Q4 2021 Hexcel Corp Earnings Call
[music].
Hello, Thank you for standing by my name is Brent and I will be your conference operator today at this time I would like to welcome everyone to the XL Q4, 2021 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time simply press star followed by the number one on your telephone keypad.
I would like to withdraw your question again press Star one thank you.
Now I'd like to turn today's call over to Mr. Patrick Winter Electric Chief Financial Officer. Please go ahead Sir.
Thank you.
Good morning, everyone welcome to Hexcel Corporation's fourth 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 might 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 that could cause future actual results or outcomes to differ materially from our forward looking statements today.
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 Corporate Corporation and is copyrighted material.
It cannot be recorded or rebroadcast without our express permission.
Participation on this call constitutes your consent to that request.
With me today are next tonnage on chairman CEO , and President and <unk> got on our Vice President of Investor Relations.
The call is to review our fourth quarter 2021 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 both fourth quarter and full year 2021 results.
When we spoke a year ago, the pandemic had a tight grip on both our business and our personal lives.
Last January less than 1% of the world's population was fully vaccinated against Covid.
International travel was at a virtual standstill, a large portion of our salary workforce at hexcel was working remotely and our great customer relationships had taken on a new dimension via various video platforms.
Like many businesses, we have learned quickly to work differently and effectively.
We never forgot however that hexcel is a technology manufacturing company and we believe strongly in the value of in person interactions driving collaboration and innovation.
Our production facilities have kept operating throughout the pandemic, albeit at lower capacities.
Now since the end of last summer and aside from any specific country or state restrictions all our sites and offices are back in person on a regular basis, providing the most effective foundation for hexcel to grow strongly once again.
And with almost 4 billion people fully vaccinated around the world and air traffic traffic in the U S alone back to more than 2 million people a day I'm optimistic that strong growth lies ahead.
Certainly there are lingering effects from the pandemic affecting our business, including challenges for certain aircraft programs supply chain constraints hiring and retaining top talent and inflationary pressures yes.
Yes, we are determined to address and overcome these and other obstacles we may face.
Our focus is set firmly on a steep growth trajectory in 2022.
Our primary challenges are the kinds of challenges, we like to have such as how to ramp up quickly to meet an increase in demand that started late last year and is continuing as we start 2022.
When the pandemic drove a decline in demand from lower aircraft build rates and our customers' destocking in 2020 and early 2021 textile kept moving forward.
We responded quickly by making tough decisions, including restructuring the business idling assets.
Reducing overhead and right sizing our workforce.
Throughout 2021, and despite the uncertainty and the difficult decisions. We took the hexcel team accepted and embraced the challenges we faced.
Quickly developing options and taking decisive actions.
They knew what needed to be done and they did it they.
They quickly realigned our business for lower market demand, while expecting nothing less than excellence in everything we do.
I'd like to take a moment to thank our hexcel team for making 2021, our safest year in recent history.
Considering their extra workloads after our reductions in force plus complex equipment restarts and many new hires who still are learning their jobs, our team's commitment to working safely is phenomenal.
It is clear as we share our Q4 and full year results that hexcel begins 2022 on a firm base.
Better and stronger than ever.
And aligned with demand and ready for a return to growth.
Now, let me turn to our results first I'll cover the fourth quarter results and then full year 2021.
Fourth quarter sales of $360 million were almost 22% higher than Q4 2020.
Adjusted fourth quarter diluted EPS was a positive 16.
Compared to a negative 18 cents last year.
Turning to our three markets are promising recovery is emerging an error in commercial aerospace fourth quarter sales increased almost 59% in constant currency when compared to Q4, 2020 and increased 19% sequentially over Q3.
Contributing to the increase were higher narrow body sales increased Airbus <unk> hundred 50 sales and higher business jet sales.
We have now realized two consecutive quarters of double digit sales growth in this market.
In space and defense sales of $106 million represented an 11% drop in constant currency compared to our very strong fourth quarter last year.
In the second half of 2021, we had some softness in legacy military and civilian rotorcraft as well as space programs.
Sales for the F 35, CH 53, K and a 400 M programs were up in the fourth quarter compared to the prior year period.
As we begin 2022, our outlook for space and defense remains positive.
Industrial sales increased almost 13% in constant currency during the quarter to $55 million.
Strength in the automotive and recreation markets as well as other industrial markets drove the increase partially offset by lower wind energy.
Now, let me turn to some specifics in our full year 2021 results.
Sales were $1.3 billion to $5 billion down 12, 6% year over year in constant currency <unk>.
However, adjusted diluted EPS for the year was 27.
Compared to <unk> 25 in 2020 on roughly $175 million of lower sales.
Improved adjusted EPS on lower year over year sales was achieved through our team in racing the pandemic challenges and driving efficiency and productivity.
