Hexcel Corporation (HXL) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Hexcel's Fourth Quarter 2019 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Patrick Winterlich, Chief Financial Officer. Thank you. Please go ahead, sir.

Thank you. Good morning, everyone. Welcome to Hexcel Corporation’s fourth quarter 2019 earnings conference call. Before beginning, let me cover the formalities. First, 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 fourth quarter and full year 2019 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 2019 results. We completed 2019 with our strongest ever full year results and a solid fourth quarter, taking into account certain end market challenges. 2019 also saw a very positive step up in our return on invested capital to 14.5%. Let me start by highlighting our fourth quarter results. Fourth quarter sales of $564 million increased nominally from the very strong Q4 2018. Adjusted diluted EPS was $0.86, reflecting an increase of 5% year-over-year. We delivered higher adjusted net income despite a decline in quarterly adjusted operating income due to lower volumes for some key aerospace and industrial customers that created overhead absorption challenges. Net income which benefited from a lower tax rate in the quarter was up compared to the prior year period. Fourth quarter aerospace sales were affected primarily by the continued slow down in 737 MAX production. However, business jets were strong in Q4, with a 20% increase in year-over-year sales. In fact, the business jet category was the largest growth contributor in commercial aerospace during Q4. As in our previous quarter, Gulfstream programs primarily drove this growth. Space & Defense sales continued on a growth trajectory during the fourth quarter with an 18% increase as compared to Q4 2018. While our ARC acquisition technologies contributed strongly to Space & Defense sales, growth in this segment is broad based across a number of defense and space programs. Industrial sales declined about 11% when compared to a strong fourth quarter last year. Wind energy sales increased substantially throughout the year despite some inventory adjustments contributing to a deceleration at year end. Now, let's turn to some specifics in our 2019 results. Full year 2019 sales were $2.356 billion, up 8% year-over-year. Adjusted diluted EPS was $3.54, an increase of more than 16% over last year. We finished the year with our sales in line with our revised guidance and earnings per share just above our guidance range. In addition, 2019 was another record year for free cash flow generation with a company delivering $287 million. The impact of our sustained commitment to operational excellence on cost savings and productivity have never been stronger. Although the MAX was a headwind in the second half of 2019, our Hexcel team did a terrific job mitigating some of the effects on our earnings by continually working more efficiently, improving our processes and eliminating waste. As you heard from Boeing last week, 737 MAX production is still suspended. Boeing expects to start up at reduced build rates while they focus on returning to service and delivering existing aircraft. While we remain optimistic that the MAX will return the service soon, the temporary production stop is impacting our 2020 sales. I'll discuss further when I share the guidance with you in a few moments. Turning to our primary markets. 2019 commercial aerospace sales were 5.1% higher than 2018 at almost $1.6 billion. The composite rich Airbus A350 was at [Rate 10] throughout the year, while sales for the 787 as well as the new Boeing 777X continued to grow favorably. We congratulate Boeing on the first flight of the 777X on January 25, and look forward to its entry into service in 2021. Additionally in 2019, we benefited from strong build rates and shipset increases related to the transition from legacy to latest generation narrow bodies including the A320neo, which maintains strong backlogs In other commercial aerospace which is primarily business and regional jets, we saw a strong growth in the second half of the year. Space & Defense sales for 2019 were almost $445 million, which was an increase of 21.6% over 2018. Excluding our technologies, growth would have been over 7%. Our acquisition of ARC contributed to our strong sales growth throughout the year in sales and composites penetration continued in the F-35 Joint Strike Fighter and across a broad range of other military programs. Finally, turning to industrial, sales were $313 million in 2019, which was 10.6% higher year-over-year. At the end of 2018, we experienced an exceptional recovery in wind sales with a 67% year-over-year increase, which continued into 2019 with another 25% year-over-year increase. We are encouraged by a strong backlog at our key customer Vestas. Automotive, marine and sports applications continue to provide opportunities for growth, or our technological advancements in strength and lightweighting have led to increase composites penetration. I'd like to mention a couple of milestones from 2019. First, we completed our acquisition of our technologies in January, and our integration could not have been more successful with the acquisition delivering the strong sales we targeted. We seamlessly combined our sales efforts and our culture's with positive feedback from our customers. Our technologies, materials and coatings expertise contributes to a broader product portfolio with greater functionality for our customers and the ARC business is contributing strong margins that frankly have exceeded