Q3 2021 Hexcel Corp Earnings Call
Good morning, My name is Brent and I will be your conference operator today.
At this time I would like to welcome everyone to the <unk> third quarter 2021 earnings call.
At this time all lines have been placed on mute to prevent any background noise.
After the speakers.
<unk> remarks, there will be a question and answer session.
If you would like to ask a question at that time simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question again press Star one.
Now my pleasure to turn the call over to Patrick <unk>, Chief Financial Officer, Sir. Please go ahead.
Thank you.
Good morning, everyone welcome to Hexcel Corporation's third 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.
Certain statements contained in this call may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, they involve estimates assumptions judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes 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, this call is being recorded by Hexcel Corporation and is copyrighted material.
Not be recorded or rebroadcast without our express permission your participation on this call constitutes your consent to that request.
With me today are next tonnage, our chairman CEO, and President and Kurt Goddard, Our Vice President of Investor Relations.
Purpose of the call is to review our third quarter 2000.
One results detailed in our news release issued yesterday 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 third quarter results and look ahead to year end.
The results we shared in our news release last.
Last night reflected strong earnings performance as sales recover and our margin expands as a direct result of the decisive actions we took to realign our cost base early in the pandemic along with our continued focus on improving productivity through operational excellence.
With our restructuring.
<unk> now behind US, we have never been leaner more focused or better aligned to take advantage of the demand for light weight advanced composite products than we are today.
With customer Destocking essentially complete we remain confident that build rates will steadily increase.
<unk> to meet pent up demand for air travel as well as the need to replace aging aircraft with more fuel efficient lower emissions aircrafts made possible by the advanced material solutions that hexcel has to offer.
We're closely monitoring the continued effects of the pandemic on our business.
<unk>, including supply chain constraints inflationary pressures in a competitive market for talent.
Our supply chain is experiencing some tightness and our team is focused and working hard to ensure the continued availability of raw materials to meet our customers' growing demand.
We are not immune to inflationary pressures such as the rising cost of energy and freight. However at this point in time, we have not experienced any meaningful impacts to our costs in part thanks to our long term supply contracts and commodity hedging.
Yes, we must remain vigilant.
Inc.
Historically, we've offset inflation through productivity initiatives to improve efficiency and I can assure you all our plants will have robust productivity goals built into their plans for 2022 and beyond no different than years past.
After reducing.
Our head count by approximately 35% over the past 18 months. We are now re hiring as we bring idled assets back online to meet new and increasing demand, especially for carbon fiber.
Like many others, we are finding the talent pools to be tighter than they were pre <unk>.
<unk> yeah.
Yet still we have made exciting new additions to our team over the past quarter and I am confident that we will continue attracting the best the brightest the most diverse and the most talented workforce available.
There are many encouraging signs that lead us to believe.
Pleased that a sustained return to growth is now taking place as you know for example, the U S is expected to lift its international travel ban in November and that is great news since international travel has been muted for so many months.
We're seeing strong improvement in aircraft orders around.
Paul.
Airlines are recovering with many receiving new planes and more importantly, refreshing their fleets with the most fuel emissions.
Emissions efficient aircraft, which means composite rich platforms.
Now let me highlight some of the results from this quarter.
The globe overall sales in the third quarter of 2021 were $334 million compared to $287 million in the third quarter of 2020.
Aerospace sales of $167 million represents an increase of almost 30% compared to the third quarter of last.
Here as a result of stronger narrow body demand.
We believe the <unk> hundred 50, Destocking generally concluded during the third quarter and after three successive quarters of increasing business jet sales, we think that business jet Destocking is also now largely.
Yes.
In July Airbus launched the <unk> hundred 50 freighter with a scheduled entry into service in 2025.
It will be the first composite rich freighter in the market and because of its fuel efficient profile. It will comply with the tightening aircraft emission standards.
Behind it take effect later this decade.
Light weight composites helped enable the value proposition and additional <unk> hundred 50 production volume will obviously be beneficial for hexcel, whether passenger or freighter configurations.
Sales to other commercial aerospace such.
The regional and business aircraft were up over 9% compared to third quarter 2020.
The business jet market, where we have a great positions, particularly on new composite rich large cabin aircraft continues to demonstrate a positive trend.
Yeah.
Turning to space and defense.
Such as sales were more than $110 million, which represents a one 5% increase over 2020.
We have content on hundreds of programs in space and defense, including significant advanced composite content on both the Lockheed Martin F 35, and Sikorsky CH 53, K and.
And we anticipate winning additional incremental work to help boost future sales.
Industrial sales were about $56 million during the quarter, which was roughly a 12% increase in constant currency.
We're seeing strength returned to several industrial submarkets, including.
Including winter sports and recreation equipment.
Our automotive business remains strong even considering the chip shortage impacting that industry.
<unk> has also benefited from new sales as we allocate carbon fiber capacity to other industrial markets.
Wind energy sales.
