Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hexcel First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question-and-answer session. Thank you. Patrick Winterlich, Chief Financial Officer, you may begin your conference.

Thanks, Rob. Good morning, everyone. Welcome to Hexcel Corporation's first quarter 2023 earnings conference call. Before beginning, let me cover the formalities. I want to remind everyone about the safe harbor provisions related to any forward-looking statements we 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 2023 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 2023 results. Our first quarter results reflect a strong recovery in demand with overall sales up 18% year-over-year, bolstered by a 30% increase in Commercial Aerospace sales. We delivered strong margin leverage on the increased production volumes, leading to a robust operating income for the fourth quarter. The strong demand for new aircraft is clear with a combined backlog for Airbus and Boeing now at roughly 12,600 aircraft. Airline orders are increasing for new, lightweight, composite-intensive planes to replace older, less fuel-efficient fleets and to meet growth in passenger demand. Indications are that domestic air travel has not stopped accelerating in recent months despite inflation, and now many expect that passenger demand could recover to 2019 levels by the end of this year as China reopens. International air travel is also coming back strongly, including both leisure and business, and is recovering more quickly than many had expected. During the first quarter of 2023 alone, there have been six different widebody orders and options announced from Asia, the Middle East and Europe, for a total of 215 widebody aircraft for Airbus and Boeing. Announced orders or options for narrowbodies, including the Airbus A320neo family, the A220, and the Boeing 737 MAX, remains strong and steady at 464 aircraft in the first quarter. We remain aligned with our customers and ready to support their growing demand. We recognize though that there are broader challenges in the aerospace industry relating to supply chain constraints, labor shortages, and workforce experience, and we are staying vigilant and agile in order to provide support as required to our customers. Yet while our optimism may be tempered by these factors, we could not be more pleased to start 2023 with such positive momentum. Our confidence is strong as we reaffirm our full year 2023 guidance that we provided in January. Now let me highlight some of the results, and Patrick will then provide more detail on the numbers. Commercial Aerospace sales of $285 million increased 30% compared to the first quarter of 2022, led by growth in the Airbus A350 and A320neo programs. Other Commercial Aerospace increased more than 23% for the first quarter on expanding business jet demand. The outlook for narrowbodies, widebodies and business jets is extremely encouraging. They are all growing and creating further demand for more Hexcel composite material. Space & Defense sales of $126 million increased 7.6% in constant currency with growth across a number of platforms globally, including fixed-wing aircraft and both military and civilian rotorcraft. We see a period of increased space and defense spending, including Europe and Asia Pacific, which for the first quarter of 2023 represented approximately one-third of our total Space & Defense sales. Total Industrial sales of $47 million decreased about 9% in constant currency due to lower wind energy sales that were partially offset by sales growth and recreation, automotive, and general industrial markets. Marine continues as an emerging growth market for us. This week at the JEC World Trade Show in Paris, Hexcel was recognized along with one of our customers and a consortium of other partners for our work on new composite technologies for the marine sector that will eventually lead to quieter and more environmentally sustainable cruise and cargo ships. As with every quarter, I want to thank our One Hexcel team for their focus on execution and efficiency through operational excellence, ensuring that we deliver quality products to our customers on time. The labor market remains tight and certainly the necessary talent takes longer to find. Yet we have been filling jobs both on the plant floor and in our offices with great success over the past several months as job seekers are attracted to our collaborative culture and our compelling business outlook with our sustainability-oriented, lightweight, leading products. Our success as a company is not just what we do, but how we do it. Our growth position today is supported by how Hexcel managed during the downturn by quickly ramping down yet without sitting still. A prime example of that is our decision to invest in a new research and development site adjacent to our largest carbon fiber and matrix plant in North America and Salt Lake City, Utah, which some of you have visited on previous Investor Days. We broke ground in October 2021, and then on March 22 of this year, our Center of Research and Technology Excellence officially opened. Customers from about 20 companies joined us for an event where we celebrated with local public officials and employees, with everyone having the chance to tour our state-of-the-art labs and meet our researchers and scientists who now are calling this remarkable innovation center their home. With about 100,000 square feet of floor space, our new R&T center of excellence provides us with an amazing opportunity to expand our research and broaden our technology portfolio. It is also an ideal platform for us to collaborate with our customers on the latest innovation and lightweight, sustainable solutions and the latest developments in carbon fiber and matrix technologies for aerospace Space and Defense and industrial applications. It will quickly become a showcase that demonstrates our world-leading composite technology. Lastly, as you read in our news release last night, we are reaffirming our guidance at $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 manage accrued capital expenditures with approximately $90 million of sales forecasted. Now I'll turn it over to Patrick to provide more details on the numbers.

