Q4 2020 Hexcel Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the textile Q4 2020 earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session ask a question. During the session you will need to press star one on your telephone.
Please limit your questions to one please be advised.
Today's conference is being recorded if you require any further assistance. Please press star zero I would like to now hand, the conference over to your speaker today.
Patrick Lynch <unk> Chief Financial Officer. Please go ahead Sir.
Thank you.
Good morning, everyone and welcome to Hexcel Corporation's fourth quarter 2020 earnings Conference call before beginning let me cover the formalities first I want to remind everyone about the safe Harbor provisions related to any forward looking statements. We may make during the course of this call certain statements contained in this call.
May constitute forward looking statements within the meaning of the supply of Securities Litigation Reform Act of 1995, they involve estimates assumptions judgments and uncertainties caused by a variety.
That could cause future pool actual results or outcomes to differ materially from our forward looking statements today.
These factors are detailed in the company's SEC filings on last Night's news release.
A replay of this call will be available on the Investor Relations page of our website.
Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material it cannot be recorded broadcast without our expressed permission.
Your participation on this call constitutes your consent to that request.
Good day on next tonnage on chairman, CEO, and President and Kurt Goddard, Vice President of Investor Relations.
Paul is to review, our fourth quarter and full year 2020 results detailed news release issued yesterday.
Now, let me turn on the call over to Nick.
Thanks, Patrick.
Good morning, everyone and.
And thank you for joining us today, as we share both fourth quarter and full year 2020 results.
After reading our news release last night I'm sure you'll agree that clearly we've had a seismic shift in the business our demand our volume and our financial metrics.
I also hope that you recognize how hexcel has moved quickly and robustly in response to the market challenges arising from the pandemic.
The results we are sharing with you today reflect the strong and decisive actions that we took swiftly in response to the substantial impact on.
On all of those involved in the aerospace industry in 2020.
The actions, which are ongoing include approximately a 35% reduction in global head count.
Temporarily idling assets.
How do we discretionary expenditures prioritizing the most critical projects, including capital expenditures and right sizing working capital to generate strong cash flow.
So I'm glad that 2020 is behind us.
At the same time, it's amazing what you learn about yourself and your organization during such challenging times.
I learned how extraordinarily strong resilience and action oriented hexcel employees offer.
Throughout the year and despite the uncertainties on the difficult decisions we took on.
Our team accepted and embraced the challenges we faced quickly developing options and taking decisive actions.
They knew what needed to be done and they get it.
Although 2020 as over the pandemic headwinds will continue to test us into 2021.
As I mentioned in our news release last night. This first quarter of 2021, along with Q3 and Q4 2020 are anticipated to be our most challenging quarters. During this pandemic.
We expect continued inventory destocking in the first part of 2021, which will continue to impact sales volumes and mix.
Growth for both our customers and for Hexcel is contingent on a healthy return to air travel following a successful vaccine roll on.
We are guardedly optimistic for a steady recovery in our business as 2021 progresses.
2021 is going to be yet another unusual year as the world gradually emerges from the pandemic and.
And remaining discipline will be vital for our success.
We will not drop the ball or our guard in relation to the health and safety of our employees.
We will continue to work with our customers to provide innovative solutions to meet their needs. While at the same time, maintaining our focus on delivering operational excellence and cost control and not allowing waste and inefficiency in any areas of our business.
We will remain disciplined in relation to cash management and maintain an optimal level of working capital throughout our business and control inventory levels to match our customer demand requirements.
2021 will be another challenging year, but I can assure you that hexcel is ready.
Our teams are focused and we are optimistic that the actions we have taken and continue to take during the pandemic are laying the foundation for another period of robust growth in the years ahead.
Now, let me turn to our results first I'll cover fourth quarter results and then full year 2020.
Fourth quarter sales of almost $296 million were in line with our forecasts.
Adjusted fourth quarter diluted EPS was a negative <unk> <unk> compared to a positive 86 cents last year.
Our focus on cash management has been unwavering throughout this pandemic and in the fourth quarter, we generated another $104 million, resulting in $214 million of free cash flow for the year.
Turning to our three markets.
Fourth quarter Aerospace sales were down 66% compared to Q4 2019.
All of our major programs were down substantially with the largest sales impact being related to the <unk> hundred 50 wide bodies.
Build rate reductions driven by the pandemic combined with the 737, Max grounding and significant supply chain inventory Destocking led to the reduced sales levels.
Sales to other commercial aerospace, which includes regional and business aircraft sell almost 60% year over year.
