Q2 2021 Hexcel Corp Earnings Call
Good day and thank you for standing by welcome to the Hexcel Q2, 'twenty 'twenty 1 earnings conference call. At this time, all participants are in a listen only mode.
I'll start and the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded.
I would now like to hand, the conference over their first speaker today, Mr. Patrick Ventolin.
Actually financial officer. Thank you. Please go ahead Sir.
Thank you.
Good morning, everyone welcome to Hexcel Corporation's second quarter 2021 earnings conference call before beginning let me cover the formalities 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.
Is that 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 and last Night's news release.
A replay of this call will be available on the Investor Relations page of our website lastly.
Lastly, this call is being.
Being recorded by Hexcel Corporation, and is copyrighted material and cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request.
With me today are mixed tonnage, our chairman and CEO and President and Kurt Goddard, Our Vice President.
President of Investor Relations.
The purpose of the call is to review our second quarter 2021 results detailed in our news release issued yesterday now.
Now, let me turn the call over to Nick.
Thanks, Patrick.
Good morning, everyone and thank you for joining us today as we share our.
Our second quarter results and look ahead to the second half of the year.
And the globe Global Covid pandemic is far from over but with the growing availability of explanations. There is cautious yet positive momentum is domestic travel and appears to be on the rebound and aircraft backlogs have started.
To grow again.
While there remains uncertainty ahead, our focus has shifted toward a return to growth.
All of us recognize that the past year and a half has been unprecedented.
The global pandemic required hexcel to take aggressive and swift restructuring actions, which.
Started yet.
We also took advantage of the lower production levels to drive cost and efficiency improvements.
These efforts have positioned us to exit the pandemic more focused and more efficient for a strong rebound.
The way our team responded to the challenges has been phenomenal and as.
Which we did and the results we reported in our news release last night.
A robust start to the year continued into the second quarter with results in line with or slightly ahead of our expectations.
We achieved strong margin performance, despite lower year over year sales as a result of a favorable.
As reflect mix from higher carbon fiber sales.
Combined with efficiency improvements and reductions and our overhead costs, we were able to deliver 8 of adjusted EPS for the quarter.
If you remember back to the second quarter of 2020, we also reported <unk> of adjusted EPS.
However, on sales that were almost 17% higher and constant currency.
This demonstrates the cost controls actions that we took quickly and 2020 and that continue today are making a significant difference and the sustained value we offer to our shareholders.
As we anticipated last quarter, we believe inventory destocking is largely behind us as we move into the second half of the year.
Specifically destocking for the <unk> hundred 20, and 737 Max are basically complete.
The wide body is still have some inventory to burn through.
Expect that will take a few more months to align with the announced build rates.
We are encouraged that airlines, such as United are placing orders with the commercial aerospace Oems as revenue passenger kilometers continue to grow around the world.
Deliveries climbed in June for both Airbus and Boeing.
<unk>, which we believe is further evidence that we along with our customers are beginning to emerge from the effects of this pandemic driven downturn.
However, while we anticipate gradual increases and build rates in the coming months, we recognize that it will take some time for rates to return to.
And we 19 levels.
Even with vaccines restoring confidence and travel there are uncertainties with additional variance of the COVID-19 virus spreading.
U S air travel is steadily increasing but still about 25% lower than before the pandemic.
European travel is improving however, the recovery is slower with flights remaining about 50% lower than pre pandemic levels.
So while we see some encouraging signs and are planning for increased demand and a gradual recovery, we recognize that the effects of the pandemic on commercial aerospace.
To our business are likely to remain for some time.
Even so we are very excited about our future and pride ourselves on a relentless drive for continuous improvement.
With that in mind, we have taken full advantage of this time to deepen our customer relationships, which have never been.
And.
To further improve our processes and to build our broad portfolio and our commitment to continued innovation.
We announced in May that we are building a flagship center of excellence for research and technology and the U S to support next generation developments and advanced composite technology.
Strong.
And when it opens in 2022 at our Salt Lake City campus and will be our largest center for innovation and product development and North America, and a showcase for our advanced composites technologies.
Eventually about 150 scientists and other employees will work.
At the New center, including many of the experienced and talented R&D employees currently working and Dublin, California.
With about.
<unk> thousand square feet of laboratory and office space and the latest state of the art testing equipment and will allow us to expand our research to further develop new products and processes and provide an even greater opportunity for us to collaborate with our customers on the latest and advanced composites technology.
100 day to deliver innovative solutions and support future growth.
Design efforts are well underway and we expect to break ground in the fourth quarter of this year.
We're excited to make this investment and innovation today to ensure our continued leadership tomorrow.
And I look.
Acknowledged to inviting many of you to visit once the site opens towards the end of next year.
Our recently completed touring all of our U S locations to conduct site readiness reviews.
And I found during these site visits thrilled me.
Our work force is engaged focused and.
Look forward and motivated for a return to growth the.
The caliber of site leadership and the shop for teams across our plants is truly outstanding.
I was shown numerous examples of increased productivity significant process enhancements and a long list of continuous improvement.
