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My name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to Hexcel First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. [Operator instructions]. Thank you. I would now like to turn the conference over to Patrick Winterlich, Chief Financial Officer. Patrick, you may begin your conference.

Thanks, Krista. Good morning, everyone. Welcome to Hexcel Corporation's first quarter 2024 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 make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Security Ditigation 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 in its 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 are Nick Stanage, 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 2024 results, detailed in our news release issued yesterday. Now, let me turn the call over to Nick.

Thanks, Patrick. Good morning, everyone, and thank you for joining us today as we share our 2024 first quarter results. Hexcel's upward trajectory continued as we began the year with solid performance, that includes year-over-year sales growth in both commercial aerospace and space and defense as demand continues to increase. Additionally, we were pleased to read reports that in February, the airline industry achieved full recovery in overall global passenger traffic and both domestic and international air travel has now surpassed 2019 levels. This is terrific news and demonstrates the resiliency of the industry and the strong desire for air travel. While commercial aerospace sales grew year-over-year, posting the highest level of sales since Q1 2020, I would like to begin by referencing our commercial aerospace sequential improvement from the fourth quarter of 2023. With international air traffic now above 2019 levels, wide-body production continues to ramp and we benefited from sequential growth in all of our wide-body programs. This is an encouraging data point illustrating how the wide-body supply chain has been ramping relatively steadily and smoothly. Further, our total narrow-body sales in the first quarter of 2024 also increased sequentially. As you will recall, our narrow-body sales softened in the second half of 2023. There are certainly challenges remaining within the overall narrow-body supply chain and we expect continued choppiness in the first half of 2024. However, the sequential improvement is encouraging. Let me highlight some of the results and Patrick will then provide more details. First quarter sales of more than $472 million were 3% higher than Q1 2023. Adjusted diluted EPS in the first quarter was $0.44 down year-over-year yet up sequentially. A number of specific items in the first quarter of 2023 drove the particularly strong results last year. Our gross margin and adjusted operating income have been trending upward since the middle of last year and we are very encouraged by this robust performance as our volume leverage continues as expected. Turning to our three markets, in commercial aerospace, first quarter sales of almost $300 million represented an increase of 5% in constant currency on increasing wide-body sales, with significant growth in the Boeing 77 platform. We were especially pleased to see Korean Air and Japan Airlines placing orders for 75 new aircraft, including 64 composite-rich wide-bodies, where Hexcel has significant content. Other commercial aerospace sales decreased 6% for the first quarter of 2024 compared to the first quarter of '23 on softer overall business jet sales. Although it should be noted, sales to our largest business jet customer Gulfstream did increase year-over-year. Based on the secular growth with composite adoption for large cabin business jets, we expect overall 2024 business jet sales to exceed 2023.We also would like to highlight and congratulate Gulfstream on the recent FAA certification of the G700. It is a high performing next generation large cabin business jet, and we are proud that Hexcel composites are utilized. Now for a few additional aerospace highlights. We had another successful JEC World Composites show in Paris, where we met with dozens of customers and launched a significant new innovation. HexTow IM9-24K carbon fiber is our newest intermediate modulus fiber, and it provides significant improvements in tensile strength over our baseline IM7 fiber, which already is a major component in commercial aircraft engine fan blades and other aerospace applications. IM9-24K offers our customers a high performance carbon fiber solution for high rate manufacturing, and it is particularly suited for primary and secondary aerospace structures. The combination of the fiber's high performance and composite tensile strength, as well as the increased fiber production throughput and productivity provided by a 24K tool size, provides a strong value proposition, when compared to other commercially available IM fibers. And I especially want to congratulate our team on being recognized last month by Northrop Grumman, during their Supplier Excellence Awards event. Only about one half of 1% of suppliers receive this recognition each year, so it was quite an honor for us to be among this prestigious group. Northrop Grumman's recognition validates our relentless focus on execution and delivering quality products on time. Now moving to space and defense; sales of $139 million increased 10% in constant currency for the quarter as compared to the first quarter of 2023. The sales increase was led by six wing aircraft programs, including the Lockheed Martin F-35 and Airbus A400M, as well as various classified programs. Hexcel has great global positions in space and defense, and we remain confident in our 2024 outlook. Industrial sales of about $34 million represented a decline of more than 28% in constant currency year-over-year. Our industrial business now represents about 7% of total sales. Sales were soft in the first quarter as global consumers pulled back on spending, and a few of our customers worked through some production issues on their end. Industrial remains an attractive market, where we are pursuing multiple value-adding technology opportunities, and [indiscernible] activity remains strong in a number of submarkets, including automotive, EVs, and energy. Our cash performance remains strong, and we continue to return cash to our stockholders. During the first quarter, we repurchased $101 million of stock and we paid a $0.15 per share quarterly dividend. During our Investor Day, we highlighted the road map for multiyear growth. This included cyclical growth from production rate ramps by our customers that is supported by extensive aircraft backlogs and secular growth by our composite lightweight value proposition. This growing top-line will drive margin expansion from higher capacity utilization, supported by our continued focus on execution and enhancing productivity. This all leads to strong forecasted cash generation with more than $1.5 billion of adjusted EBITDA forecasted for the three-year time frame 2024 to 2026. We remain committed to delivering our full year 2024 and our mid-term guidance as our Hexcel team drives growth, margin expansion and cash generation. As an organization, we will continue to prioritize innovation and advancing our technologies. We will continue to focus on growth markets, where there is tremendous pull for the specialized lightweight materials that only Hexcel can provide. Stronger, lighter, more durable, innovative, collaborative, customer focus, no words better describe who we are at Hexcel or who we will be going forward. Now let me turn it over to Patrick to provide more details on the numbers.