<unk>, which is the largest submarket and industrial declined more than 31% in constant currency compared to third quarter, 2020, which reflects ongoing softer demand as well as the closure of our wind blade material plant in the U S about a year ago.
Before I turn it over to Patrick let me share some highlights.
From the quarter.
In September we announced an expansion at our engineered core facility in Morocco, we expect to double the size of the plant by early 2023 to meet continued and increasing demand for lightweight honeycomb materials for engineered core parts for aircraft.
Entering the cells and helicopter blades youll.
Youll recall that we celebrated the grand opening of our plant in Casablanca and 2018. So when just three years with at least half of that time spent navigating the effects of a global pandemic. We are realizing strong demand growth for our composites.
Region.
Just last week, we were joined by several of our customers and local government officials in Salt Lake City for a groundbreaking at what will become our newest center of research and technology Excellence.
We announced plans to build the center back in May and we remain on track.
For completion in late 2022.
It will be our largest center for innovation in product development in North America, and a flagship for our advanced composites technology with space for future growth and expansions in the years ahead.
Our additives thermal plastic.
What's in the factoring capabilities are now certified by both Airbus and Boeing for commercial aircraft applications.
In September we announced that we had been awarded a multiyear contract to produce aerospace structures using this technology for the Boeing Triple Seven X.
And finally, we had a couple.
Couple of terrific recognitions from customers.
We were awarded the success partner award for our efforts to deliver outstanding product quality on time to spirit Aero systems.
And our Salt Lake City operations were recognized by Blue origin for our contributions toward helping them achieve their firm.
Many human flight aboard the new Shepherd.
Now I will turn that over to Patrick to provide more details on the numbers.
Thank you Nick as a reminder, the year over year comparisons are in constant currency. The majority of our sales are denominated in dollars. However, our cost base is a mix of dollars euros and British.
Dish pounds as we have a significant manufacturing presence in Europe.
As a result, when the dollar strengthens against the euro and the pound our sales translate lower while our costs translate lower leading to a net benefit to our margins.
Conversely, a weak dollar is a headwind to our financial results, we hedge this currency exposure overtime.
Over a 10 quarter horizon to protect our operating income.
Turning to our three markets commercial aerospace represented approximately 50% of third quarter sales third quarter commercial aerospace sales of $167 2 million increased 29, 8% compared.
<unk> for the third quarter of 2020 led by narrow body sales as narrow body Destocking concluded last quarter on Airbus is increasing the production rates on the <unk> hundred 20 family.
For wide body. The <unk> hundred 50, Destocking was generally finished by the end of the third quarter consistent.
Without communications during our last earnings call.
Destocking for the 787 will be extended though we are not in a position to estimate the timeframe.
Space and defense represented 33% of third quarter sales and totaled $110 4 million increasing one.
4% from the same period in 2020.
We witnessed strength in fixed wing aircraft, including the F 35, and unmanned aerial vehicles as well as commercial helicopters and the CH 53 K.
Regionally Europe was strong partially offset by some softness in Asia Pacific.
Industrial comprised of 17% of third quarter 2021 sales industrial sales totaled $56 $2 million, increasing 11, 7% compared to the third quarter of 2020.
We are continuing to experience subdued wind demand with wind energy.
LNG, representing approximately 40% of third quarter industrial sales.
Recall that our industrial business uses both carbon and glass fibers, we purchased glass fiber from third parties for applications, such as wind turbine blades.
Aerospace grade carbon fiber.
It is sold for technology, driven industrial applications.
Our industrial team is now selling carbon fiber to several new customers utilizing available capacity for high performance applications.
On a consolidated basis gross margin for the third quarter was 19, 8% compared to four.
7% in the third quarter of 2020.
The strengthening gross margin benefited in the quarter from a strong fiber rich sales mix leveraged against our reduced overhead cost base.
To share some perspective on mix.
Our manufacturing processes, obviously differ whether.
We are producing honeycomb carbon fiber or engineered products.
For carbon fiber are manufacturing value chain begins with the production of pre Casa which is then carbonized.
We then we have the carbon fiber over a range the fibers in a uni directional orientation.
And I had one of our many.
Proprietary resin formulations in a process called <unk>.
As we begin to grow again, the impact of ramping and producing the carbon fiber is more pronounced as that is the highest margin portion of our product line.
We expect relatively more weaving and pre pegging activity.
C going forward compared to the last two quarters, which is why our margin recovery will not always be a perfectly smooth quarterly progression.
Okay.
As Nick commented, we did not experience any meaningful inflationary cost pressures during the third quarter. However, we are not immune to cost.
Cost challenges and supply chain pressures.
Our team is focused and working hard to ensure the availability and delivery of raw materials on time to our production requirements.
Our largest raw material purchases, including resins and fibers are typically under long term contracts and industrial.
<unk> resins typically have pass through mechanisms.
We hedge our aquila nitrile purchases, which lays and cost changes over time.
