Hexcel Corporation (HXL) Q4 2020 Earnings Call Transcript

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Hexcel Corporation (HXL 0.51%)
Q4 2020 Earnings Call
Jan 26, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Hexcel Q4 2020 Earnings Conference Call. [Operator Instructions].

I would like to now hand the conference over to your speaker today, Patrick Winterlich, Chief Financial Officer. Please go ahead, sir.

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Thank you. Good morning, everyone, and welcome to Hexcel Corporation's fourth quarter 2020 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 accrual -- 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.

[Indecipherable] 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 2020 results detailed in the news release issued yesterday.

Now let me turn the call over to Nick.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Thanks, Patrick. Good morning, everyone, and thank you for joining us today as we share both fourth quarter and full-year 2020 results. After reading our news release last night, I'm sure you'll agree that clearly we've had a seismic shift in the business, our demand, our volume, and our financial metrics. I also hope that we recognize how Hexcel has moved quickly and robustly in response to the market challenges arising from the pandemic.

The results we are sharing with you today reflect the strong and decisive actions that we took swiftly in response to the substantial impact of the pandemic on all those involved in the aerospace industry in 2020. The actions which are ongoing include approximately a 35% reduction in global headcount; temporarily idling assets; cutting discretionary expenditures; prioritizing the most critical projects, including capital expenditures; and rightsizing working capital to generate strong cash flow.

So I'm glad that 2020 is behind us. At the same time, it's amazing what you learn about yourself and your organization during such challenging times. I learned how extraordinarily strong, resilient, and action-oriented Hexcel employees are. Throughout the year, and despite the uncertainties and the difficult decisions we took, our team accepted and embraced the challenges we faced, quickly developing options and taking decisive actions. They knew what needed to be done and they did it.

Although 2020 is over, the pandemic headwinds will continue to test us into 2021. As I mentioned in our news release last night, this first quarter of 2021, along with Q3 and Q4 of 2020 are anticipated to be our most challenging quarters during this pandemic. We expect continued inventory destocking into the first part of 2021, which will continue to impact sales volumes and mix. Growth for both our customers and for Hexcel is contingent on a healthy return to air travel following a successful vaccine rollout. We are guardedly optimistic for a steady recovery in our business as 2021 progresses.

2021 is going to be yet another unusual year as the world gradually emerges from the pandemic, and remaining disciplined will be vital for our success. We will not drop the ball or our guard in relation to health and safety of our employees. We will continue to work with our customers to provide innovative solutions to meet their needs, while at the same time maintaining our focus on delivering operational excellence and cost control, and not allowing waste and inefficiency in any areas of our business. We will remain disciplined in relation to cash management and maintain an optimal level of working capital throughout our business and control inventory levels to match our customer demand requirements. 2021 will be another challenging year, but I can assure you that Hexcel is ready. Our teams are focused, and we are optimistic that the actions we have taken and continue to take during the pandemic are laying the foundation for another period of robust growth in the years ahead.

Now let me turn to our results. First, I'll cover the fourth quarter results and then full year 2020. Fourth quarter sales of almost $296 million were in line with our forecast. Adjusted fourth quarter diluted EPS was a negative $0.18 compared to a positive $0.86 last year. Our focus on cash management has been unwavering throughout this pandemic, and in the fourth quarter we generated another $104 million, resulting in $214 million of free cash flow for the year.

Turning to our three markets. Fourth quarter aerospace sales were down 66% compared to Q4 2019. All of our major programs were down substantially with the largest sales impact being related to the A350 widebody. Build rate reductions driven by the pandemic combined with the 737 MAX grounding and significant supply chain inventory destocking led to the reduced sales levels. Sales to other commercial aerospace, which includes regional and business aircraft, fell almost 60% year over year. Again, the decline was from lower demand resulting from the pandemic.

On a positive note, space and defense sales increased almost 4% compared to Q4 2019. Growth in this segment is broad-based across several defense and space programs, particularly US military rotorcraft. Industrial sales declined approximately 29% when compared to Q4 2019. As you know, wind energy sales are our largest industrial submarket, and those sales declined 42% in constant currency. During the year, we saw a decline in demand for wind energy materials in the United States by our largest wind energy customer Vestas. That led us to close our prepreg production facility in Windsor, Colorado in November. The decline is attributable in part to the commoditization and outsourcing of blades with a changing technology from prepreg to infusion wind energy remains a good business for Hexcel, and we are adjusting to the changing market dynamics and introducing new innovations to support our customers. Vestas continues to be a great customer and manufacturing continues at our plants in Neumarkt, Austria; and Tianjin, China.

