Meggitt PLC (MEGGF) CEO Tony Wood on Q4 2020 Results - Earnings Call Transcript

Meggitt PLC (OTC:MEGGF) Q4 2020 Earnings Conference Call March 4, 2021 4:30 AM ET

Company Participants

Tony Wood - Chief Executive Officer

Louisa Burdett - Chief Financial Officer

Conference Call Participants

Michael Tyndall - HSBC

Robert Stallard - Vertical Research

George Zhao - Bernstein

Andrew Gollan - Berenberg

Chloe Lemaire - Exane BNP Paribas

David Perry - JPMorgan

Nick Cunningham - Agency Partners

Harry Breach - MainFirst Bank

Jeremy Bragg - Redburn

Sandy Morris - Jefferies

Tony Wood

Well, good morning, everybody, and thank you for joining. Welcome to the 2020 Full Year Results Presentation for Meggitt PLC, I am taking place from our new Ansty Park offices in the UK. With me today is Louisa Burdett, our Group CFO. Just before I proceed a quick note that if you wish to ask a question at the end of the session, then please use the dial in details provided during the Q&A session.

So with that to get us going, as you can see from the agenda over the course of this morning's presentation, we'll provide an overview of our financial performance for the year. And our response to what has been a challenging period for the world and our sector, but also a reminder of the strong fundamentals that may get well-placed for the recovery.

I'll begin by providing an overview of our results and achievements during the year before Louisa talks through the numbers in more detail. I'll then take you through the key characteristics and strengths of Meggitt that underpin our confidence in the future, and our sustainability agenda and some of the priorities for 2021 before closing with the outlook for the full year. And finally we'll obviously open it up for your questions. But first, please note the following cautionary statement.

So clearly, it's been a very challenging year in civil aerospace with a large proportion of the global population in lockdown at various times, leading to a reduction in air travel and a fall in demand for new aircraft and aftermarket services.

I'm proud to say that as a result of the resilience and the determination of our teams, we've responded quickly and acted decisively to the anticipated and the subsequent reduction in demand.

Our ability to take effective and immediate action reflects not only the dedication of our employees, but also the work we've done to transform the business, particularly the move to a less fragmented, more efficient and customer-aligned organization, but also in building a high-performance culture across the group in recent years.

We've moved quickly to mobilize our crisis management teams and formulated our own internal scenarios for planning purposes, enabling us to map-out the likely changes in demand from our customers. Our response has very much been centered on those areas within our control. Our number one priority has been and continues to be ensuring the safety of our people and supporting the communities where we operate.

Secondly, we focused on business continuity, and keeping our operations running safely, supporting our customers throughout this challenging period. But at the same time, we've preserved cash, meeting our in-year cash savings target of £450 million through a carefully targeted set of actions.

We've also taken the necessary action to resize the group with a 26% reduction in global headcount since the 1st of January 2020. And also the adoption of short time working in the first half of the current year, to position us appropriately as 2021 unfolds. And finally, we continue to execute and accelerate key aspects of our strategy to further strengthen the group.

The work we've done over the last four years to streamline the group and make it more resilient is also clear to see by a progressive strengthening of the balance sheet and a lowering of net debt during that time period.

So turning then, as always, to our individual and markets and starting with Civil. In Civil OE deliveries of new aircraft by Boeing and Airbus were significantly lower as airlines and operators deferred deliveries to cut capacity, deliveries of regional and business jets were also impacted.

As you can see from the chart at the top of this slide, while global ASKs and RPKs were down significantly in 2020, we saw a gradual increase in air traffic in the second and third quarters, as economies emerged from their initial lockdown. While air traffic subsequently plateaued in the final quarter on the back of second waves, news of vaccines has been encouraging, improving sentiment and providing confidence in a recovery in 2021.

Within Civil Aerospace, business jets have continued to outperform the wider global commercial fleet, reaching utilization levels that are very close to 2019 levels at the end of 2020. And in our core US Defense market outlays have remained healthy with growth rates in core Meggitt segments, namely procurement and RDT&E which saw strong growth.

And finally in Energy, while oil price volatility has led to delays in several major oil and gas projects, investment in LNG, lower carbon and renewable projects has remained robust.

So turning then to our financial results. Defense book-to-bill remains healthy at 1.05 times. And the group book-to-bill of 0.9 times reflects the reduction in civil orders mitigated to some degree by our Defense and Energy market exposure.

Group organic revenue was 22% lower than the prior year, as a result of the weakness in our civil end markets, which more than offset another good performance in Defense. And underlying operating profit was down 53% at £191 million, representing a margin of 11.3%.

As I've already mentioned, having moved quickly to manage the business to the lower demand scenario, we delivered our in-year cash savings target of £450 million. And as a result, we closed the year with free cash flow of £32 million positive, which was slightly better than plan. And this coupled with proceeds from the sale of Training Systems in June meant we ended the year with net debt of £138 million lower than the end of 2019. Our liquidity remained strong, with headroom of over £900 million pounds at year end.

And in light of the ongoing challenging market conditions, the Board is not recommending the payment of a final dividend for 2020. We are very aware of the importance of dividends to our shareholders and look forward to restoring payments when the recovery is more established.

So turning then to our strategy, where we remain focused on executing our four priorities to enable us to outperform the market. Starting with portfolio, where the sale of Training Systems now positions us with over 80% of our revenue generated from businesses in attractive markets, where we have a strong competitive position and above the target that we set out three years ago.

Moving to customers, where we added 14 SMARTSupport contracts during the year, and now have a total of 39 agreements with an aggregate value of nearly £190 million. These long-term contracts underpin our aftermarket revenue and market share growth and provide a very valuable insight into the customer maintenance plans and forward demand.

We've continued to secure new contract wins, including a large multi-million pound order, announced earlier this week for the supply of cockpit indicators to Boeing on 737 Max. And across our Defense and Energy businesses, we still have a healthy pipeline of opportunities.

In competitiveness, we opened our new Ansty Park offices in the UK. And they're making good progress with the fit-out of the production area, as we look to complete the transfer of production from four UK sites by the end of the third quarter 2021. We've also reduced our footprint as a result of further site closures and disposals during the year.

And on culture, our move to a more integrated team has been an absolutely key enabler, as we moved quickly to manage the business to our base case scenario. Our priority has been to look after our people across our sites, and the response of our employees has been truly outstanding. And it's what's enabled us to support all of our stakeholders in what have been extremely challenging times.

Our teams have also been highly innovative in providing support to our local communities, including modifying aircraft restraint system machines to produce a range of personal PPE and using our aircraft oxygen system knowledge to develop and support ventilator production. And against the backdrop of a very difficult year, it's humbling to see that employee engagement has remained at the high-performance norm level, as we continue to work hard to protect, to support and to engage our global teams, as we continue to navigate our path to the recovery.

So in summary, we acted fast and delivered our cash targets. We continue to execute our core strategy. And we remain focused on a number of priorities to position ourselves to emerge strongly from the crisis.

And with that, I'll now hand over to Louisa, who's going to talk through the results in a little more detail. Louisa?

Louisa Burdett

Thanks, Tony. And good morning, everyone. So as Tony's already said, we adapted quickly to the significant change in our market conditions last year, and as well as delivering on that £450 million of internal liquidity through cost and cash actions. We honored our debt payments, and we secured additional sources of external financing.

And I'm particularly pleased that through the collective action of the team, we delivered positive free cash flow and a meaningful reduction in net debt during such a challenging time.

But before I get into the numbers, I'd like to express my thanks to the finance team across the globe who have been at the forefront of the work we've done here in 2020. I'm incredibly grateful to them for all of their hard work.

And having navigated 2020 and set ourselves up for '21, we do anticipate this year being something of a transition period for both P&L and cash, reflecting the net impact of the actions that we took in 2020. But also the expectation that the recovery in civil aerospace is likely to be weighted towards the second half. I will talk through that in more detail later at the end of my section. But for now I'm going to turn to the results for the year and the income statement.

