Good morning. My name is Emma. I will be your conference operator today. At this time, I would like to welcome everyone to the Hexcel Fourth Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Patrick Winterlich, Chief Financial Officer, you may begin your conference..

Thanks, Emma. Good morning, everyone. Welcome to Hexcel Corporation’s fourth quarter 2022 earnings conference call. Before beginning, let me cover the formalities. I want to remind everyone about the Safe Harbor provisions related to any forward-looking statements we may make during the course of this call.

Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

They involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company’s SEC filings and last night’s news release.

A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without 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 fourth quarter 2022 results detailed in our news release issued yesterday. Now let me turn the call over to Nick..

Thanks, Patrick. Good morning, everyone, and thank you for joining us today as we share both fourth quarter and full year 2022 results. Many of our key markets have seen a robust return to growth in 2022, especially in Commercial Aerospace, where air travel has experienced a strong and much welcomed rebound.

Our Space and Defense markets have remained strong and have grown nicely over 2021. There’s also been a year of supply chain challenges, inflationary pressures and a tight labor market. Hexcel has remained focused on meeting our customer’s needs and overcoming the headwinds faced.

We achieved a roughly 20% step up in annual revenues and delivered double-digit operating margins, a 500 basis point improvement over 2021.

The strong recovery and return both to domestic and international travel are appealing to see airports that now are crowded with travelers and high load factors for airlines globally, and we see it as airlines are reportedly returning into service, older aircraft that are not fuel efficient, simply because they cannot get new planes fast enough to meet passenger demand.

The opportunities for growth are tremendous and I continue to believe that no company is better positioned than Hexcel to benefit from the strong pull for newer composite intensive, lightweight aircraft that are more fuel efficient. Hexcel advanced materials are enabling enhance sustainability and will continue to do so for decades to come.

In 2022, we celebrated numerous times with supplier recognitions from customers, including Airbus, Boeing, Lockheed Martin, CTRM Aero Composites, Sunseeker and the list goes on. Our customer intimacy throughout these challenging times has never been better.

So many times over the past several months customers have asked, how are you doing it, how does Hexcel just keep delivering when others are struggling? I give credit to our one Hexcel team. They have done a phenomenal job. They go above and beyond, not only to ensure that we succeed, but to further position us for an incredible future.

I could not be prouder of the team as they stay the course, remain focused and never wavered in their commitment to our customers. Now let’s turn to some specifics reported in our earnings release last night. First, I will cover the fourth quarter results and then full year 2022. Fourth quarter sales of $429 million are 19% higher than Q4 2021.

Adjusted diluted EPS in the fourth quarter was $0.40, compared to $0.16 last year. Turning to our three markets in Commercial Aerospace, fourth quarter sales of more than $256 million represented an increase of almost 29% in constant currency when compared to Q4 2021 and up 23% sequentially over the past quarter.

We have now realized six consecutive quarters of double-digit sales growth in this market. Other Commercial Aerospace increased almost 45% in the fourth quarter compared to Q4 2021. Business jets and regional jets, both grew strongly year-over-year.

Virtually every platform from narrow-body to wide-body to business jets is growing and the customers continue to ramp as fast as the supply chain allows.

As the market recovers, Hexcel benefits from the continued penetration of lightweight composite materials, as well as our relentless commitment to innovate with our customers on new materials and processes for next-generation programs.

The same is true in Space and Defense, fourth quarter sales of $126 million represented a 22% increase year-over-year in constant currency. This was broad-based growth across the submarkets we serve and also geographically with growth in programs in the U.S., Europe and Asia. We were pleased last quarter to see the U.S.

Navy confirm all production for the composite rich CH-53K heavy lift helicopter. This will become a top defense platform for us in next few years as production ramps. Industrial sales of $47 million were down 7% year-over-year in constant currency.

Given the economic pressures, the wind energy industry has changed structurally and opportunities for our legacy glass prepreg products have limited. However, we have seen stability in our wind business in the second half of 2022 focused on our European market.

Our Industrial business is pivoting away from wind energy to other markets, including automotive, consumer electronics, marine and recreation. I mentioned earlier that some of our customers have recognized us this year and I wanted to specifically mention the sustainability award we received in November from Airbus Defence and Space.

The award granted to Hexcel recognizes a partnership we announced in 2021 with Fairmat to recycle carbon fiber prepreg composite offcuts from Hexcel’s European operations and our customers. The offcuts are reused in manufacturing composite panels sold in the industrial markets.

It’s an award that recognizes a key collaboration, an important milestone in our relentless pursuit of innovations that in partnership with our customers will lead to a more sustainable future for us all. Now let’s turn to our full year 2022 results. Sales were $1.58 billion, up almost 22% year-over-year in constant currency.

