Q4 2019 Earnings Call
Fourth quarter 20, I can't earnings call.
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I'd like to hand, the conference over to your Speaker today, Patrick when <unk> Chief Financial Officer. Thank you. Please go ahead Sir.
Thank you good morning, everyone. Welcome Tech So corporation's fourth quarter 29 Teen 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 99 spine.
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Such factors detailed in the Companys FCC findings and lost nine news release.
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With me today on Nick Stanage, our chairman CEO, and President and COO caught out our vice President Investor Relations.
Perhaps the goal is to review our fourth quarter and full year 2019 results detailed in our news release issued yesterday.
Now, let me turn the call over to Nick.
Thanks, [laughter]. Thanks, Patrick Good morning, everyone and thank you for joining us today as we share both fourth quarter and full year 2019 results.
We completed 2019 with our strongest ever full year results and a solid fourth quarter, taking into account certain end market challenges.
2019 also saw very positive step up in our return on invested capital to 14.5%.
Let me start by highlighting our fourth quarter results.
Fourth quarter sales of $564 million increase nominally from the very strong Q4 2018.
Adjusted diluted EPS was 86 cents, reflecting an increase of 5% year over year.
We delivered higher adjusted net income despite a decline in quarterly adjusted operating income due to lower volumes for some key aerospace and industrial customers that created overhead absorption challenges.
Net income, which benefited from a lower tax rate in the quarter was up compared to the prior year period.
Fourth quarter Aerospace sales were affected primarily by the continued slow down in southern three seven Max production.
However business Jets were strong in Q4 with a 20% increase in year over year sales.
In fact, the business just category was the largest growth contributor in commercial aerospace during Q4.
As it or previous quarter Gulfstream programs, primarily drove this growth.
[noise] space and defense sales continued on a growth trajectory during the fourth quarter with an 18% increase as compared to Q4 2018.
While our arc.
Acquisition technologies contributed strongly to space and defense sales growth in this segment is broad based across a number of defense and space programs.
Industrial sales declined about 11% when compared to a strong fourth quarter last year.
Wind energy sales increased substantially throughout the year, despite some inventory adjustments contributing to a deceleration at year end.
Now, let's turn to some specifics on our 2019 results.
Full year 2019 sales were $2.356 billion up 8% year over year.
Adjusted diluted EPS was $3.54, an increase of more than 16% over last year.
We finished the year with our sales inline with our revised guidance and earnings per share just above our guidance range.
In addition, 2019 was another record year for free cash flow generation with a company delivering $287 million.
The impact of our sustained commitment to operational excellence on cost savings and productivity have never been stronger.
Although the Max was a headwind in the second half of 2019 or Hexcel team did a terrific job mitigating some of the effects on our earnings by continually working more efficiently improving our processes and eliminating waste.
As you heard from Boeing last week 737, Max production is still suspended.
Boeing expects to start off at reduce build rates, while they focus on returning to service and delivering existing aircraft.
While we remain optimistic that the Max will return to service soon the temporary production stop is impacting our 2020 sales I'll discuss further when I sure guidance with you in a few moments.
Turning to our primary markets.
2019, commercial aerospace sales were 5.1% higher than 2018 at almost $1.6 billion.
The composite rich Airbus Athree hundred 50 was that rate Chen throughout the year, while so sales for the 77 as well as the new Boeing Triple Sevenx continued to grow favorably.
We congratulate Boeing on the first flight of the Triple Sevenx on January 25th and look forward to its entry into service in 2021.
Additionally, in 2019, we benefited from strong build rates and shipset increases related to the transition from legacy to latest generation narrow bodies, including the Athree 20 meal, which maintains strong backlogs.
In other commercial aerospace, which was primarily business and regional Jets, we saw strong growth in the second half of the year.
Space and defense sales for 2019 were almost $445 million, which was an increase of 21.6% over 2018.
Excluding arc technologies growth would have been over 7%.
Our acquisition of art contributed to our strong sales growth throughout the year and sales and composites penetration continued in the F 35 joint strike fighter and across a broad range of other military programs.
