Q2 2023 Hexcel Corporation Earnings Call
Please standby were about to begin.
Good morning, ladies and gentlemen, and welcome to <unk> second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. Please be advised that this call is being recorded.
After the Speakers' prepared remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star one on your telephone keypad. If you would like to withdraw your question simply press Star One again and we do ask that you. Please limit yourself to one question and one follow up question and at this time I would like to turn the call over to Mr.
Patrick <unk> Chief Financial Officer. Please go ahead Sir.
Thank you Bob.
Good morning, everyone welcome to Hexcel Corporation's second 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 might make during the course of this call.
The 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.
Participation on this call constitutes your consent to that request.
With me today are mixed tonnage chairman CEO and President and got all our vice President of Investor Relations.
The call is to review our second quarter 2023 results.
Tayo and unused release issued yesterday.
Now, let me turn the call over to Nick.
Thanks, Patrick.
Good morning, everyone and thank you for joining us today as we share our second quarter 2023 results.
We started the year with great momentum that has carried forward into the second quarter as we delivered a solid year over year increase in sales of almost 16%.
Collecting robust demand for lightweight advanced composites and strong execution.
We continue to manage and mitigate supply chain constraints.
Place generic pressures and a tight labor market to protect our customers' requirements.
As we work through these issues and global supply chains continue to improve our confidence increases.
While delays and cancellations at airports. This summer has been frustrating for many it reflects an industry with high demand and growth.
On June 30th TSA screened almost $2 9 million travelers.
Marking the highest daily number of passengers. The agency has screened on record.
According to the International Air Transport Association domestic travel in key markets globally is now on average five 3% higher.
19 levels.
International travel is more than 90% recovered in May 2023.
The first month that the global passenger load factor had returned to 2019 levels.
Thinking back to the depths of the pandemic there are many who doubted that air passenger traffic would cover it at these levels by mid 2023.
Growing passenger demand both domestically and internationally is great news for our customers and for us.
Commercial aircraft order backlogs now at a combined level of over 13500 aircrafts for Airbus and Boeing are just above the prior peak level.
Demand is strong for next generation fuel efficient aircrafts with lower emissions and improve long term maintenance costs.
The demand for advanced composites, and secular penetration opportunities continue to grow and <unk> is well positioned to keep winning in this space with our broad portfolio of lightweight solutions.
Now let me highlight some of the results of the second quarter and Patrick will then provide more detail on the numbers.
Commercial aerospace sales of $264 million increased more than 15% in constant currency compared to the second quarter of 2022.
The strongest growth came from the Airbus <unk> hundred 50 <unk>.
787 wide body programs.
Other commercial aerospace increased more than 13% for the second quarter on continued robust business jet demand.
Announced orders and options for narrow bodies, including the Airbus <unk> hundred 20 Neo family the Airbus <unk> hundred 20, and the Boeing 737, Max remained strong in the second quarter.
And growth in new regions and re fleeting in existing markets to improve fuel efficiency and reduce operating costs.
We remain agile and aligned with our customers and ready to support their growing demand.
In response to some of that increased demand we celebrated the expansion at our site in Casablanca, Morocco in May.
Plant, which first began production in 2018 has now doubled in size as we ramp up to meet the growing requirements for lightweight composite engineered core materials in the region.
Also want to mention that earlier this month, we received or we learned that for the fourth consecutive year our team at Casa Grande, Arizona has been recognized by Boeing with the supply chain performance Achievement Award for superior supplier excellence.
<unk> is the world's largest honeycomb provider for the aerospace industry.
At our Casa Grande, Arizona, and Duxford U K plants.
Turning to space and defense sales of $138 million increased 22% in constant currency with broad based growth across a number of platforms globally, including fighter aircraft, such as the F 35, and Raphael as well as space programs in Seville.
In rotorcraft.
This level of quarterly sales for space and defense is our highest ever.
Our space and defense business is supported by our team at Amesbury, Massachusetts, where we produce materials for multiple U S defense programs, including the F 35.
You will recall that we acquired this business in January 2019.
This has been an excellent strategic acquisition for us Amesbury as a high quality business that broadens our product line, and then enables innovation and deeper conversations with existing and potential customers regarding our composite solutions.
Since the acquisition textile has leased the building from the former arc technologies owner.
One we recently had the opportunity to buy the property. We're glad we did so and close the deal around the end of May.
Ownership provides textile with control and flexibility of the site, which will simplify our ability to grow and expand operations to meet the many opportunities we foresee in the years ahead.
This step to acquire the site is a clear signal that the Amesbury team is now fully integrated into our <unk> family.
Total industrial sales of $53 million decreased about 3% in constant currency due to lower wind energy sales that were only partially offset growth in automotive marine and other industrial markets.
