Senior plc (SNR) Earnings Call Transcript

Good morning, everyone. Welcome to Senior plc's 2021 Interim Results Presentation. Bindi and I are once again at our head office in Rickmansworth. And our Chairman, Ian King, is also on the call. Gulshen Patel, our Director of Investor Relations, is also participating and will be curating the Q&A session at the end of the presentation. In terms of our agenda this morning, I will briefly cover the highlights and set the scene for what we're going to be talking about today. Bindi will run through and comment on the results, and I will then focus on markets, strategy and outlook. Before we get into the H1 results, I wanted to say a few words on why we believe we are well positioned for the future. We have a clear strategy to maximize shareholder value by focusing on supply of our IP-rich fluid conveyance and thermal management technology and products into diverse and attractive end markets, markets that are showing clear signs of recovery and share compelling structural growth characteristics. We are confident that by doing so, we will deliver a minimum of 13.5% return on capital employed in the medium term. The building blocks are already in place to achieve this. And at the end of the presentation, I will step through this slide in more detail, describing how we aim to successfully deliver that commitment. I will leave Bindi to go through the financial highlights in a few minutes. I'm pleased to say, however, that trading in the period was ahead of our previous expectations, and we once again demonstrated the resilience of our business in very demanding circumstances by delivering strong free cash flow with a strengthened balance sheet and healthy liquidity. We made good progress on our portfolio. And in April, we successfully completed the strategic divestment of Senior Aerospace Connecticut. Perhaps the most important is the growing evidence that there are clear signs of recovery in our end markets, and I will go through that in detail in the market update section of the presentation. ESG remains a very high priority for Senior, and we've not allowed the pandemic to distract us from our progress on this front. We continue to lead the industry in our sustainability commitments. And as we said previously, we are the first company in our sector anywhere in the world to have our Scope 1, 2 and 3 greenhouse gas emission reduction targets approved through the Science Based Targets Initiative. It was always our aspiration that others would follow in our footsteps, so it's great to see heightened activity by aerospace and other industrial companies in this area. I'm not going to go through a full update on our ESG metrics. We did that in March, and we'll do so again at the time of our full year results. Rather, I will focus on what we've been busy on over the past few months. We made very good progress in H1 with our Scope 3 supplier activities, actively engaging with our top 80% suppliers by value with respect to their targets and commitments. I've enjoyed personally interacting with the business leaders of our key suppliers, who have generally been responsive and enthusiastic about our quest to reduce greenhouse gas emissions in our own businesses and throughout our supply chain. In addition, we have spent considerable effort on scenario analysis, which is a vital part of the Task Force on Climate-related Financial Disclosure recommendations. And we'll be discussing that in depth with our Board during this quarter. From a workforce perspective, we undertook a global employee opinion survey, which had excellent participation levels. Feedback was generally very positive and is enabling us to follow up across the business with actions focusing on those areas that matter most to our employees. And from an ethics perspective, we've refreshed and updated our Code of Conduct and delivered a personal copy to every employee in the appropriate language to accompany the training we've rolled out. I will now hand over to Bindi to take us through the financial results, after which I will pick up on markets, strategy and outlook to finish.