Now let's turn to some specifics in our full-year 2020 results. 2020 sales were $1.5 billion, down 36% year over year. Adjusted diluted EPS for the year was $0.25. Our full-year results were bolstered by the pre-pandemic Q1 2020 results, which were the strongest of the year. Free cash flow came in strong at $214 million compared to $287 million in 2019. Our liquidity position remains robust, and we have managed working capital tightly during this pandemic. 2020 commercial aerospace sales were about $822 million compared to $1.6 billion in 2019, a decline of almost 50% [Indecipherable] an unprecedented decline in demand driven by lower build rates across all programs, including the 737 MAX, was compounded by inventory destocking across the supply chain. Sales to other aerospace declined by one-third.

Space and defense sales for 2020 grew nominally to $448 million compared to $445 million in 2019. Select programs have been impacted by pandemic-induced disruptions, although we feel these are temporary impacts that we -- that will be recovered over time. Moreover, space and defense is traditionally a strong and attractive market for Hexcel, now enhanced by our ARC Technologies acquisition where we continue to be pleased with the excellent performance and sales growth.

Finally, turning to industrial, sales were $232 million in 2020, which was 26.5% lower year over year. We have good wind energy demand continuing from the European and Asian markets as we enter 2021, and we are encouraged by growing demand for composites in automotive, marine, and sports applications where we have opportunities for growth. Our technical innovations in strength and light-weighting have led to increased composites penetration in these markets.

As always, I want to take a moment to thank our entire Hexcel team. They were challenged in 2020 in ways we never could have imagined. Despite all the uncertainty, distractions, and sacrifices, they performed well for our customers and shareholders, and I couldn't be prouder. Our employees accepted the challenge of wearing face masks all day, constantly distancing themselves from one another, dealing with additional concerns about their own health and family's well-being in the midst of a pandemic, and they did this while continuing to deliver the high standards we set. In this context, we achieved our best-ever safety rate performance in 2020. That's just phenomenal and illustrates our deeply rooted safety culture.

I also want to take a moment to reassure you that not even a pandemic, such as we are experiencing, has altered our commitment to continued innovation and customer intimacy. All of our R&D sites are considered essential businesses, and these teams kept up their work in our labs throughout 2020. They've continued to advance new technologies that will lead to new and optimized product offerings and improved manufacturing performance. Our advanced composites technology leads our industry, and we're proud that we have been able to continue to work for our customers during the pandemic.

Finally, I want to mention that in Q4 we were pleased to expand our contract with Safran to include our HexTow IM7 Carbon Fiber for the GE9X engine that powers the 777X as well as positioning Hexcel for next-generation engines being developed by Safran. This expansion also includes our advanced composites for Safran Cabin, Seats, and Aerosystems. Our relationship with Safran spans more than 35 years, and we are proud to partner with this key customer providing our high-performance materials that support the strength, efficiency, and reliability in their products.

Now, I'll turn it over to Patrick to provide more details on the numbers.

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Thank you, Nick. To briefly summarize the quarterly results, our 2020 sales were negatively impacted by lower build rates and continued destocking as we expected and communicated last quarter. Our aggressive cost-reduction actions are starting to have an impact, which we've demonstrated by sequential margin improvement compared to the third quarter of 2020. Further, we continue to generate free cash flow and deleverage with particularly strong and disciplined management of working capital. We have increased our liquidity by $239 million at December 31st, 2020, compared to the end of the first quarter of 2020.

As a reminder, the year-over-year comparisons are in constant currency. 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. Accordingly, a weak dollar, as we are currently facing, is a headwind to our financial results.

We hedge this currency exposure over a 10-quarter horizon to protect our operating income. Quarterly sales totaled $295.8 million. The sales decrease year over year reflects production rate decreases by our commercial aerospace customers in response to the pandemic combined with continued commercial aerospace supply chain destocking.

Turning to our three markets, commercial aerospace represented approximately 43% of total fourth quarter sales. Commercial aerospace sales of $126.7 million decreased 67% compared to the fourth quarter of 2019 as destocking continued to impact our sales. We expect continued destocking in the first quarter of 2021 at a similar level to what we witnessed in the third and fourth quarters of 2020. Destocking is then forecast to wind down during the second quarter of 2021. We then expect to generally be at a steady-state entering the second half of 2021, with destocking largely behind us and realizing a substantial portion of the cost takeout benefits we have implemented and continued to work on.

Space and defense represented 40% of the fourth quarter sales and totaled $119.7 million, an increase of 2.5%, compared to the same period in 2019. U.S. military rotorcraft was strong in the fourth quarter. We remain bullish for the outlook for our space and defense business globally. Industrial comprised 17% of fourth quarter 2020 sales. Industrial sales totaled $49.4 million, decreasing 31% compared to the fourth quarter of 2019 on weaker wind and recreation markets, partially offset by strengthening automotive. We closed our Windsor, Colorado wind energy facility during the fourth quarter as previously disclosed. Recreation markets remained soft due to the pandemic, particularly for winter sports. In contrast, the fourth quarter of 2020 generated the strongest automotive sales since mid-2019.