Again, the decline was from lower demand, resulting from the pandemic.
On a positive note space and defense sales increased almost 4% compared to Q4 2019.
Broken this segment is broad based across several defense and space programs, particularly U S military rotorcraft.
Industrial sales declined approximately 29% when compared to Q4 2019.
As you know wind energy sales, our largest industrial submarket and most sales declined 42% in constant currency.
During the year, we saw a decline in demand for wind energy materials in the United States by our largest wind energy customer vestas.
That led us to close our pre Craig production facility in Windsor, Colorado and North on.
The decline is attributable in part to the Commoditization and outsourcing of blades with a changing technology from pre prep to infusion.
Wind energy remains a good business for hexcel, and we're adjusting to the changing market dynamics and introducing new innovations to support our customers.
<unk> continues to be a great customer and manufacturing continues at our plants and no Mark Austria in Tianjin China.
Now, let's turn to some specifics in our full year 2020 results.
2020 sales were $1 5 billion down 36% year over year adjusted.
Diluted EPS for the year was 25 songs.
Our full year results were bolstered by the pre pandemic Q1, 2020 results, which were the strongest of the year.
Free cash flow came in strong at $214 million compared to $287 million in 2019.
Our liquidity position remains robust and we have manage working capital tightly during this pandemic.
2020, commercial aerospace sales were about $822 million compared to $1 6 billion in 2019, a decline of almost 50%.
And unprecedented decline in demand driven by lower build rates across all programs, including the 737, Max was compounded by inventory destocking across the supply chain.
Sales to other commercial aerospace declined by one third.
Space and defense sales for 2020 grew nominally to $448 million compared to $445 million in 2019.
Select programs have been impacted by pandemic induced disruptions, although we feel these are temporary impacts.
That will be recovered over time.
Moreover, space and defense is traditionally a strong and attractive market for hexcel now enhanced by our arc technologies acquisition, where we continue to be pleased with the excellent performance in sales growth.
Finally, turning to industrial sales were $232 million in 2020, which was 26 and enhanced percent lower year over year.
We have good wind energy demand continuing from the European and Asia markets as we enter 2021, and we are encouraged by growing demand for composites in automotive marine and sports applications, where we have opportunities for growth.
Our technical innovations and strength and light weighting have led to increased composites penetration in these markets.
As always I want to take a moment to thank our entire hexcel team.
They were challenged in 2020 in ways, we never could have imagined.
Fight all the uncertainty distractions and sacrifices they performed well for our customers and shareholders and I couldn't be prouder.
Our employees accepted the challenge of wearing face masks all day.
Constantly distancing themselves from one another.
Dealing with additional concerns about their own health and families well being in the midst simple pandemic and.
And they did this while continuing to deliver the high standards we set.
In this context, we achieved our best ever safety rate performance in 2020.
That's just phenomenal and illustrates our deeply rooted safety culture.
I also want to take a moment to reassure you that not even a pandemic such as we are experiencing has altered our commitment to continued innovation and customer intimacy.
All of our R&D sites are considered essential businesses and these teams kept up their work in our labs throughout 2020.
We continue to advance new technologies that will lead to new and optimize product offerings and improved manufacturing performance.
Our advanced composite technology leads our industry and we're proud that we've been able to continue to work for our customers during the pandemic.
Finally, I want to mention that in Q4, we were pleased to expand our contract with Safran to include our X toe I am southern carbon fiber for the GE <unk> engine that powers, the triple seven X as well as positioning herself for next generation engines being developed by <unk>.
<unk>.
This expansion also includes our advanced composites for Safran cabin seats and aerospace.
Our relationship with SAP brand spans more than 35 years, and we are proud to partner with this key customer providing our high performance materials.
Fort the strength efficiency and reliability of their products.
Now I'll turn it over to Patrick to provide more details on the numbers.
Thank you Nick.
To briefly summarize the quarter.
On 2020 sales were negatively impacted by lower build rates and continued destocking as we expected and communicated last quarter.
Our aggressive cost reduction actions are starting to have an impact which was demonstrated by sequential margin improvement compared to the third quarter of 2020.
Further we continue to generate free cash flow when deleverage with particularly strong and disciplined management of working capital.
We have increased on liquidity by 213 $9 million at December 31, 2020, compared to the end of the first quarter 2020.
As a reminder, the year over year comparisons in constant currency. The majority of our sales is denominated in dollars.