Thank you, Nick. As a reminder, regarding foreign exchange exposure and as I explained in detail during our fourth quarter 2023 earnings call, Hexcel benefits from a strong dollar, we continue to hedge foreign exchange exposure over a 10-quarter time horizon The year-over-year sales comparisons I will provide are in constant currency, which thereby remove the foreign exchange impact to sales. While I'm going to provide my typical year-over-year comparison of financial results, I want to begin by highlighting the sequential improvement over the last three quarters in total sales and margins. Beginning with sales, both total wide-body sales and total narrow-body sales increased sequentially, as the overall aerospace supply chain expands output to meet the tremendous demand for new fuel-efficient commercial aircraft and importantly, margins expanded sequentially on higher operating leverage. We continue to expect further progress as we move through 2024 as we utilize more of our existing assets, volume leverage continues to improve, and as the wide-body ramp continues and the narrow-body aerospace supply chain stabilizes and strengthens. Turning to our three markets; Commercial Aerospace represented approximately 63% of total first quarter 2024 sales. First quarter Commercial Aerospace sales of $299.3 million increased 5.2% compared to the first quarter of 2023, led by growth in wide-bodies, particularly the Boeing 787 program. The other Commercial Aerospace category decreased 6.3% on lower overall business jet sales year-over-year. We continue to expect full year 2024 business jet sales to be higher than 2023. Space & Defense represented approximately 30% of first quarter sales and totaled $139.1 million, increasing 10% from the same period in 2023. The Lockheed F-35, the Airbus A400M and other fixed wing platforms grew strongly, along with classified programs. Industrial comprised approximately 7% of first quarter 2024 sales and totaled $33.9 million, increasing 28.5% compared to the first quarter of 2023. Sales softened across most of our industrial submarkets. Gross margin improved again and was 25% for the first quarter of 2024. The first quarter of 2023 was exceptionally strong with gross margin of 27.9%. As I explained last year, Q1 '23 benefited from particularly favorable absorption and a favorable sales mix. Also, the cost base in the first quarter last year was lower as beginning in the second quarter of 2023, we undertook the deliver overhead infrastructure, including labor hiring and training to prepare for strong customer production ramps and ensure Hexcel would always be ready to meet our customer demand. Sequentially, from the fourth quarter of 2023, gross margin improved 250 basis points on higher operating leverage. As a percentage of sales, selling, general and administrative expenses and R&D expenses were 13.6% in the first quarter compared to 14.1% in the first quarter of 2023. This year-over-year improvement in operating expenses as a percentage of sales illustrates our tight control as we target operating expenses to grow at a fraction of our sales growth. Adjusted operating income in the first quarter was $54.1 million or 11.5% of sales compared to $63 million or 13.8% of sales in the comparable prior year period. The year-over-year impact of exchange rates in the first quarter to adjusted operating income was favorable by approximately 30 basis points. Sequentially, the adjusted operating income margin improved by 80 basis points on higher operating leverage, partially offset by the stock-based compensation charge taken in the first quarter as is typical each year. Now turning to our two segments; the Composite Materials segment represented 80% of total sales and generated an operating margin of 15.8%. The operating margin in the comparable prior year period was 18.4%. The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 20% of total sales and generated a 13.9% operating margin as compared to 14.9% in the comparable prior year period. Net cash used in operating activities was $7 million in the first quarter of 2024, which compared to a net cash use of $23.4 million in the first quarter of 2023. Working capital with a cash use of $84.5 million in the first quarter of 2024, for the comparable prior year period, working capital increased $104 million. We remain focused on tightly managing our working capital. Capital expenditures on an accrual basis were $18.6 million during the first quarter of 2024 compared to $16.8 million in the comparable prior year period. Free cash flow during the first quarter was negative $35.7 million, which compares to negative $41.5 million in the first quarter of 2023. It is normal for the business to use cash in the first quarter of the year. The Board of Directors declared a $0.15 quarterly dividend yesterday. The dividend is payable to stockholders of record as of May 3, with a payment date of May 10. We repurchased $100.7 million of common stock during the first quarter. The remaining authorization under the share repurchase program on March 31, 2024, with $386.4 million. The share repurchase authorization was increased by $300 million in February, recognizing the strong future cash generation profile of the company. With that and for the final time, on behalf of myself and all my Hexcel colleagues, I want to take the opportunity to express our enormous gratitude and thanks to Nick for leading Hexcel so successfully as CEO for well over a decade. I also want to thank Nick for all his guidance and friendship and for the great honor of sharing the Hexcel earnings calls for the last seven years, it has been a privilege. And so having just gone off script and hopefully not throwing him too much, let me turn the call back to Nick.

