Albany International Corp (AIN) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Albany International First Quarter Earnings Call. (Operator Instructions) As a reminder, your conference call today is being recorded.

I'll now turn the conference call over to your host, Director of Investor Relations, John Hobbs. Go ahead, please.

Thank you, Alan, and good morning, everyone. Welcome to Albany International's first quarter 2022 conference call. As a reminder for those listening on the call, please refer to our press release issued last night detailing our quarterly financial results. Contained in the text of the release is a notice regarding our forward-looking statements and the use of certain non-GAAP financial measures and their associated reconciliation to GAAP. For the purposes of this conference call, those same statements apply to our verbal remarks this morning.

Today, we will make statements that are forward-looking that contain a number of risks, uncertainties, among which are the potential effects of the COVID-19 pandemic and the potential effects of the Russian invasion of Ukraine on our operations, the markets we serve and our financial results.

For a full discussion, including a reconciliation of non-GAAP measures we may use in the call to their most comparable GAAP measures, please refer to both our earnings release of April 25, 2022, as well as our SEC filings, including our 10-K.

Now I'll turn the call over to Bill Higgins, our President and Chief Executive Officer, who will provide opening remarks. Bill?

Thank you, John. Good morning, and welcome, everyone, and thank you for joining our first earnings call of 2022. Today, I'll comment on our first quarter results, our strategic progress and corporate governance, and Stephen will then cover our financial results in more detail.

First, let me express our concern for the people of Ukraine following the Russian invasion, the will of the Ukrainian people and the resistance is inspiring. And we hope this senseless war comes to an end soon. Like many companies, Albany has ceased doing business in Russia. Specifically, we have stopped shipping machine clothing belts to paper companies in Russia, and we're withdrawing from a very small joint venture in Russia that produce belts for local paper manufacturers.

Our business exposure in Ukraine is small. We have no employees there, and we typically export a modest amount of machine clothing to paper making customers there, and we look forward to continuing to support those customers in the future. The combined effects had a minor impact on our first quarter results, which Stephen will outline. Our 2022 outlook assumes no Russian sales moving forward. Suffice it to say, 2022 has already started out as another year with unpredictable events, the effects of which may not be entirely visible yet.

Despite the unpredictable environment, I'm pleased to report strong revenue growth in the first quarter in both our business segments. In fact, our Aerospace Composites segment grew net sales by more than 20%, and our Machine Clothing segment posted mid-single-digit growth compared to the first quarter last year.

In the first quarter, we achieved GAAP EPS of $0.87 per share, up $0.02 per share from last year's $0.85 and adjusted EPS of $0.91 per share versus $0.87 per share adjusted EPS last year. Most impressive is our team's ability to be adaptive to work together to overcome difficult supply chain challenges, logistics barriers, material shortages while replanning operations to deliver to our customers on time.

In Machine Clothing, for example, we continue to see delays of raw material deliveries from our suppliers, but we were still able to hit record levels of output, improve absorption and productivity, deliver to customers on time and produce excellent financial results. This took a lot of extra effort working across the globe to share materials and rebalance factory capacity and output. We have great teams that are performing exceptionally well.

On the cost front, we're closely monitoring and actively managing inflationary pressures in materials, wages, logistics and energy. We're passing through cost increases where we can. Inflationary cost increases continued into Q2 and are expected to impact our profitability for the year overall.

For example, rail transport from China to Europe across Russia is no longer viable and has been replaced by boat transport, adding cost and doubling the shipping time. Truck transportation within China is timing by pandemic lockdowns and driver quarantines. And truck availability in Europe is impacted by the loss of Ukrainian truck drivers who returned home, contributing to an estimated 10% reduction of truck transport capacity in Western Europe.

On a positive note, I'm confident we'll continue to be nimble and flexible. Our supply chain and operations teams have demonstrated their agility by navigating the challenges of the last 2 years and the first quarter remarkably well.

Despite this unpredictable global environment, we're optimistic about our growth opportunities. Our strategy is to invest in R&D and product development to drive organic growth to collaborate with key customers to design the next generation of advanced materials for long-term growth and to position Albany as the technology leader and partner of choice in both of our segments. This means we must be good at both developing advanced materials solutions and operational performance.

