Q3 2019 Earnings Call
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I would now like to hand, the conference over to your speaker today, Patrick when Truelok.
Axles Chief Financial Officer. Please go ahead Sir.
Thank you.
Good morning, everyone welcome to check so corporations third quarter 2019 earnings conference call.
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Certain statements contained in this call may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, they involve estimates assumptions judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes.
<unk> materially from all forward looking statements today.
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Last night news release a.
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With me today on Nick Stanage, our chairman CEO , and President and COO caught out our vice President of Investor Relations.
The purpose of the goal is to review our third quarter 2019 results detailed in our news release issued yesterday.
Now, let me turn the call I, but to me.
Thanks, Patrick Good morning, everyone and thank you for joining us as we share our third quarter results.
As a strong quarter with our operating margin exceeding 19%.
We delivered a 12.5% increasing earnings per share versus Q3, 2018, and we continue on track toward a record year for cash flow.
These results reflect the commitment and the capability of our team to execute and deliver value to shareholders.
Let me highlight some of the results and Patrick will then provide more details on the numbers.
Sales in the quarter, a $572 million were up 6.6% year over year in constant currency.
Adjusted diluted EPS was 90 cents compared to 80 cents in the third quarter of 2018.
We delivered third quarter operating income of almost $110 million, which was up almost 14% year over year and resulted in an operating income margin of 19.2 per cent compared to 17.9% in Q3 2080.
Our operating margin was robust in the quarter as we continue driving efficiencies increasing productivity and focusing on continuous improvement.
Our people are committed to constantly looking for opportunities to improve productivity and generate cost savings, which translates to improve margin quality.
Clearly our commitment to operational excellence throughout the business is working and gaining momentum.
Now turning to our three primary markets.
Commercial aerospace sales in Q3 were $386 million, an increase of 3.6% in constant currency as compared to Q3 2018.
Driven primarily by the Athree hundred Twentyneo, Boeing 77, and Airbus Athree hundred 50 programs.
We are encouraged by the strong growth of almost 17% in other commercial aerospace, which includes regional and business judge.
The growth was primarily driven by Gulfstream programs.
We continue to see growth in commercial aerospace, although slowed by the effects of the Boeing seven three southern Max grounding.
The decrease in matched production did not signet significantly affect our sales during the first half of the year as we benefited from a few Boeing suppliers taken advantage of the grounding to catch up and build inventory in Q2.
However, as the grounding extended the channel inventory grew and ask Q3 progressed more than two thirds of our seven three southern Mac Shipsets sales were affected by the lower build range.
Today, we remain optimistic for a 737 Max returned to service and resumption of growth with higher production levels following regulatory approvals.
Unfortunately, the uncertain timing of returned to service has pushed sales to the right and required us to revise our sales guidance for the year as you read in our release last night.
Our revised guidance reflects lower sales volume for the 737 Max program.
Along with softening due to uncertainties in the global economy that are impacting some of our industrial markets and a sustained stronger dollar.
Which leads to reported lower sales.
To add some perspective I reported sales are now expected to be lower by approximately $30 million for the year as a result of the sustained strength of the dollar against the euro compared to our original guidance as a reminder, a stronger dollar leads to lower cost for our European operations.
And result in a net tailwind to margins.
We remain cautiously optimistic for the remainder of the year and more positive as we head into 2021, we expect the 737 Max to return to service and build rates to increase driving growth for more than two thirds of our Mac shipset content.
Sales from other key commercial aerospace programs remains strong.
We're currently at rate on the Athree hundred 50, and the Athree 20 continues to grow steadily while the 77 continue to ramp during 2019 and we'll be at full rate for the first full year in 2020.
Backlogs remain robust at over 12000 aircraft composites adoption and secular penetration continue to accelerate in our market share of strong and growing.
Actual has a sustainable competitive advantage excellent customer relationships and a leading sole source position in key markets with high barriers to entry.
With innovative technology, the broadest aerospace composite product portfolio in the industry and $3 billion of global gross value property plants and equipment. There is no other company in our advanced materials space that is better positioned to take advantage of the growth opportunities ahead, then hexcel.