Thank you, Nick. As a reminder, the majority of our sales are 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. As a result, currency changes are laid into financial results over time. As a reminder, the year-over-year sales comparisons I will provide are in constant currency, which thereby remove the foreign exchange impact to sales. Turning to our three markets. Commercial Aerospace represented approximately 62% of total first-quarter 2023 sales. First quarter Commercial Aerospace sales of $284.5 million increased 30% compared to the first quarter of 2022, led by both the Airbus A350 and A320neo programs. Airbus raised the production rate of the A350 in early 2023, which led to increased first quarter sales, including some restocking. The Other Commercial Aerospace category grew 23.5%, led by strength in business jets. I would like to highlight that our first quarter 2023 business jet sales exceeded pre-pandemic levels, which is supported by the growing secular adoption of composites for lightweighting by business jet manufacturers. Space and Defense represented 28% of first quarter sales and totaled $126.2 million, increasing 7.6% from the same period in 2022. The growth continues to be across multiple platforms globally, including fixed-wing aircraft and both military and civilian rotorcraft, partially offset by softer space sales. Industrial comprised 10% of first quarter 2023 sales. Industrial sales totaled $47 million, decreasing 9.1% compared to the first quarter of 2022 on lower wind energy sales. As we mentioned last quarter, wind energy sales stabilized in the second half of 2022. Recreation, automotive, and other general industrial sales grew year-over-year. On a consolidated basis, gross margin for the quarter was 27.9% compared to 22.3% in the first quarter of 2022. Higher production levels and robust margin leverage were the principal drivers of this strong performance. However, I want to caution that the gross margin this quarter was particularly strong for a number of reasons; sales mix was favorable with strong demand for Hexcel fiber-rich products; there was a favorable absorption impact as a result of the increasing finished goods inventory; and foreign exchange was also a tailwind this quarter due to the significant dollar strength compared to the first quarter of 2022. As a percentage of sales, selling, general and administrative expenses and R&D expenses were 14.1% in the first quarter compared to 14.2% in the first quarter of 2022. Consistent with past trends, first quarter SG&A expenses were elevated on stock-based compensation. So SG&A is expected to moderate for the remainder of the year. R&D expenses were higher on more material development costs as we pursue new opportunities with our innovative composite lightweighting solutions. Adjusted operating income in the first quarter was $63 million or 13.8% of sales compared to $31.1 million or 8% of sales in the comparable prior year period. The year-over-year impact of exchange rates in the first quarter to adjusted operating income was favorable by approximately 80 basis points. Now turning to our two segments. The Composite Materials segment represented 83% of total sales and generated an 18.4% operating margin, strengthening year-over-year on higher sales and production volume as well as mix. The operating margin in the comparable prior year period was 12.9%. The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 17% of total sales and generated a 14.9% operating income margin as compared to 13.7% in the comparable prior year period. The effective tax rate for the first quarter of 2023 was 21.9%. Net cash used for operating activities in Q1 2023 was $23.4 million compared to a use of $19 million in the first quarter of 2022. Working capital was a use of cash of $104 million in the first quarter to support higher sales. This working capital increase was consistent with expectations and path trends as working capital increased $74.3 million in the first quarter of 2022. Capital expenditures on an accrual basis were $16.8 million in the first quarter of 2023 compared to $11.1 million in the prior year period. As previously disclosed, 2023 capital expenditure included further construction related to the partially completed carbon fiber line at our facility at Decatur, Alabama to support future growth. Free cash flow was negative $41.5 million in the first quarter of 2023, which was similar to the negative $39.9 million in the prior year period. For an alternative metric of cash generation, adjusted EBITDA in the first quarter of 2023 was $106.6 million, up 44.6% from $73.7 million in the first quarter of 2022. I am pleased to let you know that we have just renewed and extended the maturity date of our bank-syndicated $750 million revolver to April 2028. The terms and conditions were basically unchanged with two key revisions to highlight. First is that the borrowing base rate was revised from LIBOR to SOFR as expected. The other change is beneficial to Hexcel as the leverage covenant calculation was revised to net debt whereas, previously, it was measured on a gross debt basis. Successfully concluding this refinancing during a period of banking turmoil speaks to the financial strength of Hexcel and the support of our bank group. The Board of Directors declared a $0.125 quarterly dividend yesterday, payable to stockholders of record as of May 5 with a payment date of May 12. We did not repurchase any common stock during the first quarter of 2023. The remaining authorization under the share repurchase program on March 31, 2023 was $217 million. As Nick stated, our full year 2023 guidance is reaffirmed. With that, let me turn the call back to Nick.