However on a 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 strengthens against the euro and the pound our sales translate lower while our costs also translate lower leading to a net benefit to our margins. Accordingly, a weak dollar as we are currently facing is a headwind to our financial results, we hedge the currency exposure over a 10 quarter horizon.
To protect our operating income.
Quarterly sales tasteful $295 8 million sales decrease year over year reflects production rate decreases by our commercial aerospace customers in response to the pandemic combined with continued commercial aerospace supply chain Destocking.
Turning to our three markets commercial aerospace represented approximately 43% of total fourth quarter sales.
<unk> aerospace sales of $126 $7 million decreased 67% compared to the fourth quarter of 2019 as Destocking continued to impact offsets.
We expect continued destocking in the first quarter 'twenty 'twenty, one at a similar level to what we witnessed in the third and fourth quarters of 2020 day.
Destocking is then forecast to wind down during the second quarter of 2021.
We then expect to generally be at a steady state entering the second half of 2021 with Destocking largely behind us and realizing a substantial portion of the cost takeout benefits, we have implemented and continue to work on.
Space and defense represented 40% of the fourth quarter sales in total was $119 $7 million an increase of two 5%.
Compared to the same period in 2019.
U S monetary rise Kraft was strong in the fourth quarter, we remain bullish for the outlook for on space and defense business globally.
Industrial comprised 17% fourth quarter 2020 sales industrial sales totaled $49 $4 million decreasing 31% compared to the fourth quarter 2019 on weaker wind and recreation markets, partially offset by strength in automotive.
Yes.
We closed our Windsor, Colorado wind energy facility during the fourth quarter as previously disclosed.
Recreation markets remain soft due to the pandemic, particularly for winter sports.
In contrast, the fourth quarter of 'twenty to 'twenty generated the strongest automotive sales.
Mid 2019.
On a consolidated basis gross margin for the fourth quarter was 10, 3%.
26% in the fourth quarter of 2019.
As we discussed on our last earnings call. We continue to temporarily idle the lack of carbon fiber capacity Jane in the fourth quarter.
And this is continuing into 2021 as we maintain alignment with customer demand.
The sales mix, particularly lower sales of carbon fiber products continued to be an earnings headwind.
Our view of forward demand continues to be consistent with what we communicated at our last earnings call and I'll tell you that with Q3 and Q4 2020, along with Q1 2021 being the low point of the pandemic.
We are staying close to our customers and maintaining our focus on operational excellence with process improvements and cost realignment actions across the business.
Fourth quarter, selling general and administrative expenses decreased 29, 2% in constant currency or $9 $9 million year over year as a result of head count reductions and continued tight controls on discretionary spending.
Research and technology expenses decreased 21, 4% in constant currency.
We are on innovative material Science company and continued research and technology funding is critical to our future growth.
We have been very selective on cost reduction actions in this area of the business.
The other expense category reflected severance costs, primarily in Europe.
We continue to target eliminating $150 million of annualized overhead costs, including indirect labor.
We expect that a significant portion of these cost actions.
It will be completed as we entered the second half of 2021.
Adjusted operating loss in the fourth quarter total $6 1 million.
Selecting the lowest sales volume on over.
Net headwinds combined with the negative sales mix.
The year over year impact of exchange rates was negative by approximately 40 basis points.
Now extending to Watson segments. The composite materials segment represented 76 percentage of total sales and generated a negative six 2% operating margin compared to 18, 8% margin in the prior year period.
The engineered products segment, which is comprised of our structures and engineered core businesses.
It presented 24 percentage of total sales and generated an eight 6% operating margin compared to 16, 9% in the fourth quarter of 2019.
The tax benefit for the fourth quarter and year to date periods for 2020 was $12 million and $61 million respectively.
The tax benefit was primarily due to losses incurred in various jurisdictions due to the impacts of COVID-19.
The 2020 tax benefit was also impacted by discrete tax items of $55 million, primarily composed of a valuation allowance released in the third quarter of 2020.
The pandemic and consequent mixed results across the countries in which we operate.
Expect it to continue to have an impact on the company's overall effective tax rate throughout 2021.
Net cash provided by operating activities was $107 $1 million for the fourth quarter and $264 $3 million for 2020, working capital was a source of cash of $87 $7 million in the last quarter of the year.
Capital expenditures on an accrual basis with $3 2 million in the fourth quarter of 2020 compared to $30 million for the prior year period in 2019.
Accrual basis capital expenditures were $42 $5 million for the full 2020 year.
We continue to tightly manage capital expenditures on look for innovative ways to optimize the flexibility of our existing capacity to support new business opportunities in the future.