In our markets commercial aerospace sales represented 50% of our total sales for the year and we're about $668 million a decline of about 19% compared to 2020, which was only partially impacted by the pandemic.
The decline was a result of lower commercial aircraft build rates in a period of inventory destocking by our customers.
Sales to other commercial aerospace declined less yet still were about 12% lower than 2020.
We're encouraged as we began 2022 by strong order activity for the narrow bodies and by favorable developments regarding the 737 Max returned to service in China.
Our two largest commercial aerospace customers Airbus and Boeing delivered 951 aircraft in 2021 combined up significantly from 2020.
Airlines are also ordering again as they refresh and increase their fleets for growth fuel efficiency and emissions reductions and we believe that trend will continue driving the demand for lightweight composite materials.
As a reminder, we disclosed in previous calls that we have been transitioning some less complex engineered product work out of our Kent, Washington facility for Boeing to our 50 50 joint venture with Boeing called ACM or aerospace composites, Malaysia.
This transition was completed at the end of 2021.
This shift impact 737, Max sales and chipset values and has a relatively small impact to the contribution margin of the 737 Max program.
It is an exciting new chapter for our Kent site as we transition toward more advanced composite production technologies, including larger more complex parts that leverage our processing expertise and non destructive testing capabilities already we have started to fill the extra capacity at Cannes with new <unk>.
Contracts for higher margin growth programs.
Space and defense sales of about $435 million reflected a 3% year over year decline.
If this market remained relatively strong throughout the pandemic and accepting some quarterly lumpiness. We expect it will continue to grow steadily in the medium to long term.
Textile composites as a benchmark in this market with our products on over 100 programs, which provides us a diversified foundation for strong growth.
We will strengthen our leadership position in this market not only through our technology, but also our strong customer relationships.
At year end, we saw market share gains as some new and extended contracts. So we have great confidence heading into 2022.
Industrial sales of almost $222 million were up 7% year over year decrease in constant currency.
Lower wind energy sales were partially offset by other industrial markets, including automotive and recreational.
For 2021 wind energy sales decreased about 38% in constant currency compared to last year. However, we have been very pleased with our ability to divert some of our spare capacity towards new revenue opportunities in this market space.
We are reinstating guidance as we see more robustness in our end market recovery.
As you read in our news release last night, we are guiding to $150 billion to $163 billion in sales for 2022 with adjusted diluted earnings per share of $1 to $1.24.
Our guidance on free cash flow is to generate more than $145 million while.
<unk> to manage accrued capital expenditures with approximately $75 million of spend forecasted.
As part of our normal ongoing process, we regularly review the information that we provide publicly.
As a result of our most recent review, we're moving away from providing specific platform chipset values for commercial aerospace programs.
Instead, we're going to provide chipset ranges for those and additional programs.
<unk> says can vary among configurations based on seating capacity and use such as whether they are configured for passenger freight.
Chipset values can also fluctuate as more composites are integrated into aircraft design and as customers become more efficient and more productive using advanced composite materials further encouraging adoption and replacement of models.
This is a process, we proactively support by providing new creative solutions that improve cost material processing time to help define future and next generation materials.
We believe the ranges will provide a better long term perspective of our value proposition across a larger number of programs, including for the first time, some select defense platforms.
These new ranges will now include the Airbus <unk> hundred 20, as well as large cabin composite rich business jets that have ship sets ranging from 200 to $500000 joining the Airbus <unk> hundred 20, Neo family and the 737, Max family and the ship set range.
The Boeing Triple seven Triple seven X and 77, along with the Airbus <unk> hundred 30, neo or in the ship set range of 1 million to $2 million and the Airbus <unk> hundred 50 with textile carbon fiber used on the wing in fuselage is between four and a half and $5 million <unk>.
<unk>, the 901000 and freighter configurations.
Finally, I will share on this call ship set ranges for some of our top military programs to illustrate our growing and strong positions in space and defense as well as our progress towards deepening composite penetration in this market.
Legacy programs, such as the Black Hawk helicopter and Raphael fighter jet fall in the range of 200000 to $500000.
The F 35 is our largest military program with an individual ship set per aircraft between 500000 and $1 million.
More significant military programs by ship set value are the heavy lift a 400 M transport aircraft and the V 22, Osprey tilt rotor aircraft, which.
Which have ship sets in the range of $2 million.
Dollars.
Range of $1 million to $2 million per aircraft.
And illustrate the future growth opportunity from what will become a top program as productions rate increase our ship set on the CH 50, <unk> heavy lift helicopter is between two and a half and $3 $5 million with some variation depending on whether we produce the entire blades set or that aspect is performed in house.
By the OEM.
