Senior plc (LON: SNR) have today published interim results for the half-year ended 30 June 2019.
Growth in adjusted profit and EPS; Board expects to meet current expectations for 2019
Headlines
● Half year 2019 Group trading in line with expectations
● 4% increase in adjusted profit before tax; 7% increase on a consistent post IFRS 16 basis
● Free cash inflow of £13.2m after investing £35.0m in capital expenditure for future growth
● Interim dividend increased by 4% to 2.28 pence per share
● The Board expects to meet current expectations for 2019
Commenting on the results, David Squires, Group Chief Executive of Senior plc, said:
“Trading at the Group level in the first half of 2019 has been in line with expectations. Notwithstanding the reported 737 MAX production rate cuts and the ongoing uncertainty around the current geopolitical and macro-economic backdrop, overall the Board expects to meet current expectations for 2019.
Looking ahead, the Group is working to minimise the impact of the risk associated with the challenges described, with a renewed focus on cost and efficiencies. The Group is well-positioned, operating in attractive end markets and is financially robust. The Board remains confident of improving performance and returns for our shareholders.”
INTERIM MANAGEMENT REPORT 2019
Overview
Trading across the Group in the first half of 2019 has been in line with expectations with growth in adjusted profit before tax of 4.4% and growth in adjusted earnings per share of 6.5%. Return on capital employed increased by 20 basis points to 11.7% as at 30 June 2019.
Group revenue increased by 10.9% to £580.4m (H1 2018: £523.3m). Excluding the favourable exchange rate impact of £22.4m, Group revenue was up £34.7m (6.4%) on a constant currency basis with growth in Aerospace partly offset by the expected decrease in Flexonics. The Group’s book to bill ratio was slightly over 1.0x. Revenue growth in the Aerospace Division was driven by both the civil aerospace and defence markets. The Group was able to mitigate some of the 737 MAX revenue impact through stronger sales on other civil and military programmes. Revenue in the Flexonics Division decreased compared to prior year due to the sale of Senior Flexonics Blois SAS (“Blois”) in February 2019 and softer demand in some of our land vehicle and industrial markets.
We measure the Group on an adjusted basis which excludes Group items that do not impact the operating performance (see note 4). References below therefore focus on these adjusted measures. Adjusted operating profit increased by £2.8m (6.5%) to £46.2m (H1 2018: £43.4m). Excluding the favourable exchange rate impact of £2.3m, adjusted operating profit increased by 1.1% on a constant currency basis. The Group’s adjusted operating margin decreased by 30 basis points to 8.0%. As expected, the operating margin in the Aerospace Division was lower as increases from operational efficiencies and learning curve improvements were offset by the impact of the 737 MAX production rate decrease, volume reduction on mature programmes and the costs associated with the introduction and industrialisation of new programmes including the start-up of our second facility in Malaysia. The Flexonics Division delivered operating margin improvement as a consequence of our continued focus on cost management and efficiency initiatives, coupled with our “prune to grow” strategy.
Net finance costs increased by £1.1m to £5.5m (H1 2018: £4.4m) with an underlying decrease offset by £1.8m increase related to adoption of IFRS 16 Leases. Adjusted profit before tax increased by 4.4% to £40.7m (H1 2018: £39.0m) and on an IFRS 16 like-for-like basis, it increased 7%. Adjusted earnings per share increased by 6.5% to 7.84 pence (H1 2018: 7.36 pence).
Reported operating profit was £39.2m (H1 2018: £35.8m), reported profit before tax was £26.5m (H1 2018: £31.4m) and basic earnings per share was 4.81 pence (H1 2018: 5.90 pence).
The Group generated free cash inflow of £13.2m (H1 2018: £32.2m) after gross investment in capital expenditure of £35.0m (H1 2018: £22.0m). The reduction in free cash flow compared to prior year was mostly due to higher investment in capital expenditure to support future growth, including our facility expansions, and higher working capital. Working capital remained under our target of 15% of sales at 14.9% of sales at the end of June 2019 (December 2018: 14.4%). The increase in working capital of £13.2m in the period was partly as a consequence of the 737 MAX situation and partly to support new product introductions. The level of net debt at the end of June 2019 was £268.3m (December 2018: £153.0m). The adoption of IFRS 16 from 1 January 2019 increased opening net debt by £96.1m. The rest of the increase in net debt was principally due to £21.7m dividend payments, £6.3m purchase of shares by the employee benefit trust and £2.3m outflow with the disposal of Blois partly offset by the free cash inflow of £13.2m. The adoption of IFRS 16 does not impact the Group’s lending covenants as these are currently based on frozen GAAP and on this basis, the ratio of net debt to EBITDA at the end of June 2019 was 1.2x.