Free cash flow for the fourth quarter of 2020 was $104 $3 million and $213 $7 million for the year, we remain focused on generating and preserving cash as we deleverage.
We increased our liquidity by $108 million as on 30, <unk> December 31, 2020 compared to September 30 of 2020 further strengthening our balance sheet.
Total liquidity at the end of the fourth quarter of 2020 was $875 million consisting of $103 million of cash on an undrawn revolver balance of $772 million.
Have no near term debt maturities on our revolver matures in 2024 and on two senior notes mature in 2025 and 2027, respectively.
Our leverage as of December 31, 2020, as measured on a net debt basis and was three six times compared to 325 times at September 32020, which at that time was measured on a gross debt basis the.
The increase in the leverage ratio was due to the lower 12 months trailing EBITDA is net debt actually decreased $108 million at December 31, 2020 compared to September 32020, we remain within covenants conditions.
Our revolver facility has a leverage covenant based on a debt to trailing 12 month EBITDA.
During the third quarter 2020, we worked with our bank group to temporarily amended covenant from a gross debt measurement to our net debt measurements and to increase the maximum allowable leverage for a period of four quarters.
While we comfortably remained in compliance with the amended covenants at December 31, 2020, we recognized that the trailing 12 month EBITDA is decreasing more than we had forecast early in the third quarter of 2020.
This reflects on our projections based on our latest customer demand requirements, along with our belief that the aerospace supply chain Destocking will now run through the second quarter of 2021 compared to our previous thinking that it would be largely completed by the end of 2020.
We are currently in discussions with alpine.
Moving on our revolver facility and we are extremely confident that a mutually agreeable solution will be reached soon to ensure continued covenant coupons.
Our share repurchase program remains suspended and it also restricted by the previously referenced revolver Amendment.
Our board will continue to regularly evaluate capital allocation priorities.
To summarize full year 2020 results.
<unk> sales decreased 36% adjusted operating income was $72 million and adjusted diluted earnings per share with 25.
We delivered $214 million of free cash flow during the year, which we used to deleverage.
As our earning release states, we are not providing financial guidance at this time, but I would like to share the following.
Our current market outlook, considering the strong pre pandemic first quarter of 2020 is that we expect 2021 annual sales to be lower in 2020.
We expect the aerospace chain destocking to largely come to an end during the second quarter of 2021.
Consistent with prior years, selling general and administrative expenses are forecast to be higher in the first quarter were <unk> 21 compared to the following quarters due to the timing of recording stock based compensation expenses.
Some additional restructuring the restructuring costs are on.
Dissipated primarily in the first half of 2021 based on labor actions already initiated.
Capital expenditures in 2021, we will continue to be managed very tightly.
That needs to be at a similar level to 2020.
We expect to generate free cash flow in 2021, and further reduce debt levels.
The tax assumption is more complicated than normal, but we expect the rate to be approximately 24% to 25% in 2021.
This change from prior rates is due to a mix of the jurisdictions, where we expect to generate income or EBITDA.
Time, we expect the tax rate to return to pretend that Nick levels.
With that let me turn the call back to Nick.
Thanks, Patrick.
It seems as though everything has changed in reality nothing has changed about who we are as a company.
We still have the broadest technology portfolio in our industry with leading positions on the world's largest aerospace programs work with our advanced composites materials.
We continue to generate cash and further strengthen our balance sheet.
We're taking this opportunity to strengthen our foundation, especially in the areas cost control realigning the business from lower demand for a period of time and cash management to name a few.
The great job our team has done.
Puts us in a position to return to growth with strong leverage once this pandemic is behind us.
Clearly there is still uncertainty.
While air travel has increased from the 2020 lows it remains a week.
So the next couple of quarters will be challenging.
However, we can see a path forward toward a return to stability and we view 2021 doesn't transfer transition period that sits between the trough of the second half of 2020 and a return to growth in 2022.
This year one of our primary objectives is to continue to stay close to aligned with and responsive to our customers' needs.
Global demand for advanced composites technology for lighter weight.
Longer and more durable materials in all of our markets will only grow and our technology and products remain unrivaled in our industry.
The potential for a significant upturn in 2022 and beyond continues to look promising.
The actions, we have taken and will continue to take will ensure that hexcel emerges from this pandemic stronger than ever strategically.
Strategically position for growth to support the future of aerodynamics and sustainability in the markets we serve.
We continue to be disciplined and ready for the year ahead.
Joanne will now turn it back over to you and are ready to take questions.
As a reminder to ask a question on U S tier one on your telephone.