Thank you, David. Good morning, everyone. The year's half 1 2021 results demonstrate the group's resilience and its intrinsically strong cash generation. Despite the greatly reduced sales from the continued impact of the pandemic on some of our markets and customers, we were able to report a profit for the first half of this year and deliver a robust cash performance. I'll cover the other metrics later, but let's start with cash. Throughout this period, as always, we have focused on generating free cash flow and responded promptly to counteract the effects of the pandemic on the business. As a result of strong controls and agility in our operating and capital expenditure as well as reductions in working capital, we delivered robust free cash inflow of GBP 19.2 million, which was 20% higher than last half year. In addition, after taking into account the net cash proceeds from successfully completing the divestment of Senior Aerospace Connecticut, net debt, excluding capitalized leases, reduced to GBP 71 million at the end of June. This was an GBP 84 million improvement from a year ago. At the end of June 2021, the group's net debt-to-EBITDA ratio improved to 2x, and the group's headroom on committed borrowing facilities increased to GBP 215 million. As you would expect, compared to half 1 2020, which was partly pre COVID, revenue, adjusted profit, adjusted earnings per share and return on capital employed all declined in the period. Despite the greatly reduced sales with the benefits from our restructuring activities, we were able to report a profit in the period. I'll now summarize the key elements of the group's trading performance in the first half of 2021. The chart bridges revenue from GBP 409 million in half 1 2020 to GBP 332.8 million in half 1 2021. Excluding the unfavorable currency impact of GBP 25 million, revenue from the Aerospace division decreased by GBP 57 million, and Flexonics revenue grew by GBP 6 million. Excluding sales from Connecticut, which was divested in April 2021, Aerospace revenue on an organic basis declined by GBP 49 million or 19%. Civil aerospace sales decreased by GBP 61 million, 34%, reflecting the ongoing impact of reduced production rates by civil aircraft and engine OEMs and customers' rebalancing of inventory throughout the supply chain. However, Defense sales increased by GBP 6 million due to the ramp-up of the F-35 Joint Strike Fighter and higher demand for other defense products. A number of our Aerospace businesses supply product to broader industrial markets. Revenue from these markets increased by GBP 6 million from growth in space and semiconductor equipment activity. In Flexonics, sales grew by 6% in the first half of 2021 compared to prior half year. Revenue from land vehicle markets increased to 51% as a market recovery in on- and off-highway vehicles as well as passenger cars continues. Senior sales to North American truck and off-highway markets increased by GBP 10 million, up 45%. Sales to other truck and off-highway regions, primarily Europe and India, increased by GBP 5 million and sales to passenger vehicle markets also increased by GBP 5 million. As expected, revenue from power & energy markets decreased by 21% in the period as customer demand continue to be impacted by the pandemic. Senior sales to oil and gas markets decreased by GBP 13 million as a result of a lower upstream activity and the closure of the Malaysia oil and gas business. On the downstream side, some maintenance projects continue to be deferred by customers. The chart on this page bridges adjusted operating profit from GBP 9 million in half 1 2020 to GBP 5.2 million in half 1 2021. In Aerospace, excluding GBP 1.6 million operating profit reduction from the divestment of Connecticut, on an organic basis, adjusted operating profit decreased by GBP 2.8 million. The drop-through impact of the reduction in revenue was partially mitigated by additional savings delivered from the restructuring program. In Flexonics, the GBP 2.8 million increase in adjusted operating profit reflected the drop-through impact of growth in revenue, coupled with additional restructuring savings, which more than offset the inflationary impact of freight and commodity costs. Despite the continued impact of the pandemic on some of our markets, both Aerospace and Flexonics divisions remained profitable throughout the period. The decisive restructuring actions which we have taken to insulate the business through the pandemic in 2020 and 2021, including headcount reductions and business closures, mean that we are now an even leaner and more efficient business. We've delivered savings of GBP 25 million in the first half of 2021, an increase of GBP 14 million compared to half 1 2020. A net P&L charge of GBP 0.1 million was incurred in the first half of this year with a net cash outflow of GBP 3 million. In the second half of this year, we are expecting a further cash outflow of around GBP 6 million mainly related to the closure of our Senior Aerospace Bosman operating business. With our focus on delivering the expected benefits, we're tracking ahead of plan. We now expect to achieve cumulative annualized savings of around GBP 50 million for the full year 2021. Our restructuring program is effective and delivering benefits ahead of plan. This slide reconciles adjusted operating profit to the statutory reported profit for the period. It also highlights our interest and tax charges. Net interest payable decreased by GBP 1 million to GBP 4.3 million mainly due to the repayment of the USD 20 million private placement note in 2020 and lower average net debt in the period compared to last year. A tax charge of GBP 0.5 