Before I turn the call over to Patrick I'm, particularly pleased to highlight that our board reinstated a dividend based on our confidence that our business has emerged better and stronger from the unprecedented events of the past two years and is planning for strong growth in the coming years.
Now I'll turn the call over to Patrick to provide more details on the numbers.
Thank you Nick.
As a reminder of the year over year comparisons are in constant currency. The majority of our sales are dominated in dollars. However, our cost base is a mix of dollars euros and British pounds as we have a significant manufacturing presence in Europe .
As a result, when the dollar strengthens against the euro and the pound our sales translate lower while our costs also translate lower leading to a net benefit to our margins. Conversely, a weak dollar is a headwind to our financial results. We hedged to this currency exposure over a 10 quarter horizon to protect our operating income.
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Turning to our three markets commercial aerospace represented approximately 56% of total fourth quarter sales fourth quarter commercial aerospace sales of $199 7 million increase.
Increased 58, 7% compared to the fourth quarter of 2020 with growth in all three categories, including narrow bodies wide bodies and business Jets.
We remain aligned with our customers on their publicly stated production rates space.
Space and defense represented 29% of fourth quarter sales and totaled $105 $9 million decreasing 10, 8% from the same period in 2020 software space sales and lower military and civilian rates Cross sales drove the decrease partially offset by stronger F 30.
Five sales.
Industrial comprised 15% of fourth quarter 2021 sales.
Industrial sales totaled $54 $7 million, increasing 12, 8% compared to the fourth quarter of 2020, we experienced strength across a variety of markets, including automotive and recreation as well as consumer electronics, we have continued to experience subdued wind demands.
With the wind energy, representing approximately 35% of fourth quarter industrial sales.
On a consolidated basis gross margin for the fourth quarter was 19, 2% compared to 10, 3% in the fourth quarter of 2020.
A growing contribution from highest sales combined with disciplined efficiency and productivity management is driving the higher gross margin.
We continue to do a good job mitigating inflationary pressures as most of our significant raw material purchases, including resins and fibers are typically under long term contracts and industrial resins typically have pass through mechanisms.
We hedged our Crinone I trial purchases and we have long term contracts a power and natural gas at many of our sites. However, given the exceptional level of inflation in the general economy, we do expect to feel some margin pressure, where inflation impacts minor raw materials and consumable items.
As a percentage of sales selling general and administrative expenses and R&D expenses were 12, 2% in the current quarter compared to 12, 3% in the fourth quarter of 2020 notes that in the fourth quarter of 2020, we still had some temporary compensation and.
<unk> reductions instituted.
Part of our cost control actions.
Adjusted operating income in the fourth quarter was $25 2 million or 7% of sales the year over year impact of exchange rates in the fourth quarter was favorable by approximately 100 basis points.
Now turning to our two segments. The composite materials segment represented 80% of total sales and generated an eight 7% operating margin strengthening year over year on higher sales that supported increased capacity utilization.
The operating margin in the comparable prior year period was negative.
The engineered products segment, which is comprised of our structures and engineered core businesses represented 20% of total sales and generated a four 2% operating margin.
The operating margin in the comparable year period was eight 6%.
The quarter included an adjustment to the allocation methodology for stock compensation that resulted in a year to date catch up in the fourth quarter. The best represents the amounts between the two segments and corporate.
Without this adjustment the Q4 operating income margin for composite materials would have been nine 9% and the Q4 operating income margin for engineered products would have been five 4%.
The effective tax rate for the fourth quarter of 2021 was 19, 3%.
For full year 2021, the effective tax rate was 26, 9%.
The pandemic and consequent weighted mix of results across the countries in which we operate impacted the companys overall effective tax rate throughout 2021.
Net cash generated by operating activities for 2021 was $151 7 million.
Working capital was a cash use of $18 3 million, increasing modestly to support growing sales.
Capital expenditures on an accrual basis were $41 4 million for fiscal year 2021, compared to $42 $5 million for 2020.
We continue to tightly manage capital expenditures with a focus on improving existing assay efficiency and new technology advancements.
Free cash flow for the fourth quarter of 2021 was $74 6 million and was $123 8 million for fiscal year 2021, expanding.
Expanding profitability combined close with closely managing capital expenditures drove the strong free cash flow generation and more than covered the modest working capital increase that is supporting the growing sales.
In 2020 free cash flow generation was $213 $7 million, which was driven.
Given by working capital reductions on substantially lower sales as customers and the supply chain Destocking.
As Nick said the board reinstated a dividend based on our confidence in expected free cash flow generation is reset returned to growth.
This action is also consistent with gradually returning to our pre pandemic practice of returning a portion of our net income to shareholders.
Our share repurchase program is restricted three months, 31st 2022 by the revolver Amendment executed in January 2021.