our initial expectations. We look forward to growing this exciting part of our business as our combined teams explore new technologies and enhanced customer solutions. Second, we delivered exceptional free cash flow in 2019, surpassing our guidance and achieving a record $287 million. Over the past four years, we have generated a total of almost $0.75 billion in free cash flow, and we expect to surpass our previously communicated target of $1 billion over the 2016 to 2020 period. This is an outstanding accomplishment and I couldn't be prouder of how we stayed disciplined and committed to achieving this goal for our stakeholders. Now let me turn to our engineer product business and speak to a transformation that will continue for some time specifically for work at our Kent plant in Washington. For roughly the last two decades, we have had a highly successful long-term collaboration with Boeing and other customers to build a robust and globally competitive supply chain especially in Asia for engineered products. It's been a terrific partnership and the Kent team has done a tremendous job helping our customers succeed. Overtime, the aerospace supply chain has evolved and now the less complex work we've been doing in Kent is transitioning to other suppliers. To that end, some current work packages at Kent will move to other parts of the supply chain including to our 50-50 joint venture with Boeing, known as Aerospace Composites Malaysia or ACM. We expect it will be a slow transition over the next few years. With that said, we're excited to communicate our evolving Kent strategy, which focuses on more complex, highly engineered product manufacturing that only a team with significant technical expertise and capabilities can perform. We believe this is a great opportunity to capture new business in Kent, as we continue our close partnerships with our customers. I want to take a moment to thank our entire Hexcel team for staying disciplined, and delivering value and innovative products to our customers. Our emphasis on operational excellence has never been stronger, and our teams focus on continuous improvement toward perfect safety, quality, and on-time delivery performance is inspiring. All-in-all, it was another terrific year and we entered 2020 with momentum and great anticipation. As you will understand providing guidance in light of the 737 MAX uncertainty that surrounds aerospace industry, it is more complicated than usual. As we outlined in our earnings release issued yesterday, in order to frame the guidance, we are sharing, we have provided our assumption for the number of shipsets that we expect Hexcel to supply in 2020. We are you using 200 aircraft shipsets as a conservative expectation for the year, and we'll provide updates as the year develops and we have more information. Based on this assumption for the 737 MAX, we're guiding for Hexcel overall sales growth of flat to low-single digit and EPS growth of low-to-mid single digit. We have a track record of delivering strong margin intensity in the face of headwinds and we are determined that 2020 will be no different. By driving operating margins, optimizing working capital, and with lower capital expenditure in the range of $100 million to $120 million, we are guiding to deliver more than $300 million of free cash flow in 2020. Our outlook is reinforced by continued investment in research and technology to develop new and innovative solutions for next generation platforms and derivatives to provide increased functionality and value to our customers. I would now like to take a few moments to discuss the transformational merger of equals with Woodward that we announced a few weeks ago. The combination of Hexcel and Woodward will create a premier integrated systems provider that will propel the future of flight and energy efficiency, and our combination couldn't be more timely. Fuel efficiency and emissions reduction are top of mind in the aerospace industry now more than ever. We believe the strategic and financial benefits of the transaction are compelling. Together Hexcel and Woodward will be uniquely positioned to meet some of the most pressing challenges our customers are facing. The combined company will have well balanced portfolio across customers, and market and investment cycles, with significant free cash flow generation forecasted and a disciplined capital deployment strategy to support investment in the business and capital return to shareholders. Since our announcement with Woodward, we've had conversations with many of our stakeholders about the merger and how it advances our shared objective to drive long term growth and value creation for our shareholders, customers and employees. In particular, the response from our customers has been extremely positive and we're very excited to bring them solutions that will improve aerodynamics, energy efficiency, safety, and lower emission technologies. We're making good early progress with our merger integration planning and continue to expect the transaction to close in the third calendar quarter of 2020 subject to shareholder approvals, and other customary closing conditions and approvals. As we move through this process, we look forward to continuing to speak with you about the exceptional strength of the combination and the benefits it will deliver for all of our stakeholders. Important materials regarding the transaction can be found on our joint transaction website at woodwardhexcelmerger.com. Now let me turn the call over to Patrick to discuss more of the quarter and full year financial details.

