentally. I think you should also look at the split, if you look at the back of the pack of the split, slightly different profile for the business now where look at the top customers. So was Boeing, Rolls-Royce and Spirit, I think they don't even appear in the top profile. You've got it there somewhere, I think...

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Yes. I personally thought it was quite an intriguing picture. So you can see the key customers across the group there. Airbus, single biggest now. And then you got the defense work. We, actually, [ Renton ] includes column that includes commercial aerospace, Boeing at 3%. But look at the other column. So we like that long tail, it's good to have that diversification in the customer base. And some of them are in Flexonics, we're not beholden to any single customer in this moving forward. David was first, Andy. We don't see him very often. So he got to ask question.

So just 2 from me. One is you talk about mid-cycle growth. But to be honest, we're probably in the very early stages of a big upturn. So I'm just wondering why not just give a sales guidance through to 2029 -- 2028, 2029 because mid-single digit to me doesn't seem right number to use? And secondly, any color you can give us on the timing of the disposal when you might be able to announce it, when you might be able to close it?

Let me deal with the second one first, while Bindi thinks about the first one. So I mean, also, we wouldn't be talking about today unless we were relatively close. That's the first thing. We wouldn't be as bold as that. So we are in the final stages of negotiation. I don't want to set the wrong expectations. I'm not going to pick the week that we're going to get it done. But it is pretty close now, and we're very keen to get that done. I will say once we've exchange [ SBA ] and signed a deal, there will be a regulatory process to go through. If the buyer is not a U.S. buyer, if the buyer's a U.S. buyer, then that doesn't apply. But if not a U.S. buyer, CFIUS could take 12 weeks after -- foreign controlled influence in the U.S., so that could take 3 months once we exchange the deal. So that was going to be part of our business for some months yet. So we're making sure we're going to drive that very hard over the next few months. That's as much as I'm able to say. Bindi on the...

On the growth. So I mean, if you look at Flexonics with land vehicle markets growing about 3% per annum in power and energy in that 2% bracket that you can see why we're seeing mid-single digit through the cycle in the medium term. For Aerospace, when you split out and you look at the fluid system side of aerospace and you'll see that in the platform page, there is a better breakout -- better mix of civil aerospace, regional, business and defense, where structures was more heavily biased towards the large commercial aerospace sector. And that is the one that's growing fastest. So that's what's -- when you look at Aerospace in total with the fluid conveyance fit hat on and the mix of the breakout between defense and aerospace in total, yes, in the near term, the growth will be in the high single digits or even reaching double-digit but eventually, it will come back towards that 3% to 4%, and we continue to expect to outgrow the end market.

Thanks for the challenge on margins. Andy?

Andy from Jefferies. Just going back to Richard's question on Flexonics, but maybe looking at slightly differently. If we were to create a scenario, which I think is probably fair that pathway business now looks like it's got a couple of good years ahead. We get a truck recovery in '26, which is what everyone is assuming. I was hoping to go on that -- '26. Is 12% the right upside for Flexonics? It feels to me like you're assuming that something always kind of doesn't go to plan in Flexonics from an end market perspective to get to that 12%, because if pathway is a higher margin truck has a good recovery, good operational gearing, 12% feels a little bit low to me or am I missing something?

I think 10% to 12% is a sensible and achievable target to set expectations for. If everything goes brilliantly, could it be a bit better that? Of course, it could, yes. But I think it's a sensible range to be guiding to. We could always try and do better. And you're right, when pathway has a good year, it makes a huge difference for Flexonics, and we put -- not been able to announce it right up until today, but in the detail in the results announcement, we've shown the contract we did win, which was from Gail in India for new [indiscernible] plant, over 100 of those giant expansion joints we've been providing last year into this year. So yes, that really helps the business. And we're going to try and win some more of those. So that's what would take us to the top of that level if everything went to plan, can we get above it? Maybe, but I think it's a sensible range to go to.

And looking at your acquisition framework, it looks like you're going to be buying a North American owner-managed fluid conveyance product business for [ GBP 50 million to GBP 100 million ]. If we -- if I can ask you to go to Slide 22, it looks like you guys have everything covered off. If we were to cut this from a different way, maybe from your competitors, and where they sit. Do you guys have holes in your portfolio that you would like to fill from a product perspective? Or is it a question of adding to what you currently have to make it stronger, broader, whatever?

I think with the Spencer acquisition, we've filled the standard parts hole that I've been inching about for some time, and that's so glad that's working out well for us. We -- Nigel is here, who's our EVP of Strategy and looks after technology and strategy and the things we're focused on are -- think of our best businesses, it's like Metal Bellows up in Massachusetts. We're making custom design products in the fluid conveyance field. They've got multiple applications. At the heart of that is a tiny little bellow, but they are performing the bespoke items for specific applications. Those are the sorts of businesses. I think you'd be most likely to see us interested in. These are annuity contracts, annuity programs that lasts for a long time. They've got deep engineering. But once you're in there, they're there for a very long time, generating very good margins indeed. So I think that would be the ideal, I think if we were looking at bolt-on M&A. But there's other capital allocation priorities as well as I know you're aware.

And then just quickly on the disposal comment. Are there likely to be stranded costs kept within the business once you got rid of structures that you then need to kind of get rid of over the next kind of couple of years? Or is that a reasonably clean break in that respect?

So it is a reasonably clean break. We try and keep sort of specific costs within the businesses themselves. But naturally, from a group perspective that for example, on information security, we take those costs at the center. Some of those will be lower when you've got fewer businesses to look at insurance, although some -- most of the insurance is passed back to the businesses as well. But as I said, we will always align central costs in line with the revenue profile of the group.

Any more questions? All right. Well, really appreciate every coming along. We'll let you half an hour. I know we've got lots of meetings lined up with our shareholders and very much looking forward to those through the course of this week. And some of you have come a long way, I really appreciate you making the effort to get to you. Thanks a lot.

Thank you.