Q1 2021 Hexcel Corp Earnings Call
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The heck, so Q1, 2021 earnings call.
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Today, Patrick went to watch Chief Financial Officer. Please go ahead.
Thank you.
Good morning, everyone. Welcome to Hexcel Corporation's first quarter 2021 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 private Securities Litigation Reform Act of 1995.
They involve estimates assumptions judgments and uncertainties caused by a variety of factors.
Could cause future actual results or outcomes to differ materially from our forward looking statements today.
Such factors are detailed in the company's SEC filings on last Night's news release of.
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 or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request.
With me today on mixed tonnage on chairman CEO, and President and kind of got on our Vice President of Investor Relations. The purpose of the call is to review our first quarter 2020 results detailed in our news release issued yesterday now.
Now, let me turn the call over to Nick.
Yeah.
Thanks, Patrick.
Good morning, everyone and thank you for joining us today as we share our first quarter results.
These numbers reflect the beginning of what we expect will be of gradual and steady recovery over the coming quarters as the world emerges from the economic effects of the pandemic and regains its confidence in air travel once again.
The results we reported in our news release last night represent a solid start to the year and were largely consistent with our expectations.
And we were more than pleased with how well we performed in controlling costs and delivering stronger margins.
Our hexcel team has transformed this downturn in demand into an upturn in productivity cash management inventory control and efficiency.
While we have a few more months of restructuring ahead of us, especially in Europe, which is on track we are already realizing meaningful results from our rapid and robust response to the pandemic and its unprecedented effects on our business.
As we've previously communicated we expect to reduce overhead cost by the middle of this year on on an annual basis by approximately $150 million and I'm pleased to report a significant portion of those savings are reflected in our first quarter results.
We expected the second half of 2020 in our first quarter. This year would represent the trough or the low point of the demand cycle, resulting from COVID-19.
Now with Q1 behind us and a clearer view of head.
Even more convinced that our expectations were correct, which we continue to validate the of regular customer interactions, including customer site visits where this can now be accomplished safely.
Keep in mind. However, the pandemic has triggered many challenges that the world has not yet fully overcome and therefore any substantial increases in build rates per passenger demand and even consumer spending remain uncertain.
For example, we anticipate that 2021, we will continue to be impacted by pandemic headwinds, including inventory Destocking, which we expect will wind down as we move through the second quarter and to be largely behind us as we move into the second half of the year.
Some tightness in our supply chain is always a risk and even more so with the ever present threat of pandemic related slowdowns and shutdowns and shortages.
The rollout of vaccines is encouraging from some countries yeah. Unfortunately slow on others.
Domestic travel in the U S is showing signs of improvement and may boom by year end, while other countries are entering the second third or fourth lockdowns with minimal domestic flights.
International travel is still showing little sign of recovery.
So for the aerospace industry 2021 remains a transition period between the dramatic decline triggered by the pandemic and of returned to strong growth in 2022.
We remain cautiously optimistic by both our demonstrated performance and the momentum we see building in the global economy as the air travel begins of gradual return to pre pandemic levels.
Now let me highlight some of the results.
First quarter sales of $310 million were in line with our expectations.
Adjusted first quarter EPS was a negative 10 cents compared to a positive 64 cents last year.
Throughout the pandemic, we have maintained a strong focus on cash and in the first quarter. Our free cash flow was the use of $6 million compared to a use of $19 million in Q1 2020.
Despite significantly lower sales, we continue to tightly manage cash by controlling spending which includes capital expenditures.
Liquidity at the end of the quarter was strong and included $82 million of cash and $536 million of revolver borrowing availability.
Overall, our balance sheet remains robust.
Turning to our three markets aerospace sales of $147 million were down more than 59% compared to the the first quarter of last year, which included sales before the effects of the pandemic began to dramatically impact commercial aerospace.
Sales were down significantly across all major platforms, which reflects pandemic induced build rate reductions by the aircraft Oems and continued supply chain destocking.
While one quarter does not make the trend we did see sequential sales growth in the first quarter for narrow bodies.
Admittedly Boeing 737, Max sales continue to be out of low level is the supply chain works through channel inventory.
This may take some time and will be uneven as inventory levels vary across the supply chain.
Yeah.
Sales to other commercial aerospace, which includes regional and business aircraft were down 48% compared to 2020.
Business Jets is the largest portion of the sector and while most business ship programs were down significantly year over year.
We're a few select programs that increased modestly.
While not getting into the program specifics, we are confident business jet demand will return over time likely led by the small and mid size classes.
Based on defense sales were basically flat year over year at $112 million.