So the material reduction in civil aerospace of 41% can be seen throughout our income statement, starting with organic orders, which fell 38%, resulting in a book-to-bill of 0.9 times.

On an organic basis, group revenue was 22% lower, and that reflects the breadth of our end markets and the mitigating impact of our Defense business in particular. The organic reduction in underlying operating profit of 50% to £191 million reflects lower civil trading volumes for nine months of the year, partially mitigated by the impact of our cost saving actions.

Finance costs were slightly lower at £31 million, and our underlying tax rate of 19.7% was lower than 2019, largely because provisions were taken in 2019 in relation to UK state aid, so taking all of that into account, underlying EPS was 16.5 pence per share.

On the next slide, we look at revenue by end market. On the left-hand chart, Civil OE revenue was down 40% organically, reflecting lower demand from the OEMs. Civil aftermarket revenue was down 41%, as the airlines and other aftermarket customers deferred orders for spare parts and repairs.

The half on half trends in civil are shown in the top right-hand box, and in the call out boxes, we've also shown you the split of OE and aftermarket by large regional and business jets. And as Tony has already said, business jets are continuing to show relative resilience.

Defense spending was robust during the year with continuing good outlays in the US. And our order book remains healthy with book-to-bill of 1.05 times underpinned by multi-year contracts.

Excluding Training Systems, which we sold in June, Defense revenue grew by 4% with growth of 8% in half one. The second half was flat, and that was somewhat dampened by COVID-related production disruption in the US in quarter four.

And finally, in Energy revenue was down 8%, which was a solid performance given the volatile energy prices in the first half, and it was underpinned by a strong order book as we entered the year. So on a portfolio basis, OE was 55% of our full year revenue, and aftermarket 45%.

Turning to divisional performance on the next slide, and each of our divisions made a really important contribution to our overall cash and cost savings, but particularly the reduction of inventory, and all while continuing to support their customers.

But you can clearly see the impact of the downturn in Civil in our OE divisions, with organic revenue down 22% and 28% in airframes and engine systems respectively, and services and support revenue was 35% lower.

Absolute profit and operating margin also declined materially in airframes and engine systems, with airframes generating an operating margin of 15% down from 24% and engines making a loss of £13 million pounds. Just as context for these margin outcomes, it is worth a quick reminder that our aftermarket margin is shared between the OE divisions and services and support, value is attributed to airframes and engines for intellectual property and manufacture, and S&S is rewarded for distribution services and MRO.

So in summary, it's basically lower volumes and under recovery of fixed factory overheads that are the principal drivers of the reductions that we see in the operating margins of airframes and engines. But in engines, this was compounded by COVID-related delays in both production and customer approvals to ship composite parts from Mexico.

So moving on to free cash flow. Tony has already mentioned that we generated a free cash inflow of £32 million, which was better than our expectations when we updated the market in November. The working capital inflow reflects the work done across the group to reduce gross inventory and tight management of receivables.

Capital expenditure of £89 million was broadly in line with last year, and this outturn was around £40 million lower than the initial guidance which we gave you this time last year. However, a proportion of those investments that were planned in 2020 have been deferred into this year, notably the completion of Ansty Park and some of the investment in carbon capacity.

Pension deficit payments of £22 million pounds was £13 million lower than the prior year. And that reflects principally the deferral of £10 million in the UK, which will now be re-phased equally over the remainder of the current recovery period through to 2023.

The increase in cash exceptional items to £49 million, includes £19 million of non-recurring COVID-19 costs, the bulk of which relate to severance, and then site consolidation costs as we continue to rationalize our global footprint. And finally, we incurred higher levels of cash tax in the prior period due to phasing of payments in the US at the beginning of the year.

The free cash inflow of £32 million was boosted by proceeds from the sale of Training Systems. And as has been noted previously, we're pleased to have reduced the net debt by £138 million during quite a turbulent period.

So moving on to our balance sheet, left hand chart shows that since December 2019, our net debt has decreased from £911 million to £773 million. We recognised the continuing support from all of our lenders. And in the top right corner, we show significant headroom of £908 million at the year end, against committed facilities of £1.5 billion.

As we've disclosed last year, our committed facilities include a forward start on our revolving credit facility of $575 million, as well as $300 million of new PP notes, which we issued in November 2020.

The Group has retained access to £600 million under the UK CCFF scheme. But to clarify, we have no outstanding paper under this scheme at the balance sheet date or as of today.

On the bottom right-hand chart, our net debt to EBITDA ratio was 2.2 times at the end of December, well within our covenant limit of 3.5 times. And just before moving off this slide, as part of our ongoing scenario planning, and as we've noted in our RNS statement today, we have stress tested the balance sheet against a base and downside case, with the latter reflecting a more severe set of COVID outcomes. And in both base and downside cases, we remain within our covenant limits during '21.

So turning the page on a tough year, onto the final slide from me. After the actions we've taken, we are in a good position, and we're ready to face into 2021, having reduced our cost base. However, as I mentioned earlier, notwithstanding those actions, '21 does remain a transition year for two main reasons.

Firstly, Tony is going to pick this up later in the presentation. But we continue to face uncertainty over the rate and timing of the civil recovery and therefore the level of our EBITDA generation.

And secondly, we took action on costs and cash in 2020. And some of these actions will have cost benefit to 2021, such as the reduction in headcount, but other actions will partially offset this, notably bounce back costs, which were curtailed at the height of the pandemic. So the purpose of this final slide in my section is to give you some shape to some of those key cost and cash drivers in 2021.

And critically without making any assumptions about revenue growth versus 2020, which is clearly difficult to predict, the key takeaway messages from this slide are firstly, that we will have an element of underlying profit accretion from cost actions taken last year of about £20 million.

And secondly, our free cash flow should be broadly in line with 2020, with increases in pension and tax, which are cumulatively about £14 million [ph] being offset by lower OpEx and CapEx of £10 million each, plus that £20 million cost driven EBITDA benefit that I've just mentioned.

So I'm going to work from top to bottom on the graphic. Employee costs and SG&A. The reduction in staff numbers in June 2020 will save around £140 million pounds versus the 2019 cost base. As I said in September, £70 million of that benefit was taken in the second half of last year. So there is a remaining £70 million benefit in 2021. However, offsetting this we are estimating bounce back costs in the region of £50 million in 2021, leaving a net year-on-year benefit of around £20 million.

On CapEx, the delay to certain projects means that we're going to spend around £80 million in 2021 as those projects are completed, and after this year, we expect CapEx to return to more normal levels of around £70 million per year. With our peak expansion projects behind us.

On pension, the outflows principally relate to deficit payments on the UK defined benefit scheme, with some smaller payments in the USA. Our agreed recovery plan from 2018 required annual payments in the mid £30 million out to 2023. This year, these cash payments will rise to £47 million. And that reflects a proportion of the £10 million that I've just referred to that were deferred from 2020, as well as some timing on the US amounts. And as noted on the slide, the remainder of that deferred £10 million will be spread over '22 and '23.

Just before moving off of pension, as part of our ongoing liability management, I would draw your attention to the closure of the UK defined benefit scheme to future accrual from April this year.

On cash tax, we expect payments to be around £60 million in '21. That reflects payment of £18 million in respect of the UK CFC regime. Beyond this year, we expect the cash tax rate to gradually converge with the P&L rate over a period of about two to three years, as certain reliefs come to an end. We've also included our assessment of the impact of the UK tax changes, and the potential changes of the US corporation tax rates in your appendix.

And then finally, on operating exceptional costs, these will remain elevated in '21, as we finished Ansty Parks alongside other site consolidations. But from 2022, we expect OpEx to reduce substantially.

Thank you very much. I'll now hand you back to Tony.

Tony Wood

Thank you very much, Louisa. And now I'd like to spend some time to highlight the strong fundamentals that characterize Meggitt and which underpin our confidence in being well-placed for the recovery. And also our excitement about the role that Meggitt will continue to play in shaping the future across many of our end markets.

