Q1 2022 Hexcel Corp Earnings Call
Ladies and gentlemen, thank you for standing by my name is Brent and I will be your conference operator today at.
At this time I would like to welcome everyone to the Hexcel first quarter 'twenty to 'twenty two 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.
I would like to ask a question at that time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one. Thank you. It is now my pleasure to turn today's call over to Mr. Patrick Winter Ledge, Chief Financial Officer, Sir. Please go ahead.
Thank you Brian .
Good morning, everyone. Welcome to Hexcel Corporation's first quarter 2022 earnings conference call before beginning let me cover the formalities I want to remind everyone about the safe Harbor provisions related to any forward looking statements. We may make during the course of this call.
Certain statements contained in this call may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
They involve estimates assumptions judgments and uncertainties caused by a variety of factors 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 it cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request.
With me today on Nick's tonnage, our chairman CEO , and President and Kurt Goddard, Our Vice President of Investor Relations.
The purpose of the call is to review our first quarter 2022 results detailed unusually issued yesterday.
Now, let me turn the call over to Nick.
Okay.
Thanks, Patrick.
Everyone and thank you for joining us today as we share our first quarter 2022 results.
<unk> started in 2022 on a solid foundation and we have come a long way from the low point of the pandemic in 2020.
Now with six quarters of sales growth behind us and increasing demand edibles business is undeniably moving in the right direction for our customers and textile.
We are reporting adjusted first quarter diluted EPS of <unk>, 22 cents and sales of $391 million.
Representing a year over year revenue increase of 26%.
This compares to last year, when we reported negative earnings per share and sales of $310 million.
Based on recent travel trends and industry commentary. It is apparent the effects of the pandemic are lessening on air travel and in our markets.
<unk> is now benefiting from the Swift restructuring and cost reduction actions that we took at the start of the pandemic as well as our disciplined management of cash and working capital.
We have remain closely aligned with our customers throughout this challenging period and focused strongly on our operational efficiency to be ready for this positive revenue rack.
Similar to many global industrial companies. The major headwinds we are now facing stem largely from the economic impacts of the pandemic.
Or the geopolitical pressures in supply chain disruptions, resulting from the tragic conflict in Ukraine.
One of the hallmarks of Hexcel team.
Our agility.
We responded quickly to deal with challenges and this is a tremendous advantage as we work through the current uncertainties.
With every situation, we space Hexcel remains focused on our fundamental objectives and delivering on our commitments.
<unk> is not immune to the inflationary pressures currently affecting most economies around the world.
We have some protection as a result of our long term supply contracts to mitigate a significant portion of those pressures.
Still it has now become the norm for our teams to be regularly working to minimize the impact of rising energy.
And certain raw material costs as well as working through supply chain logistical constraints as efficiently as possible.
While higher energy costs are impacting textile over time.
It also boosts demand for our lightweight fuel savings composites as for example airlines choose to replace aging fleets with lighter more fuel efficient aircraft made possible by advanced composites.
Like many others. We are also faced with a tightening labor market.
However, I am encouraged that our workplaces desirable as many who have left textile during the pandemic are choosing to return.
That reaffirms, what we already know well.
Talented people, who want to work in a collaborative and respectful culture, where everyone is encouraged to share and build on innovations for a better more sustainable future and <unk> is a great place to be.
There may be a lot of competition out there for the best people, but our value proposition is strong and we are confident that as we continue to expand we will attract the top talent, we need to join our winning team.
All in all our results demonstrates strengthening customer demand and our upward business trends.
Sales continued to grow.
Margins are recovering and quarterly EBITDA is rising.
Our teams have effectively dealt with nearly two years of uncertainty by working smarter to innovate collaborate and deliver best in class materials for the next generation of aerospace and industrial applications.
Our fundamentals remained strong and our team is focused on forging ahead through all the challenges to ensure that we take full advantage of the significant growth opportunity that lies ahead in 2022 and beyond.
Now, let's turn to some specifics reported in our release last night.
First quarter sales of $391 million or 27% higher than Q1, 2021% in constant currency.
First quarter adjusted diluted EPS was <unk> 22 cents.
Compared to a negative 10 last year.
Turning to our three markets.
Commercial aerospace is benefiting from strengthening narrow body sales higher <unk> hundred 50 sales and growth in business Jets.
Sales of $219 million were up almost 49% this quarter in constant currency.
Other commercial aerospace, which includes business and regional Jets was up 70% when compared to Q1 2021.
This was the third consecutive quarter of double digit sales growth in commercial aerospace.
As the market recovers <unk> benefits from the continued penetration of lightweight composite materials as well as our passionate commitment to partner with and serve our customers.