Adjusted diluted EPS for the year was $1.28, compared to $0.27 in 2021. Adjusted operating income as a percentage of sales was 10.4%, which is almost doubled our 2021 results.

In our markets, Commercial Aerospace sales were led by the Airbus A320neo and A350 programs combined with strong growth of about 63% year-over-year for other Commercial Aerospace driven by business jets. We are encouraged as we begin 2023 by strong order activity for both narrow-bodies and wide-bodies.

Our two largest Commercial Aerospace customers, Airbus and Boeing, delivered 1,141 commercial aircraft in 2022 combined, up 20% over 2021. Backlogs are growing with more than 12,600 aircraft in total for Airbus and Boeing.

Airlines are ordering again as they refresh and increase their fleets to meet increased growth in passenger demand and as we strive toward meeting their sustainability goals for emission reductions to greater fuel efficiency, which is achieved in great part by replacing heavy metal components with lightweight composite materials.

The recent order from United Airlines for 100 Boeing 777s and 100 737 MAX jets reflects the largest order for years for wide-bodies as demand increases, especially for international travel.

With the Chinese Government recently lifting its strict COVID entry requirements, air travel within China and cross-border is expected to expand rapidly, another positive factor for new commercial aircraft demand. Now turning to Space and Defense.

The invasion of Ukraine, tightening global concerns for the need to strengthen national defense, and as a result, we see governments around the world committing to increase defense spending and that leads to increased opportunities for us over time.

Hexcel composites are the benchmark in this market and our products are on over 100 programs, which provides us with a diversified foundation for a strong future. Finally, Industrial sales were negatively impacted by the decline in wind energy business, which was mostly offset by growth in a variety of Other Industrial markets.

At the end of 2022, we closed our industrial wind energy plant in Tianjin, China due to a decline in wind energy orders that led to a stop in prepreg production earlier in the year. Our Industrial business suits over 30 different markets from a manufacturing site in Austria, including legacy wind business.

This legacy European wind blade business is forecasted to remain stable for a period of time, supported by existing contracts. While we no longer have manufacturing operations in China, we will continue to maintain a sales office in Shanghai to serve our customers in the region including COMAC.

Our focus is set firmly on a solid growth trajectory in 2023. With the increased demand we forecast across the business in the coming years, we have reinitiated construction on a carbon fiber line in Decatur, Alabama. This new line should be operational and qualified in 2025 for aerospace-grade carbon fiber production.

When the line is completed, the Decatur plant will be home to our first combined fan and carbon fiber production facility in the U.S. Reflecting confidence in our return to growth and our capacity to generate cash in the coming years, the Hexcel Board announced yesterday an increase in our quarterly dividend from $0.10 to $12.5 per share.

As the revenue news release last night, we are issuing 2023 financial guidance with double-digit growth in both sales and EPS. We are guiding to $1.725 billion to $1.825 billion in sales for 2023 with adjusted diluted earnings per share of $1.70 to $1.90.

Our guidance on free cash flow is to generate more than $140 million, while continuing to tightly manage accrued capital expenditures we spend approximately $90 million. Now, I will turn it over to Patrick to provide more details on the numbers..

Thank you, Nick. As a reminder, the majority of our sales is 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 are translate -- 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 for our financial results. We hedge this currency exposure over a 10-quarter horizon to protect our operating income.

As a result, currency changes are laid into financial results over time. As a reminder, the year-over-year sales comparisons and I will provide are in constant currency, which thereby removes the foreign exchange impact to sales. Turning to our three markets, Commercial Aerospace represented approximately 58% of total fourth quarter 2022 sales.

Fourth quarter Commercial Aerospace sales of $256.2 million increased 28.9% compared to the fourth quarter of 2021. The Airbus A320neo and A350 grew the strongest followed by encouraging growth from both the Boeing 787 and 737 MAX. Business and regional jets grew strongly year-over-year.

Space and Defense represented 29% of the fourth quarter sales and totaled $126.5 million, increasing 22% from the same period in 2021. Strength was broad based globally with growth in all of our various sub-sectors including fixed-wing rotorcraft and space. Industrial comprised 13% of fourth quarter 2022 sales.

Industrial sales totaled $46.7 million decreasing 7% compared to the fourth quarter of 2021 on lower wind energy sales. For wind energy, the year-over-year fourth quarter comparison was somewhat challenging, as they were still wind energy sales in Asia for the prior year period, but no sales in the fourth quarter of 2022.

Wind energy sales stabilized in the second half of 2022 with sales virtually unchanged sequentially from the third quarter to the fourth quarter of 2022. Recreation and Other Industrial sales grew year-over-year whereas automotive was unchanged.