We have content on over 100 space and defense programs and they fluctuate by quarter.
Our space business has been growing nicely over time, you have paused in the first quarter with softer sales, which is not usual.
We are not unusual.
We are beginning to benefit from the ramp and the CH 53, K and we're pleased to see the growing international demand for this composite rich.
Heavy lift helicopter we are encouraged with the initial outlook the proposed U S defense spending, particularly as composite light weighting supports the U S military focus on longer range aircraft and rotorcraft.
We expect to benefit from growth in space and defense throughout the year.
Total industrial sales of $51 million in the first quarter were down more than 23% and 27% in constant currency.
Lower wind energy sales drove the decrease yet were partially offset by stronger automotive sales, which may be an indication that consumer confidence is improving.
Wind energy sales, which is the largest submarket in industrial were down more than 40% compared to last year and reflects the previously reported softening in customer demand as well as the closure of our wind blade Preprint production facility in North America last November.
When the energy remains a good business for hexcel investors continues to be of great customer.
Material manufacturing continues at our plants in Norway, Mark, Austria, and Tianjin China.
As well as our continuing commitment to innovation in the wind energy market.
During the quarter, we announced our new hex ply except of surface treatment technology that significantly reduces shell manufacturing time during the wind blade production process.
It's a product that has had a successful track record in preprint blades and now has adapted for infusion processes.
We also received type of approval certification for our Hex play.
On a pre prep materials, which adds to our growing portfolio of prepaid processing options for marine applications.
The finish I'd like to provide a slightly longer term perspective.
As sales recover in 2022 and beyond we expect to deliver strong incremental margins as utilization of existing capacity increases.
While we do not guide the incremental margins with May be helpful is to review of pass sales levels and operating margin performance before the $3 50 reach peak rates.
Specifically in the 2014 to 2015 timeframe XL sales were in the range of one eight to $1 9 billion with operating margins in the range of 17%.
And what is noteworthy is that the <unk> hundred 50 production rate was ramping to five per month during these years.
We believe that we can return to these margin levels. When we attained similar sales levels, while our depreciation expense is now higher than during that prior time period, our focus is to more than offset this by efficiency improvements in our overhead cost reductions.
Our cost base will expand with growth, but what is the incumbent on our management team is to be extremely disciplined in managing cost growth and ensuring the depreciation headwind is more than overcome.
The state the same play we expect to achieve strong mid teens, plus operating margins with sales of approximately 1.8 to $1 $9 billion and we are targeting to exceed prior peak margins when we return to previous peak sales levels.
Now I will turn the call over to Patrick to provide more details on the numbers.
Thank you Nick as a reminder of the year over year comparison growth constant currency. The majority of our sales are denominated in dollars. However on a cost base of the mix of dollars euros and British pounds as we have a significant manufacturing presence in Europe as a result, when the dollar store.
Against the euro on the pound on sales translate the lower while of course wholesale translate lower leading to a net benefit to all of months.
Accordingly of weak dollar because we are currently facing is a headwind to our financial results, we hedge the currency exposure of over 10 quarter horizon to protect all of operating income.
Quarterly sales totaled $310 $3 million the sales decrease year over year reflects production rate decreases by of commercial aerospace customers in response to the pandemic combined with the continued commercial aerospace supply chain Destocking.
Turning to our free market commercial aerospace represented approximately 48%.
Total first quarter sales.
Most of the aerospace sales of $147 $6 million decreased 59, 7% compared to the first quarter of 2020 of Destocking continues to impact sales.
We continue to expect Destocking of the wind down during the second quarter of 2021, consistent with what we have communicated during our fourth quarter 2020. The earnings call. We then expect to generally be aligned with areas of production levels entering the second half of 2021 with the.
Destocking largely behind us and recognizing the beneficial impact of the cost takeout actions that we have implemented.
Space and defense represented 36% of first quarter sales totaled the $111 7 million.
Basically unchanged from the same period in 2020, we remain bullish for the outlook for on space and defense business globally.
Industrial comprised 16% of first quarter 2021 sales.
Industrial sales totaled $61 million decreasing 27, 1% compared to the first quarter of 2020 on the week of wins and recreation market, partially offset by stronger automated.
When the any day represented approximately 50% the first quarter industrial sales.
On a consolidated basis gross margin for the first quarter was $17 one per cent compared to 26% in the first quarter of 2020 the.
The sequential gross margin improvement from the fourth quarter of 2020 had three drivers, including greater impact from our cost reduction actions improved sales mix and a few more carbon fiber lines coming back online as the production levels of inventory becomes the appropriately realigned with the.
