Hexcel Corporation Q1 2023 Earnings Call
Yes.
Okay.
Good morning, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the Hexcel first quarter 2023 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'd like to ask a question. During this time simply.
Press Star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press the star one.
Patrick Lynch <unk>, Chief Financial Officer, you May begin your conference.
Thanks, Rob.
Good morning, everyone. Welcome to Hexcel Corporation's first quarter 2023 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 make one.
Forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
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.
And not be recorded or rebroadcast without our express permission your participation on this call constitutes your consent to that request.
We've made today.
<unk>, our chairman CEO and president.
I'm Vice President of Investor Relations.
The call is to review our first quarter 2023 results detailed in unused release issued yesterday.
Now, let me turn the call over to Nick.
Thanks, Patrick.
Good morning, everyone and thank you for joining us today as we share our first quarter 2023 and results.
Our first quarter results reflect a strong recovery in demand with overall sales up 18% year over year bolstered by a 30% increase in commercial aerospace sales.
We delivered strong margin leverage on the increased production volumes, leading to robust operating income for the fourth quarter.
The strong demand for new aircraft is clear with a combined backlog for Airbus and Boeing now at roughly 12600 aircrafts.
Airline orders are increasing for new lightweight composite incentive plans to replace older less fuel efficient fleets and to meet growth in passenger demand.
Indications are that domestic air travel has not stopped accelerating in recent months, despite inflation and now many expect that passenger demand could recover.
19 levels by the end of this year as China reopens.
International Air travel is also coming back strongly including both leisure and business and is recovering more quickly than many had expected.
During the first quarter of 2023 alone there have been six system wide body orders and often announced from Asia, The Middle East and Europe for a total of 215 widebody aircraft from Airbus and Boeing.
Announced orders for options for narrow bodies, including the Airbus <unk> hundred 20, Neo family the <unk> 'twenty and the Boeing 737, Max remained strong and steady at 464 aircraft in the first quarter.
We remain aligned with our customers and ready to support our growing demand.
We recognize though that there are broader challenges in neuroscience industry relating to supply chain constraints.
Labor shortages and workforce and experience and we are staying vigilant and agile in order to provide the support as required to our customers.
Yeah, while our optimism may be tempered by these factors, we could not be more pleased to start 2023 with such positive momentum.
Our confidence is strong because we reaffirm our full year 2023 guidance that we provided in January .
Now let me highlight some of the results and Patrick will then provide more detail on the numbers.
Commercial aerospace sales of $285 million increased 30% compared to the first quarter of 2022 led by growth in the Airbus <unk> hundred 50, <unk> hundred 20 neo programs.
Other commercial aerospace increased more than 23% for the first quarter on expanding business jet demand.
The outlook for narrow bodies wide bodies and business Jets is extremely encouraging theyre, all growing and creating further demand for more hutzell composite materials.
Space and defense sales of $126 million increased seven 6% in constant currency with growth across a number of platforms globally, including six aircrafts and both military and civilian rotorcraft.
We see a period of increased space and defense spending, including in Europe and Asia Pacific.
For the first quarter of 2023 represented approximately one third of our total space and defense sales.
Total industrial sales of $47 million decreased about 9% in constant currency due to lower wind energy sales that were partially offset by sales growth and recreation automotive and general industrial markets.
Marine continues as an emerging growth market for us and in fact this week at the JV Seaworld trade show in Paris.
<unk> was recognized along with one of our customers and a consortium of other partners for our work on new composite technology for the marine sector that will eventually lead to quieter and more environmentally sustainable crews and cargo ships.
As with every quarter I want to thank our one <unk> team for their focus on execution and efficiency through operational excellence, ensuring that we deliver quality products to our customers on time.
The labor market remains tight and certainly the necessary talent takes longer to offline, yes, we have been selling job both on the plant floor and in our offices with great success over the past several months as job seekers are attracted to our collaborative culture and our compelling business outlook.
With our sustainability oriented light weighting products.
Our success as a company is not just what we do but how we do it.
Our growth.
<unk> today is supported by how Petzel mandates during the downturn by quickly ramping down yet without setting sale.
A prime example of that is our decision to invest in a new research and development site adjacent to our largest carbon fiber and matrix plant in North America in Salt Lake City, Utah, which some of you have visited on previous Investor days.
We broke ground in October 2021, and then on March 22nd of this year, our centre of research and Technology Excellence officially open.
Customers from about 20 companies join us for an event, where we celebrated with local public officials and employees with everyone, having the chance to tour our state of the art lamps and meet our researchers and scientists who now are calling this remarkable innovation center their home.
With about 100000 square feet of floor space, our new R&D Center of excellence provides us with an amazing opportunity to expand our research and broaden our technology portfolio.