Year to date total hexcel sales of $912 million are up more than 16% year over year in constant currency and EPS is up 82% from 55. This time last year the $1 at the end of June 2023.
All of which reflects <unk> strong performance and growing momentum.
Before I hand over to Patrick I'd like to say, we were excited to return to the Paris Air show last month.
As always it is thrilling to see all the aircrafts on display knowing that hexcel has extensive and growing product content on practically every aircraft flying and in development today.
We had many face to face customer meetings to talk about how our lightweight solutions will propel their next generation products, which always is the best part of the event.
And it was made even more notable this year as we hosted about 180 customers for especially back to celebrate <unk> 75th anniversary.
At the show, we launched two new aerospace products that each deliver faster cure cycles, enabling higher production throughput rates.
We also exhibited parts made with our advanced composite materials by Airbus for the wing of Tomorrow project.
We congratulate Airbus on the recently announced the opening of a new win in Technology development Center and filter in UK.
Look forward to our continued collaboration on making longer.
And lighter aircraft wings, which represent one of the biggest opportunity is to improve fuel efficiency.
<unk> C O two.
And ultimately work toward the air transport industry carbon emissions reduction goals.
Finally, our hexcel leadership team had the opportunity to ring the opening Bell at the New York Stock Exchange in June and recognition of hexcel 75th anniversary.
The last time <unk> had the privilege of ringing the bell within 2005, when we celebrated 25 years on the stock exchange.
This was truly an experience for all of us and a great way to represent and recognize our <unk> team for their hard work and effort that has led us to this anniversary year and the significant moment in our history.
Now I'll turn it over to Patrick to provide more details on the numbers.
Thank you Nick as a reminder, the majority of our sales is denominated in dollars. However, our cost base is a mix of dollars euros and British pounds as we have a significant manufacturing presence in Europe .
As a result, when the dollar strengthens against the euro and the pound our sales translate lower while our costs also translate lower leading to a net benefit to our margins.
Conversely, a weak dollar is a headwind to our financial results.
We had to this currency exposure over a 10 quarter horizon protects our operating income as a result currency changes are laid in the financial results over time.
As a reminder of the year over year sales comparisons I will provide our in constant currency, which thereby removes the foreign exchange impact to sales.
Turning to our three markets commercial aerospace represented approximately 58% of total second quarter 2023 styles.
<unk> commercial aerospace sales of $264 $3 million increased 15, 4% compared to the second quarter of 2022 led by growth in the Airbus <unk> hundred 50, and Boeing 787 programs.
The other commercial aerospace category grew 13, 3% led by strength in business Jets on greater adoption of lightweight concepts and the latest generation of large cabin business jets.
Space and defense represented 30% of second quarter sales and totaled 137 $5 million, increasing 22, 1% from the same period in 2022.
The aircraft were particularly strong, including the F 35, and re file and Black Hawk and civilian Reg prompt also grew strongly along with a solid performance for space.
Industrial comprised 12% of second quarter 2023 sales industrial sales totaled $52 5 million decreasing three 3% compared to the second quarter of 2022 as growth in other in automotive and other industrial markets.
Not all SaaS, the lower wind energy sales.
On a consolidated basis gross margin for the second quarter was 24, 4% compared to 22, 8% last year.
The gross margin this quarter was consistent with our expectations. Following an unusually strong first quarter 2023 gross margin due to a number of factors we called out on our last earnings call, including favorable sales mix with strong demand for <unk> cel fiber rich products.
And significant overhead absorption from increasing inventory.
As a percentage of sales selling general and administrative expenses and R&D expenses were 10, 8% in the second quarter compared to 11, 4% in the second quarter of 2022.
Collecting robust cost control as sales growth.
Adjusted operating income in the second quarter was $61 $8 million or 13, 6% of sales compared to $44 7 million or 11, 4% of sales in the comparable prior year period.
The year over year impact of exchange rates in the second quarter to adjusted operating income was favorable by approximately 30 basis points.
Now turning to our two segments. The composite materials segment represented 83% of total sales and generated an operating margin of 16, 2%.
The operating margin in the comparable prior year period was 14%.
The engineered products segment, which is comprised of our structures and engineered core businesses represented 17% of total sales and generated an eight 9% operating margin as compared to 12% in the comparable prior year period.
The operating margin was softer than normal in this quarter on sales mix and higher development and tooling costs related to the CH 50, <unk> and various space programs.
The effective tax rate for the second quarter of 2000, 2023 was 22, 1%.
Net cash provided by operating activities is $30 $1 million year to date.
<unk> $18 3 million.
First half of 2022.