As part of our continuing alignment with increasing customer demand, we broke ground last quarter on an expansion at our engineered core facility in Casablanca, Morocco that will double our manufacturing capability at the site when completed early next year.
Illustrating another future growth opportunities Archer aviation recently announced that it has selected textile to supply high performance carbon fiber materials that will be used in manufacturing Archer's EEP toll production aircraft called the maker.
Whether called electric vertical takeoff and landing.
<unk> Air mobility UAE.
Or advanced Air mobility Aam's. This was an emerging market that holds real promise to improve lives, we are clean and convenient mobility in a market that could develop into a significant source of accomplished composites demand overtime.
<unk> with its broad portfolio of materials is ideally positioned to provide solutions to this exciting and evolving market space.
Space and defense sales of $118 million represented a 7% increase in constant currency.
<unk> composites are the benchmark in this market, which provides us with a diversified foundation for a strong future.
While there has been pandemic related disruptions within the space and defense supply chain. We believe stability has generally return and we anticipate steady demand through 2022 from the platforms we serve.
The growth outlook for space and defense beyond 2022 has been further supported by recent announcements for increased defense spending in a number of western countries.
International interest in the F 35, and CH 53, K has also been strong over the past few months.
A key to our continued success is a strong relationship with our space and defense customers.
Our commitment to quality.
Time delivery and operational excellence led to a recognition during the quarter by Sikorsky as an elite supplier.
In addition, we announced in March that our advanced composites had been selected by Northrop Grumman for the Artemis nine rocket booster.
This was an inspiring program to return humans to the Moon and illustrate the critical role composites play in space craft design and light weighting to maximize payload capacity and overall performance.
Turning to industrials sales increased more than 9% in constant currency during the quarter to $54 million.
Strength in the recreation automotive and consumer electronics market drove the increase more than offsetting lower wind energy demand.
As an example of <unk> innovation for the industrial market. We recently introduced a new technology called G. Fact for automotive claims processing that delivers a game changing reduction in processing time and cost for marine manufacturers without compromising mechanical performance.
Finally, our 2022 guidance, we shared with you in January remains unchanged.
We continue to expect sales in the range of one five to $1 63 billion.
With adjusted diluted earnings per share of $1 to $1 24.
Our guidance for free cash flow is to generate more than $145 million, while continuing to manage accrued capital expenditures in the range of $75 million.
Now, let me turn it over to Patrick to provide more details on the numbers.
Thank you Nick as a reminder of the year over year comparisons I will provider in constant currency. The majority of our sales are denominated 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 at Kohl's and costs also 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 suppose you over a 10 quarter horizon to protect our operating income.
Turning to our three markets commercial aerospace represented approximately 56% of total first quarter sales first.
First quarter commercial aerospace sales of $218 $9 million increased 48, 8% compared to the first quarter of 2021 with growth in narrow bodies wide bodies and business Jets.
Also noteworthy is that commercial aerospace sales increased nine 6% sequentially from the fourth quarter of 2021 based on growth in Airbus platforms and business Jets.
Space and defense represented 30% of first quarter sales and totaled $118 2 million, increasing 7% from the same period in 2021.
Based markets posted strong growth as did CH 50, <unk> heavy lift helicopter and military jet platforms, including the F 35 and Raphael.
Industrial comprised 14% of first quarter 2022 sales industrial sales totaled $53 5 million, increasing nine 4% compared to the first quarter of 2021.
We experienced strength across a variety of markets, including recreation, automotive and consumer electronics, which more than offset the lower wind energy sales wind energy was approximately 35% the first quarter industrial sales.
On a consolidated basis gross margin for the first quarter of <unk> was 2022, 2% compared to 17, 1% in the first quarter of 2021.
In line with sales gross profit dollars increased for the sixth consecutive quarter and we achieved the best gross margin percentage performance since the first quarter of 2020.
While we continue to improve our margins we are not immune to the inflationary cost pressures impacting the world.
As we explained last quarter many of our largest raw material purchases are protected by long term contracts. So financial hedges that are designed to layer in pricing changes overtime and minimized quarterly volatility to our earnings.
We are witnessing some inflationary cost impacts around certain raw materials logistic costs consumables, such as packaging material.
And on our LNG costs.
Freight and shipping delays are impacting us just as they are impacting many other businesses globally. However, we are managing to mitigate any significant impacts to our customers.
As a percentage of sales selling general and administrative expenses and R&D expenses were 14, 2% in the current quarter compared to 16, 5% in the first quarter of 2021.
As we return to growth we are focused on cost control so that our sales grow at a higher rate than costs return to the business.