Thanks, Patrick. As I near the end of my final call as CEO and President of Hexcel and transition to Executive Chairman, I'd like to take a few minutes to reflect. My decision to retire is something I have personally been contemplating for some time. As I thought about my upcoming 65 birthday, I began more specific discussions with our Board on my potential retirement. Our Board is continually engaged in management succession preparation, and I wanted to ensure that we had a robust, comprehensive strategy and a thorough and exhaustive search process to identify the best person to lead Hexcel forward. I told the Board that I would be flexible. I would stay longer, if the search dictated it or I could step aside sooner if the time was right. I tell you today without hesitation that I believe Tom Gentile is the ideal choice to be the next CEO and President of Hexcel. The more I have talked and worked with Tom, the more excited I've become by the future of Hexcel. Already, we have shared with him a mountain of data and details about our people, our products, our processes and most importantly, our one Hexcel culture. I look forward to helping Tom focus on our priorities and supporting him in every way that I can in the months ahead. I would also like to share some perspective from the Board on our transition. Following an extremely thorough search and recruitment process, including extensive reference checks throughout the industry, the Hexcel Board firmly believe Tom is the right choice for Hexcel for many reasons. Tom has fantastic aerospace industry knowledge and understanding with strong customer relationships. Very importantly, Tom has been one of the largest buyers of composite materials for many years. He understands how they are used, what developments are needed for the future and what is required from composites for the next generation of commercial aircraft and space and defense applications. Tom has extensive experience, a factory for transformation through implementing manufacturing execution systems and lean production processes to drive operational excellence, quality and productivity. Tom brings all this knowledge. And in addition, the most critically, the Board believes Tom is an excellent cultural fit for Hexcel. This last point cannot be overstated. Hexcel could be described as a high-performing material science machine, driving innovation and delivering operational excellence for our customers. Our quality, on-time delivery and value proposition are our top priority. Tom is taking over a fantastic business with a fantastic team, not disrupting this strong momentum is crucial and Tom is bringing a unique skill set and operating philosophy that is ideally suited for executing in the near-term while positioning and growing Hexcel over the longer term. Initially, Tom will focus on execution, to deliver Hexcel's 2024 and medium-term guidance. He and the Hexcel leadership team will continue to drive flawless execution that starts with safety for our team, continuous improvement of productivity and efficiencies and maintaining our constant and laser focus on quality and on-time delivery to our customers. And Tom will continue to position Hexcel within the industry and with our customers for next-generation platforms as we pursue and benefit from strong secular growth of lightweight composites. Tom is completely aligned on the strategy that we outlined at our Investor Day in February. While I look forward to spending more time with my family, I cannot tell you how much I will miss my Hexcel family. I have grown to love this company and all that we have built together. Tom is inheriting an awesome team and a growing business with the brightest future ever. I am so proud to have had the honor of working with the most talented team I have ever known. I also want to sincerely thank all of you, our stockholders and the analysts that cover Hexcel, you all been fantastic. You have challenged me over the years, and I'm grateful for that because you've made me a better leader and you've made Hexcel a better company. Thank you for following Hexcel. Thank you for your questions, your coverage and your kind words. I trust you all will support Tom as you have supported me over the past 14 years as Hexcel continues to generate strong shareholder value. Krista, we're ready to take questions now. Thank you.