Finally, I would like to share some additional detail regarding our 2022 guidance as Nick stated we are forecasting sales in the range of $1 5 billion to $1 six 3 billion.
Adjusted EPS in the range of $1 to $1.24.
And free cash flow is forecast to exceed $145 million.
Accrued capital expenditures are forecast in the range of $75 million as we grow back into our existing capacity and construct a new R&D innovation center in Salt Lake City, and expand our engineered coal plant in Morocco.
We expect full year 2022, commercial aerospace sales to comprise approximately 55% of total sales our sales forecast based on publicly stated OEM aircraft build rates and expectations.
We expect space and defense to comprise approximately 30% total sales, we expect industrial to comprise approximately 15% of total sales.
Additionally, we expect depreciation to generally remain similar to 2021 levels.
Consistent with prior years, selling general and administrative expenses are forecast to be higher in the first quarter of 2022 compared to the following quarters, reflecting the timing of recording stock based compensation expense.
Continuing on this seasonality, we expect free cash flow to be stronger in the second half of the year.
Our 2022 foreign exchange exposure is approximately 75% hedged today.
We estimate that a 5% movement in relevant exchange rates would have approximately a $3 million impact to earnings net of our hedges.
We expect the effective tax rate to be approximately 23% for 2022 I also want to highlight it in 2022, we expect cash taxes to increase due to revenue growth and changes to U S tax treatment of R&D expenses as a result of the 2017 tax cuts and jobs Act.
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With that let me turn the call back to Nick.
Thanks, Patrick.
For many years sustainability has been a core element of hexcel business proposition is the latest step in this journey. We recently made our 2030 sustainability targets public on our website and our teams are sharing these targets with our customers.
These long term goals span several foundational pillars with measurable milestones for reductions in greenhouse gas emissions.
<unk> waste and freshwater usage.
We also are committed to continued improvements in workplace safety diversity inclusion and community involvement.
XL sustainability is about making responsible products and responsible ways supported by a diverse one hexcel team that is propelling us towards a better tomorrow.
These goals will guide our initiatives foster greater transparency and accountability and allow us to track progress through specific time bound objectives that are aligned with our strategic planning processes.
I look forward to sharing progress with you as we continue this journey.
While there is still uncertainty around some aerospace programs, along with some supply chain constraints and inflationary pressures. There are also many encouraging signs as air travel recovers and airlines are clearly refreshing their fleets with fuel efficient lower emissions aircrafts made possible by the solutions <unk> offers.
<unk>.
Future challenges are inevitable pandemic related or otherwise, however, hexcel will always continue to control our destiny by staying focused on efficiency and productivity.
Cash management, and overall performance, especially in quality and on time delivery.
Global demand for advanced composite technology for lightweight stronger and more durable materials in all of our markets will only grow and our technology and products remain unrivaled in our industry.
The potential for a significant upturn in 2022 and beyond looks very promising the disciplined.
The actions, we have taken and will continue to take will ensure that hexcel emerges from this pandemic stronger than ever providing long term shareholder value.
Brent that concludes our prepared comments, we're now ready to take questions.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad and the interest of time. Please limit yourself to one question should you have a follow up please re queue.
First question comes from Mike Sure Molly with true with Securities. Your line is open.
Hey, good morning, guys. Thanks for taking the question Nitro results here in quite the CVI guidance back.
Maybe just I guess as we think about 'twenty two I guess the embedded.
Outlook calls for about 30% growth in aerospace.
Are you guys or how should we be thinking about.
The excess capacity and maybe still idle assets tied to the wide body side of the business I mean, we've obviously heard from Boeing.
Is that going to be continue to be a drag on margins as we go throughout the year are you are you going to be able to to repurpose some of that capacity how should we think about that.
So like.
<unk> thanks for joining.
Our assets that were idled as a function of the command about demand drop.
It was very significant in 2020, and we have steadily been bringing them back online. So it's not a big Bang approach is as the demand comes back.
Methodically, bringing those lines back on with trained and talented resources.
During the course of the correction. We have also targeted to find new avenues, new areas of opportunity to sell our fibers in our materials and the team has done a fantastic job in doing that at very nice and certainly very acceptable margin levels.
We'd see that journey, continuing as we ramp through 2022 again, we do not need to bring on any new assets in the foreseeable future. It's just a matter of.
Basically repurposing the assets that have been idle and bringing them back online.
For the future.
Got it.
A quick follow on any mix issues, we should be aware of.
As the Aero ramp continues.
I think you've kind of said in the past margins could be a bit volatile quarter to quarter or is there anything you guys are looking at that would be a little bit more dilutive on that on that structure of weaving side or anything we should be aware of there.
Hi, Mike nothing too specific I mean, we have called out that we have.
Makes these volatile we've seen some very nice quarters, I think Q3 was especially strong in 2021, I would say any marginal any margin dilution will be limited.