Adjusted operating income in the first quarter was $31 1 million or 8% of sales.
Year over year impact of exchange rates in the first quarter was favorable by approximately 30 basis points.
Despite all the challenges and cost pressures, we are maintaining our 2022 guidance.
As we progressed through the year, we will benefit from operating leverage as capacity utilization increases we continue to target double digit adjusted operating margin for the full year of 2022.
Now turning to our two segments. The composite materials segment represented 80% of total sales and generated a 13, 2% adjusted operating margin.
<unk> on higher capacity utilization as the adjusted operating margin in the comparable prior year period was 8%.
The engineered products segment, which is comprised advanced structures and engineered core businesses represented 20% of total sales and generated a 13, 9% adjusted operating margin driven by a strong mix of engine and defense sales.
The adjusted operating margin in the comparable prior year period was five 4%.
The effective tax rate for the first quarter of 2022 was 22, 5% compared to a 36, 8% benefit in the first quarter of 2021.
The prior year period included a discrete tax benefit of $3 2 million from the revaluation of deferred tax liabilities related to a favorable U S state tax law change.
Net cash from operating activities in the first quarter of 2022 was a use of $19 million compared to a use of $1 2 million for the first quarter of 2021.
Working capital was a cash use of $74 $3 million increasing to support higher sales. This compares to working capital being a cash use of $26 2 million in the first quarter of 2021.
Capital expenditures on an accrual basis were $11 1 million in the first quarter of 2022 compared to $4 million in the prior year period.
Expenditures are increasing this year on higher capacity utilization plus growth capex as we expand our production in Morocco to support commercial and aerospace commercial aerospace and defense markets as.
As well as building a new research and technology Innovation Center in Salt Lake City, Utah to support next generation aircraft and future industrial applications.
Free cash flow for the first quarter of 2022 was negative $39 9 million compared.
Compared to negative $6 $1 million in the prior year period.
As we referenced last quarter, our free cash flow generation is typically weighted to the second half of the year.
The revolver terms and conditions have now reverted to the terms of the original 2019 agreement following the exploration of the second Amendment on March 31 2022.
With the exception that the size of the borrowing facility remains at $750 million.
Our next leverage Covenant measurement will be on June 32022, and we remain confident of being in compliance.
Our share repurchase program is no longer restricted by the revolver Amendment and the remaining authorization under the share repurchase program on March 31, 2022 was $217 million.
The board of directors declared a <unk> 10 quarterly dividend yesterday with a payment dividends with a payment date of May 13 to stockholders of record on May six.
With that let me turn the call back to Nick.
Thanks, Patrick.
As we progress through 2022, we are executing to support continued growth.
We recognize the current supply chain constraints, the tight labor market and the inflationary pressures on energy and certain raw material costs. However, we remain confident in our ability to deliver our reaffirmed financial target guidance.
<unk> has emerged stronger from the pandemic.
And then as our performance reflects we are growing and focusing on our future that provides value to our shareholders.
Throughout 2022, textile we'll stay focused on efficiency and productivity.
Cash management, and overall performance, especially in quality and on time delivery.
Already we are realizing a significant upturn in demand that will only grow stronger with continued robust global demand for advanced composites technology for lighter weight stronger and more durable composite solutions that only <unk> can deliver.
Brett that's the end of the prepared remarks, 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. If you would like to withdraw your question again press Star one.
In the interest of time, we request that you limit yourself to one question and one follow up question.
Your first question comes from line of Michael <unk> with <unk> Securities. Your line is open.
Oh, Hey, good morning, guys. Thanks for taking the question.
Patrick just on the sequential growth in commercial aerospace you called it out pretty impressive nine 6% how should we think about that moving forward.
I think you called out some wide bodies to obviously not much happening with the eight seven it looks like the rate increase on that 350 might have gotten pushed out six months I mean should we expect that to subside a little bit or just any color on how to think about that sequentially.
So I think as we progress through the year I mean, we've got you just mentioned the program. So we're probably more or less at steady state on the $3 50 now at <unk> five and so we're all looking ahead for the move to raise six as Airbus signaled going into 2023, so that will be the next movement.
<unk> will be a few months ahead of that build rate change for Airbus and the <unk> hundred 50, I think the <unk> hundred 20 is going to continue to ramp I mean, essentially we're moving from the <unk> 45 from last year going up to 65 by the middle of 2023, and we're on that curve. So we're going to see.
Nice steady growth on the <unk> hundred 20.
Now getting to the heart of <unk> is the Boeing programs, we're seeing growth from the Max program, which is great. We're moving up towards the rate 31 and were obviously, you're watching China to see what happens there.
