Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hexcel First Quarter 2022 Earnings Conference Call. It is now my pleasure to turn today's call over to Mr. Patrick Winterlich, Chief Financial Officer. Sir, please go ahead.

Thank you, Brent. Good morning, everyone. Welcome to Hexcel Corporation's first quarter 2022 earnings conference call. Before beginning, let me cover the formalities. I want to remind everyone about the safe harbor provisions related to any forward-looking statements we may make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgments, and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company's SEC filings and last night's news release. A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request. With me today 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 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 our first quarter 2022 results. Hexcel has started 2022 on a solid foundation, and we have come a long way from the low point of the pandemic in 2020. Now with six quarters of sales growth behind us and increasing demand ahead of us, business is undeniably moving in the right direction for our customers and Hexcel. We're reporting adjusted first quarter diluted EPS of $0.22 and sales of $391 million, representing a year-over-year revenue increase of 26%. This compares to last year when we reported negative earnings per share and sales of $310 million. Based on recent travel trends and industry commentary, it is apparent the effects of the pandemic are lessening on air travel and in our markets. Hexcel is now benefiting from the swift restructuring and cost reduction actions that we took at the start of the pandemic as well as our disciplined management of cash and working capital. We have remained closely aligned with our customers throughout this challenging period and focused strongly on our operational efficiency to be ready for this positive revenue ramp. Similar to many global industrial companies, the major headwinds we are now facing stem largely from the economic impacts of the pandemic and the geopolitical pressures and supply chain disruptions resulting from the tragic conflict in Ukraine. One of the hallmarks of the Hexcel team is our agility. We respond quickly to deal with challenges, and this is a tremendous advantage as we work through the current uncertainties. With every situation we face, Hexcel remains focused on our fundamental objectives and delivering on our commitments. Hexcel is not immune to the inflationary pressures currently affecting most economies around the world. We have some protection as a result of our long-term supply contracts to mitigate a significant portion of those pressures. Still, it has now become the norm for our teams to be regularly working to minimize the impact of rising energy, freight, and certain raw material costs as well as working through supply chain logistical constraints as efficiently as possible. While higher energy costs are impacting Hexcel, over time it also boosts demand for our lightweight, fuel-saving composites as, for example, airlines choose to replace aging fleets with lighter, more fuel-efficient aircraft made possible by advanced composites. Like many others, we are also faced with a tightening labor market. However, I'm encouraged that our workplace is desirable as many who left Hexcel during the pandemic are choosing to return. That reaffirms what we already know. For talented people who want to work in a collaborative and respectful culture where everyone is encouraged to share and build on innovations for a better, more sustainable future, then Hexcel is a great place to be. There may be a lot of competition out there for the best people, but our value proposition is strong, and we are confident that as we continue to expand, we'll attract the top talent we need to join our winning team. All in all, our results demonstrate strengthening customer demand and our upward business trend. Sales continue to grow, margins are recovering and quarterly EBITDA is rising. Our teams have effectively dealt with nearly two years of uncertainty by working smarter to innovate, collaborate and deliver best-in-class materials for the next generation of aerospace and industrial applications. Our fundamentals remain strong, and our team is focused on forging ahead through all challenges to ensure that we take full advantage of the significant growth opportunity that lies ahead in 2022 and beyond. Now let's turn to some specifics reported in our release last night. First quarter sales of $391 million were 27% higher than Q1 2021 in constant currency. First quarter adjusted diluted EPS was $0.22 compared to a negative $0.10 last year. Turning to our three markets. Commercial Aerospace is benefiting from strengthening narrowbody sales, higher A350 sales and growth in business jets. Sales of $219 million were up almost 49% this quarter in constant currency. Other Commercial Aerospace, which includes business and regional jets, was up 70% when compared to Q1 2021. This is the third consecutive quarter of double-digit sales growth in Commercial Aerospace. As the market recovers, Hexcel benefits from the continued penetration of lightweight composite materials as well as our passionate commitment to partner with and serve our customers. As part of our continuing alignment with increasing customer demand, we broke ground last quarter on an expansion at our engineered core facility in Casablanca, Morocco that will double our manufacturing capability at the site when completed early next year. Illustrating another future growth opportunity, Archer Aviation recently announced that it has selected Hexcel to supply high-performance carbon fiber materials that will be used in manufacturing Archer's eVTOL production aircraft called the Maker. Whether called electric vertical takeoff and landing Urban Air Mobility, UAMs, or Advanced Air Mobility, AAMs, this is an emerging market that holds real promise to improve lives via clean and convenient mobility in a market that could develop into a significant source of composite demand over time. Hexcel, with its broad portfolio of materials, is ideally positioned to provide solutions to this exciting and evolving market space. Space & Defense sales of $118 million represented a 7% increase in constant currency. Hexcel composites are the benchmark in this market, which provides us with a diversified foundation for a strong future. While there have been pandemic-related disruptions within the Space & Defense supply chain, we believe stability has generally returned, and we anticipate steady demand through 2022 from the platforms we serve. The growth outlook for Space & Defense beyond 2022 has been further supported by recent announcements for increased defense spending in a number of Western countries. International interest in the F-35 and CH-53K has also been strong in the past few months. A key to our continued success is the strong relationship with our Space & Defense customers. Our commitment to quality, on-time delivery and operational excellence led to our recognition during the quarter by Sikorsky as an elite supplier. In addition, we announced in March that our advanced composites had been selected by Northrop Grumman for the Artemis nine rocket booster. This is an inspiring program to return humans to the moon and illustrate the critical role composites play in spacecraft design and lightweighting to maximize payload capacity and overall performance. Turning to Industrial. Sales increased more than 9% in constant currency during the quarter to $54 million. Strength in the recreation, automotive and consumer electronics market drove the increase, more than offsetting lower wind energy demand. As an example of Hexcel's innovation for the industrial market, we recently introduced a new technology called G-Vent for out-of-autoclave processing that delivers a game-changing reduction in processing time and cost for marine manufacturers without compromising mechanical performance. Finally, our 2022 guidance we shared with you in January remains unchanged. We continue to expect sales in the range of $1.5 billion to $1.63 billion with adjusted diluted earnings per share of $1 to $1.24. Our guidance for free cash flow is to generate more than $145 million while continuing to manage accrued capital expenditures in the range of $75 million.