We obviously started very strongly with carbon fibers, and we've said that may come down a little bit over time and the overall picture, but he is nothing too dramatic and I wouldn't overplay. It. So we won't see quarter three type margins every quarter life is not a straight line, but fundamentally as volumes grow and we get that.
Top line leverage the trend of our margins will continue to be upwards.
The next two to three years as we grow back.
Got it thanks, guys I'll jump back in the queue.
Thanks, Mike.
Your next question comes from Robert String Iron with Melius Research. Your line is open.
Hi, Good morning, Nick Patrick.
One resolving.
I thought maybe I'd add some strategic things, especially given the just the long term potential here and.
So I wanted to touch on something that Stan deal talked about from Boeing and the Seattle times. He talked about a new gross weight version of the 77 Dash 10 to compete against the 800 5900 and wondering to what extent this might provide incremental opportunity for hexcel.
Well, Rob we've said it before any anytime there's a derivative engine or aircraft or a new engine or aircraft, we expect our content and positioned to grow significantly again.
Stating the obvious lightweight materials composite materials are a huge enabler for efficiency and sustainability going forward. So again I am not.
I'm going to get into details on what a 787 refresh might look like but I.
I am pretty convinced it will be more composite intensive, especially as the technology has continued to evolve and the near net shaped and the processing just allows more and more secular penetration into those platforms.
No may be shifting slightly.
Hi can you update us on your.
Reshaped research efforts to.
To support high volume out of autoclave parts that might be.
Targeted for example at narrow bodies in the future.
Composites haven't been as heavy or rather as use actually a better word.
In the past.
Yes, so again, that's one of the one of the areas. We're so proud of and why we talk about our unrivaled.
Our portfolio.
We have multiple options for advanced materials that utilize both out of autoclave and in autoclave.
Don't think it's going to be a total conversion I think it'll be a migration based on the application, but we have some very productive very exciting materials that certainly can be cured outside of autoclave much quicker.
Yeah.
Much more effectively with less waste, allowing the dose.
To penetrate the narrow bodies and as we have been called out the composite intensive large cabin business areas.
Thanks, Nick.
Very helpful.
Thanks, Rob.
Your next question comes from the line of Robert Stallard with vertical research. Your line is open.
Thanks, so much good morning.
Good morning.
Questions on the wide body front first of all our full year 2022 guidance. Thanks, so much for bringing it back what did.
He built in there on the 787, obviously given the uncertainty there and then secondly, you called out the <unk> hundred 50, <unk> growing year on there is that basically the end of Destocking or are you starting to see a bit of restocking in preparation for that rate to be a bit higher.
Okay.
Yes so.
I'll hit the 787 first.
We're aligned with Boeing we're shipping at a very low monthly ray.
Assume many of you participated in the Boeing call yesterday I can just tell you our guidance embeds their assumptions going forward and we think we're very well positioned.
Another one of the reasons on why we opened up our range a little bit more this year than maybe we have historically, so we think we're aligned.
Certainly rooting for Boeing to get the FAA recertification to be able to start delivering again in producing backup to a rate of five.
And on the <unk> hundred 50.
Ill.
The destocking is behind us and that provided.
What we believe is the majority of the growth in Q4.
That will continue into this year and then as Airbus ramps up.
To go up one claim per month.
We will get that.
Our that tailwind.
In the second half of this year.
That's great. Thank you.
Thank you.
Your next question comes from the line of Ken Herbert with RBC capital markets. Your line is open.
Hi, good morning, Patrick and Nick.
Hey.
Wanted to.
Just wanted to follow up on on the guidance.
For your space and defense I mean, it looks like the guidance implies about a high single digit recovery in topline in 'twenty two after.
After some of the issues in in 'twenty, one what can you point to in terms of the upside is it I know we've talked in the past about F 35, and CH 50, <unk> is it those programs are you seeing anything else any more granularity on the space and defense outlook would be great.
Yeah, Hi, Ken I mean, you are.
Orion Gateway, a CPU take Amit point, youre going to banking, so about 8% year over year growth.
'twenty one was obviously down about 3% over 2020, so essentially we're catching that up and then growing beyond that.
The primary drivers.
As you called out the F 35, where they were.
10, or a dozen pushed from 2021 into 2022, so that helps and the CH 53, K and clearly we've just sort of Nic has called out the ships at this and you can see the significance of it as that now starts to grow in double roughly every year as we go forward for the next sort of two to three years those are the key drivers.
Now the future vertical lift programs have some way to go but there'll be more material that continues to supply the early sort of prototyping, which is going to help.
And most of the other.
Programs run a steady state with some lumpiness, we did see some softness in some of the legacy programs towards the end of 2021, but fundamentally we continue to be optimistic for a longer term medium term low single growth for several years to come.