Thank you, Nick. I will provide a review of our markets and as usual these year-over-year comparisons are in constant currency. Currency movements influence are reported results and some of this impacts may not be intuitive. 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, but our costs also translate lower, resulting in a net tailwinds and margins. Accordingly, we prefer a strong dollar to a weak dollar. In terms of currency hedging, we employ a disciplined hedging strategy to protect our operating income that lays in hedges over a 10 quarter horizon. We do not hedge on sales and foreign exchange fluctuations had an adverse impact on our top line revenue of approximately $20 million compared to our original 2019 got sales guidance. Just over a year ago, as we shared our initial 2019 financial guidance, we were producing the 737 Max at a rate 52 per month, and preparing for 57 per month by summer 2019 along with the rest of the supply chain. We were preparing for the 787 production ramp to 14 per month and continuing to supply for the A380. As we enter 2020 uncertainty continues regarding the timing of the MAX returns to service and future production levels. The 787 production rate is being reduced to 12 per month by the end of 2020 and then to 10 per month early in 2021 and we expect to feel the impact of the 787 reductions in the second half of 2020. The A380 seats in production, we are not planning for any further sales to this program. It is against these headwinds that we ended 2019 and report our results. Beginning with quarterly results, commercial aerospace represented approximately 67% of total fourth quarter sales, commercial aerospace sales of $380 million decrease 1.5% compared to the fourth quarter of 2018. As previously mentioned, the fourth quarter of 2018 was particularly strong and in comparison to fourth quarter 2019, legacy narrowbody sales decreased as expected. Notably, MAX sales were well below original expectations, and A380 sales declined significantly as the final aircraft the bill and the supply chain is depleted. Space & Defense represented 21% sales and for the fourth quarter sales totaled $115 million dollars, an increase of 18.9% compared to the same period in 2018. Growth was led by our ARC acquisition along with the F-35 program, supported by strength across a broad range of both Defense & space programs. Industrial comprised 12% fourth quarter 2019 sales. Industrial revenues totaled $69 million decreasing 9.3% as global trade tensions and lowering GDP growth in certain key European Asian markets dampen demand across several of our industrial submarkets, including automotive and recreation. Wind energy remains the largest submarket with industrial comprising more than 60% of industrial sales. Our wind energy sales soften some in the fourth quarter of 2019 reflecting end of year inventory adjustments. On a consolidated basis gross margin for the fourth quarter was 26% compared to 26.8% in the fourth quarter of 2018. We incurred some manufacturing under absorption of fixed costs in the fourth quarter, due to the 737 MAX and associated LEAP-1B engine production below our production capacity combined with softness in our industrial markets. For the fourth quarter selling, general and administrative expenses increased 14.4% year-over-year in constant currency. Current year sales include the costs from the 2019 ARC Technologies acquisition. Research and technology expenses in the fourth quarter decreased 12.2% year-over-year in constant currency. Qualification cost fluctuates on a quarterly basis and were lower for the fourth quarter of 2019 compared to the prior year period. We delivered $97.4 million of adjusted operating income with a robust margin performance of 17.3% while overcoming some under absorption as referenced earlier. Total depreciation expense increased $2.3 million in the fourth quarter of 2019 compared to the prior year period. The year-over-year impacts of exchange rates was unfavorable by approximately 20 basis points. The Composite Material segment represented 82% of total sales and generated and operating income of 18.8% for the fourth quarter of 2019 as compared to 20.9% margin in the prior year period. The Engineered Products segment which is comprised of our structures and engineered core businesses represented 18% of total sales and generated and adjusted operating income margin of 16.9% due to favorable program mix in the fourth quarter of 2019 compared to 14.9% in the fourth quarter of 2018. Remember ARC Technologies is all being reported within the engineered product segment. While the operating margin is lower than the composite’s material segment, engineered products requires a much lower level of investment generating strong returns on invested capital. The adjusted effective tax rate for the fourth quarter of 2019 was 16.6% and 21% for the full year. Net cash from operations totaled $491.1 million for fiscal year 2019. Working capital represented a source of cash of $12.8 million in 2019. Capital expenditures on an accrual basis were $191 million compared to $179.1 million in 2018. The Hexcel team generated record free cash flow of $287 million in 2019 compared to $237.3 million in 2018. Strong free cash flow generation in the fourth quarter is consistent with our quarterly cash profile as we typically use cash in the first half of the year and generate cash in the second half of the year, with the fourth quarter being the strongest period of generation. We target a gross debt to EBITDA leverage ratio in the range of 1.5 to two times. At the end of the fourth quarter 2019, our leverage ratio was 1.8 times. This represents a continued decrease from the first quarter of 2019 as we repaid a portion of the debt used for financing the January 2019 acquisition of ARC Technologies, combined with strong and growing EBITDA. We repurchased approximately $76 million of our common stock during the fourth quarter of 2019, bringing the total for the year to $143 million and we have $242 million remaining under our share repurchase program. To summarize full year 2019 results, sales increased 8.6%, adjusted operating income increased 12.2% and adjusted diluted earnings per share increased 16.1%. These strong results benefit shareholders as we delivered $287 million of free cash flow and our return on invested capital strengthened to 14.5% at year end. Before I conclude, I would like to share some additional background on the guidance provided by Nick. As a reminder, we are forecasting total sales growth of flat to low single-digits. For our market sectors, we are forecasting a decline of low to mid single-digits for commercial aerospace growth of high single-digits for space and defense and growth of mid single- digits for industrial. Adjusted diluted earnings per share growth is forecasted to be low to mid single-digit, share count is not expected to change materially as we have halted our share repurchases until the merger with Woodward closes. Free cash flow is expected to exceed $300 million. Capital expenditures are forecasted in the range of $100 million to $120 million. This figure is lower than previous guidance as our Operational Excellence Initiative is driving productivity gains from our existing assets, combined with the software market due to the 737 MAX situation has led us to slow the previously announced carbon fiber capacity edition of our Decatur, Alabama facility. I would also like to take this opportunity to update you on our medium term capital expenditure guidance where we had previously said we were expected to spend between $500 million and $550 million in the period 2019 to 2021. We are now revising that number to be close to $400 million in the 2019/2021 period. Depreciation will increase approximately $5 million in total for 2020 as a result of asset additions, partially offset by some fully depreciated assets now rolling off. Consistent with prior years selling, general and administrative expenses are forecasted to be higher in the first quarter of 2020 compared to the following quarters due to the timing of recording stock-based compensation expenses and we will continue to reinvest in research and technology to retain our global leadership position within aerospace composites. Free cash flow is expected to be stronger in the second half of 2020 compared to the first half consistent with the seasonality the business experiences. Our forecasted 2020 foreign exchange exposure is now approximately 75% hedged. We estimate that a 5% movement in relevant exchange rates will have approximately a $4 million earnings impact net of our hedges. Guidance is based on an effective tax rate of 23%. With that, let me turn the call back to Nick.