Thank you, Nick. As a reminder, the year-over-year comparisons I will provide are in constant currency. 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, our sales translate lower, while our costs also translate lower, leading to a net benefit to our margins. Conversely, a weak dollar is a headwind to our financial results. We hedge this currency exposure over a 10-quarter horizon to protect our operating income. Turning to our three markets. Commercial Aerospace represented approximately 56% of total first quarter sales. First quarter Commercial Aerospace sales of $218.9 million increased 48.8% compared to the first quarter of 2021 with growth in narrow-bodies, widebodies, and business jets. Also noteworthy is that Commercial Aerospace sales increased 9.6% sequentially from the fourth quarter of 2021 based on growth in Airbus platforms and business jets. Space & Defense represented 30% of first quarter sales and totaled $118.2 million, increasing 7% from the same period in 2021. Our space markets posted strong growth as did CH-53K heavy-lift helicopter and military jet platforms, including the F-35 and Rafale. Industrial comprised 14% of first quarter 2022 sales. Industrial sales totaled $53.5 million, increasing 9.4% compared to the first quarter of 2021. We experienced strength across a variety of markets, including recreation, automotive, and consumer electronics, which more than offset the lower wind energy sales. Wind energy was approximately 35% of first quarter Industrial sales. On a consolidated basis, gross margin for the first quarter was 22.2% compared to 17.1% in the first quarter of 2021. In line with sales, gross profit dollars increased for the sixth consecutive quarter, and we achieved the best gross margin percentage performance since the first quarter of 2020. While we continue to improve our margins, we are not immune to the inflationary cost pressures impacting the world. As we explained last quarter, many of our largest raw material purchases are protected by long-term contracts or financial hedges that are designed to layer in pricing changes over time and minimize quarterly volatility to our earnings. We are witnessing some inflationary cost impacts around certain raw materials, logistic costs, consumables, such as packaging material, and on our energy costs. Freight and shipping delays are impacting us just as they are impacting many other businesses globally. However, we are managing to mitigate any significant impacts to our customers. As a percentage of sales, selling, general and administrative expenses and R&T expenses were 14.2% in the current quarter compared to 16.5% in the first quarter of 2021. As we return to growth, we are focused on cost control so that our sales grow at a higher rate than costs return to the business. Adjusted operating income in the first quarter was $31.1 million or 8% of sales. The year-over-year impact of exchange rates in the first quarter was favorable by approximately 30 basis points. Despite all the challenges and cost pressures, we are maintaining our 2022 guidance. As we progress through the year, we will benefit from operating leverage as capacity utilization increases. We continue to target a double-digit adjusted operating margin for the full year of 2022. Now turning to our two segments. The Composite Materials segment represented 80% of total sales and generated a 13.2% adjusted operating margin, strengthening on higher capacity utilization as the adjusted operating margin in the comparable prior year period was 8%. The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 20% of total sales and generated a 13.9% adjusted operating margin driven by a strong mix of engine and defense sales. The adjusted operating margin in the comparable prior year period was 5.4%. The effective tax rate for the first quarter of 2022 was 22.5% compared to a 36.8% benefit in the first quarter of 2021. The prior year period included a discrete tax benefit of $3.2 million from the revaluation of deferred tax liabilities related to a favorable U.S. state tax law change. Net cash from operating activities in the first quarter of 2022 was a use of $19 million compared to a use of $1.2 million for the first quarter of 2021. Working capital was a cash use of $74.3 million, increasing to support higher sales. This compares to working capital being a cash use of $26.2 million in the first quarter of 2021. Capital expenditures on an accrual basis were $11.1 million in the first quarter of 2022 compared to $4 million in the prior year period. Capital expenditures are increasing this year on higher capacity utilization plus growth CapEx as we expand our production in Morocco to support commercial aerospace and defense markets as well as building a new research and technology innovation center in Salt Lake City, Utah to support next-generation aircraft and future industrial applications. Free cash flow for the first quarter of 2022 was negative $39.9 million compared to negative $6.1 million in the prior year period. As we referenced last quarter, our free cash flow generation is typically weighted to the second half of the year. The revolver terms and conditions have now reverted to the terms of the original 2019 agreement following the expiration of the second amendment on March 31, 2022, with the exception that the size of the borrowing facility remains at $750 million. Our next leverage covenant measurement will be on June 30, 2022, and we remain confident of being in compliance. Our share repurchase program is no longer restricted by the revolver amendment, and the remaining authorization under the share repurchase program on March 31, 2022, was $217 million. The Board of Directors declared a $0.10 quarterly dividend yesterday, with a payment date of May 13 to stockholders of record on May 6.