In Machine Clothing, we have a strong operating culture. We've earned a reputation for producing products of exceptional quality and durability for our customers. We're the global technology and market share leader in paper machine clothing, a market whose underlying long-term demand trends are expected to grow with economic activity, e-commerce trends and a secular shift towards renewable and recyclable materials as paper replaces plastic.

In our Engineered Composites segment, our strategy is consistent to bring the next generation of advanced materials to market and to earn a reputation for operational excellence and great customer service. It started with our development of 3D woven composites in collaboration with Safran on LEAP engine fan blades and fan cases.

The durability and performance of 3D woven composites exceed the performance of any other fan blade materials, titanium or 2D composite blades. Moreover, we achieved higher rates of commercial production and demonstrated the commercial feasibility of 3D woven composite components.

Our success with LEAP is a springboard to propagate the use of 3D woven structures across the aircraft. We're excited about the long-term opportunities for advanced 3D woven composites on the next-generation airframe and engines with a variety of OEM and Tier 1 customers and partners.

In the near term, we're ramping up production on the LEAP program and preparing our factory for our most recent win, the F transition for the Sikorsky CH-53K helicopter, which positions Albany as a major player in rotary aircraft.

Later into the future, these programs and opportunities lay the foundation for sustainable long-term organic growth. The strategy takes advantage of long-term secular trends driven by climate change and energy efficiency. Our aim is to be at the center of this shift to lighter composite aircraft that are fuel efficient.

Now let me make a couple of comments about recent changes in our corporate governance. First, we're pleased to welcome 2 new members to our Board of Directors, Christy Alvord and Russell Toney. As part of our Board refreshment process, we're excited to have Christy and Russell join Albany. They bring strategic, operational, technical leadership experience to the Board. With their collective experience in materials, aerospace, technology and diversified global manufacturing, our governance, strategic planning and growth capability is enhanced.

And second, we've effectively transitioned Albany to a single class share structure. 100% of Class B shares have now been converted to Class A shares, and all outstanding common stock is now Class A. Therefore, all shareholders now have equal voting rights. Our next step will be the formal retirement of the dual-class structure in our bylaws, which we intend to bring to a shareholder vote in 2023.

So with that, I'll hand the call over to Stephen. Stephen?

Thank you, Bill. Good morning to everyone. I will talk first about the results for the quarter and then provide an update on our outlook for our business for the balance of the year.

For the first quarter, total company net sales were $244.2 million, an increase of 9.8% compared to the $222.4 million delivered in the same quarter last year. Adjusting for currency translation effects, principally the decline in the euro relative to the U.S. dollar, net sales increased by 11.5% year-over-year in the quarter.

In Machine Clothing, also adjusting for currency translation effects, net sales were up 5.7% year-over-year, driven by growth in all grades of product. Engineered Composites net sales, again, after adjusting for currency translation effects, grew by 23.1%, with growth on LEAP and CH-53K, partially offset by a decline on the F-35 platform.

During the quarter, the LEAP program generated revenue of almost $38 million compared to a little under $27 million in the same quarter last year. LEAP revenue was also up significantly sequentially, as we have now completed the planned destocking of our finished goods. We finished Q1 with less than 100 LEAP-1B engine shipsets in stock, in line with the safety stock levels required under our contract.

First quarter gross profit for the company was $91.6 million, an increase of 3.5% from the comparable period last year. The overall gross margin declined by 130 basis points from 39.8% to 37.5% of net sales, caused mainly by the mix shift due to AEC's top line growth outpacing that of the MC segment and a lower gross margin in AEC.

Within the MC segment, gross margin was flat at 51.5% of net sales as the drop-through benefit of the increased revenue was fully offset by higher input costs and fully reserving about $600,000 of WIP and finished goods that had been destined for Russian customers.

Within AEC, gross margin declined from 16.4% to 13.6% of net sales, caused primarily by raw material and WIP reserve, mix effects and a slightly larger net unfavorable change to long-term contract profitability.

During the quarter, raw material held at a third-party storage facility was determined to have been stored inappropriately, with temperature fluctuations that effectively consumed its useful life. While we will pursue options for recovery of some or all of our loss, we made the determination to reserve $2.4 million in Q1 for the raw material and the WIP into which the suspect material had been incorporated. To the extent that our recovery initiatives are successful in a future quarter, we would, at that time, reduce the reserve appropriately.