Demand.
We continue to temporarily idle select carbon fiber assets and as we bring further lines back into production over time to support the expected gradual and steady sales growth in future periods. This should help generate strong incremental margins.
First quarter, selling general and administrative expenses decreased 17% of $8 million on constant currency year over year as a result of head count reductions continued kind of controls.
On discretionary spending.
Research and technology expenses decreased 19, 7% in constant currency.
The other expense category consisted primarily of severance cost in Europe.
We continue to target of approximately $150 million of annualized overhead cost savings, including indirect labor.
As Nick said, a significant portion of the savings have been achieved and were reflected in our Q1 2021 results.
We expect that most of the remainder of this cost takeout will be achieved by the end of the second quarter of 2021.
Adjusted operating income in the first quarter was $1 $9 million, which is the first positive operating income since the Destocking began in earnest during the third quarter 2020.
The year over year impact of exchange rates was negative by approximately 10 basis points.
Now turning to our two segments.
The composite materials segment represented 76% total sales and generated a 3% operating margin or an adjusted operating margin of 8% compared to 19, 9% adjusted operating margin in the prior year period.
The engineered products segment, which is comprised of our structure of an engineered coke sales represented 24% of total sales and generated a six 4% of operating margin or of five 4% adjusted operating margin compared to $6 six adjusted operating margin in the first quarter of.
2020.
The tax benefit for the first quarter 2021 was $7 5 million, which included a discrete tax benefit of $3 $2 million from the revaluation of deferred tax liabilities.
Related to a favorable U S state tax law change.
The pandemic and consequent mix of results across the countries in which we operate is expected to continue to have an impact on the company's overall effective tax rate throughout 2021.
Net cash used by operating activities was $1 $2 million for the first quarter.
Working capital was the use of cash of $26 2 million in the quarter, primarily related to increased receivables as first quarter sales were weighted towards the end of the quarter.
Capital expenditures on an accrual basis were $4 million in the first quarter of 2021 compared to $21 9 million for the prior year period in 2020.
Capital expenditures continue to be tightly managed with a focus on improving existing assay of efficiency and new technology flexibility.
Free cash flow for the first quarter of 2021 was negative $6 1 million compared to negative $18 $6 million in the prior year period, which reflects the client spending control on significantly lower sales.
In late January 2021, we announced the second amendment to our revolver with the structure to accommodate the temporary economic impact of the pandemic the.
The amendment temporarily replaces the leverage covenant with the minimum liquidity covenant the.
The minimum required liquidity is $250 million, which includes unrestricted cash cost and utilize the revolver availability.
This minimum liquidity requirement is through and including March 31st 2022 the.
The facility terms, then we book to the prior leverage covenant of effective April 1st.
The first measurement of leverage two <unk> as of June 30 of 2022.
Additionally, the amount of the revolver was reduced to $750 million from $1 billion previously they.
This amendment preserves our access to liquidity during this period of market transition on.
Reinforces our strong relationship with our bank syndication, we remain within all covenants conditions.
Our total liquidity at the end of the first quarter of 2021 with $618 million.
Consisting of $82 million of cash and an undrawn revolver balance of $536 million.
We have no net debt maturities on our revolver matures in 2024 on our two senior notes mature in 2025 and 2027, respectively.
Our share repurchase program remains suspended and he's also restricted by the previously referenced with both the amendment.
Board continues to regularly evaluate capital allocation priorities.
As of any where the states we are not providing financial guidance at this time, but I would like to reinforce and expand upon the information shared during our fourth quarter 2020 earnings call.
We continue to expect 2021 annual sales to be lower than 2020 in fact, largely in line with the current market consensus.
We expect the aerospace supply chain destocking to largely come to an end during the second quarter 2021.
While some destocking may continue into the second half in selecting the.
This should be offset by strengthening narrow bodies items.
Some additional restructuring costs are anticipated in the remaining quarters of 2021, but below the fourth quarter level.
We expect the fiscal year 2021, adjusted operating margin percentage to be in the low single day tickets.
Capital expenditure in 'twenty, one we will continue to be managed very tightly and is expected to be at a similar level to 2020.
We expect to generate free cash flow in 'twenty, one and the reduced debt levels.
The tax assumption is more complicated the normal, but we expect the underlying effective rate to be approximately 25% of 'twenty one.
This change from prior rates in the future attained in the mix of jurisdiction, where we generate income over time, we expect the tax rate to return to pre pandemic levels, assuming no changes to existing the tax rate in the major jurisdictions, where we operate.