Finally, turning to industrial sales were $313 million in 2019, which was 10.6% higher year over year.
At the end of 2018, we experienced an exceptional recovery and when sales with the 67% year over year increase which continued into 2019 with another 25% year over year increase.
We are encouraged by a strong backlog at our key customer festus.
Automotive marine and sports applications continue to provide opportunities for growth, where our technological advancements in strength and lightweighting have led to increased composites penetration.
I'd like to mentioned a couple of milestones from 2019.
First we completed our acquisition of our technologies in January and our integration could not have been more successful with the acquisition delivering the strong sales we targeted.
We seamlessly combined our sales efforts and our cultures with positive feedback from our customers.
Our technologies materials, and coatings expertise contributes to a broader product portfolio with greater functionality for our customers and the arc business is contributing strong margins that frankly have exceeded our initial expectations.
We look forward to growing this exciting part of our business as our combined teams explore new technologies and enhanced customer solutions.
Second we delivered exceptional free cash flow in 2019, surpassing our guidance and achieving a record $287 million.
Over the past four years, we've generated a total of almost three quarters of $1 billion and free cash flow and we expect to surpass our previously communicated target a billion dollars over the 2016 to 2020 period.
This is all outstanding accomplishment I couldn't be prouder of how we stayed disciplined and committed to achieving this goal for our stakeholders.
Now, let me turn to our engineered product business and speak to a transformation that will continue for some time specifically for work at our Kent plant in Washington.
For roughly the last two decades, we've had a highly successful long term collaboration with Boeing and other customers to build a robust and globally competitive supply chain, especially in Asia for engineered products.
It's been a terrific partnership and the Kent team has done a tremendous job, helping our customers succeed.
Over time, the aerospace supply chain has evolved and now the less complex work, we've been doing intent is transitioning to other suppliers.
So that end some current work packages that chat well move to other parts of the supply chain, including two our 50 50 joint venture with Boeing known as aerospace composites, Malaysia or HCM.
We expect to will be a slow transition over the next few years.
With that said, we're excited to communicate our evolving strategy, which focuses on more complex highly engineered product manufacturing that only a team with significant technical expertise and capabilities can perform.
We believe this is a great opportunity to capture new business and Ken as we continue our close partnerships with our customers.
I want to take a moment to thank our entire hexcel team for staying disciplined and delivering value and innovative products to our customers.
Our emphasis on operational excellence has never been stronger and our teams focus on continuous improvement toward perfect safety quality and on time delivery performances inspiring.
All in all it was another terrific year.
And we entered 2020 with momentum and great anticipation.
As you will understand providing guidance in light of the 737, Max uncertainty that surrounds the aerospace industry is more complicated than usual.
As we outlined in our earnings release issued yesterday in order to frame. The guidance. We're sharing we have provided our assumption for the number of ship sets that we expect hexcel to supply in 2020.
We are using 200 aircraft shipsets as a conservative expectation for the year and will provide updates has a year develops and we have more information.
Based on this assumption for the 737, Max we are guiding for heck. So overall sales growth of flat to low single digit EPS growth of low to mid single digit.
We have a track record of delivering strong margin intensity in the face of headwinds and we are determined that 2020 will be no different.
By driving operating margins optimizing working capital and with lower capital expenditures in the range of $100 million to $120 million, we're guiding to deliver more than $300 million of free cash flow in 2020.
Our outlook is reinforced by continued investment in research and technology to develop new and innovative solutions for next generation platforms and derivatives to provide increased functionality and value to our customers.
I'd now like to take few moments to discuss the transformational merger of equals with Woodward that we announced a few weeks ago.
The combination of Hexcel, and Woodward will create a premier integrated systems provider that will propel the future of flight and energy efficiency and our Tam combination couldn't be more timely.
Fuel efficiency and emissions reduction are top of mind in the aerospace industry now more than ever.
We believe the strategic and financial benefits of the transaction are compelling.
Together hexcel in Woodward will be uniquely positioned to meet some of the most pressing challenges our customers are facing.