Thanks, Patrick. We welcome the return to growth and ramp-up in programs. Our customer relationships have never been better, thanks in part to our flexibility, transparency, and reliability. Pent-up demand for air travel is loading up seats on airplanes, which is expanding backlog for new, more fuel-efficient aircraft. And as the market recovers, Hexcel benefits from the continued penetration of lightweight composite materials as well as our never-ending commitment to innovate with our customers on new materials and solutions for next-generation programs. Supply chain issues remain a watch item for us as they do for most other suppliers in our industry. However, global demand for advanced composite technology from lighter-weight, stronger, and more durable materials in all of our markets is growing. Our technology and products remain unrivaled in our industry. The disciplined actions we have taken and our focus on execution will ensure that Hexcel continues providing long-term shareholder value. Rob, that concludes our prepared remarks. We're now ready to take questions.

Your first question comes from John McNulty from BMO Capital Markets. Your line is open.

Yes, good morning. Thanks for taking my question. So a question regarding the maintenance of your full year guide. So your first quarter came in really strong. And it did sound like maybe there was a little bit of continued restocking of inventory, so maybe that is part of the answer. But I guess when we think about the seasonality of the business, your strength in the first quarter would imply maybe a better range for the full year. So I guess, can you help us to understand maybe some of the puts and takes there or some of your conservatism as to the full year guide and no changes there?

Yes, John. Well, thanks for the question. First off, clearly, we started the year strong, and we're seeing improvements in many of the supply chain aspects that are creating some uncertainty and continued pressure in the industry. So for one, we're early in the year. We just gave guidance in January, and the guidance has pretty wide ranges on it. So to tweak it at this point in time just didn't make sense to us. Secondly, the supply chain risks, not necessarily only to us but for other components that could ultimately impact build rate ramps, I can't say those have gone away. They're still there, and we probably are taking a conservative view on that and some of the other shortages that are driving some challenges in various areas of discrete part manufacturing within the industry. So maybe a little bit conservative, but at this point in the year, that's really the position we want to take and convey.

Got it. Fair enough. And maybe just as a follow-up, your balance sheet strengthened a lot. Your leverage, if I'm looking at it right, is now below 2 times. And you actually have that maybe better covenant flexibility as well. So how should we think about cash flows and the uses as we go forward? Can we see maybe a push into buying back some stock throughout the year? Or are there opportunities on the M&A front just given your strength maybe relative to others out there where maybe that's more attractive? I guess maybe you can give us some color around that.

Yes. So I'd say it's unfortunately for you, maybe a boring answer, but it's consistently what we've said for quite a few quarters, certainly since I've been talking and sharing our earnings results. First and foremost, our team are pushing innovation, new technologies, innovative new fibers, new processing, new solutions for our customers to help them not only on existing platforms and various derivatives that are being worked to prepare for the next generation of platforms. There's also new programs out there that awards are not set yet, for example, on the Valor 280 or many military programs that we continue to work and continue to innovate. So organic growth is priority number one. Priority number two is we really look at the M&A landscape. We look at bolt-ons. We look at our technology portfolio and how we might expand that to be able to offer our customers even broader, more value-driving solutions for their lightweight needs. That pipeline, we've been looking at that continually. We're disciplined. We're very selective. But that's how I look at number two. And then lastly, we always look at our balance sheet. We look at our debt ratio and we review with our Board on a regular basis our dividend strategy and our share buyback strategy. And as you see, the cash generation is ramping up as our sales grow. So I would expect we'll continue to look at all three of those priorities. And without guiding definitively, I'd say all of them are in play going forward.