With that let me turn the call back to Nick.
Yeah.
Thanks, Patrick.
Our first quarter results give us confidence on our outlook or of steady recovery throughout 2021.
We believe that the aerospace industry will realize some upticks in demand beginning in the second half and as it does hexcel is well positioned to benefit from our leadership and much sought after advanced lightweight composites from our strong customer relationships that have grown stronger throughout the pandemic.
And from our continuous focus on continuous improvement through operational excellence.
This is also not the time to be shy about investment in R&D and we are continuing to realize the strong pull from our customers to further drive the advancements in existing and new innovations that position us to win the next generation platforms.
I encourage the participants on this call to review the Webinars on our website as we position for high volume of aerospace composite manufacturing with liquid composite molding and thermal plastics as well as examples illustrating how we are tailoring, our innovative solutions for new and evolving market.
That's such as urban air mobility and space.
Despite all the turmoil and challenges that arose in 2020, the great strengths and values of hexcel remains as robust as well.
We still have leading positions on the world's largest aerospace programs with our advanced composite materials and the broadest technology portfolio in our industry.
The great job our team has done puts us in a position to return to substantial growth. Once this pandemic is behind us.
Few companies are as efficient, whereas good at execution or is committed to excellence as hexcel.
Our people are the most resilient and talented group that I've ever known and I'm always proud to share with you their accomplishments every quarter.
For several years Hexcel has been building capacity to meet extraordinary ramp ups in demand.
So the chance to pause with our customers over the past few months has afforded us the unique opportunity to ensure that we are aligned with them and in the strongest position possible to meet the growing demand ahead.
<unk> never been more focused on its customers innovation and operational excellence.
We expect to emerge from these challenges as a leaner and stronger company and even better positioned for strong growth and returned to shareholders.
Julien, we'll now turn it over to you.
We are ready to take questions.
Thank you.
If you'd like to ask the question. Please press star followed by the number one on the telephone keypad to withdraw.
All of your question please press the pound.
<unk>.
Please note that the management ask that you. Please limit yourself to one question and one follow up question. Thank you.
Your first question comes from Robert Stallard from vertical research. Please go ahead. Your line is open.
Thanks, so much good morning.
Good morning, Robert Good morning.
Nick I just wanted to follow up on that comment you made in your prepared commentary about narrow body rates. I think you said it was up sequentially I was there any way of hexcel now stands relative to the production rates at Airbus and Boeing is the first question and secondly, what is your sense of inventory in the chain for net.
Our bodies and could we actually flip over each of restocking period has these rates start to move up.
Yes.
So Robert.
We still believe there's destocking going on as you know our supply chain is very complex and it's at different levels, depending on whether the materials being shipped to Oems tier ones twos and threes.
Having said that we believe that the narrow body rates are getting closer in line than the wide body and certainly we would expect more of the Q2 destocking to be weighted towards the wide bodies.
With respect to rates.
We would expect as we go into the second half of the year to be fairly aligned with the OE build rates and again the last day come into alignment are going to be specifically the wide bodies.
Just on the tightness in the chain for narrow bodies geofence them.
You know again.
We're expecting that.
Boeing and Airbus narrow on rates.
Could trend up and increased production rates towards the second half of this year. So.
I do believe there will be some.
Sales related to restocking as the rates go back up.
Clearly, there's probably some in the supply chain that have cut inventory levels down to align with very low rates and we will get a kiss from that as the rates rebound. So to your point there will be some restocking in the supply chain and that will be led with the narrow bodies.
That's great. Thanks Austin.
Thank you Robert.
Your next question comes from Ken Herbert from Canaccord. Please go ahead. Your line is open.
Hi, good morning, Nick and Patrick.
Good morning, good morning.
And I just wanted to follow up.
Nick on your your longer term comments surround the one eight to $1 9 billion in sales.
And the margin implications.
With the capacity you've taken out as you get back to those higher numbers does that represent full capacity in terms of of utilization or is that still even even less optimal.
<unk>.
Well again remember our assets come online and chalk sold the assets that we bring up to support one eight to $1 9 billion will be run at optimum efficiency, having said that remember we went almost two five.
So there is incremental capacity in our supply chain.
On our global plants that will still be available. So if you want to look at the total hexcel.
And you roughly size it based on the revenue drop that gives you an indication of the asset utilization.
Okay very helpful and just to follow up on the first quarter.
You indicated the part of the gross margin sequential expansion was from some some lines coming back on can.
Can you talk about your.
