HEXCEL CORP /DE/ Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Innovation and Growth Trajectory: Tom Gentile highlighted Hexcel's innovation across sites, with long-term growth driven by increased use of composite materials in aerospace for fuel efficiency, emissions reduction, etc. Global air travel and aircraft backlog are strong, but supply chain challenges (e.g., Boeing strike) disrupt production rates.
• Workforce and Production: Recruited and trained new labor to prepare for future production rate increases, though it creates near-term margin headwinds. Staffed to meet future production rates for Airbus and Boeing programs, even though rates are pushed out.
• Strategic Review and Divestiture: Explored strategic options for the Austria plant due to misalignment with strategic priorities (focus on industrial markets not aligning with Hexcel's strategy).
• Third Quarter Results: Sales of $457 million (+8% YOY), adjusted EPS $0.47 (+20% YOY). Commercial Aerospace grew 17%, Space & Defense was flat, Industrial declined. Recognized by Sikorsky and Airbus for operational excellence.

Segment Performance

• Commercial Aerospace: Sales were $296 million, increased 17% year-over-year in constant currency, representing approximately 65% of total third quarter sales. Key programs like Airbus A350, A320, and Boeing 787 saw double-digit growth; other commercial aerospace (including business jets) grew 9%.
• Space & Defense: Sales totaled $128 million, essentially flat in constant currency. While some key programs (e.g., Lockheed F-35, Sikorsky CH-53K, Black Hawk) grew, the space subsegment (launchers, satellites, rocket motors) was soft, and the V-22 program was a headwind. Represented approximately 28% of third quarter sales.
• Industrial: Sales were $32.4 million, decreased 17.3% year-over-year, representing 7% of third quarter sales. Softness was seen across submarkets including high-end performance automotive.

Guidance

• Withdrawal of Midterm Guidance: Withdrew midterm guidance issued in February due to supply chain turbulence and uncertainty in the aerospace supply chain outlook.
• 2025 Guidance: Will provide 2025 guidance in January. Confident in long-term outlook for commercial aircraft and Space & Defense markets.
• Share Repurchases and Capital Expenditures: Repurchased ~$50 million of stock in Q3, total ~$252.2 million YTD. Expect capital expenditures below $100 million annually, target dividend payout ratio ~20% of net income.

Risks

• Supply Chain Challenges: Ongoing issues like the Boeing strike disrupt production rate increases, impacting near-term margins.
• Market Volatility: Space & Defense market is volatile, especially in space subsegments (launchers, satellites, rocket motors).
• Industrial Softness: Industrial markets are soft, leading to exploration of divestiture for the Austria plant, which represents a portion of industrial revenue.

Question and Answer

Q: Taking a more conservative view on '26 guidance. In terms of end market growth implied in '24 guidance, could you give details?

A: Tom Gentile discussed '24 growth in programs like A350, 787, and A320, noted defense market strength, and mentioned industrial divestiture impact (Austria plant represents ~a third of industrial revenue as a headwind for 2025).

Q: Are there other parts of the portfolio you're still reviewing as areas to shed?

A: Tom Gentile stated only the Austria plant is being reviewed for divestiture as it focuses on industrial markets not aligned with Hexcel's strategic priorities; the rest of the portfolio is homogenous and not logical to divest.

Q: Are you at staffing levels to support the next move up to 8 a months on the A350?

A: Tom Gentile said they are staffed to meet future production rates for Airbus and Boeing programs, are overstaffed relative to current rates, but prepared for future increases as production rates will rise next year.