Hexcel Corporation (NYSE:HXL) Q3 2023 Earnings Call Transcript

Hexcel Corporation (NYSE:HXL) Q3 2023 Earnings Call Transcript October 24, 2023

Operator: Good morning, ladies and gentlemen. Welcome to the Hexcel Third Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode, and please be advised that this call is being recorded. After the speaker’s prepared remarks, there will be a question-and-answer session. [Operator Instructions]. Now this time I would like to turn the things over to Mr. Patrick Winterlich, Chief Financial Officer. Please go ahead, sir.

Patrick Winterlich: Thank you, Paul. Good morning, everyone. Welcome to Hexcel Corporation’s third quarter 2023 earnings conference call. Before beginning, let me cover the formalities. I want to remind everyone about the safe harbor provisions related to any forward-looking statements we may make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today. Such factors are detailed in the company’s SEC filings and last night’s news release.

A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request. With me today are Nick Stanage, our Chairman, CEO and President; and Kurt Goddard, our Vice President of Investor Relations. The purpose of the call is to review our third quarter 2023 results detailed in our news release issued yesterday. Now let me turn the call over to Nik.

Nick Stanage: Thanks, Patrick. Good morning, everyone, and thank you for joining us today as we share our third quarter 2023 results. Continued strong demand in our Commercial Aerospace and Space and Defense markets resulted in another consecutive quarter of double-digit sales growth for Hexcel. Hexcel continues to benefit from the post-pandemic travel recovery and from the growing pull for newer, more fuel-efficient lightweight aircraft to meet that demand and to replace aging fleets. Over the past several months, numerous airlines around the world have placed a significant number of orders for both narrowbody and widebody aircraft, resulting in total backlogs that are at record levels. Hexcel is on a long-term growth trajectory, and we are working hard to ensure that we are ready to satisfy that demand.

This involves bringing back operational capacity, which has been either turned off or running at reduced rates since the pandemic. We have been recruiting the talent we need to meet the strong demand ahead of us, and we continue to focus on training and expanding shop floor experience to prepare for the higher production rates. We’re excited about the growth opportunities ahead, and we expect that growth to drive significant cash generation over the next several years. As a reminder, we continue to expect capital expenditures to remain below $100 million for the next few years as we grow into, and reutilize existing plant and equipment. Third quarter sales grew strongly year-over-year, and they also reflect the normal third quarter seasonality we typically experience from the European summer vacation period.

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Q&A Session

In addition, there are some ongoing supply chain challenges in the commercial aerospace market as the OEMs navigate their way through the strong ramp-up in build rates. Given our higher number of production assets in service today, along with the preparation to support strong growth ahead, the expected lower third quarter sales resulted in a reduction in our margins. The supply chains for our raw materials are greatly improved compared to last year, though shipping lead times are still not quite back to the levels seen pre-pandemic. Pressures also continue around certain inflationary impacts, most notably energy costs in Europe. Our response to all these challenges is our ongoing commitment to operational excellence, which continues to drive efficiencies and increase productivity throughout our operations.

Positioning in advance for the build rate growth ahead is critical, both for Hexcel and our customers to avoid disruptions and to replenish the supply chain. The commercial aerospace industry is on a fast-paced journey to ramp the build rates of modern lightweight aircraft. Over the next three years, build rates for narrowbody aircraft are expected to increase by nearly 50% and build rates for widebody aircraft are expected to almost double. This is both a challenge and a great opportunity, and Hexcel is determined to be ready to ensure our products are produced efficiently and delivered on time to our customers. The forecasted cash generation over this period will provide significant capital deployment opportunities in the coming years, while we continue to maintain strong discipline around our balance sheet structure.

This is truly a great time to be in the business of manufacturing lightweight composite materials. Now let me highlight some of the third quarter results, and Patrick will then provide more detail on the numbers. Commercial Aerospace sales of almost $252 million increased more than 19% in constant currency compared to the third quarter of 2022. The strongest growth came from the Airbus A350 and Boeing 787 widebody programs. Narrowbody sales were relatively flat year-over-year, reflecting some temporary disruptions in the overall aerospace supply chain. While each quarter, we highlight the strongest programs from Airbus and Boeing, remember, we have great positions in the business jet segment. Other Commercial Aerospace increased more than 20% in the third quarter on continued strong business jet demand.

Let me highlight a couple of additional points. First, the combined Airbus, Boeing backlog currently stands at a record 13,775 aircraft. Airlines are securing their place in line that is 8 to 10 years long as they plan to replenish their fleets with new efficient, lightweight aircraft. Virtually every OEM out there is ramping as fast as the supply chain will allow. Commercial Aerospace is booming and demand remains strong, perhaps stronger than ever. Lightweight materials for fuel-efficient aircraft are being pulled harder than I have seen in my 14 years with Hexcel, and the reason is clear, making flying platforms light and strong is the number one enabler for both performance and sustainability, and Hexcel is at the leading edge of developing and producing these technologies.