On a consolidated basis, gross margin for the fourth quarter was 10.3% compared to 26% in the fourth quarter of 2019. As we discussed at our last earnings call, we continued to temporarily idle select carbon fiber capacity during the fourth quarter, and this is continuing in 2021 as we maintain alignment with customer demand. The sales mix, particularly lower sales of carbon fiber products, continued to be an earnings headwind. Our view of forward demand continues to be consistent with what we communicated at our last earnings call in October, with Q3 and Q4 2020 along with Q1 2021 being the low point of the pandemic downturn. We are staying close to our customers and maintaining our focus on operational excellence with process improvements and cost realignment actions across the business.

Fourth quarter selling, general, and administrative expenses decreased 29.2% in constant currency or $9.9 million year over year as a result of headcount reductions and continued tight controls on discretionary spending. Research and technology expenses decreased 21.4% in constant currency. We are an innovative material science company and continued research and technology funding is critical to our future growth. So we have been very selective with our cost reduction actions in this area of the business.

The other expense category reflected severance costs, primarily in Europe. We continue to target eliminating $150 million of annualized overhead costs, including indirect labor. We expect that a significant portion of these cost-out actions will be completed as we enter the second half of 2021. Adjusted operating loss in the fourth quarter totaled $6.1 million, reflecting the lower sales volume and overhead headwinds combined with the negative sales mix. The year-over-year impact of exchange rates was negative by approximately 40 basis points.

Now turning to our two segments. The composite material segment represented 76% of total sales and generated a negative 6.2% operating margin compared to 18.8% margin in the prior year period. The engineered products segment, which is comprised of all structures and engineered core businesses, represented 24% of total sales and generated an 8.6% operating margin, compared to 16.9% in the fourth quarter of 2019.

The tax benefit for the fourth quarter and year-to-date periods of 2020 was $12 million and $61 million, respectively. The tax benefit was primarily due to losses incurred in various jurisdictions due to the impacts of COVID-19. The 2020 tax benefit was also impacted by discrete tax items of $55 million, primarily composed of a valuation allowance released in the third quarter of 2020. The pandemic and consequent mix of results across the countries in which we operate is expected to continue to have an impact on the company's overall effective tax rate throughout 2021.

Net cash provided by operating activities was $107.1 million for the fourth quarter and $264.3 million for 2020. Working capital was a source of cash of $87.7 million in the last quarter of the year. Capital expenditures on an accrual basis was $3.2 million in the fourth quarter of 2020, compared to $30 million for the prior year period in 2019. Accrual basis capital expenditures were $42.5 million for the full 2020 year. We continue to tightly manage capital expenditures and look for innovative ways to optimize the flexibility of our existing capacity to support new business opportunities in the future.

Free cash flow for the fourth quarter of 2020 was $104.3 million and $213.7 million for the year. We remain focused on generating and preserving cash as we deleverage. We increased our liquidity by $108 million as of 31st -- December 31st, 2020, compared to September 30th, 2020, further strengthening our balance sheet. Our total liquidity at the end of the fourth quarter of 2020 was $875 million consisting of $103 million of cash and an undrawn revolver balance of $772 million. We have no near-term debt maturities. Our revolver matures in 2024 and our two Senior Notes mature in 2025 and 2027, respectively. Our leverage as of December 31st, 2020, is measured on a net debt basis and was 3.6 times compared to 3.25 times at September 30, 2020, which at that time was measured on a gross debt basis. The increase in the leverage ratio was due to the lower 12-month trailing EBITDA as net debt actually decreased $108 million at December 31, 2020, compared to September 30, 2020. We remain within covenant conditions.

Our revolver facility has leverage covenants based on a debt to trailing 12-month EBITDA. During the third quarter of 2020, we worked with our bank group to temporarily amend the covenant from a gross debt measurement to a net debt measurement and to increase the maximum allowable leverage for a period of four quarters. While we comfortably remained in compliance with the amended Covenant's December 31st, 2020, we recognized that the trailing 12-month EBITDA is decreasing more than we had forecast early in the third quarter of 2020. This reflects our projections based on our latest customer demand requirements along with our belief that the aerospace supply chain destocking will now run through the second quarter of 2021 compared to our previous thinking that it would be largely completed by the end of 2020. We are currently in discussions with our bank group regarding our revolver facility, and we are extremely confident that a mutually agreeable solution will be reached soon to ensure continued covenant compliance.

Our share repurchase program remains suspended and is also restricted by the previously referenced revolver amendment. Our board will continue to regularly evaluate capital allocation priorities.

To summarize full-year 2020 results. Total sales decreased 36%, adjusted operating income was $72 million, and adjusted diluted earnings per share was $0.25. We delivered $214 million of free cash flow during the year, which we used to deleverage.