It is also an ideal platform for us to collaborate with our customers on our latest innovation in lightweight sustainable solutions and the latest developments and carbon fiber a matrix technology for aerospace space and defense and industrial applications.
It will quickly become a showcase that demonstrates our world leading composites technology.
Lastly, as you read in our news release last night, we are reaffirming our guidance at $1 75 billion to one $8 billion to $5 billion in sales for 2023 with adjusted diluted earnings per share of $1 70.
The $1 90.
Our guidance on free cash flow is to generate more than $140 million, while continuing to manage accrued capital expenditures with approximately $90 million of spend forecasted.
Now I'll turn it over to Patrick to provide more details on the numbers.
Thank you Nick as a reminder, the majority of our sales are dominated 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 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 had to this currency exposure over a 10 quarter horizon to protect our operating income as a result currency changes delayed into financial results over time as a reminder, the year over year sales comparisons I will provide or in constant currency, which thereby removes the foreign exchange impact to sales.
Turning to our three markets commercial aerospace represented approximately 62% of total first quarter 2023 sales.
First quarter commercial aerospace sales of $284 5 million.
Increased 30% compared to the first quarter of 2022 led by both the Airbus <unk> hundred 50, <unk> hundred <unk> programs.
Thus raised production rates at the <unk> hundred 50 in early 2023.
Which led to increased first quarter sales, including some restocking.
The other commercial aerospace category grew 23, 5% led by strength in business Jets.
I would like to highlight that our first quarter 2023 business jet sales exceeded pre pandemic levels, which is supported by the growing secular adoption of compensates for light weighting by business jet manufacturers.
Space and defense represented 28% of first quarter sales and totaled $126 2 million, increasing seven 6% from the same period in 2022.
The growth continues to be across multiple platforms globally, including fixed wing aircraft and both military and civilian rotorcraft, partially offset by itself to space sales.
Industrial comprised 10% of first quarter 2023 sales <unk>.
Industrial sales totaled $47 million.
Decreasing nine 1% compared to the first quarter of 2022 on lower wind LNG sites.
As we mentioned last quarter wind energy sales stabilized in the second half of 2022.
Recreation automotive and other than just general industrial sales grew year over year.
On a consolidated basis gross margin for the quarter was 27, 9% compared to 22, 2% in the first quarter of 2022.
Highest production levels and robust margin leverage were the principal drivers of this strong performance. However, I want to caution that the gross margin. This quarter was particularly strong for a number of reasons.
Sales mix was favorable with strong demand for hexcel fiber rich products. It was a favorable absorption impact as a result of increasing finished goods inventory and foreign exchange was also a tailwind this quarter due to the significant dollar strength compared to the first quarter of 2022.
As a percentage of sales selling general and administrative expenses and R&D expenses were 14, 1% in the first quarter compared to 14, 2% in the first quarter of 2022.
Consistent with past trends first quarter SG&A expenses were elevated on stock based compensation. So SG&A is expected to moderate for the remainder of the year.
R&D expenses were higher on more material development costs as we pursue new opportunities with our innovative compensate light weighting solutions.
Adjusted operating income in the first quarter was $63 million or 13, 8% of sales.
<unk> to $31 1 million or 8% of sales in the comparable prior year period.
The year over year impact of exchange rates in the first quarter two adjusted operating income was favorable by approximately 80 basis points.
Now turning to our two segments.
The composite materials segment represented 83% of total sales and generated an 18, 4% operating margin strengthening year over year on higher sales and production volume as well as mix the operating margin in the comparable prior year period was 12, 9%.
The engineered products segment, which is comprised of our structures and engineered core businesses represented 17% of total sales and generated a 14, 9% operating income margin as compared to 13, 7% in the comparable prior year period.
The effective tax rate for the first quarter of 2023 was 21, 9%.
Net cash used for operating activities in Q1, 2023 was $23 $4 million compared to a use of $19 million in the first quarter of 2022.
Working capital was a use of cash of $104 million in the first quarter to support higher sales.
This working capital increase was consistent with expectations and cost trends as working capital increased $74 3 million in the first quarter of 2022.
Capital expenditures on an accrual basis was $16 8 million in the first quarter of 2023 compared to $11 1 million in the prior year period.
As previously disclosed 2023 capital expenditure included further construction related to the partially completed carbon fiber line at our facility in Decatur, Alabama to support future growth.
Free cash flow was negative 41 $5 million in the first quarter of 2023, which was similar to the negative $39 9 million in the prior year period.
For an alternative metric of cash generation adjusted EBITDA in the first quarter of 2023 was $106 6 million.
44, 6% from $73 7 million.
In the first quarter 2022.
I am pleased to let you know that we have just renewed and extended the maturity date of our bank syndicated $750 million revolver to April 2028.