On a consolidated basis, gross margin for the fourth quarter was 23.1%, compared to 19.2% in the fourth quarter of 2021. Higher sales volume is driving favorable operating leverage, although inflationary cost pressures and the productivity challenges related to a less experienced workforce remain headwinds.

Additionally, energy costs continue to pressure margins and we are working to minimize near-term volatility. We do this by locking in forward contracts typically for 12 months and these assumptions are built into our guidance for 2023.

As a percentage of sales, selling, general and administrative expenses and R&D expenses were 12.3% in the current quarter, compared to 12.2% in the fourth quarter of 2021. The fourth quarter saw a rebalancing of an unusually low third quarter SG&A expense. For the year SG&A and R&D expenses were 12.3% of sales, compared to 13.6% of sales in 2021.

Adjusted operating income in the fourth quarter was $46.3 million or 10.8% of sales. The year-over-year impact of exchange rates in the fourth quarter to adjusted operating income was favorable by approximately 40 basis points. The financial impact of closing the Tianjin, China wind energy plant was not material.

The plant size is just under 90,000 square feet. So relatively small for Hexcel. Most of the assets were fully depreciated and the charges incurred were primarily severance related. Now turning to our two segments.

The Composite Materials segment represented 83% of total sales and generated a 12.7% operating margin strengthening year-over-year on higher sales to support increased capacity utilization. The operating margin in the comparable prior year period was 8.7%.

The Engineered Products segment, which is comprised of our structures and engineered core businesses represented 17% of total sales and generated a 14.4% operating margin, driven by favorable sales mix. The operating margin in the comparable prior year period was 4.2%. The effective tax rate for the fourth quarter of 2022 was 17.7%.

For full year 2022 the effective tax rate was 21.1%. Changes in the geographic mix of profitability, as well as changes in valuation allowances impacted the effective tax rate in 2022. Net cash generated by operating activities for 2022 was $173.1 million, compared to a $151.7 million in 2021.

Working capital was a use of cash of $72.7 million in 2022 increasing to support higher sales.

Capital expenditures on an accrual basis was $69.8 million for fiscal year 2022, compared to $41.4 million for fiscal year 2021, with the growth largely reflecting the construction of the new R&D innovation center at our Salt Lake City, Utah facility and the expansion of our engineered core facility at Casablanca Morocco.

Free cash flow was $98.7 million for the fourth quarter of 2022 and was $96.8 million for the fiscal year 2022. Rising profitability was favorable to cash generation, partially offset by higher working capital that is supporting our sales growth along with higher capital expenditure in 2022. In 2021, free cash flow generation was $123.8 million.

The Board of Directors declared a $12.5 quarterly dividend yesterday payable to stockholders of record as of February 10th with a payment date of February 17th. We did not repurchase any common stock during the fourth quarter of 2022. The remaining authorization under the share purchase reprogram on December 31, 2022, was $217 million. Finally.

I would like to share additional details regarding our 2023 guidance. As Nick stated, we are forecasting sales in the range of $1.725 billion to $1.825 billion, adjusted diluted EPS in the range of $1.70 to $1.90 and free cash flow of greater than $140 million. Accrued capital expenditures are forecast in the range of $90 million.

This forecast includes ongoing maintenance capital expenditures, as well as the spend related to the reinitiated fiber line construction, the completion of the work on our R&D center in Salt Lake City and the expansion of our facility in Morocco. We expect full year 2023 Commercial Aerospace sales to compromise approximately 58% of total sales.

Our sales forecast are based on publicly stated OEM aircraft build rates and expectations. We expect Space and Defense to comprise approximately 29% of total sales and we expect Industrial to comprise approximately 13% of total sales. Additionally, we expect depreciation to remain similar to 2022 levels.

We have locked in much of our forecast energy and intended [inaudible] trial needs for 2023 to minimize the impact on our margins of any price volatility experienced in those markets.

Consistent with prior year’s selling, general and administrative expenses are forecast to be higher in the first quarter of 2023 compared to the following quarters, reflecting the timing of recording stock-based compensation expense. Continuing on this seasonality, we expect free cash flow to be stronger in the second half of the year.

Our 2023 forecast foreign exchange exposure is more than 80% hedged today. Based on our existing hedges, foreign exchange is forecasted to be a tailwind in 2023 and is incorporated into our guidance. We estimate that a 5% movement in relevant exchange rates would have approximately $2.5 million impact on earnings net of our hedges.

We expect the effective tax rate in 2023 to be approximately 23%. With that, let me turn the call back to Nick..