First quarter selling, technical, general and research expenses increased from $46.7 million in the prior year quarter to $52.6 million in the current quarter and increased as a percentage of net sales from 21.0% to 21.5%, caused primarily by the impact of our decision to exit the Russian market and higher R&D expenses.

During the quarter, we fully reserved about $1.2 million in receivables from our Russian customers. Total operating income for the company was $38.8 million, down from $41.8 million in the prior year quarter. Machine Clothing operating income decreased by about $700,000, caused by the higher gross profit being more than offset by higher STG&R and restructuring expenses. Meanwhile, AEC operating income decreased by about $1.7 million caused by lower gross profit and higher STG&R expense.

Other income expense in the quarter netted to income of $3.9 million compared to expense of about $600,000 in the same period last year. The improvement was primarily driven by a more beneficial foreign currency revaluation effect in this quarter, partially offset by the write-down of the $800,000 net book value of our equity stake in our small Russian paper machine clothing joint venture. With respect to the latter, we have provided notice to our joint venture partner of our intention to fully exit that relationship.

The income tax rate for this quarter was 28.1% compared to 26.7% in the prior year quarter. The higher rate this quarter is primarily due to the absence of a beneficial true-up of estimated tax payments recognized in the first quarter last year. Net income attributable to the company for the quarter was $27.7 million, essentially flat compared to last year as lower operating income and higher tax rate were only partially offset by the favorable change in other income and expense.

Earnings per share was $0.87 this quarter compared to $0.85 in the same period last year. After adjusting for the impact of foreign currency revaluation gains and losses, restructuring expenses, the discrete impact of exiting the Russian market and expenses associated with the CirComp acquisition and integration, adjusted earnings per share was $0.91 this quarter compared to $0.87 last year.

Adjusted EBITDA increased slightly to $61 million for the most recent quarter compared to the same period last year. Machine Clothing adjusted EBITDA was $57.7 million or 37.4% of net sales this year, up from $54.9 million or 37.1% of net sales in the prior year quarter. AEC adjusted EBITDA was $13.7 million or 15.2% of net sales down from last year's $16.7 million or 22.6% of net sales.

During the quarter, the company had negative free cash flow, defined as net cash used in operating activities less capital expenditures, of about $21.1 million. This was not at all unexpected as it is typical for the company to have negative cash flow in the first quarter due to seasonality in receipts and incentive compensation payments for performance in the past year. This quarter's cash flow performance does not change our outlook for free cash flow for the full year.

During the first quarter, we returned over $50 million of cash to our investors, comprised of over $6 million in regular dividends and almost $44 million in share repurchases. We repurchased almost 515,000 shares during the first quarter at an average price of $85.35. Share repurchases have continued in Q2.

Our net leverage ratio is now about 0.52, which still provides us significant flexibility to return cash to shareholders without impairing our ability to make strategic investments should an opportunity arise.

I would now like to provide an update on our financial guidance for 2022. Machine Clothing had a very good quarter, with a strong top line more than making up for some of the headwinds we talked about on the prior call, including input cost increases and the weak euro. However, we continue to see risks in the balance of the year.

First, it is unlikely that the high sales performance we saw this year will continue at the same level as we believe that the revenue growth, we saw this quarter in both the North American and European markets exceeded underlying demand and was driven by timing of certain customer requirements. In future quarters, we do not expect to be able to fully offset the impact of input cost inflation through higher revenue driving increased drop-through.

This challenge is exacerbated by the fact that inflation is still rising. In fact, in the 10 weeks since we issued our initial financial guidance for 2022, our assessment of the impact of inflation on the segment's bottom line for the full year has risen by about $4 million.

Second, the risk of the destocking cycle we discussed on our last call remains. Many of our customers have continued to operate with a higher-than-normal safety stock of our finished goods at their facilities, driven by fear of future supply chain disruptions. Given global events, including the invasion of Ukraine and resulting sanctions, the inflationary environment and the lingering impact of the pandemic, those fears did not abate in the first quarter. We do not know when or to what extent that risk will manifest itself in terms of impact to our revenue, but it is still possible we will see some impact in 2022.