Great. Thank you.
Thanks, Ken.
Your next question is from the line of John Mcnulty with BMO capital markets. Your line is open.
Yeah. Thanks for taking my question and congratulations on some solid results in so and I guess to that or question is really on the on the free cash flow side and your balance sheet. So cash flow was stronger in the quarter than expected and at least based on the guide it looks like your balance sheet in terms of leverage will be now maybe arguably under two.
Times by the end of 2022, so can see some of that cash going forward is going in the dividend, but I guess can you can you help us to think about where else as the year progresses free cash and some of that excess balance sheet strength can go to I know you've got some some issues.
Issues around covenants that I think you're clear by the middle of the year. So after that can we see buybacks do you see an M&A pipeline I guess, how should we be thinking about that.
Yeah, all of the above in one sense, but yes, we're confident to generate significant cash now going forward with forecast greater than a $145 million and we'll be driving to push that as strongly and as high as we can.
As the topline grows we working capital will be a headwind again, I mean, our receivables and our inventory we will continue to step ups that we need to manage that in a disciplined way sort of relative days.
It's the way, we sort of chose to do that.
Capex capstone expenditure will be managed tightly we kind of getting back I guess to sort of what we used to call a maintenance level of spend we've called out the R&D Center.
The expansion in Morocco, which is a bit of a longer term ongoing program. So we balance those things the organic growth is covered as Nick said by and large we're growing into existing footprint. So that then leaves the cash that we have we have to work within the covenants, we will revert to the leverage ratio of <unk>.
Gross debt to EBITDA on June 30th at the end of the second quarter, we need to be under 375, we should be comfortably under that and we will then work it down as our EBITDA grows I mean, just to point out we have reduced net debt by $300 million.
Between the end of 2019 at the end of 2021, which I think is a tremendous performance.
Over the last two years, so, yes, we've announced a dividend of 10 cents, so eight and a half million dollars or so a quarter and as the year goes on we will look at both M&A opportunities, we will be disciplined, but we would love to do another sort of arc technologies type acquisition high technology, good margins and integrate that into.
Zelle and going forward, we should have the capacity to look at that at least something that size or larger.
Then, yes stock buyback, perhaps the last sort of piece of the equation as and when we have that confidence in our cash generation I'm sure that will come on to the agenda as well.
Got it and maybe with just a quick follow up with regard to the to the 2022 guidance. It looks like it implies about a 30% incremental margin on the sales that you are bringing in give or take a little bit is that the right way to think about the incremental margins going forward or are there some puts and takes this year that.
May either skew that a little higher going forward or a little bit lower I guess, how should we be thinking about that.
Well.
I don't know if thats, a trip hazards, John but I'm not going to commit to a number we're just going to drive our incremental leverage as strongly as we can as you've seen it's very high historically high in 2021 and for the next year or two is certainly going to be above what you'd say is a historic norm be just because of the growth leverage we're seeing double digit high.
Double digit growth for two or three years, we're going to drive our incremental leverage through efficiency and productivity as strongly as we can what I would call out sort of a double digit plus operating income target. This year as we go into 2022.
Got it thanks very much for the color.
Your next question is from the line of Peter <unk> with Alembic Global Your line is open.
Hey, good morning, everyone.
Just follow up on the nice cash flow guidance for 2022, Patrick you talked about the cash check check cumae cash tax headwind from our the law change can you quantify that for us the impact in 2022, and then maybe how it kind of rolls down in 'twenty three 'twenty four just going to have a sense of the other non operating dynamics.
Yeah, I mean, it's fairly marginal in truth, we called it out.
It's the growth in net income that's going to drive most of the increase in our cash taxes.
The switch I mean, very broadly half of R.
R&D spend is in the U S. So that would be $123 million or so in 2021. So if you imagine half of that we can now take 20% is a deductible.
That's going to impact us what couple of million dollars to $3 million.
HCA you then kind of add back another 20%. So in five years' time, it becomes a non event. If it is not repealed which hopefully it will be so that the RMT tax impact is marginal paid the bigger impact is from our income growth on cash taxes.
Okay. Thanks for that and then just last one for me.
Flora future vertical lift.
I guess, we're supposed to make the award this year does it matter to you guys, which team wins.
Are they both potentially sizable content for you and.
Could this be sort of your largest could it be as big as the F. 35, you guys lifetime.
So we're not picking a winner.
We have great content on both platforms and we're supporting both of the teams.
And I will tell you it will be a nice program, regardless for us once that gets awarded and starts ramping up.
Okay, great. Thanks, guys.
Thanks, Pete you're.
Your next question is from David Strauss with Barclays. Your line is open.
Thanks, guys good morning.
Good morning, David.
Good morning. So you you had previously spoken about getting back to mid teens margins.