Sorry, your question does the powder hashed.
Please limit your questions to one on thank you Ethan and violence on pilot Q&A question.
First question comes from the line of bottom corner from Cowen. Your line is now open.
Yes, thanks, good morning, guys.
Paul on the interest of keeping it as a warm thank.
But if it goes on.
I'm wondering can you elaborate on which programs are seen the destocking on extending into Q2 was there like an incremental wave on the eight seven or.
Yeah.
How does what changed if you will since last quarter. So.
Well.
That's on.
You could imagine the programs that have the higher rates on higher ship set content and took the biggest rate production reduction on <unk>.
Ones that impacted the smallest clearly the <unk> hundred 50 was was leading.
That impact on the 78 southern on a percentage basis was very near to the same level.
No.
The 737, Max has certainly been an issue with respect to build rate reductions and inventory destocking for the past many months.
And have probably a little bit less impact than the <unk> hundred 20 deal yet.
So in general I expect a little bit more southern Aesop and wide body reduction as we go through Q1.
And hopefully soon see some kick off as those levels stabilize on narrow bodies potentially increase later in the year.
Thanks, guys.
Thank you Gautam.
And your next question comes from the line of Mike Sison from Wells Fargo. Your line is now open.
Hey, guys good morning, Anna.
Glad you guys all sound healthy.
Nick.
Just curious historically.
I have to start with the sales.
Planned deliveries somewhere between six to six months before the delivery so.
Has there been a change on that is the.
Cause the spread a little bit longer or shorter.
On the coming out of the pandemic and are there any differences between maybe narrow and wide body. As you look forward I'm. Just just just wanted to see if the timing is hopefully deliveries improve in the second half in 'twenty two.
Yes, Mike So again when you look at our two business segments on the engineered products versus the composites there tends to be a little different timing. There. It has not changed over the time dynamic when I wouldn't expect it to change.
I would point out that.
We believe there is an opportunity and we believe the supply chain.
Coppery will amplify that stabilization of the rates and hopefully the increased rates later this year, but as far as the lead time that we ship.
To support aircraft build nothing really materially changes there from our perspective.
Great. Thank you.
Thank you Mike.
Your next question comes from the line of Richard Sarhan from Safran from Seaport Global Your line is now open.
Thanks, Nick Patrick Kirk Good morning, how are you all hope you're well morning.
On it.
So.
It does.
Patrick I know you mentioned.
Nick This is for either one of you.
In the past you've talked about incremental margins on I understand you know.
Things are getting better you don't have good visibility yet into how quickly things are getting better but what day.
The idea of a destocking ends after two Q and given your remarks about a strong recovery in 2022, the cost takeout et cetera, I thought you might discuss and elaborate on your prior remarks about how we should think about your incremental margins as volume returns and what they might look like relative to history.
So Richard I'll take a first stab at that so.
I'm not going to get into specific numbers.
Suspect you understand that I would tell you that the cost actions, we're taking and how we're viewing the opportunity during this slowdown to get costs out and driving efficiencies within our plants within our indirect workforce.
We fully plan on those.
Living through the pandemic and even as we start to grow so I'd also point out.
We are very closely monitoring and tracking our incremental leverage and we've actually built that into our metrics on.
How we're measuring our performance and reporting on to our board going forward.
On forward.
Thanks.
Sure.
Thank you Richard.
Our next question comes from the line of Myles Walton from UBS. Your line is now open.
Thanks, Good morning.
Hey, Patrick Good morning, David.
You gave the color on the topline pressure.
Pressure in 'twenty, one do you think you can hold the reported.
Adjusted margins operating margins versus 2020, or they were a little faint there as well year on year.
I think.
And as Nick was talking to ready in terms of operating margin clearly Q1, 2020 kind of put that to one side.
But I.
I think now with the cost coming out with a bit of stabilization suddenly sort of arriving in Q2 and going into the second half of the year.
I mean, that's on the margins are going to continue to be challenging we have on overheads headwinds and without some volume and we have the mix.
Headwind.
With the lower carbon fiber sales, but as we start to pull through stronger carbon fiber side holds especially going into 2022 that is going to help us with incrementals.
On drivers for 2021.
I don't see a further decrease.
In operating income percentage margins, but I would be cautious about.
Our ability to drive them up until we get some volume on a stronger mix combined with the cost takeouts.
Okay, and just a clarification you mentioned the destock sort of stabilizes into <unk> does that imply sort of flat revenue profile are or just maybe what is stabilization in <unk> versus <unk>.