Great, thanks very much for the color.

Your next question comes from the line of Rob Spingarn from Melius Research. Your line is open.

Hi, good morning. Nick, following up on that last question, we've seen strong numbers in the first quarter. You mentioned the OE on the build rates, but I would like more details on your plans for the major programs such as A320, A350, 737, 787, and so on. I'm particularly interested in the MAX, as there have been discussions about increasing rates. However, I'm unclear if some of those aircraft are modifications coming out of Moses Lake, which might mean you wouldn't be involved since those aircraft are mostly built from Hexcel's standpoint. So essentially, how do the rates flow throughout the year for those programs?

Let me start with Boeing. There's a lot of momentum and positive news coming from Boeing. I know they are addressing a recent issue with Spirit, but prior to that, they were looking at potentially increasing rates from the low 30s. We feel very optimistic about the MAX. China continues to release reports that make it easier for airlines to take new MAX deliveries, and we know Boeing has inventory built and structured for the Chinese market, which would be another advantage for the MAX. The demand for the MAX remains strong as the supply chain stabilizes and Boeing increases rates. Regarding the 787, although we highlighted the A350 and A320neo, we still saw year-over-year growth in both the MAX and the 787, as well as sequential increases for both. I don't want to downplay Boeing's strengths; we just noted the key market drivers for revenue. For the 787, it has seen low rates but experienced a nice uptick in Q1. Boeing is aiming to be closer to 5% by the end of the year, and we expect this growth to continue. On the Airbus side, the A220 continues to receive strong orders, and we have a solid position there. The 320neo is set to ramp up to the mid-60s by the end of next year, with a target of mid-70s by 2025. We see continued growth and strong positions. The A350 has recently increased to six a month, and Airbus has publicly stated its goal to ramp up to nine per month by the end of 2025. The A330neo, where we also have a solid position, is expected to maintain a consistent level going forward. Overall, we still see positive momentum in build rates, and we remain very confident in the market, with the understanding that the supply chain's ability to ramp up quickly may impact build rates in the next 12 to 24 months.

Thank you for the insights. Patrick, I wanted to touch on the business jet sector. You've mentioned previously that the content per aircraft has increased compared to 2019, which is one of the reasons your revenue exceeds 2019 levels. Is there a way to quantify your content as a percentage of an aircraft's value and how that has changed and is expected to change in the next couple of years? How confident are you and Nick about the potential increases in business jet production rates?

I would like to discuss business jets. We've seen remarkable growth in build rates over the past few years, and we are currently at a high level. While the growth rate may not continue at this speed, I anticipate that demand will remain strong, which is driving a significant amount of Hexcel composite material usage. Regarding the content, the newer, larger jets are generating substantial shipsets. We've noted that large business jets are valued between $200,000 and $500,000, and some of the largest models, like Gulfstream and the Dassault Falcon 10X with a carbon wing, may exceed that range. We are very enthusiastic about the increased use of composites on these platforms, which we expect to maintain high demand for the foreseeable future. Therefore, we are very confident about the outlook for business jets.

Thank you both for the color.

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

Yes, good morning, Patrick and Nick. Maybe, Patrick, really nice gross margins in the quarter. And you called out sales mix and absorption. As we look at where the incremental were this quarter, with the build rate plans, it doesn't sound like maybe those tailwinds necessarily moderate too much, at least through this year. So how should we think about incrementals on the gross margin line? And is the current margin rate sustainable? Or how much are you expecting or thinking we should see that moderate over the year?

Yes. I mean, it was a great margin quarter, and the volume leverage was the key driver. I think as I said in my script, I would moderate expectations a little bit. We had a particularly sort of Hexcel fiber-rich product mix in Q1 which helped. It gave us a bit of punch. And going forward, inventory, I would not expect to continue to grow. If anything, we will now be stabilizing that and, if anything, bringing it down. So I wouldn't expect an absorption tailwind either going forward. I mean, we do expect good quality margins but I would moderate down a little bit from what I would see is a little bit of an exceptional Q1 margin performance.

No, that's helpful. And as I think about headcount and bringing staff back to support the higher rates, where are you in that process? And maybe at which level of staffing are you to support future rates? Or how much of that do you still have to go?

