Good morning, everyone, and welcome to today's Senior plc Quarter Three Trading Update Conference Call. My name is Drew, and I'll be your operator today. During today's call, there will be a Q&A session. To register a question, please press star followed by one on your telephone keypad. If you wish to withdraw your question, then it's star followed by two. As a reminder, this call is for the analysts and investors, and if you are media, you should not be on the call and should disconnect now. I'll now turn the call over to David Squires, Chief Executive of Senior plc.
Thank you, and good morning, everybody. Thank you for taking the time to dial in for our Q3 Trading Update. I'll go through the interim [verbatim], then just add a few comments at the end before we invite any questions. This is the Q3 2024 trading update for the nine months to the end of September. Our performance for the nine months ended September, the group continued to see strong order intake with a healthy book-to-bill of 1.13. Group revenue for the period increased by 5% year- on- year on a constant currency basis. Aerospace revenue grew 13% year-on-year, driven by growth in commercial Aerospace, and as previously indicated, Flexonics revenue reduced by 9% compared to prior year.
Flexonics did have good growth in downstream oil and gas, power generation, and nuclear, which partially offset lower Land Vehicle market demand and lower sales to upstream oil and gas customers. So we look at, the markets and divisions now. In Civil Aerospace, air passenger traffic continues to grow. According to IATA, total demand, measured in revenue passenger kilometers for the eight months to August twenty-four, increased by 12% year-on-year. IATA expects demand for air travel to double by 2040 and this growth, along with the replacement of older aircraft, underpins demand for new aircraft. Both Boeing and Airbus are planning to increase build rates across their key narrow and wide-body programs over the coming years, and Senior Aerospace is well positioned to benefit from this growth with a robust order book and is continuing to win new business.
In the near term, however, as is extensively reported, the commercial Aerospace manufacturing industry is facing temporary but significant headwinds. Boeing's production rates this year on the 737 MAX have been restricted under the oversight of the FAA, following the Alaska Airlines incident early in 2024 . So we were pleased to hear confirmation from Boeing at their last earnings call that they were expecting to achieve a monthly production rate of 38 by the end of this year. However, with the employee strike at its commercial aircraft operations in the Puget Sound area now in its fourth week, there is an inevitable impact on our operating businesses most exposed to this customer, both directly and through its Tier 1 suppliers. In addition, Airbus has publicly been clear about the supply chain challenges it has been facing, particularly on engines and interiors.
Meanwhile, other parts of the Airbus supply chain that we have contracts with are generally produced in line with original scheduled rates. Consequently, there appears to be an imbalance of supply into different parts of the aircraft, and we have recently been informed by one of our customers, an Airbus Tier 1 supplier, that they intend to significantly reduce scheduled deliveries from Senior in Q4 of this year before returning to normal during Q2 next year. While the full impact on our businesses exposed to the affected programs is not yet certain, we have moved decisively to contain costs and preserve cash, as described, which I'll describe in a moment. In Flexonics, our view on markets has not changed since our interim results statement. Land Vehicle markets, particularly in Europe and North America, are seeing a slowdown, largely as anticipated.
ACT Research is forecasting a decline in North American heavy-duty truck production of 7% in the full year of 2024, while S&P data shows that European heavy truck production for the full year of 2024 is forecast to be down 20%. In Power & Energy, our upstream oil and gas demand remains subdued, partly offset by continued robust demand in our downstream oil and gas and nuclear business. So let me talk about the mitigating actions that we're taking as a consequence of the Aerospace issues I described. Cost and cash management actions are already underway across the group to help mitigate the impact of the challenges described. These include aligning our direct and indirect headcount to match capacity to sales demand profile through both temporary furloughs and permanent headcount reductions.
