Q3 2020 Hexcel Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Heck's out Q3 Twentytwenty earnings call.
At this time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero.
I would now like to handle the conference over to your Speaker today, Patrick Lynch alleged Chief Financial Officer. Please go ahead.
Thank you.
Good morning, everyone welcome to XL Corporation's third 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.
This call May constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 99 spot.
They involve estimates assumptions judgments and uncertainties caused by a variety of factors.
Cause future actual results or outcomes to differ materially from our forward looking statements today.
Such factors.
Detailed in the company's FCC 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 expressed permission your participation on this call constitutes your consent to that request.
With me today are Nick Stanage, our chairman CEO, and president and could have called out our vice President of Investor Relations. The purpose of the call is to review our third quarter 2020 result details in our news release issued yesterday.
Now, let me turn the call EBITDA Nick.
[laughter].
Thanks, Patrick.
Good morning, everyone and thank you for joining us as we share our Q1 results.
The impact of the coal good meat cheese and on our industry and our company, especially our commercial aerospace business becomes more of it in every quarter.
The results we share in our news release last night.
Going to claim reserve.
Resulting from global corn change.
Downs and social distancing that will continue until the world received its confidence in air travel.
In the meantime, we're adjusting and making business decisions to position ourselves for growth on the other side of the time.
We are encouraged that we have seen a slow yeah relatively.
Relatively steady increase in global passenger travel since its trough in April.
We have a long way to go before we returned to pre pandemic levels and the world now must navigate challenging winter season.
We expect that inventory de stocking will continue to impact production levels throughout the entire supply chain and consequently, we are preparing our business for channel adjustments. It could take another two to three quarters fully work through the system.
Our fundamentals remain unchanged we are.
We have leading positions on the world's largest aerospace programs with our advanced composite technology.
Our office portfolio in the industry.
Industry.
We continue to generate cash flow and further strengthen our balance sheet.
The great job our team has done to strengthen our foundation over the past decade puts us in a strong position to weather the storm.
Although we faced some challenging times, we know how to plan.
Execute and to work through them.
As we mentioned our objectives during our second quarter earnings process, we have reduced labor costs.
Roughly 30% and have eliminated more than 2000 positions.
We have various assets to keep overhaul capacity aligned with demand and we are focused on reducing inventory and maintaining a lean streamlined internal supply chain.
We have cut overhead costs by reducing or eliminating discretionary spending.
We're seeing benefits and more.
Like so many others Archie made sacrifices as we took action to stay in lockstep with our customers.
Our team has accepted pay cuts furloughs and shorter work week.
The staffing was trim others added to their work flow.
All this was done with the knowledge that this downturn is not the time to simply wait, but rather an opportunity to keep moving forward to position our company to emerge even stronger when the pandemic subsides.
We're taking advantage of this time to refocus restructure and draw on our resiliency to ensure that we continue to deliver strong shareholder value.
Global demand for lightweight stronger and more durable materials and all of our markets will grow and our technology and broad portfolio remains unrivaled in our industry.
In addition, we have the most talented.
Diversified and experience it seems composite material science work force in the World.
Those things have not and will not change.
Now I'll share with you some of the numbers we reported last night.
Sales in our third quarter $287 million or about 50% down year over year.
Adjusted diluted EPS was negative 29 cents compared to 90 cents in the third quarter of 2019.
Despite negative adjusted operating income, we generated $76 million or free cash flow during the quarter, which brings our year to date free cash flow to $109 million.
As a result of this ongoing cash generation our debt levels are now lower than at the beginning of the year.
Cash on hand, 68 million with an undrawn revolver balance of 698 million.
As part of our normal business cycle, plus further tightening as a result of the pen done.
Capital expenditures this year sharply lower than the past few years, when we were investing in additional capacity for program ramp ups.
As we grow and return to pre cope at market levels over the next few years, our installed capacity will provide the foundation for a long period of strong leverage and sustained cash generation.
Now turning to our three primary markets.
Commercial aerospace sales continued to decline last quarter as global passenger air traffic remains at about half the 2019 levels.
Build rate reductions driven by the pandemic combined with significant inventory de stocking led to the reduced sales levels.
All major programs were down substantially with the largest sales impact related to the Athree hundred 50.
Additional build rate reductions publicly announced at the end of July by Airbus and Boeing are further extending the supply chain de stocking.
However, we are encouraged as a southern three southern Max moves closer to recertification in the Us Europe and Canada.