So as many of you know, we have diverse exposure across both and within Civil, Defense and selected Energy markets, with the latter two representing over half of our revenue in 2020. As well as providing more avenues for future growth and the ability to leverage our core technologies across different end markets, the breadth of our portfolio has helped to mitigate the reduction in civil activity in 2020.

Within our Civil businesses, we have content on 51,000 aircraft, and good exposure to large, regional and business jets. And particularly within the large jets, two thirds of our aftermarket revenue come from the narrowbody fleet. We have an excellent Defense business representing 46% of revenue, as well as a large installed fleet of 22,000 aircraft. We've got strong positions on a broad range of platform categories, and exposure to defense markets outside of the United States.

And as you know, across both our Civil and Defense fleets, we've increased our content on the newest platforms, securing future revenue streams and returns for many years to come.

And in Energy, which now represents 11% of group revenue, we have very good exposure to those segments that are less exposed to oil price volatility, and which are expected to take a greater share of the energy market in the future, namely through our strategic float focus on the market for LNG, lower carbon and also renewable applications.

So later on in the presentation, I'll set out what we are doing in terms of some of the most exciting next generation technologies. But on this slide, I just want to reinforce the message about the incumbent positions that we already occupy when it comes to technology and our strong positions on the current fleet.

We hold leading and established market positions in several product groups, reflecting our deep intellectual property, and our track record of developing differentiated technologies with high certification requirements with over 70% of our revenue derived from sole source positions.

Right through from our leading position in airframes, across braking, fire suppression and fuel containment systems to our strength in engine components, including thermal systems and advanced engine composites through to our leading position in supplying printed circuit heat exchangers in the energy market, it's our deep understanding of our customer's applications that enables us to continue to develop novel technologies, which play a critical role in both the performance, but as importantly the sustainability of our customers platforms.

And it's these technologies and the products installed across that large base that will drive our revenue and profit growth as people return to flying and the world economy recovers.

Another key strength is the breadth of our Civil Aerospace business, with strong exposure to almost the entire fleet of civil aircraft across large, regional and business jets. And as a consequence, we will benefit from those parts of the market that will recover the fastest, notably, as we've seen in business jets, followed, obviously by regional jets and the narrowbodies.

In large jets, we've increased our shipset content by an average of 70% on the new generation of narrow- and wide-bodied aircraft, which reflects the investment that we've made and which we continue to make in research and development.

And as you know, we have strong positions in regional and business jets, with the latter having recovered well. We also have a very strong aftermarket business delivered through our services and support division with a geographically diverse customer base. And it's these characteristics, alongside our relatively young fleet, which will drive revenue growth as activity levels pick up.

And finally, as I've already mentioned, we continue to win back market share through our SMARTSupport offering, with another 14 contracts signed even through a very difficult year last year.

So moving on to our Defense business, where robust levels of growth continued underpinned by our core US market, as well as being a large market and providing opportunities for future growth, our Defense business has a number of attractive characteristics, including good exposure to both original equipment and aftermarket, and an attractive return and cash profile, given the nature of the customer base and the opportunities to benefit from joint funding on development projects.

As with our Civil business, we have a large installed fleet across fighters, rotary wing and ground vehicles, with our growth in recent years benefiting from high levels of refreshed and retrofit activity, and these are underpinned by multi-year contracts in many cases.

It's through our strengths in a number of core technologies that we've secured some strong content on some of the newest and the hardest works platforms such as the F-35, the Apache and a number of ground vehicles. And moving forwards, we believe that our existing positions, strong technology, and opportunities to increase market share in wider defense applications such as UAVs and ground vehicles, and to some extent in space will continue to ensure that defense provides a cornerstone for group performance and profitability as the recovery in civil aerospace comes through.

And moving on to Energy, which performed solidly in 2020 and represented 11% of group revenues and where we see good opportunities for further growth. Our Heatric business designs bespoke heat transfer solutions for selected energy markets, and is a world leader in heat exchanger technology, providing a significant size and performance benefit versus our competitors.

Heatric has produced over 3000 PCHEs for operation in extreme environments around the world for both existing and emerging energy markets. And our technology serves a number of core end markets, primarily onshore and offshore gas and LNG. And in 2020, Heatric secured a number of new orders, including the largest order that we've taken in that business for over five years.

And on energy sensing and controls, which enables safer and more efficient operation of critical machinery in power generation applications, and these are typically gas turbines, nuclear and also renewables, but which also includes the three largest hydropower plant installations in the world. And it's our integrated systems that monitor 1000s of rotating machines worldwide, providing protection and also very accurate condition monitoring.

And as you can see, while we already have a significant exposure to lower carbon applications, primarily in gas and LNG, we continue to build a strong pipeline of new opportunities in these areas, as well as in renewables.

So moving on to priorities, I'd now like to talk about some of them and these represent very much a continuation of our strategic objectives, and where our overriding aim is to outgrow the market through high value, and innovative products and services like many of those that I've just taken you through.

We've divided these priorities under three broad categories, namely, how we win in a change marketplace, how we continue to deliver outstanding operations, and how we develop great teams and culture.

So key to maintaining growth in the future, is that we continue to invest in several incredibly innovative technologies, including those that will support our customers to deliver a more sustainable future. And as we've previously said, over two thirds of our innovation spend is devoted to sustainable technologies that specifically address four key themes, as you can see on the slide here.

The remaining third is devoted to improving the reliability and the performance of our products in the field, and to also continually improving the tools and the processes that underpin how we make those products on our sites.

And as this slide shows, we've already developed or are in the process of developing a range of technologies and products to answer these questions. And some of them are very exciting, our advanced thermal systems pedigree, which is enabling designs of half the size and twice the performance of current technology, and significantly reducing aircraft fuel burn.

Our advanced engine composites and the role that they play in light weighting, which potentially reduces aircraft CO2 emissions by up to 3%. Our work on optical pressure sensors enabling increases in combustion efficiency, reducing emissions in today's gas turbines, and very much one that's coming through for the future, our electric propulsion systems, which are enabling urban Air Mobility applications to become very much a reality today.

So turning next to the aftermarket, where we have made very good progress in building our capability, we're focused on building on this success and growing our market share through enhancing our capabilities. We've made good progress with SMARTSupport in 2020. And we continue to see this as a key part of our strategy to recapture market share, whilst also strengthening relationships with our customers, and enhancing our service offering.

We also see an opportunity to further streamline and consolidate our routes to market to increase the proportion of business that we do directly with airlines and operators of equipment.

And finally, we're optimizing value to ensure that we achieve appropriate market-based returns, commensurate with the benefit that our products and services provide to our customers. We're also investing in competitiveness through data and digital technologies and e-commerce to enable the customer experience and how they interact with us to be improved, but also to improve our own insights into the performance of our products and services.

And further enhancements of global materials management is optimizing where we hold inventory, which has clearly been a key theme throughout 2020, helping us to improve efficiency and our turnaround times. And by investing more in people and capability, we continue to strengthen our three core centers of excellence at our regional aftermarket hubs around the world.

Another key priority is to build on the progress we've made in recent years in transforming our operations and consolidating our global footprint into fewer larger and more efficient and capable sites. A cornerstone of this strategy is our new campus Ansty Park in the UK where we're transmitting from today, which enables the consolidation of four UK sites and provides a home for our thermal management, our braking systems, and our services and support businesses. And the fit out of this facility is progressing well, with the full transfer of production scheduled to be completed by the end of the third quarter of this year.

As well as providing a very modern office facility and a working environment, Ansty Park also leverages a number of sustainable technologies, including a photovoltaic roof, one of the largest interestingly in the UK, which is capable of providing up to 15% of the energy that we require at the site, as well as greywater capture and process water recycling systems.