Movement projects, our team implemented across our manufacturing footprint during the pandemic to reduce cost further enhance worker safety and job quality and to position hexcel to expand margins as growth returns.
The ability of the supply chain to.
<unk> remains a watch item for us and we're working very closely with our suppliers to successfully overcome any challenges that arise.
The same focus applies to our labor requirements, which I am happy to say are growing once again.
At this point, we have been able to attract the labor we need.
Yet, we anticipate further challenges, which will address through robust recruitment planning and continuing to stay in lockstep with our customers.
Now, let me highlight some of the results from the quarter.
Aerospace sales of $154 million were down almost 25% compared to the.
Ramp up quarter of last year.
Narrow body demand is recovering quickly with second quarter sales, reaching their highest level since the first quarter of 2020.
Sales to other commercial aerospace such as regional and business aircraft were down 27% compared to 2020.
The second business Jets is the largest portion of this sector and sales continued to recover but remained lower year over year.
Space and defense sales were about $107 million, which represents relatively flat year over year performance affected primarily by pandemic related production delays.
And as you know we have significant content on both the Lockheed Martin F 35, and Sikorsky CH 53, K with these platforms receiving new orders within the past month, both will continue to be strong programs for us as well as the 100, plus other defense and space programs and this sector.
Industrial sales were about $60 million during the quarter, which was a 15% decline and constant currency.
Wind energy sales, which is the largest sub market and industrial declined 44%, which reflects ongoing softer demand along with the previously reported closure of our wind.
Pre price production facility and North America last November.
In addition, solid sales and other industrial markets, including automotive and recreation and helped to offset reduced wind energy sales during the quarter.
Throughout the pandemic, we have maintain a strong.
Strong focus on cash and and the first half our free cash flow was almost $30 million compared to just over $33 million for the first 6 months of 2020.
Yes.
Before I turn the call over to Patrick I want to provide a brief update on our activities related to sustainability.
Sustainability is at the heart of Hexcel, innovating and producing modern lightweight advanced composite materials and enabling the evolution of more aerodynamic fuel efficient aircraft producing significantly lower emissions than older generation aircraft.
More broadly.
And responsibility has been 1 of our 4 primary values for many years and it calls on us to strive to be good citizens and the communities and which we live and work.
We continue to build on our sustainability goals highlighted and our sustainability report first published several years ago and we are now excited.
<unk> to participate and the carbon disclosure project or CDP.
Initially the CDP report will be submitted selectively to some of our customers. This year and we expect to share next year some middle publicly.
We recognize that many of our investors evaluate our progress and in relation to sustainably.
The ability and especially our ongoing work to reduce greenhouse gas emissions and you can be assured of our continued strong focus and actions on this topic.
Now I'll turn it over to Patrick to provide more details on the numbers.
Thank you Nick as a reminder of the year.
Comparisons are in constant currency. The majority of our sales are denominated in dollars. However, our cost basis and 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 cost also.
Also translate lower leading to a net benefit to our margins.
Firstly, a weak dollar is a headwind to our financial results. We hedge this currency exposure over a 10 quarter horizon to protect our operating income.
Quarterly sales totaled $323 million the sales decrease year.
Over year reflects production rate decreases by our commercial aerospace customers and response to the pandemic combined with the continued supply chain destocking.
You will recall that in the second quarter of 2020, OEM production rates were only beginning to be reduced midway through the quarter and that supply chain.
Jane Destocking had not yet begun to any great great degree.
I would say this is a reminder to consider when evaluating the year over year sales comparisons.
Turning to our 3 markets commercial aerospace represented approximately 48% of total second quarter sales.
Quarter.
Commercial aerospace sales of $153.7 million decreased 24, 8% compared to the second quarter of 2020. This destocking continues and we.
We believe the substantial Destocking is now behind us as we enter the third quarter of 2021, and then I'll narrow.
Quarter production is generally aligned with OEM production rates. However.
However, our wide body sales is still facing some lingering supply chain adjustments that are expected to conclude by the end of the summer.
Space and defense represented 33% per second quarter sales and totaled 1.
$46.9 million decreasing 2.7% from the same period and 2020.
While the demand outlook remains favorable for composite secular growth to enhance performance and extend capabilities quarter to quarter sales can fluctuate as we experienced in the second quarter.
100, and Lockheed Martin has publicly commented the F 35 deliveries in 2021 will be lower than initial expectations on pandemic and juice disruptions, which impacts the supply chain and our deliveries.
Sales were also softer due to some short term pandemic related interruptions impacting.
And other programs, including a number of space oriented platforms with customers located outside of the United States.
Industrial COVID-19% of second quarter 2021 sales industrial sales totaled $59.7 million decreasing 15, 1% compared.
Compared to the second quarter of 2020.
<unk> demand remained subdued while other industrial markets, including automotive and recreation witness growth and the second quarter of 2021.
Wind energy represented approximately 45% of second quarter industrial sales.
And on a consolidated basis gross margin for the second quarter was 19, 3% compared to 14, 5% and the second quarter of 2020.