Terms and conditions were basically unchanged with two key revisions to highlight.
First is the borrowing base rate with refined from LIBOR to sofa as expected the.
The other change is beneficial to <unk> as the leverage covenant calculation was revised to net debt, whereas previously it was measured on a gross debt basis.
Successfully concluding this refinancing during a period of banking turmoil speak to the financial strength of <unk> and the support of our Bank group.
The board of directors declared a 12 and a half cent quarterly dividend yesterday payable to stockholders of record as of May fit with a payment date of May 12.
We did not repurchase any common stock during the first quarter of 2023, the remaining authorization under the share repurchase program on March 31, 2023 with $217 million.
As Nick stated our full year 2023 guidance is reaffirmed.
With that let me turn the call back to Nick.
Thanks, Patrick.
We welcome the return to growth and ramp up in program.
Our customer relationships have never been better thanks in part to our flexibility transparency and reliability.
Demand for air travel is loading up seats on airplanes, which is expanding backlogs for new more fuel efficient aircraft and as the market recovers <unk> benefits from the continued penetration of lightweight composite materials as well as our never ending commitment to innovate with our customers.
On new materials and solutions for next generation programs.
Supply chain issues remain a watch item for us as they do for most other suppliers in our industry. However.
However, global demand for advanced composite technology for.
For lighter way stronger and more durable materials and all of our markets is growing and our technology and products remains unrivaled in our industry.
Disciplined actions, we have taken and our focus on execution will ensure that hexcel continues providing long term shareholder value.
Rob that concludes our 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 then the number one on your telephone keypad. We ask you. Please limit yourself to one question and one follow up.
Your first question comes from the line of John Mcnulty from BMO capital markets. Your line is open.
Yes. Good morning, Thanks for taking my question.
So a question regarding the maintenance of your full year guide. So your first quarter came in really strong and it did sound like maybe there was a little bit of continued restocking of inventory. So maybe that is part of the answer but I guess, when we think about the seasonality of the business.
Your strength in the first quarter would imply maybe a better range for the full year. So I guess can you help us to understand maybe some of the puts and takes there are some of your conservatism as to as to the full year guide and no changes there.
Yes, John .
Thanks for the question.
First off.
Clearly we started the year strong.
And we're seeing improvements in many of the supply chain aspects that are creating some uncertainty and continued pressure in the industry.
For one we're early in the year, we just gave guidance in January .
And the guidance is pretty wide ranges on that so the tweak yet at this point in time.
It didn't make sense to us.
Secondly, the supply chain risks.
Not necessarily only to us but for other components that could ultimately impact build rate ramps.
Can't say those have gone away. They are still there and we probably are taking a conservative view on that.
And some of the other shortages that are driving some some challenges.
In various areas of discreet part manufacturing within the industry, So may be a little bit conservative, but at this point in the year, that's really the position we want to take and convert.
Got it fair enough and maybe just as the follow up your balance sheet strengthened a lot your leverage if im looking at it right is now below two times and you actually have that that maybe better covenant flexibility as well. So how should we think about cash flows and the uses as we go forward can we see.
Maybe a pushing to into buying back some stock throughout the year or are there opportunities on the M&A front, just given your strength maybe relative to the others out there where maybe that's more attractive I guess, maybe you can give us some color around that.
Yes, so I'd say it's.
Unfortunately for you may be a boring answer, but it's consistently with what we've said.
For quite a few quarters certainly.
I have been talking and sharing our earnings result, first and foremost our team are pushing innovation, new technologies innovative new fiber new processing, new solutions for our customers to help them not only on existing platforms and various derivatives that are.
Our work to prepare for the next generation of platforms Theres also new programs. After that awards are not.
Seth <unk>.
For example in the Valor <unk>.
For many military programs that we continue to work and continue to innovate so organic growth is priority number one.
Priority number two is we really look at the M&A landscape. We look at all times, we look at our technology portfolio and how we might expand that to be able to offer our customers even broader more.
Value driving solutions for their lightweight needs.
And that pipeline, we've been looking at that continually we're disciplined we're very selective but that's how I look at number two and then lastly, we always looked at our balance sheet and we look at our debt ratio.
And we review with our board on a regular basis, our dividend strategy and our share buyback strategy and as you see the cash generation is ramping up as our sales grow. So I would expect we'll continue to look at all three of those priorities.
And without guiding to that.
<unk> I would say all of them are in play going forward.
Great. Thanks, very much for the color.
Thank you John .
Our next question comes from the line of Rob Spingarn from Melius Research. Your line is open.
Hi, good morning.
Good morning, Ralph.
Nick obviously on.
On the back of that last question you had strong numbers here in the first quarter.
And you talked about the OE.