[Operator Instructions] Your first question comes from John McNulty from BMO Capital Markets. Please go ahead

Yes, good morning, and Nick, let me start off by just thanking you for all your help over the years. It's been a pleasure to see where you've taken the company and good luck going forward. So I just wanted to dig into the commercial business a bit. So you're looking for mid-teens growth as you kind of look out through the year. You're off to an okay start, but admittedly, it looks like there's still a lot of heavy lifting ahead. So I guess, can you help us to think about the biggest drivers and how you would prioritize what's going to get you to that mid-teens growth? Is it the confidence in the wide-body ramps at this point? Or is it narrow-body kind of getting back on track and getting through some of the issues that's been struggling with over the last couple of quarters?

Yes, John. Well, first, thanks for your kind comments. I'd say, John, it's a combination. Clearly, the supply chain and the narrow-body it's continuing to be challenged in various areas. We've seen nice progressive performance and growth with Airbus. We know the challenges with Boeing. But even there, it's been steady over the last several quarters. So our confidence level that the supply chain will continue to improve and stabilize continues to be strong, recognizing that it's not going to be perfect as we go forward. I'd say widebodies, clearly, if you look at our performance on both the 87 and the A350 over the last multiple quarters, it has just progressively grown very steadily at a nice steady rate and a manageable rate. So I'd say overall, some of the things we're seeing within our workforce with respect to the ability to hire, the ability to train, the ability to retain I think that's indicative of what the whole industry is seeing. And that, in turn, provides stability, that provides better efficiency, and it gives us confidence that things are going in the right direction. So overall, again, we're rolling up our updated forecast. We're getting very good signals and indications on the pull, not only to support the existing demand, but strong pull on new opportunities that could provide incremental benefits over the mid-term simply because of light-weighting and the importance of efficiency to drive performance and sustainability over the long haul.

Got it. Okay. No, that's hugely helpful. And then maybe just as the follow-up. On Space & Defense, you had a really strong start to the year. I guess, how do you see the potential for upside relative to the guide, just considering you do have the CH-53K still ramping and you do have admittedly a lot of conflict where there may be some really solid demand pull from the military side. So I guess, can you help us to think about the potential for upside relative to your outlook?

Yes, John. So, we're encouraged by how we started the year, for sure. And again, we're working and on such a diverse set of platforms, if you look globally with certain platforms going down or being stable and many other platforms growing. If you look at the CH-53K, the Rafael, the KC-390, our strong position in global rotorcraft, the V-280 is going to ramp up down the road, and very strong performance this quarter on the F-35, lots of momentum, lots of energy there. And we'll have to get through another quarter before we really want to talk about tweaking our guidance, but it would be a good thing if we have the opportunity to give some indication that it could be higher than we had even expected. And again, if we look around the global situation and what's going on, as sad as it is, it does tend to stimulate investment in defense systems and deterrence. So I think with that backdrop, I'm optimistic, and I think our position puts us in a great position for us to continue to perform and potentially exceed our top-line estimates.

Your next question comes from Matt Akers from Wells Fargo. Please go ahead.

Yes. Hey, guys. Good morning and best of luck, Nick. Could you talk a little bit about the destocking. I think last quarter, you had said kind of expect a little bit of pressure from that in the first half. Are we mostly through that at this point?

Yes. I don't think there was destocking in the first quarter. Actually, if anything, there might have been a little bit of restocking, especially on the wide-bodies, because the rates have steadily grown. I think if you look at the orders, the way the backlog has built up, the way Boeing and Airbus are looking at increasing their rates to 10 in the near-term years ahead. I think that gives confidence and the supply chain probably was a little tight in certain areas. The issues were on the MAX. And again, we've seen very level and steady performance for several quarters now. So I don't expect there's a ton of destocking ahead, again, maybe a little restocking once the market and the supply chain gain confidence and the OEs can get to the rates that they intend to and need to support this huge backlog.