And the strengthening gross margin benefited in the quarter from a higher mix of carbon fiber sales and production.
And our margin recovery will not.
Completely smooth quarterly progression as it will be impacted at times by step ups and the utilization of major assets, such as precursor and carbon fiber lines.
Second quarter, selling general and administrative expenses increased 24, 3% or 7 million.
<unk> and constant currency year over year research and technology expenses decreased 3.2% and constant currency.
Other expense category consisted primarily of restructuring costs in Europe.
In terms of the year over year comparison of SG&A expenses, the second quarter.
2020 was artificially low as pandemic induced restructuring actions led to nonrecurring reductions and stock compensation accruals as well as a temporary implementation of salary reductions.
As a point of reference second quarter 2021, SG&A expenses.
Our lower by approximately 21% or $8.4 million compared.
Compared to the pre pandemic second quarter of 2019.
Our targeted $150 million of annualized overhead cost savings as being fundamentally achieved at the end of the second quarter as.
As we now pivot to.
And sales and production levels, our focus will be to drive efficiencies and minimize the amount of cost that return while at the same time preparing for significant growth.
Adjusted operating income and the second quarter was $19.3 million.
<unk> strong variable margin.
Performance and robust overhead cost control.
The year over year impact of exchange rates was favorable by approximately 70 basis points.
Now turning to our 2 segments. The composite materials segment represented 75% of total sales and generated a 9.6.
Percentage operating margin compared to 6.3% in the prior year period and.
Adjusting for nonrecurring costs, the adjusted composite materials operating margin and the current period was 10, 7% compared to 8.9% and Q2.2020.
The engineered.
Product segment, which is comprised of our structures and engineered core businesses represented 25 percentage of total sales and generated a 7.4% operating income margin or 7.6% adjusted operating margin compared to 2.6% adjusted operating margin in the second quarter of 2020.
Yeah.
The adjusted effective tax rate for the second quarter of 2021 was 18, 8%.
Pandemic and consequent mix of results across the countries and which we operate is expected to continue to impact the company's overall effective tax rate throughout 2020.
<unk> 1.
Net cash generated by operating activities was $38.9 million year to date working capital was a use of $19.6 million year to date, primarily related primarily due to increased receivables.
Capital expenditures on and.
Accrual basis with $3.8 million in the second quarter of 2021 from.
And <unk> to $11.5 million per the prior year period and 2020.
Capital expenditures continue to be tightly managed with a focus on improving existing asset efficiency and new technology flexibility.
Free cash flow for the second quarter of 2021 was $35.8 million.
Compared to $51.8 million in the prior year period.
Continued tight tight cost control and lower capital expenditures are supporting free cash flow generation.
Liquidity.
And at the end of the second quarter of 2021 consisted of $115 million of cash and an undrawn revolver balance of $543 million.
Our liquidity remains well above the bank covenant minimum of $250 million and we have no near term debt maturities.
Our revolver matures in 2024, and our 2 senior notes mature in 2025 and 2027, respectively.
Our share repurchase program as restricted through March 31, 2022 by the revolver Amendment Amendment executed in January 2021.
Dividends also remains suspended at the current time.
Our board continues to regularly evaluate capital allocation priorities.
As our earning release states, we are not providing financial guidance at this time, however, I would like to reinforce and expand upon the financial outlook share during.
First quarter 2021 earnings call.
We continue to expect 2021 annual sales to be lower than 2020 and below the current market consensus due to recent commercial aerospace production rates adjustments.
The remainder of our previously stated expect.
During the <unk> remained largely unchanged, including.
Some additional restructuring costs are anticipated in the remaining quarters of 2021 and are expected to be below first and second quarter levels.
We continue to expect the fiscal year 2021, adjusted operating margin percentage.
<unk> and the low single digits cap.
Capital expenditure in 2021, we will continue to be managed closely and are expected for the full year to be at a similar level to 2020.
We expect to generate positive free cash flow and 2021 and further reduce debt levels.
We.
The effective tax rate to be approximately 25% in 2021.
Lastly, repeating some broad context from the first quarter's earning call in April we continue to target strong mid teens, plus operating margins once we achieved sales and the range of 1.
To be <unk> to $1.9 million and we are targeting to exceed prior peak margins. When we returned to previous peak sales levels.
With that let me turn the call back to Nick.
Thanks, Patrick.
We believe the worst is behind us and we are cautiously.
A optimistic of our continued and steady recovery during the remainder of 2021 that will propel us into 2022, when we expect a significant return to growth, which will extend into 2023 and beyond.
Without a doubt some of this growth will come from pent up demand for air.
Travel yet much of it also comes from airlines ready to replace older less efficient aircraft with more aerodynamic and fuel efficient solutions as the worlds.
Demands long term reductions in greenhouse gas emissions.
No company has a broader or more vertically integrated.
<unk> portfolio of strong durable and late wait advanced composite solutions that lead to fewer emissions than hexcel.
The market is demanding lighter yet high performing materials, and we anticipate strong pull for our entire portfolio from carbon fiber.