We have long term contracts for power and natural gas at many of our science and specifically our European natural gas needs are locked.
<unk> a period of time, a lot of which was done before the recent price spike.
There will likely be additional cost pressures over time with certain raw materials, including aluminum at this point in time I would characterize the anticipated impact as being modest relative to our total cost base.
And as a reminder, the flip side to higher oil prices is that it drives the aircraft fleet replacement, we support on top line growth over time.
As a percentage of sales selling general and administrative expenses and R&D expenses increased to 12, 7% in the current.
Current quarter compared to 13 12, 3% in the third quarter of 2020.
Recall that last year, we had implemented temporary compensation and benefit reductions as part of our cost control actions.
Okay.
Adjusted operating income in the third.
Quarter was $23 $6 million, reflecting strong variable margin performance and robust cost control the.
The year over year impact of exchange rates in the third quarter was favorable by approximately 100 basis points.
Now turning to our two segments the composite <unk>.
Materials segment represented 76% of total sales and generated an 11, 1% operating margin strengthening on sales mix and topline growth.
The operating margin in the comparable prior year period was negative.
The engineered products segment, which is comprised of our structure.
<unk> core businesses represented 24% of total sales and generated an eight 1% operating margin again in the operating margin in the comparable prior year period was negative.
The effective tax rate for the third quarter of 2021 was 38, 3%.
And then pandemic and consequent mix mix of results across the countries in which we operate is expected to continue to impact the company's overall effective tax rate throughout 2021.
Yes.
Net cash generated by operating activities was $64 $2 million year to date.
Working capital was a use of $46 million year to date.
We believe this level of working capital growth is appropriate to support our forecasted sales growth.
We manage our working capital by considering number of days and the quarterly days sales and days payable outstanding has been consist.
Each quarter in 2021.
Inventory has seen some growth as we prepare for increasing OEM aircraft production rates in 2022.
Capital expenditures on an accrual basis was $6 $5 million in the third quarter of 2021% and $14 $3 million year.
Year to date.
This compares to $39 $4 million through the nine months ended September 32020.
Capital expenditures continue to be tightly managed with a focus on improving existing assay efficiency and new technology advancement.
Free cash flow for the third quarter.
Just in 'twenty, one was $19 5 million and $49 $2 million year to date through the end of the third quarter.
This compares to $109 $2 million generated through the first nine months of 2020, which was supported with large reductions in working capital.
In summary.
We are expanding profitability and tightly controlled capital expenditures supporting free cash flow generation in 2021, despite some modest working capital increases to support growing sales.
Our liquidity remains well above the bank covenant minimum of $250 million.
And we have no near term debt maturities.
I'm confident that we will continue to meet this minimum liquidity covenant and confident that we are well positioned to meet the pre pandemic leverage coverage ratio when the revolver covenants revert back to the original facility agreement terms in mid 2022.
<unk> our share repurchase program as restricted through March 31st 2022 by the revolver Amendment executed in January 'twenty. One dividends also remains suspended at the current time.
Our board continues to regularly evaluate capital allocation priorities.
Our earnings release States, we're not providing financial guidance at this time however.
Previously provided some framework around 2021 financial expectations.
And on which I will briefly reconfirm.
Market consensus revenue is generally reasonable.
<unk> be mindful.
Full of specific program pressures.
The year to date adjusted operating margin percentage is now a reasonable proxy of our expectations for the full year.
Capital expenditures in 2021 will continue to be tightly manage and are expected to be at a similar level to 2020 or just.
Hello.
We expect to continue to generate positive free cash flow during the remainder of 2021 and further reduce debt levels.
We expect the effective tax rate to be approximately 23%.
With that let me turn the call back to Nick.
Thanks, Patrick.
Over the past several months, we have been adjusting and making tough business decisions to position ourselves for growth as the effects from the pandemic begin to lessen.
While it is going to take a number of years before we return to pre pandemic revenue levels are fundamental.
Just both remain unchanged we.
We have leading positions in the world's largest programs with our advanced composite technology and the broadest portfolio in our industry.
We continue to generate cash flow and further strengthen our balance sheet.
The great job our team has done to strengthen our firm.
<unk> mentioned over the past decade put us in a strong position that has allowed us not only to weather the storm, but to come through it is stronger than ever.
It goes without saying our markets remain uncertain.
Even though we're seeing positive signs, we need to be cautious and stay extremely folk.
The cost control and cash management.
Our team is also laser focused on staying on top of our raw material supply chain to minimize any potential production impacts.
We closely monitor on time delivery and quality and our customer ratings regarding these two key performance.
Metrics remained very high despite the challenges imposed by the pandemic.
Most importantly, we are staying close to our customers to ensure that we are aligned with changing demand.
We remain confident in our continued aerospace recovery, which was supported by growing.
<unk>, an OEM backlogs and production rate increase announcements that should support strong growth in 2022 2023 and thereafter.