Third, we have new challenges resulting from Russia's invasion of Ukraine and the tragedy that is unfolding there. Direct impacts of our exit from the Russian market include both the write-offs and reserves that we recognized in the first quarter and the loss of approximately $10 million in sales per year.

As Bill noted, there also have been significant disruptions to the cost and availability of shipping options between Asia and Europe. Potential indirect impacts, such as effects on our supply chain or to global demand for our customers' end products are unknown at this time, but could be significant.

As a result, we are maintaining our previously issued segment guidance for net sales of $590 million to $610 million and adjusted EBITDA of $205 million to $225 million.

Turning to Engineered Composites. We are seeing no meaningful direct impacts from Russia's invasion of Ukraine as the segment has almost no Russia-sourced revenue. However, there are secondary risks, most notably that our customers could see disruptions elsewhere in their supply chains or that the potential economic impact of the conflict and the sanction regime could disrupt the recovery in the global aerospace market.

At this time, while it is not possible to assess the size or probability of the impact of these risks on the segment's top line performance, we do not expect a meaningful impact from those risks on our 2022 segment outlook.

The first quarter was challenging from an underlying profitability perspective for the segment, as the lower revenue on some fixed price programs, most notably on the F-35 program, meant that we did not see any improvement in gross margin from a higher revenue this quarter compared to last year.

This effect, combined with the raw material-related reserve and the previously announced higher investments in new business pursuits and R&D, caused us to temporarily deliver an adjusted EBITDA margin under 20%.

For the full year, we still expect to deliver an adjusted EBITDA margin of over 20% for the segment. Therefore, we are maintaining our segment guidance for revenue of $330 million to $350 million and adjusted EBITDA of $65 million to $75 million.

At the total company level, we are maintaining most of our previously issued full year guidance as follows: revenue of between $920 million and $960 million, unchanged; effective income tax rate of 29% to 31%, unchanged; depreciation and amortization of $75 million, unchanged; capital expenditures in the range of $75 million to $85 million, unchanged; GAAP earnings per share of between $2.76 and $3.26, updated from prior guidance of between $2.80 and $3.30; adjusted earnings per share of between $2.80 and $3.30, also unchanged; and adjusted EBITDA of between $215 million and $245 million, also unchanged.

Returning to the present, it does remain a challenging environment. Over the past 3 years, our employees have had to deal with the effects of the 737 MAX grounding, the pandemic, the inflationary environment and now the Ukrainian crisis. Through it all, our employees have performed admirably, particularly our production management, supply chain and human resources personnel who have had to manage through a constantly changing environment where every week has brought new challenges. The company owes all of our employees a debt of gratitude for their hard work, their diligence and persistence and at all times, their commitment to safety.

With that, I would like to open the call for questions. Alan?

(Operator Instructions) We will first go to the line of Pete Skibitski with Alembic Global.

New AEC, in particular, it seemed like the ramp on LEAP was really strong, maybe over 300 shipsets or so in the quarter. And so I'm wondering if you think the visibility for that ramp to continue is really good at that point. There's some questions about China accepting deliveries or not. But from your end anyway, does it seem like kind of all systems go on LEAP?

Yes. I'm sorry, Pete, we missed the first part of your question, I don't know, at least at our end, the first couple of seconds. But I think I got the gist of your question.

Look, LEAP, as we said, was up fairly significantly this quarter, certainly, compared to Q1 of last year. I'm not just quite the 300 shipsets you referenced. But if you have talked about total number of shipments, it's -- our total number of units produced, you're probably in the right directional range, at least.

We certainly feel we have as much insight into demand is our direct customer Safran has. We get regular updates from Safran, their outlook for it. I am not sure that right now, that outlook is heavily dependent on the Chinese market reopening, although clearly, at some point, it will be. That is a significant market, as you know, for single-aisle aircraft.

And we would expect at some point in the future, again in 737s and A320s to be selling there in quantities comparable to what we saw before the crisis. Right now, I would say that we think our outlook into the balance of this year is good. As we get into 2023, it's less hazy -- or more hazy, I should say. But I don't think there are significant risks to our outlook for this year.