787 will support Boeing we're ready to move when they are they're obviously working closely with the FAA, but I don't want to get ahead of Boeing and we'll just have to be and we are ready to support. So we do see ongoing growth really driven by the $3 20, most obvious day Mike.
Got it got it and just a follow up then any any near term implications on the triple seven ex Im assuming there was de Minimis revenues any way flowing through there but is that part of the near term planning horizon, what we see that this year or has that kind of been pushed out a little bit.
So on the Triple seven we're at a low level today.
It's a marginal impact to us obviously wed love to see it come through sooner rather than later and the ramp begin but.
Given our current production and output, it's a minimal impact.
Okay, great. Thanks, a lot guys ill jump back in the queue.
Your next question comes from the line of Ken Herbert with RBC. Your line is open.
Hey, good morning.
Nick and Patrick.
Good morning, Ken.
Just wanted to follow up on the on the aerospace growth in the quarter I know last year. You are obviously facing some destocking headwinds is it fair to assume that the up almost 50% growth represents sort of all volume or is there anything else from a from a channel build or anything else unique.
On in the quarter.
Yes, Ken I think.
As you mentioned, we do view that destocking pretty much behind us even the 77, we believe the majority of the supply chain adjustments theyre down to boeing's very low rate.
That's mostly taken place now so we do believe we're very well aligned with the production build rates.
And.
There could be a little bit restocking here and there given the complexity of the supply chain, but for the most part we're pretty much aligned with the OEM build rates today.
Okay.
Helpful and just as a follow up on that considering.
Some of the risks in the supply chain that you called out.
Are you yourselves I know you've invested quite a bit in the quarter and working capital, but how do we think about your own inventory levels is there any risk from your own supply chain.
Near term or long term that youre hedging against or that could be a potential factor later on in the year as you look at the rate increases.
Yes, so a couple of points, obviously with our rest on a going up we certainly expected receivables to fall off so that's.
Our working capital use inventory as a combination.
We clearly have some strategic inventory, we've identified and that we're protecting our supply chain and our ability to deliver on our customer demand.
We are also facing supply chain disruptions and bonds and delays in delivery, which by definition, we wanted to have a little extra inventory so.
On the one hand, we're holding more inventory than we would under normal steady stay stable supply chain.
In today's environment.
Patrick and I are both.
A little more lenient on bringing in some raw materials to protect us going forward.
Would say during Q1, the number of supplier shortages on small type components.
As you know we're under contract on the large volume.
Chemicals in commodities in that space, but smaller type components were popping up through the quarter our team manage them.
But at this point in time I don't expect that to go away in the second quarter hopefully the second half of the year, it will slowdown and stabilized for us, but as of this point, where we're under control.
And we are holding a little excess inventory.
Great well, thank you very much.
Thanks, Ken.
Your next question is from the line of Myles Walton with UBS. Your line is open.
Thanks, Good morning.
Quite a bounce in sales and margins and you Didnt really mention any anything that Senate one off in nature, particularly on the engineered products margins.
Maybe if you if theres anything in there that would suggest it's unsustainably high I think the only thing I heard was engines in defense were as strong as it relates to mix, but no tooling or anything else like that.
Or was there.
No I mean fundamentally it was it was a favorable mix, but it wasn't overly exceptional theres nothing I'd call out is a significant one time item to your point.
What I might sort of just sort of.
Mind people is we talked about the transition of material into ACM last year that was lower margin product that is now gone and so the remaining average mix. If youre line is probably slightly better in our engineered products. Even so this was a sort of a strong mix quarter as well so.
Nothing to point out, but perhaps going forward, we might see a slightly higher average in that space.
Okay. That's good.
And then in terms of the inflation you mentioned it a couple of times, but.
Obviously, it didn't really show up here on the margins in the first quarter is the anticipation that it starts to eat into your contracts or your sort of your forward long term agreements would start to show some of that sharing of the inflation in the next few quarters.
I mean, we have long term pricing contracts wheatstone sort of jump around that much and the protection. We have as you've heard us say before some long term sort of input costs are major resins, we hedge propylene we have futures on some energy and so there is some large chunks where we.
Have some protection, but as we're trying to say we're not bulletproof there are aspects of our business Fray some energy cost and some if you like some of the smaller raw materials, where we are seeing an inflationary pressures, but we're working hard through efficiency and productivity to overcome that.
So we're not complacent, perhaps we have a bit more protection than most.
But we're pretty confident as we said, we're still aiming for double digit operating margin this year and that's our goal.
Okay, and the last one F 35.