million was recognized on the group's adjusted profit before tax of GBP 0.9 million. This equates to an adjusted tax credit rate of 55.6%. But of course, percentages are more sensitive when amounts are relatively small. In terms of reconciling adjusted profit to statutory reported profit, the significant item excluded from the adjusted profit measures for 2021 is net income from corporate undertakings of GBP 21.5 million. This comprises a gain of GBP 24.2 million on the divestment of Senior Aerospace Connecticut and costs of GBP 2.7 million relating to bid defense and other corporate activities. Now on to cash. With our strong focus on cash generation, we delivered robust free cash inflow of GBP 19.2 million in the first half, a 20% improvement compared to half 1 2020. We saw GBP 5.8 million inflow from a net reduction in working capital, reflecting our relentless and effective focus on working capital management. We have been encouraged by news from Boeing and Airbus regarding the increase in production rates on single-aisle aircraft. Consequently, we expect to see an increase in inventory required to support these higher production rates towards the end of the year. Net capital expenditure of GBP 7.8 million was 0.4x depreciation, excluding IFRS 16. As previously advised, we are now past the peak investment phase and are capitalized and prepared for recovery and growth. Payments for interest, tax and pension contributions in excess of service costs totaled GBP 8.8 million. After GBP 8 million cash outflow from restructuring, legal claims and corporate activities and GBP 49.7 million net cash proceeds from the divestment of Connecticut, the group generated net cash inflow of GBP 61 million in the first half of 2021. At 30th of June 2021, the group held committed borrowing facilities of GBP 286 million, and the group had liquidity headroom of GBP 215 million under these facilities, an improvement of GBP 58 million from December. Net debt before lease liabilities was GBP 71 million at the end of June, and the group's net debt-to-EBITDA ratio was 2.0x, comfortably with a normal covenant limits. In April, we refinanced the U.S. revolving credit facility of $50 million and extended its maturity to June 2023. Accordingly, the weighted average maturity of the group's committed facilities is now 3.4 years. Senior has strong liquidity and stable finance arrangements. In summary, Senior has, once again, delivered a robust cash performance despite the continued impact of the pandemic on some of our markets and customers. Our restructuring program is effective and delivering ahead of plan, and both divisions remained profitable throughout the period. Senior has a robust balance sheet, strong liquidity and stable finance arrangements. This, together with the group's intrinsically strong cash generation and our operating businesses already well capitalized, means that we are prepared for recovery and growth. Thank you. And I will now hand back to David to cover the markets, strategy and outlook.

Thank you, Bindi. So let's turn our attention to markets. In H1 2021, Aerospace represented 66% of the group's revenues, and Flexonics was 34%. Not surprisingly, our exposure to civil aerospace has decreased compared to H1 2020 while defense has increased. The recovery in land vehicle markets has meant that revenue in that sector has increased significantly as a proportion of group sales, while power & energy has decreased slightly as oil and gas markets remained subdued in the first half of the year. Before I step through each of our markets, I thought we would share the updated snapshot of our most important markets that we showed back in March at our full year results. In essence, market trends are evolving largely as we expected them to, with defense being stable, a strong recovery underway in land vehicles, positive signs in civil aviation markets and economic recovery leading to higher demand for energy. So there is cause for optimism, and I will elaborate that over the next few slides. To set the scene for our aerospace and defense markets, I thought it'd be useful to share how our sales break down by platform. This chart shows the percentage of our Aerospace sales for H1 of this year adjusted for the disposal of our Connecticut helicopter parts machining business. And remember, this includes all sales to all customers that end up in a particular platform. So for example, sales to Safran on the LEAP-1A engine would show up on the A320 segment. As can be seen, the Airbus single-aisle program represents the largest percentage of sales by platform, followed by 2 defense platforms, F-35 at 8% and C-130 at 6% and so forth. Even at the low levels of production in the first half of the year, the 737 MAX represented 4% of Aerospace sales. And so you can imagine, as rates increase there in coming months and years, that will go racing up the rankings. The thing that surprises most observers when I showed them in this chart for the first time is the amount of sales not attributable to any specific platform at 2% or higher. This is an important part of our business and will include sales on space platforms, aftermarket and also sales which emanate from our Aerospace businesses that are for other industrial markets. A good example would be sales for semiconductor equipment and medical applications. I will come back to that theme later. Air traffic recovery in 2021 is evidently underway as travel restrictions continue to ease globally and the COVID-19 vaccine rollout gathers pace. While long-haul international travel remains subdued, short-haul domestic travel in certain aviation markets, for example the U.S., has seen