Thanks, Patrick. Before I turn it over to questions, I wanted to share with you that earlier this month I had the pleasure of welcoming the Hexcel team to our 75th anniversary and to set the stage for a year-long celebration of the pivotal moments and people in our past that have propelled us to this significant moment in our history.

This anniversary provides us with a rare opportunity not only to look back at our shared legacy as a company but also to look ahead to all that Hexcel can and will become in the next five years, 10 years or 25 years from now when we celebrate our 100th anniversary. Our history at Hexcel is rich and diverse.

It was in 1948 that two 20-something-year-old mechanical engineers who had recently graduated from the University of California, Berkeley and completed service in the US Navy took $500 moved into a basement workshop and changed the aerospace industry forever with some fiberglass, honeycomb-dipped in resin.

And although much has changed in the world and with Hexcel, since the time of our founding, one thing has never changed and that’s lightweight. It was our first innovation and for 75 years, we have continued building a strong, broad portfolio of lightweight materials for our customers. We have changed the world for the better.

Over its 75-year history, Hexcel has completed more than 20 mergers and acquisitions. All that we are today reflects all that we have been in the past and challenges us to continue building a strong foundation for the future. Hexcel has been a composite leader for 75 years and will continue to lead our industry for at least 75 more.

Lightweight composites are the future of sustainability. Hexcel has the products, the knowledge, and most importantly, the people to deliver that sustainable and profitable future. Emma, we are ready to take questions now. Thank you..

Thank you. [Operator Instructions] Your first question comes from the line of David Strauss with Barclays. Your line is now open..

Thanks. Good morning, everyone..

Good morning, David..

Good morning..

Could you touch on the margin outlook implied in the guidance for 2023, it looks like you are implying somewhere in the mid-30% incremental margin range, if that’s correct? And you have previously talked about getting back to the mid-teens margins when you get back to $1.8 billion to $1.9 billion on revenue, is that still how you are thinking about progression from here?.

Yeah. Hi, David. So, I mean, firstly, yes, you are in the ballpark that is kind of the leverage shape that we are seeing. You can do the math that’s built into our guidance. So I would agree with that.

And then, I mean the caveat there, I mean, we will drive it as strong as we can as we always do with incremental volumes and margins we are going to continue to push. So we will do that as much as we can.

And I guess in relation to that, I mean, we called it out, I mean, I mentioned it in the analysis we do have some headwinds around the edges of our cost range.

We do a very good job on sort of long-term contracts for our resins and major fibers and hedging FX and hedging acrylonitrile, but we do have inflationary exposures around minor raw materials, freight, packaging, energy, expect the energy in Europe.

And so those mid-teens margins 14% to 16% range are more challenged right now, but we are not giving up on those targets and we are going to push as hard as we can, especially as the revenue continues to grow in the next sort of a couple of years up towards that, yeah, $1.8 billion, $1.9 billion and plus range.

So we will keep driving, but there are headwinds today that makes it a bit tougher..

Okay. And in terms of capital deployment from here, you obviously announced the dividend increase, you have been paying down a bit of debt, obviously, you still have authorization on the share repo program.

How should we think about what you might do with the cash that you are going to generate next year, would you see yourself getting back to buying back stock? Thanks..

Yeah. I mean, our priorities remain the same. We are always going to look after our organic growth, but we are doing that comfortably now. We should be under that 100 level of CapEx as we called out for a few years now. M&A is definitely on our agenda. We are staying focused and disciplined for opportunities. We see that as part of our growth.

But in the meantime, we announced what we believe is a very positive dividend increase, the 25% from $10 to $12.5. And yes, so stock repurchases will come onto our agenda if the cash starts to come in. This year, next year, the next two or three years we are going to generate a lot of cash, it’s going to start to flow.

And undoubtedly, I would expect stock repurchases to emerge at some point, but M&A we are staying disciplined increase in dividends and then balance that with some stock repurchases is how I would look at it..

Thanks very much..

Your next question comes from the line of Pete Skibitski with Alembic Global. Your line is now open..

Hey. Good morning, guys..

Good morning..

Maybe you could -- can you speak to sort of raw material and labor inflation and your ability to kind of pass that through to customers kind of understanding you have hedging? And then also part two of that is, on all the new hires that you have made, how long do you expect it to take to get the new hires up the learning curve? Thanks..

So in terms of - I mean, we have talked about the raw material inflations and even just to David, as I was saying, we do a good job for some of our key raw materials to mitigate the impact, but we are not immune to inflationary pressures and so we have seen them.

I think we probably 2022 saw bigger inflationary pressures and hopefully, we are going to see in 2023, we are starting to see it dissipate. Energy costs, however, in Europe are high.