Your plans for bringing lines back on through the remainder of this year I mean, it sounds like from your commentary probably none of the hot near term, but in the second half we might see a step change in that any any color around that would be helpful.
Yeah, Ken I don't know that Youre going to see a step change, but as we speak we continue to bring on additional fiber lines on assets.
Can imagine we talked about fiber because it's so.
Asset.
Heavy and rich on capital as well as driving our margin in our mix, but think about our preprint clients. Our core plants. There is assets that are idle.
In most of those plants.
Hello, Hello, Ken.
Yes.
Were you able to head Nick.
No I I missed the very last part of what she said.
Nick can you still on line.
I think on each line must of drops Julianne can you try and get Nick back. Please I can try and answer questions.
Certainly.
So Patrick I'm not sure if anybody else can hear you can hear this but it sounds like some gradual lines come on as we go through this year, but no yes.
I think that's what Nick.
Frankly, I think thats, what Nick was outlining its not going to be of dramatic that change, it's going to be glad to.
The increase in production levels as we go throughout the year as we bring the lines on we'll look to sort of.
Strong the utilized each incremental line, we won't bring up lots of lines and the use of about 20% level will bring out one at a time and use of the 18, 19% and then we'll bring the next one up and fill that up but it will be of gradual and steady increase rather than a dramatic step up.
At any point in time.
Great Alright, thank you.
Hey, Thanks, Ken I am sorry, I got disconnected, but I have rejoined now.
Great. Thanks, So I think I'm all good with with Patrick So thank you very much.
Okay, Ken Thank you.
Your next question comes from Robert Spingarn from Credit Suisse. Please go ahead. Your line is open.
Hi, good morning.
Good morning, Rob morning.
Turning to wind.
With Vestas buying out Mitsubishi in the offshore area does that increase your access to the offshore part of the wind market going forward.
Yes.
So.
We've got a long relationship with past us and we are working with them on new technologies, one that I noted in the in the script today with our surface treatments, but most of those big blades continue to be the.
Infusion processing.
Which does not lend itself to the type of production that we had in the U S of what we're doing in Tianjin or annoying Mark today. So yes, it will provide us access to continue to.
Implement new technologies, but it will not most likely be related to blade shell manufacturing per the prior technology.
Okay, and then just as a follow up Patrick you mentioned earlier the sales mix was one of the three drivers of margin in the quarter and I was going to ask if you could just elaborate a bit on that.
Well the only to say the the mix was pulling through a bit more of a carbon.
Carbon fiber than we've seen in the previous couple of quarters.
And then just one or two programs with favorable pricing and that combination just gave us a better overall mix and essentially variable margin, which drives the the gross margin.
Within the company and as I said that combined with more carbon fiber production and the strong cost control really gave us the very positive gross margin in the quarter.
Okay. Thank you.
Thanks, a lot.
Your next question comes from David The Jazz from Barclays. Please go ahead. Your line is open.
Good morning, everyone.
Morning, David.
So just.
Follow up there on Rob's question, So composite materials, Patrick you talked about the 8% margin in the quarter.
You're talking about margins low single digit for the full year for the at the.
The total level of.
Was there anything unusual at composites in the quarter.
That would kind of imply the things step down from here or don't don't go up.
You know werent higher with additional volume as we go throughout the rest of the year.
Yes, so what I would say is that over the next several quarters. There is going to be of general steady increase in performance now quarter to quarter. It may be a little bit lumpy, but I would say Q1 was kind of in the ballpark the mix was.
Particularly strong.
But we should be there all of their of balance now going forward and if I look high but sort of a long.
Sort of timeframe for six quarters, and you should we should see steady increases as we get more topline leverage against the cost space.
Okay.
And then the Paul.
All up question on the.
I guess for Nick on net.
Margins the comment around margins getting back to kind of a similar level that you were at when you were doing you know 1.8, $1 9 billion of revenue before how how does mix kind of factor into that by by end market.
Yeah, I would think out there youre potentially looking at a lower mix of commercial aerospace maybe more heavy heavier on space and defense does that.
Does that mix.
Potentially negatively impact the the margin outlook.
I don't think between commercial aerospace and space and defense there is going to be a big change in the complexion of the heck sell and the mix impacting yet.
I would say.
As the wind as you know as the lower margin business.
And the North American transition and our closure of our site. There that's kind of go on the positive direction. So overall David.
I don't see a big change.
Driven by heavier space and defense as a percentage of sales going forward.
Okay. Thanks for the color appreciate it.
Thank you David.
Your next question comes from Mike Sison from Wells Fargo. Please go ahead. Your line is open.
Hey, guys.