Thanks Patrick. In summary, 2019 was marked by record sales, earnings per share, and free cash flow. Hexcel is benefiting not only from aircraft program ramp ups, continued adoption of advanced composites and strong demand, but also from our internal efforts to work more efficiently, continuously improve our processes, develop new and innovative products and position ourselves for growth. Now as we turn toward 2020, we have every reason to believe that our relentless focus on operational excellence and our strong discipline will continue to serve us well. We're pleased with our performance despite the effect of the MAX grounding and remain optimistic that the aircraft will return to service soon. In closing, we expect our 2020 results this year will demonstrate growth, exceptional cash generation and a strong return on investment for our shareholders. Our markets are continuing to benefit from long-term growth due to secular penetration, reflecting the growing need for lightweighting to drive fuel efficiency and emissions reduction. Our priority remains squarely on delivering exceptional performance to produce extraordinary results. We're confident in our position as a global leader in advanced composite technology, as well as our strategy to generate sustainable growth while creating ongoing shareholder value. We look forward to closing on our transaction with Woodward later this year, and starting an exciting new chapter in our history. With that, Julian we’ll turn it over to you now and ready to take any questions.

[Operator Instructions] Your first question comes from Mike Sison from Wells Fargo. Your line is open.

Had a question just on the back to Hexcel and Woodward combination you've had another month or so to sort of sit on it. Can you maybe talk about your relationship with Airbus and as I recall, Woodward doesn't have a significant position there. So, maybe what the synergy potential is on that bringing them into the equation as a combination unfolds?