Now turning to space and defense it was another terrific quarter with double digit growth over Q3 2018.
Sales were almost $110 million, reflecting an increase of 22.7% in constant currency.
Growth was driven primarily by the F 35 joint strike fighter program, along with increasing strength in military rotorcraft.
Our arc technologies business continues to perform well and as making strong contributions in our overall sales growth in our space and defense market.
Finally, industrial sales were about $77 million for the third quarter, which was essentially in line with Q3 2018, no up about 3% in constant currency.
While demand for composite materials and wind turbine blades remains strong growth in this market is stabilizing as we near the end of a steep ramp up.
For the past few quarters Hexcel has benefited from strong growth in when sales.
Going forward global demand appears to be leveling out at current elevated levels.
Coupled with short term softness in both the automotive and recreational markets. These factors are likely to keep industrial sales relatively constant in the near term ahead of expected growth in 2020.
In summary, we continue to demonstrate year over year growth margin expansion exceptional cash generation and strong returns on investment.
Backlogs are healthy customer relationships have never been stronger and hexcel continues to win in the marketplace and create value for shareholders.
Other than revising our sales guidance related to the 737, Max grounding and foreign exchange movements. The remainder of our 2019 guidance is unchanged.
Now I'll turn the call over to Patrick to discuss more of the quarter's financial details.
Thank you Nick I will provide a review of our markets and as usual these year over year comparisons are in constant currency as Nick already said currency movements influence how reported sales and some of this impact may not be intuitive that.
The majority of our sales is denominated in dollars. However, our cost base is a mix of dollars euros and British pounds as we have a significant manufacturing presence in Europe .
As a result, when the dollar strengthened against the euro and the pound our sales trends like lower but our cost also translate lower resulting in a net tailwind margin.
Accordingly, we prefer a strong dollar to a weak dollar.
In terms of currency hedging, we employ a disciplined hedging strategy to protect our operating income that layering in hedges hybrid and quota horizon.
Commercial aerospace represented approximately 68% of total third quarter sales.
Commercial aerospace sales of $386 million.
The 3.6% compared to the third quarter 2018, driven by production rate increases, including the Athree 20, Neo increasing to 60 aircraft a month and the 77, increasing mid year to fortinet crop among tempered by the lowest 737 Max production range.
Space and defense represented 19% of sales for the third quarter space and defense sales totaled $110 million, an increase of 22.7% compared to the same period in 28 team.
Growth was driven by the F 35 program supported by other fixed wing programs as well as the black hole can be 22, including the wide cord Reits crop Blake.
Industrial comprised 13% third quarter sales industrial revenues totaled $77 million, increasing 2.7% compared to the strong prior year period.
Wind energy remains the largest submarket within industrial comprising just over 60% of industrial sales.
Our wind energy sales of stabilizing following a very steep period of growth that began in mid 2018.
We have 32 different submarkets within industrial and during the third quarter, we experienced fluctuations within some of these markets, notably automotive, which is not unusual from business.
On a consolidated basis gross margin for the third quarter was 27.6% compared to 26.5% in the third quarter 2018.
We continue to focus on operational excellence, which drives higher margins and when combined with the absence of some headwinds we experienced last year led to over 40% incremental operating margins year over year.
Total depreciation expense increased $3.2 million into third quarter sort of 29 team compared to the prior year period, as we continue to invest to support future growth.
For the third quarter, selling general and administrative expenses increased 5.4% year over year in constant currency.
Section technology expenses increased 4% year over year in constant currency.
We continue to expand our leading technology positions through investments in research supported by seven global R&D centers of excellence located in Europe , and North America.
Operating income increased 13.9% for $13.4 million year over year, the operating income margin expanded to 19.2% sales for the third quarter of 29 team, which is one of the highest quarterly operating margins ever posted by hex.
Now.
The strong margin performance compared to an operating margin of 17.9% for the third quarter 2018.