Western capsule with the use of cash of $113 $9 million year to date to support higher sales.
For the comparable prior year period, working capital increased $95 1 million.
Capital.
<unk> on an accrual basis was $75 million in the first half of 2023, which includes $37 8 million for the Amesbury, Massachusetts property process discussed by Nick.
This compares to $28 3 million in the prior year period.
I would also like to mention that early in July we sold our former wind energy facility in Colorado for $11 million.
This was an asset that was held for sale and will be accounted for in the third quarter of 2023.
Free cash flow for the first six months of 2023 was negative $44 $7 million, which includes the Massachusetts property acquisition.
For the comparable prior year period free cash flow was negative $19 6 million.
For alternate metric of cash generation adjusted EBITDA in the second quarter of 2023 was 95 $6 million or 21% sales compared to $78 8 million or 20% of sales in the second quarter of 2022.
As disclosed on our last earnings call, we renewed and extended the maturity date of our bank syndicate has $750 million revolver.
The leverage liquidity Covenant calculation is now on a net debt basis. As a result, we may trend a little lower than our desired leverage range of one and a half to two times as we have previously defined that range on a gross debt basis.
The board of directors declared a 12 and a half cent quarterly dividend yesterday payable to stockholders of record as of August 4th with a payment date of August 11.
We did not repurchase any common stock during the second quarter of 2023, the remaining authorization under the share purchase program at June 32023 with $217 million.
As you read in our release oftentimes, we are updating our 2023 guidance.
We have raised and narrowed on site sales guidance range to $1 76 5 billion.
183 5 billion.
And similarly, we have raised and narrowed our EPS guidance range to $1 80.
<unk> to $1 94.
Our guidance for free cash flow is updated to reflect the purchase of the Ames pre Massachusetts property.
Free cash flow guidance is not to generate more than $110 million with accrued capital expenditures in 2023 revised to approximately $130 million.
And as a reminder, on sales forecasting seasonality, we typically experienced softer sales in the third quarter of the year due to summer vacations, particularly in Europe .
With that let me turn the call.
Yes.
Thanks, Patrick.
We are confident that the outlook for hexcel continues to get stronger with expectations for significant cash generation in the coming years.
As we plan for that cash generation, our capital deployment priorities remain unchanged.
First we will invest in organic growth opportunities to support secular penetration and expanded composite adoption.
Well for the next few years, we expect our capital expenditure requirements to be subdued as we grow back into and optimize our existing capacity and footprint.
Our next priority is to explore.
Disciplined manner high quality M&A opportunities involving innovative and value, adding material science technology.
We will continue to pay a dividend and depending on these activities, we will repurchase our stocks, while staying aligned with our target leverage range.
Before we take questions I want to note that last week, our global team. We're in Stanford for our annual strategic review, which is a three days of sharing and collaborating on the new and expanded business opportunities that lie ahead for our markets our customers and help sell over the next five to 10 years.
While we packed a lot into that meeting at least two things we're crystal clear.
First our advanced composite materials are a key enabler and helping our customers meet their efficiency and sustainability targets and.
That value proposition continues to expand as the focus on global emissions reduction increases.
We look forward to continuing our relentless pursuit of new technologies and lightweight materials solutions that enable our customers to achieve their goals to optimize fuel consumption.
Sure emissions.
Reduced noise and help sustain the planet for generations to come.
Second we are absolutely ready to meet the growing demand forecasted over the coming quarters and years.
Although we did during the pandemic to become lean and efficient and all that we have done to prepare ourselves for robust growth is paying off.
We are aligned with our customers.
We are adept at pivoting and flexing with changing requirements.
And we have demonstrated time and again that we know how to work through uncertainties were challenges that arise.
Our one hexcel team will stay focused on efficiency and productivity.
Cash management, and overall performance, especially in quality and on time delivery.
I remain extremely confident in <unk> future and our ability to continue delivering value to our stockholders.
Thank you Paul.
We're now ready to take questions.
Thank you Mr signage, ladies and gentlemen at this time to do you have any question again star one please and if you're finding your question has been addressed you can remove yourself from the queue by pressing star one again and again, we do ask you. Please limit yourself to one question and one follow up question.
We'll go first this morning to Ken Herbert at RBC capital markets.
Yes, hi, good morning, Nick and Patrick.
Good morning, Ken.
Hey, I just first I wanted to just clarify on the free cash flow outlook I think obviously the facility acquisition justified the majority of the change in the cash flow outlook.
Can you comment on any other moving pieces that we may or otherwise would've expected to see in the cash flow guide.
Yes.
Yes.
It really was driven fundamentally by that one time in July .
The exceptional capital expenditure to buy the property.