We have refocused restructured and drawn on our resiliency to ensure that we continue to deliver exceptional value to our customers.
Boeing.
And it is only going to continue.
Global demand for lighter weight stronger and more durable materials and all of our markets will grow and our broad and expanding technology portfolio remains unrivaled in our industry.
In addition, we.
Customer exceptionally talented diversified and experienced advanced composite materials science workforce.
We anticipate strong pull for our entire portfolio for many years to come.
Our team remains energized and focused on our priorities, including innovation.
Generating in.
Tightly managing cash and further strengthening our already strong balance sheet.
And controlling costs, while at the same time positioning ourselves for the demand recovery ahead.
We're aligned and positioned to deliver strong incremental margins and long term shareholder value.
With that Brett, we're now ready to take questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Due to time constraints, we are requesting that any participants ask one question and one follow up question.
Yes.
We will just pause for a moment to compile the Q&A roster.
Okay.
Your first question comes from the line of Sheila <unk>.
We'll move with Jefferies. Your line is open.
Good morning, Nick and Patrick and thank you.
I guess.
Nick and Patrick you, both talked about inflationary pressures in the industry can you give us the split of raw materials and labor and what percentage of your raw materials, you hedge and just a follow up to that Patrick I wanted to clarify what you said I think you said operating margins in the quarter.
<unk> could be a proxy for the full year, but I might have misheard. It. So if you could just clarify that.
So just to clarify that firstly, I'm really saying the year to date.
<unk>, 6%.
Adjusted operating income is sort of roughly a proxy it is not an exact science and I'm not giving you an exact number.
But there or thereabouts for the full year not the quarterly number the okay. The year to date number in terms of raw materials, I mean, im not going to be exact and specific aquila nitrile is the one commodity we hedge we hedge at over eight quarters, we actually buying propylene.
As a proxy.
Oxy because that through a formula that drives what we pay for equivalent nine trial and what that does over time as it takes away the peaks and troughs.
Of any price movements, we will go up it will go down but it has a good smoothing effect for us.
Our key aerospace resins are perhaps the most obvious.
This thing and that is our largest single third party purchase.
We have long term contracts.
To buy those and so we do get protection.
What we're really talking about is freight and energy costs and some of our smaller raw materials, where we don't have the same long term contracts we are.
We're going to see some inflationary pressure on undoubtedly around labor at some point. They will also be pressures, but within the total cost base, we're confident to keep it under control and as Nick talked about through efficiencies and productivity drive that we put in place every year, we will do our best to mitigate it as much as we.
Can but we're not immune we don't want anyone accuses of saying, we're not going to feel any effect, but we are going to do our very best to minimize that effect and we're confident to do that.
Great. Thank you.
Your next question comes from the line of David Strauss with Barclays.
Barclays. Your line is open.
Thanks, Good morning.
Good morning, David.
Nick you touched on the.
The growth that you're expecting next year I wanted to see if you wanted to comment at all on.
What youre thinking relative to where the 2020.
Two revenue consensus is which looks like it implies about.
35% to 40% growth in your in your commercial Aero business.
Okay.
Yes.
Yes, David So we're in the process of rolling up the plan, we are optimistic looking at narrow bodies.
What our customers have stated they're growing their rates to over the course of 2022 and beyond.
The fact that Destocking is behind us on the <unk> hundred 50, the narrow bodies of business jet that's going to be.
Tailwind for us going into 2022.
So I don't want to get ahead.
I think consensus 2022 estimate isn't wildly out of line.
So I.
I look forward to providing guidance when we report in Q4.
We report our full year results, which is our intent.
In Jan.
Okay.
But we're excited with the strong growth that are that we're seeing as of today.
Okay, Thanks for that and.
Patrick.
You know you you mentioned a little bit of a working capital drag obviously I would assume as revenue starts to come back to your Capex is going to increase.
Annually.
You've given us rough guidance about thinking about the EBIT EBIT margin progression from here. So we can kind of get to an EBITDA number looking out over the next couple of years.
What level do you think you can convert EBITDA into free cash flow given the working capital drag in higher Capex from here.
I mean, our capex is going to remain subdued for some time I mean multiple years, we're probably going to creep up back towards what we saw historically as a maintenance level, but our need for large scale capacity.
Bend is some years away I mean, we're really going to grow.
<unk>.
The existing plants and equipment, we have so based on that.
We need topline growth that will pull up.
Our bottom line that will drive our EBITDA and for a period of time, we should see very good cash conversion I don't want to get into the forecast and specifics today, but with that one.
<unk> reduced level of capital expenditure.
We're going to have a period, yes, very good cash conversion, which I think is your underlying point, which I would agree with.
And can you just remind us the maintenance level of Capex.
We've always historically talked about $60 million to $70 million and so it's not an exact science.
Got it in that range alright.
Alright, we're running near full capacity correct.
Alright, Thanks, guys appreciate it.
Thanks, David.
Your next question comes from <unk> Misra with Bergen for Aaron Berg. Your line is open.