Thanks, Patrick. As we progress through 2022, we are executing to support continued growth. We recognize the current supply chain constraints, the tight labor market, and the inflationary pressures on energy and certain raw material costs. However, we remain confident in our ability to deliver our reaffirmed financial target guidance. Hexcel has emerged stronger from the pandemic. And as our performance reflects, we are growing and focusing on a future that provides value to our shareholders. Throughout 2022, Hexcel will stay focused on efficiency and productivity, cash management, and overall performance, especially in quality and on-time delivery. Already, we are realizing a significant upturn in demand that will only grow stronger with continued robust global demand for advanced composites technology, for lighter weight, stronger, and more durable composite solutions that only Hexcel can deliver. Brent, that's the end of the prepared remarks. We're now ready to take questions.

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

Patrick, just on the sequential growth in Commercial Aerospace. You called it out, pretty impressive, 9.6%. How should we think about that moving forward? I think you called out some widebodies, too. Obviously, not much happening with the 8-7. Looks like the rate increase on the 350 might have gotten pushed out six months. I mean, should we expect that to subside a little bit? Or just any color on how to think about that sequentially.

As we move through the year, we are at a steady state with the A350 at rate 5, and we are anticipating a transition to rate 6 as indicated by Airbus for 2023. This will be our next adjustment. With the A320, we are transitioning from a production rate of 45 last year to 65 by the middle of 2023, and we are progressing on that path, which will result in consistent growth for the A320. On the other hand, the situation is a bit more challenging for the Boeing programs. We are seeing growth in the MAX program, which is promising, as we approach rate 31, and we are keeping a close eye on developments in China. For the 787, we are prepared to act once Boeing is ready, as they are actively collaborating with the FAA. We are committed to supporting them and expect ongoing growth, particularly driven by the A320.

Got it. And just a follow-up then. Any near-term implications on the 777X? I'm assuming there was minimal revenues anyway flowing through there. But is that part of the near-term planning horizon? Will we see that this year? Or has that kind of been pushed out a little bit?

Currently, the 777 is at a low level for us, which has a minimal impact. We would prefer to see progress sooner rather than later and to begin ramping up production. However, based on our current production and output, the impact is slight.