That essentially moves us down really from a 140 to 100, but we felt a little bit more confident with the earnings that we see coming through and the outlook and getting control of inventory now for the rest of the year.
Posted to 110, theres not a lot more to it than that so really recognizing the annual spring property purchase and some underlying strength.
Great. Thanks, Patrick and as I look at the full year commercial aerospace growth you, obviously saw some slightly slower growth in the second quarter I think the guidance would imply sort of high teens for the full year as the growth rate for aerospace in the second quarter, a fair starting point as we think about the second half of the year or does it may be softened a little bit.
From where you are today.
Well I mean, we called out the seasonality with Q3, and particularly the European vacations, and so that will slow things down a little I think the question really is how strong is the fourth quarters are going to be ever.
Everyone's obviously you read about the Raytheon Whitney engine issue. This morning, there are always challenges out there, but fundamentally we're confident the underlying demand is fantastic.
<unk> on all these platforms is strong.
And we're always be willing Airbus and Boeing to to move forward as strong as possible. So we're still pretty positive bonds. We recognize is not always going to be a smooth path, but it should be a solid second half of the year, especially the fourth quarter.
Great. Thanks, Patrick.
Thank you we'll go next now to Gautam Khanna at Cowen.
Hey, good morning, guys.
Good morning, Good morning Gardens.
I wanted to just ask.
In the quarter itself did you guys see a rate increase on.
307 Max.
Joining me either decided.
A couple of programs of $3 50, 787%.
Year over year, but I don't know sequentially too much change.
Any of the programs.
Yes, so if you look at the first half.
We are clearly aligned with Boeing in the low <unk> on the right, there's a little bit of movement between first and second quarter may be some supply chain restocking happened in Q1, So we saw a minimal decrease lump.
Sequentially Gotham.
Okay, and just stepping back do you feel like.
<unk>.
Most of that most of the supply chain most of your customers are aligned on right across the.
Across the board with underlying assembly rates at Boeing and Airbus or is there anyone that's.
Out of whack.
Noticeably.
Well, we pay a lot of tension.
We pay a lot of attention to the supply chain and especially looking for outliers that may be pulling excess material or not pulling enough and right now we see our supply chain.
Throughout the Oems and the tier ones twos and beyond to be pretty much aligned on the product lines that we're providing.
Thanks, a lot guys.
Thank you.
Yes.
We'll go next now to David stress at Barclays.
Thank you.
Good morning.
Good morning.
Just wanted to.
First question on margins in the quarter. So could you just maybe touch on the mix of all the different things that might have impacted the.
The margin in composite materials in Q2 versus Q1, I mean, the revenue was fairly similar the margin obviously was down a decent amount.
So if you could address that first.
Yes, I mean, I think as we tried to call. It out in Q1, and I think <unk> touched on in the in the previous comments.
Q1, really was kind of the things aligned with somewhat exceptional we had a very strong.
Product mix, if you like textile carbon fiber rich product mix and that always drives our strongest profile of margins and so we have a good weighting of that in Q1. We also had quite a lot of inventory build in Q1.
And that combined with good cost control led to very good overhead absorption and so with that strong mix of <unk> pharma products.
Good sales leveraging out of our.
Our controlled overhead base and combined with some inventory, though that is really those are really the key factors that drove that strong or very strong Q1.
I would say Q2 is back more in the normal solid range, we would expect to be performing with this level.
<unk> is the way I would frame it.
Okay and.
I guess a question on where we go from here I think previously Patrick you talked about mid teens margins.
Total margins for the company on one eight to $1 9 billion in revenue youre going to be kind of at the bottom end of that range. This year. It doesn't look like based on your EPS guidance or you're implying that you're going to get all the way to mid teens margins. So how do we think about the margin progression from here as volumes continue to go higher.
Yes, I think we talked to this property in.
And in the fourth quarter and then after the Q4 earnings.
Essentially the inflationary pressures last year, probably pushed us back a bit on that mid teens, one eight to $1 9 billion sort of model and I think we acknowledged we would be at the low end of that range and it would now be a struggle to get to something like 15%.
One eight.
A lot of the inflationary pressures are transit trading so energy costs again, anticipating certainly as we look forward into 2020 for some of the commodity chemicals enrollments aerials that we buy are going to ease off and so the general shape of what we put out there.
It's fundamentally correct, but we have been delayed in getting that so as we now approach 2024, and we said on our sales are going to staff up again significantly.
We will definitely be looking at that mid teens.
Maybe slightly higher range.
For our operating income and then as we go above $2 billion and continue to drive up to banks. So everyone 2019, we should be pushing ourselves back to the 17, 18% op income that we historically saw and ultimately will be looking to push past that.