And to <unk> to engineering core for many years to come.
Additionally, non team is better prepared to meet a quick ramp up and our hexcel team.
Over the past several months, while demand retracted we plan for the inevitable rebound we have become more efficient more.
Cost effective and more competitive than ever.
The downturn, we have improved our processes to ensure that we continue making gains, especially and employee safety quality and on time delivery.
Certainly there are risks ahead, and especially so within the supply.
<unk> and the availability of raw materials and labor.
And it comes down to staying focused and aligned with our customers and we intend to do just that.
I am excited about the path ahead, thanks to our great team and our commitment to innovation and continuous improvement through operational excellence.
We are poised to drive strong incremental profit.
General and robust cash flow and deliver increasing returns to our shareholders.
Yes.
Katrina I will now turn it over to you for questions.
Thank you Sir as a reminder to ask a question.
I changed the press star 1 on your telephone.
To withdraw your question press, the pound or hash key.
And I'll go to allow every time for questions everyone for questions. We ask that you. Please limit yourself to 1 question.
Please standby, while we compile the Q&A roster.
Your first question is from Robert Spingarn from Credit Suisse. Your line is open.
Good morning.
Morning, Robert.
Sort of a 2 sided question on related to margins, but Patrick I guess your implied second half margins, a little bit lower than the first half and does that.
And do with your comments just now on sales or are there some other.
Things at work here I wanted to factor in inflation here on raw materials and see if you could talk a little bit about that as well if you're covered through hedges not only through the end of this year, but into next year as.
And I would have to.
Yes, Hi, Robert.
Just to be clear I am not so quarter 2 was strong.
I think thats, what Ive said I wouldn't necessarily say that the second half of the year is going to be lower than the first half of the year. If you look at the first half of the being 3.4%.
Well.
Second quarter was strong because of the mix driven by the strong variable margin because of the carbon fiber mix and you combine that with the efficiencies, we talked about and the ongoing cost savings, which will still be there and the second part of the year, but we may not always have the same strong favorable mix so that.
I think hopefully that gives a context in terms of inflationary pressures and clearly they exist and the world today, what I would say that the hexcel team and our contracts are doing a great job to help them here, we have long term back to back purchase contracts with pricing that's fixed.
So a lot of our key resins, the pricing won't move our commercial resins.
Aquila nitrile the base sort of raw material from carbon fiber, we hedge out.
And it 1 stop and the price moving up but it will smooth that and certainly protected from any dramatic impact this year there.
Does that mean inflationary pressure on things like our industrial resins, but again those contracts give us a pass through and maybe with a quarter delay but to some extent again, we're protected so around the edges and freight may be and area, we will see some inflationary pressure, but it shouldn't be material.
So our margins.
As we close out the year.
Okay, and then just Nick if I could squeeze in just a quick 1 for you, but this <unk> hundred 50 freighter opportunity could you just speak to that for a moment it sounds like that would be good and wood and aircraft like that have more or less carbon fiber content.
Well.
And obviously from our perspective more fuel efficient and slate way aircrafts that have a life of 30 years is a great thing and especially the <unk> hundred 50 being adopted as a freighter variant is exciting for us. So obviously a good thing.
We do not anticipate.
And a significant change in the ship set content going from a passenger version to a freighter version, but.
We're certainly excited and.
Hopeful that both Airbus and Boeing launch new advanced aircraft for free to versions going forward.
Thank you.
Thank you Robert.
Our next question is from John Mcnulty from BMO capital markets. Your line is open.
Yeah. Thanks for taking my question, maybe maybe just 2 related ones on the cost side. So you know.
Nick you had indicated you were adding <unk>.
Labor.
Werent really having and problems with that should we be thinking about that as we normally when you bring up a new facility. There is a little bit of a ramp up or learning curve and there's some inefficiencies early on it.
Is that something we should be assuming with the people that you're bringing on now or are these more experienced and then I guess the second question would just be on the R&D front where right.
And are running at a at a 20% or 25% lower level than you had kind of and the.
The pre Covid World I guess can you speak to the efficiencies that you've learned and can kind of work with in that lower cost environment and and how we should be thinking about R&D ramping up as we as we look forward over the next year or so.
Okay. So let me start with the RMT, we certainly would expect R&D to grow.
And above second quarter levels, and we're putting plans in place for that as we speak.
Okay.
Neither.
With respect to labor and.
Now you're kind of efficiencies.
Many many of the add backs have been experienced hexcel.
Employees.
And throughout my visit it was exciting to welcome them back and to see the excitement and their eyes and the motivation and enthusiasm. So we really have not had.
And he issues and bringing back experienced people.
Anticipating some tightness in those markets and we're being pretty aggressive and how were recruiting posting advertising and staying in touch with prior employees, but to really answer. Your question, we don't see a big learning curve.
<unk> or think that you should anticipate 1.
Got it thanks very much for the color.
Thanks, John.
Our next question is from Gautam Khanna from Cowen Your line is open.
Yes, I was wondering Patrick could you elaborate on where you are seeing.