Just a quick question on industrial longer term. It was the platform that you had looked at for growth in AD.
Acquisitions potentially.
What do you think you know when you think about that 1819, how does industrial sort of fit in and what's the potential for that segment longer term.
Sure.
Well, Mike we've been focused on the total industrial and again I'll remind everyone that the way we track it consists of.
30, I think 32 sub segments of everything from when the automotive the marine Winter Sports rack pooling the list goes on and on.
We still are very excited about the opportunities within the industrial.
Clearly wind automotive marine or some of the sectors that we see more near term growth.
Solar fuel cells.
The other industrial.
Thus the real applications pressurized tanks continues to be of spot that we are looking at not to go into areas that we view as more commoditized, but look at areas, where we can introduce our new technology innovative solutions that help position.
A differentiated and sustainable competitive advantage with our customers. So.
Terry Merlot leads on the industrial efforts and we've doubled down on our strategic planning and I'm looking forward to the opportunities that the team are identifying and net we're prioritizing going forward.
Got it and just one quick one on the commercial aerospace.
Since you commented on comfort with consensus you know first half of it looks like the about 630 <unk> sales second half of about 750 is that the delta between the run rate and the Destocking and then.
Is that a number that you know the 120 million Delta there is that what could come back when folks restock overtime.
So obviously I am kind of alluded to the the annual consensus number and we're not going to get into the core to the detail, but I think that kind of steady phased increase as opposed to it as the romantic stat.
Sort of like me shape of the year on obviously, a large portion of that is the destocking.
Fleeting, finishing if you like as we come out of the first half of the year going into the second half yes.
Got it thank you.
Thanks, Mike.
Your next question comes from Richard Safran from Seaport Global. Please go ahead. Your line is open.
Nick Patrick Kurt Kurt Good morning, how are you.
Hey, good morning.
So I wanted to ask you if you could expand on your working capital comments.
Am I right that you're seeing in answer the cash flow benefit from inventory reductions.
You noted in the quarter of the increase in receivables I think your original expectations were working capital would level off in 'twenty, one I want to know if that's still the case and in your answer if you could comment on the cadence for the rest of the year.
So, yes, I think you've pretty much got it right there rich.
Essentially last year, we drove fantastic working capital benefit of about $116 million, we squeezed inventory dramatically.
The unpaid receivables reflected the the change the decline in sales offset by payables.
This year on Sky two screens that further I think as we called out and you've just mentioned.
Last we don't expect to get a lot more out we will manage it as tightly as we can in terms of the relative days of inventory and controlling.
Our days of receivables receivables will move a little bit depending on the mix of customers the timing of any given quarter et cetera.
But we expect working capital to be relatively neutral overall this year is the way I would put it.
Okay. Thanks for that and then quickly.
In deference to your remarks about cost controls you noted in the filings that you reduced head count by about 35% globally I think.
With volume increasing I'm, just wondering if youre now happy with the balance sheet struck between anticipated volume on head count.
Sure.
So I'll give you my perspective on it I am.
Very pleased with how quickly our team right sized our business on.
Direct head count as well as driving efficiencies and finding opportunities to reduce our indirect channel.
The indirect head count as well, so where we sit today is as we bring the lines up as we.
The increase our production to align with customer demand clearly, we're bringing the in direct resources.
But we're also finding opportunities and continuing to look for efficiencies before we bring in heavy indirect resources going forward. So today, we're close to right size, we still have some restructuring ongoing as we mentioned in Europe, which takes longer.
So we'll be doing both some additions in <unk>.
The areas, where demand require it and some additions to or reductions to continue to drive efficiencies.
Thank you very much.
Your next question comes from Pete's Kubicki from Alembic Global. Please go ahead. Your line is open.
Hey, good morning, Nick and Patrick and Kurt.
Hey, guys just wanted to talk more about wide bodies of the 787 in the $83 50 in particular.
I'm just wondering how the visibility is there I know, we expect the inventory of kind of dwindle down this quarter or maybe in the third quarter, but Patrick you mentioned, the really bad levels of international traffic. So I'm wondering how your visibility is and what your confidence level is that the real kind of demand Paul will be there and start to.
Ramp in the back half of the year on on the wide bodies.
So let me let me start.
And touch on the fact that Q1.
Clearly destocking was a heavy element on the wide bodies and we were nowhere near.
Our customers.
Publicly stated production rates.
Having said that.
And again I think if you read the reports from the airlines and a lot of the.
The tracking firms and companies.
They are expecting the domestic growth to come back fairly robustly in the U S. Hopefully by the end of the year on international to lag.