Thanks very much.
Yes.
We'll go next now to Robert Spingarn at an earliest research.
Right.
Hey, good morning.
Good morning, Ralph.
Nick I think you just said.
Maybe Patrick said, it but you are pretty aligned with Boeing on the Max and a low thirties here in the second quarter. When would you expect to start building to that 38 per month and then another quick one on <unk>.
Future programs.
Yes basic.
Basically.
Confirm that we are very aligned with following not only on the back foot on the 77 running at about four.
And low thirty's on the Max.
We have the capacity, we are ready to ramp up and we're not going to get ahead of Boeing but as soon as they start pulling material at a higher rate getting up to their 38 target or 41, or even 50 end of 'twenty five 'twenty six.
We're going to be aligned with them so to put a prediction on that I'll, let Boeing talk to that tomorrow.
Okay, and then a couple of things on Airbus Theres been some talk that the $3 21, XLR, maybe hitting some weight challenges that might affect range to what extent.
Are you talking to them about maybe increasing your lightweight material content to mitigate that and then you also talked about having brought in your team.
On future programs, so that must be fresh in your mind as you mentioned the wing of tomorrow.
<unk> in the UK.
Wondered if you could speak a little bit to the hexcel opportunity on wing of tomorrow.
Yeah, Rob so.
Start with on the XLR.
We're seeing what everybody else is seeing and reading on some weight challenges related to the central fuel tank in the back of the aircraft and some additional lining thats going to take place I can tell you we are intimately involved with Airbus.
On their development efforts I can't call out this specifically.
Because it's related to fuel liner.
And I don't want to get into the details, but anything that they can do.
Kris that weight impact they certainly know our portfolio they know our capability and they know the areas that we can continue to help them to drive weight out so that's ongoing.
Again, I'll, let Airbus talk to that point tomorrow during their earnings call.
The wing of Tomorrow.
Exciting obviously, it's there.
There really is no final wing of tomorrow as of yet there is a lot of demonstrations, there's a lot of different material product forms.
What I'm so excited about with <unk> cel is our portfolio allows us to position multiple material types to help optimize that win and it depends on the type of ultimate technology that selected so we.
We believe we're in a great position with Airbus have a.
A fantastic path forward to continue to decrease weight increased strength and optimize the future wing.
The next new narrow body or any other derivative they move forward with.
And Nick do you think that they've got the technology, where it needs to be and I'm speaking specifically to composite wing.
It could keep up with the types of rates that are necessary in narrow body.
I think they have the technology and they could launch a wing today, absolutely I think they.
We are still evaluating that technology and the right throughput not only in the material laydown rate, but the material cure rate and the downstream processing all of that is being evaluated with the various material forms.
I can just say I'm excited that we're side by side with them, helping them to optimize that design.
Great. Thanks, Nick.
You're welcome Rob.
Thank you we'll go next to Matt Akers at Wells Fargo.
Hey, good morning, guys. Thanks for the question.
Yes.
But put a finer point could.
Could you talk about the decision to buy the Ainsberg facility.
What drove that was it just that the prior owner I was looking to sell and you ought to be the owner today. It seems like it wasn't in the original plan for the year.
So youre right. It was not in our original plan for the year and Thats one of the major reasons or the major reason why we updated our guidance on cash and Capex.
When we acquired Amesbury.
Arc technologies, we were excited to find that technology that so cohesively fit into our existing portfolio and technologies and how to add value to composites. As you know, it's primarily a U S U S military.
Bye.
But the opportunities around what they do and how we can enhance our overall composite offering is tremendous.
And our excitement just continues to grow with that site when Dan Healey the prior owner approached us and we found out that he was going to market that property. He wanted to change direction.
Look the opportunity to pursue it so that we could control the expansions there we could control the facility modifications and consolidations and really continue to drive the growth and the efficiency that we see in the coming periods.
Got it that makes sense and then.
If I could ask on industrial I know.
When compares get a lot easier in the back half, but can you just talk about sort of how you think about that business growing sequentially. After.
Kind of step up sequentially in Q2.
Okay.
Well.
I think we've said before wind has pretty much stabilized for us in the second half of 'twenty two.
Obviously, that's driven by Europe .
By the legacy products that were supporting there and we do see it stabilizing and continuing to be a solid business for the foreseeable future.
Early automotive marine and other industrial continues to grow nicely.
And we see that offsetting.
Or basically driving some of the significant growth we see in the go forward periods on the industrial side.
<unk> has been a little softer on some winter sports and some of the goods, but again that tends to be a little bit impacted by GDP and inflationary pressures and again the product offerings. We have there and the technology. We are introducing there we continue to see that as being an opera.
Community going forward.