Okay.
<unk> good morning can.
Can you just remind me what your sales mix is typically in terms of carbon fiber versus honeycomb and I think you mentioned that mix has been different in recent quarters. So just any sense as to what it has been more recently.
Yes.
We don't disclose.
Thank you a lot of our individual product lines sales, obviously, the sales we disclose it by market and we sort of build rates and chipsets give you. Some of the key programs I mean carbon fiber is either sold directly to third parties or we use more of it we used two thirds or more of what we produced internally.
And it gets pulled through woven fabrics or <unk>.
What I will say and what we've been I guess trying to say the last couple of quarters is that at the beginning of the supply chain process that we have and it's been sort of perhaps disproportionately weighted towards more carbon fiber overtime now in front.
<unk> diverse and it will be a bit lumpy, we're going to see the woven products the pre brake products grow and so there'll be a small dilution. It's still all aerospace it's still good quality margin, but that sort of almost exceptional waiting towards carbon fiber will dilutes a little bit.
But carbon fiber is growing we've seen tool.
We really nice quarters of growth has come back probably a little bit faster than we had expected and we hope to see that continue especially as our team are also doing a good job allocating some of the capacity to industrial sales for personal electronics recreation oil and gas applications.
Tool, which is also great for covering overhead.
Understood. Thanks, and then just to follow up on your share buyback program. When is the earliest that you can restart the.
Share buyback is that the.
Second quarter next year or could that be sooner.
Yes.
<unk>, unless we would see sort of renegotiate.
Get a way out of the agreement, which I don't expect us to do we will come out on the first of April next year now that doesn't mean, we will jump straight back into it but the option is technically open to us and we will be reviewing our capital allocation as we are now going through next year.
Great. Thanks.
<unk> go ahead.
Okay.
Your next question comes from the line of Pizza Kubicki with Alembic. Your line is open.
Hey, good morning, guys nice quarter, good to see the return to growth. Thanks.
Thanks Pete.
So I was particularly surprised about the growth.
Patrick and industrial markets, just with Patrick.
Patrick.
Nick you talked about with the Colorado shut down not annualizing, yet in the automotive hiccups out there. So can you give us some more color as recreation that big now that it can just kind of help drive things on its own and is it reasonable.
Adam maybe.
As you get to kind of out of the middle of 2020 to win.
Colorado is annualized and hopefully we're past the problems with semiconductors and automotive.
Is it reasonable for us to think that industrial can grow up pretty strongly in the double digits when things are kind of evened out.
Yeah.
The thing what I would say is I mean.
And obviously it was I mean, if I can start with wind, which is kind of the weak apart in a way that has obviously deteriorated that has softened the market is softer in front of us and we closed the U S plant.
So that does weigh us down as youre seeing in the headline numbers, but where.
So very positive about and thank you for recognizing it is we have seen good automotive sales we have seen good recreation sales and we're seeing these other new industrial markets open up now none of them at the moment or is launches wind.
But they are growing and we see.
We're sort of looking.
We have been pushing towards these value add applications and opportunities in industrial is utilizing our capacity and we're going to continue to push it strongly.
I look further out you've got <unk>, you've got the development of battery technologies, you've got potentially storage tanks.
And so we're excited it's not going to happen overnight, but those are opportunities in the next several years that we're going to pursue.
Okay, you are expecting a little more headwind in Europe wind in China Wind next year is that a good.
Assumption.
Well I don't want to get into specifics I mean, we call China wind down as a watch.
Watch item and I think that's how I would term it today I think Europe winds will be reasonably steady, perhaps with some some small headwind there as well.
Thanks for the color guys.
Your next question comes from the.
The line of Richard Safran with Seaport Partners. Your line is open.
Nick Patrick Kirk Good morning, how are you.
Morning, Richard.
So.
You clearly had some real success here with the $150 million cost take out this year.
Just wondering how do you think you might top that how much runway.
But for additional cost reduction next year or is it that you're just thinking now you have an optimal cost structure based on the volumes you see ahead.
Yeah. So any anybody in August is always driving for productivity improvements and we're no different.
He was excited during my.
While you have tour and visiting all the sites and looking at the automate automation initiatives looking at the plant throughput initiatives and again just a reminder, when we have so many common lines across the business. When we develop an improvement it's very easy to replicate and translate that into further.
You were activity so.
I am very proud of what the team's done we responded very quickly.
We attacked the challenge and right sized our cost structure, we're going to be very careful as we grow.
To take advantage of the processes the systems the automation that we put in place.
<unk>.
And along with Patrick and the team are excited about the leverage we're going to yield and how we're going to get back well into double digit op income earnings as we've seen in past and even higher.
Now just as a quick follow up.
In your remarks about the <unk> hundred 50.
And operator.
Since that was that was an incremental opportunity for <unk>. So I was just wondering if the triple seven X freighter that Boeing is now talking about.
Also represents an incremental opportunity for you.