And this together with the closure of Basingstoke, Orange County and the sale of MTSI and after the year end the Dunstable business, we ended 2020 with 37 sites, representing a 34% reduction from our 2016 baseline. As well as reducing our overall environmental footprint, the move to a smaller number of larger and more capable sites is reducing our overheads and increasing efficiency through economies of scale, and importantly providing greater resilience across our manufacturing base.

As I've already mentioned, the work we've done to embed our high-performance culture and the dedication of our employees was pivotal in helping us to navigate the challenges presented in 2020. This year, protecting our people and supporting our communities remains our top priority, as we continue to manage our operations in what are certainly in the near-term uncertain times.

Our work to create a rewarding safe and productive working culture will continue through reinforcing our high-performance culture concepts, our employee recognition schemes and the continued promotion of diversity and inclusion through our employee resource groups. And we'll also continue to invest in talent through our operational and our leadership programs. These are important initiatives as we look to build on the strong levels of engagement that we manage to sustain in 2020.

So before concluding with our outlook for 2021, I wanted to spend just a little bit of time to talk about our sustainability framework that supports our ambition of net zero emissions by 2050. Before I do that, it's important to remember that Meggitt has a long track record of developing highly innovative technologies that has and will continue to play a critical role in both increasing efficiency and reducing the environmental impact in the markets that we serve.

You can see some of the examples on this slide. Before 2000, the introduction of digital technologies on the legacy fleet, such as digital engine vibration monitoring systems, which significantly increased safety, while significantly reducing disruption to our customers operations.

The provision of unique technology on the modern fleet, such as the Ebrake on the A220, which enables us to eliminate the use of hydraulic oils in the braking system. And as I've already talked about, we continue to play a major role on the latest series of innovative technologies that will help to make the future fleet and our operations more sustainable by reducing their respective impact on the environment.

And some examples of these include, our new green fire suppression agent, VERDAGENT, which is a replacement for Halon, our new facility at Ansty Park, which reduces energy consumption and emissions, and the use of those printed circuit heat exchangers in lower carbon, and renewable applications.

We've now brought together our ongoing work on sustainability under a framework comprising three core pillars, namely people, planet and technology. People focuses on creating the right environment for our employees and supporting our local communities. And we've introduced a number of initiatives in 2020, with further plans for this year.

Planet is our commitment to a cleaner future by continuously improving and adapting our sites through harnessing green energy, driving operational excellence, and reducing harmful emissions. While we've made progress in a number of these areas during the year, including the completion of several sustainability projects on our sites, and recently reaching a key milestone of sourcing 100% of our electricity from green sources in the UK, we've still got more to do. And we've set reduction targets for our sites in 2021. As we look to build on the progress that we've made over the last five years.

And as I've already talked about technology is about how we support the evolving needs of our global customers, and build on our rich heritage as we continue to invest in innovative new technologies to support and enable sustainable aviation and also clean energy. We see our work on sustainability as integral to the future development of the group. And we'll report our progress under this framework going forwards.

So turning then to the outlook for the year ahead. As Louisa has already said, while we are well-positioned for the recovery through the actions we've taken, and the rollout of vaccines is very encouraging, uncertainties remain in predicting the precise timing and pace of the recovery in Civil Aerospace.

At the current time, our working assumption is that the trends seen in Civil Aerospace during the second half of 2020 are likely to continue in the first half of this year. With recovery weighted more towards the second half of the year. And we expect conditions in our Defense and Energy end markets to remain robust.

Assuming no further disruption to normal operations during the year, as the result of additional lockdowns, in 2021, we expect the Group to generate revenue that's broadly in line with 2020, to generate an increase in underlying operating profit versus last year, and to be positive free cash flow. And we'll continually review our assumptions as the year progresses. And we gain greater clarity on the recovery in Civil Aerospace. And we very much look forward to providing you with more detailed guidance, as the market conditions allow, and the recovery becomes more established.

So in summary, 2020 has been a challenging year for Meggitt, and indeed for the entire industry. Our teams, however, have risen to this challenge. And I'd like to thank them all personally for their response and ongoing resilience, which has been truly outstanding.

We've taken action to mitigate the impact of the downturn in Civil Aerospace. We've lowered net debt, and we've resized the business. Alongside this, we've continued to serve our customers and execute our strategy, whilst we've protected investment for future growth in our long-term business.

We also identified ways to accelerate our transformation, and to ensure we emerge strongly from the crisis. And we've strengthened our liquidity and have very good levels, as Louisa has shown of headroom on our facilities.

And while the timing of the recovery remains unclear, we remain positive and excited about the future. Through the work we've done to position ourselves on next generation technologies, many of which I've covered today, and to enhance the efficiency of our operations, and to recapture market share in the aftermarket, which will ensure that we remain at the forefront of the end markets that we serve for many years to come.

So I think on that note, we'd now like to invite your questions, I'll move back to adjacent to Louisa on the platform here, which are going to be hosted by our webcast provider. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Michael Tyndall from HSBC. Please go ahead.

Michael Tyndall

Yeah. Hi, Tony. Hi, Louisa. It's Mike Tyndall. Just a couple if I may. I guess the question in my mind is to what degree will your recovery lag the overall recovery in the market? So I wonder if you can talk about green timing? What are you seeing on that front? If it's still prevalent? What are you seeing in terms of airline destocking? Have we seen any movement in that regard? And I guess, to what degree does that mean, there's a maintenance backlog building up that potentially unlocks maybe in 2022.

And then on the Civil OE side, with just looking on slide 41, it looks like you're guiding free of charge down between 12% and 11%. Is that the right proxy for what you think is going to happen to your OE business? And if so, is that because of inventory within the actual pipeline? It seems a lot more bearish than what the airline, sorry, the assemblers are saying themselves. Thanks.

Tony Wood

Okay. Thank you, Mike, and thank you for your questions. I'll pick up the first one straight to it in terms of trying to call the recovery and what that means for our Civil Aerospace aftermarket. And then Louisa will likely pick up on the FSCS [ph] point.

In terms of how we see green time, clearly green time has been used quite extensively by many of the major airlines in the world to keep their fleet flying. But obviously minimize maintenance spend through 2020. We do see that there's a debt being built. It's not clear, it's - you know, the mountain of data that we would need to access to be able to model that accurately is enormous.

But we do have a view that, as we're starting to see the percentage of the fleets in some of the countries around the world increase. And I'll give you two data points that we pay a lot of attention to, in China they are now flying about 83% of all the fleet on a daily basis, the US is up to about 66%. So two thirds of the fleet in the US are flying again. I mean, typically there's about 10% of the fleet that's inactive, being maintained at any point in time. So pretty positive in those two markets.

Europe very much the laggard in the sort of low 40s still at the moment, but starting to come through, as obviously vaccines and confidence builds. So there's not a direct correlation, sort of one for one between ASKs and our aftermarket. But we are increasingly confident that as the fleet gets put back into service that we will see those maintenance orders start to increase to support that expected sort of increase in flying and the second half.

I think your point is right, I'd agree with you that this is transition and it's really 2022 where we'd expect to see the bulk of that because this is the year in which most of the fleet will really be put back into operation and the maintenance opportunity from that comes back, sort of the first part of '22 onwards.

In terms of destocking, obviously, we've got a very wide fleet there between civil business and regional jets. We certainly think that destocking is going to help us on the business jet side. There's not been many orders on business jet for spare parts and brakes, because that's typically been managed by the OEMs. Because of the strength and the fact that particularly business jets in that marketplace have recovered quite strongly with almost last year sort of levels now that we do think that there will be orders to come on business jets.

And then on the last point, I think, well, that's covered it really in terms of the maintenance backlog. So yes, very much a transition, but strengthening into '22. On FSCS?

Louisa Burdett

Yeah, Mike, just on FSCS. You've obviously picked up the numbers in the back of the appendix of 53, this year, guiding in a range of 47 to 52, 53. So I've got that - wrong, 53 last year 47 to 53 this year. So essentially, there is a flat scenario in that guidance. So I wouldn't read too much into the bearish point that you made. And you know, clearly inventory and other factors will affect that guidance that we give.