Great. And I guess one for Patrick. On the share repurchase, you guys stepped up quite a bit this quarter, but I guess the diluted shares for the quarter were actually up a little bit. Can you just talk about that with our additional dilution? Or is that just kind of timing of when that flowed through?

Now that's just reflecting the normal Q1 to comp, where we get stock issues. The stock buyback is the purchase of the $100 million, that effect will really come in over time. It will start to be seen in the second quarter, but you have to average it in. So we really got very little, if you like, EPS benefit from that in the first quarter, and that will impact that beneficial impact will come as we move through the year. So everything in-line with expected and, yes, $101 million buyback in Q1.

Your next question comes from Bert Subin from Stifel. Please go ahead.

Hey, good morning and congratulations on your retirement, Nick.

Thanks, Bert.

Maybe just a follow-up on the first question on the Commercial Aerospace side. It sounds like from your comments, Nick, you expect some choppiness. And so maybe the second quarter is potentially stronger on a year-over-year basis but probably not meaningfully. Based on maintaining the up and mid-teens guide just for the segments that would imply, I guess, 20% plus back half growth. I'm just curious what your visibility is? And if you could give any commentary on sort of what your expectation is on the A350? I know you made some comments about seeing some improvement on the 87. I'm curious if that's translating to Airbus?

Yes. So again, the indications we're seeing -- and again, we've got great customer relationships. We work very closely with them. Remember, many of our materials require to go in freezers, which has limited space. So we have pretty good insight on how much inventory our customers and the supply chain are sitting on, although not perfect. We do work with them very closely. And again, I think our customers are trying to provide as much visibility and lead time to ensure that the supply chain is ready when they want to ramp up and as they want to ramp up going forward. So I'd say our visibility and our communications have never been better with our customers. Now those include some tweaks based on their supply chain, but we build that in. And again, I think we've got very good visibility up to this point for 2024. I'd say on the A350, I'm very encouraged with the 1000 and the orders coming in. I'm very encouraged with the upcoming A350 freighter where we have great shipset content. And I'm very encouraged by the backlog and the orders that are coming in. I think from our perspective, we see with the international travel picking up and getting back to pre-pandemic days and higher, we see the pull for wide-bodies accelerating simply because of replacements, simply because of the number of seats required. So we believe our visibility is very good. We work very closely with Airbus. And again, I mentioned this before, but if you look at our quarterly progression and the smooth growth that we've seen, gives us confidence that it's going to continue to deliver to Airbus as 10 per month in the 2026 time frame.

Got it. Okay. And just a follow-up for you, Patrick, on the margin side. Last quarter, you said you expected 13.5% to 14% operating margin for the year. It seems like off to a fine start in the first quarter. Curious if that is -- that range remains intact. And as we think about 14%, what would need to happen to get us there, just to be on the higher of the revenue guide?

Yes. I mean we've held our guidance. We've reaffirmed our guidance for 2024. And so my position is the same. I mean Q1 is always down a little bit because of the extra stock comp costs that we take. But when you adjust that out and the further volume leverage and growth comes as we move through the year, I'm confident that in the 13.5% to 14%, we're obviously going to push that as strongly as we can. But as I said, I mean, essentially, we're holding guidance the $2.10, $2.30 EPS. So that's our target. And yes, you back into a margin range, as you described, and we're confident in achieving that as we stand here today.

Your next question comes from the line of Louis Raffetto from Wolfe Research. Please go ahead.

Hey, good morning. I'll say congrats, Nick. Maybe just a follow-up on Matt's question there, if we back out the comp in the first quarter, margins look like they're going to be sort of flattish the rest of the year even on the higher sales that you kind of expect as the year goes on. So just to be clear, was there anything in 1Q that was mix beneficial or anything just we should be thinking about as we think about the next couple of quarters?

No. I mean, other than the stock comp and backing that out, Q1 was actually a particularly clean month -- clean quarter. There was really very little oddball. It was good, steady progress; a good normal, if you like, mix of aerospace, space and defense business. Industrial was a little bit weaker in the mix at 7% of total sales, but margin-wise, nothing peculiar, nothing odd really to call out. A good positive start as far as we're concerned and as I called out sort of three quarters in a row now where we've got good sequential positive momentum.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Please go ahead.