So as you know, we took our headcount down from about 7,000 heading into the pandemic to about 4,500. Today, we're actually probably pushing 5,500. So we've almost brought back 1,000 people, which reflects the growth from the trough of the pandemic. I mean, our direct headcount will just pro-rata. It will grow as demand grows. I mean, you can see sort of our guidance this year, $1.8 billion roughly just under the midpoint if you look at the midpoint. And if you compare that to the $2.4 billion, so that's about a $3.75 billion level. So we will not jump again this year, a bit more in the coming years. We will manage indirect labor very prudently, but we will obviously not constrain ourselves to the growth opportunities, the R&T opportunities in front of us, and we will invest in people going forward. But the biggest mover on headcount is obviously direct labor, and that will follow revenue.

Great. Thank you very much.

And your next question comes from the line of Myles Walton from Wolfe Research. Your line is open.

Thanks. With Flora now decided, and you alluded to it, but I was hoping you could talk to some of the relative content you'd have on the Valor. Is the shipset closer to a V-22 or CH-53K? And I guess how much of the content is still up for bid?

Well, Myles, I would say the content will certainly be above the Black Hawk. We're still working on multiple packages both Valor. So it's really premature for us to get a shipset at this point in time other than it's going to be nice, it's going to be a material driver for us and it will be more than the Black Hawk.

Okay. All right. And then Patrick, you mentioned the restock benefit on the A350? Any way to size that? And the reason I ask is it's hard to imagine that Commercial Aerospace sales don't sequentially grow in some way, shape, or form through the course of the year, which, I guess, is implied at the top end of your guidance still. So maybe if you can size that or give us any way to stay in the range.

Yes. As Nick mentioned, we started the year around six and we are working our way up to nine by 2025. This growth will take the form of a gradual incline rather than a straight line. In the first quarter, we experienced a surprising level of demand, which likely included some restocking. The A350 is a platform that utilizes a significant amount of our fiber, and as we have noted before, an increase in this type of mix tends to enhance our margins. I do believe we will see consistent growth, although I doubt we will experience the same restocking and fiber-rich mix each time. This mix certainly contributed to an increase in our margin percentage in the first quarter of this year.

I would just add to Patrick's comments that in addition to the A350 in production, we're also providing materials for the freighter. And Airbus has recently completed the central wing box, which again has all Hexcel fibers on. And then lastly, remember, our supply chain for the A350 are over 40, 50 locations. So it's quite a complex broad supply chain that does require some safety stock and some provisioning of materials, which we think some of that came through in Q1.

Okay, all right. Thank you.

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

Great. Patrick, Nick, following up on the earlier questions on cash use, with the new Boeing airplane seemingly not on the horizon for this decade, the balance sheet where it is and the relatively minimal CapEx requirement, I mean, you're going to be in a period of unprecedented growing free cash flow in this up cycle. So what's your appetite to use the balance sheet or this cash for transformative M&A? Do you think you need it? Are there anything of interest? Or potentially just returning 100% of that free cash flow to shareholders through dividends or buybacks?

Yes, Kristine. So thanks for the question. First, I would remind everyone that the lead time for material selection before a new airplane is lost is in the vicinity of five years to 10 years. So you shouldn't think that we're not investing, working with our customers on the next-generation materials, processes, and solutions for those types of platforms, which we are. Secondly, do we need to do M&A? We don't view that we need to. That's really how we drive our discipline and the value proposition to how it enhances our portfolio. So as you say, we have plenty of powder. We're looking at various areas and targets and technology that we think would fit very well. That's an active process that we have our team working on. But again, could we return more to shareholders, depending on the availability and the actionability of those targets? Again, it could fluctuate based on those factors.

Great. And then in terms of the investment dollars, can you size that? Is this 5% of sales annually or less? How should we think about that level of investment that you'd have to do for the next airplane program?

Yes. We really don't go there. We're working with our customers on very few technologies, whether you're talking about fibers, whether you're talking about matrix systems, whether you're talking about in auto plate, out of auto plate, thermal set, thermoplastic, there's a wide variety of technologies that will be used in different parts of the aircraft. I'd also say we're firm believers that the penetration - the secular penetration of composites will continue to grow. So as we can make our materials more flexible, more adaptable to new processing, it opens up the window of the next composite airplane to be above 50%, who knows, maybe 70%.