significantly improving trends. And in fact, North American departures have recovered to their highest levels since March 2020, while European summer air traffic in the first half of July was up 75% on last year. In May, IATA forecasted that world passenger flows will return to 2019 levels by the end of 2022 and will reach 105% of 2019 levels by 2023. As demand recovers, production of new aircraft will be supported by the replacement cycle driven by the retirement of older, less-efficient aircraft. Beyond this, the drivers supporting air traffic growth over the long term of around 4% per annum remain in place. With our diversified product portfolio and especially the attractive positions we hold across the newest generation of single-aisle aircraft platforms, we are well positioned to benefit from the expected recovery. Production rates for single-aisle aircraft were significantly cut in 2020 due to the pandemic and have remained at subdued levels in the first half of 2021. Nevertheless, both Airbus and Boeing have recently confirmed plans to ramp up single-aisle production in the near term. Airbus confirmed in May 2021 an average A320 family production rate of 45 aircraft per month in Q4 2021, up from their announced rate of 40 per month in 2020. They also called on suppliers to prepare for a firm rate of 64 by Q2 2023. And in anticipation of a continued recovering market, Airbus has also asked suppliers to enable a scenario of 70 by quarter 1 2024. And longer term, Airbus is investigating opportunities for rates as high as 75 by 2025 for the A320 family. Similarly, Boeing stated on their earnings call last week that the 737 program is now producing at a rate of approximately 16 per month and reaffirmed their expectation of an increase to 31 per month in early 2022, with further gradual increases to correspond with market demand. Boeing also stated that since the FAA's approval to return the 737 MAX to operations in November 2020, more than 130 737 MAX aircraft have been delivered, and airlines have returned more than 190 previously grounded airplanes to service. In addition, Boeing confirmed that they have an order backlog of around 3,300 737 MAX aircraft, so we expect this program to be very successful for Senior in the future. Recovery in the international travel sector, which typically uses wide-body aircraft, is expected to take longer than domestic routes. Airbus recently announced the A350 family, currently at an average production rate of 5 per month, is expected to increase to 6 by autumn in 2022. For the A330 family, production remains at an average monthly production rate of 2 per month. Boeing announced an average production rate of 5 per month on the 787 platform from a peak rate of 14 per month prepandemic. However, Boeing has stated that production will be lower than 5 per month temporarily while they complete required inspection and rework before gradually returning to that rate. Production of the 767 will continue at a rate of 3 per month, and the 777/777X combined production rate will remain at 2 per month with Boeing continuing to expect first delivery of the 777X in late 2023. Overall, our focus for defense is very much on the U.S. market, where defense spending is almost as high as the next 12 countries combined. And Senior's production volumes reached meaningful levels for sustained periods, which, in due course, will also generate good aftermarket sales for our fluid conveyance products. Long-established programs, such as C-130 and P-8 remain important revenue drivers for Senior. But of course, F-35 is the largest defense program that we are on. You will have seen in the pie chart I showed a few moments ago that F-35 is currently the second highest revenue Aerospace and defense platform after A320. We have several operating businesses supplying to various customers on this program, and we are currently completing Lot 14 deliveries and preparing for Lot 15 manufacturing. And then there are newer growth programs that will become important for us. For example, our high-pressure ducting products are on the Boeing/Saab T-7A Red Hawk platform, which is a new U.S. Air Force trainer jet and which will ramp up in production over the coming years. We would expect this platform to be successful internationally in addition to the U.S. volumes. Sales of the type of products we make in our Aerospace operating businesses and to end markets outside of the civil aerospace and defense markets are classified under Other Aerospace and include sales into the space, semiconductor equipment and medical markets. As this has now reached 11% of group sales, we felt it would be useful to elaborate further. For the eagle eyed amongst you, you might have noticed that the chart showing our major customers, which is on Page 51, shows Lam Research, a semiconductor equipment manufacturer, in our top 10 customers by revenue. The semiconductor end market is currently experiencing high levels of demand from the strong business in consumer electronics sector as a result of pandemic-related consumer and work-from-home trends. And it has been further strengthened by recovery in industrial markets such as automotive. Given the well-publicized chip shortages affecting various industries, we would expect investment in semiconductor manufacturing capacity to increase in coming years. Our highly engineered proprietary products use our world-class bellows technology to provide excellent solutions for semiconductor manufacturing equipment. Other sales in this category include custom-designed medical products and structural assemblies for space satellites, which are built in Senior Aerospace AMT in the Seattle area. Turning