Yeah.
So it would.
We don't expect the ship set content.
Content on the freighter versus the passenger versions to be wildly different.
No.
As you know we have much more content on the <unk> hundred 50.
But the triple seven.
While it's not as.
Composite intensive SMA $3 50.
<unk> is certainly has.
<unk> improvements that I think the market would welcome.
And any kind of.
Any and all wide body rate drivers are are good for hexcel.
Thanks, a lot.
Thank you Richard.
Yeah.
Your next question comes from the line of John Mcnulty with BMO capital markets. Your line is open.
Yes. Thanks for taking my question I guess, the first one would just be on the industrial applications that you've that you've found or the newer applications do you view these as long standing opportunities that.
Richard markets finally opened up for you or do you view them more as kind of placeholders, while you're while youre waiting for some of the for some of the aerospace side to come come back to the market or so.
So.
I'll take this and Patrick can add too, but one of the one of the positives.
Coming.
<unk> out of the pandemic as we had time to take a step back reevaluate certain markets certain areas that we may want to pursue and with available capacity. It allowed our teams to go in and go after niche performance related industrial applications. So.
Where the Mark we when we go into this we went in with the thinking that these are sustainable areas of the industrial market that we intend to continue to serve and grow.
Got it fair enough and then I guess, maybe to that angle just given the increased push that we're seeing kind of daily.
Really from an ESG perspective are there new opportunities that are opening up from that angle, whether it's for more light weighting or it's for different energy storage uses et cetera that maybe you can speak to where whatever three five years ago. They weren't even on the radar screen, where they're where they now are really opening up or are there opportunities that we should be thinking about.
Triangle.
Right.
It's a huge topic and there is tremendous opportunities and if you really look.
It'll be an evolution to get to a carbon zero footprint, which people are talking out in 2050.
We're talking about a more efficient fuels, but if you really think.
From what the short term medium term enabler is it's light weighting.
<unk> weighting composite structures aircraft more efficient engines, that's step number one so we're seeing significant opportunities on the sustainability front and I would just be remiss if I.
Mentioned, we work sustainability everyday we have going back for more.
<unk> many years, we reissued our sustainability roadmap in 2017. So we recognize that this was a real opportunity it's being adopted at different levels based on the region.
I didn't but is going to be here and continue to gain traction visibility and priority going forward. So it's a great enabler, it's a great opportunity for hexcel and lightweight materials.
Great. Thanks, very much for the color.
Thank you.
Your next question.
<unk> comes from the line of Gautam Khanna with Cowen Your line is open.
Yes, hey, thanks, guys.
Patrick I just wanted to follow up on your.
Directional guidance on margins next year.
With that type of.
Sales increase why Shouldnt.
<unk>.
Prove off for year to date level. It just seems like.
Yes the.
Average you'll have.
In Gulf Coast golfer.
Awesome.
Maybe I missed that but certainly it's not what I said I've only referring to 2021.
No I Didnt talk in any way to 2000.
Didn't mark to.
My reference was to how we were going to close out 2021, which would be roughly around the year to date 2021.
Op income adjusted Op income percentage I made no reference to 'twenty, two we will talk about <unk> in.
In January.
Obviously with strong sales growth, we're hoping and expecting to leverage strong bottom line growth too.
Okay. Thank you that helps maybe I misheard that.
And then just as we talk about next year.
Are there any are there any remaining programmatic headwinds.
I mean destocking is over hopefully 787 is a risk I don't know F 35 is there anything.
From where you sit today, where you see would actually be declining.
Okay.
Theres always the unknown, but based on what we see today based.
And.
If you look at the space and defense segment with our projections from Lockheed on the F 35, with the growth rate, we're seeing on CH 53, K. When you look at the diversity of the product offerings and the new platforms, we're winning on there's no surprise in that segment.
<unk>.
I'm encouraged with what our team has done an industrial.
Especially given the softness in wind and the ability to offset with nice margin business in the sub segments in the industrial and then I think you hit the nail on the head with the commercial.
It's really around China certification for the Max and what will Max rates do over the course of 2022.
And what will happen with the 787 with.
With respect to some of the recent issues and the idling of up.
<unk> build which I do have to point out the 787 was a large headwind for our topline in the third quarter. If you remember Boeing re.
Slowed down their line.
Adjusted the supply chain the demand to the supply chain.
The <unk> dropped and Thats a function of them working on the issues to retrofit and get those corrected to get back up to their <unk> five and then beyond so.
Other than that I think we're well positioned and very excited about the opportunities we're seeing in the pull on our products.
Thanks, a lot guys.
Your next question comes from the line of Myles Walton with UBS. Your line is open.
Thanks, Good morning, Nick and Patrick maybe a follow up to two.
David and a governance question a little bit.
Alex engineered products segment faced some more material headwinds because of the Kent relocation of work or maybe I have that note incorrect, but I thought it was a 2020 to clip over and.
