Post-close Market Update

10 July 2020

Senior plc: Post-close market update - Robust cash performance in the period

Senior plc ("Senior" or the "Group"), an international manufacturer of high technology components and systems, principally for the worldwide aerospace & defence, land vehicle and power & energy markets, today issues this market update following the close of the six-month financial period ending 30 June 2020.

Summary

Liquidity

As well as delivering a robust operating cash flow performance in H1 2020 we have increased our financial flexibility, with appropriate covenant relaxations from all of our lenders in relation to the June and December 2020 testing periods and confirmed eligibility for the Bank of England's Covid Corporate Financing Facility.

The Group continues to undertake extensive scenario testing for 2020 based on a variety of end market assumptions and, under all scenarios tested, the Group has sufficient liquidity under its existing committed facilities.

Trading update

In our Market Update on 24 April 2020, we reported that trading for the three months ended 31 March 2020 was slightly ahead of our expectations coming into the year, despite the tangible impact of the Coronavirus (COVID-19) during March.  As expected, in the second quarter that impact was more pronounced with aviation, land vehicle and power and energy markets severely affected.  As a result, activity significantly slowed across both our Aerospace and Flexonics Divisions, as customers temporarily closed their facilities and lowered production rates.

We now expect Group revenue in H1 2020 will be around 30% lower than H1 2019 and consequently, margins will be significantly lower.

The Group's underlying cash performance has been robust with a net cash inflow of £3m in the period.  This is due to our focus on conserving cash through careful management of capital expenditure and working capital, especially inventory.  Net debt at the end of June 2020 is expected to be around £239m (including capitalised leases of £84m and adverse currency movements of £12m) with £162m of headroom on our committed borrowing facilities, an improvement of £3m from 31 December 2019.

At the time of our Full Year 2019 Results in early March 2020, we advised our expectation was for Aerospace revenue in 2020 to be around 20% below 2019 levels as a consequence of Boeing's temporary halt in 737 MAX production and our decision to not renew certain contracts which did not meet our returns requirements.  In addition to the above, the impact of COVID-19 has led to severe end market disruption and, as a consequence, we now expect Aerospace sales in H1 2020 to be around 31% lower than H1 2019.  On a quarterly constant currency basis, Aerospace sales are expected to have declined 22% in Q1 and 40% in Q2, year-on-year.

Economic forecasts at the time of our Full Year 2019 Results suggested that Flexonics' cyclical end markets would decline in 2020, before recovering in 2021, and Flexonics revenue was expected to be to be lower in 2020 compared to 2019.  At that time, ACT Research forecasted the North American heavy-duty diesel truck market to decline 34% in 2020 and in the upstream oil and gas market the US rig count was expected to contract in 2020.  With the additional impact of COVID-19 on the land vehicle and the oil and gas markets, we now expect Flexonics sales in H1 2020 to be around 27% lower than the same period in 2019.  On a quarterly constant currency basis, Flexonics sales are expected to have declined 23% in Q1 and 33% in Q2, year-on-year.

Market Update

In civil aerospace, the impact of the pandemic led to a severe decline in global air traffic, reaching a low in April 2020, down 94% year-on-year.  As a result, many airlines have cut capacity, retired older aircraft and looked to defer deliveries of new aircraft.  Civil aircraft and engine OEMs have announced significant cuts to programme production rates.  Further disruption has been caused by temporary customer production closures and rebalancing of inventory throughout the supply chain; an activity that is continuing.

In Flexonics many of our customers temporarily shut production facilities and reduced output once reopened.  In the first five months of 2020 North American truck production was down 54% year-on-year.  The huge decline in air and land travel contributed to an excess of crude oil supply over demand of more than 20m barrels per day, negative oil future prices and, as a consequence, the mothballing of some upstream exploration capacity.

Throughout the period, other growing markets important to Senior, such as defence, semi-conductor equipment and medical, remained healthy, representing approximately 20% of Group sales in H1 2020.

Management actions

In 2019, in order to counter the anticipated decline in Group sales, a restructuring plan was initiated which was communicated in November 2019, including the alignment of headcount to anticipated demand; further efficiency improvements leading to overhead reductions; the closure of Senior Aerospace AMT's South Carolina facility; the transfer of major work packages to South East Asia.  These actions have all been implemented and are delivering the expected benefits.