now to Flexonics. We will firstly look at land vehicles, which covers truck, off-highway and passenger vehicles. For this market, we sell a range of proprietary products to major OEMs, in particular our exhaust gas recirculation coolers, or EGR coolers, as they are commonly known, which protect the environment by reducing emissions. We are seeing strong growth in North America and Europe in the heavy-duty truck and off-highway sectors. We expect similar levels in the second half of this year then further growth in 2022. Passenger vehicle markets are also showing strong recovery. Most of our sales are in Europe, and we also supply into India with smaller amounts to North America and China. Strong, double-digit growth is being seen this year in these markets, and we expect further growth next year. Our EGR cooler expertise means that we are well positioned for other applications which need innovative thermal management and fluid conveyance solutions, notably battery cooling for electric vehicles. And I will talk about that later when we come to the strategy section. Our other most important Flexonics market is power & energy. Back in March at the time of our full year results, we talked about the slump in demand for oil and gas products brought on by the lockdown restrictions implemented by governments around the world and the subsequent decline in air and land vehicle travel. At the time, we said we did not anticipate any meaningful recovery in this sector until economic activity levels pick up around the world. Given improving economies and the sustained recovery in crude oil prices, we're now increasingly confident that the inflection point for upstream oil and gas will be at the end of this year, so we expect a return to growth in 2022. In the medium term, we are well positioned to grow our nonfossil fuel business, building on our existing renewables and nuclear energy customer base. And again, I will come back to that in the strategy slides. I'd like to change tack now and talk about progress with strategy, which we've continued to focus on despite the necessary distractions caused by the pandemic. At our last Capital Markets Day in May 2019, we highlighted 2 key technology themes. One was Structures, with other being fluid conveyance and thermal management. Our strategy for our Structures business is straightforward. We have a well-equipped global footprint, including excellent manufacturing facilities in Southeast Asia as well as North America and the U.K. Our focus is on filling our existing capacity with work that meet our returns criteria. The most important element of that will be the ramp-up in production of the Airbus and Boeing single-aisle programs as the civil aero markets recover. Remember, for most of our product lines, we are already fully invested for the rates we had envisaged over the next few years. We are starting to have success in winning new business from commercial aerospace and space customers who appreciate our reliability and operational performance. Adding more contract wins remains a priority. Most of our R&D and product development efforts are for our fluid conveyance and thermal management businesses, which span our Aerospace and Flexonics divisions. These products and subsystems come in all shapes and sizes but share common underpinning technology. Typically, we're responsible for the design as well as manufacture of these products, and they have strong intellectual property content. On this slide, you can see some of the highly engineered fluid conveyance and thermal management products that we supply into a range of diverse and attractive end markets, including medical, semiconductor equipment, defense, industrial and, of course, commercial aerospace. It's these sorts of applications where we concentrate our product development activities. This model of providing innovative products using proprietary technology, servicing diverse and attractive end markets is a fundamental element of Senior's go-forward strategy. And this core capability continues to be highly relevant as we transition towards a low-carbon economy. Earlier, I spoke about the great work we are doing to reduce greenhouse gas emissions in our own operations and those of our suppliers. The products which we already supply and which we have in development also contribute to reducing carbon. And by the way, it isn't just carbon dioxide we should be concerned with, other greenhouse gases are just as important. For example, our EGR coolers prevent nitrogen oxide from venting to the atmosphere. Nitrous oxide has 300x the warming effect on our atmosphere that CO2 has. In thermal management, our intellectual property can be used to prolong battery life, a key determinant of electric and hybrid vehicle economics. We are in production with our 70-kilowatt battery cooler, our first electric vehicle application, and we have various development projects and multiple bids underway with a variety of battery manufacturers and land vehicle OEMs. In addition to vehicle applications, we're also working with customers on future cooling solutions for stationary power storage and building on our strong legacy of work with renewable energy projects such as solar farms. From an aerospace perspective, our technology and products are entirely compatible with sustainable fuels. We are now bidding, designing and prototyping parts for electric air vehicle companies and participating in important research and technology projects for commercial aerospace, hydrogen and zero-emission projects. Over the next few slides, I will try to explain in more detail of how our focus on current and future technologies is helping to future-proof