Michael Tyndall

Thank you very much.

Operator

Our next question comes from Robert Stallard from Vertical Research. Please go ahead.

Robert Stallard

Thanks so much. Good morning. A couple from me. First of all, in terms of older aircraft in your install base, I wonder if you can give us an update on what that percentage could be and whether there's any products in the portfolio that could be more exposed? And of course, in relation to that, have you seen any signs of accelerated retirements of old planes and surplus parts being sent - added to the business?

And then secondly, on the business jet side of things, there's been some talk that there are some new business jets development programs working through the system. Does that imply that your R&D could be tracking back up perhaps in wheels and brakes in the next couple of years? Thank you.

Tony Wood

Thank you. Thank you, Rob. Just to come on those fairly quickly. In terms of the surplus and the retirement profile, it's quite interesting that global retirements are pretty much running as they were pre-pandemic. I guess I would caution that, you know, we've got aircraft that are parked, but have not yet been sentenced to be retired and broke into parts.

The real number that I'm tracking for last year, when we look at our fleet is that there are about 1500 aircraft that are parked that we're not expecting to come back to service. So that's the sort of accelerated retirement. And we do think that over the next two or three years, you're going to see, you know, that number growing before we stabilize back to the sort of 2% a year type numbers that we've seen in the past.

So the issue is that the value of an aircraft to break two parts is still very low. So they haven't yet committed to actually strip those parts and turn them into surplus. So still very little surplus out there in the market, we think that we will start to see some surplus, but it'll be back end of this year, more phenomena for 2022.

But a very different level of exposure for Meggitt at this time around, given the breadth of our fleet now in terms of the investments we've made over recent years. So less of a risk for us, haven't really seen it yet, we'll see it in the next two or three years, I think.

On biz jets, just remind the question of biz jet again…

Louisa Burdett

R&D…

Tony Wood

Oh! R&D. No I think our R&D, I mean, whilst our revenues come down, so as a percentage R&D is running sort of in the 5.5 to 6 range. I really don't see our total R&D starting to increase. There's still very little activity out there in terms of those that would normally drive significant slices of R&D. I think we're still comfortable with our sort of 5% to 6% of revenues range.

Robert Stallard

Yeah. That's great. Thanks very much.

Operator

Thank you very much. Our next question comes from George Zhao from Bernstein. Your line is now open.

George Zhao

Hi. Good morning, everyone. So I wanted to come back to the - the more [ph] aftermarket, you know, the year-over-year trend seems to be getting worse. We went from minus 47 in Q2, minus 50 in Q3, and now it looks like Q4 was in a minus high 50. You know, at a time when we've been seeing other suppliers post better sequential aftermarket numbers, and of course the traffic's are improving. So what do you think has been driving the sequential weakness you're seeing versus the market? Is that mainly due to the buffer inventory and destocking the business jets? What about pricing, is pricing still holding up? Thank you.

Tony Wood

Yes. No, thank you, George. Pricing is holding up. So certainly no real issues on that front. I think it is just mix and how it's coming through. We're not really seeing anything different to anybody else. As I said, we're expecting the first half our civil aftermarket in aggregate to look something similar to what we saw in the second half of last year.

But, you know, certainly as we get into quarter two this year, we'd expect to get a much clearer signal as to what are the order placements likely to be to support the fleet returning in the second half. And we're having those conversations now. And I think, again, it's those forward indicators that give me some confidence.

If you look at what we were staring at last year, we were staring at the fleet plans for the airlines, and also the booking patterns of people buying seats on aircraft. Both of those things changed, I mean that the whole market recovery moved back a couple of months, maybe three months, between last quarter of last year, and where most of us were in the first part of this year.

And that that was really in the absence of a vaccine, I think we're seeing the vaccine is very much underpinning, it gives a platform on which to build confidence that this time, the fleet plans of the airlines, and therefore the aftermarket expectation looks a bit more solid. So we'll see how it goes. Obviously, you can see by our absence of specific guidance, that there's still uncertainty around that, but the conditions are very different now, I think in terms of at least seeing the building blocks of how recovery can be built, this time rather than going backwards. So we're more optimistic on that front.

George Zhao

Great. Thank you. I could just follow up on that, on retirement, you talked about a different profile this time around, you mentioned 54% of the civil aftermarket is lead from 10 years or younger. If I go back to similar disclosure from the last decade you know, that number is not that different from 2012. So how will retirement risk be different this time?

Tony Wood

No, I think it's a much smaller proportion of the total Group. So the Group has grown significantly. And we've also built capability in that area. So you know, SMARTSupport means where the first port of call rather than, you know, the last port of call for the spare parts order. And that materially is helping us get much closer to the airline so that we can be part of that decision about whether it's a new part sale, or a used part. And we have built a surplus trading business. And we have that capability, which we didn't have five years ago.

So it's about being the first port of call with your end customer and having contractual terms around that which as you've seen, we've grown our SMARTSupport coverage, quite significantly or bit, you know, a lot more to come there, I think. But it's that and also being part of that whole surplus activity, which is why we believe it's going to be much less of an impact than we saw last time around.

George Zhao

Great. Thank you.

Operator

Our next question comes from Andrew from Berenberg. Please go ahead.

Andrew Gollan

Hi, morning. Its Andrew Gollan from Berenberg. A couple of questions, please. The first one bit of housekeeping really, could you, Louisa, give us the organic growth rates by end market for Q4, it looks like obviously Defense was down, you talked about that and energy too I believe.

And then secondly question is on margins. And as we look ahead, obviously this year massively impacted by under recovery of costs, as you said, I mean, and you also mentioned the delays in the engine systems business. As we look ahead, we get civil activity stabilizing, volumes recovering, plus the benefits from the operational efficiencies and cost reduction, et cetera. So how should we think about the pace of margin recovery really back to pre-pandemic levels and beyond? You know, if we assume a recovery is well underway in 2022, maybe you could talk around that, that will be useful.

Louisa Burdett

So the growth rates by quarter are in your deck, Andrew, appendix 11, and you're quite right the Defense market did decline 7% in the fourth quarter, 22% down in Energy. I did refer to that briefly in my presentation on Defense. It was largely just related to a couple of our Defense orientated factories in the US suffering from some COVID outbreaks in the dying weeks of Q4.

So we hope that's more timing than anything else. So that's the main reason on Q4. And I think there's also some anecdotal evidence that sort of purchase orders from the DoD around training were delayed. So those are the two.

In terms of the broader comment about factory fixed overheads. You know, this is clearly a volume game. We've been particularly affected in engine systems, as I drew out in the presentation, because the pandemic hit, just as the composites business was breaking even so there was a little bit of fragility there at the beginning of the pandemic.

But I would hope that we would start to see much more margin accretion, you know, if the recovery is truly in full swing in '22. And just reminding you, as I think you know, that, you know, we are geared towards aftermarket recovery, and that benefit is shared across all of our divisions.

I think we will also have some natural leverage coming into the P&L, anyway, from the site consolidation activity that Tony has highlighted in his presentation. As we go into 2022, the Ansty Park fit-out will be completed. Therefore, those you know, four or five old factories that were consolidating, will be generating leverage Ansty Park.

We've talked a lot about Mexico, improving the cost profile of the composites business. And there are other consolidations in the background involving low-cost manufacturers. So hopefully those things will also coalesce with the recovery, giving us some natural tailwind there as well.

Andrew Gollan

Thank you. If I could just tack [ph] on to the end there. Then back to the first question, actually, guidance by - in '21 by end market. I mean, presumably, we've got a pretty good idea about commercial aerospace volumes now, fences [ph] and timing issues do they comeback, energy robust, you said as well. So can you at least talk about those three end markets in terms of where you see them in terms of growth rates year-on-year?