Well I think I mean, I mean, destocking will I mean, it's not going to be zero as we go into the second half of the year on the 787 Destocking is probably going to be the program that comes later just because of the timing of what's happened.
I think we've had this double whammy.
Honestly through the three as we call them trough quarter is Q3, Q4, 'twenty and Q1 'twenty, one I think as we come out of that and Destocking winds down.
We are going to stabilize stabilize more closely to actual build rates and so we should start to see a little bit of positive growth not we're not getting carried away, but a little bit of growth in the revenue line and then as build rates start to increase.
Debt into the second half of the year, hopefully that will that trend will continue further.
Okay. Thank you.
Your next question comes from the line of.
You did see from Alembic Global your line is now open.
Hey, good morning, guys.
Im wondering I guess on it.
I guess I was supposed to working capital.
You, obviously took a lot out in 2020 can.
Can you give us a sense of how 2021 looks especially from kind of a first half second half perspective.
So first on our second half youre getting into details I mean, our ability to take out working capital is obviously different in 2021 compared to 2020. We responded as you would expect very robustly very disciplined way and we took out.
Lately a lot of working capital in 2020 in response to the downturn.
Our inventory came down obviously on receivables came down offset by our payables.
As the business stabilizes as you would imagine.
Our working capital is going to kind of level off now we will be very disciplined we will maintain sort of the days on hand on the day's payables days receivables as strongly as we can and we will limit any growth as business grows back.
So.
You would expect perhaps more pressure on working capital in the second half of the year than the first year, but.
But we will continue to be to be very disciplined that's what I would differentiate but youre not going to see another 2020 working capital adjustment.
Of course, okay. Thanks for the color.
Okay.
And your next question comes from the line of John Mcnulty from BMO capital markets. Your line is now open.
Yes. Thanks for taking my question just with regard to the to the cost cutting initiatives that you've got in place can you quantify how we should be thinking about the improvement in 'twenty, one versus 'twenty from a cost perspective, and just the timing of when that when that'll sequencing on it sounds like it's more front half loaded, but but a little any granularity you can give would be great.
Yeah, Good morning, Tim.
I mean, we're starting to get some of that cost benefit in the fourth quarter and we will get more in the first quarter, we continue to take cost out actions.
And they will continue through the year, but I think as we call. It down I think in the script in the narrative by the middle of 2021, a decent portion of that cost saving will be in place will be flowing through.
And so yes that will help margins it will help those incremental margins and importantly, we need more volume we need more carbon fiber to help the overall mix come through but those three things combined.
Should start to help push on margins back up in the second half of the year and then even more so as we go into 2022.
Got it thanks for the color.
Our next question comes from the line of Greg Conrad from Jefferies. Your line is now open.
Good morning.
Okay.
To follow up on one of the questions before I mean, you mentioned in the script sales are down in 2021 without providing guidance, but I mean, how are you thinking about each one versus age two and given the impact of Destocking. In <unk> 2020 is there any way to think about the magnitude of recovery or growth in <unk> or.
Maybe quantify the impact of Destocking to kind of help frame that tailwind as you get into the second half and into 2022.
Si.
Start by saying first half of 2021.
Is going to be going against a comparable on a very strong quarter in 2020.
So you can imagine there's going to be a mark reduction on Q1 that will carry the first half.
We don't see a recovery being a snapback, we think it's going to be gradual we think the oes are going to be disciplined in how they ramp their rates back up to work with the supply chain.
Again, the rates will ramp up and compounded with that we will be supply chain replenishment.
So we see a gradual increase.
Going into the second half of the year on that's about all the color.
Really prepared to provide at this time.
Thank you.
Thank you Greg.
Your next question comes from the line of Michael CMO Leach on Jewish Securities. Your line is now open.
Hey, good morning, guys. Thanks for taking my question.
Maybe just to stay.
Hey on what Greg was just asking I mean, obviously, there's a lot of uncertainty out there, but whats really preventing you from giving more granular granular guidance. This year I mean, we all know what Boeing and Airbus rates are gonna be presumably you are closer to them you don't have any aftermarket exposure, which is really short.
Cycles so.
The hesitancy I mean does that suggest the demand signals.
The stated rates for Boeing and Airbus, you're not really confident there I mean, I think we can all see the widebody pressures maybe can you just kind of frame up maybe what the biggest on knowns are that's preventing you from Devon.
On a more.
Held level projections.
Well I'll start by saying we are absolutely oops.
Cement and connected with our customers recognizing that it is very dynamic times.