Your next question comes from the line of Ken Herbert with RBC. Your line is open.

Nick and Patrick, just wanted to follow up on the aerospace growth in the quarter. I know last year, you were obviously facing some destocking headwinds. Is it fair to assume that the almost 50% growth represents sort of all volume? Or is there anything else from a channel build or anything else unique going on in the quarter?

Yes, Ken. I think as you mentioned, we do view the destocking pretty much behind us. Even the 787, we believe the majority of the supply chain adjustments there down to Boeing's very low rate, that's mostly taken place now. So we do believe we're very well aligned with the production build rates. And there could be a little bit of restocking here and there given the complexity of the supply chain, but for the most part, we're pretty much aligned with the OEM build rates today.

Okay. That's helpful. As a follow-up, considering the risks in the supply chain you mentioned, how should we think about your inventory levels? Are there any near-term or long-term risks from your own supply chain that you are managing, or that could impact you later in the year as you consider the rate increases?

We anticipated that as our revenue increased, receivables would also rise, which reflects a use of working capital. Regarding inventory, we are managing a mix of strategic inventory aimed at safeguarding our supply chain and our ability to meet customer demand. Additionally, we are experiencing disruptions in the supply chain, leading to delays in deliveries, which is why we decided to maintain a bit more inventory than we typically would under stable conditions. Both Patrick and I are currently more flexible about acquiring additional raw materials to ensure our preparedness moving forward. In the first quarter, we faced shortages with smaller components, while contracts for larger chemicals and commodities remained intact. Our team has handled these challenges, but I do not expect the shortages to resolve in the second quarter. Hopefully, the situation will improve and stabilize in the latter half of the year. For now, we have things under control and are holding some excess inventory.

Your next question is from the line of Myles Walton with UBS. Your line is open.

Quite a bounce in sales and margins. And you didn't really mention anything that's kind of one-off in nature, particularly on the Engineered Products margins. Maybe if there's anything in there that would suggest it's unsustainably high. I think the only thing I heard was engines and defense were strong as it relates to mix. But tooling or anything else like that, what was there?

No. I mean fundamentally, it was a favorable mix, but it wasn't overly exceptional. There's nothing I'd call out as a significant one-time item, to your point. I think what I might sort of just sort of remind people is we talked about the transition of material into ACM last year. That was lower-margin product that is now gone. And so the remaining average mix, if you like, is probably slightly better in our Engineered Products. Even so, this was a strong mix quarter as well. So nothing odd to point out. But perhaps going forward, we might see a slightly higher average in that space.

Okay. That's good. And then in terms of the inflation, you mentioned it a couple of times, but, obviously, it didn't really show up here in the margins in the first quarter. Is the anticipation that it starts to eat into your contracts or your sort of your forward long-term agreements would start to show some of that sharing of the inflation in the next few quarters?

I mean we have long-term pricing contracts which don't sort of jump around that much. And the protection we have, as you've heard us say before, are some long-term sort of input costs: our major resins, we hedge propylene, we have futures on some energy. And so there are some large chunks where we have some protection. But as we've tried to say, we're not bulletproof, but there are aspects of our business, freight, some energy costs and some, if you like, some of the smaller raw materials, where we are seeing inflationary pressures. But we're working hard through efficiency and productivity to overcome that. So we're not complacent. Perhaps we have a bit more protection than most, but we're pretty confident. As we said, we're still aiming for double-digit operating margin this year, and that's our goal.

Okay. Regarding the F-35, I would have expected it to be a larger challenge for you, especially with the supply chain issues that others are encountering. However, you experienced growth. You mentioned the CH-53K and space programs. Was the F-35 less of a concern this quarter, with expectations for improvement as the year progresses? It seems like a strong performance despite the challenges many others are facing in the F-35 supply chains.

Yes, Myles, I don't think the F-35 stood out from our perspective relative to our plan and our expectations. And we see that continuing to be strong throughout the year based on our products that we provide for structures and through our technology. So CH-53K was a nice bump as well as our called out space. So, I mean, we really didn't see anything unusual and continue to view the F-35 as a growth opportunity this year and next.

And your next question is from the line of Sheila Kahyaoglu with Jefferies. Your line is open.

I want to ask about commercial aero and other commercial. What are you guys seeing in biz jets? I think a large supplier just earlier called out some potential headwinds in helicopters and biz jets. So what are you guys seeing there?