Year over year impact if exchange rates was favorable by approximately 10 basis points.
The composite materials segment represented 78% total sales and generated an operating income margin of 21.2% for the third quarter 2019, as compared to a 20.6% margin in the prior year period.
The engineered product segment, which is comprised of on structures and engineered pool businesses represented 22.2% to sales and generated an operating income margin of 16.3% due to favorable program mix in the third quarter 29 team compared to 14.4.
In the third quarter 2018.
While the operating margin is lower than the comps and materials segment engineered products reclines, a much lower level of investment generating strong returns on invested capital.
The adjusted effective tax rate for the third quarter 2019 was 21.4% we continue to full cost an underlying effective tax rate of 24% for the fourth quarter of 29 team.
Net cash from operations was $120.1 million in the quota and is $277 million year to date.
Working capital represented a use of cash of $1 million in the third quarter Twentynine team.
Capital expenditures on an accrual basis with $53.3 million during the third quarter 2019, compared to $43.5 million in the third quarter 2018.
Free cash flow is typically stronger for heck sell in the second half the year and was $114.6 million year to date compared with $128.2 million in the same period in 28 team.
We target a gross debt to EBITDA leverage ratio between 1.52 times.
The ended the third quarter, our leverage ratio was 1.9 times.
This represents continued decrease from the first quarter Twentynine team as we repaid a portion of the debt used for financing. The January 2019 acquisition of technologies combined with strong and growing EBITDA.
We repurchased approximately $56 million about common stock during the third quarter Twentynine team and have $318 million remaining under our share repurchase program.
Capital allocation priorities continue to be investing inorganic growth, followed by targeted and disciplined M&A and commitment to returning greater than 50% on net income to shareholders through dividends and stock buybacks.
Before turning the call back to Nick I would like to review the 2019 guidance included in the earnings release issued yesterday.
We released on 2019 sales guidance range to a full cost to $2.34 billion to $2.4 billion. When we first issued the sales guidance in January 2019, we were expecting the Max production rate to reach 57 month by mid year 2019 consider.
System with the publicly disclosed build rates issued by Boeing.
When we reaffirmed guidance last quarter, we were experiencing expecting the Max returned to service early in the fourth quarter of 2019, consistent with industry expectations at that time.
We have now reduced on sales guidance due to the expected Max returned to service being delayed further than initially expected combined with some other unanticipated short term headwinds, including foreign exchange rates and the general flattening of industrial sales due to recent softness in the global economy.
We are maintaining our guidance for excess capital expenditures and free cash flow, reflecting our confidence in our employees and I'll focus on operational excellence to drive earnings and cash generation.
Our EPS guidance. He is a range of $3.43 to $3.53 per share recall that we raised on EPS guidance last quarter, increasing the midpoint by three cents to $3.48 per share from $3.45 per share.
Capital expenditures are expected to be in the range of $170 million to $190 million.
Free cash flow is forecast to exceed $250 million as we again expect to generate significant cash in the fourth quarter of 29 team.
With that let me turn the call back to Nick.
Thanks, Patrick as we mentioned we are on track to deliver record cash flow. This year. So let me follow up by restating that our plans for that cash include growing the business organically and through M&A.
Our teams are working diligently with our customers on next generation materials to support future programs and growth opportunities.
Our business development pipeline is very active with multiple ongoing projects.
We remain committed to finding areas and opportunities to expand our technology portfolio to better serve our customers and deliver solutions that benefit the future.
We expect to share our 2020 guidance in January when we report our fourth quarter and full year results.
We are at the beginning stages of rolling up our plan for next year and our initial view is that we have robust growth for the Athree hundred twentyneo as their butts moves toward a rate of 63 per month in 2021 and for Boeing 77, which should achieve its first full year at the higher rate of four.
14 per month.
And there is further growth expected next year in several additional programs, including the triple Sevenx and Airbus eight to 20.
On the 737, Max we remain confident in its long term success and look forward to its return to flight and gradual ramp up in production during 2020.