On one when I step back and we step back and look at the uncertainties out there you've got vaccinations happening at different rates all over the world and I think everyone would say either happening slower than we had hoped and expected. So when exactly will the majority of the population.
Receive vaccinations and then most likely there will be a lag on when it will on mass public and business feel confident to get back on planes.
<unk> orders have reopened and are allowed to fly on land without foreign television. So I don't know anyone or I haven't read anything that clearly defines when those states are going to happen and it's evolving over time, so to stay connected to Airbus.
And following in Safran and all of our customers.
Focusing on as being responsive and being exactly aligned with respect to our working capital with their needs.
Igniting that if they need to adjust upward they will if they need to adjust downward day, well and at this point in time, we just do not have the clarity to feel confident that we can report a forecast that is meaningful.
No. That's fair, maybe just a follow up did Airbus as rates on the go on to 47 per month catch you guys off guard or was that or was that a factor.
So I haven't heard right 40.
Coming off what I mean, yeah, not not going to rate 47 of them in slowing that down what's that sort of gross price for you guys.
I think that is a disciplined approach.
Bringing the supply chain back on and I view that very positively ramping up 40, 345 and evaluating for further rate increases going forward. So it wasn't a surprise.
Got it helpful. Thanks, a lot guys I appreciate it thanks Michael.
Your next question comes from the line of Phil Gibbs from Keybanc Capital. Your line is now open hey, good.
Morning.
Good morning.
So your $150 million of structural cost outs are on track how much of that run rate have we realized exiting 2020, just trying to gauge how much more you have left on the tank.
So they're on track I mean, we haven't put specific numbers to specific timeframes.
I think we've sort of said it will be largely in place by the middle of this year, we undoubtedly had a portion sort of did a little bit even in Q3.
More coming through Q4, and we will see more in the next couple of quarters.
I don't really want to start to try and get sliced and diced. It specifically, but we continue to work on those cost day counts to 150 continues to be.
Target, we're working to and by the Middle of this year, a very large portion of that will be in place.
Okay.
And then.
And the the raw material environment, obviously, we've seen a lot of strange.
Strange volatility this year, and lumber and steel and iron ore on plastics and everything in between.
How is the raw material environment for you all going I know, it's typically are.
Pass through you try to pass it through but.
What are what is the raw material environment looking like right now on and how are you going to manage through it.
Yeah, I mean by and large it's relatively steady as we've said many times, we have some long term supply contracts inside that protects since with a lot of the pricing.
Aquila nine trial, which we know hedge as the base raw material for our carbon fiber that has been pressured on the propylene market.
On that those prices have gone up compared to the middle of say 2020, but again the impact on us is mitigated because of operating so.
Overall, I would say not too much of an impact as well.
So we shouldnt think about raw material volatility as a headwind in 'twenty one versus 'twenty.
Nothing major in that.
Okay. Thanks very much.
Your next question comes from the line of Noah <unk> from Goldman Sachs. Your line is now open.
Hi, good morning, everyone.
More on Dol.
I'm just curious if you guys have any intel.
Insight into what's going on with 77 quality control issues.
Obviously it doesn't it doesn't tie to you its a Boeing manufacturing is for you, but just given that it's in.
Composite structural components I thought you might have more insight there than I do and then as they're building, but not delivering airplanes. What does that mean for for hexcel, I mean, I know it kind of folds into the overall inventory destocking, but it would seem to be even more on that program.
So we have no more insight than you do on Saudi southern manufacturing issues and ore.
What's going on with fuselage.
I will say I'm confident that going on.
Have that under control and that that issue if not already go on we will go away.
With respect to inventory and.
What's going on it on with respect to build rates and winding down.
77 to Patrick's point clearly.
Moving down to rate five more.
Refi is going to be some incremental headwinds on supply chain adjustments for a quarter or two.
737, it'll be interesting to see.
On the burn off of the inventory in stock.
And the ramp back up of the production from the very low rates that are running today, but again, we're still optimistic.
We will start to see that in the second half of 2021.
Okay.
And your other commercial aerospace revenue.
About 60% and you specified on the release, particularly business jet.
The oem's on aggregate there havent redo.
The reduced production nearly that much I don't think.
Is that also seeing inventory destock or is that end market worrisome.
That market certainly has seen some inventory destocking, especially in the fourth quarter.
I think some of the questions around business jets, and the size classes and how will rebound.
Remains to be seen but we remain optimistic certainly for the small class medium class.
In 2021.
On to show some recovery.