Okay. Got it. One last one for me on Machine Clothing, also kind of related to China and the global economy with regard to the lockdowns in China. How much is that -- how much of that negatively impact you revenue-wise in the quarter? And then there are some concerns about the potential for a global recession maybe early next year, like this year.

And Machine Clothing, I think, is at least partially viewed as sort of a stable product, if you will, maybe modestly discretionary. But how are you guys thinking about the potential for a meaningful slowdown in Machine Clothing late this year or next year. With the inventory in the channel with the potential for the economy slowing. It's been sort of a mixed record, I think, historically, if I look back. So what are your thoughts as you see it today?

Yes. Pete, let me start with that. So far, Machine Clothing has performed remarkably well and the -- we keep -- in fact, we're asking again last night. Are we seeing any effects in China with the lockdowns now extending across Beijing, in addition to Shanghai and other places? Our facilities in China have been up and running. We've been able to keep them operating so far, so good.

So it feels pretty solid right now. I think that we're watching the customers that we think have built up extra inventory because of the supply chain sort of risk mitigation. That will probably continue for a little bit longer while we're seeing these transit and transport interruptions and bottlenecks and delays.

But I think for now, Machine Clothing looks pretty solid. As we go into the year, packaging tissue has been strong, particularly in North America. What happens in China longer term? Is there a recession? Those are big questions I'd like to know the answers to because as we mentioned in the commentary, we've just been through the MAX, the pandemic and now this war effect. So we hope we don't go into a recession, but we don't see any evidence of it affecting us just yet.

There's probably, Pete, to your question about the excess inventory, there's probably of our product in the channel in the tens of millions of dollars in total of extra product out there that would be presumably consumed first were we to -- see some slowdown, just kind of size the risk -- the immediate risk level.

As you said, we are a staple product. But as a consumable product, we do see a much more muted cycle than many members of the pulp and paper supply chain, which are providing more capital-intensive products. Our belts wear out. They -- and if you look at prior cycles, the volume consumed even during prior economic cycles, while it clearly goes down, it is a cyclical business. It's a much more muted cycle than many cyclical industries.

Yes. Steve, I mean, tens of millions. So that's on the order of 10% of your Machine Clothing revenue, that's kind of...

I wouldn't say as high as 10%.

Our next question, we'll go to the line of Peter Arment with Baird.

A question is really on just kind of circle a little bit on what Pete was asking about on MC. Just on kind of the top line cadence. I guess, historically, your second quarter has always been a little bit stronger seasonality, and I'm just wondering, you mentioned there was some timing on some shipments with North America and Europe. Is there -- how should we be thinking about just kind of the cadence? Do we still think we're growing sequentially? Or it seems like it would be a tough year-over-year number when we look at the second quarter last year on MC on the top line?

Yes. I don't know that we're looking for big growth. I mean we're holding our guidance. Things feel pretty steady. Our bookings coming into the quarter are solid. So I think we feel like we're in pretty good shape, but I don't think we're expecting a big step-up here.

Yes. Peter, we try not to get involved in giving quarterly guidance. But as Bill says, we are in a strong position heading into the second quarter. Certainly, our order book is strong, albeit probably unbalanced, a little weaker than it might have been at the same time last year. So expecting another blowout quarter, it's -- we expect to see it continue to perform well. But as you mentioned, Q2 is a tough comp.

Yes. Okay. No, that's helpful. I just wondered. And then just, Steve, just on kind of FX, can you remind us a little bit kind the dollar obviously continues to really strengthen a lot -- against a lot of the currencies around the world, what your exposure is on that front?

Yes. Against euro, we have sales of over $100 million in euros. And so clearly, at the top line, we see a drag with the euro having come down. Last year, we had an average close to $1.20 in terms of the euro-dollar exchange rate. Now we're down a little north of parity, quite frankly, bounces around, but down in that $1.06, $1.07 range at times.

So top line over, $100 million. At the bottom line level, we're long the euro, still probably the round numbers in that, let's say, close to $50 million range. And so as you look at that, the over 10% decrease we've seen this year in the euro. That will drive north of $5 million of impact to the bottom line.

Our next question will come from the line of John Franzreb with Sidoti & Company.

Just on the kind of higher inflationary costs. I'm curious about what your staffing level looks like between the 2 segments. Are you fully staffed? Or are you still having any troubles kind of bringing people on board?