The combined company will have well balanced portfolio across customers end market and investment cycles with significant free cash flow generation forecasted and a disciplined capital deployment strategy to support investment in the business and capital return to shareholders.
Since our announcement with Woodward, we've had conversations with many of our stakeholders about the merger and how it advances our shared objective to drive long term growth and value creation for our shareholders customers and employees.
In particular, the response from our customers has been extremely positive and we're very excited to bring them solutions that will improve aerodynamics energy efficiency safety and lower emission technologies.
We're making good early progress with our merger integration planning and continue to expect the transaction to close in the third calendar quarter of 2020 subject to shareholder approvals and other customary closing conditions and approvals.
As we move through this process, we look forward to continuing to speak with you about the exceptional strength of the combination and the benefits it will deliver for all of our stakeholders.
Important materials regarding the transaction can be found on our joint transaction website at Woodward Hexcel merger Dot com.
Now, let me turn the call over to Patrick to discuss more as the quarter and full year 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 currency movements influence our reported results and some of this impacts may not be into it that the majority of our sales at denominated in dollars. However, our cost base is a mix of dollars euros and Buddy.
Pounds as we have a significant manufacturing presence in Europe.
As a result, when the dollar strengthens against the euro in the pound sales trends by lower but our costs also translate Noah resulting in a net Tailwinds mountains.
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 lays in hedges over 10 quarter horizon.
We do not hedge on sales and foreign exchange fluctuations hadn't in.
But its impact on on topline revenue of approximately $20 million compared to our original 29 team got sales guidance.
Just over a year ago as we shared our initial 2019 financial guidance, we were producing the 737 Max at a rate of 52 per month and preparing for 57 per month by some at 29 team along with the rest of the supply chain. We were preparing for the 787 production ramp to 14 per month.
I'm continuing to supply for the Athree 80.
As we enter 2020 uncertainty continues regarding the timing of the Max we tend to service and future production levels. The 77 production rates is being reduced to 12 per month by the end of 2020, and then 10 per month early in 2021, and we expect to feel the impact of the 77 reductions in this.
Second topic Twins 20.
380, ceasing production, we're not planning for any further sales to this program.
It is against these headwinds that we ended 2019 and reported results.
Beginning with quarterly results commercial aerospace represented approximately 67% of total fourth quarter sales commercial aerospace sales of $380 million decreased 1.5% compared to the fourth quarter 2018, as previously mentioned the fourth quarter of 28 team.
The strong and in comparison to full quotes 2019 legacy narrow body sales decreased as expected, notably Mac sales were well below original expectations and Athree 80 sales declined significantly as the final aircraft that built on the supply chain is depleted.
Space and defense represented 21% sales into the fourth quarter sales totaled $115 million, an increase of 18.9% compared to the same period in 28 team.
Growth was led by our our acquisition along with the F. 35 program supported by strength across a broad range of both defense and space programs.
Industrial comprised 12% fourth quarter 2019 sales industrial revenues totaled $69 million decreasing 9.3% globe global trade tensions and lowering GDP growth in certain key European Asian markets dampened demand across several of our industry.
We will sub markets, including automotive and recreation.
Wind energy remains the largest submarket with industrial comprising more than 60% of industrial sales, our wind energy sales softened some in the fourth quarter 2019, reflecting end of year inventory adjustments.
On a consolidated basis Christ gross margin for the fourth quarter with 26% compared to 26.8% in full quotes are 2018.
We incurred some manufacturing under absorption of fixed costs in the full quota due to the 737, Max and associated leap one be engine production below on production capacity combined with softness in our industrial markets.
For the fourth quarter, selling general and administrative expenses increased 14.4% year over year in constant currency.
Current yet sales increased the costs from the 2019 technologies acquisition.
Research and technology expenses in the full quota decreased 12.2% year over year in constant currency.
Qualification cost fluctuate on a quarterly basis and were lower for the fourth quarter Rhuphtwenty 19 compared to the prior year period.
We delivered $97.4 million of adjusted operating income with a robust margin performance to 17.3%, while overcoming some under absorption as referenced earlier.