And.
And some continued destocking, like which which wide body program or programs.
Well I think the simple answer is all of them.
I think probably what wed.
So and the $3.50, we are probably going to get through that.
Program, Destocking first really reflecting that that ramp down happened a little bit earlier, and a little bit fonts to the 787 ramp down from 14 to 10 to 6 to 5 probably happened a little bit later, so that's going to linger a bit further.
And perhaps separate to the.
Pandemic Destocking, but obviously you went now.
There's some more sort of delays around the 787 and I think it will be.
And limited amounts of Destocking, but we could see that even sort of carry on later and so it's all wide bodies, but.
Hopefully the $3.50 to finish soon.
And the 787 and carry on a little bit longer.
Okay and just.
Jeff and National question on Destocking.
Are you seeing that and generally you guys are.
Below on the wide bodies are below the official assembly right.
At Boeing and.
And Airbus, but on the narrow bodies you're in line with the official Assembly right.
And I'm just curious like.
We hear that certain people and the supply chain are running at 3 a month on the <unk> hundred 50, whereas Airbus and is obviously.
Assembly and at a higher rate allegedly.
I'm just curious like in general.
By Destocking, and restocking and like Youre synced up with the assembly rate on the narrow bodies and.
And not so elsewhere. Thank you.
So I'll take a shot at essential.
Wide bodies clearly we were.
Well under the.
Cash and rates stated by the Oes and again, that's the supply chain adjustment that destocking.
To get down to the new stable rates the narrow bodies.
Basically we've seen that wind down with respect to the delta between the stated OEM build rate.
Rates and our ship to rates.
And pretty much based on the demand the visibility that we have with the Oems.
And their supply chain.
We're paying very close attention to above and beyond what we typically do.
And we're seeing that subside and Thats why.
We have confidence that the narrow bodies are pretty much.
And behind us with potentially just immaterial amount carrying on the real.
Items will be the wide body and some <unk>.
Trickle through the summer.
Okay. Thank you very much.
Our next question is from Myles Walton from UBS. Your line is open.
Thanks, Good morning.
Good morning.
Patrick and thank you said that you expect 'twenty 1 just from a sensitivity perspective to be below 2020 sales and that consensus you'd be below that.
And I think consensus has moved since last quarter. When you thought you'd be in line I'm. Just curious is the only change that you've seen a sort of that and.
10, or 15 fewer ship sets on the 87, because what Boeing is doing or are there other moving parts as well.
Well, there's a million moving parts, but the.
And with significant thing is definitely EBIT of 787 models, yes.
Okay, but from a magnitude perspective, that's what the Delta yes.
Aeriality EBIT perspective, that's the largest per share yeah.
Okay, Perfect and then obviously you had great margin performance and composite materials and.
You mentioned, the carbon fiber mix, but I guess, the other mix that I would've guessed worked against you would be the industrial mix as a percentage and maybe I'm not level set, but I thought and industrial margins generally would be below and obviously that mix was was nicely or was higher than your aero and defense mix.
Was there something special about the industrial mix that was not as dilutive.
No I mean, youre right and the only thing I can point to as the absolute dollars for those industrial sales.
Relative to the Aero sales and the higher fiber sales, obviously is kind of weighted down there is a small dilutes.
Impact.
You're 100% correct.
I think given the relative dollar values of the sales.
And overall it becomes very marginal.
Okay, Alright, I'll, let it go there thanks.
Our next question is from <unk>.
Dubicki from Alembic Global your line is open.
Yes, good morning, guys.
Hey, Patrick just wondering if you could provide us any more color on maybe the cadence of margins and in the back half of the year.
I would think you guys would have some feel for the mix and <unk> and <unk>.
And then also it sounds like a day.
And you talked about the step up and and capacity utilization.
And I would say you'd have some feel for that so are we.
We've taken that <unk> will be will be down on a little bit higher volume and the third quarter, but maybe you know fourth quarter is is the high for the year I'm. Just wondering if you could provide us any more color.
On that yes, I really not going to get into our quarterly guy.
Guidance on margin cadence I mean, what I will say as I pointed out 3.4% I would say, it's going to be low single digits for the whole year I'll go as far as saying I don't think theres going to be anything dramatically different between Q3 and Q4.
But I think.
We're not going to get into quarterly specifics.
Okay Fair enough, maybe just 1 last 1 from me that.
You guys and I thought I had an interesting release earlier this month with regard to <unk>.
Doing some work for <unk> and and automotive suspension provider and there was talk about.
I guess I'm being a mass production order.
Automotive supplier. So just wondering is this.
Are you guys feeling like this could be a big breakthrough and the automotive space for you guys or is it way too early or how promising could disappear.
Well I'm not going to go as far as.
Hey, a big breakthrough, but I am excited with the advancements that our team continue to make on new products new processes not only for structural bought for quick curing to make the solutions.
Even more efficient so we continue to do well very well with European car.
As to <unk>.
And BMW being 1 of the leaders and that pack so.