We're containing all discretionary spend, we have rescheduled incoming materials to align to future demand, and we're postponing uncommitted capital expenditure. The group will remain comfortably within its covenant limits. So now turning to the outlook. In Flexonics, our expectations for the full year are broadly unchanged, with H1 performance higher than H2. For the full year, we still expect year-on-year growth in Aerospace performance. Nevertheless, as a result of the temporary near-term customer-related headwinds described above, we now expect Aerospace H2 performance to be lower than H1. The short-term issues described in this trading update are clearly temporary in nature. The group's future growth is underpinned by our robust order book, and is well positioned in its markets and with its customers to capture further new business.
Increasing aircraft build rates, operational efficiency benefits, and improved price agreements are expected to drive good growth in the Aerospace division performance beyond 2024, and we remain confident of continuing to outperform the key end markets in which our Flexonics division operates. That's the Q3 trading update we have released this morning at 7:00 A.M. In essence, Flexonics is pretty much unchanged from what we discussed at the interim results at the half year. On the Aerospace, however, you know, Q3 has been a bit slow. That's not unusual with holidays and so forth, and normally we can sensibly make that up in Q4. But with the twin difficulties of the Boeing strike and the Airbus supply chain imbalance, we will not be able to do that this year.
We felt as soon as we became aware of the impact, we needed to share that with analysts and investors. I'm happy, Bindi is also on the call, as is Gulshan Patel. Bindi and I will be happy to take any questions that anybody may have.
Thank you. We will now start today's Q&A session. To register a question, please press star followed by one on your telephone keypad, and if you wish to withdraw your question, then it is star followed by two. Our first question today comes from Andrew Douglas from Jefferies. Your line is now open. Please proceed with your question.
Yeah, good morning, guys. Thank you for the call and the opportunity to ask some questions. I just wanna double check on the debt side. My working assumption is that clearly we need to reflect the lower operating profit guidance that you guys have given today. And there might be a small working capital outflow in the second half rather than a small influx. Is that the order of magnitude? Because if I take my budget and plug in some new numbers, it looks like you're still gonna be, you know, three times net debt to EBITDA relative to covenant, which I believe is three. So from a balancing perspective, you should be fine.
And then on the Airbus side in particular, can I just confirm that's on the engine side of it? Because that's where the supply and demand imbalance is more impactful. Is that fair?
Sorry, Andrew, could you just repeat the second part of your que-
Yeah.
Question.
With regards to Airbus and the Tier 1 supply challenge, is that more on the engine side from their side? Which is why it's impacting you guys, because it's more of a supply and demand imbalance on the engine side.
Let me answer the second question first, and then we will comment on the balance sheet question. The balance sheet's in good shape, so there's a number of communications on the call. Well, so what everyone knows is, as Airbus has said on a number of occasions, is that the supply chain issues, particularly around engines and interiors, we do not have the same issues on other parts of the aircraft, for example, the wings.
Yeah.
So the slowdown is actually on the other parts of the aircraft, to get it in line, to get the-
Mm.
To get the inventory and supply chain back in line on a more balanced basis. So no, it's the bits that are ahead, that-
Okay.
That their Tier 1 supplier is slowing down. It's not directly Airbus, it's from our Tier 1 supplier-
Got it.
Who supplies into other parts of the program, just to be clear?
Yeah, okay. Yeah, that is fantastic.
Andrew, on the balance sheet and cash flow side, so the decrease in Aerospace operating profit flows through to cash, and there's a working capital impact as well, because we've got material and work in progress that then needs to flush out, you know, in 2025. While we're doing everything we can now to make sure we're stopping and delaying incoming materials. Between the two, we're expecting free cash flow consensus to come down from about the 10 million range to the low single digits. Two to three million GBP, I think, is what the updated consensus or updated forecast that we're receiving this morning showed. For net debt EBITDA, though, we are still expected to be comfortably within our covenant limit.
Our covenant, net debt EBITDA is limited three times. We will be comfortably below that.
That's really helpful, yes.
As a reminder, if you would like to ask a question on today's call, please press star followed by one on your telephone keypad, and if you wish to withdraw your question, then it is star followed by two. Our next question today comes from Richard Paige, from Deutsche Numis. Your line is now open. Please proceed with your question.