I would've thought that would've been more of a headwind to you along with supply chain issues that sort of others are seeing but you had growth in thank you called the CH 53, K and space.
Was was the F 35 sort of a lighter had this quarter and it builds through the course of the year or is there any.
I'm just it was a really good performance of growth against the sort of the offsetting features that most of the rest of the people are seeing on the F 35 and supply chains.
Yes Myles.
I think the F 35 stood out from our perspective relative to our plan and our expectations.
And we see that continuing to be strong throughout the year.
Based on our <unk>.
Our products that we provide for structures and through our technology. So CH 53, K was a nice bump as well as our called out space.
So.
We really didn't see anything unusual and continue to view the F 35, as a growth opportunity this year and next.
Okay I'll stop there thanks.
Thanks miles.
Your next question is from the line of Sheila <unk> with Jefferies. Your line is open.
Thank you so much I wanted to ask about commercial Aero and other commercial you know what are you guys seeing in Biz Jets I think I'm, a large supplier just earlier called out some.
Some potential headwinds in helicopters and does Jeff. So what are you guys seeing there.
Well I'll start.
I'll stick to business Jets.
I'll start off.
As you know.
Recently added chipset guidance on.
Large cabin business Jets were composite penetration is just continuing to grow with some of the new applications actually being at the high end of our 200 to $500.
Chipset range, so were particularly strong with Gulfstream on platforms like the <unk> 600.
Also on the <unk> platforms as well so.
We're seeing.
The OE backlogs.
The lead times.
Just in the charter free in flight opportunities with respect to how tight those markets are we think that's a growth opportunity certainly for the balance of the year.
Okay.
Great and thank you for that Mike and then maybe if we could talk about.
Capital deployment opportunities now that I think the restriction is lifted on share repurchases like how do you prioritize capital deployment from here or do you go back to M&A and more defense acquisitions like ours, because that could be an end market.
You know that has more potential than you previously thought.
Yeah. So.
Again, our basic lending agreements did revert back and I think our nuts measurement period is in June and we're on track.
Where we expect it to be so.
Share buyback is back on the table.
As you know, we reinstated dividends last quarter and the board approved the second quarter.
The second quarter in a row.
Dividend.
So our fundamental priorities haven't changed.
Best thing organically.
I would take the opportunity now to.
To highlight that the pandemic will provide.
Some pretty significant opportunities with download capacity for the first time in probably a decade, we had the opportunity to experiment and work and our assets for new material variance as well as processing enhancements to help our productivity and the leverage on incremental sales.
Going forward.
That's going to create new organic opportunities.
Pursuing fibers fast cure resin systems faster lay down rate.
Materials solutions for both aerospace and industrial so organic investment is going to continue to be priority number one bolt ons as you mentioned through M&A, our M&A pipeline and our team are working that as harvest alpha to identify the right opportunities and based on that.
Dale ability that certainly is on the table.
As our return to shareholders through dividends dividend increases and share buybacks. So that's kind of the sequence of how we view it and how we look at it on a.
On a daily basis Sheila.
Great. Thank you so much.
Thank you.
Your next question is from the line of Mike Sison with Wells Fargo. Your line is open.
Hey, guys nice start to the year.
Nick I think you mentioned that the inflation is giving.
More opportunity for light weighting and I I think rush aerospace, it's pretty straightforward, but what are you seeing in industrial where you are.
He might be able to get some momentum and some maybe newer applications are legacy applications for light weighting.
Well.
<unk> markets I'm, not going to turn away from them and the fact that some of the legacy pre Craig materials in wind.
This lift their lines certainly in North America, and in China, and we are pursuing and investing in new technologies that enhance the value for wind turbines.
<unk> G fast technology to help out of autoclave to make our solutions more economical bolt in the.
Cost of the materials, but the processing the processing time and the overall lifecycle costs for the end user.
So we're continuing to invest there we've seen strong coal in marine we've seen strong coal in automotive.
And again remember when we talk automotive it's typically the premium in many of the European.
High end sports cars, where performance Statics light weighting is required for the application.
Those applications have seen less of that shift impact that.
Mass market has experienced so that's remained strong for us.
We continue to look at other areas of growth opportunity hydrogen pressure vessels and.
Power transmission just to mention a few Mike.
Got it and then it was <unk>.
Past that you're able to keep.
Sort of labor intact, and new hirings for as things ramp up but do you think about 'twenty three 'twenty four when when demand can really pick up for you guys.
Do you still feel pretty good that you can get the labor you need to meet that demand.
Well.
If I go back to the start of Q1.
To tell you.
We were working very hard and we were challenged by R&D.
Direct labor as well as indirect I would tell you over the course of the quarter.