I don't really have the size of that headwind if at all.
So it's.
Thank you.
Evan you adjustment, which we flagged out some time ago with those sales transferring out of our Kent facility into the joint venture that we own 50% with Boeing today based in Malaysia. So that work we will transfer you are correct.
That transfer essentially takes place at the end of this year.
So when those sales move into the.
Into the JV from which we derived 50% of the earnings.
In terms of a material headwind I mean, I wasn't quite sure I mean, so it's a revenue adjustment. It obviously reduces the material that we sell on those programs that are transferred.
And then.
We've worked through it and I think with the pandemic in some ways, it's kind of going to smooth soften that.
Adjustment, but there is a specific even though we're going to grow strongly into 2022 within that there will be a step down out of that.
<unk>, Kent, Washington facility.
Okay, Okay, and then maybe a clarification in the Q you mentioned a $20 million.
Grant from the American Jobs Act I think half of that comes through the fourth quarter or would that just be a onetime exclusion and no impact to the margin trajectory you were talking about Patrick.
<unk>.
Exactly miles it will come through the first half roughly will come through in the fourth quarter of this year and we probably will see the second half maybe in the second quarter next year I would expect at the end of the six month period.
It is tax deductible, but youre right. It will go through a non operating income and we.
Adjusted out obviously, it will be a cash benefit.
Yeah, Okay. Thanks.
Your next question comes from Pete <unk> with <unk> Securities. Your line is open.
Good morning. This is Pete on for Mike <unk>. Thanks for taking my questions. This morning.
Okay.
First of all just a question on raw materials, how much ability do you have to pass through increased raw material costs and your pricing and how does that vary across our different end market.
It varies it varies quite a lot I guess in truth on our industrial markets defined stop there some of our larger contracts.
We have a pretty good pass through mechanism the base chemical based industrial chemicals that may be a quarterly lag, but we can pass those through in.
Aerospace our protection on mitigation is really through our own long term sourcing contracts and hedging on the Aquila.
<unk> Winked trial, we do have some of our commercial contracts with sort of escalators around oil price.
And some other commodities, which do kick in but they tend to be fairly wide sort of colorado's savings in flows.
So industrial pretty readily.
For the nine months through.
On the aerospace side, it's more about the protection that we put in place through our long term sourcing hedging contracts.
Okay. Thanks, that's helpful and then just on <unk>.
Follow up on margins are there any significant price or margin differences that you are expecting as a result of.
Pump Repurposing your capacity for industrial products or do you expect that the margins youre able to realize a consistent.
With the aerospace applications.
The purpose of awesome.
I think the reality is the industrial markets are not as strong or margin intensive as the aerospace market.
Still good it's not commodity carbon fiber or industrial grade carbon fiber margins.
I stood goods solid.
Margins that justify us using the capacity in that direction, but I would have to say is not as strong as aerospace.
Simply because the qualifications the specification.
<unk> premium the cost to serve is different exactly.
Alright, Thank you very much.
Okay.
Your next question comes from the line of Noah <unk> with Goldman Sachs. Your line is open.
Hi, good morning, everyone.
Hey, Noah.
I was wondering if we might go back to 787, and the Max and if you could spend a little more time on your take on what's happening there.
Whats your take on the latest quality revelations on the 707 and how long until you're delivering back to Boeing's stated rate there and then on the Max.
What's your take on why the delivery rate there is slower than.
We would have thought based on their production targets in inventory unwind.
So I'll start with narrow bodies in general and just reflect on the huge backlogs.
And the ability for airlines.
Lines to get aircraft that they want and they need so.
Obviously, you see what Airbus is doing with the $3 20.
I think there is significant demand for the 737, Max I think if you look at the flights that have been taken in the.
The slope of the curve on how.
It's being brought back into service is fantastic and a signal of the.
Product.
I think the big question on the Max again is around certification in China, because it drives a pretty meaningful portion of the backlog.
<unk>.
And I don't have a crystal ball that can give you anything more than you can read.
So again I think if you look at where Boeing is today and where they are planning to go what's going to be a nice step up on rates without China with China It will accelerate.
Switching to the <unk>.
And then.
Unfortunately, there's been a couple of issues. There is one that just recently came about.
We're keeping abreast of that were seeing close to Boeing.
To make sure we're aligned with them on the demand.
<unk> and the volume adjustments so again, it's too.
Early for us to make any predictions I E.
Would recommend you listened to boeing's call on.
I think next week.
And see what they have to say on their plan to get back to five plus.
Okay. So.
Alright.
So all your points there Nick on.
The narrow body market and the Max in terms of where the backlog as we see the new orders coming in.
It doesn't seem like there's any major challenge with the airplane, but the delivery rate just doesn't add up to that it sounds like you don't see any show stopper and it's more of a logistical.
Issue at the moment.
I think it's making sure the supply chain is fully prepared as you know the supply chains are quite complex and it only takes one sole sourced component or supplier to hold it up so I think both the big Oes are being sensitive and practical.