Thank you. Morning, all. I was just wondering on this sort of impact, whether you could provide any color as to which part of Aerospace or how much it relates, particularly to the structures business, first off? And then, secondly, just whether, given the change in scheduling, whether there's any recourse for you that you can pursue to recover any of the additional costs? And then, I guess, ultimately, finally, just whether you can provide any sort of within the revised guidance, what sort of impact from Boeing strike or timeline you're factoring in or assuming now, please? Thank you.
Okay. So, firstly, if you think about the Boeing strike, we have many businesses that supply into Boeing, or its suppliers and, you know, Tier 1 suppliers, in both our structures businesses and our businesses. So all are affected, but the greater impact is on our structures business. So, for example, in the Pacific Northwest, you know, they are largely Boeing suppliers. And just a reminder, what's affected here, if it's the 787 , that's not affected because the 787 are built in South Carolina, and are not affected by the strike, by IAM in Washington State, in the Puget Sound area. So we are still manufacturing parts for the 787 , but pretty much everything else is affected.
So, you know, we've had to stop shipping on the 767, the 777, as well as the 737 MAX, in common with other suppliers who are on time, ironically. So, because we're on time, you know, Boeing are on strike. I think they've been quite open that they've said that, their CFO said that, you know, if you're not on time, you can make up a delivery. If you're on time and they have inventory, they don't need parts. And they are within their contractual rights to do that in the case of a strike.
Just to see what we've done about that. In the Pacific Northwest, which are the businesses most affected, we've got a number of other businesses also affected, but you know, we have close to half the workforce on furlough at the moment. In other businesses, we are making permanent headcount reductions. Obviously, all overtime has stopped, but mainly it's using temporary furloughs because these issues are very temporary in nature. You know, as soon as the strike finishes, we'd expect Boeing to start ramping up production again. It may take them a couple of weeks. We don't know how long it will take. We don't crystal ball. We have looked at how long the strikes have taken historically at Boeing.
You know, we know that they were discussing again yesterday between management and the unions, and we look forward to hearing an update on that. But, you know, let's assume, in our planning assumption, we've assumed, that it's, you know, complete disruption through the end of October, and we made some allowance, in case it goes beyond that as well. But when I said, you know, the details aren't yet certain, that's really the bit I'm referring to. But we do believe with our updated guidance here, that that should cover, the strike eventuality and some, you know, unless it went very long term. On the other supply chain side, the Tier 1 supplier, there, the big impact for us will be November and December, and also into the start of next year.
There will be a slow ramp back up during January, February, March, and then back to normal by April, by which time we think that supply chain will be balanced again. So again, very temporary in nature. You all know how robust Airbus and Boeing order books are, so we just need to get through these few months here, and then we should be humming along very well on the production side again. So hopefully, hopefully, that answers your questions. On the Airbus supply chain side, it's primarily structures that are affected, Rich. On the Boeing side, it's both, but again, structures will be the heavier impact. Bindi, do you want to comment on the other question there, Rich, sorry?
Just, it's more on whether you've got any recourse on this or how you're managing this?
Oh, I see. I see. Yeah. Well, you know, we have a firm window on the Airbus supplier side, and we are invoking that, so that's why the reduction doesn't cut in until November, but then it really, you know, drifts away for the rest of the year, so that's why we're having to use temporary furloughs to really manage the situation, because it will start picking up again in Q1 and return to normal by Q2, so the customers have followed their contractual rights. Of course, we will discuss with them the way that we can make that softer impact for us wherever possible, and you know we've got good relations with both the tier one Airbus supplier, Airbus themselves and Boeing.
So we're having good discussions with them about how we can quickly get back on the path to full production once these issues are behind us. But yes, they are within their contractual rights to do so, and responding accordingly by really taking on the cost that I mentioned.
Okay. So that's very clear. Thank you.
Our next question today comes from David Perry from J.P. Morgan. Please go ahead.