Our hiring has become easier not that it has gone back to pre pandemic levels, but I can tell you.
Our business performance the attraction of what we offer with respect to benefits keep in mind, our jobs are technical in nature and higher paying the minimum wage.
We offer very competitive wages as compared to the geographies and the markets. We participate in so to answer your question.
Balance of 'twenty, two given what we know today I feel confident that we're going to be able to recruit retain and hire the top talent that we need to support the demand that our customers are placing pumps.
Great. Thank you.
Thanks, Mike.
Your next question is from John Mcnulty with BMO capital markets. Your line is open.
Yes. Good morning, Thanks for taking my questions. So just just really one.
When I think about the guide that you've put out and in particular the sales guidance.
Midpoint of the range kind of basically says you're going to see similar volumes similar similar sales levels that you saw in <unk>.
Are there any is there anything in terms of your outlook, what you're seeing kind of in your end markets that gives you pause or makes you think that realistically you're not going to see growth from the first quarter type levels, how should we think about that.
So John .
Yes.
I'll give my perspective and perhaps.
Patrick will will add some additional color.
If you look at the growth that Airbus has communicated publicly.
They intend to go with the 850 next year to six.
The 320, continuing to generate strong orders build backlog and increasing the ramp rate.
Boeing little less certainty on when the 70 Seven's will again be delivered.
We believe we've been conservative on our forecast and that's included so that doesn't change our outlook nor does the Max and the fact that the re certification in China.
Hasnt happened until.
It starts and who.
We're certainly not in a position to predict.
When that's going to happen I can just say, we'll be ready for it.
So in general we.
We don't see anything I don't see anything.
Gives us pause that we're not going to continue to grow.
Through the balance of the year.
Got it no that's perfectly clear. Thank you thanks for the color.
Thanks, John .
Your next question is from David Strauss with Barclays. Your line is open.
Thanks, Good morning.
Good morning.
Morning, David.
Hey, Nick Hey, Patrick So on currency, Patrick I think not going to be much of an impact this year because of your hedging but.
We've obviously seen a big strength in here on the dollar. So can you talk about where things stand for next year any kind of current rates how much of a tailwind it might be too to margins.
Yeah, absolutely, we certainly welcome the stronger dollar and as you recognized for 2022 were kind of largely locked in.
The opening pace, if you like is giving us the small tailwind that we alluded to I think we called out 30 basis points sort of in the first quarter.
So.
The euro or the dollar continues to strengthen against the Euro I think biopsy sorry under 107. This morning, and then Dan somebody that's going to help so we're starting to lock in hedges for 2023, it's a little bit premature for me to kind of call out any sort of margin impact other than the direction is favorable so cut.
Currency right now and combined with our hedging policy is definitely a positive.
Okay.
Is your average hedged rate against the Euro this year and 'twenty two.
I'm not going to call out a specific rate like that's I mean, we're obviously somewhere in the teens as an average rate.
And it's going to be stronger next year, but.
We were locked in 75% more or less coming into 2022.
And we're building out now our profile of our hedge coverage if you like for 2023.
Okay.
And.
The corporate line I know you had the stock comp impact in Q1, but.
What does that look like the rest of the year or is it a similar level kind of as what you saw overall Q2 through Q4 next year, sorry last year or is that bump up at all.
Yes, I mean, our profile annually for stock comp is always similar we get the largest charge in the first quarter.
M&A normally hit it tends to be the months of February and.
Then the remainder of the year is not zero, but it has had a lower level. So you should expect to see a similar profile.
To previous years.
Nothing exceptional or different this year.
Okay. So like in.
Like $30 million range total the rest of the year or something like that <unk>.
What are we talking about stock comp.
No I'm talking about the total corporate line, which I think Q2 through Q4 of last year was like $31 million.
Yeah. So that's a sensible number give or take I mean, you can always get puts and takes but thats the right magnitude yet.
Alright, thanks very much.
Thanks, David.
Next question is from the line of Pete <unk> Kubicki with Alembic Global Your line is open.
Hey, good morning, everyone nice quarter.
Thanks, Nick I guess as people get more concerned about the macro backdrop are you seeing any pockets of weakness in industrial markets for instance.
And I know you do have tougher comps in industrial the back half of the year, but I'm wondering if maybe.
When you might actually be less of a headwind for you over the next few quarters and so maybe you can can offset some from general industrial weakness, but I was just interested in your in your <unk>.
Visibility there.
Well.
Certainly as the macro economic impacts what's going on in Ukraine, with Russia, and how that could imports China, that's clearly a watch item.
In industrial.
I would have to say.