Again, we have multiple initiatives underway to work with our customers to help them identify solutions that put them and are better positioned to win and the marketplace. So we feel good about that and look forward to continue.
<unk>.
Thanks, guys.
Our next question is from David Strauss from Barclays. Your line is open.
Thanks, and good morning.
Good morning, David.
Nick as we.
Think about and then into 'twenty, 2 and 23, just given the level of you know the magnitude of Destocking that you've seen.
Would you actually expect to see a bit of a restocking.
On the other side. So you know what I'm, implying is that your rates could be above.
The.
Actual manufacturer production rates as we get on the other side of this elite and lease for a little bit of time.
That's a great point, David and we've actually spent a fair amount of time, making sure. We're not surprised by some incremental buffer that will be required and the various supply chains, obviously the 320.
With the most aggressive and near term ramp rate is and item we're looking at.
But wide bodies as well as the rates starts to come back I do think some of the supply chain, probably has driven down their inventory.
And to preserve cash and may be tighter than.
And what they can run at higher rates. So we are definitely putting that into our forecast and our evaluation to make sure we're not caught short.
Okay.
And.
Nick could you just maybe level set us in terms of.
Where you stand from a capacity utilization standpoint day.
Mainly on the on the composite materials side.
And utilization capacity our capacity utilization.
It varies I mean.
And my tour of the U S sites I saw sites that we're basically running full out and.
Areas within plants that.
And are basically at or near capacity, while we have other assets and sites idled. So around fiber Patrick pointed out that we continue to ramp up precursor and carbon fiber assets throughout the year and we.
To do more before the end of the year.
But we still have a fair amount of capacity in place.
That will prevent the need for major capex investments for a few years.
Okay. Thank you very much.
Thanks, David.
Our next question is from Paris, <unk> from Darrin Burges Your line is open.
Thanks, and good morning can you talk about your other commercial aerospace category and deep business and regional jet and.
In terms of what sort of bill rate and demand ramp up are you expecting and the second.
Plant and how are the inventories and that business business are looking.
Well, we don't specifically get into build rates I can tell you.
We're excited on the new platforms, some of which are just coming into production with Gulfstream where.
We're excited with opportunities, we have with the soul and potential big wins in that space, obviously similar to commercial aerospace, there's a migration to more efficient composite aircraft and components and.
We love the space for that.
Clearly theres a long.
Long way to go to catch up with pre pandemic levels, but we've seen some.
Optimism with respect to hours flight hours and the demand on the biz jet, especially the larger class size.
And again, we remain excited and bullish on that for the balance.
Of the year.
Thanks for that Nick and.
1 more just going back to the labor issue given the narrow body build rates.
And our ramp up ahead and.
Do you have any sense as to how much in terms of head count.
Kris.
You'll have to implement over the next step.
6 to 12 months.
Yeah.
Well, we're not going to give that perhaps when we give next year's guidance will elaborate a bit but I can tell you.
And 1 of the specific sites I visited in the last couple of weeks as recently ramped up calling back a 100 people. So.
Every site is different.
We're bringing people in and as we as the demand necessitates and we're pretty much and lock step I would also say.
We are continuing to drive the continuous improvement projects. So we're we're even bringing in some labor to work on those advancements and productivity.
<unk> enhancements that will pay dividends down the road as rates return.
Thanks, Nick I appreciate the color.
Youre welcome.
Just a reminder, in order to allow everyone time for questions. We ask that you. Please limit yourself to 1 question.
Weston.
Our next question and from Robert Stallard from vertical research. Your line is open.
Thanks, so much good morning.
Good morning.
And Nick since the loss.
Last call 3 months ago, we have seen Airbus given updates on its build rates and not really much change.
Change on the <unk> hundred 50 and.
And in the next couple of years and of course Boeing has also cut the.
787, again, and so I was wondering if this news has pushed out your expectation for when the wide body side of your business will get back to full rate.
Okay.
Uh huh.
Actually it hasn't.
I'll tell you again this is from my perspective after getting out in the U S and hitting every 1 of our sites seeing how our team has rapidly ramp backup to travel to visit customers to visit suppliers to visit our sites.
No doubt in my mind.
Global.
Travel is going to come back and it's going to come back strongly now vaccines have to accelerate borders have to open up but I can tell you for myself to get into Europe to visit our sites to visit our customers is imperative going forward. So personally based on all the data and all.
The market news that I keep up on and I'm more optimistic on business coming back quicker than was anticipated 612 months ago.
Okay, and then earlier and in your commentary you noted that there is still and.
And related to the pandemic and.
Paul guidance I'm wondering if there's 1 specific thing or several things that you need to see and clarify themselves before you'd feel comfortable enough, giving financial guidance again.
Well I don't know if its 1 thing but certainly.
And getting Europe to open the borders so.
And that there can be free travel unrestricted travel between the us and Europe, and Europe and the U S.
That's paramount for us to get back up.
And having confidence on where we are at the same time the rates and the stability.
And I always look to our customers.
<unk>, Airbus and Boeing and when they start providing guidance so.