And how theyre going to grow their rates on narrow bodies <unk> wide body. So we've seen that.
And Thats, what we expect to see going forward.
But no we don't.
Don't see any we don't see an issue.
And certainly <unk> ready and prepared.
Just one other one Patrick in order.
I have the full year 2021, and adjusted operating margin equal to the first nine months it.
It would need to be down in the fourth quarter on your projection of higher revenue.
So why would that be the case.
Because I didn't give you an exact number.
It's a thing it's a reasonable proxy may be will be a bit above it maybe we can get to mid single digits.
I mean, I didn't say exactly.
I understand the math your point is correct.
Okay fair enough. Thank you.
Yeah.
Your next.
Question comes from the line of Mike Sison with Wells Fargo. Your line is open.
Okay.
Hi, This is Richard on for Mike.
<unk>.
First question is on the comment that the.
Consensus for 2022 revenues.
In line with what Youre thinking can you give us.
I'm just.
In terms of breakdown I'm, obviously commercial is going to drive the bulk of that but do you see anything on the space and defense side.
Lead to.
The higher growth or.
Conversely on the industrial side, where you have some new applications new customers that you sign.
Side anything there that should.
Drive higher than expected growth.
Segments.
I mean, I don't think so I mean, I think the world is basically spelt out I mean, Nick just talked to now are about the narrow body strength I think the <unk> 320 family is going to be sort of the foundational driver into next.
<unk>, we are excited about the Max and where that's going to go because it is going to accelerate at some point the $3 50, just getting back to a steady state rate five beyond the Destocking, obviously makes a significant difference to us given the chipset and Boeing will work through the 787, so commercial aerospace.
Here is the big driver year over year no surprise there.
Think the F 35 was a is going to end up a little bit softer than this year than we would have expected back in January we know about 10, or so were pushed out into 2022. So.
That growth should solid out the CH 53 K continue.
<unk> to grow so space and defense low single digit growth that we've talked to for some time and we're going to push industrial as hard as we can and we've alluded to some new customer opportunities. So.
Too early to give guidance or commentary I mean, directionally, we recognize where street consensus is.
And as Nick said, it's not crazy.
Okay got it and then just a follow up.
Terms of your capacity.
Talked about sorry to hire some people to bring back some production where are you in terms of capacity utilization and sort of where do you. How do you see that cadence in terms.
Sure.
Matching that growth over the next couple of years.
Yes.
You're going to still be growing back into existing capacity over the next couple of years, it's going to be beyond that timeframe that we would need to put in new plants and equipment. If you think we were at 232 $4 billion coming into the pandemic.
We're obviously going to be driving sales up 161, 8 billion $2 billion over the next two to three years or so.
We've got capacity to grow back into by and large it varies across our plants fibers. These coming back fast as we've talked to.
But we still have capacity there for a period of time.
And we've got weaving in pre plaguing and honeycomb capacity to grow into engineered products. These patents more direct labor driven but across the board. We will increase direct labor pro ramps are essentially with our sales growth building in as much efficiency and productivity as we can so.
I think the simple answer.
<unk> growing banking to capacity over the next couple of years is by and large what youre going to see.
Okay.
Great. Thanks.
Due to time constraints. Your final question comes from the line of Hunter Keay with Wolfe Research. Your line is open.
Thanks, Jamie.
Two from me on the 787.
Just to be clear youre, not having any issues producing or your suppliers aren't and can you quantify if that's your question and then can you quantify how much of a headwind. It was in <unk> you mentioned it was a big headwind I think Nick.
So.
To answer your first question, we're having no issues with our material.
<unk>, our suppliers' inability to supply 77 or any program.
I would tell you directionally. The 787 headwind was close to the gap, we saw between consensus and our actual number.
Okay.
Thank you and then.
You mentioned some choppiness on the margins in the next year with the weaving in prepaying pre frac mix shifting around a little bit I'm, sorry, I wasn't following that that conversation can you just explain to me sort of fundamentally what's happening there.
Yes. Thank you go ahead.
Not really choppiness, but just as the business.
Grows back different product lines are going to grow at slightly different rates and so we've seen the carbon fiber product line grow first which we would expect.
And then we have at our <unk> and so it's just saying the product lines.
As a large vertical integration and what we do.
<unk>.
The change starts with the carbon fiber so that gets moving first fastest and returning we've seen some weaving in pre plaguing and as we go forward the weaving in the pre breaking in.
Keith sort of accelerating as perhaps the carbon fiber starts to slow down at some point, which would you would naturally expect.
That's going to return ultimately roughly to our pre pandemic mix of production across our different production lines Thats all were trying to say.
You don't immediately jump back into the production mix.
Pre pandemic post pandemic, it will take a year or two to actually get back to that.
We're just in mix.
So just the normal sort of ramp.
Much so yes, yes, thanks Patrick.
Yes.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
Okay.
Production.
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Okay.
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