Currently the largest part of our demand for the Max is at a rate of 42, and we expect positive growth from that base as we move through 2020.
The outlook for our space and defense business continues to be extremely positive wind power as a source of energy generation continues to become more cost competitive and we see many possibilities to support wind industry initiatives with further penetration of advanced material composites.
And more broadly with significant numbers of electrification and lightweighting projects emerging hexavest composite materials are becoming increasingly relevant to enable our customers to meet these challenges.
In closing we expect our results this year will demonstrate solid growth exceptional cash generation and a strong return on investment for shareholders.
We continue to benefit from aircraft program ramp ups.
10, you'd secular adoption of advanced composites and strong demand with continued long term growth.
We are achieving our objectives by staying disciplined.
Focusing on operational excellence investing in the future and by delivering on our commitments to customers and shareholders.
Julianne that ends our prepared remarks, so we're ready to take questions.
Thank you as a reminder to ask a question you'll need to press star one on your telephone.
Your question press the pound Keith we ask that you. Please limit yourself to one question and one follow up question.
Thank you please standby, while we've compiled acuity roster.
Your first question comes from Gautam Khanna from Cowen and company. Your line is open.
Yes. Thank you sorry for the background no caremark, Bob I, just wanted to follow up on.
Some of your comments on that now.
Hello Hello.
Points or.
Well the multiples.
Right.
Pardon.
For the basin below that.
So we got them I think I picked up most of the question. There is a lot of background noise.
We believe that.
The bulk of our customers on the Max now are trending to the 42 level.
We have broad customer base, and it's hard to have exact visibility into that but when we do our sanity checks and we look at what some of the key suppliers to the Max have stated their app. It ties together, where we're pretty comfortable but that somewhere between two thirds in three quarters of our of our.
Shipset content is at the 42, whereas another portion the balance is somewhere between 40 to 52.
Thank you very much.
Thank you.
Your next question comes from Mike Sison from Wells Fargo. Your line is open.
Hey, guys nice quarter there.
Thanks, Mike.
In terms of your range this year Nick.
On the low end I in the guidance yes.
10 cents is is the delta generally within your control to get a top or the bottom or is there is at the top more driven by sales growth and either segments.
Yes, so we look at both the upside potential as well as the downside risk and we believe it's very centered.
So I think there's as much opportunity for us over deliver and depending what could happen with supply chains tightening as they normally do in fourth quarter.
How cash may become an issue within commercial aerospace given the Max issues is a question Mark. So we think were covered we think our guidance is accurate based on what we see no today.
And believe we can deliver that.
Great and then I know its little bit our led to give specific.
The outlook for 2020, but if.
The Mac stays at 42, I guess for the full year. It does sound like you have other programs.
That will drive garlic for commercial aerospace so is that really the case. So you can you can still get pretty good growth next year commercial aerospace sales, even if the Max stays at 42.
Well, we certainly have growth and other programs and more broader than the Max but let's not forget at $400000 per shipset. The Max is a meaningful program for XL and pick a number if it's 10 down or 15 down from where Boeing intends to go.
You can do the math on that onto what it would equate to for a full year impact.
But to answer your question, we are seeing strength and many programs across our markets, including other space and defense has been incredibly strong and we're very bullish on it as well.
Great. Thank you.
Thanks, Mike.
Your next question comes from Robert Spingarn from Credit Suisse. Your line is open.
Hi, good morning.
Good morning, Robert.
Just on that Youre following that last question not so much on Max but you've talked about the growth embedded.
For the 77 and you also mentioned the triple Sevenx, but.
There's some concern and 77 rates, you're gonna have to come down maybe not in 20, but in 21.
And.
And of course, the triple seven axis been shifting to the right. So how does that cloud your view for 2020.
So again, if you look at.
The build rates.
Even if Boeing stays where they are today and do not receive another order they still have close to three and a half years of backlog.
350 is at five plus so.
I, we don't view 2020, being a risk item relative to those build rates in those programs.
We're also bullish on.
Wide body replenishment being required now whether those rates start or orders start coming in in 2020, 2021, but we're hopeful that they do and they can justify.