On the build rates, but I wanted to get a little bit more specific and see if you could take us through your plans for the major program <unk> hundred 20, <unk> hundred 50, 780, 777 et cetera, and I'm, particularly focused on the Max because theres talk of higher rates, but what we're not clear on is whether some of those aircraft are modest coming out of Moses.
Blake.
And therefore, you wouldn't participate because youre already those aircraft are already largely built from a <unk>.
Perspective, so that's essentially the question what is how to rates flow throughout the year on those programs for you.
Well let.
Let me, let me start with let me start with Boeing.
There's a lot of momentum and.
And positive news coming out of Boeing I know they had a recent issue that they are working through with spirit.
But.
Before that they are really looking at potentially getting to a point of increasing rates from where they have been around the low thirty's.
So we feel real good about the Max we see China continuing to issue reports that make it more possible for airlines to take new managed deliveries when we know Boeing have inventory that had been built and structured for the Chinese.
Market, so that would be another tailwind that would help the Max so.
The aircraft, obviously with the orders Youre seeing.
A long time it takes to get a new aircraft. There is plenty of demand for the Max as the supply chain stabilizes on Boeing can increase slips so thats the math on the <unk>.
And I would point out even though we highlighted the <unk> hundred 50, <unk> hundred 20, Neo we were up year over year on the Max and the 787, we were up sequentially on both those platforms.
I don't want to diminish the strengths of Boeing.
Called out.
The biggest market drivers for the revenue.
If you look at the 77 again it was up it has been at low rates.
Saw a nice uptick in Q1 and again Boeing is targeting to be closer to five by the end of the year. So we'd expect that to continue to provide strength going off going forward.
So let's bring it to the Airbus side, if you look at the <unk> hundred 20 orders continue to come in strongly.
Have a nice position there 320 neo.
On a glide path to ramp up to the mid Sixty's by the end of next year still targeting to be in the mid Seventy's by 2025 timeframe. So continued growth strong positions. We have there and then the increased 50 has recently moved up to six.
And Airbus has been vocal and public targets.
Targeting the ramp ups of 90 per month by the end of 2025.
<unk> hundred 30, Neal where again, we have strong position is at four per month, and we see that maintaining a consistent level going forward. So overall, we still see tail winds on build rates.
And again, we're very bullish on the market.
With the caveat that with supply chain is still questionable with respect to how quickly it can ramp up and if it might impact build rates.
In the next 12 to 24 months.
Okay.
That's great color. So I appreciate that Patrick just briefly on the Biz jet I think you talked about biz jet before and have content per aircraft is up.
Versus 19, and Thats one of the at least one of the reasons why you are above 19 levels and revenue is there any way to measure that where you are what your content is as a percentage.
Of an aircraft's value and how thats moved and where it's going to move over the next couple of years and how much confidence do you and Nick have in the Biz jet production rate hikes.
That said the way I would talk about Biz jets as we saw some fantastic growth in build rates over the last couple of years and we're now at an elevated level now the growth rate.
Not continue at the same pace, but I do expect to see it stay remain at this elevated level of demand and that's pulling through a lot of textile comps of material.
To answer your question about sort of content the more modern that larger more modern jet are pulling through significant chipset.
I think we called out the large business jets are in the two to $500000 range.
And some of the larger ones, the largest sort of Gulfstream and adapt so sort of <unk> with the the carbon wink I'm going to push beyond that so we're extremely excited about further thank.
Secular penetration of composite onto those platforms.
Which we expect to remain elevated demand level for some time.
The foreseeable future and beyond.
We're very confident on the outlook for business jet.
Thank you both for the color.
Thanks, Brian .
Our next question comes from the line of Ken Herbert from RBC. Your line is open.
Yes, hi, good morning, Patrick and Nick.
Good morning, Ken.
Maybe Patrick really nice gross margins in the quarter.
You called out sales mix and absorption.
As we look at where the Incrementals were this quarter with the build rate plans. It doesn't sound like maybe there is tailwind necessarily moderate too much at least through this year. So.
How should we think about incrementals on the gross margin line and is the current margin rate sustainable or how much are you expecting or thinking we should see that moderate over the year.
Yes.
Well, it's a great margin quarter and the volume leverage was the key driver I think as I've said in my script I would moderate expectations, a little bit we had a particularly sort of hexcel fiber rich product mix in Q1 with talent and gave us a bit of punch.
And going forwards inventory I would not expect to continue to grow if anything.
We will now be stabilizing that and if anything bringing it down so I wouldn't expect an absorption tailwind either going forward.
We do expect good quality margins, but I would moderate down a little bit from what I would say is a little bit of an exceptional Q1 margin performance.
No that's helpful and if I think about head count and bringing staff back to support the higher rates, where are you in that process and maybe at which maybe at which level of staffing are you to support future rates or how much of that do you still have to go.