Total depreciation expense increased $2.3 million in the fourth quarter of 2019 compared to the prior year period.
The year over year impact of exchange rates was unfavorable by approximately 20 basis points.
The composite materials segment represented 82% of total sales generated an operating income of 18.8% for the fourth quarter of 2019 as compared to 20.9% margin in the prior year period.
The engineered products segment, which is comprised of cost structures and engineer coal businesses represented 18% of total sales and generated an adjusted operating income margin of 16.9% due to favorable program mix in the full quota through 2019 compared to 14.9% in.
Fourth quarter of 28 team.
Remember OCC technologies, all being reported within the engineered products segment.
While the operating margin is lower than the comps it's material segment engineered product requires a much lower level of investment generating strong returns on invested capital.
The adjusted effective tax rate for the fourth quarter of 29 team was 16.6% and 21% for the full year.
Net cash from operations totaled $491.1 million for fiscal year 2019, working capsule represented a source of cash of $12.8 million in 29 team.
Capital expenditures on an accrual basis were $191 million compared to $179.1 million in 2018.
The hexcel team generated record free cash flow of $297 million in 2019 compared to $237.3 million in 2018.
Strong free cash flow generation in the full quota is consistent with our quarterly cash profile as we typically use cash in the first half the year generating cash in the second half the with the full quarter being the strongest period of generation.
We targeted gross debt to EBITDA leverage ratio in the range of 1.5 to two times.
At the end of the fourth quarter 2019, our leverage ratio was 1.8 times.
This represents a continued decrease from the first quarter 29 team as we repaid a portion of the debt used for financing. The January 2019 acquisition of our technologies combined with strong and growing EBITDA.
We repurchased approximately $76 million of our common stock during the fourth quarter of 2019, bringing the total for the year to $143 million and we have $242 million remaining under our share repurchase program.
To summarize full year 2019 results sales increased 8.6% adjusted operating income increased 12.2% and adjusted diluted earnings per share increased 16.1%.
These strong results benefit shareholders as we delivered $287 million of free cash flow and our return on invested capital strengthened to 14.5%.
Correct.
Before I conclude I would like to shed some additional background on the guidance provided find Nick.
As a reminder, we are forecasting total sales growth of flat to low single digits from market sectors. We are forecasting a decline of low to mid single digits for commercial aerospace growth of high single digits for space and defense on growth of mid single digits for industrial.
Yeah.
Adjusted diluting diluted earnings per share growth is full constant to be low to mid single digits share count is not expected to change materially as we have posted on share repurchases until the merger with Woodward closes free cash flow is expected to exceed $300 million.
Capital expenditures a full commented in the range of $100 million to $120 million. This figure is lower than previous guidance is our operational excellence initiative is driving productivity gains from our existing assets combined with the softer market due to the 737 Max situation has led us to slow the previously announced car.
And fiber capacity addition that would dictate to Alabama facility.
I would also like to take this opportunity to update you on our medium term capital expenditure guidance, where we had previously said we would expect it spend between 500 $550 million in the period 2019 and 21.
We are now revising that number to be close to $400 million in the 2019 21 period.
Depreciation will increase approximately $5 million in total 2020 as a result of asset additions, partially offset by some fully depreciated assets now rolling off.
Consistent with prior years, selling general and administrative expenses, a full constant to behind in the first quarter twentytwenty compared to the full of following quarters due to the timing of recording stock based compensation expenses, and we will continue to reinvest in research and technology to retain.
We will leadership position within aerospace compensates.
Free cash flow is expected to be stronger in the second half of Twentytwenty compared to the first Tom consistent with the seasonality the business experiences our full cost at 20 to 20 foreign exchange exposure is now approximately 75% hedged we estimate that a 5% movement in relevant exchange rate.
This will have approximately a 4 million dollar earnings impact net of hedges.
Guidance is based on an effective tax rate of 23%.
With that let me turn the call back to now.
Thanks, Patrick.
In summary, 2019 was marked by record sales earnings per share and free cash flow.