The existing build rates for both Boeing and Airbus.
Okay, and then just as my follow up just switching to industrial you talked about growth resuming.
In 2020, what what are your assumptions on what drives that just when come back is automotive is it something else.
Well so.
We're rolling up the plan as we speak and I don't want to get ahead of ourselves, but seeing some lumpiness, especially in automotive and rack is typical we see that were will have a big quarter and then we'll we'll have a down quarter and has to do with timing and keep in mind a lot of our business in the automotive is on the very high end.
Yes premium cars.
We are build rates are not necessarily ex per month on a steady basis.
Rack is similar with with climate in with some seasonality in there so.
We're comfortable that thats going to come back when we continue to work that theres been some restructuring with festus on their mix, we feel real good about our positions in our new technologies, there, having said that we're not going to see the kind of growth we've experienced over the past few quarters simply because.
They are at very high rates and we expect those rates to continue going forward. So the growth rate will come down.
Compared to where we have been over the last few quarters, but we're still looking for a nice business growth in those segments.
Okay. Thank you Nick.
Thank you Robert.
Our next question comes from Myles Walton from FBR. Your line is open.
Thanks, Good morning.
Good morning, but I'm wondering.
Patrick first so Patrick on the implied fourth quarter margins.
Just struggling with why they would decline I guess implied.
As much as they would if you're at the high end of the sales range.
Perhaps maybe it's looking to the low end of the sales range and for more modest.
Margin decline, but maybe just talk about the moving parts on margin in the fourth quarter and also engineered products margins in particular on a third quarter you've touched on that.
Sure morning Myles.
I mean, I would say as Nick said with the yes, I would say again with fairly sensitive in terms of the sales range, where kind of trying to balance ourselves at the midpoint as opposed to the top for the bottom.
And based on those ranges December is always a bit of a funding month in terms of the volumes in the overhead recovery and all the rest of it but but we expect to continue to drive decent margins going into the fourth quarter. There's nothing exceptional in terms of cost we will drive incremental.
Margin leverage as strongly as we can.
And I would say we have reason to be centered in terms of the engineered products.
Third quarter, the 16 plus percent, which does stand out it was kind of exceptionally high.
That is probably a couple of factors that I mean, Drs technologies these old being reported through.
Engineered products and that is starting to to help and perhaps weight that segments helped a little bit and it was just then combined with a strong mix of program, which we can get a bit of lumpiness in engineered products. So it was those two things together that I would say that drive to 16%.
Whether we'll be able to repeat 16% time will tell but that was sent me a high outline for now.
Okay, and then on arc, Nick I think you mentioned the growth in space and defense driven by the F 35.
Arc, a bigger contributor or was the F 35 bigger contributor I.
I guess, maybe arc would've been up there.
Well, our arc was the bigger contributor and keep in mind when when we talk F. 35 arc does have a good position on F 35, as well as legacy Hexcel before arc. So in total F 35, but the bulk.
Was clearly the acquisition and the role in quarter over quarter of the arc business.
But miles I would also add the underlying growth in space and defense was high single digits even without.
Yes, I've got the last one.
Patrick on the.
The FX effect on.
Operating income was at a net push or tailwind to to the adjustments.
I would help our FX FX at the operating income level was a slight benefit it was a small tailwind.
But only small basically because of the hedges we do.
We are the hedges protects the operating income and we got a slight boost.
Makes sense. Thanks again.
Your next question comes from John Mcnulty from BMO capital markets. Your line is open.
Yeah. Thanks for taking my question.
Got to the.
With regards to the incremental margins they were clearly higher than than we've seen and in a long time and it does sound like maybe there was a little bit of Lumpiness in the engineered products, but anything else that was driving that I mean, certainly relative to the first half.
They were notably better even though you had some what I would have argued were some easier comps in the first half. So I guess, how should we think about that.
Well I think you touched on the easier.
Ups simply because of some of the headwinds we faced last year with and in resin.