our growth for a low-carbon world. This visual on the left of this chart shows our view of how powertrains will develop over time. The larger the font, the greater the demand. There has been a marked acceleration of all-electric for lighter-classification vehicles, and we are working diligently to manage this transition and ensure that we have innovative products ready for market at the right time and at the right cost. We see hydrogen fuel cells as a more realistic low-carbon alternative for heavy-duty trucks, and that also plays to our strengths. The top-right infographic demonstrates that volume production of hydrogen-powered aircraft is a long way off, though development activities have started, and we are involved with those. For smaller aircraft, we may see all-electric propulsion around the turn of this decade, all of which demonstrates the great importance of using more sustainable or synthetic aviation fuels for the current generation of aircraft so that we can affect a much earlier impact on reducing carbon emissions as we all fly around the world. And finally on this slide, the bottom right graph shows what may happen to demand for different energy sources based on the commitments made by various countries under the Paris Agreement. No doubt this will be under great scrutiny at the COP 26 summit in Glasgow in November this year. We continue to invest in new technology and product design and development in the areas of fluid conveyance, thermal management and additive manufacturing in support of our key markets in Aerospace, land vehicles and power & energy as they transition towards a low-carbon economy. In Aerospace, as mentioned, our traditional fluid conveyance products are entirely compatible with sustainable aviation fuels currently under evaluation by our customers. Our additive manufacturing capabilities are enabling advances in complex product design for improved performance and weight reduction for the benefit of our customers. Our world-class capability in thermal management and fluid conveyance opens up opportunities to support electric and hybrid air vehicle applications. And we are leveraging and building upon our long experience of providing hydrogen fluid handling and distribution products for industrial markets to support development of both on-aircraft and off-aircraft hydrogen technologies as this alternative propulsion system evolves. In land vehicles, our current exhaust gas recirculation and waste heat recovery products continue to support evolving land vehicle powertrain systems as they become more efficient and lower their impact on the environment. To focus on product offerings for the transition to a low-carbon economy, we are engaged with our customers' new product development programs by providing design and engineering support for cooling and fluid handling solutions for batteries and electronics on the growing number of electric and hybrid vehicles. We're supporting the development of commercial vehicle hydrogen fuel cell cooling and conveyance by capitalizing on several years' experience of producing hydrogen fuel cells products in the energy sector. In power & energy, we continue to develop and establish a wide range of fluid conveyance and thermal management products, many of which, such as our expansion joints, use our world-leading bellows technology. Our products are ideally suited for harsh environments in green energy generation, including solar farms, wind power plants, hydroelectric, geothermal, fuel cell and nuclear power applications. Our many years' experience of providing fluid conveyance products for harsh environments, and specifically hydrogen fuel cell cooling and conveyance, opens up opportunities in hydrogen production and infrastructure applications. In fact, hydrogen production electrolyzers have been described as a plumber's nightmare. Our design engineers love solving those sorts of problems. So hopefully, as you can see, our capabilities and technology will remain highly relevant as we transition over coming years and decades to a net zero environment. I'll just set briefly through one case study to help bring this to life a little bit. In this case, one of our largest established land vehicle customers is expanding its product range to adapt to hydrogen power solutions. It is developing electrolyzer systems to produce green hydrogen. However, due to the characteristics of hydrogen, only fluid conveyance components that can respond well to hydrogen embrittlement can be implied in those systems. Hydrogen embrittlement is where hydrogen can diffuse into the metal, causing parts to crack under stress. Senior has years of experience in terms of handling hydrogen fuel cell applications. We already produce stainless steel fluid conveyance products, and we understand how to avoid and resist hydrogen embrittlement. In this case, Senior has a long-standing relationship with the customer and is the go-to source for similar products. The outcome of this particular case study is that Senior Flexonics Canada is producing stainless steel hoses for the customers' electrolyzer applications. We've offered the customer a viable solution for its transition into greener technologies. And importantly, this experience has opened up more future opportunities for Senior in the growing hydrogen market. We're looking forward to diving deeper into our fluid conveyance and thermal management capabilities at our upcoming Capital Markets Day. But hopefully, that gives a flavor of what we will be covering. In addition to our technology and product development activities, another central plank of our strategy is portfolio optimization. The group continuously reviews