Well, I'll stick to business jet. So to start off, as you know, we recently added chipset guidance on large-cabin business jets, where composite penetration is just continuing to grow with some of the new applications actually being at the high end of our 200,000 to 500,000 chipset range. So we're particularly strong with both streamed on platforms like the G600, also on the Dassault platforms as well. So we're seeing the only backlogs, the lead times, and just in the charter rate and flight opportunities with respect to how tight those markets are. We think that's a growth opportunity certainly for the balance of the year.

Great. And then maybe if we could talk about your capital deployment opportunities now that I think the restriction is lifted on share repurchases. Like how do you prioritize capital deployment from here? Do you go back to M&A and more defense acquisitions like ARC because that could be an end market that has more potential to grow than you previously thought?

Yes. Our basic lending agreements have reverted back, and our next measurement is scheduled for June. We are on track with our expectations. Share buybacks are back on the table. We reinstated dividends last quarter, and the Board has approved the second quarter of consecutive dividend awards. Our fundamental priorities remain unchanged. We are focused on organic investments. The pandemic presented Hexcel with significant opportunities due to reduced capacity. For the first time in nearly a decade, we had the chance to experiment and innovate with our assets for new material variants and processing enhancements to improve productivity and drive incremental sales in the future. This will create new organic opportunities, which we are pursuing in fibers, fast-cure resin systems, faster lay-down rates, and material solutions for both aerospace and industrial sectors. Organic investment will continue to be our top priority. As for bolt-on acquisitions, our M&A pipeline and team are diligently working to identify suitable opportunities. Depending on availability, that is also on the table, along with our returns to shareholders through dividends, dividend increases, and share buybacks. That's the approach we take and how we assess it daily, Sheila.

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

Nice start to the year. Nick, I think you mentioned that the inflation is giving more opportunities for lightweighting. And I think Commercial Aerospace is pretty straightforward, but what are you seeing in Industrial, where you think you might be able to get some momentum in some maybe newer applications or legacy applications for lightweighting?

Well, our big markets, I'm not going to turn away from them and the fact that some of the legacy prepreg materials in wind, they've lived their life certainly in North America and in China, and we're pursuing and investing in new technologies that enhance the value for wind turbines; our new G-Vent technology to help out-of-autoclave to make our solutions more economical both in the cost of the materials, the processing, the processing time, and the overall lifecycle cost to the end user. So we're continuing to invest there. We've seen strong pull in marine. We've seen strong pull in automotive. And again, remember, when we talk automotive, it's typically the premium end, many of the European high-end sports cars where performance, aesthetics, lightweighting is required for the application. Those applications have seen less of the chip impact that mass market has experienced. So that remains strong for us. And then we continue to look at other areas of growth opportunity, hydrogen pressure vessels and power transmission, just to mention a few, Mike.

I was impressed that you're able to maintain your current workforce and continue hiring as operations ramp up. As you look ahead to 2023 and 2024, when demand is expected to increase significantly, do you feel confident that you can acquire the necessary labor to meet that demand?

At the beginning of Q1, we faced significant challenges in finding both direct and indirect labor. However, as the quarter progressed, the hiring process became easier. While we're not back to pre-pandemic hiring levels, I can confidently say that our business performance and the attractive benefits we provide are helping. Our jobs are technical and pay above minimum wage, with competitive wages relative to the markets we operate in. Given what we know for the rest of '22, I'm optimistic about our ability to recruit, retain, and hire the talented individuals we need to meet our customers' demands.

Your next question is from John McNulty with BMO Capital Markets. Your line is open.

When considering your guidance, specifically the sales expectations, the midpoint indicates that you anticipate similar volumes and sales levels as experienced in the first quarter. Is there anything in your outlook or in the end markets that raises concerns or suggests that growth from first quarter levels may not be feasible? How should we interpret this?

So John, I'll share my viewpoint and maybe Patrick can provide some additional insights. If you examine the growth that Airbus has publicly announced, specifically their plans for the A350 next year increasing to 6 and the A320 continuing to attract strong orders, build backlog, and raise the rack rate, Boeing has a bit more uncertainty regarding when the 787s will be delivered again. We believe our forecast has been cautious and that includes these factors. This doesn’t alter our outlook, nor does the MAX situation or the delay in recertification in China, which we can't predict. I can assure you that we will be prepared for it. Overall, I don't see anything that causes concern about our continued growth for the rest of the year.