Yes Mike, thanks for your question. I would point out that you're right in the fact that Woodward do not have significant direct sales to Airbus, but keep in mind, they're on virtually every aircraft through engines and other tier one providers. So they have very strong positions on the Airbus platform portfolio. Having said that, we're very excited and we've had discussions with Airbus, as Tom has on new opportunities for next generation technologies that help improve dynamics, aerodynamics, as well as efficiency. So it's a little premature to really go in and jointly work it but our teams are certainly getting educated on each of those capabilities and we're in a great position to demonstrate to Airbus as well as many others the value of the complimentary combination of our two companies.

And quick follow-up on the 737 MAX, you talked about 200 shipsets this year. Can you maybe help us see how that flows throughout the year? And then how many shipsets were you on in 2019 just to give me a comparison on a year-over-year basis?

So in 2019, as Patrick commented on we were at 52. And in the process of scaling up when the accidents happened and the reduction started. So we were in the range of 42 to 52, depending on who in the supply chain we were providing throughout most of the year. With respect to what we see this year, Mike as you know Boeing is still basically not producing. So, we're really not going to provide more guidance around how we've split our 200 assumption for the year. I think Boeing is communicated, they expect return to service midyear, and production to start before that. So just build that into your model and divide the 200 over the remaining months.

Your next question comes from Ken Herbert from Canaccord Genuity. Your line is open.

I just wanted to first start off and ask about the - you're clearly guiding your much lower sort of CapEx number then you have you know as recently as last quarter I guess. As we think about this year, and it's 2021, was there anything else besides the MAX or the slowdown in the Decatur expansion, you would point to that's may be pushed some of the CapEx to the right in terms of maybe expected investments on some other new programs or anything else you'd call out?

Well I think you've hit the big pieces Ken. I think even a bigger impact is really the productivity initiatives that the team have generated. And again, you have to remember being sole sourced, we have to go in and make sure we're never short. So by definition, we're always a little bit long on capacity. So we couldn't build in the expectation that we would deliver to the level that the team delivered. So that in turn with the slowdown on the MAX and even now with some additional softness with 787 coming out later in the year, by the [Rate 10] in 2021. That gives us the confidence that we can push that CapEx spending to the right and decrease our overall CapEx spend in 2020 and even 2020 and 2021.

And Nick, just to follow-up, can you just talk about the extent to which you're able to repurpose some of the CapEx around the composite material side, maybe in your capacity there not CapEx but more of your capacity relative to engineer materials and how we should think about the, I guess specifically the MAX impact as it relates to each of the segments?

So you have to look at it based on the technology and the product form. So first I'd say with respect to precursor and carbon fiber, those assets are fully flexible, fungible. They can be repurposed, changed over in hours and redirected to wherever the demand may be pulling material for. If you look at Honeycomb core, which we provide a significant amount for aircraft space and defense, rotor blades engines and the cells, that too can be redeployed very easily and the market is very tight. So we are reallocating engineer core and Honeycomb core based on the needs in that market space. With respect to engineered products, that takes a little longer because we basically go out identify the opportunities. You've got to bring it in to the tooling to the development qualification and identifying those platforms and to convert the resources and the technology over, it just takes a little more time than the other continuous flow materials do.

Your next question comes from Myles Walton from UBS. Your line is open.

I was hoping you could maybe size that that Kent, Washington revenue that we're talking about that may be getting - put into business elsewhere including your own JV and kind of what's the timing as to how that headwind works into the numbers over the next couple of years?

Yes sure, so the transition as Nick described, is really going to take some time I mean, it will start now and sort of two to three years over sort of a few years as Nick said, to sort of support moving those packages out. And over that period of time, we will be out there winning new packages, we've already identified some new packages, which we're going to be running in 2020 in that facility. So it's a little bit - we are in a net position, if you can imagine some packages are going out, some packages are coming in and so, we're going to be - there will be an offset is the objective. We've given our commercial guys strong challenges to obviously bring things in as soon as possible. And they're out there and they're confident and the President of our Americas' business team is leading that initiative. So don't really want to give a specific revenue number because we'd really be guessing around timing, but it is a decent sized block of revenue. I mean that we’re talking about transitioning over that two to three year period.

Yes, I just want to add that this is not new. This is basically how ACM was formed, really the product work came into Kent, our team did the engineering work, did the tooling, did the processing, and basically had it until it made sense to move to a lower technology, lower cost source. So we've been doing that for years and years with Boeing. It's just further transformation of that supply chain. And really getting Kent ready and opening up capacity to do more complex, more core work for our differentiated capability.