As our earning release states, we are not providing financial guidance at this time, but I would like to share the following. Our current market outlook, considering the strong pre-pandemic first quarter of 2020, is that we expect 2021 annual sales to be lower than 2020. We expect the aerospace chain destocking to largely come to an end during the second quarter of 2021. Consistent with prior years, selling, general, and administrative expenses are forecast to be higher in the first quarter of 2021 compared to following quarters due to the timing of recording stock-based compensation expenses. Some additional restructuring costs are anticipated primarily in the first half of 2021 based on labor actions already initiated. Capital expenditures in 2021 will continue to be managed very tightly and are expected to be at a similar level to 2020.

We expect to generate free cash flow in 2021 and to further reduce debt levels. The tax assumption is more complicated than normal, but we expect the rate to be approximately 24% to 25% in 2021. This change from prior rates is due to a mix of the jurisdictions where we expect to generate income. Over time, we expect the tax rate to return to pre-pandemic levels.

With that, let me turn the call back to Nick.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Thanks, Patrick. While it seems as though everything is changed, in reality, nothing has changed about who we are as a company. We still have the broadest technology portfolio in our industry, with leading positions on the world's largest aerospace programs with our advanced composites materials. We continue to generate cash and further strengthen our balance sheet. We are taking this opportunity to strengthen our foundation, especially in the areas of cost control, realigning the business for lower demand for a period of time, and cash management, to name a few.

The great job our team has done puts us in a position to return to growth with strong leverage once this pandemic is behind us. Clearly, there is still uncertainty. While air travel has increased from the 2020 lows, it remains weak. So the next couple of quarters will be challenging. However, we can see a path forward toward a return to stability, and we view 2021 as a transition period that sits between the trough of the second half of 2020 and a return to growth in 2022.

This year, one of our primary objectives is to continue to stay close to, aligned with, and responsive to our customers' needs. Global demand for advanced composites technology for lighter weight will grow, and our technology and products remain unrivaled in our industry. The potential for a significant upturn in 2022 and beyond continues to look promising. The actions we have taken and will continue to take will ensure that Hexcel emerges from this pandemic stronger than ever, strategically positioned for growth to support the future of aerodynamics and sustainability in the markets we serve. We continue to be disciplined and ready for the year ahead.

Joann, we'll now turn it back over to you and are ready to take questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Gautam Khanna from Cowen. Your line is now open.

Gautam Khanna -- Cowen and Company LLC -- Analyst

Yeah, thanks. Good morning, guys.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Good morning.

Gautam Khanna -- Cowen and Company LLC -- Analyst

I'll make sure to keep it to one. Thank you. I was wondering, could you elaborate on which programs you're seeing the destocking on extending into Q2. Was there like an incremental wave on the 87 or, you know, what changed, if you will, since last quarter?

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Well, Gautam, you could imagine the programs that have the higher rates and higher shipset content and took the biggest rate production reductions are the ones that impacted us most. Clearly, the A350 was leading that impact and the 787 on a percentage basis was very nearly the same level. So the 737 MAX has certainly been an issue with respect to build rate reductions and inventory destocking for the past many months and had probably a little bit less impact than the A320neo jet. So in general, I expect a little bit more 787 and widebody reduction as we go through Q1 and hopefully soon see some pickup as those levels stabilize and narrowbodies potentially increase later in the year.

Gautam Khanna -- Cowen and Company LLC -- Analyst

Thanks, guys.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Thank you, Gautam.

Operator

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

Michael Sison -- Wells Fargo Securities LLC -- Analyst

Hey, guys. Good morning. And glad you guys all sound healthy. Nick, just curious, historically, Hexcel would see sales versus planned delivery somewhere between six to -- six months before the delivery, so has there been a change in that? Is the spread a little bit longer or shorter coming out of the pandemic and is there any differences between maybe narrow and widebody as you look forward? And just want to see the timing as hopefully deliveries improve in the second half and '22.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Yeah, Mike. So, again, when you look at our two business segments on the engineered products versus the composites, there tends to be a little different timing there. It has not changed over the pandemic, and I wouldn't expect it to change. I would point out that we believe there's an opportunity, and we believe the supply chain recovery will amplify that stabilization of the rates and, hopefully, the increased rates later this year. But as far as the lead times that we ship product to support aircraft build, nothing really materially changes there from our perspective.

Michael Sison -- Wells Fargo Securities LLC -- Analyst

Great, thank you.

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Thank you, Mike.

Operator

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

Richard Safran -- Seaport Global Securities LLC -- Analyst

Thanks. Nick, Patrick, Kurt, good morning. How are you? Hope you're well.

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Good morning.