As a reminder, while the Athree hundred 50, as heck cells largest content program the narrow bodies, such as the 320 Neo and seven pre seven Max jury substantial hexcel content in the engines and secondary structures and they are typically produce that much higher build rates.
So will benefit significantly when narrow body demand increases.
For example, the Airbus backlog for their Athree hundred Twentyneo family is basically unchanged year to date, despite the pandemic and nine months of production.
At current production rates the Athree 20 backlog represents 13 years of production.
Straining the medium to long term demand for these aircraft craft remains robust.
Regional business aircraft sales fell by about 50% during the third quarter compared to 2019.
This is an area we are watching closely as increasing lifetime for the smaller class business jet indicates an encouraging trend.
In contrast, with commercial aerospace our space and defense sales remained steady year over year.
We experienced growth in U.S. defense programs. Although this was more than offset by lower demand from a number of European space and defense platforms.
Overall, we remain confident in the continued strength of space and defense affects all his position on diverse programs, including military aircraft slight vehicles launchers helicopters, both civil and military including growth programs, such as the CH 50, Threek Kay and.
Airbus H. Onesixty.
We see a lot of positive momentum and tremendous opportunities ahead.
I want to point out our technologies acquisition continues to perform exceptionally well.
Space and defense now represents about 27% of our year to date sales compared to 2% to 19% for all of 2019.
Industrial sales continued to be challenged by the impact of the pandemic and changes in the wind energy systems.
Specifically the sales decline in our wind energy segment reflects competitive pressures that have led to a shift in demand from our advanced slas fiber pre preg to lower cost products as it were.
As a result of this demand change in early November we will close our wind energy preprint production facility in Windsor, Colorado.
I want to be clear in stating that our relationship with our largest wind energy customer vestas remain strong.
While we anticipate the continued cost pressures for future wind turbine blades, we expect to maintain our market share and legacy blades and replacements for many years to come.
In addition, we are working today to innovate technologies and solutions to help our wind energy customers enhance the performance of their wind turbines further and continue to drive the economic case for wind energy as a source of renewable power.
In addition, we have been working successfully for several years to grow our automotive marine recreation and other industrial businesses and we.
We continue to see good growth opportunities in several niche industrial markets.
Our industrial team is excited by the opportunities and interest we've received on our materials are engineered products and our solutions around the globe.
This was another challenging quarter for our business and we expect further disruptions before this pandemic downs still hexcel remains a global technology leader with strong business execution and a great investment.
Market challenges have forced us to make tough decisions and we have significantly reduced headcount and continue to restructure the business and.
Even though our team has done a phenomenal job although.
Although we are stretching our resources every day, we have never taken our focus away from innovating, new technology and solutions position us for new opportunities to grow the business drive operational excellence.
Develop even stronger relationships with our customers.
Speaking of customers, let me take a moment to say that even though this has been one of the most difficult times, we chase we can't ignore some of more positive outcomes from this crisis.
One of them comes from the need to think and act differently as we deepen our customer relationships. During these months social distancing unlimited travel.
For example, we are now spending quality time interacting with customers.
Actual technology meetings.
We're getting more of our talented team in touch with our customers than ever before.
Without a doubt the way we do business is changing and we are embracing it.
Now I'll turn the call over to Patrick to provide more details on the numbers.
Thank you Nick.
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 strengthened against the euro and the pound our sales translate lower but our costs also translate level, leading to a net benefits while margins accordingly, a weaker dollar as we are currently facing is a headwind to our financial results, we hedge the currency exposure over 10 quarter horizon.
And protect our operating income.
Quarterly sales totaled $286.9 million the reduction in sales year over year is due to the significant and rapid production rate decreases by our customers in response to the pandemic compounded by aggressive supply chain de stocking across our product line.
And you will recognize that as build rates at all in any given level of inventory in the supply chain will now represent a greater number of months of demand.
But the fact that X. I lost experience this level of quarterly sales a decade ago over the past decade Aerospace company adoption, just brine marketplace. An XL has won a significant share of the market opportunities.
During this time, we have expanded our intellectual property broadened and deepened our customer relationship grown our global manufacturing presence, while simultaneously enhancing our operational excellence and significantly strengthening our balance sheet and liquidity.
I've said its ties to illustrate the magnitude of the current de stocking impact and as a reminder, the de stocking will end and gradual restocking will begin when production rates rise again.
Turning to our free market commercial aerospace represented approximately 45% core styles.