its overall portfolio of operating businesses and evaluates them in terms of their strategic fit within the group. We've continued our prune to grow strategy by divesting, closing or combining noncore or performance challenged assets. This year, we closed our small Flexonics oil and gas business in Malaysia. And in H2, we will complete the closure of our Aerospace business in the Netherlands. And in case of the latter, we are transferring manufacturing to our very capable French Aerospace businesses, and that is progressing to plan. In April, we completed the divestment of our Senior Aerospace Connecticut business. You will recall that this business was the only operating business in Senior whose primary focus was built-to-print parts for the rotary sector. The divestiture is consistent with Senior's strategy to review the overall portfolio of our businesses and evaluate their strategic fit within the group. And the net proceeds have further strengthened Senior's balance sheet, providing greater flexibility for the group to operate with its capital deployment framework. So let me finish by talking about the outlook for Senior. Over the past 18 months, we have demonstrated our resilience through the pandemic and have taken action to ensure our business is lean and fit. That resilience is standing us in good stead and leaves us well positioned for the future. For the rest of 2021, our assumptions are basically unchanged. We can see that civil aerospace volumes are lower in 2021 compared to 2020. That simple math is based on the announced production rates from the OEMs. However, we are now seeing single-aisle production rates picking up. We expect defense markets to remain stable. Truck and passenger vehicle markets recovery is underway and will continue. And we can see the recovery in the oil and gas sector is likely to be at the turn of the year. In our 9th July 2021 post-close trading update, we stated that despite the well-publicized headwinds associated with freight and commodity costs, semiconductor supply chain challenges for our land vehicle customers as well as the divestment of our Senior Aerospace Connecticut business, we expect overall group performance for 2021 to be slightly ahead of our previous expectations. In relative terms, H1 2021 is likely to be slightly stronger than H2 2021 due to reduced defense sales in H2 2021, which, based on delivery profiles, we expect to pick up again in 2022. Looking further ahead, our differentiated offering in fluid conveyance and thermal management products, our investment in low-carbon and advanced manufacturing technology, our global footprint, our strong track record and commitment to the highest ESG standards and our positioning in attractive and diverse end markets means that the Board is confident we will make good progress as the recovery continues. Over the medium term, we remain committed to delivering a strong recovery across our divisions, driving the group ROCE to a minimum of 13.5%, in line with our previously stated ambition. We expect 2022 to show progression towards our medium-term goal. Clearly, the end market recovery we have described will drive revenue growth across the group with strong operating leverage. The key building blocks are in place to drive our ROCE improvement. Firstly, the restructuring benefits are already visible in our H1 results. While of course we will need to hire back direct labor as volumes recover, we are now an even leaner and fitter organization. Bindi has already referenced our intrinsically strong cash generation. That is something which will always be a priority in Senior. I've laid out in some detail the reason why our strategic focus is on our proprietary fluid conveyance and thermal management technology and products. This capability is relevant for our customers' needs today, is highly relevant in a future low or no-carbon economy and, very importantly, is vital throughout the transition period of the next 5 to 20 years depending on which end market we are talking about. We will elaborate on this further in our CMD in October, which, by the way, we hope will be in-person at the London Stock Exchange. And Gulshen will be in touch as arrangements firm up. Finally, we will continue with our portfolio optimization strategy, divesting noncore assets and, where appropriate, making value-enhancing strategic acquisitions in our target areas to help propel us beyond our minimum ROCE target of 13.5%. With that, we will open the floor to any questions, which Bindi and I will be delighted to answer. And Gulshen is going to curate the Q&A. So Gulshen, do we have our first question?

We have a question from Andy Douglas. Question is, "Please, can you talk to the opportunities for market share gains in both civil aerospace and defense? Is your window of opportunity still open?"

Okay. Thanks, Andy. Yes, there are still very good opportunities for new contracts and new work share in civil aerospace and defense and, I would also say, in space. So we have been securing some new work. We're looking forward to customers allowing us to announce some of those wins. And we've also been renewing existing contracts, multiyear contracts, which is also very important that we preserve the works that we have today. I think customers are seeing that we're very reliable, we're financially resilient. Our quality and on-time delivery is very high. And that seems to be -- those seem to be qualities that are welcomed, particularly over the last 18 months, when some suppliers have really struggled. So yes, I remain confident that we can add some additional work share, and that will supplement the market recovery that we see underway.