In addition, as outlined above, the pandemic has led to a significant decline in some of the Group's end markets.  Whilst we are doing everything possible to sustain jobs, all likely scenarios involve a prolonged contraction of some of our end markets which means that we have extended and broadened the scope of the restructuring activities to further reduce costs.  At the end of June 2019 Group headcount was approximately 8,200.  Between June 2019 and December 2019 Group headcount reduced approximately 5%¹.  We have reduced headcount by a further 12% in H1 2020.  In addition, globally there is approximately 19% of the remaining workforce on furlough.

We have taken advantage of the period in which customers were closed to accelerate the planned transfer of work packages to South East Asia.  In addition, where possible we are redeploying equipment to better utilise it within the Group, for example for use on our growing military aerospace work instead of civil aerospace.

Reflecting the additional actions which we are taking, we now expect the total restructuring charge to be up to £35m, an increase from the £23m we had advised at our Full Year 2019 results.  Cumulative savings will now be around £35m in 2020, increasing from the estimated £20m advised at the time of our Full Year 2019 results.

The associated cash outflow is expected to be up to £25m, an increase from £15m expected at the Full Year 2019 Results.

In addition, we anticipate recognising a significant non-cash reduction in the carrying value of certain intangible assets under International Accounting Standard (IAS) 36 as at 30 June 2020.

More details of these updated restructuring plans, costs and savings will be provided in our Interim Results.

Outlook

In civil aerospace, the significant reduction in production rates seen in the second quarter is expected to continue in the second half of 2020 and into 2021.  While it is likely to take several years for air traffic to return to 2019 levels, the demand for air travel is expected to continue to grow in the medium and long term.  The lower operating cost and better sustainability of new aircraft, on which Senior has significant content, will continue to be a necessity for the airline industry.

In Flexonics, we are not anticipating meaningful improvement in our end markets in the second half of 2020.  The latest ACT forecast is for the North American heavy-duty market to decline 61% in 2020, with a return to growth in 2021.  In Oil & Gas we are expecting the significantly lower equipment demand to be maintained for the remainder of the year.

Whilst we expect that the structural long-term drivers of our end markets will remain in place, trading for the rest of 2020 continues to be impacted by COVID-19.  As a result, guidance for 2020 remains suspended.

David Squires, Group Chief Executive of Senior plc said:

"The Coronavirus pandemic has had a profound effect on our markets and customers since March and the impact will be with us for some time to come.  Throughout, our highest priority was, and remains, the health and welfare of our employees.  They have worked tirelessly and skilfully in response to the changing environment, which, in turn, has allowed business continuity to be the very best it could be.  In the face of these extraordinary conditions, the Group has focused relentlessly and effectively on cash preservation and liquidity.

Based on our analysis of economic and industry expert forecasts, and our customers response to those, we expect the difficult conditions to remain for many months to come.  Our original restructuring programme has progressed in line with plans.  Whilst we are doing everything possible to sustain jobs, regrettably market conditions are such that we have extended and broadened the scope of that restructuring and we will provide more details of that at our interim results.

However, we remain confident that in the medium term, our differentiated offering in fluid conveyance and thermal management products, our global footprint and our positioning in attractive and diverse end markets will help to ensure that we emerge strongly as the recovery starts to take shape".

Senior intends to announce its 2020 interim results on Monday 3 August 2020.

Notes

This announcement contains inside information.

Further information

About Senior

Senior is an international manufacturing group with operations in 13 countries.  It is listed on the main market of the London Stock Exchange (symbol SNR).  Senior designs, manufactures and markets high technology components and systems for the principal original equipment producers in the worldwide aerospace & defence, land vehicle and power & energy markets.  Further information on Senior plc may be found at: www.seniorplc.com

Cautionary Statement

This announcement contains certain forward-looking statements.  Such statements are made by the Directors in good faith, based on the information available to them at the time of the announcement, and they should be treated with caution due to the inherent uncertainties underlying any such forward-looking information.