I would say in Machine Clothing, we're fully staffed, John. In AEC, we're adding folks for both the LEAP production growth as quickly as we look to exit this year going into next year for the future. And then we're building the CH-53K production facility in Salt Lake City, where we're adding people as well. So we are staffing up folks there in very tight labor markets.

And when do you expect that to be done, Bill?

Well, the LEAP production, I think, will go into next year. The CH-53K is probably most of it this year.

Okay, Okay. And just on -- going back to the China question, maybe I missed it. How much of revenue was deferred out of the first quarter into the second? Or was there any because we should say you were probably operational?

So in China, we are fully operational in first quarter and nor did we see any material impact to our customers, either our operations or the demand in the first quarter. So for us, first quarter was relatively unimpacted by what's going on with COVID in China at the current time. Not to say that there could not be impact to Q2. There's clearly -- there's some news about it spreading to other cities and seeing the kind of stringent lockdown we saw in Shanghai most recently. But certainly, there was no impact to our Q1 results, no deferred revenue.

Our next question will come from the line of Gautam Khanna with Cowen.

I may have missed this, so pardon if I ask a repeated question. But the -- on the on 1B, LEAP-1B visibility that you guys have, how firm is that schedule? Just do -- I just wonder, how much it's changed around over the last 6 months? And how far of a forecast forward to get from Safran on this? And are you guys still kind of comfortable with the 2,000 deliveries of total LEAP product that they talked about for 2023? That's my first question.

Yes. So I think maybe the context of it is that our production isn't directly linked to what Boeing is doing or even engine shipments. We work it out with Safran. The production we're going to plan for the year, we set that in motion. And in January, we kick it off. And in some years, like when the pandemic, it got changed quite a bit. But this year, it's pretty steady. So we're working to a production plan that we've agreed to with Safran that might be a little different than what you're seeing with Boeing.

Okay. And then one of the things we hear from a number of industrial companies is inflation in resins and inflation -- and availability of resins have come down. Has that impacted any of the carbon fiber prepreg product that you guys are sourcing? Or is that all well sourced and you don't see the inflation in those impacts?

We are seeing inflation, as I mentioned, generally, we're seeing inflation cost of materials and resins and yarns and chemistries in both AEC and MC, both segments are managing on. It's a 24/7 job. So if you were to sit it in, in our business reviews with our supply chain teams, I mean you could write a book on it. It's amazing, the effort that goes into keeping production going.

In the Machine Clothing segment, we actually manufacture some of our own polymers. And because Machine Clothing products are all custom made, we buy a lot of different size and types of polymers. So we're ramping up our internal production to shore up the needs that we have there.

And then in the AEC side, we work with very large OEMs that are helping us, Safran, Sikorsky and whatnot, when we buy materials.

Yes. For most of the end item raw materials, the resins, carbon fiber, whether it's prepreg or just to grow carbon fiber that we use in AEC. There are long-term contracts entered with those suppliers by our customers, and we are buying under those agreements.

And so we're a little bit insulated from the impact of inflation in AEC. Not completely, certainly. A lot of the non-end item materials, whether it be gloves, release agents, vacuum bags, everything else that goes into making parts, we are procuring on the open market and are subject to inflation just like any company.

But on the -- a lot of the end item raw materials that are in the finished product, as I say, they're brought under contracts, our customers negotiate. And we, along with other suppliers to those customers, are buying under that master contract.

That's very helpful. And then just on 787, could you talk a little bit about what your expectations are for the year, where we are in that destock? And have you seen any uptick, yes, in production queues to you guys?

Yes. We don't have it in the commentary because we're just kind of running the line to keep it warm, and that's sort of the plan for this year. So we have very little in the plan.

Our revenue in the quarter on 787 was under $2 million, Gautam. So it's -- and we finished last year close to 10. So view that as essentially flat because it's a little noisy quarter-to-quarter. We are seeing no uptick right now. It is keep the line warm, operate at the lowest level possible.

Great. And one last one. I know we talked about Russia, Ukraine as risk. Is there any forthcoming opportunities that are created by it? Was, I don't know -- because any of your customers sourcing from Russia and Ukraine that may want to create their own infrastructure outside of the region in the Machine Clothing side or is it just a potential negative?