Good morning, Nick and Patrick, and Kurt and Nick, congratulations on your retirement, wishing you all the best, and thank you for everything. Maybe I just wanted to start off, Patrick, for you, just given working capital. How do you think about managing your working capital, the puts and takes just as you see supply chain issues, whether on narrow-bodies or wide-bodies, how do you kind of think about that the purchasing, whether it's inventory or delivering product to your customers?

Yes. Sheila. I mean, we're going to stay very focused on it. And -- in terms of inventory levels, talking about raw materials, finished goods, as I called out before, the key metric for me is the relative days on hand. We're trying to improve that. So we look at our level of sales and we try to improve the sort of the relative days of inventory we have to that. We're not going to build inventory, if this is your question. We're not going to sit on extra raw materials or finished goods as buffers or build up. That is not our intention. -- find the opposite. We want to be more efficient. We're going to react quickly. We have the capacity to meet the ramp. We are not the bottleneck in the aerospace supply chain as we've called out several times. We're ready to support Airbus and Boeing with their ramp-ups, and we're going to work very, very closely as Nick outlined earlier. So in terms of inventory, we're going to manage it tightly. And if anything, try to continue to improve the days. We'll manage our receivables. Historically, we've done a great job. We're going to continue to do that. And we're going to try and extend and manage our payables as productively as we can. We do see a little bit of scope to increase our days of payables. I think historically, we've been very low. So we're focused across the board on working capital management to optimize our cash position.

Your next question comes from the line of Gavin Parsons from UBS.

Please go ahead. Thanks. Morning. And Nick, congrats on your retirement. The industrial revenue guide for the year implies a pretty significant sequential ramp up throughout the year. Can you talk about what gives you visibility into that risk to the guide?

Industrial is challenged certainly in the European market, which makes up a big portion of our industrial business with some of our customers backing off, taking a little bit of pause. Automotive, some of the premium automotive suppliers, the high-end vehicles slowed down a little bit. to pull for our materials in rack and sporting simply because of some of the economic pressures hit Q1, especially hard. Now we do expect recovery there, but there's probably pressure on our industrial to be low single digit to kind of flat. But having said that, I would tell you the order activity and the engagement with our customers and the pull for our materials, some of which are short-term pull because it's a much quicker cycle is strong, very strong. So we're not giving up on industrial, but we certainly recognize that there's a little bit of hole after Q1 that we've got to go work.

Okay. That's helpful detail. And maybe just on the margin implications of all that. I think you said industrial is margin dilutive, but I would imagine that the level of revenue decline you had in the first quarter probably has some excess capacity in there. So what are the margin implications of the big industrial step down in the quarter? Was that largely dilutive?

Yes. So Gavin, I mean, the wind margin and the winds sort of decline in sales is going to be a positive over time. I mean that part of the industrial business over several years has become weaker. But that decline has now been the last five, six years. And so that has helped us. I think at this point, the differentiation between industrial and aerospace is still there. Industrial is lower, but it's probably less pronounced because a lot of the industrial we're doing, sophisticated woven fabric, non-prime fabrics, utilizing carbon fibers. So -- and down 7% of sales, that mix impact is becoming less. So there's a small margin impact, beneficial dilution margin impact, but I wouldn't overplay it, Gavin. I think wind helped us and pulling out that low losing, if you like, that low-margin wind business has happened, has not been a bad thing, but the remaining industrial -- there's actually more opportunity on margin, albeit it's not a aerospace or space and defense levels.

Understood. Okay. Final quick one. Do you have visibility to say gross margin in the first quarter is the low point for the year?

We're not going to guide by quarters. We're just going to drive our margins as strongly as we can. Gross margin, unlike adjusted operating income is not impacted so much by the stock comp. But we will continue to drive that as strongly as we can. .

Your next question comes from the line of Guatam Khanna from TD Cowen. Please go ahead.

Hi, good morning and Congratulations, Nick. .

Thanks, Gautam.

I just wanted to ask your opinion on the destocking that began in Q3 on the narrow-body side, and it seems to have resolved in the first quarter. Is that pretty broad-based among your intermediary customers on the 737 MAX in particular? In other words, I imagine you shipped to a number of different subcontract manufacturers. Are you seeing most of those now in alignment with one another? Or are you still seeing some folks going down, some folks going up, and just maybe if you could just talk about what -- looking back over the last six months, where did you see the biggest reductions? And have those suppliers come to a bottom in terms of their buying?