Where we can part pricing through or sort of increase pricing to sort of cover those cost increases we do, we have a lot of long-term contracts, some of which have formulas that led us to pass it through and we obviously take advantage of that wherever we can and work with our customers to manage pricing.

Industrial, we have more flexibility that tends to just flow straight through formulas. So we do have some price increase flow-through, but a lot of the time we are taking efficiency and productivity to manage and overcome the inflationary pressures.

In terms of labor, you can’t give someone five-years, three years of experience in six months or nine months, but we are working as hard and as focus as we can on training and accelerating it. And we were very encouraged by the output, and the production we saw in Q4, which really underpinned our ability to get out of a high level of sales.

By the end of Q3, we called out the strong demand and we certainly saw that in the fourth quarter. So we are still working on training, it’s not a short-term fix and working on pushing it through 2023..

Sorry, you guys cut out for a minute there. I appreciate the time. I will let it pass on. Thanks..

Thanks, Pete..

Your next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open. Pardon me, so next question, oh, my apologies..

Sorry, this is Ellen [ph] on for Sheila.

Just on the organic sales growth of low-teens in 2023, how are you thinking about the contribution from narrow-bodies versus wide-body ramp given disruptions to the MAX and 787?.

We have already given..

I think I heard the question, Patrick..

Hello..

Sheila, if you look, obviously, we have more content on wide-bodies and what we are seeing with respect to the A350, the Airbus A330 and the 787 coming back that provides a nice boost to 2023. Similarly, with Boeing rebounding and stabilizing their supply chain, MAX is expected to grow and the 320 is just limited by the supply chain.

So we are not going to give you the percentages per se narrow-body versus wide-body, but we are seeing pretty strong growth in both of those platforms..

Thank you, both..

Your next question comes from the line of Ron Epstein with Bank of America. Your line is now open..

Hey. Good morning, guys. Maybe just a quick one on technology. When you think about looking out over the next couple of years or maybe even towards the end of the decade, with Boeing really not pursuing a new airplane for a while other than what they have got going on at the moment.

How are you thinking about investments in technology and where do you think you need to spend maybe some incremental internal funded money on what and just curious on how you are thinking about that?.

Yeah. Ron, so remember the development cycle for commercial aircraft is quite long seven years, eight years. So material development obviously takes place well in advance. So I don’t know that we are spending incremental.

We are spending the appropriate level for what we see as opportunities for next-generation materials, both from a mechanical standpoint, as well as processing capability and the ability to lay the materials down and form the parts faster.

So again, and is that unique, solely to a potential new Boeing aircraft or new a Airbus aircraft, the penetration we are seeing in business jets, penetration and opportunities we are seeing in Space and Defense all require next-generation materials. And again, we are pretty much agnostic.

Our assets run all of our products, our development on our fiber is applicable across all of our markets, so a continued focus on R&D and investment, getting our center done in Salt Lake City and getting it staffed appropriately is certainly front and center and a key driver for our future..

Great. Thank you..

Your next question comes from the line of Myles Walton with Wolfe Research. Your line is now open..

Thanks. Good morning..

Good morning..

Good morning, Myles..

Patrick, I think you gave end market composition for 2023, which you can back into growth rates.

And so correct me if I got them wrong, but it did look like the Commercial end markets are growing about 13 and Defense up about 11, are those right, and I guess, Commercial seems a little bit lower and Defense alone, it seems with a stronger than they were otherwise expect anything to call out there?.

Yeah. No. Your math is pretty good. I mean Commercial Aero, perhaps, the run rate is slowing a little bit certainly Airbus from what we saw in 2022, but it’s still good solid growth and it’s the majority of the growth, is still the largest portion again.

Space and Defense, we are just seeing a lot of general strength very broadly CH-53K, F-35 is still continuing to creep up. We have got some European military spend going up and then we are across such a broad base and given the military budgets, there’s just a lot of pull at the moment.

I guess I should also mention business jets and Commercial Aero remains robust, but again, what you probably expect a lower growth rate..

Okay. And maybe one on the CapEx side and starting this year is that primarily for growth beyond 2025 versus what you -- when you started the program obviously, the A350 was at 10 and you were thinking about beyond 10, 777 was at 52 gone 57 you think about beyond that.

Is the focus of the Decatur expansion eyes on those kind of rates or is it more of an efficiency formula that you don’t need those kind of growth beyond your….

It’s a combination, Myles. So we obviously see the wide-bodies continuing to creep up, but the military as we have just talked about is going to put increasing demand for our products to the business jets, something like the Dassault Bolton 10x with a composite wing, that’s pulling.

So it really is sort of we see some growth in the wide-bodies, plus some new programs and extra pull come 2025, 2026 in general program growth..

All right. Thanks..