The $1 9 billion in revenue is that still the right way to think about it given.
Some of the inflationary pressures you you highlight today.
It is it is our mindset and what we're seeing today based on the restructuring the process and productivity improvements we've made.
Today, we're pretty comfortable that that will offset the inflationary pressures we're seeing.
And thats still our target to get to that level of operating margin percentage and that sales range.
Okay.
And.
Patrick you highlighted the good cash performance here over the last two years, obviously, you've had a big working capital tailwind it looks like $150 million or so how much of that comes back into the business says as we ramp back to call. It. This 181 9 billion in revenue level.
How much working capital yes.
Yes, how much does working capital kind of drag on the cash flow profile as revenue starts to ramp back up I assume youre at add some working capital back to the business.
Absolutely and I think I said that a moment ago I mean, if you think we took out.
About $115 million to $120 million of working capital in 2020, I mean, I mean in simple terms, if our sales get back to $2 4 billion. A very large portion of that is going to come back now, we'll try and minimize that will try and be efficient and disciplined with inventory and always do our best job.
On collections, but yes as the topline grows you necessarily will carry more working capital.
But we will obviously try and be as efficient and drive those days those relative days of sort of receivables relative days of holding inventory keep that as tight but you can imagine as we grow back to 232 $4 billion.
A lot of that working capital will come back he is going to come back over several years, but it will come.
Okay, and Nick last one on <unk> hundred 50 about growth there this quarter.
Obviously the rate I don't think has actually gone up yet.
So I assume that's just a bit of restocking I mean, how much upside do you actually have you think from from restocking before you actually see the benefit of a higher rate there.
Well.
I don't know if there's so much restocking David that helped us in the fourth quarter. It was more a point of the supply chain had equalize to the lower rate and the Destocking stopped and we caught up to the current five per month rate. So again, we're 4% to six.
Months ahead of Airbus I would think the added rate would start hitting us in Q3 type timeframe.
Great. Thanks, guys.
Thank you David question comes from the line of Richard Safran with Seaport Global Your line is open.
Nick Patrick Kirk good morning.
I came a little late so if you've covered this.
I apologize.
You've noted and it was really expected once the business recovered and grew that you'd have to increase the workforce and grow overhead.
Impacts I think some portion of $150 million in cost savings.
I thought you might talk a little bit about growth in the workforce overhead growth and if you could discuss what part of the $150 million you.
Do you think might be a permanent savings.
Yeah.
So we've called that out we achieved $150 million thereabouts, which was on targeting cash cost savings.
As the business now grows back and the challenges operationally increase the overhead base will naturally has to go up we will trying to be as disciplined as possible.
What we've called out sort of again in reference to the 181 $9 billion as revenue scenario, where we had bounced $60 $65 million.
Less depreciation last time, we had that level of revenue.
Clear target is to hold onto or at least that much of the cost takeout.
So so that's what I would speak half or a bit more of those cost savings are likely to come back we definitely a challenging ourselves to cover that depreciation over hedge.
That depreciation headwind.
Through efficiency productivity technology on all those good things that we're working on over time.
Okay shifting gears to industrial industrial end markets and expectations 2002 and longer term.
Just to know about growth expectations are for example for automotive long term do you think at some point.
Although motive offsets.
Sets wind.
Are the opportunities you're pursuing.
Likely to drive better margins here I was just curious about how youre seeing that play out.
Yes. So again, we're excited with the growth we're seeing in automotive we're excited with what we're seeing in marine and some of our new technologies and the adoption and how we're helping customers provide more efficient solutions, we still are a.
We're not a commodity material provider, we're focusing on the high end the European branded automotive applications, where we can provide a competitive advantage whether it be structural way for light weighting for electrification or performance.
Those are really the areas, we're focusing on and those margins are quite nice.
So I think we've taken a very disciplined approach I don't see it.
Changing the complexion of our business mix between.
Aerospace space and defense and industrial but I do think it is a growth platform that we're going to continue to pursue and continue to have opportunities to grow.
Thanks, Nick that was interesting color.
Your next question comes from the line of Gautam Khanna with Cowen Your line is open.
Hey, guys. Thank you for squeezing me in.
Patrick could you elaborate on what has changed with the JV I'm just curious with the work that's moving out of XL into the JV.
What the EBIT impact if there is any round numbers you could give.
Because.
I presume youre going to get some equity income, but on the other hand.
That's the work's not captive to <unk> I would imagine that's in that.
Reduction.
And EBIT related to the JV, so what sort of changed on January one with respect to that arrangement.
Well what changed on January 1st was the end of a two year journey really our multiyear journey to transition that products out of our Kent, Washington facility over to the joint venture I mean, it took a lot of planning and efforts and training and education.