Most of the aerospace sales of $128.8 million decreased 66% compared to the third quarter of 2019.
This large percentage decrease illustrate the additional impact of the de stocking for reference to key platforms. The Airbus Athree hundred 20, Neo and the Athree hundred 50, I production rate decreases of 33 cents, 50% respectively.
Additionally, the Boeing 77 mat sales, what's extends to the lower year over year as production continued at a very low rate and there remains a high amount of inventory in the supply chain as.
As Nick outlined we expect commercial aerospace supply chain adjustments to continue into the first half of Twentytwenty one.
Space and defense represented 38% third quarter sales and totaled $108.8 million a decrease of half a percent compared to the same period in 2019.
You asked space and defense sales increased year over year, while the European space and defense sales decreased we remain bullish for the outlook of our space and defense business globally.
Industrial comprised 17% of third quarter 2020 sales industrial sales totaled $49.3 million decreasing 38%.
Wind energy weakness continued from the second quarter Twentytwenty as our major wind energy customers shifted the U.S. played operation to an outsourced model rather than using x., so fast fiber composite material to manufacture the place in house for the Americas region.
As a result, we are placing our wind the Colorado facility in the fourth quarter, Twentytwenty, which was dedicated to wind energy.
Our plan to move some of the equipment to another hex help to sit at the in the U.S. and then sell the wins that site.
Our wind energy facilities in Austria in China continue to operate serving the European and Asian markets respectively.
Automated recreation and other industrial markets remained weak during the third quarter, reflecting the continued impact of dependent.
On a consolidated basis gross margin for the third quarter was 4.7% compared to 27.6% in the third quarter 2019.
As we discussed at our last earnings call, we temporarily idling select carbon fiber capacity during the third quarter and this has continued now into the fourth quarter to align supply with demand and avoid over production.
Mix, particularly lower sales at all carbon fiber also remain an earnings headwind.
We are continuing process improvements and cost realignment actions across the business and we remain exile and vigilant as we communicate frequently with our customers NFS near term demand indicators in relations to realign realignment actions that we have taken.
Selling general and administrative expenses decreased 28.3% in constant currency on $9.2 million year over year as a result of head count reductions and tight controls on discretionary spending.
Research and technology expenses decreased 25.8% in constant currency as we selectively reduce costs, while continuing to balance on needs innovation as a material science company operating in industry undergoing long term secular growth.
The other expense category includes the restructuring costs to close our wins, the Colorado facility as well as severance costs primarily in Europe.
We will be incurring additional seven call any upcoming period, including further labor reduction actions already initiated in Europe.
As Nick mentioned, we have unfortunately had to eliminate more than 2000 position back of the roughly 7000 positions. We had at the beginning of the year. This reduction includes direct and in direct employees.
Additional labor actions as well as furloughs in short time working have been initiated that will continue through year end and into 2021.
As you would expect we are we are aligning rule, all direct raw material and direct labor costs in line with demand changes across our company in.
In addition, as called out in yesterday's earnings release, we have put in place actions to realize more than a $150 million annualized overhead run rate savings, including indirect labor. Once we are through the normal lag for these cost reductions to take full effect.
Adjusted operating loss in the third quarter takes with $21.8 billion at the lowest sales levels have led to significant under absorption of fixed overhead.
The year over year impact of exchange rates was negative by approximately 40 basis points.
Now turning to our two segments. The composite materials segment represented 75% of total sales and generated a negative 9% adjusted operating margin compared to 21.2% margin in the prior year period.
The engineered products segment, which is comprised of our structures and engineering businesses represented 25% total sales and generated a negative 3.8% operating margin compared to 16.3% in the third quarter of 2019.
As we progress through the pandemic, we're continuing to evaluate every aspects of our business, including the structure of our various legal entities.
Following an internal reorganization, we recognized a discrete tax benefit of $43.9 million during the third quarter Twentytwenty.
We're not providing guidance on an effective tax rate going forward at this time due to the complexity of our traffic situation as a result of the pandemic and the relative mix shit in enclave in comparison.
Net cash provided by operating activities was $83.4 million.
Third quarter of 2020 and $157 million year to date.
Working capital was a source of cash of $80.7 million in the quarter we.
We expect working capital to be a source of cash during the fourth quarter 2020.
Capital expenditures on an accrual basis was $6 million in the third quarter compared to $53.3 million for the prior year period and 2019.
We continue to tightly manage capital expenditures.