Great. Thank you.
Thank you.
We'll go next now to Sheila <unk> at Jefferies.
Yes.
Just wanted to ask on space and defense.
Growth in the quarter.
What sort of drove that and as you think about 2024 are there any platform that decline of <unk> 2018 and defense.
So really what drove the F 35 was very strong for us in Q2, the Raphael was very strong.
We saw civil helicopters step up nicely.
Black Hawk was up strong.
And we saw space applications, which is U S driven although we've got good positions in India, which stepped up nicely. So.
All in all it was it was very broad based but those were the primary drivers.
In 2024.
There is really nothing new I would say the CH 53, K, there's a lot of optimism around that continued growth in the F 35, as Lockheed ultimately will hit their targeted delivery and build rates and <unk>.
Perhaps some softness in the V 22, but.
No.
People have been talking about that going down for a long time and it just continues to hold strong. So I'll wait until we roll up our 24 plan before I really guide more on.
What's going to be the puts and takes in the in the space and defense side.
Sure. Thank you Matt.
If I could ask one for you.
No I understand you don't want to deal with the new landlord.
Purchased that facility from arc.
How do we think about capital allocation and when you start buying back shares.
Check an analysis you do behind <unk>, our share repurchase plan.
Yes, so we continue I mean, Nick laid out our capital deployment priorities, which haven't changed the organic growth disciplined M&A will pay a dividend and share buyback kind of becomes the depots.
Sort of last stock, which we will do we're not going to sit on mountains piles of cash so as we go through the rest of this year and we will start to generate some cash now in the second half, which is the typical profile for <unk>, certainly going into 'twenty four and beyond.
We will expect to engage in share buybacks not going to call out specifically Wilson when at this point, but it is very much on our agenda in the coming periods.
Okay. Thank you so much.
Thank you. We'll go next now to eat Committee, Alabama Global.
Patrick maybe just extending your comments on the third quarter revenue wise.
Margin wise should we expect third quarter margins to be down sequentially or do you have a sense alrighty about.
Fiber mix in <unk> versus <unk>.
Maybe offset it.
Yes, I mean, what I would say in terms of fiber Max is that Q1 was unusually strong perhaps going forward for the rest of the year, we will see a more normal profile as we saw in the second quarter.
In terms of margin and we don't I am not going to get into quarter by quarter predictions have come up with any specifics, but a lower revenue that we are expecting because of the seasonality will give us less or lower sort of overhead volume leverage if your line, which makes that bottom line a bit tougher, but it's a it's a topline.
Issue, it's not a margin quality issue.
Going forward and then as the revenue steps back up.
In the fourth quarter, we should be driving that.
Thanks to strong margins again.
Okay. Thank you.
Yes.
We'll go next to Richard Safran at Seaport Research partners.
Net Patrick Kirk Good morning, how are you.
Good morning, Richard.
Nick since you brought it up I would like to ask you about.
The materials that you were highlighting in Paris had highlighted.
Or enabled a higher build rates. So I just wanted to know if you could discuss what platforms they might be being targeted for commercial defense both.
And generally when you have new aerospace materials.
They have a long term payoff and Im wondering if thats the case here or might there be more of a near term payoff for these.
Our materials you've been talking about.
Yes, so again there is multiple versions.
And we're talking about the lay down type, whether it's a creek crag, whether it's an infused product form whether it's cured in autoclave is under pressure or out of volatile plague, we're working all of those technologies.
There on the table some more mature than others.
With respect to.
The wing and Airbus and again, you look at the material cost as being one element, but the lay down in the processing and maturing and the Aster machining is also something that we work with our customers diligently on.
Would say the new materials for the most part run on our existing assets.
With respect to our flexibility and our plants. It makes for a very easy transition is just a question of qualification for the application.
Okay.
Okay. Thanks, and then Patrick just a quick one.
<unk> been talking about back half in margins and if you've answered this and I missed it I apologize, but I want to know about working capital in the back half of the year.
Specifically I guess.
Inventory.
Given the expected <unk> seasonal slowing is it correct to assume that most of your working capital benefit shows up in the fourth quarter is that the way it should trend this year.
We should definitely see.
Working capital benefit in the second half of the year I would expect driven by inventory I think we kind of turned the corner in the second quarter.
Inventory was essentially flat with a few million dollars outfit, but essentially we stopped the growth that we've seen in the sort of the <unk>.
Second half of 2022 in the first quarter of 2003, So I would expect that trend to continue in our inventory in fact to reduce.
That should drive.
And working capital reduction and therefore cash positive cash flow.
Receivables will reflect the level of sales and so with seasonality and lower Q3 sales receivables will probably step down but then they are likely to come back again in the fourth quarter, but overall driven by inventory I would expect that positive cash flow impact from working capital in the second half of the.