And I appreciate the transparency but in the 2020, topline outlook is it a - did a headwind to that outlook, you kind of didn't mention it has a headwind.

No the headwind because as I said, even if some of the early packages start to move, we want at least as much to put into the plant in 2020.

Yes. And then just one follow-up if I could, Patrick on the cash flow. Can you size the working capital headwind in 2020? Is it kind of a reversal of the really good performance on receivables in the fourth quarter, is it inventory bill? And then why 2021…

Yes I mean - so good question Myles. So the headwind is inventory to be honest and managing inventory in 2020 we will do our very best to hold on to that receivables performance as you saw at the end of last year. And we continue to drive our payables. But the headwind the hardest part for us to manage this year with the uncertainties in the market and trying to match up is going to be around inventory. And so although we wouldn't say we had a bad performance at the end of Q4 '19, it wasn't as strong as you can see at the end of Q4, and then faced with the challenges this year, that's going to be the biggest headwinds, its inventory and it's managing inventory through the middle and back end of the year as the MAX, especially the MAX sort of returns to service, but then we've got to manage the timing around the 787 as well.

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

Your guidance explicitly talk about margins, but how do we think about the profitability profile of the business and flattish margin given MAX volumes are having - you have the 787 headwind in the second half, and potentially 777X. Can you just say that a way to make sure that it's captured in the guidance or are there risks or how do we think about that? Thank you.

Hi, Sheila, that's absolutely captured in the guidance. And I would say, our commercial aerospace margins are fairly similar. We don't have huge differences across the range and so the 777X, the 787, the MAX, as you call down there, are not massively different to the rest of our commercial aerospace program. So in terms of the mix, there isn't a swing that you're going to see. I mean, obviously, what we saw in Q4 was an overhead challenge with some growth coming into business in Space & Defense in some other areas and industrial will be in a better position to cover that overhead. So that should be less of a headwind going into the year. And then really it's about - as we always say, driving productivity and efficiency, which we challenge ourselves and continuous improvement every year to overcome the inflationary pressures that are naturally there to maintain and drive strong margins and in our low-to-mid EPS guidance that's exactly what we're assuming to deliver and hold on to those margins.

And then maybe just a follow up on business jets, they were quite strong in Q4, you guys called it out. How do we think about that into 2020 with some of that Gulfstream business anniversary, if you could talk about the business jets outlook? Thank you.

Yes, I mean obviously, we're going into a strong Q1, Q2 with Gulfstream, we see that trend continuing. I think your point on the anniversary is always a good one. It can't continue to ramp and ramp, but what I would say certainly in the next couple of quarters, we continue to see as positive

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

I was wondering if you could give us maybe some granularity on the 737 MAX of the $400,000 per shipset, that you estimate. How much is related to the engine channel and how much is related to the airframe so we can sort of calibrate out conservative of the guidance which does appear, at least on the MAX to be conservative.

So we need to be careful not to call out specific customers. But what I would say Gautam is that about a third of our MAX $400,000 shipset value is shipped to Tier 1 suppliers including CFM and others around the leap engine and Spirit. So about a third.

About a third. Okay, and then just to understand the A380 and 787 comments a little further. So do you have a sense for how many shipset equivalence you had on the A380 in 2019? And just to be clear on the 2020 guidance does that - when do you start to feel the effects of the 10 a month on the 787?

So on the A380 Gautam, I would estimate we had about six shipsets, maybe slightly over six shipsets in 2019. If you remember, we have $3 million of shipsets on the 380, we kind of did just over that. And then the 787, I think as we described or Nick described, is going to be the back half Q3, we're going to probably start to feel the move to 12 and Q4, we're going to start to feel the move to 10.

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

Just following up on that. How is the commercial aero guide not worse than down low to mid-single digits when you've got MAX down 50% plus and obviously 87 coming down in 0.380? I mean, is there - what is in there that - what's going up in that business, I guess to offset some of those headwinds?

Well, the A320 neo continues to be strong, and we expect to see some growth coming from a small base, but the 777X is going to present some growth opportunity this year. We actually see a little bit of growth in the A320 and then as we talked about a moment ago, the business jets and regional jets is looking pretty good. And we have the - okay, you're talking about commercial aero, so those are the key ones in commercial aero.