Free cash flow for the third quarter, Twentytwenty was $76 million compared to $56.7 million for the comparable prior year period, we remain focused on generating and preserving cash.
Expect to generate additional free cash flow in the fourth quarter of 2020, as we continue to manage inventory levels and maintain strong receivable collections.
We increased our liquidity by $77 million as of September 32020, compared to June 32020, further strengthening our balance sheet.
Our total liquidity at the end of the third quarter was $766 million, consisting of $68 million of cash and an undrawn revolver balance of $698 million.
We have no near term debt maturities, our revolver matures in 20 to 24 and onto senior notes mature in 2025 and 2027, respectively.
When markets are predictable, we operate with any a minimal cash balance is up in that business generates cash based.
Based on our confidence to continue to generate free cash flow in the fourth quarter of 2020, we completed the repayment of the proactive 250 million revolver borrowing that was drawn in March in the early days and dynamic.
Our leverage as of September 32020 is measured on a gross debt basis and was 3.25 times compared to 2.8 times at June 32020 the.
The change was Joe was due to lower 12 month trailing earnings as net debt decreased $77 million.
But 30 twins 20 compared to June 30 turns trends we.
We remain within covenants conditions.
We recently worked with our bank syndication to accommodate the temporary impact of channel de stocking by amending the revolver leverage covenants for a period of four quarters and temporary changing the covenant to a net debt basis for up to $200 million of cash.
This amendment illustrates off solid bank syndication relationship and preserve access to liquidity via the revolver.
Our share purchase program was suspended during the third quarter 2020, and he is now also restricted by the recent revolver Amendment.
Third we will continue to evaluate capital allocation priorities.
Our focus remains on realigning the business generating cash while remaining agile for future growth and channel restocking when production rate increase.
With that let me call turn the call back to Nick.
Thanks, Patrick.
Yes for the responsiveness and the way we are key has adapted to this unprecedented time has been nothing short of outstanding.
The commitment the energy the passion and the continued focus on our customers has never been stronger.
Our team is controlling what they know they can control and taking action to make sure we're ready for growth as it comes back.
The future of aerospace is about Lightweighting.
Improved aerodynamics and sustainability and I can tell you there is.
There is nothing that addresses those needs better than axles composite solutions.
We continue to invest in innovative research and technology.
In August we launched a new product in our additive manufacturing product line that integrates advanced electromagnetic performance from our technologies acquisition into thermal plastic threed printed parts for commercial aerospace and defense.
We're always thinking about how we can help our customers succeed and that's evident, especially in this new product because it eliminates secondary processing steps, which otherwise would add costs and consume more manufacturing time and assets.
We're not taking our foot off the gas staying focused on winning that next new program because our sites are on long term growth long term relationships and long term sustainable value generation for shareholders.
We're also aggressively pushing many near term opportunities, especially in areas of space defense and industrial where we continue to see strong pull for our advanced materials.
We are a leader in advanced composite solutions has not changed and it never will.
Going forward, our focus is clear to generate and tightly manage cash and further strengthen our strong balance sheet, while at the same time positioning ourselves for the demand recovery ahead.
We're ensuring that we're aligned with customer demand and positioning ourselves to be ready to deliver strong incremental margins.
We know that we have more tough times ahead.
Challenge our team to work safely and to stay aligned with customers evolving technology needs and production demands.
No that I can rely on them to deliver because the commitment to excellence is bred into our one heck cell culture.
Casey will turn it over to you now take questions.
At this time I would like to remind everyone in order to ask a question. Please press star one on your telephone keypad, we ask that you limit yourself to one question only again. Please press star one to ask a question. Our first question comes from the line of David Strauss with Barclays. Please go ahead. Your line is.
Ben.
Thanks, Good morning.
Good morning, David Good morning.
[music].
Nick one to one to try and touch on this.
On the de stocking on you just talk touch on.
The visibility you think you have today versus three months ago in your car.
Confidence that this kind of takes care of itself over the course of next two three quarters and then.
It would appear that you're seeing a much bigger de stocking impact relative to others in the supply chain and maybe maybe touch on what you think is different or unique value guidance compared to some others.
Others, and what we're seeing now thanks.
Yeah. Thanks, David So a couple of points first.
First just as a reminder to everyone remember we shift our advanced materials in advance of the build by as much as six months, our pre preg, especially after be frozen. So if you think about our 20 million 18 commercial aerospace revenue in the 1.6 billion.