So those certainly have subsided russi on is up and running full speed and getting it is getting more productive everyday so really there wasn't anything unusual I again, I have to applaud and I'm very proud of the job that our team is doing with respect to productivity and efficiencies throughout.
Our operations.
That is helping the business, which obviously, we're counting on sustaining that level of performance and continuing to stretch ourselves. So.
70 improvements that we've seen have been fantastic, even causing us to look at our capex and some opportunities to push some of that to the right. So.
It's a combination of all those factors that give us confidence in continuing to drive marking margin strength.
Great. Thanks, and then with with regard to the outlook for 2020.
Look you've had a huge margin step up this year.
Is there more to come for 2020, if kind of things play out the way you think where the Max starts to get back on track next year and when it comes back I guess, how should we be thinking about the potential for further margin expansion as we look look to 2020.
Well, yes, John it's a little early for me.
We're rolling up the first pass I Havent had my first look but as I've said on this call before and as my team knows I expect continuous improvement and not only year over year, but quarter over quarter ideas and opportunities to drive productivity and it's no different for 2020.
With the Max stepping up back up with some of our sites running as efficiently and full as they are it's just gifts and provides opportunity for very strong legs leverage.
Great. Thanks, very much for the color.
Thanks, John .
Your next question comes from Chris Olin from Longbow Research.
Line is open.
Hey, good morning.
Good morning, Chris just had a quick question on the other commercial aerospace sales line and that 17% growth that you guys posted.
Thank you highlighted Gulf stream I guess my question would be is that run rate sustainable or.
Include some type of like channel fill.
Inventory management, and then I guess I would have the same type of question in terms of the growth rate on feels in defense I guess thinking outside of the F. 35 should we start thinking about the accounting tougher.
So let me let me start with other and you pointed out as we did Gulf stream drove a large portion of that and it was pretty broad base at Gulfstream.
Although the GE 500 was really big in the quarter I wouldn't expect 17% quarter over quarter growth, but I would say.
Our positions and engines and the cells and our positions on the new platforms being launched continues to be very good. So we see other to continue to do well.
On on the space and defense, it's a combination there obviously, we expect more growth with the up 35, we expect more growth in contribution from our acquisition of our technologies and then we've got broad based growth with new programs like the CH 50 Threek Kay.
Continued steady performance and growth with the rotorcraft on the military side and other drones unmanned vehicles that were supplying materials to that probably won't be material in size, but they provide great opportunities because there's more and more of them.
Being.
Looked at evaluated and ultimately will translate into production.
Okay. Thank you.
Your next question comes from Paretosh Misra from Berenberg. Your line is open.
Thank you good morning, how big it exists other commercial aerospace business for you as percentage of functions that are station.
Sorry.
Parents hedge.
So it's a bounce.
It's about 15% or so the total commercial aerospace.
Got it thanks, and then just a follow up on the your Decatur facility any updated thoughts that coming along and with the capex on that so that would be largely done by the end of this year.
So.
To your question on how we're doing there were doing great. We're.
Actually on track or maybe even ahead of schedule on that there was never a plan for that capex to be completely spent or completed this year. What we had said was we would have it completed next year, where the lines would come online and then qualified to sometime in 2021.
But overall the project has gone very well.
Understood. Thank you.
Thank you.
Your next question comes from Sheila Kahyaoglu Kao CLO from Jefferies. Your line is open.
Morning, Thanks, Nick and Patrick Nick I wanted to turn to something you said and as.
Finishing not prepared remarks, you talked about growing the business organically and through an M&A it seems more and more that and then they will.
Not happen and maybe the focus will ship to future small aircraft. Maybe can you talk about how you view heck cells technology, the maturity of the offering when it comes to high volume composite manufacturing.
Sure so.
No. We we are always working with our customers whether its boeing whether its Airbus whether it's the engine guys.
Embraer been BARDA.
Our next generation materials, whether it's for primary structures swings fuselage empanage.
Secondary structures, which could include interiors or a growing market for us where we have very good positions in engines in the cells and that hasn't changed we're working aggressively.