Richard Safran -- Seaport Global Securities LLC -- Analyst

So, Patrick, I know you mentioned, and Nick, this is for either one of you, in the past, you've talked about incremental margins. And I understand things are getting better. You don't have good visibility yet into how quickly things are getting better. But with the idea that destocking ends after 2Q and given your remarks about the strong recovery in 2022, the cost takeout, etc., I thought you might discuss and elaborate on your prior remarks about how we should think about your incremental margins as volume returns and what they might look like relative to history.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

So, Richard, I'll take a first stab at that. So I'm not going to get into specific numbers. I suspect you understand that. I would tell you that the cost actions we're taking and how we're viewing the opportunity during the slowdown to get cost out and drive efficiencies within our plants within our indirect workforce, we fully plan on those benefits living through the pandemic and even as we start to grow. So I'd also point out that we're very closely monitoring and tracking our incremental leverage, and we've actually built that into our metrics on how we're measuring our key performance and reporting out to our board going forward.

Richard Safran -- Seaport Global Securities LLC -- Analyst

Thanks.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Thank you, Richard.

Operator

Our next question comes from the line of Myles Walton from UBS. Your line is now open.

Myles Walton -- UBS Equities -- Analyst

Thanks, good morning.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Good morning, Myles.

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Good morning.

Myles Walton -- UBS Equities -- Analyst

Hey, Patrick, you gave the color on the top line pressure in '21. Do you think you can hold the reported adjusted margins -- operating margins versus 2020 or is there a little fade [Phonetic] there as well year-on-year?

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

I think, I mean as Nick was talking to, in terms of operating margins, clearly, Q1 2020 you kind of put that to one side, but I think now with the cost coming out, with a bit of stabilization certainly sort of arriving in Q2 and going into the second half of the year, I mean the top -- the margins are going to continue to be challenging. We have an overhead headwind and without some volume, and we have the mix headwinds at the moment with the lower carbon fiber sales. But as we start to pull through stronger carbon fiber sales, especially going into 2022, that is going to help us with incrementals and drive us. But for 2021, I don't see a further decrease in operating income percentage margins, but I would be cautious about our ability to drive them up until we get some volume and a stronger mix combined with the cost take out.

Myles Walton -- UBS Equities -- Analyst

Okay. And just a clarification. You mentioned the destock sort of stabilizes into 2Q. Does that imply sort of flat revenue profile or just maybe what is stabilization 2Q versus 1Q you mean?

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Well, I think, I mean destocking will -- I mean it's not going to be zero as we go into the second half of the year and the 787 destocking is probably going to be the program that comes later just because of the timing of what's happened. I think we've had this double whammy, obviously, through these three, as we call them, trough quarter in Q3 and Q4 '20 and Q1 '21. I think as we come out of that and destocking winds down, we're going to stabilize more closely to actual build rates, and so we should start to see a little bit of positive growth. We're not getting carried away, but a little bit of growth in the revenue line. And then as build rates start to increase, as we get into the second half of the year, hopefully, that will -- that trend will continue further.

Myles Walton -- UBS Equities -- Analyst

Okay, thank you.

Operator

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

Pete Skibitski -- Alembic Global Advisors LLC -- Analyst

Hey, good morning, guys.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Morning.

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Morning.

Pete Skibitski -- Alembic Global Advisors LLC -- Analyst

I guess I'll switch to working capital. You, obviously, took a lot out in 2020. Can you give us a sense of how 2021 looks, especially from kind of a first half, second half perspective?

Nick L. Stanage -- Chairman, Chief Executive Officer and President

So, first half, second half, you're getting into details. I mean, our ability to take out working capital is obviously different in 2021 compared to 2020. We responded, as you would expect, very robustly, very disciplined way, and we took out appropriately a lot of working capital in 2020 in response to the downturn. Our inventory came down, obviously our receivables came down, offset by our payables. As the business stabilizes, as you would imagine, our working capital is going to kind of level off. Now we will be very disciplined. We will maintain sort of the days on hand or the days payable, days receivables as strongly as we can, and we will limit any growth as business grows back. So you would expect perhaps more pressure on working capital in the second half of the year than the first year. But we will continue to be very disciplined. That's what I would differentiate. But you're not going to see another 2020 working capital adjustment.

Pete Skibitski -- Alembic Global Advisors LLC -- Analyst

Of course. Okay, thanks for the color.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Thank you.

Operator

Your next question comes from the line of John McNulty from BMO Capital Markets. Your line is now open.

John McNulty -- BMO Capital Markets Corp. (Canada) -- Analyst

Yeah, thanks for taking my question. Just with regard to the cost-cutting initiatives that you've got in place, can you quantify how we should be thinking about the improvement in '21 versus '20 from a cost perspective and just the timing of when that will sequence and it sounds like it's more front-half loaded, but a little -- any granularity you can give would be great.