So as you know we took our head count down from about 7000 heading into the pandemic to about four and a half thousand today, we're actually probably pushing five five so we are almost.
<unk> Bank, a thousand people, which reflects the growth from the trough of the pandemic.
Our direct head count will just pro rata or it will grow as demand grows.
You can see sort of on guidance. This year, one 8 billion roughly just under the midpoint. If you look at the midpoint and if.
If you compare that to the $2 4 billion. So that's about a three quarter level. So we will nudge up again this year a bit more in the coming years, we will manage indirect labor.
Prudently, but we will obviously not constrain ourselves for the growth opportunities the R&D opportunities in front of us and we will invest in people.
Going forward the biggest mover on head count is obviously direct labor and that will follow revenue.
Great. Thank you very much.
And your next question comes from the line of Myles Walton from Wolfe Research. Your line is open.
Thanks, with Florida, now decided and you alluded to it but I was hoping you could talk to some of the relative content.
On the valor is.
As the ships at closer to between two or <unk> 53 K.
And I guess, how much of the content is still up for bid.
Yes.
Well Myles.
So the content, we will we will certainly be up above the black Hawk.
We're still working on multiple packages horsepower. So it's really premature for us to give a ship.
At this point in time other than it's going to be nice its going to be a material driver for us and it will be more than the blackhawk.
Okay, Alright, and then Patrick you mentioned the restock benefit on the 350 anyway to size that and the reason I ask is it's it's hard to imagine that commercial aerospace sales don't sequentially grow in some way shape or form through the course of the year, which I guess is implied at the top end of your guidance still.
So maybe if you can size that or give us any way to stay in the range.
Okay.
Yes, I mean, we did as Nick said I mean, we entered the year around six and we are now in a ramp towards nine in 2025, so we're going to be some sort of slow cooked wont be a perfect straight line I think what we saw in the first quarter that perhaps with a little bit of a surprise with a lot of demand.
That must have included some restocking.
And the <unk> hundred 50 is a very heck sell fiber rich platform and you've heard us say before whenever we get that sort of pull through of mix a boost margins et cetera.
I do agree we're going to see steady growth.
Whether we will be able to whether we will get the same sort of restocking fiber rich mix every time I doubt that they've definitely gave us.
Margin percentage boost in the first quarter this year.
Okay.
Patrick I would just add to Patrick's comments that.
<unk> hundred 50.
Production, we're also providing materials for the freighter and Airbus has recently completed the central wing box that again as all have cell fibers on and then lastly, remember our supply chain for the <unk> hundred 50 or over 40 ship to locations.
It's quite a complex broad supply chain that does require some safety stock and some provisioning of materials, which we think some of that came through in Q1.
Okay alright, thank you.
Thanks.
Your next question comes from the line of Christine Lei Wang from Morgan Stanley . Your line is open.
Great.
Patrick Nick following up on the earlier questions on cash use with a new Boeing airplanes seemingly not in the horizon for this decade, the balance sheet, where it is.
Relatively minimal capex requirement, I mean, youre going to be in a period of unprecedented growing free cash flow in this up cycle. So what's your appetite to use the balance sheet or the cash for a transformative M&A do you think you need it or there anything of interest or.
Potentially just returning to a 100% of that free cash flow to shareholders through dividends or buybacks.
Yes, its sustained so thanks for the question first.
And everyone that the lead time for material selection before a new airplane. This loss is is in the vicinity of five years to 10 years. So you Shouldnt think that we're not investing in working with our customers on the next generation materials.
Bosses and solutions for those type of platforms, which we are.
Secondly, do we need to do M&A.
Don't view that we need to.
That's really how we drive.
And the value proposition to how it enhances our portfolio so.
As you say, we have plenty of powder.
We're.
Looking at various.
<unk> and targets and technologies that we think would fit very well that's an active process that we have our team working on.
But again.
Could we return more to shareholders, depending on the availability and the action ability of those targets.
Again, it could fluctuate based on those factors.
Great and then in terms of the investment dollars can you size that is this 5% of sales annually or last how should we think about that level of investment that you would have to do for the next airplane program.
Yes, we really don't go there we are working with our customers.
Various new technologies, whether youre talking about fiber, whether youre talking about matrix systems for the I'm talking about in auto play, although volatile play thermal thermal plastic theres a wide variety of technologies that will be used in different parts of the aircraft.
I would also say we're firm believers that the penetration the secular penetration of composites will continue to grow so as we can make our materials more flexible more adaptable to new processing. It opens up the window of the next compiled.
That airplane to be above, 50%, who knows maybe 70%.
70 would be a lot well great. Thank you very much.
Thank you Christine.
Our next question comes from the line of Pete Skibinski from Alembic Global Your line is open.