EXL is benefiting not only from aircraft program ramp ups continued adoption of advanced composites and strong demand, but also from our internal efforts to work more efficiently continuously improve our processes develop new and innovative products and position ourselves for growth.
Both.
Now as we turned toward 2020, we have every reason to believe that our relentless focus on operational excellence and our strong discipline will continue to serve us well.
We're pleased with our performance despite the effect of the Max grounding and remain optimistic that the aircraft will return to service soon.
In closing, we expect our 2020 results this year will demonstrate growth.
Exceptional cash generation and a strong return on investment for our shareholders.
Our markets are continuing to benefit from long term growth due to secular penetration, reflecting the growing need for lightweighting to drive fuel efficiency and emissions reduction.
Hi, priority remains squarely on delivering exceptional performance to produce extraordinary results.
We're confident in our position as a global leader in advanced composite technology as well as our strategy to generate sustainable growth, while creating ongoing shareholder value.
We look forward to closing on our transaction with Woodward later, this year and starting an exciting new chapter in our history.
With that Juliane, we'll turn it over to you know and ready to take any questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
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We ask for analysts please limit themselves to one question and one follow up. Thank you. Please standby well, we compile the Q and a roster.
Your first question comes from Mike Sison from Wells Fargo. Your line is open.
Hey, guys congrats on.
Good.
Good enter the year.
Thanks.
Just to add a question just on the back to that sound Woodward combination, you've you've had another month or south to sort of sit on it.
Hey can you maybe talk about your relationship on with Airbus and as I recall Woodward doesn't have a significant position there so.
Maybe what the synergy potential is on that.
On bringing them into the equation, if and when as a combination unfolds.
Yeah, Mike. Thanks for your question I would point out that.
You're right in.
The fact that Woodward do not have significant direct sales to Airbus, but keep in mind there on virtually every aircraft through engines and other tier one provider. So they have very strong positions on the Airbus saw.
Platform portfolio, having said that we're very excited and we've had discussions with Airbus as Tom has on.
New opportunities for next generation.
Technologies that help improve dynamics aerodynamics as well as efficiencies so.
It's a little premature to really go in and jointly work it but our teams are certainly.
Getting educated on each other's capabilities and we're on a great position to demonstrate to Airbus as well as many others.
The value of the complimentary combination of our two companies.
Okay, Great and quick follow up on the 737, Max you talked about 200 chipsets this year.
Can you maybe help us see how that flows throughout the year.
And then how many Shipsets did you where you lot and 2019 just to give me a comparison on a year over year basis.
So in 2019 as Patrick commented on we were at 52 and in the process of.
Scaling up.
When accidents happened and the reduction started so we were in the range of 42 to 52, depending on who when the supply chain we were providing.
Throughout most of the year.
With respect to what we see this share Mike as you know Boeing is still.
[music].
Basically not producing so we're really not going to provide more.
Guidance around how we've split our 200 assumption for the year.
I think Boeing has communicated they expect returned to service mid year and production to start before that so just build that into your model and divide the 200 over the remaining months.
Got it thank you.
Youre welcome.
Your next question comes from Ken Herbert from Canaccord Genuity. Your line is open.
Hi, Good morning, Nikin, Patrick really nice year.
Thanks, Ken Thanks, Ken.
Just wanted to first start off and ask about the you're currently guiding to a much lower sort of capex number than you have.
As recently as last quarter I guess as we think about this year and 21 was there anything else besides the Max or the slowdown in the Decatur expansion you would point to that.
Maybe pushed some of the capex to the right in terms of.
Maybe expected investments on some other new programs or anything else you call out.
Well I think you've hit the big pieces can.
I think.
Even a bigger impact is really the productivity initiatives that the team have generated and again you have to remember being sole sourced we have to go in and make sure. We're never short so by definition, where we're always a little bit long on capacity.
So we could build then the expectation that we would deliver to the level that the team delivered so that in turn with us slowdown on the Max and even now with.
Some additional softness with 77 coming out later in.
The year.
By the rate 10 in 2021.