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Yeah, sure. Morning, John. I mean, we've started to get some of that cost benefit in the fourth quarter and we will get more in the first quarter. We continue to take cost out actions, and they will continue through the year. But I think as we called out I think in the script in the narrative, by the middle of 2021, a decent portion of that cost saving will be in place, will be flowing through. And so yes, that will help margins. It will help those incremental margins. And importantly, we need more volume, we need more carbon fiber to help the overall mix come through. But those three things combined should start to help push our margins back up in the second half of the year, and then even more so as we go into 2022.

John McNulty -- BMO Capital Markets Corp. (Canada) -- Analyst

Got it. Thanks for the color.

Operator

Our next question comes from the line of Greg Konrad from Jefferies. Your line is now open.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Good morning, Greg.

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Good morning, Greg.

Greg Konrad -- Jefferies LLC -- Analyst

To follow up on one of the questions before, I mean, you mentioned in the script, sales are down in 2021 without providing guidance. But I mean how are you thinking about H1 versus H2 and given the impact of destocking in H2 2020? Is there any way to think about the magnitude of recovery or growth in H2 or maybe quantify the impact of destocking to kind of help frame that tailwind as you get into the second half and into 2022?

Nick L. Stanage -- Chairman, Chief Executive Officer and President

So I'd start by saying, first half of 2021 is going to be -- going against a comparable of a very strong quarter in 2020. So you can imagine there's going to be a marked reduction in Q1 that will carry the first half. We don't see a recovery being a snapback. We think it's going to be gradual. We think the OEEs are going to be disciplined in how they ramp their rates back up to work with the supply chain, because again the rates will ramp up and compounded with that will be supply chain replenishment. So we see a gradual increase going into the second half of the year, and that's about all the color we're really prepared to provide at this time.

Greg Konrad -- Jefferies LLC -- Analyst

Thank you.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Thank you, Greg.

Operator

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

Michael Ciarmoli -- Truist Securities, Inc. -- Analyst

Hey, good morning, guys. Thanks for taking my question.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Morning, Mike.

Michael Ciarmoli -- Truist Securities, Inc. -- Analyst

Maybe just to say on what Greg was just asking. I mean, obviously, there's a lot of uncertainty out there. But what's really preventing you from giving more granular guidance this year? I mean, we all know what Boeing and Airbus rates are going to be. Presumably you're closer to them. You don't have any aftermarket exposure, which is really short cycle. So the hesitancy, I mean, does that suggest the demand signals or the stated rates from Boeing and Airbus you're not really confident there? I mean, I think we can all see the widebody pressures. Maybe can you just kind of frame up maybe what the biggest unknowns are that's preventing you from giving a more detailed level projection?

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Well, I'll start by saying we are absolutely intimate and connected with our customers, recognizing that it's very dynamic times. So when I step back and we step back and look at the uncertainties out there, you've got vaccinations happening at different rates all over the world, and I think everyone would say they're happening slower than we had hoped and expected. So when exactly will the majority of the population receive vaccinations and then most likely there will be a lag on when will the mass public and business feel confident to get back on planes, provided that borders are reopened and they're allowed to fly and land without quarantining. So I don't know anyone or I haven't read anything that clearly defines when those dates are going to happen, and it's evolving over time. So to stay connected to Airbus and Boeing and Safran and all of our customers, what we're focusing on is being responsive and being exactly aligned with respect to our working capital, with their needs, recognizing that if they need to adjust upward, they will; if they need to adjust downward, they will. And at this point in time, we just do not have the clarity to feel confident that we can report a forecast that is meaningful.

Michael Ciarmoli -- Truist Securities, Inc. -- Analyst

No, that's fair. Maybe just a follow-up. Did Airbus's rates going to 47 per month catch you guys off guard, or was that a factor?

Nick L. Stanage -- Chairman, Chief Executive Officer and President

So I haven't heard rates 47 -- oh, coming off --

Michael Ciarmoli -- Truist Securities, Inc. -- Analyst

Well, I mean, yeah, not going to rate 47 I mean, slowing that down, was that sort of a surprise for you guys?

Nick L. Stanage -- Chairman, Chief Executive Officer and President

I view that as a disciplined approach in bringing the supply chain back on, and I view that very positively ramping up 43, then 45 and evaluating for further rate increases going forward. So it wasn't a surprise.

Michael Ciarmoli -- Truist Securities, Inc. -- Analyst

Got it. Helpful. Thanks a lot, guys. Appreciate it.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Thanks, Michael.

Operator

Your next question comes from the line of Phil Gibbs from KeyBanc Capital. Your line is now open.

Philip Gibbs -- KeyBanc Capital Markets Inc. -- Analyst

Hey, good morning.

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Good morning.