Your next question is from David Strauss with Barclays. Your line is open.

So on currency, Patrick, I think not going to be much of an impact this year because of your hedging. But we've obviously seen a big strengthening here in the dollar. So can you talk about where things stand for next year and, at kind of current rates, how much of a tailwind it might be to margins?

Yes, we certainly welcome a stronger dollar, and as you noted for 2022, we're largely set. The remaining aspect is providing us with the small tailwind we mentioned. We indicated around 30 basis points in the first quarter. The dollar continues to strengthen against the euro, and I saw it under $1.07 this morning. This will certainly help us. We're beginning to secure hedges for 2023. It's a bit early for me to specify any margin impact, but the trend is positive. Currently, the currency situation combined with our hedging strategy is definitely advantageous.

What is your average hedge rate against the euro this year in '22?

I'm not going to call out a specific rate like that. I mean we're obviously somewhere in the teens as an average rate, and it's going to be stronger next year. But we were locked in 75% more or less coming into 2022, and we're building up now our profile or hedge coverage, if you like, for 2023.

Okay. Regarding the corporate line, I know you experienced an impact from stock compensation in the first quarter, but how does that look for the remainder of the year? Will it be at a similar level to what you experienced overall in the second to fourth quarters last year? Does it increase at all?

Yes. I mean our profile annually for stock comp is always similar. We get the largest charge in the first quarter. It normally hits actually the month of February and then the remainder of the year is not 0, but it's at a lower level. So you should expect to see a similar profile to previous years', nothing exceptional or different this year.

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

Nice Quarter. Nick, I guess as people get more concerned about the macro backdrop, are you seeing any pockets of weakness in industrial markets, for instance? And I know you do have kind of tougher comps in Industrial in the back half of the year, but I'm wondering if maybe wind might actually be less of a headwind for you over the next few quarters and so maybe can offset some general Industrial weakness. But I'm just interested in your visibility there.

The macroeconomic situation, particularly the ongoing conflict in Ukraine and its potential impact on China, is definitely something we're monitoring closely. In the Industrial sector, there has been some softness, particularly in wind energy. Western Original Equipment Manufacturers have indicated softer sales forecasts for the next couple of years, mainly due to incentives that led to a pre-buy and significant steel inflation affecting turbine towers. This steel inflation poses challenges. In contrast, when we look at marine, automotive, and consumer electronics, which we are targeting with some of our available capacity, we are taking a selective approach focusing on niche, specialty markets that currently show no major impact. However, we need to keep an eye on various factors throughout the year, such as the possibility of a recession, inflation trends, and whether it will decelerate or escalate. These are key considerations.

Your next question is from the line of Phil Gibbs with KeyBanc Capital Markets. Your line is open.

I'm curious about how far ahead you might be in terms of the rate, especially for the Boeing 737 MAX. If you're currently at 31 and shipping slightly ahead, does that imply you could be receiving it at or above that rate? Or is there still some uncertainty regarding future increases?

Yes. I mean, Phil, I would say we're still on the way to rate 31. And Boeing has called out it hasn't gone beyond 31 publicly, and we're certainly not going to get ahead of them. But at the moment, we're still on the ramp up to 31 is what I would say.

Okay. Is it fair to say that based on your comments to David, the weakening of the euro is actually beneficial for this year? It seems to be somewhat offsetting the inflation you are experiencing elsewhere.

Yes, I mean a little bit. I wouldn't overplay that. We've been experiencing a relatively strong dollar for a couple of years, and it continues to strengthen, albeit marginally. We do expect that to present a slight challenge in 2022 compared to 2021.

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

So your margins indicate you've been able to offset the typical step-down pricing with increasing volume and long-term agreements. Now look, I know this is a bit sensitive, but can you offer a comment or two on the pricing environment overall and your efforts to increase pricing certainly in aerospace but also within Industrial since I'm thinking that's probably where you have the most opportunity?

Yes, Richard. Let me begin with aerospace. These contracts are long-term, so any price decrease due to volume recovery is negligible. We're under contract, and this has a minor impact as we return to pre-pandemic levels. It's important to remember that these long-term contracts include various indices that account for inflation and oil prices, which typically have a lag of six to twelve months. In contrast, the industrial sector responds much faster, with many shorter contracts that allow us to adjust pricing as our costs increase. We have been reducing prices where it's appropriate in the industrial segment. While there are longer-term contracts there as well, they typically allow for quicker updates, potentially quarterly or semi-annually, and it is uncommon for them to extend to twelve months.