Wind in particular, there is some softness I think the western.
We have called out some some softer forecasted sales for cup.
A couple of years driven primarily by.
First incentives that.
Caused a pre buy.
In supporting those incentives and secondly steel inflation.
As a big factor in the towers that.
All of them to utilize.
Steel inflation has been very significant which is also going to create some headwinds. So that's the one area.
When we look at the marine the automotive consumer electronics that.
That we targeted with some of our open capacity.
I think we're being very selective in niche specialty type markets that I don't see a huge impact today, but again, what transpires over the course of the year how.
Do we go into a recession, what happens with inflation to slow down or does it accelerate again those are watch items.
Okay fair enough thanks for the color.
Hi, Thank you.
Your next question is from the line of Phil Gibbs with Keybanc capital markets. Your line is open.
Hey, good morning.
Good morning.
Just interested is in terms of how far you can get.
Ahead of.
The the rate, particularly for the Boeing 737, Max So if they're near 31, right now and you're shipping ahead, perhaps by a little bit does that mean.
You may be seeing them, receiving it at or above that rate or is there still some.
Uncertainty as it relates to taking that up prospectively.
Yeah, I mean first I would say, we're still on the way to raise 31.
And Boeing has called out Hasnt gone beyond 31 publicly and we're certainly not going to get ahead of them and.
But at the moment, we're still on the ramp up to 31 is what I would say.
Okay.
And then fair fair to say based on.
The comments that you made David that excuse me that the euro.
Weakening is an actual benefit to this year.
It seems like to be somewhat offsetting the inflation, you're seeing elsewhere, yeah, I mean, a little bit I wouldn't overplay I mean, we've been in a period of relatively strong dollar now for a couple of years or more and so we're seeing but it continues to strengthen and marginally and I stress the margin rate.
We do expect that to be a little bit of a headwind 2000 to over 21.
You expect currency to be a headwind to results sorry, it was already a tailwind a tailwind okay. Okay sorry.
Sorry, I apologize hillary's.
Minus status.
No worries, that's why I thought take care guys.
Your next question is from the line of Richard Safran with Seaport Research Partners. Your line is open.
Nick Patrick Kirk good morning.
Richard.
So your.
Your margins indicate you've been able to offset the typical step down pricing with increasing volume and long term agreements.
I know this is sensitive but can you offer a comment or two on the pricing environment overall and your efforts to increase pricing certainly in aerospace, but also with an industrial since im thinking thats, probably where you have the most opportunity.
Yes, Richard So let me, let me start with aerospace.
Aerospace obviously those are long term contracts.
Price down because of volume recovery.
That's significant.
Nothing I mean, we are under contract and that that's happening.
Similar impact as we ramp back up to where we were pre pandemic levels I'd say on the <unk>.
And on the aerospace keep in mind those long term contracts had various indices built in that reflect inflationary pressures in oil and both have somewhat of a lag to when contracts are identical.
You need to think of a lag of six to 12 months for the typical aerospace type contract.
Industrial responds much quicker and many of those are shorter contracts.
Some of which we can even.
Pushed pricing as our cost and our input costs go up so we've been increasing pricing where it is justified.
Throughout the industrial segment I would also say, we do have longer term contracts in that space.
They have faster refreshes, so they could be updated quarterly or.
Or semi annually.
It's rare that they go out to 12 months.
Okay.
Thanks for that.
Okay.
Hi.
I wanted to ask you about.
Capital deployment again, I thought I'd ask you to get specific about one item buybacks is that something you think could start in 'twenty two or is it more likely I'm thinking given the uncertainties in the business that is 2023 that could start again.
Well, yes.
Patrick mentioned, we look at that and have discussions on that every quarter and we have over the past year. So.
Our debt leverage is going to help us decide on the right timing and mix between.
Potential M&A, how close we are what opportunities present themselves.
<unk> spend and internal organic growth pursuits that we're continuing to invest in and then perhaps.
A dividend growth strategy down the road, so I wouldn't rule out the possibility that share buybacks could could start in 2022, but at the same time I'm not going to commit to it either.
Fair enough. Thanks, Nick.
Thanks Richard.
Your next question is from Robert Springer Iron with <unk> Research. Your line is open.
Hi, good morning.
Good morning, Robert.
Hi couple of high level questions. One for you Patrick one for Nick.
Patrick when you factor in future mix inflationary costs on raw materials labor packaging energy all the things you've talked about today, maybe accept currency.
How do your longer term operating margins look when volumes return compared to the 18% or so you did pre pandemic. So this is a long term look at margins based on everything that's happened, including all the restructuring you did for the past two years.