Yes.
Well, thank you very much.
Goodness now to Christine will add at Morgan Stanley .
Great Hey, guys Patrick on the Airbus <unk> hundred 20, Dash 500, or should I say the potential.
Airbus <unk> hundred 2500 can you provide any color in terms of the maximum ships that content you could potentially win is there an opportunity for hexcel I am fiber for the aircraft and should you get.
On the upper end of your expected ships that content, how do we think about capex requirements to meet that program.
Okay. So that was a lot of questions in there so.
So essentially the two to 2000 today and we call out in sort of 2% to $500000 range in terms of ship set is probably at the lower end of that range.
I mean, if we were to win a significant position the wing on the on the 200 <unk> hundred will be aiming for other opportunities as well if they reengineer that platform, but clearly we see a significant step up in the ship set I mean multiple times, what we have today.
Not going to try and give a number of these fonsi variable.
<unk> is a great opportunity.
Attract im fiber very likely to attract buyers of some sort.
The wing involved and unique structural integrity and the iam filers bring so again.
<unk> fiber rich opportunity would be great in terms of capital expenditure.
I wouldn't foresee two months.
We are bringing on as you know, we're completing our new fiber line and we have a pipeline in the works into case around Obama, which we put on hold as we went into the pandemic and I would imagine that capacity certainly in the next few years will cover US now is the platform grew significantly combined with other opportunities.
We will gladly invest in capital for strong long term.
Turns and good margins.
Great. Thank you for the color.
We'll go next now to Myles Walton at Wolfe Research.
Thanks, maybe to follow up on that Patrick or.
How much of the sales today within composite materials.
Supplied or furnished with your own fiber for vertical integration perspective.
Well I'll turn that around a little bit I don't know that were explicit on that but we use 70% to 80% of our own five of the fiber we produce we consume the vast majority internally now were not at the full capacity we were in 2019 yet.
But it is staffing up and we are using 70% to 80% of what we produce the remainder goes to.
Third parties.
Military outlets and and a smaller amount goes to industrial but we use the vast majority of our own fiber.
And you.
Your next from external sources less fiber I presume, that's what you are producing internally.
That is true for some of the legacy programs is really where we're at we're buying third party fibers and that will continue because those programs are long term qualified and very unlikely to be re qualified and so yes, we do buy in five years, but it is a smaller quantity than we use of our own.
<unk>.
Okay Fair enough and then looking to cash flow is there a path to a 100% net income to free cash flow conversion in 2004.
Or is the growth I think simple answer the simple answer is yes, we're definitely driving towards that whether we will get there in 2004, I don't know, but we're we're definitely moving in that direction in the next year or so of your miles yes.
Okay perfect that was my only two thank you.
We'll go next now to Ron Epstein Bank of America.
Hey, good morning.
Maybe just wondering Ron.
A quick financial question and then maybe a more technical question.
Finance one first I mean, what are you guys seeing out there in the M&A environment is there any interesting add on things that you'd want to do technologies or or whatever I mean, if you could.
Sure a couple of words on that and then I just have a quick technology question.
Yes, Ron.
As part of our Strat review, obviously, M&A and more importantly technologies around material science is a big portion of our review process.
And I would say there are technologies out there that are attractive that would enhance our portfolio allow us to offer broader solutions to our customers.
Whether that's a value add to the materials or.
Sensing capability to do on condition maintenance or diagnostics.
To get into the specifics on companies, obviously is tough to do and as always it always comes down to what's actionable. So we have a pipeline is very active we review it on a regular basis we.
We have our priorities that our pipeline is based on and we continue to work those and stay mindful, but always disciplined on what we would consider going forward.
Got it got it and then on the technology side.
When we think about future wings, that's come up a couple of times here in the context of.
800, 2500 or future wing.
Would you expect it to be kind of how they are doing it today, where the tape lay up.
Or where do you expect to how.
I just felt that through 'twenty does it within an injection molded technology.
Or something completely different.
How are you thinking about that when we think about the future application of advanced composites on on something like a wing I mean, just could give us.
Our broad context for that.
So that's a great question and it's.
It's one of the.
Focus was on Hexcel strategy and that is we're not making the assumption that a win will be designed with one material type <unk>.
The technology has advanced so rapidly our customers knowledge and ability to design and work with multiple material forms all composite lightweight just allows them a great opportunity to optimize the way. So when you are talking about our wings.
This is a win for us.
First was a spa versus brackets really what I believe and what <unk> position or is it not going to be one material type it could be a combination of.
Thermal set thermal plastic pre Craig and Hughes and liquid compound molding.