Dollar range and think of six months of inventory, even ski lift back to say four and a half months $600 million of inventory in the supply chain that weve ship that is in the tier ones twos and threes, making parts along various aspects of the build cycle.
If you if you look at that and think about reducing that.
Our third that kind of calibrate you on the magnitude of the supply chain adjustment require no.
Now.
What gives us confidence and what we've seen so clearly from Q2 to Q3.
We continue to see and learn more about the impacts of the pandemic we.
We've seen and continue to learn more about travel patterns and the slow recovery for domestic and even slower recovery for international travel having.
Having said that we.
New Q3 was going to be a big just stocking quarter and we expect Q4 will be another sizeable.
De stocking order and it will still linger into.
2021 in the first couple of quarters, and let me remind you that rate.
To creep down so.
Especially in the wide body, where we have high content. So I think we have as good a line of sight as you say.
In the middle of the pandemic, knowing what we know today.
More and more confident as were looking to.
To right size, our business and our supply chain and our internal inventory to those levels. So.
So David I hope that captured your.
Just to your question.
Yeah. Thank you I'll get back in the queue.
Our next question comes from the line of Robert Spingarn with Credit Suisse. Please go ahead. Your line is open.
Hi, good morning, Thank you.
Good morning, Nick appreciating how challenging this has been and I thought your answer to David just now gave US a fair amount of color X. I want to ask a clarification there and then a margin question for Patrick but does.
What does this mean that.
Based on all the puts and takes that 120 $829 million in commercial Aero would bottom around Q2 next year is that the idea with that and then Patrick on the Decrementals in the quarter, which were about 46% decremental margin.
Historically or the last couple of years before the pandemic you peaked around 30% might we expect those decrementals to drop a bit going forward.
Sure.
So.
Respect to the commercial revenue going forward, we certainly see Q4 being.
Being very challenged with another.
Material amount of Destocking happening, we expect de stocking to trail down and carry over into next year, but our belief is it won't be slipped magnitude that it is today, so I really don't want to get into.
Predicting the bottom I'm hopeful that we are at or near it but I really don't want to get into.
Guidance on what our commercial aerospace sales will be in the first quarter second quarter next year.
Patrick on the margin.
Yes, hi, Rob so in relation to the margins, yes, 46% in the quarter as you note.
We always seem to lose a lot of variable margin as our top line comes down.
We have a pretty strong variable margin percentage and so as revenue comes out we lose a lot of that sort of coverage of our overhead base and that really.
That drives the strong incrementals I mean, if I can just sort of counter that for a second on the way back up is going to drive very strong incrementals.
As we leverage sort of overhead base, especially now that we've taken out the additional costs in terms of the 46% I would see that as a kind of a low point, we should start to see that cell phone or improve whichever way you want to look at it as we go forward partly because.
We've kind of realizing the cost we've taking out those costs, we've talked about on an annualized basis more of thats going to come through and how you typically is just even small increases in our pulp line I can to help both say offset some of that detrimental impact, but uh huh.
How do you see that kind of gives you a shape I would see that as a kind of a low points in Sacramento.
It does thank you.
Our next question comes from the line of Ken Herbert with Canaccord. Please go ahead. Your line is open.
Ken Herbert with Canaccord. Please go ahead your line is open.
Yes, hi, good morning, Dick and Patrick.
Hey, good morning, Ken what did it.
I wanted to follow up Patrick on the working capital I mean, you did a good job in the quarter clearly you called out opportunities as well in the fourth quarter to two sounds like take inventory and working capital should be a source of cash but your inventory levels are still relatively high how do we think about working capital.
Here, maybe some more specifics into the fourth quarter, but then as a as a source of cash into the first half of 21, a balanced against when you might need to start to just sort of restock or were investing some material again.
Yes, thanks, Ken So working capital in the third quarter was just under 81 million as a source of cash.
That was clearly a strong release of cash from working capital than you can only take you down so much relative to the the overall business demands of reduction.
I do see further opportunities in inventory.
I'm not going to call out specific numbers.
Receivables are probably going to start leveling off as our payables.
But I do see a working capital benefit in the fourth quarter 2020, as we start to stabilize and level as well so with our working capital and so there comes a point, where we're going to kind of level off in terms of releasing anymore from and I think that's what you were alluding to we should see some.
What I call the stability in our working capital level as we go into 2021.
Then as we kind of move into the second half of the year, we stopped the little bit of growth.
