Senior plc (LON: SNR), an international manufacturer of high technology components and systems, principally for the worldwide aerospace, defence, land vehicle and power & energy markets, issues this trading update for the ten months ended October 2019.
David Squires, Group Chief Executive of Senior plc said:
“Senior is focussed on delivering improved returns for shareholders with many of our operating businesses performing well. However, in recognition of the challenges in some of our Flexonics and Aerospace markets, Senior is implementing a restructuring programme to drive improved returns. These actions and our “prune to grow” strategy will strengthen our business. Combined with a slightly lower forecast tax rate and lower central costs, this means that the Group’s performance in 2019 will be broadly in line with our expectations.”
Activity in the Flexonics Division in the Period has been broadly in line with expectations with markets weakening in the last four months as anticipated. We continue to expect the full year margin progression in the Division to offset the sales decline with the benefits from our focus on cost management and efficiency initiatives being delivered.
The truck, off highway and passenger vehicle markets in North America, Europe and Asia have softened over the last four months. Current economic forecasts suggest that our Flexonics cyclical end markets will continue to decline through the rest of 2019 and into 2020, before starting to recover in 2021. We will continue to take appropriate steps to protect our returns and position the Group to take advantage of future recovery in our end markets.
We have seen year-on-year sales growth in the ten months of 2019 compared to the previous year. However, revenue in the last four months has been lower than our previous expectations due to weakness in wide-body commercial aircraft engine demand and further impact of the 737 MAX situation as some customers balance inventory to demand. Despite the lower revenues, 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.
Senior continues to make good progress on new product introduction and industrialisation activity. In those businesses where this activity is near completion, we continue to see improving returns. We have seen some customers delay the production ramp of certain contracts, where we are displacing incumbent competitors, and we now expect these to be at full rate production in 2021 instead of 2020.
In a highly competitive environment, we are maintaining our pricing and return on capital discipline. While we have successfully renewed a number of important long-term contracts, in line with our strategy to improve returns across our businesses, we have decided not to renew certain contracts which did not meet our returns requirement. As a result of this, our current view is that sales in our Aerospace Division will be lower in 2020 than in 2019 before returning to growth in 2021.
Management is taking actions to mitigate the challenges described above. We are implementing a restructuring programme across the Group, which includes:
● Aligning direct headcount to match capacity to sales demand profile
● Further efficiency improvements resulting in overhead cost reductions
● Transferring major work packages to South East Asia, taking advantage of our global footprint and cost competitive country strategy
● Closure of Senior Aerospace AMT’s South Carolina facility by early 2020
The opportunities currently identified will result in a total exceptional restructuring charge of around £20m, with a significant portion coming from headcount reductions as we match capacity to demand. The cash cost of this is approximately £15m, of which £6m is expected to be incurred in 2019 and will be financed by improvements in operating cashflow. The balance of the cash cost is expected to be incurred in 2020. The cost of this restructuring programme is expected to be largely recovered in 2020 and 2021.
Prune to grow
The Group has continued with its “prune to grow” activities and recently disposed of two more non-core businesses, in addition to Senior Flexonics Blois which was disposed of at the start of the year.
In September 2019, the Group disposed of its Flexonics operating company in Brazil, Senior Flexonics Brazil Ltda, serving the local automotive and power & energy markets.
In October 2019, the Group completed the sale of Absolute Manufacturing, part of our Aerospace Structures Division, focused on small built-to-print precision machining components.
These disposals enable us to have greater focus on our core activities and to deploy capital in other parts of the Group that have higher returns. These two businesses represented less than 2% of Group revenue in 2018 and the transactions are slightly accretive to the Group’s adjusted earnings for 2019.
The latest triennial actuarial valuation of the Senior plc Pension Plan, which is a funded scheme in the UK, has been completed. As a result, and effective from April 2019, the Group’s cash contributions to the UK Plan have reduced from an annual amount of £8.1m to an annual amount of £5.5m. These contributions are payable over the three year period to March 2022 and are subject to review and amendment as appropriate at the next funding valuation in 2022.
Summary and Outlook
Many of our operating businesses are performing well with improving returns. However, as described above, we are dealing with some challenges in some of our Flexonics and Aerospace markets. The Group is taking actions to address these by implementing a restructuring programme and by continuing its “prune to grow” programme. Combined with a slightly lower forecast tax rate and lower central costs, this means that the Group’s 2019 performance remains broadly in line with our expectations.
We continue to manage capital expenditure and working capital and, together with the benefit from the reduction in pension contributions, this enables us to fund our restructuring programme without impacting net cashflow for the year.
Senior plc 2019 full year results will be announced on Monday 2nd March 2020.