Your next question comes from the line of Robert Spingarn with Melius Research. Your line is now open..

Good morning..

Good morning..

Nick, I want to follow-on with what you ended your monologue with a little bit and touch maybe on what Rob was talking about, just because this is such a secular story and I wanted to ask you about your opportunity on narrow bodies specifically.

And why -- what are the technical hurdles and can you get to narrow-body at some point, like you are on wide-body and while I know there is no new aircraft on the near-term horizon, I am thinking of things like A320neo, rewing 220-500 and then I will throw in the GE or the CFM RISE program as well?.

Yeah. Thanks, Robert. Well, there is no reason whatsoever that narrow-bodies can’t approach a similar penetration or entitlement as wide-bodies. Remember the latest airplanes develop happened to be the wide-bodies, the 787 and A350, and they are the aircraft that are 50% composite in total weight.

If you look at the next new narrow-body and the entitlement, our technology and the market technology has just enabled that to perhaps grow even bigger. And you can see signs of that. Look at what Dassault is doing with Falcon 10x. That’s a composite wing. So we are seeing more and more pull for composites.

We are seeing the development that we are doing not only on the mechanical performance of our composite fiber products, but the way it is processed, the way our customers are able to make parts, lay it down and tape or fiber placement, the way they are able to cure it, whether it’s in our autoclave or autopilot, and whether it’s a combination of thermoplastics or thermosets.

So we have that total array, that total sweep of products to enable our customers to optimize the next new aircraft..

So, as a follow-on to that, is there any way for us to think about the relative differences in your product offering than your closest peers?.

Well, I -- the first thing I’d say is, we are the largest in the aerospace industry. I would say, we are amongst vertically integrated and diversified. If you look at our portfolio of pan and fibers, woven products, unidirectional and woven prepregs, honeycomb core, engineered core, all the way to structures.

If you look at our peers and what they have to offer is a much narrower band. Now, I am sure they are working similar technologies to improve mechanical performance, to improve processing and lay down, but I like where we are.

I like the direction we are moving and at the pace we are moving, and I think our customers are going to appreciate and recognize the value proposition we provide them for the long-term..

Thanks, Nick. Appreciate it..

Thanks, Robert..

Your next question comes from the line of Kristine Liwag with Morgan Stanley. Your line is now open..

Hey. Good morning Nick. Good morning, Patrick..

Good morning..

Good morning, Kristine..

Maybe a follow-up on wide-body demand. When you look at Boeing’s production rate plans, working with 787 go from 1.5 to 2.5 per month today and they are kind of going to that 10 per month by 2025, 2026 and that’s a 400% to 500% increase.

You guys already have the CapEx in place since you were meeting the rate higher from that pre-COVID, so it would seem like a step up in volume should be relatively easy for you.

So just want to understand, are there any hurdles that we want to keep in mind, as we see the ramp up or should this be easy-peasy considering how the CapEx is in place already?.

Well, I am not sure I’d characterize it as that easy, growing and ramping up and driving efficiency and productivity is always challenging, and we always challenge our team to go above and beyond and not do it the way we had in the past decade, but define new ways, new opportunities to make us even more productive going forward.

To your point, expanding and growing. Knowing how to put the assets in the ground that’s fairly straightforward. We have replicated our assets numerous times in various countries and we know how to do that well. We have got great processes and teams to make sure we manage and deliver and execute based on our commitments.

I’d say and Patrick touched on it, the training curves. We have a significant number of our team that are fairly new in terms of their knowledge with the product, processing and efficiencies. And although we are running and we are ramping up, and we are seeing more efficiencies climb rapidly.

That is the challenge that we really focus on and really work on going forward. So we know how to do it, to your point, we have done it before, it’s nothing special, it’s just a matter of executing. And I think we have a pretty good track record on delivering on our commitments and executing to plan..

Thanks, Nick. That’s really helpful. And following on some of the earlier questions on long-term growth. I mean, you have addressed your market share success in carbon fiber and you have benefited from the high barrier to entry, intermediate modulus carbon fiber. That’s been very clear in your operating history.

But when you look at that next-generation wide, sorry, next-generation narrow-body when we get to that 2030 timeframe, if thermoplastic you indeed takes more of a share versus your traditional metal products like how do you think about that evolution.

Would you have the same benefit in terms of your technology? Is that a substitution also for carbon fiber? How do you think about the evolution of thermoplastics and carbon fiber in that sense in your competitive advantage?.

Yeah. Well thermoplastics clearly are not as mature as thermoset technology and it has a ways to go. What we are promising is we have that technology. We are working on that technology. We are demonstrating that technology with our customers.

And I don’t believe there’s going to be a mass transfer of products moving from thermoset to thermoplastic overnight.