Return on capital employed (ROCE) increased by 20 basis points to 11.7% (H1 2018: 11.5%, on a post IFRS 16 basis) and was in excess of the Group’s cost of capital. The increase in ROCE was achieved through the improvement in adjusted operating profit for the last 12 months compared to prior year, which offset the increase in capital employed as a result of investments for future growth.
The Board has approved an interim dividend of 2.28 pence per share, an increase of 4.1% over the prior year (H1 2018: 2.19 pence). It will be paid on 29 November 2019 to shareholders on the register at the close of business on 1 November 2019.
Market conditions
The outlook for the civil aerospace market remains positive as new, more efficient, aircraft programmes continue to ramp-up in production. Nevertheless, this sector has been impacted by the grounding of the 737 MAX fleet following the Lion Air and Ethiopian Airlines tragic air accidents. Boeing subsequently cut production rates on the 737 MAX programme from 52 airplanes per month to 42 per month, in mid-April, instead of increasing to rate 57 as had been planned.
For the first five months of 2019, IATA reported air traffic growth of 4.5% and demand for new aircraft remains robust with Boeing, Airbus and independent forecasters continuing to predict air traffic growth in excess of 4% per annum over the next 20 years.
2019 is the peak transition year with the largest increase in production of newer aircraft platforms and a similar large decrease in production of mature aircraft platforms. In the first half of 2019, production of the A320neo, 787, A350 and A220 ramped up and as anticipated, production of the classic 737, A320, A330, 777 and A380 ramped-down. Following the entry into service in November 2018, Airbus delivered 13 A330neos in the first half of 2019. Boeing have advised that the 777X first flight will be in early 2020 and first delivery is scheduled for the end of 2020 albeit there is some risk to that schedule. Mitsubishi Aircraft rebranded the former MRJ90 as the SpaceJet M90 and announced details of the stretched MRJ70 redesign, which will now be called the M100 with a predicted entry into service of 2023. The Bombardier Global 7500 was awarded certification by EASA in February 2019 and 3 aircraft were delivered in the first half of 2019.
In the defence sector, market growth has been primarily driven by the ramp up of the F-35 Joint Strike Fighter. Longer term growth will be supported by further increases in the F-35 programme as well as new programmes such as the CH-53K King Stallion helicopter and the USAF T-X trainer. These programmes are expected to grow significantly, while the near-term outlook for the C-130 transport aircraft and UH-60 Black Hawk helicopter programmes continue to be reaffirmed.
Our Flexonics Division end markets are less certain and somewhat dependent on macroeconomic and geopolitical factors such as the ongoing trade discussions between the US and China. Market production of North American heavy-duty diesel trucks increased 20% in the first half of 2019 compared to first half of 2018 which helped to offset softness in off highway markets. Industry analysts are currently forecasting a low level of production growth in the North American heavy-duty diesel trucks market in 2019, with the growth in the first half of the year partly offset by a decrease in the second half of the year. For the upstream oil and gas markets, as anticipated, output was restricted in the first half of 2019 due to infrastructure constraints. While new oil pipelines have been installed, work is ongoing around the associated natural gas infrastructure and the US rig count has decreased 10% in the first half of 2019. Downstream oil and gas activity remained stable.
Delivery of Group Strategy
Senior plc is focused on delivering improved returns for shareholders and is targeting ROCE of 13.5% over the medium term. The Group benefits from its balance between Aerospace and Flexonics, drawing on shared technology and intellectual property in its fluid conveyance businesses. We are investing in new technology and product developments that will underpin future growth in both segments of our business. We undertake regular reviews of the Group’s portfolio as we seek to increase shareholder value by leveraging our current operations, and where appropriate, acquisitions, disposals or mergers of operations will be considered to optimise returns on capital.