Following on from that, "Please, can you give us a feel for your best guess for the inflection point in downstream oil and gas? And please, can you expand upon whether you can attack all the opportunities in your low-carbon world from your existing technologies? Or might you need to acquire?"

Okay. So 2 different questions. Firstly, I think the inflection point for oil and gas will be at the end of this year or start of '22. We listened very carefully to Schlumberger, who's our biggest customer for oil and gas. And their peers, Baker Hughes and Halliburton, they all said very similar things. They're starting to see some improvements, particularly in the international markets. So that bodes well for us. So reasonably confident. And with price of Brent in the 70s now for -- $70 for some considerable time, we'd expect that to be around the turn of this year. We've got much that we can do organically. We are very confident of achieving our medium-term ROCE target through organic means. But we do think there's a place for value-enhancing acquisitions in the areas of fluid conveyance and thermal management, and some of those may well supplement our capabilities in that area. So yes, that's something we would do if the right opportunity came up that we meet our returns criteria. And as our balance sheet strengthens and continues to strengthen, that leaves us in good shape to do that.

We have a question in from Chris Leonard from Crédit Suisse. "If the 737 MAX is producing at 16 per month, is there an indication of where you are producing on average across your content to Boeing, Spirit and the engine manufacturers? Or how many months until you expect inventory to be fully burned up?"

Yes. And Chris' question, of course, relates to the fact that we've said before we supply into multiple parts of the supply chain: engine, Spirit, who makes fuselages, of course, but also some of the nacelle work, and also direct to Boeing and other customers as well, in fact. So yes, depending on where you are in the supply chain will depend what that level of inventory is. It's certainly burning off now, and we are indeed seeing orders coming through for their [ 816 ] that Boeing talked about and even for their [ 831 ] at the start of next year. And those are businesses that are sort of furthest ahead in the supply chain. So that's encouraging. I think it'll take a few more months for them actually to burn off completely. But overall, in much better shape than it was before and looking forward to those higher rates starting to generate some additional revenue in 2022 for us.

A further question. "The U.S. job market appears to be tightening with higher wages. Are you seeing this impact now? And how are you working to sustain your restructuring savings?"

Yes. Certainly, it's no secret that the jobs market not just in the U.S., by the way, but around the world, is pretty dynamic. We've seen it in land vehicles first. So if you went to our Bartlett business in Illinois near Chicago, we are hiring there. And there's been some difficulties in getting the amount of new [ starts ] we require, so we're working quite a little over time, but we're managing it. We are getting those [ starts ] coming in. So we're seeing it as an issue, but I think we're managing it very well. And we would imagine that would continue. And we're already preparing for the inflection point in Aerospace towards the end of this year as well and making sure we -- our capacity plan is intact. And we know what to do to, going in with direct labor so, we're not caught out there. So yes, it's an issue, one we're very familiar with, and we seem to deal with it pretty well.

A further question. "You comment on Aerostructures providing strategic optionality in the future. Are you looking to win further share first before considering a divestment review?"

I think the key strategy for Structures, as I already had set out, it's firstly to fill our existing capacity. And remember, we are -- we've made all the capital investments necessary to manufacture at much higher rates. So let's think about Airbus single aisle, first of all. Airbus has said by early '23 they hope to be at rate 64. That's actually higher than they were producing at prepandemic. We were already at rate 63 in anticipation of Airbus going there back in 2019. So we're actually already capacitized for that level. So we don't need to buy much more sort of the capital equipment. And then adding in some additional work, as we were just describing in relation to Andy Douglas' question at the start, and a bit of diversification into space. We are now doing quite a lot of space work in the Pacific Northwest for satellite companies, and that's really helpful, too. So I think that's what we're focused on. We're going to drive the sales up, are going to drive the profits up, and that gives us strategic optionality in the future.

We have a question here from Charlotte Keyworth from Barclays. "Prepandemic, 737 MAX was set to generate around 20% group sales for Senior. Could you please comment on how your ramp will track behind Boeing given the existing inventory burn-down still acquired? And then please talk about the phasing of the profitability uptick on the program given this was prized as a high-volume platform for you."