Working capital will be in a very disciplined and controlled way.
Potentially start to grow again as you would expect.
Great. Thank you.
Our next question comes from the line of Richard Safran with Seaport Global. Please go ahead. Your line is open.
Nick Patrick Curt Good morning, how are you good morning.
Good.
So I thought one of the more interesting comments in your release was a statement about expecting I think you said a significant upturn in 2022, I thought you might tell us where the confidence comes to make that.
To make that statement. So you might elaborate on that a bit more maybe you could touch on you know for example, which platform to see some major drivers in the recovery.
Yes.
Okay, Rich I'll take a shot at that so.
In general, it's not one thing but.
Our view piece.
People want to travel.
People want to get out go places visit.
And as the orders open off is.
Medical advances continue as vaccines are released.
People are going to get back out travel I believe there's a huge pent up demand and even.
Even on the business side businesses need to get our visit customers visit sites to business.
I believe that's going to recover again as the genomic in the understanding and the social distancing and the new processes and procedures you have confidence that that's the big thing.
Second if I look at.
What we're going through today the de stocking.
Destocking is a onetime event now granted it's layered on by program and every production.
Ex mortgage shocking, but it is one time and once it's done if you are right sized.
There is a tremendous upside opportunity for once the growth comes back because remember that supply chain will be very lean and our customers and the complex.
Complex supply chain will be pulling and replenishing that broad supply chain.
You look at.
Body demand, we mentioned it in the script that narrow body Athree 20 backlog.
Order intake continued so that the backlog is where it was even after nine months of build rate.
Sure.
Hopeful and I believe we're seeing more and more confidence that the Max will return in even though there's a large inventory in that supply chain.
Still expect going to ramp up and get their supply chains secured and gradually increase over time so.
So strong.
Narrow body backlog strong.
Max.
Polls that will happen out of inventory first and then bill rates will increase if you look at what we've done the actions we've taken on the restructuring on the cost reductions on the overhead reductions, it's just going to make us even more efficient and able to leverage that growth and incremental margins.
So.
Based on what I'm seeing the pole, we're seeing from our customers. Even during this challenging time for advanced composite materials to provide new solutions to provide new ways to drive down cost down efficiency up it makes me.
Confident gives me even more confidence and lastly, recognizing white body recovery, probably will be slower than certainly the narrow bodies.
And international travel will probably lag domestic travel growth, having said that there's a significant amount of parked aircraft that will be taken out of service and as that travel comes back the replacement aircraft are going to be highly composite intensive newer airplanes.
Where we have strong positions. So it's just a question of when that happens towards the end of 21 early 22, I think we're in a great position to capitalize on that market.
Thank you very much appreciate it.
Thanks Richard.
Your next question comes from the line of Robert Stallard with vertical. Please go ahead. Your line is open.
Thanks, so much good morning.
Hi, good morning, Robert.
No because what if you could elaborate a little bit more on what's been going on in the wind sector I'm, sorry, I don't know how to go about it actually and how much further pressure that could be on the market share situation here.
[noise] so.
And again as we have stated before the wind energy market is certainly very cost competitive in the cost pressures, they're not new it's the way that business has been since I've joined EXL.
If you look at.
Our key customer and others their ability to compete by being vertically integrated.
There are no longer able to do that so they're outsourcing various components to improve their business model and that's one of the things that's happened in the US when markets are migrating to an outsourced.
Wind turbine blade for various models and that wind turbine blade may outsource providers do not use a pre preg solution they use a lower costs.
Fusion method.
And.
Lastly, we looked at our Windsor save we looked at the cost pressures and the margin.
And it just makes no sense for us to continue in that area given our other opportunities with with acceptable margins from our perspective.
So could this issue also spread to Europe, and Asia as well.
So in Europe in Austria, we have a broader mix of products.
And the more significant portion our legacy blades.
With a high mix so the likelihood of those migrating is much lower although there's always cost pressures there and we're working with our customer to continue to find cost reduction initiatives that we can share with that intention our wind plant in China, we continue to operate.
Very well today, we continue to work with Vestas. It's no different there are cost pressures there and we're closely watching that to make sure. We can align with bestest direction and needs are going forward. So it's a watch item for us.
That's very helpful. Thank you.
Thank you Robert.
Your next question comes from the line of Michael ceremony from Trust Securities. Your line is open.
Hey, good morning, guys. Thanks for taking the question.
Good morning, Mike just wondering.