I think there will be applications that are better suited for thermoplastic, that are better suited for thermoset, and again, why I love our position is that we offer both, we can help our customers identify the optimum solution based on the application they have.

So, again, I think, it’s going to be a function of when that new aircraft is launched, how far down the road, because all technology whether it’s thermoset, thermoplastic or honeycomb core and noise suppression or thermal management those technologies just continue to advance every day and will be even more ready down the road..

Thank you very much..

Thank you..

Your next question comes from the line of Gautam Khanna with Cowen. Your line is now open..

Hey guys. Great quarter..

Thanks..

Thanks..

I wanted to just ask you M&A pipeline anything evolving there, anything of interest and -- but, yeah, if you could just comment on that?.

Well, we never slowed down, Gautam. We have got an active business development function. We look at technologies that will enhance our portfolio, would allow us to serve our customers better provide more value. So we have an active pipeline. Bolt-on type acquisitions, bolt-on type technology targets are high on our priority list.

Obviously, I can’t get into details on any of those names, but you can imagine some of them may be actionable, may not be actionable and that changes over time.

So it’s clearly one of the priorities we constantly look at and we balance our capital deployment against what internal developments we have versus what M&A opportunities we see not only near-term but potentially mid-term or long-term..

I was just curious with a while back there was the Woodward pursuit or whatever you want to call it, the -- any desire to move into the aftermarket?.

Well, again, the Woodward merger of equals that we worked in 2019 and announced early in 2020, which we then had to abandon because of the pandemic. That was very unique, a game changer really for both companies and to the advantage of our customers in offering more efficient and optimized solutions.

Aftermarket is certainly a nice piece of business that helps diversify away from all we and can stabilize markets during different type of macro events.

It certainly is attractive, but it’s not what drives our strategy, our strategy is driven around lightweight, innovative solutions to help our customers meet their efficiency and sustainable requirements going forward. And if there happens to be some aftermarket tied to that. That’s great. But we don’t target or make that a priority..

Your next question comes from the line of Mike Sison with Wells Fargo. Your line is now open..

Hey, guys. Nice end of the year. Just curious sort of an interesting time most pundits are looking for a downturn in the U.S. to battle inflation. How do you think that affects the industry this time around, if there is a meaningful slowdown in the U.S.

and are the indicators still seeing pretty pause for us bit, but just your thoughts there?.

Yeah. Mike, it has a certain Space and Defense. We have seen that that market segment is fairly resilient to short-term recessions or economic impacts and we see the same.

Commercial Aerospace if you look at where we are coming out of the pandemic, if you look at the strong demand and if you look at the supply chain challenges, perhaps, a little slowdown in other areas may actually be an enhancement to help with the supply chain catch-up and just a new aircraft in customers hands that are looking for them.

So we see minimal to no short-term impact in our Commercial markets. Even in our Industrial segments. If you look at our strategy and the way we differentiate it tends to focus on the high end, whether you are talking automotive or marine or recreation and sports, those are high performing applications that really are pretty resilient to recessions.

Electronics and Consumer Goods certainly there could be an impact there. But right now, we do not see the impact of significance based on what we are looking at today..

Great. Thank you..

Thanks, Mike..

Your next question comes from the line of Michael Ciarmoli with Truist Securities. Your line is now open..

Hey. Good morning, guys. Thanks for taking the question and nice results. If I can just to go back to the guidance and I guess the implied midpoint of the growth rate for Aero, you had a really strong sequential uptick in this current quarter.

Hadn’t really been much change in rates? And I guess, it seems like that revenue run rate is just going to be flattish through 2023 to get to the midpoint.

I mean is that the right way to look at it? I mean, it sounds like the 87 ramp will be a bit later, but anything from a cadence perspective, we should be thinking about?.

I think we will see some steady growth sort of going into the first half of 2023. I think the seasonality that we always historically saw and we saw what we did state in 2022 with Q3 being a bit softer reflecting the European sort of holidays in that region is likely to happen again and now sort of going forward in future years.

I think we will see that seasonality. And we will see how the year finishes, which is really going to depend on where the OEMs are with that build rates. But I think Q4 over Q3 2022 was clearly aligned step out that you have got that kind of seasonality effect. We talked about the strong underlying demand and our ability to get product out of the door.

And yes, so we are going to see another step up again into the first half of 2023 and our Q3 we will back of a little bit to seasonal lines, and then hopefully, finish the year strong again. But a fairly solid stable robust growth year.

But double-digit in all our markets, which is what you will see, Commercial Aerospace, Space and Defense and Industrial..