Nick, I wanted to ask you about capital deployment again. I thought I'd ask you to get specific about one item, buybacks. Is that something you think could start in '22? Or is it more likely, I'm thinking, given the uncertainties in the business that it's 2023 they could start again?

Well, as Patrick mentioned, we look at that and have discussions on that every quarter. And we have over the past year. So our debt leverage is going to help us decide on the right timing and mix between potential M&A, how close we are, what opportunities present themselves, R&T spend and internal organic growth pursuits that we're continuing to invest in, and then perhaps a dividend growth strategy down the road. So I wouldn't rule out the possibility that share buybacks could start in 2022. But at the same time, I'm not going to commit to it either.

Your next question is from Robert Spingarn with Melius Research. Your line is open.

A couple of high-level questions. One for you, Patrick, one for Nick. Patrick, when you factor in future mix, inflationary costs on raw materials, labor, packaging, energy, all the things you've talked about today, maybe except currency, how do your longer-term operating margins look when volumes return compared to the 18% or so you did pre-pandemic? So this is a long-term look at margins based on everything that's happened, including all the restructuring you did for the past two years.

That's a great question. We are focused on maintaining strong margins in our business through efficiency and productivity. We've successfully reduced costs by $150 million at the peak of our cost-cutting efforts, and we aim to retain as much of that as possible. We have strong protections in place, including long-term contracts for resin supply, hedging for propylene, and futures contracts on energy. However, we do acknowledge the ongoing pressures you mentioned. Our goal is to work efficiently and return the company to the 18% margin level once our volumes increase. We believe we can achieve this, and it's a priority for us. The wider guidance range reflects our awareness of these pressures, and we are in the process of managing them. While I'm not going to provide specific forecasts for 2023 and beyond, we are targeting double-digit growth for 2022. Some of the challenges we're currently facing are temporary, and I see potential for improvement in raw material supply issues. Ultimately, our aim remains to restore the business to double-digit growth this year and to aim for that 18% margin in the future.

Okay. That's very good color. Nick, is your next step change opportunity in commercial aero from a new clean sheet, let's say an NMA, or an update to an existing program like maybe a composite wing, for example, on the A320?

That's a great question. We see significant potential in both areas, whether it's a new engine that requires a new nacelle or a new wing, which are both highly composite-intensive and present excellent opportunities for us. Ideally, a clean sheet design is the ultimate objective regarding the fuselage, wing, and overall structure, especially with advancements in composites and near-net shape processing. We believe the next new airplane will rely heavily on composites, likely even more than the latest designs like the 787 and A350. I'm interested to know what will happen first: a clean sheet design or the introduction of a composite wing or another composite structure by one of the OEMs as a bridge to a new platform. I can assure you that we are developing technologies that support both paths. We have new advanced materials that cure faster and deliver more value to the OEMs compared to traditional materials. Therefore, we are well-positioned with a diverse portfolio, no matter which direction the OEMs take.

Okay. Just a quick one on Archer, maybe a clarification. But are you a risk-sharing partner there?

We're not.

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

I was curious about two things. First, are you observing any significant discrepancies among your customers regarding any of the programs, such as the A350 or 787? Are some customers purchasing at much different rates, with some still behind and overstocked? I'm interested to know if there is still a need for catch-up among the customers on a net basis so that everyone...

Yes. I'd basically strongly say absolutely not. I think the benefit that our customer intimacy and our strong relationships provide us is we talk with them every day, we see what's going on in the supply chain. And even though the fast supply chain may be slightly different on where they are with respect to build rates and their inventory levels, all in all we see very good alignment, and I don't see anything in particular that's driving extra demand or potentially will limit demand going forward other than the OE build rates.

Okay, that's very helpful. Patrick, I know you've addressed this in various ways, but could you provide a more direct answer regarding the input costs on the aerospace side that aren't protected by contracts? I'm curious about what is and what isn't subject to surcharges over time.

I'm not going to provide a definitive list, but as we have mentioned, we have coverage on major materials like propylene and acrylonitrile, which are important for carbon fiber and some energy components. However, we are more exposed to consumable items, packaging materials, and minor chemicals. For significant parts of our business, we have strong protection, but for smaller components like freight, which isn't a large part of our costs, we have more exposure.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.