Yes, so I mean, that's a great question and.
Whereas the crystal ball. So I mean, so we obviously look counts we have strong margins fundamentally in our business.
And we continue to drive to that through efficiency and productivity. We took a lot of cost out as you alluded to $150 million.
And sort of the low point of cost out.
And we're going to hold on and retain as much of that as we can.
But youre right well I need to say as I said earlier, we've got a lot of protection. We've got long term contracts for resin supply, we hedged propylene, which is a smoothing and we have futures on energy. So we do have a chunk of protection, but there is this underlying pressure there is ongoing pressure that youre alluding to so our job is to work.
Hard to be efficient and to return the company back to that 18% level when volumes return, we need that volume leverage there is no doubt so as we sit here today, we're not kind of thinking we comp return ever to those levels that definitely on our agenda, we're going to find out a way to do it.
But at the same time, we acknowledge those pressures.
One of the reasons guidance ranges, perhaps still wider than you might expect is because we can see those pressures and we're working our way through.
Managing to offset and mitigate them I'm not going to get into soda quoting our forecast for 2023 and beyond we've indicated we continue to target double digits between 'twenty two.
That's our focus so.
I acknowledge all of the things you raised.
Definitely looking and thinking I mean, some of them. Some of the items are also going to be more sticky than others I actually see the world's working through some of these raw material supply issues.
And there'll be some softening so I don't think all of these things are here forever.
But anyway, our goal is still to return the business to double digits. This year, and then drive to 18%, where we were previously as you call out in future years.
Okay. That's very good color. Nick is your next step change opportunity in commercial Aero from our new clean sheet, let's say in MMA or an update to an existing program like maybe a composite wing for example on the <unk> hundred 20.
Yes.
And that too was a very good question I mean, both of which we love the opportunity because of derivative whether it's a.
New engine, which requires a newness cell or a new win.
Those will all be very composite intensive and great opportunities for us.
Obviously, our clean sheet is the ultimate goal or the ultimate opportunity with respect to the fuselage.
Yes.
Entire structure and even further penetration with the advancements in composites and the near net shape and the processing enhancements. So the next new airplane, our belief is going to be very composite intensive and most likely even more intensive than <unk>.
Latest designs in that 77, and the <unk> hundred 50.
You need to tell me, what's going to come first is it going to be a clean sheet design or Mike one of the Oems.
Introduce a composite wing or other composite structure to bridge us to a new platform.
I can tell you we're working on the technologies to support coal we have new.
Materials that produce faster cure faster.
And provide value to the oes beyond what.
Historic materials had done so we're in a great position with a very diversified portfolio, regardless of what direction. They always go.
Okay. Thank you just a quick one on Archer, maybe a clarification, but are you a risk sharing partner there.
We're not.
Okay. Thanks, so much.
Youre welcome.
Your final question comes from the line of Gautam Khanna with Cowen Your line is open.
Yeah.
Yeah, Hey, thanks for all.
All the candor on the call I was curious about two things one.
Are you seeing any disconnect any meaningful disconnects among many customers on any of the programs we have <unk> hundred 50.
787, what have you.
Sure.
They are purchasing at very different rates I E. You're still seeing some folks that are well behind and overstocked.
Yes, I'm just I'm curious like is there still a catch up to be had on a net basis.
I do.
<unk>.
Basically strongly say absolutely not.
I think the benefit that our customer intimacy and our strong relationships provide us as we talk with them every day, we see what's going on in the supply chain and even though the vast supply chain may be slightly different on where they are with <unk>.
To build rates and and their inventory levels. All in all we see very good alignment and I don't see anything in particular, that's driving the extra demand or potentially will limit demand going forward other than the OE build rates.
Okay.
That's very helpful. And then Patrick I know you've answered this a number of different ways, but.
Maybe just more directly on things that arent contractually protected.
Cough.
On the aerospace side, so I presume resins are I'm, just curious what what is and what isn't surcharge. The ball. If you will over time, what I'm not going to go through a definitive place, but as we've called out I mean major resins propylene, which is obviously, a big <unk>, which is a big feat for the carbon fiber.
Some LNG elements, we have some coverage on but some of the consumable items packaging items mine at chemicals. Those are the sort of things that were more exposed to so.
On some large significant chunks of our business, we have really good protection some of the smaller pumps freight for example, which is not a huge component of our cost we're more exposed to.
And is there any way to quantify just the aggregation of those smaller items.
They account for X dollars of X percent of cost of goods sold anything you could say to that.
I'm just going to repeat what I've said large portion is protected some advanced smaller elements.
Thanks, guys.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
[music].
Okay.
[music].