Well, 70% would be a lot. Great. Thank you very much.

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

Hey, good morning, Nick and Patrick and Kurt. Nice quarter, guys. On Industrial, the sales decline, I think the release mentioned wind. Was European wind down in the quarter? And what's kind of the prospects of that going forward? Have you bottomed there or not? And last one is, could you just touch on are you seeing any headwinds in the balance of the Industrial portfolio or not?

Yes. Currently, all our sales in wind are focused on Europe. As you may recall, investors withdrew from U.S. operations in 2020, leading us to close our wind facility in Colorado. We also announced the closure of our plant in Taishan, China, at the end of last year. Consequently, our wind energy efforts are now primarily based in Europe. As mentioned earlier, we are stabilizing in the wind segment. The last three quarters have shown relatively consistent performance, though there has been a noticeable decline year-over-year when comparing Q1 2022 to Q1 2023. We anticipate maintaining the wind energy business at this level for some time and are innovating new resin coating gel products that we expect to see expand globally. Regarding the automotive sector, almost every segment showed growth, with increases in automotive and recreation, along with a few other key industrial areas. Overall, we are experiencing general strength in the wind business, which has returned to being one of the major components of our industrial market.

Thanks guys.

Our next question comes from the line of Sheila Kahyaoglu from Jefferies. Your line is open.

Thank you. Good morning, Nick and Patrick. Thanks so much. You guys seem to be beating numbers without breaking a sweat here, Nick, I think you alluded to it too. You're watching labor inefficiency, supply chain. Others are stumbling on this. So I guess, what has improved over the last six months for you guys? And what are you guys watching most carefully going forward?

I must say it hasn't been easy. Our teams have been working incredibly hard to manage the supply chain and address issues that arose frequently in previous quarters. While we're not completely out of the woods, these issues have slowed down. We are seeing some improvement in supply consistency and lead times, though it's still not as stable as it was before the pandemic. We need to remain vigilant because new issues keep emerging. On the logistics side, especially regarding international freight by sea, lead times have improved significantly, and we're noticing a downward trend. However, it's still too early to say we're back to 2019 levels. Nonetheless, we are observing positive developments in our logistics and supply chain capabilities.

Great. And I wanted to ask one on Defense and Space. I don't know if you've ever given your breakout of how much space contributes. I wanted to know if your contracts are structured differently there, both within defense and space just given the customer bases.

Pure space sales make up a smaller part of our Space and Defense segment. Space and Defense is the primary focus of that segment. While the contracts in this area may be slightly shorter in duration, we maintain similar commercial agreements and arrangements with those customers, comparable to many of our other commercial customers, particularly in Commercial Aerospace. Unlike the long-term contracts common in the Commercial Aerospace sector, our space contracts are generally not on a decade-long basis, though that could change over time. The structure of these contracts is similar, although they tend to be shorter term, but there's nothing significantly different.

Okay. Thank you.

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

Nick, Patrick, good morning. How are you? So I wanted to ask your V-280 question, a bit of a different perspective though. I think you made the point, correct me if I'm wrong, that you're agnostic. However, one, Flora, now that the award has been made and the protest over, could you comment on the transition to the V-280 from the UH-60, when the V-280 should start to impact your P&L? And how long you're expecting UH-60 program to last?

Yes. So Rich, I mean, a good question. There's going to be an overlap, I would expect. I mean, in terms of the V-280, we wouldn't expect to see any real significant revenue probably for a couple of years into 2025. As Nick said, we're still working on a number of packages to try and get more content on that aircraft, and it's too soon to declare our shipset status. I would expect the Black Hawk program and the transition over to take several years. I think we're going to see strength in replacement blade demand around the Black Hawk for some period to come. There could even be a little bit of a bump where we're supplying to both programs for a period. But I think it will be a steady transition. I don't think there will be a sudden drop in Black Hawk before the V-280 ramps; I think there'll be an overlap, and we'll see a fairly gradual transition over time.

I wanted to ask a quick question about labor. Nick, if you mentioned this in your remarks and I overlooked it, I apologize. With the increase in headcount, could you provide some insights on how training has been progressing and how quickly the workforce is ramping up? Considering the tight labor market and your comments about finding the right people, it seems that based on your results, things appear to be performing a bit better than expected.