The Group continues to make good progress against our six strategic priorities which were identified as key elements of our business model, underpinning the continued delivery of improved shareholder value:
- Enhance Senior’s Autonomous and Collaborative Business Model.
- Focus on Growth.
- Introduce a High Performance Operating System.
- Competitive Cost Country Strategy.
- Considered and Effective Capital Deployment.
- Talent Development.
We continue to implement and deliver our specific plans for 2019 which we laid out on pages 14 and 17 of the Annual Report & Accounts 2018. We will give a full update on these when we announce our full year 2019 results.
In February 2019, the Group sold its French Flexonics land vehicle business, Senior Flexonics Blois SAS (“Blois”). Blois’ main end market was European passenger vehicles and the sale enables us to have greater focus on our core activities.
We will continue to “prune to grow” where it makes sense to do so while maintaining a disciplined approach to additions to our portfolio.
Operational review
To enable us to meet increasing customer demand and to ensure we remain competitive and profitable, the Group continues to invest in capacity and capabilities for both our Aerospace and Flexonics businesses. In the first half of 2019:
● Our second Aerospace facility in Malaysia was officially opened in June 2019.
● To support planned growth, construction is continuing for the expansion of the Aerospace Fluid Systems Metal Bellows facility in Massachusetts and is expected to complete in the first quarter of 2020.
● Our plans to relocate our Flexonics Crumlin operation in South Wales to a new dedicated, design and development centre are continuing. We anticipate construction to commence towards the end of 2019.
● We continue to invest in our Advanced Additive Manufacturing Centre in Burbank, California.
We are in a period which is unprecedented in the scale of its transition from mature aircraft programmes to newer aircraft programmes, with 2019 being the peak year of transition. Senior has been working hard to ensure that we maximise our content on these new aircraft programmes, hence the high levels of new product introduction and industrialisation activity. In the first half of 2019 we continued to balance ongoing cost reduction and learning curve improvements on newer programmes, with the cost of further new product introductions and industrialisation. We are making satisfactory progress in line with our plans and as expected, industrialisation costs remain high in 2019. We continue to see improving returns in those businesses where new product introduction and industrialisation activity is near completion. Naturally, those businesses with ongoing high levels of new product introduction and industrialisation activity have significant opportunities for improvement.
As we have outlined consistently, any new work packages that we take on meet our return on capital targets and are in line with our capital deployment strategy. Similarly, when bidding for renewals of existing work we ensure our pricing discipline is firm, preferring to forego sales if the returns are not sufficient to meet our expectations.
Our operating businesses are working hard to mitigate the impact of the rate cut on the 737 MAX programme by Boeing, for example by substituting sales in those businesses that have strong order cover. As highlighted in the April trading update, our Senior Aerospace AMT (“AMT”) business in the Seattle area, which is our Structures Division’s largest business and has the largest content within Senior on the 737 MAX, is unable to fully mitigate the rate cut to 42 airplanes per month. AMT, having secured a high level of new content on the Boeing 777X, is already absorbing high new product introduction and industrialisation costs as that platform moves closer to entry into service. Our current working assumption is that rate 42 will now continue until at least the end of 2019. As a consequence we expect there to be some ongoing impact on Aerospace margins for 2019 and we will continue to take steps across the Group as necessary to mitigate this.
Outlook
Trading at the Group level in the first half of 2019 has been in line with expectations. Notwithstanding the reported 737 MAX production rate cuts and the ongoing uncertainty around the current geopolitical and macro-economic backdrop, overall the Board expects to meet current expectations for 2019.
In the second half we expect to make progress across our Aerospace division however we continue to monitor the developments on the 737 MAX situation closely. While we have yet to receive definitive information from Boeing about how long rate 42 per month build rate will be in place, our current working assumption is that rate 42 will now continue until at least the end of 2019. Despite this, we expect to maintain Aerospace margins at a similar level in the second half of the year compared to the first half of the year.
The outlook for our Flexonics Division remains consistent with the position set out in the announcement of 4 March 2019 and for the full year we continue to expect margin progression in this Division to offset the sales decline.
Looking ahead, the Group is working to minimise the impact of the risk associated with the challenges described, with a renewed focus on cost and efficiencies. The Group is well-positioned, operating in attractive end markets and is financially robust. The Board remains confident of improving performance and returns for our shareholders.