I don't see any opportunity at this point. It's probably slowed down Europe a little bit more. North America has been very strong. I was happy to see the strike in Finland ended, but I don't see any upside from the Russian Invasion.

Our next question will come from the line of Michael Ciarmoli with Truist Securities.

Just I don't know, Bill or Stephen, all the commentary around Machine Clothing risks seemingly significantly increasing. You've got the Russian headwind. Why not lower the guidance? It seems like your commentary is much more bias to the downside there.

Well, we certainly had a very strong first quarter, which puts us in a good position covers some of that risk and allows us to stay within the same guidance range. It's also, quite frankly, Mike, it's Q1. We're 1 quarter through the year. I -- there are many uncertainties in the balance of the year unless we're quite sure how some of them are going to unfold, it feels a little early to be thinking about changing guidance in either direction for either segment, unless something is very sure at this stage.

Okay. No, that's fair. I mean, you kind of talked about inflation still rising. Just calling out those risks, figured I'd ask it. What about -- has anything changed with your confidence level getting back to the $450 million in revenue in AEC by '23, again, just given what's going on in the world and things looking a bit more hazy here. Any kind of sentiment change there?

Sorry, look, no sentiment change. Is there more just global uncertainty than when we last spoke 2.5 months ago. Sure. There's clearly more global uncertainty with the invasion and the sanctions regime that's in place. But right now, we certainly -- we're not kicking ourselves regretting making that statement 2.5 months ago, Mike. So I think we still feel generally good about that. And we'll see how this year unfolds and obviously give you better guidance for 2023 when we get together in 9 months.

And I think taking the longer view, as I said in my commentary, we're optimistic because we're working on programs. We've talked about a number that CH-53K being the most recent win. Hypersonics, we talked about our collaboration with Spirit last year getting that off the ground. There are some other ones that we haven't talked about. So we're just optimistic longer term that we've got some growth in front of us.

Got it. Makes sense. And then just one more, if I can. Just on the AEC margins, obviously weaker in the quarter. You talked about the 20%. It sounded like some just under absorption on the Joint Strike Fighter and I guess, presumably, the write-down of some of the assets may have been in there.

But what's it going to take specifically, I guess, in terms of programs and volume to drive those margins? Is it continued LEAP, it certainly doesn't sound like 787 is going to be a contributor? Is it Joint Strike Fighter ramping? What's going to drive the EBITDA margin as we move through the year here?

Yes. If you look, Mike, if you look at the shortfall, let's say to that 20% level during the quarter, roughly half it close up a little over half of it was driven by this reserve. We had to take on raw material and our WIP related to that issue. That should not be a repeating issue. So that gets us back halfway there just from the absence of that.

The rest, as you say, it was really from F-35 being particularly low this quarter. Our certainly -- our plan is not dependent on enormous recovery and programs beyond what we're seeing today. So I do not think that getting back to a 20% EBITDA requires some -- and it's very easy for me to say, herculean effort. I'm sure for the guys in the operating segment every day as herculean effort these days. But it doesn't require enormous LEAPs. We think we're on a solid path to get to that is what I'm saying, Mike. It's not like falling off a log. But there's certainly a solid path to delivering that without some heroic assumptions around demand beyond the trends we're already seeing in the market.

(Operator Instructions) We'll go next to the line of Pete Skibitski with Alembic Global for a follow-up question.

Yes. Just one follow-up, guys. Since we have a defense budget now, and it looks like a little bit better outlook. I just want to get kind of your updated thoughts on, Bill, I think you touched on your missiles in general and hypersonic missiles in particular. I know that's been tested going on across the industry. But how soon should we think that beyond JASSM, I guess, how soon should we think the hypersonic missile category could be a part of the growth story for you?

We've got a ways to go still on that. I probably could give more color on that towards the end of the year into next year. It's a development program right now.

Look, without saying anything we can't say this publicly out there, various companies talking about testing plans over the next 24 months, let's say, 18 to 24 months. I would not expect material revenue for us before that time period. But hopefully, some programs will go into production where it certainly toward the middle of the decade, we could see some meaningful revenue.

Okay. Yes. Now I know it's a sensitive area. I just wanted to get a -- I was just curious, if visibility had improved since we had a better budget outlook.

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