Hey, good morning, guys, Nick and Patrick and Kurt.
Morning, guys.
Thanks Bill.
Guys on industrial sales decline I think the release mentioned wind.
Was European wind down in the quarter, and what's kind of the prospects of that going forward have you bottomed there or not.
And.
One is can you just touch on are you seeing any headwinds in the balance of the industrial portfolio or not.
Yes.
And when really all of our sales now are European focused as you will remember we investors pulled out essentially a <unk> blade, making in the U S. In 2020, we closed our Windsor, Colorado bonds, we announced at the end of last year as the closure of <unk> in China.
So those are now gone so really all our wind energy focus or at least the vast majority of it is in Europe out of our European production base.
I think as I said in my script, we're now sort of stabilizing on wind.
The last three quarters of being relatively level.
But certainly it stepped down fairly significant step down year over year. If you look at Q1 'twenty to Q1, 'twenty three but we expect to continue to support the wind energy business. After this rough level for some period of time, and we're innovating some resin coating tailor products, which we hope to see grow around the world actually.
In terms of the rest of automotive nearly every segment was up automotive with our recreation was up.
And one or two of the key other industrial paces were up so we're seeing general strength around the wind business winded kind of merged bank. If you like to be one of three or four key elements of our industrial.
Market.
Thanks, guys.
Thanks Pete.
Our next question comes from the line of Sheila <unk> from Jefferies. Your line is open.
Thank you and good morning, Nathan Patrick Thanks, so much.
You guys seem to be.
Beating numbers, but how breaking a sweat.
Nick I think you alluded to youre watching labor inefficiency supply chain others assembling on this so I guess what has improved over the last six months for you guys and what are you guys watching those carefully going forward.
Well I.
Would be remiss if I said it was easy I can tell you our team has been working incredibly hard on.
Managing the supply chain, putting out fires with quarter coming up quite frequently.
A few quarters back and Theyre not completely out plus they have slowed down so I would say from our supply base our supply consistently lead times.
We are definitely seeing an improvement, but it's still not.
And stable as it was pre pandemic and we need to keep.
It says we have items pop up Brexit area I'd also say on logistics.
Especially.
<unk>.
International freight.
On the lead times have significantly improved.
And we're seeing a downward trend there that it's too early to claim victory is too early to claim that it is back to 2019 levels, but again, we're seeing positive movements in that area.
From our logistics and supply chain capabilities.
Great.
And I wanted to ask one on defence and space I don't know if you've ever given your breakout of how much space contribute.
Wanted to know your contracts are structured differently there both within defense and space, just given the customer basis.
So pillar space sales are a smaller portion of our space and defense and space and defense dominate it's the vast majority of that segment that we call out I mean in terms of the contract.
That probably slightly shorter in duration, but we have the same sort of commercial agreements.
And set up with those customers as we work with many other commercial.
Customers are with commercial aerospace customers I should say.
Probably we don't have decade long contracts as we do see in the commercial aerospace wells, but over time that that may develop as well so similar structure contracts, probably slightly shorter term in nature, but nothing massively different.
Okay. Thank you.
Your next question comes from the line of Richard Safran from Seaport Research Partners. Your line is open.
Net Patrick Kirk Good morning, how are you.
Good morning, Good morning, Richard.
So.
I wanted to ask you a V 280 question a bit of a different perspective, though.
I think you made the point correct me if I'm wrong you are agnostic whoever won.
For now.
Now that the award has been made in the protest over could you comment on the transition to the <unk> from the <unk>. When the feature waiting you should start to impact your P&L and how long you're expecting <unk> 60 program to last.
Yes, so rich good question.
There's going to be an overlap I would expect I mean in terms of the V 280, we wouldn't expect to see.
Any real significant revenue probably for a couple of years into 2025 as Nick said, we're still working on a number of packages to try and get more content.
On that aircraft and it's too soon to declare all ships that status.
I would expect the Black Hawk program and the transition over to take several years I think we're going to see strengths in replacement blade demand around the black Hawk.
For some periods to come that could even be a little bit of a bump wherewith applying to both programs for a period, but I think it will be a steady transition I don't think there'll be a sudden drop in black oil before the the V 280 ramps I think there'll be an overlap and we will see a fairly gradual transition over time.
Thanks.
I just wanted to ask a quick one on labor here.
Nick really kind of like it.
If you mentioned this in your remarks, and I missed it I apologize, but given the head count increases I wanted to know if you could offer a comment or two on how the training is progressing how quickly <unk> been seeing the workforce has been ramping.
And given the tight labor market, even mentioned if you're getting the right people I just have to think that based on your results I mean things seem to be doing a little bit better than you were expecting.
Well I don't know that I would say, they're doing better than we expected.