Louisa Burdett

Yeah. So just to take a step back on the guidance briefly, before I answer that question. What we're trying to achieve here is, you know, Tony has talk quite in detail about the fact that, we all know that the civil recovery timing and pace is quite uncertain. So what we're trying to lay out in the guidance we're able to give you today is that absent any revenue growth, where we can expect margin accretion, and what the cash position looks like, without giving too much detail about the underlying and market assumptions, which are pretty difficult to call.

Now, I know that there are implicit assumptions within a flat revenue '21 on '20, because we will have to cover the stronger Q1 in '20 within that outcome, but what we're trying to do here is to create a framework that says if nothing changes, you get this much of cost driven EBITDA accretion, and then we can layer on top of that, as we get more certainty about the aftermarket recovery.

Within that, you know, we - it's quite difficult for us to pick out individual markets, because we still may have COVID-related impact in some of the Defense and Energy businesses. So we have refrained from doing that. But I would just, sorry, repeat back at you that we do think Energy remains robust, so does Defense, although I would add that, you know, lapping comps of high and mid single digit growth becomes more and more difficult as we go forward. So we're perhaps desensitizing the growth rate a little bit on the Defense for '21.

Andrew Gollan

Understood. That's very clear. Thank you.

Operator

Thank you, Andrew. Our next question is from Chloe from Exane BNP Paribas. Go ahead.

Chloe Lemaire

Yes, good morning. It's Chloe Lemaire from Exane BNP Paribas. I have two clarification on the 2021 outlook, if I may. And the first one would be on operating profit. And I understand that the caveat around what sales can actually end up being. But assuming stable sales, should we expect that the £20 million net cost benefits you flagged on slide 15 would be the main driver for year-on-year improvement? Or would you have other operational drivers that could be layering up on top of that. In other words, should we assume £220 million of operating profits assuming stable sales? Or is that actually too low under your base case?

And the second one is on free cash flow for 2021. If I understood well, Louisa, you were mentioning stable free cash flow broadly with the moving parts, again on slide 15. But given the operating profit improvement expected, what would offset these next year? Would it be working capital? Would it be any other headwinds? I would be keen to hear those comments. Thanks.

Louisa Burdett

Yes. So sorry, go ahead.

Tony Wood

Maybe I'll start, I mean, the simple answer to the question, Chloe, and I'm sure Louisa will elaborate a little bit and build on some of the comments she shared with Andrew, is that, you know, we're trying to provide you with a sensible base, as we wait for the recovery to be more established and civil after market. And then we've been reasonably specific, I think about what that base provides.

But, you know, to go beyond the sort of positive accretion on underlying operating profit and positive free cash flow, I think that is sort of where we feel we are today. But Lou do you want to…

Louisa Burdett

Sure. I think that cracks it, Tony, that the £20 million, Chloe is really, as I said in the presentation, the benefits from the residual benefits that we get from our regrettable redundancy program, offset by an element of bounce back costs. So as Tony said, if you take the 191 that we had last year from profit, assume no revenue growth, you would get that £20 million of margin accretion from that cost benefit alone. So as Tony said, that's sort of the floor and then you can layer on top of that.

Your assumption around civil growth, and we will continue to update ours as we go. On free cash assuming that sort of stable revenue, that the message is very simple, higher tax and pension of £40 million gets offset by lower OpEx and CapEx, plus that £20 million that flows through from EBITDA, so we will be neutral, but cash positive sorry, neutral to '20, but cash positive in '21

Chloe Lemaire

Okay, very clear. Thank you.

Operator

Our next question comes from David Perry at JPMorgan. Please go ahead.

David Perry

Yes. Hi, Tony, Louisa. Hope you're both well. I've got three questions, please, two shorter term, one longer term. First one is just, we've had guidance from Safran their equipment aftermarket will be down low single digit. And I think Collins Aerospace has also said something similar. They're very similar businesses to Meggitt I think, so should we be thinking something in that ballpark for 2021 aftermarket for Meggitt, as a possible aftermarket outlook?

The second one, and sorry, to labor the 2021 guidance, just picking up from some of your previous answers, Louisa. Cost [ph] savings '20 very clear, I think FX is about £20 million negative if we just punch 114 to our models. So - and you talked about base case of flat sales might [ph] leverage. So I'm just - sort of want to pin down a little bit about this level of EBIT growth you think you might see in '21? And also, just to be clear, your flat sales, what FX would you assume in that?

And then my third question, looking longer term, which I think is more important, maybe for you, Tony, I mean, some of the other companies in the sector have started to talk a little bit more openly about what they think they can do in '23 or more like 2024, so companies talking about being back to 2019 margins, in some cases, possibly higher. Do you have any view where Meggitt could be on that timeframe, please? Thank you.

Tony Wood

Certainly. No, thank you, David. So in terms of you know, exactly putting a percentage on the aftermarket, we're not in a position to provide that today. As I say, we've tried to put the building blocks out there that give you a model on which you can build your own assumptions for the aftermarket.

So I've seen Safran's view on their equipment business. I would highlight there are some differences in terms of our portfolio and where the profitability comes from there. So, you know, difficult to draw an exact comparison with what they're saying. But, no, we're not in a position to give you very specific digits on the civil aftermarket. As far as the longest terms concerned, I'll let Louisa come back on the EBIT growth in 2021.

You know, there's nothing materially that's changed. Other than we've improved the quality of this business through tightening the portfolio, getting it very much focused around Civil Aerospace, Defense and our selected Energy markets. We're well on with a fairly significant transformation in our operating footprint and operating performance, which helps our operating leverage, we do expect that.

So I would still think about this business. And we do as a team as a 20% return on sales business, that's still very much what we're driving towards. To actually call '22 and '23, I'm very focused really at the moment on let's understand the shape of this year, let's get the market recovery established. And then we'll start to guide and give you a clearer outlook on what we think that looks like in the out years.

But I think at the moment, you know, I'm certainly not in a position to give you a view on '23 at the moment. Albeit that net positive I mean, there's more around us now in the world, and particularly in the Civil Aerospace world, that gives us confidence that because of our gearing towards civil aftermarket, that the next few years, should be one of improving growth with '22 being the first year of getting that granted into our underlying performance.

So sorry, don't be able to give you a more specific answer rather than you know, directionally as we still see this as a high-quality business with 20% return or so on margin potential.

Louisa Burdett

Hi, David. Thanks for the question about FX. We've included in appendix three, our normal currency sensitivity scenario. So we have a slightly lower estimate on FX than you do. So just to be clear, we talk in the appendix of a 0.10 [ph] movement of the pound against the dollar impacting revenue by about £85 million and PBT by 5 which sort of implies underlying operating profit at about seven. So we're slightly lower on our sensitivities than the number I think you quoted 20 to me, did I get that right or 10.

So what we've done is in the bounce back costs that I gave you, so the £50 million, netting against the £70 million of staff cost savings, we have included an element of that FX headwind within that bounce back estimate. It's rather more difficult to be precise on the top line, because clearly, we're not guiding that top line in totality. And we have made the simplifying assumption that we will just be flat to enable you to see where margin or other cost activities can improve our outturn.

So we'll include the FX piece as we go through and give more guidance on civil as we go through the year. But the 7 on EYP has been considered within the bounce back costs.

David Perry

Thank you. Just to sorts of labor going to, so I'm absolutely sure you're seeing the guidance is assuming flat FX in terms of the guidance you published?

Louisa Burdett

Sorry, I'll make up that. So the increment of £7 million on FX assumes we would move to around £140 because our planning is normally done at £130. And a 0.10 [ph] movement is around £7 million on EYP. So apologies I missed the critical delta from 130 to 140.

David Perry

Okay. So the FX in the sale and it's in the profit guidance?

Louisa Burdett

In profit, but rather looser on sales just because we haven't provided specific guidance across all of those markets.

David Perry

Okay. Got it. Thank you very much.

Operator

Our next question comes from Nick Cunningham from Agency Partners. Please go ahead.