I for one I'm, a big believer that there is tremendous pent up demand for leisure travel international.
I think the business travel is the element of that.
His question on how companies will evolve post pandemic should do business, but I for one can tell you.
Hexcel will be traveling internationally to support of our customers to support our suppliers to support our plans and I believe it will grow back to pre pandemic levels. It's just the question of how much time and it will lag domestic.
The flight return.
Okay. Okay last one for me just wondering.
And then what's the tipping point per one you kind of restart the repurchase program and reinstate the dividend.
Oh, well, we talk about that with the board every quarter at least every quarter and every board meeting we're monitoring that the share repurchase program and we still have certain restraints that are built into our <unk>.
The facility. So we're monitoring that as well so I think perhaps later this year, we'll be in a better point to give more guidance on that but right now we're in a watch mode. We're conserving cash we're controlling spending and mostly we are focused on aligning with our customers and <unk>.
The painting the ramp up.
And just to note we are restricted on the share repurchase until the current amendment finishes at the end of March 2022.
Thanks, guys.
Thanks Pete.
Your next question comes from Paul Thompson, you're traveling bearing Baird. Please go ahead. Your line is open.
Thank you good morning, Nick Patrick on correct.
Just a quick one on your 737 Max sales side did you see any sequential improvement.
On the Mac sales in Q1, and I guess any other color you could provide on inventories at the.
Different points in the supply chain, but the doctors of the Max.
Yes, I mean, Max sales did step up as the <unk> 20, we saw on narrow body rates on <unk>.
Sales increases Q1 over Q4 on that sequential basis, whereas we saw wide body decreases Q1 over Q4, which pretty much as you would expect and what we expect the particularly with the 787 build rate reduction being one of the sort of the lakes of programs to come down.
No.
And the simple answer to your question, Yes the day.
Mac sales stats of Q1 over Q4.
Thanks, Patrick and then just another follow up I guess on your SG&A and research and technology expenses for this year of any any thoughts on how those might look on a full year basis versus the last year.
Well I'm not going to get into specifics I think R&D expenditure has probably bottomed out we would probably expect to see that sort of now grads and the staff.
Nick talks a lot of balance sort of the investments in R&D and innovation, which is critical and we're going to keep pushing that forward. SG&A. Obviously Q1 is a little bit unusual with the stock comp charge. The stripping that out we will continue to maintain tight cost controls.
Over time as the business grows that will of staff pump, but we will manage that as strongly and as disciplined as a way as we can.
Great. Thanks, Scott.
Thank you.
Your next question comes from Gautam Khanna from Cowen. Please go ahead. Your line is open.
Yeah. Thanks, good morning, guys.
Good morning.
Patrick maybe a specific question following up on David Strauss of question about composite materials.
Through the year I'm, just curious do we.
There were a couple of quarters, where we were a negative.
Operating profit do you expect it to remain positive throughout and I I'm asking because you know we also.
In Q3 of their tends to be some seasonality in terms of the number of working days and the like.
Just to be clear is that we're expecting positive.
Operating profit levels like C M throughout the year is that fair.
Yes, I mean, I think that's fair I mean, the exact sort of percentage level will fluctuate, perhaps up and down a little bit, but I think we are now moving into positive territory the composite materials, yes.
Okay.
And then.
Second question on that but just can you remind us of any sort of seasonality we should be aware of in Q3 in particular or are we just talking all seasonal seasonal trends given the destocking dynamics.
I mean, there are obviously still is a little bit of underlying seasonality you've got the the European.
August if you like effect, where we get a bit of a slowdown and you've obviously got at the end of year holiday season in December Christmas new year of whatever.
So you've got that is always there, but perhaps it has been disguised though overwhelmed to some extent by the pandemic through 2020.
The pandemic the impact of Destocking will lessen.
And so yes, I mean, I think where we've historically seen in Q3 and Q4 of those impacts will still be there.
The forward, but.
And we will be more prominent if you like as the destocking becomes less and less.
Okay and on the Destocking point, sorry, another question here.
In the past you've talked about out of like on the <unk> hundred 50, there's the number of different subcontract manufacturers to Airbus.
Hexcel sales too.
And I imagine that's true on the 87 and other programs. So it's not just direct to the to.
To the OEM.
Can you talk about.
Or are you seeing any major outliers with respect to where they are in the inventory.
The inventory journey or I mean are we finally getting to the 0.3 quarters than in the Destocking where.
More or less.
Everyone's aligned with whatever rate.
I'm just curious if you're seeing any bizarre outliers with respect to how quickly they have responded.