On materials that laid down faster cure faster and provide a better economic package for the customers for expanded secular penetration.
Whether or not the enemy gets launched I'm a believer that there will continue to be upgrades. There will continue to be neos and Max's of next generation airplanes. There will continue to be growth in the other commercial and I think were the best positioned in the marketplace to provide the solutions that our customers are.
Going to need for those applications going forward, so I'm not I'm not.
As pessimistic on and I may not going I.
I'd like to stay optimistic and we'll be ready if and when it does.
Great. Thank you.
Thank you Sheila.
Your next question comes from Noah Poponak from Goldman Sachs. Your line is open.
Hi, good morning, everyone.
Good morning learning.
Patrick can you give us the old and the new tax rate inside of the full year EPS guidance.
Well.
So the year to date is obviously just the average of the three quarters I think it's just over 22%.
I mean.
As I say no I mean, as we go into the fourth quarter the underlying starting point effective tax rate that we will use the 24% now obviously historically, we get tweaks and adjustments to that but as I said I don't know what those will always be and how many stores to stock option.
The et cetera get get exercised we will move that needle, but the starting point for the full quota is 24% and then you combine that with obviously the year to date average for the first three quarters that that's what the final yet number is going to be so it's going to be under 24% in total, but how much I don't know.
Okay.
Any reason any reason you can't just give me the specific numbers to that question.
No I never Noah I don't know the number.
All right.
You have new earnings guidance in both of them how to tax rate assumption.
Right.
From a consults all so I'll I'll answer this and then we'll move on the first three quarters, one through three where the actual tax rate and our guidance midpoint has 24% as the assumption for Q4.
Okay.
On the Max.
I had interpreted your prior comments to suggest that you were.
Closer to right in between 42, and 52 and I think you've.
Even suggested.
Building, a variance versus Boeing that within need to unwind as Boeing was ramping back up.
But today your comments are just closer to 42.
So I'm wondering if that is you know somebody like the engine manufacturer stayed close to 52, while they.
Improve to their position in the supply chain clean things up a little bit and then has gravitated lower or if it's that you've been closer to 42, all along and that's just an effort to better understand whether or not you have any variance that would then need to burn off as Boeing goes higher.
Yes, so so just to clarify to my knowledge, we never said that we were going to build excess for capacity or inventory.
In anticipation of the market moving one way or another we did not do that did not planned to do that we did say and we do believe and we did experience. The fact that there was suppliers.
When we reported last quarter that basically were behind that or supply chain was empty they weren't at rate and we knew for a period of time that they would stay at an elevated rate I'd above 42 in some cases that 52 in some cases, perhaps even higher to catch up and.
We saw that and that's why over the first two core or the second quarter, we basically saw little if any impact.
Third quarter it doesn't take long at 10 per month for inventories to build up and we saw a pretty abrupt change with some big supplier specialty around engines.
That drove a change that swung are.
Shipset rate closer to the 42 than the 52, so it's really a timing and the amount of inventory that was built over the past quarter.
Your next question comes from Chris catch from <unk> Capital. Your line is open.
Yes, just following up on that I'm, assuming the guidance is based on continuing to ship.
I'm sorry, the rate closer to 42 for the fourth quarter and then also just.
One more time to sort of reconcile the delta between the.
Sales guidance and the and the reaffirmed guidance and it sounds like you said that not much really have a tailwind from.
Thanks, giving the rolling hedges, so a lot of it sounds like it's a combination of operating.
Leverage as well as mix I'm wondering if you and maybe a little bit a tax rate could you parse out those.
Contributors to the Delta there.
So I'll take the first part easy part and then I'll turn it over to Patrick but your assumption is correct. We had built into our guidance that we will stay pretty much at the current Max delivery that were on right now and Thats the guidance we shared at.
Just over two thirds being at the rate 42, and the balance being above that towards 52.
No I mean in relation to I mean, we moved guidance to 343 to 353 mid 0.3 48.
The end of last quarter and were standing by that essentially we see way than you've seen the very strong incremental margin the 19.2%.