Morning.
Just in light of the.
Destocking that's expected to continue here, how should we think.
Again, I guess taken into context, the cost out you guys have taken out of the business how should we be thinking about the double digit margin I mean is that still.
A realistic assumption for 2021, assuming we'll have some de stocking pressure should we think about maybe exiting the back half the 21 with double digit margins, maybe just some more color there.
Yes, I mean, it's a good question and our margins are going to be pressured for some time I think is a little bit I think we're not guiding to 2021, but with the cost takeout with the realignment with doing.
Were in the process of putting together, our sort of detailed plan and full cost between 21 literally right now.
We are still targeting sort of.
So to to push it makes its probably not going to happen is I think you're alluding to in the earlier part of next year.
But as we move into the second part and we continue to push we will be driving towards double digits and certainly as we go into 2022 and beyond well be driving back into those levels and much higher so no. It doesn't want to guidance between 21, yet, but certainly with double digit.
The target on our horizon for next year.
Got it understandable thanks does one.
Your next question comes from the line of John Mcnulty with BMO Capital. Please go ahead. Your line is open.
Yes. Good morning, Thanks for taking my question. So it seems like Theres kind of two de stocking issues as the industry de stocking and then your de stocking on top of it.
And it sounds like by your commentary around working capital improvements, where they may end up at the end of the fourth quarter, even though the industry destock continues for a while it sounds like at least one of those pressures I found the cost is going to is going to kind of stop which is the pressure that youre system is facing because of your own destocking I guess, how should we think about.
Or is there a way to quantify what that pressure has been so as we look to 2021, we don't we I assume we don't face that is there a way to think about that.
Well.
I would I would give you this color around that we've been very aggressive to right size, our internal supply chain to the point that.
We have multiple facilities assets sitting idle as we speak.
Especially in our high margin carbon fiber assets, we've reduced our production too.
Drop down our inventory to get it right sized so that we can enter the year with more assets online are trained workforce in place and make sure we're ready for that rebound as it comes so.
I really don't want to get it to give you a split on dollars up internal versus versus external.
But to Patricks point, we expect the bulk of the internal.
To be behind us at the end of the year and continue to drive inventory efficiencies throughput and improvement on days throughout next year.
Got it fair enough and maybe just one other thing too Nick you had mentioned at the end you are kind of prepared comments.
A focus on look you've got a really diverse platform in terms of your composite are you starting to look at other opportunities that maybe in the past werent quite profitable enough or hadn't developed enough, where where we could see some some sizable pieces of of incremental volume coming in while you're going through this what looks to be.
Potential multi year downswing on the aerospace side.
Yeah, It's a great question and no no no. The time, that's that's quite unique from hexcel perspective keep in mind, we've been investing significantly to increase our capacity for the build rates that were.
Ahead of Us and we had very little spare capacity to experiment with to try to.
To try to derive different products, we didnt have the capacity to date, we have that capacity. So to answer. Your question. We absolutely are looking at diversifying our capability and that goes not only in fiber assets, it's throughout our internal supply chain in our products and we.
We are looking at other opportunities and I'm not going to say, they're lower margin opportunities. There are great opportunities. They may be smaller volume more niche more space and industrial and specialized areas, but we're seeing a tremendous amount of pull from our customers for those types of applications.
Great. Thanks, a lot.
Our next question comes from the line of Ron Epstein with Bank of America. Please go ahead. Your line is open.
Good morning, guys.
Good morning.
Does your outlook for the Destocking outlook.
Contemplate the possibility that we could see another cut and paid 350 and 77, given what's going on in the wide body market.
So we're staying close to our customers.
Patrick mentioned were still building out our plan. It's not final we are getting close to getting ready to.
Just that all buttoned up for the year and we're looking at scenarios, both upside and downside taken that into consideration. So I think it will depend on how soon people travel.
International travel goes and what the demand for.
Wide bodies continue to do I'm still optimistic the Athree hundred 50 backlog is still relatively strong.
And again, it really is going to be driven by revenue passenger travel. So we're looking at those scenarios.
Got it and when you think about on or maybe on a on a go forward basis.
Maybe from a broader strategic perspective, how are you.
How are you thinking about diversifying the company do you think you need to.
Or or not.
Well still to do we think we need to change who we are.
No. We look who we are weve got great positions, we've got tremendous customer relationships do we need to have plans on how we deploy cash absolutely because we're going to be at a strong very strong cash generator and we want to drive growth through utilization.