That gives us the confidence that we can push that capex spending to the right and decrease our overall capex spend in 2020, and even 2020 in 2021.
Okay. That's helpful and Nick just to follow up can you just talk about the extend twitch, you're able to re purpose some of the capex around the composite materials side, maybe in your capacity, they're not capex, but more your capacity relative to engineered materials and how we should think about the I guess, specifically the Max impact as it relates to each of the second.
Yes.
So you have to look at it based on the technology and the product form. So first I'd say with respect to precursor and carbon fiber those assets are fully flexible fungible. They can be re purpose changed over in hours and redirected to wherever the demand may be pulling material for.
Okay.
If you look at honeycomb core, which we provide a significant amount for aircraft space and defense.
Rollerblades engines and the cells.
That too can be redeployed very easily and market is very tight. So we are reallocating engineered core and honeycomb core.
Based on on the needs in that market space with respect to engineered products that takes a little longer because we basically go out identify the opportunities you've got to bring it in during the tooling through the development qualification and identifying those platforms and to convert the re.
Resources and the technology over it just takes a little more time than the other.
Continuous flow of materials too.
Great. Thank you.
Youre welcome Ken.
Your next question comes from Myles Walton from RBS. Your line is open.
Hey, good morning.
Good morning morning, hoping you could you could maybe size that.
Ken Washington revenue that we're talking about that it may be getting.
Put into business elsewhere, including your own JV and kind of whats the timing as to how that that headwind works and the numbers over the next couple of years.
Yes.
So the transition as Nick described is really going to take some time I mean, it will start now and sort of two to three years over sort of a few years as Nick said to sort of support moving those packages out on over that period of time, we will be out they're winning new packages.
I'd identified some new packages, which we're going to be running.
In Twentytwenty in that facility. So it's a little bit wearing a net position. If you can imagine some packages and going out some past due to coming in.
And so we're going to be there'll be an offset.
The objective.
We have given us commercial guys strong challenges to obviously bring things and as soon as possible and they're out that and that confident in the president of on Americas business team is is leading that initiative. So don't really want to give a specific revenue number because we really be guessing around timing, but it but it is a decent sized glaucoma.
Revenue I mean that wed spoken about transitioning over that two to three year period, Yes, I just want to add that this is this is not new this is basically how.
HCM was formed really the product work came into can't our team did the engineering work to the tooling did the processing and basically had it untold it made sense to move to a lower technology lower cost source. So we've been doing that for years and years with both.
Going it's just a further transformation of that supply chain and really getting can't ready and opening up capacity to do more complex more core work for our differentiated capability.
Okay and I appreciate the transparency in the 2020 topline outlook is it.
As a headwind to that outlook, you kind of didn't mention that had.
Zero.
Not a headwind because as I said, even if some of the packages start to move we've won at least as much to two to put into the plant in 2021.
And then just one follow up but could Patrick on the cash flow can you size the working capital headwind in 2020.
Is it kind of a reversal of the really good performance on receivables in the fourth quarter as it inventory builds and then.
2021 would look I mean that so good question miles. So the headwind is inventory to be honest and managing inventory in Twentytwenty, we will do our very best to to hold onto that receivables performance. As you saw at the end of last year, and we continue to drive off payables, but.
The headwind the hardest part for us to manage this year with the uncertainties in the market and trying to match up is going to be.
Around inventory and so.
Although we wouldn't say we had a bad performance at the end of Q4 19. It wasn't as strong as you can see at the end of Q4, and then faced with the challenges this year.
Thats going to be the biggest.
Headwinds its inventory and it's managing inventory through the middle and back ended the year as the as the Maxi specialty the Mac sort of returns to service, but then we've got to manage the timing around the 77 as well.
Okay. Thank you.
Your next question comes from Sheila Kahyaoglu from Jefferies. Your line is open.
Good morning, and thank you.
Your guidance.
About margin, but how do we think about the profitability profile of the business and flattish margin given that volumes are having 77 headwind the second half.
Potentially triple seven.
Can you just.
Where that away to make sure that.
Yes captured in the guidance or are there.