Absolute level of operating income in the third quota we can just see if we sustain those levels and there's no reason, we wants with the productivity efficiency and operations.
Drive another strong fourth quarter of income.
We should be able to deliver that taxes I talked about I'm not expecting anything exceptional on tanks, but it's going to be more about cost control productivity, even with the reduced level of sales and you've obviously got a.
Take into account, where we were in the first three quarters and to see we carry on doing that it should roll out to be honest.
Got it thanks, and then just one follow up on the industrial segment you mentioned.
Sort of broad base weakness, but including weakness in automotive I'm assuming that means.
The composite.
Since the auto.
Industry more skewed towards Europe , and in Europe , there is pretty pronounced weakness on the auto and market currently.
Partly on Brexit seemingly like.
So is the bigger contributor there and Theres an acceleration in the move to electrification. Just wondering if you haven't early view on on the likelihood of composite adoption in a paradigm over there.
That's accelerated transition to electrification overtime.
The two composites play more or.
Similar to what you've been seeing and some of the higher end vehicles.
Yeah, I mean, I think in the medium to longer term, we would still be extremely positive about the opportunities for comps immaterial to the adoption with all the electric vehicle electrification as you suggest that the light weighting is still going to be a very important factor. It's relatively short term lumpiness market softness in Europe as you.
Wait becomes more and more imports and the battery adoption. The integration of batteries is an integral part to vehicles, where comps. It's has a lot to offer we remain very optimistic for the future of competence in the automotive sector.
Got it thank you.
Your next question comes from Hunter Keay from Wolfe Research Your line is open.
Good morning, guys. This is we'll 400.
Have assessed initial sense of how much depreciation will step up in 2021 dependent fiber license Decatur come online.
Well those lines as Nick kind of indicated probably won't be qualified and come online until actually 2020 won so we shouldn't see much impact from those lines in 2020.
Given a capex spend is we've called out in the range of 170 to 190 I would look at whatever this year's depreciation stack comp is being I I would say about 15 million. Obviously this year, we had beyond acquisition, which.
Pushed out the DNA a bit but I would say about 15 million also next year.
Perfect. Thanks.
Your next question comes from David Strauss from Barclays. Your line is open.
Hi, guys capitals on for David.
I wanted to talk about the sequential drop in aerospace sales from Q2 Q3 was there anything else large in there besides Max.
The major factor was the Max is we've called out that movement as Nick went into detail on ready the shift in the engine guys and the demands moving towards 52 in the third quarter that that that was really the the step change.
Okay.
And then you guys talked a lot about productivity improvements to I'm, sorry, I just wanted to ask how you feel about working capital on how much are carrying and then kind of in the context of your kind of out year 2021, 2023 free cash flow targets, that's working capital grow proportionately with sales or do you see opportunities for efficiency there.
I mean, we always going to drive efficiencies as much as we can in the longer term on working capital I mean in the near term.
We have on down to be drive as we near the always do in the second half in the last quarter the year drive out some cash from our working capital. It's the normal cycle that you would have seen many times.
And going forward, we will as we grow our working capital base will grow to some extent, obviously, what we will try to do is to make that growth as efficient as possible and improve our receivable days improved inventory days, which is what we're always striving to do.
Okay, great. Thanks.
Your last question comes from Rob Ronald Epstein from Bank of America Merrill Lynch. Your line is open.
Hi, guys. This is Kevin do anti on Corona on looking at the Skyline for the Boeing 787, if Boeing doesn't get more orders it looks like the production rate for the program may have downside risk starting in 2022.
If they do cut production rate in 2022, which is your 2021, how should we think about your sensitivity to your long term growth outlook of 6% to 9% kicker.
Well, if you do the math and you pick a number if they go from 14 to 12.
My math, so thats about 1.3%.
On a full run rate basis, and basically that'd be the impact.
[noise].
Okay. Thank you very much.
You're welcome.
We have no further questions.
This concludes today's call. Thank you for participating you may now disconnect.