And again, that's the beauty of our diverse portfolio.
Got it thank you.
Youre welcome.
And go next to Michael <unk> at <unk> Securities.
Hey, good morning, guys. Thanks for taking my questions.
Michael just on.
Back to how are you just back to Capex on the facility purchase I mean, you kind of set the path to a 100% conversion is still there does anything change in terms of your capex profile.
To support the new facility or how should we think about your capex spend there.
Our capex outlook remains unchanged really as I think I would describe that I received this property.
Acquisition is a little bit of an exception.
So our underlying trends in our underlying trend is to sort of be.
Under $100 million.
But for the next few years.
We guided to around 90 this year.
I'd say a similar shape in the next few years.
This building so to speak within an outlier.
The opportunity arose and as Nick described is strategically into the growth opportunities, we want to be in control of that science to expand and grow it.
Now, we can do that but the underlying trends in our capex.
Remains unchanged as sort of under 100 for the next few years.
Okay, Perfect and then just back to the margin question I mean, there has been some bunch of talk here on the wing of the future, but it sounds like there might be some more shovel ready projects and space and defense and I think you called out development and tooling.
Headwind in this quarter in engineered products.
Should we think about if there are if there is a bigger pipeline for space and defense should we think about maybe some margin pressure going forward in that engineered products or do you think you can get that segment back to prior peak.
Yes, I mean, we did have a soft quarter on top of a very strong first quarter in a very positive sort of engineered product mix in Q1 engineered products is lumpy in any one of these prototypes out.
For some time, we're kind of seeing that we do get tooling loans, when we buy the costs, we incurred and bring us down and then we sell tooling and we got a good mix in a quarter. When we can have a very strong engineered products. It is much more lumpy than composite materials that just because of the nature of the business.
I mean, this quarter was particularly about the CH 53, K, but there was also some developments in tooling around some space programs.
Think we believe very strongly in our opportunities for military programs going forward across our engineered core engineered products businesses, we are fantastically positioned.
To win more business and we'll be driving to do that.
Perfect. Thanks, guys.
Thank you.
Thank you and ladies and gentlemen, we have time for one further question. This morning will take that now from Noah <unk> at Goldman Sachs.
Hey, good morning, guys.
Alright.
Patrick.
I wanted to ask about the revenue profile in the back half. Thank.
I think you alluded to aerospace being down sequentially with the normal seasonality, but.
It looks historically like that's usually only down low single digits.
Thank you or maybe ramping on.
A number of airplanes. So can you give.
Give us a little more context around how much that's down and then on the defense side.
Should we be thinking of defense revenues is growing now sequentially from that new level, you've put in with <unk> in absolute dollars or.
With that does that pullback before them growing again.
Yes, so there's a lot in there I mean.
You're right, we've got underlying program growth.
Which.
We are going to see some off certainly towards the end of the year how.
How much of that really materialized in the third quarter, we will see.
We will align ourselves with Airbus and Boeing and what they're doing I think that the.
And even though the banks will be.
Be the loss of effect net net if you like and so we will see a bit of a dip I wouldn't overstate it but we will see a bit of a step down in Q3 and that in Europe could affect some of the space and defense programs as well.
Honest they might not just be commercial aerospace it could affect space and defense.
In terms of space and defense Q2 was our record highest ever sort of sales quarter of 130 $738 million.
Sure.
I mean cause this quarter, it's not a straight line.
It can be a bit bumpy from time to time, but we're very encouraged and very positive for bounce space and defense is one of our markets one of our centers and we do continue to see opportunities going forward. It wont be a perfect straight line as I see but there are growth opportunities ahead, and we would expect another good year in 2024.
Yes.
That's helpful. I appreciate that.
If I could just.
Ask one more on margins.
Should we think of next year is kind of settling back into that 25% incremental that.
It has long been sort of normalized for the business or are you early enough in.
Getting back to normal capacity utilization and maybe a slower growth in cost inputs that it should be higher than that again.
Sure.
Hello.
No, we're not going to call out a specific sort of incremental leverage number or target. We're always going to look to maximize what we can do obviously the last year 18 months has been somewhat exceptional coming out of the pandemic and we've driven very high incremental margins.
At quarter to quarter, you can get different shapes different growth profiles.
And even mixes in cost as we know, but we will always be pushing ourselves, whether it's <unk> or occasionally enforcing its going to be lower than that but we will always be driving to do the best incremental margins that we can perform too.
Okay. Thanks, so much.
Okay.
Thank you and ladies and gentlemen that will bring us to the conclusion of <unk> second quarter earnings conference call I'd like to thank you all so much for joining us and wish you all a great day Goodbye.
[music].
Okay.
Sure.