How do we think about thank you.
Hi, Sheila.
That's absolutely captured in the guidance and I would say.
Our commercial aerospace margins a fairly similar we don't have huge differences across the range inside the triple Sevenx to 77, the Max as you called out that not massively different to the rest of our commercial aerospace programs. So in terms of the mix there isn't a swing that you're going to see.
I mean, obviously the what we saw in Q4 was an overhead challenge.
We have some growth coming in the business in space and defense and some other areas and industrial will be in a better positioned to cover that overhead so that should be less of a have a headwind going into the year and then really it's about as we always say driving productivity and efficiency, which we challenge ourselves and continuous improvement every.
Year to overcome the inflationary pressures that are naturally that to maintain and drive strong margins and in our low to mid EPS guidance.
That's exactly what we're assuming two to deliver on hold onto those margins.
Okay. Thanks, and then maybe just a follow on business Jets.
Q.
How do we think about that into 2020, but some of that upstream business anniversary you could talk about.
Yes.
Yes, I mean, obviously, we're going into a strong Q1 Q2 with Gulfstream, we see that trend continuing I think you'll points on the anniversary. So he's a good one.
Hey, calm continue to ramp and ramp, but what I would say suddenly in the next couple of quarters. We continue to see is positive.
Great. Thank you.
Your next question comes from bottom cannot from.
And your line is open.
Hey, Thanks, Good morning, guys. Good morning, God morning.
I was wondering if you could give us maybe some granularity on the 737 Max of $400000 per Shipset.
Estimate how much is.
Related to the engine channel and how much is related to the airframe. So we can sort of calibrate out conservative the guidance, which does appear.
At least on the Max to be conservative.
So we think we need to be careful not to call out specific customers, but what I would say Gotham is that about a third of our Max 400000 dollar shipset value is shipped a tier one suppliers.
Including CFM and others around the leap engine in spirit. So.
About a third.
Okay and then.
Just to understand the Athree 80, and 787 comments a little further so.
Do you have a sense for how many ships that equivalents yet on the Athree 80 in 2019.
And.
Just to be clear on the 2020 guidance does that when do you start to feel the effects of the 10 a month rate.
On the 787.
So on the Athree 18 Gulf. Some I would estimate we had about six shipsets may be slightly over six shipsets in 29 team. If you remember we have $3 million as chip said on the 380, we kind of did just over that.
And then the 77 I think as we described on Nick described is going to be the back haul.
Q3, we're going to probably start to fail the move to 12 in Q4, we're going to start to me feel the move to 10.
Your next question comes from David Katz from Barclays. Your line is open.
Thanks, just just following up on that.
How is the commercial Aero guide not worse than down low to mid single digits, when you've got Max down, 50%, plus and obviously eight seven coming coming down and no Threeeighty. I mean is there what is in there that's what's going up in that business I guess to offset.
Some of those headwinds.
Well the Athree hundred 20, Neo continues to be strong and we expect to see some growth.
Coming from a small base, but the triple sevenx he's going to present some growth opportunity. This year, we ask you see a little bit growth in the eight to 20, and then as we talked about in moments ago that business Jets and regional Jets.
He is looking pretty good and we have the okay, you're talking about commercial there. So those are the key ones in commercial era.
Okay.
And then just to clarify so your your for your EPS guidance, you assumed a flat share count because you can't do share repo.
While the deals progressing correct, yes, okay, alright, thank you very much.
Our next question comes from John Mcnulty from BMO capital markets. Your line is open.
Hi, guys. This is colton bean on for John.
I was just wondering.
I was just wondering could you talk a little bit about the inventory alignment you saw in wind and kind of what kind of growth for windows embedded in your 2020 guidance.
Yes.
So.
Yes. This aki wind energy customer has a range of turbines and really it was kind of a mix inventory play towards the end of the yes. They will oversee sort of aligning themselves. They just took less material, but some of our key.
Some of the key turbines for us and so that led to a softer full quota they have various sizes. It binds newer an older and if you like it was kind of a mix effect on a sales as a sort of lined up their inventory towards the end of the year as we look forward to this yeah vestas have HM.