Clearly they are improving rapidly if we did expect that we continue to work our training programs. We continue to work our processes to try to eliminate as much of the potential human error out of our processes as we can at the same time during the pandemic we took the opportune.
The the worker productivity and efficiency improvements within our processes. So we are seeing some of that flow through.
Overall, I'd say the quality of the talent has been outstanding and the ramp up has been.
Say as we expected which is translated into efficiencies that are climbing rapidly.
Okay. Thank you.
Thanks Richard.
Our next question comes from the line of Michael <unk> from <unk> Securities. Your line is open.
Hey, good morning, guys. Thanks for taking the questions here.
Maybe maybe Nick.
Last quarter I think it came up at the longer term kind of margin goals, we are becoming a bit more challenged.
Clearly you guys had some mixing covered all the kind of tailwind this quarter, but.
Anything changed I mean, I think last quarter, we were focusing a lot on energy inflation, just general cost pressures, maybe can you give us a sense has anything sort of <unk>.
Shifting or giving you more or less confidence in getting to those longer term targets I mean, any color you might be able to add on pricing as well there.
Yes, Michael So I'd say nothing has really shifted negatively actually probably some positive ships number one energy we've seen a decline in the energy, especially in Europe .
Yes.
As those markets stabilize and come down.
Thank the team has done a great job working with our customers to recover some of the inflationary items on labor and oil.
And we've translated that well and again, we've always driven for productivity improvements year over year for efficiency improvements year over year with this never ending in an operational environment. So I would say I feel good about where we are.
We have a ways to go we're going to continue to leverage the volume growth, we're going to continue to be high on adding cost.
Certainly Sam.
Related resources.
Continuing to drive leverage and productivity going forward.
So as we grow clearly, we're going to be higher and bolt.
Patrick mentioned to support the operation.
The direct heads virtually follow the revenue.
On the salary side, we're going to continue to.
Add the technologists add the positions to help drive the growth for us to deliver well beyond the recovery.
Got it got it that's helpful. And then just one more if I may maybe going back to Rob's question firm rates on the Max.
We're going to keep production at 42, a month potentially by year end.
I think theres been some commentary that maybe 300 will be composite chipsets were built last year is that creating a bit of a headwind for you guys. Just some of the composite rich engine ship sets that need to be destock or any other color. There on Max that you could talk about.
Yes.
We don't see the masses.
In a headwind for us at all we see it as being an opportunity and it will have a tailwind as the issues that we saw and as falling ramps up.
Yes.
I'm sure. The engine manufacturers are working aggressively to maintain and to support the rates required by the Oems and we're certainly not.
Prevented from or have any obstacles in preventing us from supplying composite components for engines and the cells going forward that's not a.
Headwinds for us.
Okay, Yes, I, just I was meaning one of your suppliers had shift to maybe 300.
Extra ship sets at the end of last year and having the burn those down they were kind of producing at flat level for the leap. This year. So that's kind of what I was alluding to.
Yes.
We've got that figured into our culture and it's not that's not a big obstacle for us.
Got it perfect. Thanks Scott.
Yeah.
Your next question comes from the line of David <unk> from Barclays. Your line is open.
Okay.
Thanks, Good morning, everyone.
Good morning, David.
I know you guys you.
You maintained your all your guidance for this year, including your revenue guidance, but within that is there any change in terms of how youre thinking about.
By end market I think your implied growth in commercial aerospace based on your.
The 58% you're guiding to have total sales implied only 13% commercial aero growth for the year. So does that still hold or is that are you now assuming it's higher than that.
So I would say.
We're not ready at this point to adjust where what's the trend of sales through the midyear point and if we're going to kind of call out a revision to guidance, we would do it all at the same time now clearly, stating the obvious and you kind of just points to a Q1 commercial aerospace was strong pass a little bit stronger than we expected but.
At this time of the year as Nick talked about there is still.
Supply chain challenges for the Oems now, whether that's engines or whether it's other structural or electronic components. We don't know what's going to happen is available. So yes, a good quarter for commercial aerospace to start the year, but a long way still to go and too early for us to sort of look at the color within our.
Guidance, which we will obviously look at as we move through the year.
Okay and on <unk> 350, you said you had six.
Headed towards nine over the next couple of years, but has there been any change recently in that demand signal from <unk>.
From Airbus just in light of the fact.
Based on their deliveries there is some sort of it looks like some sort of issue there where they only delivered.
Five five aircrafts in the first quarter, so way below the production rate.
Yes. So we are obviously very close with Airbus and Boeing and our customers.
We see movement on the sidelines that provides pretty significant detail, but we have not seen any changes that cause us to change our belief or.
Forecast on the <unk> hundred 50 ramp schedule.
Okay.
Quick one.
<unk>.
Inventory side, Patrick can you just.