And im optimistic that were going to see that as we come into the second half and put us and a great position for 2022, but time will tell.
Okay. That's great. Thank you very much.
Youre welcome.
Our next question is from Richard Safran from Seaport Global Your line is open.
Nick Patrick Kirk Good morning, how are you.
Good morning.
So I wanted to ask you first about space and defense, specifically rotorcraft Lockheed noted some you know improve.
Movement, and rotorcraft and helicopters, it's RMS segment.
I don't think I'm going out on a limb here, saying it really outperformed and to Q. So I was wondering if you'd comment on with respect to what you're seeing and space and defense with rotorcraft is are the RMS results something that where we could see a pickup and the back half.
And I think if you take rotorcraft, particularly I mean, it's going well 21 quarterly sales are about 2020 sales, including Q1 'twenty.
So a nice positive trends and CH 53, K and other platforms moving starting to stamp pump.
Yeah, I'm the wrong direction, I don't think it's going to.
It will be a steady increase through the rest of this year and into 2022, but which I think is what we've called down generally across our space and defense and.
Markets that we expect to see sort of medium to long term.
Low single digit growth and right.
And moving tools within that I mean commercial civil helicopters, whatever are a pretty low percentage. It is dominated by the ministry crop.
Thanks for that Nick.
Just wanted to follow up very quickly on the comment you just made about business jets and would.
Would you be willing to comment if youre seeing.
A crowd of a pick up in and small and mid cabin aircrafts I know you know and in earlier quarter. You know you had made some comments about it I thought just maybe you'd have a remark or 2 on that.
Well again, I think the traffic and if you look at the data and used aircraft and the sale.
As positive momentum.
And again not much more color other than.
And it pretty much stood out that the large class was leading the pack with respect to the growth and the recovery.
Expect and anticipate that the mid and smaller class will follow.
Yeah.
Thank you very much.
Thank you.
Our next question is from Mike Sison from Wells Fargo. Your line is open.
Hi, This is actually Richard on for Mike.
My question.
So just on the industrial segments.
I'm just curious.
This strength and us and automotive and recreation, David just 1 more color on that and also what.
Is the current state of the wind energy market have you seen that bottom out.
And any change and that sort of customer.
And you know on their supply chains and that type of thing.
Yeah, So I'll take a shot and Patrick can add some additional color.
With respect to the industrial market again, there, there's 30 plus segments and their and we participate.
Monitor contribute all of them, obviously, the automotive we've got.
Certain differentiated technology, we continue to push we continue to work with the Oes.
Especially on the premium and and the high performance to find opportunities, where we can differentiate.
And and offer.
For advanced solutions, utilizing our technology and materials.
Marine has stepped up nicely as well as rack and we've got various wins within both categories and none of which individually.
And move the needle significantly, but they all add up and we continue to pursue those.
<unk>.
So Patrick.
And I think Thats right, I mean, and just sort of reflecting back on miles. His question is about a little bit I mean, you have to think some of the things, we supply and to industrial high and automotive woes.
Woven carbon fiber and so margins associated with that sort of that those sales those.
Lines and not greatly below some of the aerospace lines now overall they are lower on average and it is slightly dilutive, but and I think there is a mix and certainly as Nick was alluding to the high and also pulls a lot of fabric and.
And where that and textile carbon fiber that that can be attractive business.
And then just on I guess, the comps and materials are the increased mix of carbon fiber just like you mentioned do you expect that mix to continue to be.
The same going forward for rest of this year or what's your expectation.
What I tried to kind of alluded to that in the script it's going.
Be a little bit lumpy I mean, we've obviously got the growth we have now but as other product lines come back and the mix gets diluted a bit and and so we will occasionally see a step up and carbon fiber and that will help a particular quarter and give us a boost I mean.
I'm not talking significant changes quarter.
Okay.
And.
It depends on the overall mix.
And I wouldn't assume that every single quarter is going to get the same carbon fiber mix boost I think thats the simple answer.
Great. Thank you.
Okay.
Yeah.
Our next question is from Sheila <unk> from Jefferies. Your line is open.
Hey, good morning, Nick and Patrick.
Patrick you might as well give guidance at this point, because we're asking all the questions anyway, but on.
And the 77, destocking lingering a little bit longer can you tell us how youre thinking.
And lingering and what that impact on profitability would be given you know last quarter, you quantified or kind of give us some guidelines on the <unk> hundred 50, and what that would mean for profitability.
The line is breaking up a little bit, but I think you were asking about the the 787 impact.
For the rest of the year.
And obviously, we don't have specific expiring and called out and they're going to operate at a b.
Below grade 5 level for a period of time.
We're staying very close to that and we'll flex appropriately.
And obviously, having gone through a fairly significant.
About that stocking related to the pandemic hopefully that shouldn't be too much but there may be some and I think I mentioned that earlier so we're.
Staying agile and that also kind of.
My comments around the sort of revenue expectations for the year.
We obviously see and impact from that 787.
And deepened.