Secondly, we recognize that while the next narrowbody program might not have a scheduled launch state, material selections for those aircraft are several years in advance of launch, and that time is now. We have tremendous efforts underway as we pursue those opportunities with our customers. Turning to Space and Defense. Sales of almost $129 million increased 17% in constant currency, with broad-based growth across a number of military platforms globally, including classified programs. Defense spending is on an upward trajectory in many countries as governments raise budgets in response to the growing instability and increased number of conflicts occurring around the world today. In August, it was announced that the U.S. Navy awarded Sikorsky a $2.7 billion contract to build and deliver 35 additional CH-53K helicopters.

And that’s good news, both for our customers and for us. As you know, the CH-53K is becoming one of our top defense programs. Also in August, we celebrated the landing of the Chandrayaan-3 on the moon. It was the first lunar probe under the program launched by the Indian Space Research Organization, and our Hexcel lightweight advanced composites were on board. Now turning to Industrial. Sales of about $39 million decreased 21% in constant currency, attributed primarily to lower wind energy sales. Globally, the wind energy remains — wind energy industry remains challenged. Our legacy wind business is now focused in Austria, which continues to deliver to our largest wind customer, Vestas. Other parts of our Industrial business continue to grow, most notably automotive, which has increased year-over-year and now is the largest sub-segment for us in Industrial.

Our presence in high-end sports cars and SUVs as well as carbon fiber wheels is growing, pulling through high value-added composites materials. Other areas such as marine, electric vehicles and hydrogen pressure vessels, where there is a need for value-adding advanced composite solutions, are also being explored. Year-to-date, total Hexcel sales of more than $1.3 billion are up more than 15% year-over-year in constant currency, and EPS is up more than 50% to $1.38 at the end of September 2023, from $0.88 this time last year, all of which reflects positive momentum and underpins our confidence in continued strong demand and growth. As evidence of that confidence, we completed a stock buyback of $30 million during the third quarter. Lastly, our sales, EPS and free cash flow guidance remains unchanged for 2023.

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

Patrick Winterlich: Thank you, Nick. As a reminder, the majority of our sales are denominated in dollars. However, our cost base is a mix of dollars, euros and British pounds as we have a significant presence in Europe, including both manufacturing and R&T. As a result, when the dollar strengthens against the euro and the pound, our sales translate lower, while our costs also translate lower, leading to a net benefit to our margins. Conversely, a weak dollar is a headwind to our financial results. We hedge this currency exposure over a 10-quarter horizon to protect our operating income. As a result, currency changes are layered into financial results over time. As a reminder, the year-over-year sales comparisons I will provide are in constant currency, which thereby removes the foreign exchange impact to sales.

Our Q3 sales were impacted by the expected seasonality we previously highlighted as well as some general challenges in the commercial aerospace market supply chain. However, as Nick described, the outlook for Commercial Aerospace remains extremely robust, providing us the confidence to position our infrastructure and workforce for the anticipated strong growth ahead. Turning to our three markets. Commercial Aerospace represented approximately 60% of total third quarter sales. Third quarter Commercial Aerospace sales of $251.9 million increased 19.2% compared to the third quarter of 2022, led by growth in the Airbus A350 and Boeing 787 programs. Total narrowbody sales, including the Airbus A320neo, Airbus A220 and Boeing MAX were unchanged year-over-year.

The other commercial aerospace category grew 20% with business debts displaying the most significant growth. Space and Defense, represented approximately 31% of third quarter sales and totaled $128.8 million, increasing 17.1% from the same period in 2022. Sales strength came from a variety of different programs, including a number of international fixed-wing aircraft programs and domestically from growth in classified programs. Industrial comprised approximately 9% of third quarter 2023 sales. Industrial sales totaled $38.8 million, decreasing 21.3% comparing to the third quarter of 2022. The high-end automotive market, which is where we focus, grew strongly year-over-year, while wind continued to weaken. The global wind industry is currently facing a number of challenges, and we are experiencing lower demand as a result.

As a reminder, all of our wind energy production and expertise is now concentrated in Austria following our restructuring in North America and China. On a consolidated basis, gross margin for the third quarter was 21.8% compared to 22.4% last year. With the anticipated strong growth ahead, the company has infrastructure and headcount in place to meet the forecasted high levels of demand and ensure our customers are fully supported as aircraft build rates continue to ramp. This growth related overhead, however, is a headwind in the short term, impacting margins, particularly in periods with lower run rate sales such as we saw in the third quarter. As a percentage of sales, selling, general and administrative expenses and R&T expenses, were 11.6% in the third quarter compared to 11.1% in the third quarter of 2022.