Yeah, hi, David and Bindi. Could you just help me understand a bit the comment about H2 performance being down on H1 in Aero? Can you just unpick that for me on sales and, and on EBITDA, please? Secondly, just I know it's early difficult, but any provisional early thoughts on 2025 guidance in Aero? And then lastly, are you able to share your own production rates on the A320neo, for next year? If that's something you disclose. Thank you.
Bindi, maybe just guiding thoughts on the A320 side. David, I think we're not second guessing Airbus on the rate plan. We have said they're driving to rate 75 by 2027. I think most people are aware they're in the mid- to high 50s currently, so we would still expect a relatively smooth trajectory, even with the supply chain issues that they have been describing up to now. So we would expect the rates to be higher on 320 next year than they've been this year, as we work towards that rate 75 by 2027.
You know, back-of-the-envelope always reminds me, if you are an airline, you want to order a new A320 today, you can't get a slot till 2031. So, you know, it's not a question of demand, the airlines are pulling this like crazy. So, I really do think those Airbus supply chain issues will be temporary in nature. I'm not saying there won't be continued headwinds on engines and materials that Airbus has described, but the trajectory will be upwards. And the same for Boeing, to be honest, as soon as they get through the strike, they'll be able to back up to that rate 38 as quickly as they can and then move forward beyond that.
They said they want to get to, you know, rate 50 in the 2025, 2026 - in the 2026 time frame. So, I would imagine they'll be going all out to achieve that. We haven't given guidance for next year and we got enough at this stage. We went through when the strike finishes. We're confident that next year will be better than this year for the reasons we described in the trading update. Importantly, we have price agreements that we've already negotiated and that will be coming in next year. And still negotiating some others as well. We anticipate operational efficiencies will continue to improve with leverage as volumes increase. And of course, the higher sales because of the rates.
But, we'll leave our guidance till a little bit later, as is typical for us, until we see how this settles down. Bindi, do you want to make a comment on this year?
Yes. So on Aerospace, what we have said is, you know, with the assumptions we've put in, that David described on the Boeing strike, and the Tier 1 Airbus impact as well, we expect Aerospace to still be performance, to still grow year-on-year. So full year, 2024, sales and profits should still be higher than 2023. Last year, our adjusted operating profit in Aerospace was GBP 27 million, and then the half-year Aerospace profit was GBP 16.2 million, with H2 being lower than H1. So if you think about it from a numbers point of view, the floor for Aerospace is the 27 from last year, and the ceiling is the 32 million, 32.5 million pounds, if you doubled half one.
So our expectation is that the full year 2024 will fall somewhere between that. So around that, the GBP 30 million of operating profit level is the current view. With the decisive cost management actions that we've already taken and are continuing to be taken, we currently expect aerospace margins in half two to be broadly similar to half one. So that's around the 4.8% operating profit margin level.
That's very clear. Thank you.
And David, just, one additional thought. We did lay out our view on rates, back in August, but hasn't really changed since then. Obviously, with Boeing, the Boeing strike, then there will be naturally a delay this year to then getting up to rate thirty-eight, which is what we'd said we want to be by the end of the year. We'll see what they say when the strike finishes, but I would anticipate that might be a little bit later into the fifth and start of next year, in terms of getting that, running by the end of this year. But that aside, the rates we described in all the programs, including the wide-body programs, I don't believe have changed.
We'll be able to come out with our early calls fairly soon, later on this month, and we'll be watching that as well to see what they say.
As a final reminder, if you'd like to ask a question on today's call, please press star followed by one on your telephone keypad. If you wish to withdraw your question, then it's star followed by two. It looks like we have no further questions at this time, so I'll hand back over to David Squires for closing remarks.
Okay. Well, thank you very much, everybody, for joining. You know, it's a difficult trading update for us, but I'd just like to repeat and emphasize that we'll do everything we possibly can to, you know, mitigate the impact of the issues that we're facing, this customer related issues. And further emphasize, they really are temporary in nature, and we're looking forward to getting through this over the next two months and then getting back on a smooth trajectory forward again. And we'll look forward to speaking with you all in due course. Thank you very much.
That concludes today's call. You may now disconnect your line.