Give a little bit more color exactly what's going on there I mean, you're you're absolute inventory levels are pretty close to being back to where they were in 2019, yet your sales volumes are sold 25 or so percent below so why does inventory keep building from here and how significant of a drawdown should we see.
So great question Great question for CFO .
So absolutely I mean, as we talked to last year, we deliberately allowed our inventory to grow recognizing some of the supply chain challenges in bringing in the materials and we did that in order to make sure that we didn't delay or impact our customers or at least we minimize that as much as we possibly could.
Coming into this year, we saw the strong Q1 demand sort of late last year. So we built up.
Some inventory levels and that continued really into January and a bit into February to support.
The strong first quarter, what I would say going forward and I think I said to an earlier question, we now expect inventory to stabilize and for inventory to come down.
And we think we've probably peaked at the moment will be focusing on the relative days of inventory that we hold.
And I would expect and we'll be driving to release a bit of cash I wouldn't overstate it from inventory in the coming quarters, but I certainly would not expect to see more inventory growth from this point onwards. So it was really all about supporting.
It was actually quite a strong fourth quarter for us and then seeing uneven stronger first quarter as we came into 2023.
Great. Thanks very much.
Your next question comes from the line of Gautam Khanna from Cowen Your line is open.
Yeah. Thanks, guys good morning.
Good morning.
Patrick you've probably answered this five different ways, but I just want to make sure I understood. It.
Sequentially cost of sales was flat.
But sales were up $28 million or whatever it was.
And that is just mix and productivity like you said you built inventory. So it was an absorption benefit there was nothing else up sort of one time.
Yes.
Yes.
That explain that.
Fair enough.
It really was mix, which was goods all the <unk> five as it came through the absorption into the finished goods always health said I think that trend literally for the last question that trend is going to now turn so I wouldn't expect to see favorable absorption.
FX is strong if I look year over year, but you were talking sequentially, but that FX margin benefit of 80 basis points is one of the strongly sort of quarter over quarter benefits, we've ever seen but it was really about the heck sell fiber rich mix and about the the level of absorption that came through along.
With good cost control and the rest of it but those should be ongoing and improving the efficiency and productivity that Nick talked about.
Terrific and have you guys could you tell us where you are on 87 rate, where you think you are.
Thank you.
We're moving up towards rate five.
We're somewhere on that journey, we were kind of in the twos threes last year is were now moving up towards rate five it's hard to be specific again to Nick's point, we delivered multiple endpoints.
But we're on that ramp rate.
Up towards five I mean, we will obviously get there ahead of Boeing.
Boeing shifting at that level so.
Thats the thing you should always bear in mind.
Thank you guys.
And your final question comes from the line of Ron Epstein from Bank of America. Your line is open.
Hey, good morning, guys.
Flooding.
Most everything has been asked but maybe just to.
Some big picture stuff.
We think about what potential new opportunities are out there for you Greg.
And Airbus is going to go on an airplane.
Airplane development vacation for a little while what else is there out there or is there some defense things youre looking at or is.
Is there other things we should be looking for us.
Central additional growth drivers for the company.
Yes.
Yes, so again.
There is always still rib.
More frequently the new aircraft you see reallocating and you should expect that that will continue and that requires a new nacelle and just as a reminder, we have very strong positions on engines and the cells and continue to drive advanced materials.
For hotter temperatures or better sound attenuation.
Four.
Other apps.
Application.
Composites can't fulfill today, but tomorrow. So we're working on those we're working on secondary structures when certain elements that are easier to qualify and replace on derivatives.
<unk> is a big opportunity for us.
We've got.
Various materials.
Fiber on the pre Craig.
On the technology side that could offer a great advantage and an opportunity going forward. We continue to work with our customers on that so in the commercial aerospace and Patrick touched on all.
All the penetration in the secular growth on business Jets.
Gulfstream with so.
Others bid platform and again, just more and more of the aircrafts transitioning over to composites.
If I flip to space and defense always a lot of technology opportunities there with respect to new platforms.
Sure.
The space.
It's a very diversified market and we are working on multiple programs along with sizable programs like the CH 50, <unk>, which is <unk>.
Very large program for us and we're ramping up as we speak.
Kent, Washington facility so.
There is a lot of opportunities out there and again, we don't know what the.
Wind and the industrial and the automotive and all the other sub segments in industrial but our teams are finding niches.
In areas, where we can provide a sustainable competitive advantage.
The the growth opportunities the areas, where our customers want stronger.
Offer more durable lightweight materials.
Just continuing to expand the question is on the economics, and whether or not it fits within.
Our target of what we want to invest in and where we want to drive the business going forward.
Got it got it Super Thank you.
Thanks, Bob.
And this concludes today's conference call. We thank you for your participation you may now disconnect.
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