And then just to clarify, so your - for your EPS guidance, you assumed a flat share count because you can't do share repo while the deals progressing?

Correct. Yes.

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

This is Colton Bina on for John. I was just wondering, could you talk a little bit about the inventory alignment you saw in wind and kind of what kind of growth for wind is embedded in your 2020 guidance?

Yes, sure. So Vestas our key wind energy customer has a range of turbines and really it was kind of a mix inventory play towards the end of the year. They were obviously sort of aligning themselves up, they just took less material for some of the key turbines for us. And so that led to a softer fourth quarter that they have various sizes of turbines newer and older, and if you like it was kind of a mix effect on our sales as they sort of lined up their inventory towards the end of the year. As we look forward to this year, Vestas have - it continues to be a record backlog. We have about two years of visibility, it remains to be very strong. Some of the key turbines are in demand and we continue to see some growth. I mean, obviously, we're not going to see the same sort of 60%, 30% growth again, but we continue to see some level of growth in that space, where we expect to stay at the elevated revenue level.

Your next question comes from Hunter Keay from Wolfe Research. Your line is open.

This is Andrew Quach on for Hunter. Could you talk about how you see the hybrid electric segment of the commercial engine market evolving over the next five to 10 years, and if it's an area you'll prioritize. Thanks.

Quach, again anything that is driving technology for lighter more efficient aircraft or vehicles, we're working on it, I can assure you both from a material strength, from a processing capability, and from a customer care rate and how they actually form part. So I really - it's a little premature to give you any numbers but I can tell you it's a technology that we're pursuing and plan to participate in going forward.

Our next question comes from Chris Kapsch from Loop Capital Markets. Your line is open

Yes, so my question is a follow-up on just the impact that seems - that isn't necessarily factored into the guidance from the absorption variants. You saw it in the fourth quarter. And then just a few - depending on you look at it seems like that gross margin entering 2020 will be something closer to the fourth quarter then rebounding, but it seems like you need a rebound in the gross margin and the absorption variances in order to see some operating leverage to have the EPS exceed the sales growth of flat to low single digits. I hear you that you don't want to necessarily parse out when you'll feel the impact from the MAX, but I'm guessing it is at least on a comparison basis, there's going to be more pronounced impact in the first half, so seems like it's difficult to envision those gross margins rebounding sequentially in the first half. So I was just wondering if you can, maybe more granularly reconcile that delta on the margin level maybe there's some offsets in SG&A and R&D. So, thank you.

Yes I understand the point. I mean what I would say is, we had some particular adjustments in the fourth quarter in addition to the MAX, which is ongoing, but we had the wind energy softness, we even had one or two things. So the A380 completely came to an end, the air cabin-flex and coming to the end with Airbus we saw some adjustments. And the A350 is now sort of at rates and I think Airbus we’re sort of lining that up towards the end of the year. So I think on a number of fronts, we saw some absorption challenges. I think as we go into 2020, we've got growth in the areas I talked about, the NEO outlook is excellent. The 777 is going to start to grow for us, the 220, the business jets, on the military side the JSF is strong and growing the CH-53K. So that's going to help us with the absorption and that gives us confidence that we're going to be able to overcome it. And so, we'll be able to produce stronger results than we saw in the fourth quarter. So the MAX continues and we're not hiding from it. Otherwise, we don't have much more positive guidance, but we think the low to mid EPS builds on a stronger gross margin and better absorption is what we're looking at right now.

Yes I guess I just add to that, that we have very aggressive actions around cost controls, discretionary spending, temp labor, contract labor overtime, and even actions around aligning our workforce with actual demand. So it's two fronted costs and capitalizing on the topline growth.

Okay, do you see gross margin just improving sequentially in the first quarter. The other thing that you have a headwind down presumably as mix as you know - with the commercial aero down the industrial sales up, pretty certain industrial margins I believe are lower than commercial aero. So if you could just, maybe just provide color on the sequential trend there? Thank you.

Yes I mean, we're obviously looking for stronger gross margin in our outlook throughout the year. And in terms of mix I mean yes, industrial is up but you've got to remember it's only sort of 12%, 13% of total sales. Space & Defense which has good margins very similar to commercial aerospace is high single-digit growth. So, I don't think the mix headwind within our market segments is significant and we should see growth as Nick said on the cost front, we're driving that and then in the areas where we have growth to help us with the absorption.

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