I wouldn't say they are performing better than we anticipated. However, it is clear that they are improving quickly, which we expected. We are continuously enhancing our training programs and refining our processes to reduce potential human error. During the pandemic, we took the chance to focus on productivity and efficiency improvements, and you can see the results of that now. Overall, the quality of talent has been excellent, and the ramp-up has gone as we anticipated, leading to rapidly increasing efficiencies.

Okay, thank you.

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

Good morning, guys. Thanks for taking the questions here. Maybe Nick, last quarter, I think it came up at the longer-term kind of margin goals were becoming a bit more challenged. Clearly, you guys had some mix, and you covered all the kind of tailwinds this quarter. But has anything changed? I mean, I think last quarter we were focusing a lot on energy inflation, just general cost pressures. Maybe can you give us a sense, has anything sort of shifted or given you more or less confidence in getting to those longer-term targets? Any color you might be able to add on pricing as well there?

Yes, Michael. So I'd say nothing has really shifted negatively. Actually, probably some positive shifts. Number one, energy, we've seen a decline in the energy especially in Europe as those markets stabilize and come down. I think the team has done a great job working with our customers to recover some of the inflationary items on labor and oil, and we've translated that well. And again, we've always driven for productivity improvements year-over-year, some efficiency improvements year-over-year, which is never-ending in an operational environment. So I'd say I feel good about where we are. We have a way to go. We're going to continue to leverage the volume growth. We're going to continue to be tight on adding costs and certainly salaried resources, continuing to drive leverage and productivity going forward. So as we grow, clearly, we're going to be hiring both as Patrick mentioned to support the operations, and the direct heads will virtually follow the revenue. On the salaried side, we're going to continue to add the technologists, add the positions to help drive the growth for us to deliver well beyond the recovery.

Got it, got it. That's helpful. And then just one more, if I may, maybe going back to Rob's questions on rates. On the MAX, I mean, if we're going to keep production at 42 a month potentially by year-end, I think there's been some commentary that maybe 300 leap composite shipsets were built last year. Is that creating a bit of a headwind for you guys? Just some of the composite-rich engine shipsets that need to be destocked? Or any other color there on MAX that you could talk about?

We view the MAX as an opportunity rather than a challenge. As Boeing addresses its issues and increases production, we believe it will serve as a tailwind for us. The engine manufacturers are likely working diligently to meet the production rates demanded by the original equipment manufacturers. We do not face any constraints that would stop us from providing composite components for engines and cells in the future. This is not a concern for us.

Okay. Got you. Yes. I was meaning one of your suppliers had shipped to maybe 300 extra shipsets at the end of last year. And having to burn those down, they were kind of producing at flat levels for the leap this year. So that's kind of what I was alluding to.

Yes. I think we've got that figured into our plan, and it's not a big obstacle for us.

Got it, perfect. Thanks guys.

Your next question comes from the line of David Strauss from Barclays. Your line is open.

Thanks. Good morning, everyone. I see that you've maintained all your guidance for this year, including revenue guidance. However, is there any change in how you're approaching each end market? Based on the 58% sales guidance, it suggests only a 13% growth in Commercial Aerospace for the year. Does that still stand, or are you now expecting a higher figure?

I would say we are not ready at this point to make any adjustments. We will monitor the sales trend through the middle of the year. If we need to revise our guidance, we will do it all at once. Clearly, as you mentioned, Q1 for Commercial Aerospace was stronger than we anticipated. However, at this time of year, as Nick indicated, there are still supply chain challenges for the original equipment manufacturers. We do not know what will happen to the build rate regarding engines or other structural or electronic components.

Okay. Regarding the A350, you mentioned that you are currently at six and expect to reach nine over the next few years. However, has there been any recent change in the demand signal from Airbus, considering their deliveries appear to show some issues, as they only delivered five aircraft in the first quarter, which is significantly below the production rate?

Yes. So we are obviously very close with Airbus and Boeing and our customers. And we see movements, and the skyline that provides pretty significant detail, but we have not seen any changes that cause us to change our belief or forecast on the 350 ramp schedule.