That cash.
Lastly, return to shareholders through dividends and buybacks.
Our another Avenue.
First priority is to figure out how to position the business for long term sustainable growth.
And M&A landscape and looking at our business through a different lens is clearly on our radar as we demonstrated when we were in the midst of the Woodward acquisition and then Unfortunately, we had to what they ended in that so.
I'd say, we've got a pretty wide aperture on opportunities ahead of us and we continue to look at that.
But I guess, what I was saying is not necessarily dramatically changing the company, but just broadening your industrial exposure I mean theres, they're there for sure given all the changes and industrial end markets. Other places you can apply the material science you guys do outside of L.
Aerospace.
Well again it all comes from it all focus on technology, we really don't pick okay. We're going to go after and target. This market. This market, we focus on the technology and the high end technologies, the things that can differentiate us that don't fall under a commoditized product.
Scenario or can't be replaced easily and we're we're indifferent on whether that's in the space or industrial or wind or automotive or Marie. So our focus is on advanced technical solutions that help our customers.
On light weighting on durability.
On processing times, and getting cost out and it's across the board. So were seeing tremendous pull in all of our markets to do to do that.
Okay, great. Thank you very much.
Thank you.
Our next question comes from the line of Noah Poponak with Goldman Sachs. Please go ahead. Your line is open.
Hey, good morning.
Good morning.
Hey, can you guys give us a sense, even if a pretty wide range of how much annualized recurring run rate revenue, you're losing to this displacement that occurred in the wind business. Just so we can recalibrate that and then.
On the aerospace side, when you quantified the inventory in the channel and Destocking yet to occur I was curious if you could specify that on the Max since that so much different.
Be helpful to know where you stand on that program.
So in terms of wind.
I mean, I mean, you could probably almost do that you felt now but I mean I would guide you sort of industrial historically was while 12, 13% of our sales in 2019.
About half of that maybe just tell you, though is wind energy.
And broadly as well.
Was related to the Americas market so.
That kind of should give you a magnitude of what we're talking about I mean in the scheme of things.
Certainly and in a normal year, it's a relatively small amounts of revenue, but hopefully that kind of find it for you.
That's helpful.
Yes with respect to your question on Max de stocking that's a huge.
No we're.
We're being fairly conservative.
Staying very aligned with Boeing on what their scenarios look like and depending on how quickly the recertification happens and the domestic travel picks up and the delivery of the significant amount of aircraft that are already finished we're really watch.
Seeing that closely but we're not going to get into program by program on what kind of de stocking we.
We're building into our forecast.
Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead. Your line is open.
Hi, Good morning, guys and thank you for the time Nikin Patrick Good morning, Adam.
I know, you're not guiding but maybe something that would help us walk through how we could think about your gross margins this quarter and the contraction maybe Patrick if you could bucket for us what the volume decremental was first as the mix headwind and then the idle facility costs.
Of course, you mentioned 150 million of annual cost savings how much of that was in Q3 and how do we think about the cadence of that as we progress so not looking for guidance just looking for a little bit of a bridge and in the quarter just to think about how different now luck.
Yes, so if I start with the savings to 150 million annualized savings that we're now kind of got actions and were driving forward and we can see that as I say on an annualized basis. Some of that was bearing in Q3, probably a very limited amount was there in Q2 and that will come.
We continue to grow now into Q4, and Q1 Q2 next year as we really get it flowing through so that's going to come off.
Overhead base.
Our fixed cost base as a company.
In terms of all the margins you called out that I mean, I think what you have to remember is the headcount drives a strong and I think I said this earlier on a strong variable margin.
If you take account topline sales you take out a lot.
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Take out a lot of margin and that.
Clearly becomes quite a significant headwind, which drives the decrementals that we've talked about.
And so while we continue to face these challenging topline cortez.
Our margins are not going to rapidly improve.
We will continue to drive cost that will help marginally as the topline starts to creep up by small incremental steps that will also help mark to me so.
So we will right size ourselves as strongly as we can we will position ourselves to the end of this year and going into next year. We continue to take cost actions, especially in Europe would take time to really sort of play out and we'll see those benefits and it's more strongly as we go into next year, but.
But then as we start to get the top line growth will drive strong incrementals off that launch variable margin as I talked about and that will really help we positioned the company. So the 150 million is a significant step in our structural cost we will leverage that when we start to see some some growth back upwards.
Okay. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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