Nick Cunningham

Thanks very much. Good morning. Questions get bit detailed towards this end of the Q&A. I just wanted ask about few things, mix within mix within commercial as to the mix, if you like between large aircraft region and business jets, how you see that shaping up? I realized that's a lot of crystal ball gazing, but just current trends?

And then secondly, as we look through the year sequentials, obviously, 1Q has got a very tough comp, but 2Q had factory closures in it. So that's a weaker comp, then presumably it's a weaker comp in 3Q and 4Q?

And then finally, why is energy so robust in your guidance? Because it's still clearly a cyclical business. Is it just short cycle coming back faster and if so, you know, what are the sub segments within it that are doing well? Thank you.

Tony Wood

Thank you, Nick for that. Maybe I'll start and we'll double act on this one in terms of the comps and such like. And as far as the mix in commercial is concerned, I mean, our commercial aftermarket, roughly 60% large jets, slightly more than 20% of its business jets, slightly less than 20% of it are regional jets, that's roughly the split.

And we still see that split broadly mapping out in terms of how the markets going to recover. We've clearly got a bit more strength in business jets, given where the recovery is on that. And then large jet, you know, still drives the bulk of the recovery with narrowbodies and such like leading the way. So as far as mix within mix goes, hopefully that answers your question, but that's sort of how we're thinking about this year.

Why is Energy so robust? Very simply, we booked a lot of orders last year, you know, we are expecting a growth outlook this year in Energy. Largely because of the pivot on our technology, we made a very conscious decision about three years ago, to try and invest more in developing relationships in order pipelines in that LNG space, it's about half the carbon footprint of traditional oil.

The CapEx projects have sustained through the downturn in that area, largely and if you look at the sort of 10-year view of LNG, CapEx plans with the major end customers, and that still looks pretty robust. So that's really what's underpinning that.

To a lesser extent renewables, but a lot of our equipment in the sensing side and control system side is quite advantaged in the renewable space. And we've got very good customer relationships there. But it's really LNG and gas. That's where the strength is coming from, and the order intake that we're sitting on facing into the year, and actually some of the new projects that we expect to book this year. So that's those two. But, do you want to pick up the comps, that…

Louisa Burdett

I didn't think there was anything.

Tony Wood

I think you basically described pretty much how I would have described it myself on comps in terms of - yes, we're trying to lap a strong first quarter from last year. And that's we've built that into that sort of base that we're trying to establish for you this year. In terms of, you know, it's a sort of reverse year, but we are expecting strength and recovery in the second half.

Nick Cunningham

Thanks very much. Probably for the estimated [ph]

Operator

[Technical Difficulty] Please go ahead. [Technical Difficulty] Your line is now open.

Unidentified Analyst

Hello, Tony, Louisa, can you hear me?

Louisa Burdett

Yeah.

Tony Wood

We can. Yes. Thank you.

Unidentified Analyst

Hi, good morning. I just had a very quick question on mix within the aftermarket. Just coming back to product groups actually within your portfolio. Do you expect there any areas which may lead and areas which may lag? Thinking, for example, wheels and brakes versus content you may have in engine systems, for example? Thanks.

Tony Wood

Yeah. I mean, because of the aftermarket intensity and the replacement rate, and I guess, wheels and brakes will likely lead. And, you know, on bizjet, the distorting factor is that we've seen a lot of destocking last year. So we haven't booked the orders in 2020 that we would normally book.

Interestingly, we normally have a very busy period in November and December, when our - with everybody knowing that our catalog price increases kick in at the end of the year. Typically that causes the business jet OEMs to restock the shelves. That didn't really happen last year.

So to the earlier question that somebody asked on maintenance debt, you know, there's a point at which those orders have to come. And obviously, the replacement rate is quite short relative to some of the airframe spares that we provide. So, yes, we are expecting a mixed benefit there. But, you know, still hoping to see that as the recovery sort of becomes more established towards the end of the first half.

Unidentified Analyst

Great, thank you.

Operator

Our next question comes from Harry Breach from MainFirst Bank. Harry. please go ahead.

Harry Breach

Hello, Tony and Louisa, can you can you hear me?

Tony Wood

Harry, yes, very clearly.

Harry Breach

Perfect. Great. The line is a bit crackly. And just hopefully if I can, maybe start with the simplest one, maybe for Louisa. Louisa just on the hedged rate, just looking in the appendix of the presentation, I think you've commented on where it was at 2020, the sterling dollar mainly, can you maybe give us a sort of sense of where we're looking at for '21 and '22? And what your cover levels are like?

And secondly, just thinking about the Defense businesses and the issues that cause the organic revenue growth is a bit lower than I'm sure you're planning in the fourth quarter. Does that sort of mean we get a catch-up effect in '21? Can you give us any sort of sense about roughly materiality kind of that?

Then maybe just turn it over to engine composites and that business. Can you give us any sort of feeling about how - in profitability terms how that did last year, and how you see the sort of pathway to getting that up to the levels you've talked about, previously how that looks like?

And then finally, sorry, for this question, and SMARTSupport, and Tony, you touched on earlier, can you just remind us sort of what level of your overall aftermarket revenue you're up to now with SMARTSupport contracts overall?

Tony Wood

Thank you, Harry. Again, what we'll try and pick those off between us. Did you want to start with hedge rate, Louisa?

Louisa Burdett

Yes. So the policies, as you probably know, is that we hedge five years forward, up to 100%, clearly less hedging, as we go further out. We are between 100% covered and 25% covered with quite a wide range from around 138, down to about 129. So clearly, quite a lot of breath there, happy to talk you through in more detail on that. But those are the facts. And maybe do you want me to just to pick up the composites there.

First of all, you know, if you look at engine composites as a site, clearly it made a loss, you can see that in the engine systems portfolio, the £30 million that I talked about in my presentation, that would have been a contributor to that loss position.

But we are optimistic about that. So you know, I mentioned before the COVID, the pandemic hit, just as that product group was breaking even, there's been a lot of process improvement movement to low-cost countries still more work to do. But we're hopeful that when volumes come back, that we can get back on that profitability path.

We originally said they would be back at acquisition levels exit this year. But I think we're probably pushing that out, at least by another year. But we'll have to keep you updated on that, depending on the pace of the recovery.

Tony Wood

Yeah. And maybe to pick up on the other two, but maybe an additional comment actually on composites. And that is, you know, we had a very busy year. In fact, the slowdown in customer demand gave us a chance to accelerate the moves into our Mexican factories. So our employees have been absolutely remarkable there in terms of getting first production up and running, transferring, tooling, setting up the lines and such like in Mexico, and keeping the plant running.

The thing that's actually holding us back a little bit is getting our final customer approvals. It's getting, you know, a lot of our US customers into Mexico and getting those first articles and such like approve so that we can start production shipping, but we're a long way forwards now, in terms of being ready for the future, and when the volume comes back.

On Defense. Yes, it was a bit quieter. I think Louisa explained in her presentation that two elements to that, firstly, disruption in our own facilities. We have a very large facility down in Georgia, just outside Atlanta, where we did have, you know, a couple of 100 employees at one stage that were quarantining that was in kilter with that part of the United States, you know, back end of last year that caused us to lose some revenue, that will come back, so there's a catch up on that.

The bit that's probably less likely to come back, there was clearly some disruption in the staff offices in the DLA in the US where they did get behind with placing some orders. But training was down as well in the US fleets because of COVID disruptions and just you know, activities within the services being a bit slower in the last quarter.

So I think some of that will come back, but not all of it. And as Louisa also said, you know, we've had some pretty strong growth in Defense over the last few years. So it is going to be somewhat softer in the outlook, albeit still robust. So that's the Defense story.

As far as SMARTSupport goes, obviously, our civil aftermarket is somewhat smaller. But as a percentage, Harry, you should think in terms of about 10% of our civil aftermarket revenues are now sort of covered by SMARTSupport type of arrangement is just less than that, but that sort of order. And we continue to see opportunities to grow that. So that's how it's shaping out at the moment.