Okay, and Patrick how should I expect 2021 free cash flow to compare to 2020.
I think I mean also I mean, I think on kind of direction. He said he is going to be lower because we're not going to have the same working capital opportunity I mean, we're not guiding to a specific number but I think that's the shape I would put on it.
Basically just think of it as kind of Directionally flattish and then before working capital and then extract the working capital benefit.
More or less more or less.
Okay.
Okay. Thanks, so much.
Your next question comes from the line of David Strauss from Barclays. Your line is now open.
Thanks Frank.
Patrick I know you highlighted the headwinds from a weaker dollar in the quarter, how does that impact your point forward kind of where you had given given that the dollar has depreciated a fair amount here.
Yeah, I mean, so this is where the hedging does come into play again, I'm not going to get into specifics, but we don't see the same headwinds going into 2021 versus 2020 day, so because of our hedging portfolio and what we have in place.
It's going to be a lot more neutral in 2021.
I know that might sound ironic to your point, given the slightly lower on sorry, the weaker dollar, but because of the hedges we have in place.
Year over year for us the dollar should not be too much of a headwind.
Okay.
And Nick.
Nick I guess thinking about 'twenty, you know a little bit beyond 2021 out that 2022, I know, it's a ways out but.
We're building our models out and thinking about the arrow the Aero business at least as it relates to the large commercial aircraft when you would expect.
No.
Pretty much be in line with delivery rates other than maybe on the on the Max at that point in 2022.
Alright.
Absolutely.
I would expect that given we ship.
A fair amount prior to the aircraft build rates and I think the stability in the markets and the gradual increase.
Our business will certainly have the capability and capacity to support that easily so I think we'll be aligned.
Again, I also I'm not underestimating some of the supply chain replenishment that will help the business going forward on a onetime basis as the market starts to recover.
Okay. Thanks.
Thanks very much.
Thanks, David.
Your next question comes from the line of Austin.
Mahler from Canaccord. Your line is now open.
Hi, there this is Austin on for Ken.
Just to switch gears over to the defense business can you talk about what the shipping rate is for the F 35, and the outlook for that program. This year.
Yeah.
Unfortunately, we do not give build rates or ship set content on our military programs simply.
Simply because they're isolated.
And it's competitive information we don't share.
Okay.
Well just on a different point.
For the defense business are there any new program opportunities in the next few years that youre pursuing or how should we think about the program mix for that business over the next few years and are you pursuing anything in the space sector in particular.
So I would say as the leading composite supplier in the space and defense industry and the fact that our on hand, seven fiber is basically as a benchmark.
We're working on multiple new programs advanced programs, both manned and unmanned.
As we speak today so.
Certainly we would expect opportunities to continue to present themselves on us to continue to be a fiber of choice.
Great content on those applications as we go forward.
Okay got it thank you guys.
Your next question comes from the line of Hunter came from Wolfe Research. Your line is now open.
Hey, good morning, everybody. Thanks.
Good morning.
Good morning, Patrick So in 2015, you guys were expecting 3 billion sales in 2020, and it's going to come in at half that.
I know this is a hard question, but you should think about the long term planning process in the next five years D C. On.
On ability to maybe get back to that $3 billion sales level at some point.
2015.
While we clearly didn't predict dependent on on that.
We're continuing to work on our strategic planning process, we're continuing to drive the innovation on mature.
Cereals and processes and good we're continuing to expand our portfolio.
As we've done with our technologies and we will continue to evaluate organically as well as through M&A opportunities in collaboration so I.
I would answer that by we don't have our crystal ball, we're working our strategic.
Strategic planning process aggressively with the team I like the pipeline we have on like the activities we have in place.
Unfortunately is a bit premature for us to make any judgments on when we'll deliver $3 billion or any respective number.
I can assure you, though on challenging the team.
And composites and advanced materials light weighting sustainability.
Zero emission aircraft I'm excited with the opportunities and I'm, even more excited with hexcel positioned.
And.
<unk>, we're driving into the business so.
We will hit that number I just can't give you a gauge.
Okay. Nick Thanks, and then just a quick clarification did you ever pause 77 chipsets.
We never Paul 77 ship sets.
Thank you very much.
Youre welcome.
There are no further questions at this time, ladies and gentlemen, this concludes today's conference call.
You may now disconnect.
Sales volume.
Okay.
David.
No.
Okay.
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Thank you.
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Yes.
Okay.
Okay.
Okay.
Okay.
Okay.
Good day.
Yes.
Okay.
Okay.
Net.
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