And you mentioned something on the <unk> hundred 50, CEVA could you repeat on the Anthony Yes, sorry, Patrick if you could hear me now on the <unk> hundred 50 last quarter, you mentioned and Nick corrected me nicely, but on the EBIT that you mentioned.
At some point when you were at 5 per month, you were at double digit peak ish margin so kind.
Adjusted we think about the 780 sevens impact on your profitability profile.
Well I mean, the 787 is a great program and it's obviously a smaller program than the $3.50 for us.
We want to all the programs to come back I mean, the point, we were making was specifically we were kind of trying.
Kind of how the world don't think we have to get back to rate 10 on the <unk> hundred 50, and order to make mid teens plus margins that that was the specific point now open and see if we can free.
<unk> 787, and sales and the $3.50 creeps from 5 to 6 and upwards, that's just going to help boost as to.
Mid teens and high teens performance.
Okay. Thank you.
Okay.
Thanks Sheila.
Our next question is from Noah <unk> from Goldman Sachs. Your line is open.
Hey, good morning.
Good morning Noah.
And.
Patrick if I just plugged in your <unk>.
Operating margin into the third and fourth quarter, it would make the full year shake out to.
You know something and the mid to high fours, so by guiding to low single digit if I had to find that is below 5.
5 it sounds like you're telling us that the third and fourth quarter will average something less and the second quarter is that fair.
And your overall shape is about right Noah.
Let's say that low single digits is below 5 yeah, I agree with that.
Okay.
And the you know the discussion on the longer term margin and where it can be when you're back to 1.
1.8 to 1.9 billion of total company revenue, where you were a.
A few years ago.
And at that point and time, the margin was kind of 17 and 18%.
<unk>.
And calling it mid teens, rather than just getting back to where you used to be is that purely a function of.
Wide body and and you can be.
A little bit below where it used to be but close with much lower wide body rates because of everything you've done and the cost side and you would just need wide.
Body closer to where it used to be to get to get all the way back.
I think he is really just the degree of specificity that we're putting out there I mean, we're saying mid teens plus so it could be 16, and 17%. We're obviously looking to drive it as much as possible as we called out previously.
And holding onto as much of the $150 million over head take count to overcome the depreciation headwind is a key part of this.
A little bit of mix is going to impact it but absolutely when we get to the 1819 level, we will be looking to push to the same levels. We were previously perhaps.
Perhaps we're being a little bit cautious and saying mid teens, plus but we will be driving it as strongly as we can.
Got it and.
Last piece of that.
Obviously, you have much higher depreciation today than you did and the historical period of time you are referencing is that the entire depreciation variant.
And so you're referencing or is there still a little bit more of that ahead of you.
Well I mean, the depreciation difference he is going to be was $60.65 million.
That's essentially what I am talking about is the headwind.
Okay and then.
That being today versus.
So call it 2016.
Yeah. So we've got about well I'm kind of looking forward a year or 2 by the time he is going to take us to get to 1819.
Depreciation is not going to grow very much at all and I am just looking back exactly to 2015.2016 levels.
Yes.
Got it.
Okay. Thanks, so much.
Our last question is from Ron Epstein from Bank of America. Your line is open.
Yeah.
Mr. Epstein and your line is now open.
Oh, sorry about that.
Hey, good morning, guys.
Maybe just a question a bigger picture question on composites and general.
And maybe in 2 parts 1.
Where do we stand on cold cure and the ability to get.
Posit throughput quicker because that seems like that would be something that would be good for.
Future narrow body and then too.
Should we think about the recent issues on 7 and 8.7 and.
And what that means for composite usage on aircrafts given that the production difficulties that they had is that just a boeing specific thing or is that a composite thing.
So.
First thing Ron I'll, I'll address the cold cure and whether it's cold cure or accelerating cure rates in conjunction with accelerating lay down rates and.
And whether or not auto plays are needed or not and that all helps the entitlement grow.
Within the aerospace and clearly you can imagine that's a large portion of our focus whether we're talking about industrial applications for automotive or working with the Oes and the next new narrow body material. So curing the efficiency of curing the ability to make even more product.
Near net shape using composite is just going to continue to grow and the entitlement is going to follow.
With respect to the 787.
Let's not forget airplanes are big complex devices and.
And last I remember there were problems with aluminum and metal planes.
And the path so I view this as.
And I don't have the specific details, but some escape that was discovered based on the scrutiny that Boeing is putting on their products and they took a step back and decided to fix it very quickly by taking down.
Some of the rate on the 787, and so I expect them to put this behind them very quickly.
And I would also add that I think what both Boeing and Airbus and many of our other customers have continued to find is that the composite manufacturing processes heavy.
The fall dramatically and the efficiencies and cost benefits in the processing that keep in mind.
Composite planes are relatively new compared to muddle planes, but the progress made is phenomenal and it is going to continue to accelerate so I look at this as.
Development production item that will be resolved and.
Composites will continue to prosper.
Great. Thank you very much.
Thank you speakers, ladies and gentleman this.
<unk> concludes today's conference. Thank you for your participation.
And have a wonderful day you may all disconnect.
Yeah.
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Yeah.
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