Philip Gibbs -- KeyBanc Capital Markets Inc. -- Analyst

So your $150 million of structural cost-outs are on track. How much of that run rate have we realized exiting 2020? Just trying to gauge how much more we have left in the tank.

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

So they're on track. I mean we haven't put specific numbers to specific timeframes. I think we've sort of said it will be largely in place by the middle of this year. We undoubtedly had a portion sort of a little bit even in Q3, more coming through Q4, and we'll see more in the next couple of quarters. I don't really want to start to try and slice and dice it specifically, but we continue to work on those cost takeouts, the $150 million continues to be the target we're working to, and by the middle of this year, a very large portion of that will be in play.

Philip Gibbs -- KeyBanc Capital Markets Inc. -- Analyst

Okay. And then in the raw material environment, obviously, we've seen a lot of strange volatility this year in lumber and steel and iron ore and plastics and everything in between. How is the raw material environment for you all going? I know it's typically a pass-through. You try to pass it through. But what's the raw material environment looking like right now and how are you going to manage through it?

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Yeah. I mean, by and large, it's relatively steady. As we've said many times, we have some long-term supply contracts. And so that protects us with a lot of the pricing. Acrylonitrile, which we now hedge is the base raw material for our carbon fiber. There has been pressure on the propylene market that those prices have gone up compared to the middle of say 2020. But again, the impact on us is mitigated because of hedging. So, overall, I would say not too much of an impact still.

Philip Gibbs -- KeyBanc Capital Markets Inc. -- Analyst

So we shouldn't think about raw material volatility as a headwind in '21 versus '20?

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Nothing major, no, no.

Philip Gibbs -- KeyBanc Capital Markets Inc. -- Analyst

Okay. Thanks very much.

Operator

Your next question comes from the line of Noah Poponak from Goldman Sachs. Your line is now open.

Noah Poponak -- Goldman Sachs & Co. LLC -- Analyst

Hi, good morning, everyone.

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Morning.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Morning, Noah.

Noah Poponak -- Goldman Sachs & Co. LLC -- Analyst

Just curious if you guys have any insight into what's going on with the 787 quality control issues. Obviously, it doesn't tie to you. It's a Boeing manufacturing issue, but just given that it's in composite structural components, I thought you might have more insight there than I do. And then as they're building but not delivering airplanes, what does that mean for Hexcel? I mean, I know it kind of falls into the overall inventory destocking, but it would seem to be even more on that program.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

So we have no more insight than you do on 787 manufacturing issues and/or what's going on with fuselage. I will say I'm confident that Boeing have that under control and that, that issue if not already gone, will go away. With respect to inventory and what's going on with respect to build rates and winding down, 787, to Patrick's point, clearly, going down the rate five or at or run rate five. There's going to be some incremental headwind on supply chain adjustments for a quarter or two. 737 it'll be interesting to see the burn-off of the inventory and stock and the ramp back up of the production from the very low rates they're running today. But, again, we're still optimistic that we'll start to see that in the second half of 2021.

Noah Poponak -- Goldman Sachs & Co. LLC -- Analyst

Okay. In your other commercial aerospace revenue, down about 60% and you specified in the release particularly business jet. The OEMs in aggregate there haven't reduced production nearly that much, I don't think. Is that also seeing inventory destock or has that end market worsened?

Nick L. Stanage -- Chairman, Chief Executive Officer and President

That market certainly has seen some inventory destocking, especially in the fourth quarter. I think some of the questions around business jet and the size classes and how they'll rebound remains to be seen, but we remain optimistic, certainly for the small class, medium class in 2021 to show some recovery.

Noah Poponak -- Goldman Sachs & Co. LLC -- Analyst

Okay. And Patrick how should I expect 2021 free cash flow to compare to 2020?

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

I mean, I think I kind of directionally said it's going to be lower because we're not going to have the same working capital opportunity. I mean we're not guiding to a specific number, but I think that's the shape I would put on it.

Noah Poponak -- Goldman Sachs & Co. LLC -- Analyst

Basically, just think of it as kind of directionally flattish and then -- before working capital and then extract the working capital benefit.

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

More or less, more or less.

Noah Poponak -- Goldman Sachs & Co. LLC -- Analyst

Okay. Okay. Thanks so much.

Operator

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

David Strauss -- Barclays Capital, Inc. -- Analyst

Thanks. Patrick, I know you highlighted the headwind from a weaker dollar in the quarter. How does that impact going forward kind of where you hedge given that the dollar has depreciated a fair amount here?