Yes.
Yes. So just a reminder, on east reached 50 alone we shipped more than 40 different locations, including all the tier ones twos and beyond globally. So you can imagine that.
Total alignment and everybody to be at the exact same place. So it's just not going to happen. It never does everybody is a little different having said that we are communicating regularly we've got great relationships.
And people touching on our supply chain throughout the <unk> hundred 50.
We really haven't identified anybody that's wildly high or wildly low on expected to be material driver.
On a recovery of Destocking on the <unk> hundred 50 program specifically.
Thanks, very much guys.
Thank you.
Your next question comes from Michael Cerasoli from tourists. Please go ahead. Your line is open.
Hey, good morning, guys. Thanks for taking the questions.
Let me just.
Put a little finer bow on on kind of the narrow bodies and production rates.
Are you guys effectively been tracking with sort of Airbus is planned to be at 45, a month on the the 320 by by <unk> 21, and then.
It sounds like Youre, not going to give the specifics on the Max but the confidence level to get the 31 per months, presumably some of these these electrical issues really.
The modest didn't know about the relative momentum, but can you provide any specifics on.
On the right alignment with those programs.
Yeah, so Michael perhaps not to the level of detail that youre looking but you can imagine we are talking with Airbus and Boeing constantly.
On doing scenarios on.
Upside scenarios and growth.
To make sure that the supply chain is aligned and I can assure you that we are all aligned with them today.
The prepared and ready as they are ready to ramp up going forward.
Airbus rates that they've communicated ramping the 43 of them 45 this year.
And boeing's intend to get to 31 next year.
We're fully in line with that and.
Really.
Not much more to say other than we're rooting for them and the airlines and passenger travel to continue to grow and require of those airplanes.
Got it got it and then just a follow up on the wide body clearly international you called it out still weak.
Is there any scenario, where you see downside to the rates there on either of the platforms. You know assuming international airline financials remain depressed I mean, you've been pent up demand will help but it seemed like they really need to get back the profitability. I mean, how are you guys looking at your scenario planning for free.
Wide bodies are you comfortable here of that that sort of we're at bottom or is there is there a chance any way you'd see we see another modest step down or even <unk>.
Lower for longer scenario before we really see any ramp up.
Yeah.
Oh really leave it to Boeing and Airbus to provide guidance on specific rates and risk of <unk>.
On site I would remind everyone that there have been a tremendous number of older aircraft that are parked today and that have sat idle.
And the longer those aircraft are parked probably of lower probability that they will come into the ex.
Existing fleet as traffic growth so the demand for the new safe efficient.
77 to $83 50, we believe is of long term growth prospect.
And we're very excited and we're bullish as the pandemic comes to a close and we believe people feel comfortable traveling again and visiting those countries those areas.
That day.
The pre pandemic.
Got it perfect. Thanks, guys.
Thank you.
Your last question will come from Sheila <unk>.
The <unk> from Jefferies. Please go ahead your line is open.
Thanks, guys good morning, Patrick of Nick.
Just one question for you guys.
Nick maybe for you since it was in your script you know back in the Paul you had previously talked about.
Double digit margins and timing of reaching it and now it seems you guys could reach mid teens level.
When do we just five per month and that could be as soon as of Q4. So I guess, what's changed over the past few months that you've kind of gone from potentially reaching double digit sometime in maybe 'twenty 'twenty two day.
Mid teen.
Well Sheila I think.
I think maybe you've heard incorrectly on what.
We actually stated what we gave for revenue ranges of one eight to $1 9 billion and we cited 2014 2015 when the eight 350 was ramping to five per month, a similar type of scenario to where the <unk> hundred 50 is today.
Day or moving to based on Airbus is communication on that they're planning to stay at five per month. So our point there was the work we've done the efficiencies we've driven the cost actions, we've taken even in light of the increased depreciation.
We believe that we will deliver similar margins in the mid teens, when we achieve the sales revenue numbers.
So we werent given the timing for this year or next year. It was based on when we achieve those sales.
Levels.
Okay, No I I.
Understood I just to add on.
I just assume that the destocking would be over in the second half on the wide bodies. So I assume that you could potentially reach of rate of five per month on the SP SP, but of course theres other factors that go on to that okay.
On.
On your specific point on the <unk> hundred 50, and being on line closer to five which Airbus is producing at we believe we will be at that level in the second half of the year.
Okay, Alright, thank you very much.
Thanks Sheila.
This will conclude today's conference call. Thank you for your participation you may all now disconnect.
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Thanks, Paul.
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