Continues to be a record backlog, we have about two years of visibility it remains to be very strong.
Some of the key turbines are in demand.
And we continue to see some some growth I mean, obviously, we're not going to see the same sort of.
The police and 30% growth again, but we continue to see some level of growth in that space, we expect to stay at the the elevated revenue level.
Great. Thank you.
Your next question comes from Hunter Keay from Wolfe Research Your line is open.
Hey, this is Andrew quash Entre Hunter.
Could you talk about how you see the hybrid electric segment of the commercial engine market evolving over the next five to 10 years and if it's an area you'll prioritized. Thanks.
So again anything that is.
Is driving technology for lighter more efficient aircraft or vehicles, we're working on it I can assure you.
Both from a material strength from a processing capability and from a customer cure rate and how they actually form part so.
I really a it's a little premature to give you any numbers, but I can tell you. It's a technology that we're pursuing and plan to participate and going forward.
Our next question comes from Chris Kapsch from <unk> capital markets. Your line is open.
Yeah. So my question a follow up on just the the impact that.
It seems that.
Okay.
That.
Isn't necessarily factored into the guidance from the the absorption variance you start in the fourth quarter.
And then just a few depending how do you look on that it seems like that.
Gross margin entering 2020 will be something closer to the fourth quarter than than rebounding, but it seems like you need a rebound in the gross margin and the absorption variances in order to.
See some operating leverage to to have the EPS exceed the sales growth of flat to low single digits.
Matt I hear you that you don't want to necessarily.
Parse out when you'll feel the impact from the Max but I'm guessing it's.
Leased on the comparison basis, theres going be more pronounced impact in the first half. So it seems like it's difficult to envision those gross margins rebounding sequentially in the first half. So just wondering if you can maybe more granularly reconcile that delta on the margin level, maybe there's some offsets and asked DNA in R&D.
Well thank you.
Yes, I am just understand the point I mean, what I would say is.
We had some particular adjustments in the full quota in addition to the Max which is ongoing but we had the wind energy softness we even had one or two things. So the athree 80 completely came to an end the the AD cabin flex.
And coming to the end with Airbus, We saw some adjustments and the Athree hundred Fiftys now sort of at rates and I think have bus with sort of lining that out towards the end the year. So I think on a number of fronts. We saw some absorption challenges I think as we go into 2020, we've got growth in the areas.
Talked about the neo outlook is excellence.
The Triple seven is going to start to grow for us the twotwenty that business jets on the military side. The JSF is strong and growing the CH 50, threek, okay. So thats going to help us with the absorption and that gives us confidence that we're going to be able to overcome assets and so we'll be able to produce stronger results than we saw in the full quota.
So the Max continues and on went on hiding bromine otherwise, we don't have much more positive.
Guidance, but we think the low to mid EPS builds on a stronger gross margin and better absorption is what we're looking at right now, yes, I guess I'd just add to that that.
We have a very aggressive actions around cost controls discretionary spending temp labor contract labor overtime, and even actions around aligning our workforce with actual demand.
So it's too fronted.
<unk> costs and capitalizing on on the topline growth.
Okay did you see gross margin.
Just improving sequentially in the first quarter.
Other thing that you have a headwind on presumably as mix.
The with the commercial Aero down the the industrial sales up.
I'm pretty certain industrial margins I believe are lower than than commercial aero. So if you could just.
Maybe just provide color on on the sequential trend there. Thank you.
Yeah, I mean, we're obviously looking for stronger gross margin.
And our outlook in throughout the year end in terms of mix I mean, yes, industrials up and you've got to remember its any sort of 12, 13% of total sales space and defense, which has good margins very similar to commercial aerospace. These high single digit growth. So I don't think the the mix headwind within a market segments is.
Okay and.
We should see growth as Nick said on the cost front, we're driving that and then in the areas, where we have growth to help us with the absorption.
Okay. Thanks for the color.
We have no further questions. This concludes today's conference call. Thank you for your participation you may now disconnect.
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