To move it over but it was less complex lowest scaled.
Lower margin I mean still decent but lower margin work that has moved into the JV and it just makes sense. After 20 years for that evolution to happen. We are going to work first and foremost very hard and we're already seeing it put new programs into that Kent, Washington facility.
Military platforms, and other which are going to bring very good business strong new opportunities.
She is going to actually raise.
Imagine the average margins out of that facility in the JV, We're a 50% partner and yes. So we received 50% of the profit after tax the residual income.
And we expect that plant to actually grow it's a very efficient at what it does sort of more simple build to print type work and AIDS become more and more <unk>, but over the years. So it's a good transition we've worked very positively with Boeing on the transition and we're pleased on the outcome I mean I'm not in a position to give a specific.
EBIT up or down number but.
Fundamentally as I say, it's lower margin work, that's moved out and we will be moving new packages or new production opportunities at a higher margin into Ken overtime.
Maybe asked a different way is there a way to maybe quantify what it what that work.
That product.
Accounted for in terms of revenues or something in 2021, just so we have a central what kind of headwind youre actually overcoming as you drive the growth.
Into 2022.
I mean in 2020, but I mean, if I go back two or three years. It was obviously a much larger number.
Through the transition and then the pandemic, it's kind of softened greatly the year over year impact, but if I said it was in the order of $50 million. That's now gone and we are now replacing that with probably shape. It.
Okay. Thank you very much I appreciate it guys.
Your next question is from the line of Mike Sison with Wells Fargo. Your line is open.
Hey, guys.
Nick Good to hear you sound excited about pivoting back to growth here going forward and just curious could you remind us.
Maybe how the backlog.
Has has sort of shaped up over the last year or so and how much growth that provide tech sale over the next several years backlog of customer play incentives.
Hi.
Thanks, Mike.
As you've seen the.
Oems and the airlines have started placing more orders obviously.
Both at Airbus, and Boeing and Thats, adding to the backlog, especially during these lower production years.
I am a believer that there is a fair amount of aircrafts still parked and those aircrafts large percentage of them are 15 years or older and probably much less efficient than new narrow bodies and new wide bodies and there is no doubt a percentage of those aircraft will be.
Replace by new and Thats, a good position because all of the new platforms, we have stronger positions than the old model.
Pre composite adoption era.
I think the backlog is definitely very strong as.
As we see it both Airbus and Boeing there is theirs.
Currently a move to increase rates on the narrow body.
Wide bodies, obviously waiting for the pandemic and the borders and the international travel to get back to reasonable levels, which we think will happen.
Fairly soon and.
Then those orders will continue to come in as well.
Alright, thank you.
Thanks, Mike.
Your next question comes from the line of Myles Walton with UBS. Your line is open.
Good morning, I was wondering if maybe some color on the incremental margins sequentially through the course of the last few quarters. Obviously, the revenue has been growing nicely, particularly at the composite materials.
But the margins are not really keeping that step sequentially I know there was a better mix in the third quarter.
But also the trends sort of holds for the second quarter through fourth quarter.
So maybe I don't know if it's Patrick is there a mix benefit shift that occurs particularly in the first half of 2022 to get you to those double digit margins.
Hey, Myles.
I mean.
<unk> are a bit lumpy I mean, as I am probably repeating myself life is not a straight line.
We're going to see steady general margin growth over the next two to three years as our top line gives us the leverage opportunity within that yes. There is a mix impact I'm confident as we go into 2022, we're going to drive double digits.
Adjusted operating income margins.
And that's our clear goal.
Well every quarter be sequentially up I cant guarantee in port will be unlikely, but we're going to see good strong margin growth and incremental margins as the year goes on.
And then moving into 2023, they will continue to grow.
So double digit margins.
Clearly on <unk>.
Radar miles is the simple way to put it.
Your final question comes from the line of <unk> Misra with <unk>. Your line is open.
Thanks, guys and good morning, most of my questions have been answered, but maybe just going back to the labor head count question earlier, So do you have.
Plasma increased labor.
Labor head count this year.
Not in your plan for the year.
Yes, I mean, absolutely head count is going to increase our direct head count will increase sort of pro rata with our top line sales production.
That will happen around our operations around the world.
So our direct labor are variable cost labor or overhead labor will also increase to some extent, but we're going to operate in a very disciplined way and as we said before hold onto the savings as much as possible through efficiency and productivity and using it and technology to be more efficient, but I mean head count.
It will go up as part of that overhead come back but.
Ultimately, we're looking to be more productive than we were before the pandemic.
Got it.
So that's already baked into your guidance for this year I guess.
Absolutely, yes, yes.
Alright, thanks, guys.
Okay.
Ladies and gentlemen.
Thank you for your participation. This concludes today's conference call you may now disconnect.
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Yes.
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