Well, Gautam, clearly, we do ship to multiple providers for Boeing on the MAX as we do with Airbus for the 320 and all our programs. It's a very complex supply chain. And just based on that, it's rare, if ever, that everybody is in complete alignment at the same phase some parts take longer, some parts have a quicker lead time, shorter lead time. So it's never going to be completely balanced. Again, as I said before, if you look at the MAX and if you look at the rate where we've been shipping to over the last couple of quarters, it's very consistent. So from my perspective, I don't see a lot of destocking taking place. For that matter, I don't see a lot of restocking take place, which gives us an indication that there's still choppiness. There's still some uncertainty on how and when Boeing will ramp and get up to the rates that they aspire to reach. So all in all, I think the destocking is minimal from a negative standpoint as of today for Hexcel on the narrowbodies. If anything, it might be a little tailwind on the wide-body simply because they're ramping up nicely.

Got you. And then would you describe what happened in Q3 and Q4 as destocking? Or was -- because back then, you guys called out the lack of -- you were anticipating more growth than manifested. Was that destocking? Or was it something else? I'm just curious if you haven't really seen much of a change.

Well, I think it was a couple of things. We knew after we got through Q1 last year and into Q2 that we saw the growth rate on the narrow-bodies had slowed. So certainly, there was a little adjustment in the entire supply chain to deal with that. Keep in mind there was a big ramp underway. And then all of a sudden, it looks like it couldn't materialize as planned. So there was some lower rate impact as well as a slowdown on the stocking. So whether you want to call that destocking or just a general slowdown a bit to better align with what the OEs were saying they were going to do in the second half of the year and the first part of 2024, so that's from Hexcel's view and perspective what we saw.

Your next question comes from the line of Robert Spingarn from Melius Research. Please go ahead.

Good morning and congrats, Nick. Thanks, Robert. At the risk of maybe beating a dead horse on this, I'm going to just take this from another angle. When you say the rates have been for MAX have been relatively steady. Could we quantify that? Have you been the steadier rates that you've been shipping at, are we talking about low 30s?

We're talking about very low 30s, Robert.

Okay. Very low 30s. All right. That's certainly helpful. On the 787, we've heard from one airline in particular, that we really shouldn't expect above five per month for a while. And in the first quarter, they delivered only 13. So are you shipping a little bit below that 5% per month? Or are you -- how should we think about that?

So I really don't want to get too specific. I believe Boeing is reporting tomorrow, and they may they share more detail, but I can tell you we're shipping above five.

Okay. And then just quickly for Patrick. Just from a productivity perspective, you ended '23 with headcount at 80% of '19 levels. I think revenues were at 75% and then this year at the midpoint, going up to 84% of '19. Should headcount track that? Or at some point, will we see some optimization or some productivity where when you get back to 100% of 2019 sales, you're at something less on headcount?

Yes. So good question and I divided sort of headcount into your direct shop floor factory headcount and I think we called out we got a little bit of ahead there. But essentially, over time, that's going to track the top line. It's going to go pro rata as sales grow. Now we'll be efficient and disciplined as we can. Where we have the real opportunity is on the indirect labor, where we took a lot of people out in the pandemic and the fixed cost benefit that we called out at the time. And our objective is to do exactly what they are saying, Rob, that when we get back to the $2.35 billion, $2.4 billion, we should be more efficient, more productive. And so the total head count at that point should be less than it was which was just under 7,000 in 2019, we should have a bit less when we get to that revenue level next time around.

Any way to quantify what that would be?

I don't think we want to put a number on it, but obviously, we're going to drive that productivity efficiencies as strongly as we can.

Your next question comes from the line of Noah Poponak at Goldman Sachs. Please go ahead.

Hey, good morning, everyone, and congrats. Good morning, all. Thanks, all. Congrats. So Boeing has declared that they're doing these quality stand-downs whereby they're much less focused on the monthly delivery numbers and instead very focused on fixing the product quality. And I guess the key question or at least for now, is that a three to six month process and then they can move forward with the ramp? Or is that -- does it take multiples of three to six months? And I know that these questions can often be entered by you got as Boeing, but just as a key supplier and how much this will impact your forward, what's your sense there? Is it a half a year for them to get to where they need to be to be able to continue to ramp? Or do they even know? And is there a risk it can take much longer.