Got it. And just on the market, I mean, you are basically they are back at the $1.8 billion. It sounds like you are definitely grappling with some of those inflationary cost headwinds. But so just to be clear that, I guess, the confidence level in the mid-teens. Just maybe kind of battling that a bit.

Should we just calibrate expectations to deal with some of these higher costs around that target you guys had out there?.

Well, I think, you are all doing, I mean, you are backing into our guidance EPS. I think that obviously reflects a little bit of the headwinds.

I think notably the European entity, which should be, I don’t want to be compliant and I don’t want to be overly optimistic, but hopefully in time will dissipate and then as we come out of 2023 and 2024 that should give us a bump on margins and return to something more normal.

But as Nick talked about and as I talked about, we are going to drive efficiency and productivity to overcome this. What are really inflationary pressures as much as we can and drive the incremental margins. But in the short-term, there are some headwinds to that initial mid-teens guidance, but we are working hard to continue to aim for that..

Got it. Perfect. Thanks, guys..

Your next question comes from the line of Richard Safran with Seaport Research. Your line is now open..

Nick, Patrick and Kurt, good morning. Two fairly quick questions for you here, one on EPS, one on free cash flow. You had some really good outperformance all through 2021 business jets, looks like it starts to be a difficult comp this year.

I just wanted to know if you could discuss your outlook for business jets and if you think the current level -- if the current level sales is sustainable?.

Yeah. Hi, Rich. So, I mean, we saw fantastic growth 2022 over 2021 in business jets and regional jets were good too, but I guess, business jets especially so. We see continued strength, I mean, the rate of growth. I don’t expect to see the step up 2023 over 2022 the same in past 2022 over 2021. But we do see the elevated sales, the continued strength.

Gulfstream, Dassault, Bombardier continue to build that bring out new models, they are all more composite Rich than the older business jets. So it has become a really good space for us and we see continued strength. So we are positive Rich..

Okay. Thanks. And just quick follow-up on your cash flow guide for this year, I am kind of curious as to what leverage you have and what your working capital assumptions are? For example, is there any buffer or safety stock embedded in your guide and things start to improve as the year goes on, might that be upside to your guide.

I am just trying to get that generally here what’s the profitability of being coming at 2023 above your free cash flow guide?.

Well, that always be our objective. Nick and I are going to push cash as hard as we can. I mean I think when your topline is growing, you have always got a bit of upward pressure, a bit of growth around working capital. We took some of the pain and we pulled it out on our inventory growth in 2022.

We kind of got ahead of ourselves a little bit very deliberately to support our customers and get the sales out of the door. So obviously the inventory growth will be less than it might normally otherwise be, but as sales go up receivables go up, we will manage payables.

So, hopefully, only modest but with topline growth, working capital will grow modestly and we will keep driving cash. So can we outperform, that’s definitely our target, Rich..

Thanks for the color. Appreciate it..

Your last question today comes from the line of Robert Stallard with Vertical Research. Your line is now open..

Thanks so much. Good morning..

Good morning..

Thanks for sneaking me in that will happen with the technical side that. But anyway, I’d like to follow up on Myles’ question from earlier.

On Defense, because what you saw in Q4 and what you are projecting for 2023 on revenue growth is clearly different from what other defense companies the same particularly in Aeronautics, with Lockheed, look at Northrop, look at A400M, whatever it might be.

So, I wonder if you could give us a little more clarity on what you have seen and what gives you confidence this growth rate is sustainable?.

Well, I mean, we are seeing what’s in front of us Rob and we are seeing continue with strong growth on the CH-53K. I mean I know we keep talking about it, but it truly is really good growth that continues to grow very strongly. The last year, this year and probably going into 2024.

The F-35, it’s not going to grow a lot more, but it’s going to step-up a little bit more in 2023 understanding Lockheed delivery issues, but they continue to produce and we are supporting the production. And then you have got, as I say, just broad spend across the world.

In Europe, you have got the Rafale, which is going well, you have got stability even in the Eurofighter, which is a little bit stronger than if you would have asked me what 2023 was going to be two years or three years ago. I would have said, the European was going to be down, and say, it’s actually probably going to go up.

And then just general broad strength across many, many platforms as we talk about civil helicopters stepped-up, it’s a small part of what we do, but it’s stepped-up nicely, especially in Europe in 2022.

That’s going to continue for a while and Space itself is more robust with the Commercial Space applications, but it’s very broad based Rob is the answer..

So 53K sounds like it’s the key one for us to watch going forward there, because I know there is....

It is. It is and I think we have said. I don’t -- at some point is going to be up there with the F-35 and those two will comfortably be our two largest programs again..

Great. Thanks, Patrick..

This concludes today’s conference call. Thank you all for attending. You may now disconnect..