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Yeah. I mean, so this is where the hedging does come into play. Again, I'm not going to get into specifics, but we don't see the same headwinds going into 2021 versus 2020. So because of our hedging portfolio and what we have in place, it's going to be a lot more neutral in 2021. I know that that might sound ironic to your point, given the slightly lower -- sorry, the weaker dollar, but because of the hedges we have in place year-over-year for us, the dollar should not be too much of a headwind. Okay. Nick, I guess thinking about '20 -- a little bit beyond 2021, out to 2022. I know it's a ways out but as we're building our models out and thinking about the aero business, the leases that relates to large commercial aircraft. When do you expect to pretty much be in line with delivery rates, other than maybe on the MAX at that point in '22?

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Absolutely. I would expect that given we shipped a fair amount prior to the aircraft build rates, and I think the stability in the markets and the gradual increase, our business will certainly have the capability and capacity to support that easily. So I think we'll be aligned. Again, I also am not underestimating some of the supply chain replenishment that will help the business going forward on a one-time basis as the market starts to recover.

David Strauss -- Barclays Capital, Inc. -- Analyst

Okay. Thanks very much.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Thanks, David.

Operator

Your next question comes from the line of Austin Moeller from Canaccord. Your line is now open.

Austin Moeller -- Canaccord Genuity LLC -- Analyst

Hi, there. This is Austin on for Ken. Just to switch gears over the defense business. Can you talk about what the shipping rate is for the F-35 and the outlook for that program this year?

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Unfortunately, we do not give build rates or shipset content on our military programs simply because they're isolated, and it's competitive information we don't share.

Austin Moeller -- Canaccord Genuity LLC -- Analyst

Okay. Well, just on a different point. For the defense business, are there any new program opportunities in the next few years that you're pursuing? Or how should we think about the program mix for that business over the next few years? And are you pursuing anything in the space sector in particular?

Nick L. Stanage -- Chairman, Chief Executive Officer and President

So I would say is the leading composite supplier in the space and defense industry and the fact that our IM7 Fiber is basically the benchmark. We're working on multiple new programs, advanced programs, both manned and unmanned, as we speak today. So I certainly would expect opportunities to continue to present themselves and us to continue to be a fiber of choice and have great content on those applications as we go forward.

Austin Moeller -- Canaccord Genuity LLC -- Analyst

Okay, got it. Thank you, guys.

Operator

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

Hunter Keay -- Wolfe Research LLC -- Analyst

Hey. Good morning, everybody. Thanks.

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Morning. Good morning, Patrick. So in 2015, you guys were expecting $3 billion sales in 2020. It's going to come in at half that. I know this is a hard question, but as you think about the long-term planning process in the next five years, do you see an ability maybe to get back to that $3 billion sales level at some point?

Nick L. Stanage -- Chairman, Chief Executive Officer and President

2015, well, we clearly didn't predict the pandemic. We are continuing to work our strategic planning process. We're continuing to drive the innovation materials and processes and goods. We're continuing to expand our portfolio as we've done with our technologies, and we'll continue to evaluate organically as well as through M&A opportunities and collaboration. So I would answer that by, we don't have our crystal ball. We're working our strategic planning process aggressively with the team. I like the pipeline. We have -- I like the activities we have in place, but it, unfortunately, is a bit premature for us to make any judgments on when we will deliver $3 billion or any respective number. I can assure you, though, I'm challenging the team and composites, advanced materials, light-weighting, sustainability, zero-emission aircraft, I'm excited with the opportunities and I'm even more excited with Hexcel's position and the efficiencies we're driving into the business. So we will hit that number. I just can't give you a date.

Hunter Keay -- Wolfe Research LLC -- Analyst

Okay, Nick. Thanks. And then just a quick clarification. Did you ever pause 787 shipsets?

Nick L. Stanage -- Chairman, Chief Executive Officer and President

We never paused 787 shipsets.

Hunter Keay -- Wolfe Research LLC -- Analyst

Okay. Thank you very much.

Nick L. Stanage -- Chairman, Chief Executive Officer and President

You're welcome.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Patrick Winterlich -- Executive Vice President and Chief Financial Officer

Nick L. Stanage -- Chairman, Chief Executive Officer and President

Gautam Khanna -- Cowen and Company LLC -- Analyst

Michael Sison -- Wells Fargo Securities LLC -- Analyst

Richard Safran -- Seaport Global Securities LLC -- Analyst

Myles Walton -- UBS Equities -- Analyst

Pete Skibitski -- Alembic Global Advisors LLC -- Analyst

John McNulty -- BMO Capital Markets Corp. (Canada) -- Analyst

Greg Konrad -- Jefferies LLC -- Analyst

Michael Ciarmoli -- Truist Securities, Inc. -- Analyst

Philip Gibbs -- KeyBanc Capital Markets Inc. -- Analyst

Noah Poponak -- Goldman Sachs & Co. LLC -- Analyst

David Strauss -- Barclays Capital, Inc. -- Analyst

Austin Moeller -- Canaccord Genuity LLC -- Analyst

Hunter Keay -- Wolfe Research LLC -- Analyst

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