Yes. So having worked with Boeing for many years at Hexcel and other companies, I have the utmost respect for the talent, their processes, their capabilities. And it's very unfortunate on what's happened and what they're going through, but it is making them stronger, much stronger from a continuous improvement on productivity, throughput, on safety, on all the elements. So I'm a huge believer that what they're going through right now is just going to pay great dividends down the road. Now are they making progress daily? I have no doubt they're making significant strides every single day, with a changing workforce and new people and training and different processes. Remember, what they do is quite different from our continuous flow 7/24 processing material lines. Regardless, I'm sure they're well on track, and I'm really not going to be the one to talk about their timing and how quickly they're going to be able to ramp up and improve their productivity and efficiency. Personally, I'm optimistic on what I see. I'm optimistic on the poll. I'm optimistic on the communication and the alignment we have with Boeing.

Okay. Nick, that's super helpful. I appreciate that. Yes. I mean, I guess the pool alone being in the low 30s, GE just a few hours ago, had similar comments on the engines. I would guess that Boeing would not keep pulling if they thought this was a much longer process, but is there just a risk that they didn't know and they're going to learn, it's a longer process, and then that puts a divot in the middle of your year in 2024 at some point?

Yes. We're obviously going to be on the call tomorrow listening. We're obviously going to very close to Boeing. They're very transparent on what they're looking at and what their plans are for the near term and the midterm. So I think we'll know as soon as they know what they're going to do. And I think your perspective on if they're pulling at 30, they must have confidence, which I think that's a very good assumption.

Okay. And Patrick, just one more on the margins. I think you had last quarter talked about the back half better than the first half, and that was driven by the pace of volume and your investments and some costs. You normally have the 3Q seasonality. So that was going to look kind of different than a normal year. This first quarter looks better than -- is better than consensus, maybe a little better than you had. I guess just does the year now look a little more even quarter-to-quarter through the year, back half versus first half than you previously thought?

Well, I mean, again, with the provider of the stock comp impact on Q1. Yes, we're still confident we're going to see an improvement. It is slightly flatter than we said before. I don't think we're going to get into that kind of quarter-by-quarter analysis. We see steady margin progress. Volume leverage driving steady margin progress as we go through the year. We're standing by our annual guidance. You can kind of back into that, as I know you do well, Noah. And yes, we're positive, and we see a strong second half of '24 still.

Our next question comes from David Strauss from Barclays. Please go ahead.

Hi, good morning. This is Josh Korn on for David. I know the guidance this year implies like mid-20% incremental. I just wanted to ask kind of what sustainable incrementals could be -- could look like going forward in the medium term? Thanks.

Yes. I mean, as you know, Josh, we're not going to give out an incremental target. We backed off that some time ago, depending on growth in quarter-to-quarter, it just becomes a minefield because you can't have consistent incrementals. We're always going to take any incremental sales we have, any upside and try and leverage it as strongly as we can. Our goal is clearly to drive our operating -- adjusted operating income margin to mid-teens and then beyond mid-teens, back to the 17%, 18% where we were before and ultimately look to go beyond that. But the target right now is getting back to the mid-teens and pushing as hard as we can. And within that, whenever we get the opportunity, we will drive incremental as strongly as we can.

Our last question today comes from the line of Pete Skibitski from Alembic Global. Please go ahead.

Yeah. Thank you and good morning, everyone. Best of luck, Nick. You went on a nice quarter. That's good.

Thanks, Pete.

Only question for me just on Space & Defense after the nice quarter there following a strong 2023, can you remind us your split in Space & Defense between the U.S. and Europe I couldn't remember which geography was bigger for you. And are you seeing outsized growth in Europe right now just because of the threat level over there and so many of the NATO nations increasing their defense budgets. That's it for me.

Yes. Pete, I mean we have seen a little bit of a realignment over the last 12, 18 months. I mean, the U.S. is by far the biggest. It's still 70%, perhaps a little bit more. But Europe has grown. It used to be sort of 20% a little bit under. It's now well over that, pushing towards more 70-30 or around that bracket. So the U.S. is definitely the biggest. It's the strongest, and I would expect that to continue. But Europe, exactly to the point you're making with the geopolitical situation, budgets have got stronger, more of the governments in Europe have put more money into the military, and we've seen that boost a bit, so 70-30 more broadly.