Okay. One quick one to finish up. The inventory side, Patrick, can you just give a little bit more color exactly what's going on there? I mean, your absolute inventory levels are pretty close to being back to where they were in 2019, yet your sales volumes are still 25 or so percent below. So why does inventory keep building from here? And how significant of a drawdown should we see?

That's a great question, particularly for someone in my role. Absolutely, as we mentioned last year, we intentionally increased our inventory due to supply chain challenges and the need to secure materials. This strategy was aimed at ensuring we could meet customer needs without delays. As we entered this year, we noted strong demand in the first quarter, which we anticipated based on late last year's performance. This led to higher inventory levels, which persisted into January and early February to support the strong first quarter. Moving forward, we expect inventory levels to stabilize and begin to decrease. We believe we've reached a peak in inventory. Our focus will be on managing our inventory days, and we aim to generate some cash from inventory over the coming quarters. However, I don't foresee further inventory growth from this point. The strategy was primarily about addressing what turned out to be a robust fourth quarter for us, followed by an even stronger first quarter in 2023.

Great. Thanks very much.

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

Yes, thanks guys. Good morning. Patrick, you've probably answered this five different ways, but I just want to make sure I understood it. Sequentially, cost of sales flat with sales up $28 million or whatever it was. And that is just mix and productivity. Like you said, you built inventories so there was an absorption benefit. There was nothing else that was sort of one time that explains that?

No, it really was a mix, which was positive. The Hexcel fiber that came through and the absorption into the finished goods always helps. As I mentioned, I believe that trend is now going to shift. So I wouldn't anticipate seeing favorable absorption. Although the foreign exchange is strong year-over-year, your focus was on sequentially. However, that FX margin benefit of 80 basis points is one of the most significant quarter-over-quarter benefits we've ever experienced. But it really centered on the Hexcel fiber-rich mix and the level of absorption that occurred, along with effective cost control and other factors. These aspects should continue to improve efficiency and productivity, as Nick discussed.

Terrific. Can you share your current status on the 787 production rate and your expectations for it?

Well, we're moving up towards rate 5. We're somewhere on that journey. We were kind of in the two, three last year. We're now moving up towards rate 5. It's hard to be specific. Again, to Nick's point, we delivered to multiple endpoints, but we're on that ramp rate up towards 5. I mean, we will obviously get there ahead of Boeing shipping at that level. So that's the thing you should always bear in mind.

Thank you, guys.

And your final question comes from the line of Ron Epstein from Bank of America. Your line is open.

It seems like most everything has been asked, but maybe just some big picture stuff. When we think about what potential new opportunities that are out there for you, I mean, like Boeing and Airbus are going to go on an airplane development vacation for a little while. What else is there out there? Is there some defense things you're looking at? Or is there other things we should be looking for as potential additional growth drivers for the company?

Yes, Ron. So again, there's always derivatives. More frequently, the new aircraft, you see reengineering, and you should expect that, that will continue. And that requires a new cell. And just as a reminder, we have a very strong position on engines and the cells and continue to drive the material for hotter temperatures, for better sound attenuation, for other applications that composites can't fulfill today but can tomorrow. So we're working on those. We're working on secondary structures and certain elements that are easier to qualify and replace on derivatives. The A220 is a big opportunity for us. We've got various materials on the fiber, on the prepreg, on the technology side that could offer a great advantage and an opportunity going forward. We continue to work with our customers on that. So in the Commercial Aerospace, and Patrick touched on all the penetration and the secular growth on business jets with Gulfstream, with Dassault and others big platforms, and again, just more and more of the aircraft transitioning over to composites. If I flip to Space & Defense, always a lot of technology opportunities there, which we set to new platforms on the Flora and space. It's just a very diversified market, and we're working on multiple programs along with sizable programs like the CH-53K, which is a very large program for us, and we're ramping up as we speak in our Washington facility. So there's a lot of opportunities out there. And again, we don't neglect the wind and the industrial and the automotive, all the other sub-segments in industrial that are keys are finding niches and areas where we can provide a sustainable competitive advantage. So the growth opportunity, the areas where customers want stronger, tougher, more durable, lightweight materials, it's just continuing to expand. The question is on the economics and whether or not it fits within our target of what we want to invest in and where we want to drive the business going forward.

Got it. Super. Thank you.

And this concludes today's conference call. We thank you for your participation. You may now disconnect.