Harry Breach

Thank you very much. Just, sorry, Louisa, I didn't quite hear your comment about when you would get back to the acquisition level of margin with the engine composite business. Can you remind me?

Louisa Burdett

I'm not actually making a commitment on that, it was directional. But you know, given that we've taken a year back in terms of volumes, I think we'd gone at least a year to the right. And our previous expectation was that we would be exiting '21 in a healthier, you know, pre-acquisition state. I think the earliest we can expect that is '22. But that is not a firm commitment. At this point, we need to see the pace of the recovery.

Harry Breach

That's clear. Thank you very much. Thank you, both.

Operator

Our next question comes from Jeremy Bragg at Redburn. Your line is now open.

Jeremy Bragg

Hello, sorry about before, hopefully, you can hear me now.

Tony Wood

We can.

Jeremy Bragg

Thanks. So I suppose this is a bit of a way of asking the question, David asked, around 2023 or 2024, but focusing specifically on the aftermarket. So I know there's a load of stuff that impacts the timing of when the aftermarket comes back, and whether there's a lag to traffic.

But if we work on the assumption that traffic returns to 2019 levels by 2024, is it reasonable to assume that your aftermarket revenues will be back to 2019 levels by 2024 or so please? That's the first question.

And then the second one. Really, Tony, was - your kind of view on the sustainability of this business jet strength? I mean, my understanding is that part of it reflects the absence of commercial flights. So once that stuff comes back online, maybe the business jet might be a bit weaker? Thank you and apologies again.

Tony Wood

No, certainly. Thanks, Jeremy. And we can hear you now loud and clear. So thank you for that. And on civil aftermarket, it's the one area where, firstly, we're positively exposed. So in turn, from a mix perspective, flying comes back before OE build rates get back, that is net positive to our business model.

And, you know, one of the things that, you know, I've been sitting here in the last couple of years saying is that, one of the things that sort of dilutes our business, but builds a tremendous annuity for the future is the fact that OE build rates were going up, our OE growth was so strong, and Defense was very strong as well, a slightly lower margins than obviously we see in civil aftermarket.

So we are moving into a period where, you know, in terms of how you model it, and the shape, we're looking at, that the civil aftermarket becomes more prevalent, and therefore, positive to margins.

You know, frankly, I don't know whether it's '23, '24 or '25, that ultimately we get back to 2019 flying levels. But there are certainly positive signs out there that the conditions are now sort of being set for that to happen. There are plenty of arguments that might dampen demand down as well, in terms of what companies are doing with their budgets for business travel, you know, exactly how people are thinking about sustainable flights and such like, we factor all of that in, but I still feel positive about the window you're describing as the window when flying recovers.

And as I said, in my presentation, there's not quite a one-to-one relationship between our flying rates recovering and our civil aftermarket, but they're broadly heading in the same direction. So we are expecting things to strengthen as the traffic activity comes back. But, you know, it could be plus or minus on that sort of 2024 date that you're giving. And I don't think that you know, anybody's out there with a crystal ball at the moment that knows exactly how that maps into their civil aftermarket flows at the moment.

Lots of the questions that other people were asking about green time, about fleeting plans for some of the older aircraft, we will have a much clearer view as this year unfolds about how all of those things feed in and therefore what the real rate of market recovery on civil aftermarket is.

So hopefully that's helpful. It's very much what we're building as the model and why we would expect to come back to you once we can see some of those conditions getting more established.

On business jets. I am more optimistic, I think the front end of the cabin on large jet commercial, quite a lot of that is moving into the business jet world. And I think that will be quite resilient going forwards. Business jets are getting much more environmentally sustainable, synthetic fuels and such like are being flown in many business jets these days, as that becomes more available, still a way to go. But, you know, that's one consideration.

And it's just a, you know, a more direct, and certainly a safer way to travel in terms of how many of the sort of business customers are seeing it. So we think it's got legs and that market will sustain. But again, we'll see more of that as this year unfolds.

Jeremy Bragg

Thanks very much, Tony.

Operator

Our last question comes from Sandy Morris from Jefferies. Please go ahead.

Sandy Morris

Topping in the morning, everyone. To treat me like the idiot I am. When answering the question about the civil aftermarket in the fourth quarter, wasn't it very simply the last year 2019 was really strong at plus 14%. And that may have been because you got these big punchy bizjet orders, which then just didn't happen this year. And that's why the civil aftermarket looks like it's weaker in the fourth quarter, but probably wasn't really very different to the third quarter, is that right?

Tony Wood

And that's one of the contributors, Sandy. But it's not the only one. We also did some deals at the end of 2019 with distributors. We, you may recall that I announced then that we'd sold out of our RB.211 business. You know, that was before the big announcement on a lot of our 747 retirements where the RB.211 engines obviously, is the propulsion plant.

But - so a couple of things that went into that. But that drove a strong performance at the end of '19. That obviously, does make the growth rates in quarter four look a little bit more subdued. So yes, but there are some additional factors in there as well, Sandy.

Sandy Morris

Okay. In crude directionally, which seems to be today's word, and fourth quarter was probably quite similar to third quarter in the civil aftermarket, yes, no?

Tony Wood

Yeah.

Louisa Burdett

Yeah.

Tony Wood

But that's the conclusion that we're asking you to draw? Yes, it was.

Sandy Morris

Okay, thank you. And then, you know, rather than show to me if it makes you feel better, but I still haven't quite got my mind around these bounce back costs, whether they're inevitable or whether they come back in if activity starts to go up?

Louisa Burdett

So let me be clear, Sandy, they are inevitable. So some of the action we regrettably had to take in 2020 was not to give our teams a pay rise, there was no variable comp. And obviously, the long-term incentive plans have geared towards the lower end. So on the assumption that, you know, we're performing well, next year, those are a natural consequence of running a good business with a great team. So a large proportion of its that we've got an element of trouble travel and other discretionary costs coming back in.

So in terms of the volume related bounce back costs, I think Tony has already discussed that. We have obviously taken, you know, 26% of the team out. We've made an assessment of the recovery and how we would add back through shift work over time. We've got some short time working, which gives us some extra capacity this year. But most of those 50, just to be clear, are costs that we believe need to come back into the business in '21.

Sandy Morris

Great. And then a last one, and I don't want to stir up anything up here. But in terms of the no dividend, final dividend, I can't get you anywhere close to your covenants for the 12 months to end June 2021. But was the dividend a toll tied to just wanting to make absolutely sure come hell or high water that you never did flirt with the covenants, you know, assuming your mutant variants of nasty things and all the rest of it, well, there's an element of that, or literally just not the time?

Louisa Burdett

Well, I think the H1 '21 covenant is the first test where we will have pretty much a full year of this pandemic in our numbers. If you know the assumption that half one '21 looks like half two '20. So naturally, we you know, that comes into our consideration. But as Tony said, we're very conscious that dividends are important, and we are looking to, as soon as we feel that that recovery is certain, we will look at that dividend policy. But yeah, that that's all I can say, Sandy on that.

Tony Wood

I think really to add from my side, it is all about Sandy the confidence in the recovery becoming more established. Now that's the discussion that the Board had on this. And, we'll be and are wanting to put guidance out there and be more specific, as soon as we're able to and a few more months under our belt, and I'm hoping we're going to be able to have a clearer picture on how the years going to pan out.

Sandy Morris

Okay, just didn't want to sort of crop up, notice to run down off for a covenant waiver, can't see why you would, but just double checking. Thanks very much. Not wanting to get into a fight today.

Louisa Burdett

Thank you.

Tony Wood

Thanks, Sandy.

Operator

Thanks, Sandy. That concludes our Q&A section of the conference. I'll now hand back over to management for the closing remarks.

Tony Wood

Okay. Thank you very much, everybody for joining. Hopefully, you could hear and see us clearly given we're doing this virtually and we both very much look forward to hopefully seeing you physically at some point in the future, hopefully later in the year. Thank you very much.