Q3 2023 Hexcel Corp Earnings Call

Speaker 1: Please stand by, we're about to begin.

Please standby were about to begin.

Good morning, ladies and gentlemen, welcome to the <unk> third quarter 2023 earnings Conference call. At this time, all participants are in a listen only mode.

Speaker 1: Good morning ladies and gentlemen, welcome to the Hexcel Third Quarter 2023 earnings conference call. As a sign, all participants are in a listen only mode and please be as wise as this call is being recorded. After the speakers prepare remarks, there will be a question and answer session if you would like to ask the question during this time, simply press star one under telephone keypad. And if you would like to withdraw your question, simply press star one again. And we do ask that you please one yourself to one question and one follow up question.

This call is being recorded.

The speakers prepared remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star.

One on your telephone keypad and if he would like to withdraw your question Press Star. One again, we do ask that you. Please limit yourself to one question and one follow up question.

Speaker 1: Now this time I would like to turn things over to Mr. Patrick Winterlich, Chief Financial Officer. Please go ahead.

Now at this time I would like to turn things over to Mr. Patrick Winter, which Chief Financial Officer. Please go ahead Sir.

Thank you both.

Speaker 2: Good morning everyone, welcome to Hexel Corporation's third quarter 2023 earnings conference call. Before beginning, let me cover the formalities. I want to remind everyone about the safe heart of provisions related to any forward-looking statements we may make during the course of this call.

Good morning, everyone welcome to Hexcel Corporation's third quarter 2023 earnings conference call before beginning let me cover the formalities I want to remind everyone about the safe Harbor provisions related to any forward looking statements. We may make during the course of this call certain statements contained in this call Michael.

Speaker 2: Certain statements contained in this call may constitute forward-looking statements within the meaning of the private security of the CTA reform act of 1995. They involve estimates, assumptions, judgments, and uncertainties caused by a variety of factors that cause future actual results or outcomes to differ materially from our forward-looking statements today.

It's to forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

<unk> estimates assumptions and judgments.

He is caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward looking statements today.

Speaker 2: such factors, a detail in the company's SEC filings and last nights news release.

Such factors are detailed in the company's SEC filings and last Night's news release.

Speaker 2: A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexel Corporation and its copyrighted material. It cannot be recorded or re-prodcast without our express permission.

A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material it cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request.

Speaker 2: your participation on this core constitutes your consent to that request.

With me today on the Spanish Chairman, CEO , and President and co Goddard, our vice President of Investor Relations.

Speaker 2: With me today, our next challenge, our chairman, CEO and president, and Goddard, our vice president, of investor relations. The purpose of the call is to review our third quarter 2023 results detailed in our unusual issues. Now let me.

The call is to review our third quarter 2023 results detailed in our news release issued yesterday.

Now, let me turn the call over to Nick.

Yeah.

Speaker 3: Thanks Patrick. Good morning everyone, and thank you for joining us today as we share our third quarter 2023 results.

Thanks, Patrick.

Good morning, everyone and thank you for joining us today as we share our third quarter 2023 results.

Speaker 3: Continued strong demand in our commercial aerospace and space and defense markets resulted in another consecutive quarter of double digit sales rose for Hexel.

Continued strong demand in our commercial aerospace and space and defense markets resulted in another consecutive quarter of double digit sales growth for himself.

Speaker 3: Exile continues to benefit from the post-candemic travel recovery and from the growing poll for newer more fuel-efficient lightwave aircraft to meet that demand and to replace aging fleas.

Excel continues to benefit from the post pandemic travel recovery and from the growing pull for newer more fuel efficient lightweight aircrafts to meet that demand and to replace aging fleets.

Over the past several months numerous airlines around the world have placed a significant number of orders for both narrow body and wide body aircraft, resulting in total backlogs that are at record levels.

Speaker 3: Over the past several months numerous airlines around the world have placed a significant number of orders for both narrow body and wide body aircraft resulting in total backlogs that are at record levels.

Speaker 3: Excel is on a long-term growth trajectory, and we are working hard to ensure that we are ready to satisfy that demand.

So is that a long term growth trajectory and we are working hard to ensure that we are ready to satisfy that demand.

Speaker 3: This involves bringing back operational capacity, which has then either turned off, or running at reduced rates since the pandemic.

Involves bringing back operational capacity, which has been either turned off or running at reduced rates since the pandemic.

Speaker 3: We've been recruiting the talent we need to meet the strong demand ahead of us. And we continue to focus on training and expanding shop for experience to prepare for the higher production rate.

Recruiting the talent, we need to meet the strong demand ahead of us and we continue to focus on training and expanding shop for experience to prepare for the higher production rates.

Speaker 3: We're excited about the growth opportunities ahead. And we expect that growth to drive significant cash generations over the next several years.

We're excited about the growth opportunities ahead, and we expect that growth to drive significant cash generation over the next several years.

Speaker 3: As a reminder, we continue to expect capital expenditures to remain below $100 million for the next few years as we grow into and reutilize existing plant and equipment.

As a reminder, we continue to expect capital expenditures to remain below $100 million for the next few years as we grow into and we utilize existing plant and equipment.

Speaker 3: Third quarter sales who strongly year over year, and they also reflect the normal third quarter seasonality we typically experience from the European summer vacation period.

Third quarter sales grew strongly year over year and they also reflect the normal third quarter seasonality, we typically experience from the European summer vacation period.

Speaker 3: In addition, there are some ongoing supply chain challenges in the commercial aerospace market as the OEMs navigate their way through the strong ramp up in build rates.

In addition, there are some ongoing supply chain challenges in the commercial aerospace market as the Oems navigate their way through the strong ramp up in build rates.

Speaker 3: Given our higher number of production assets and service today, along with the preparation to support strong growth ahead, the expected lower third quarter sales resulted in a reduction in our market.

Given a higher number of production assets in service today, along with the preparation to support strong growth ahead.

Expected lower third quarter sales resulted in a reduction in our margins.

Speaker 3: The supply chains for our raw materials are greatly improved compared to last year. Those shipping lead times are still not quite back to the level seen prepandemic.

The supply chain for our raw materials are greatly improved compared to last year, though shipping lead times are still not quite back to the levels seen pre pandemic.

Speaker 3: Pressures also continue around certain inflationary impacts, most notably energy cost in Europe .

Pressures also continue around certain inflationary impacts most notably energy costs in Europe .

Speaker 3: Our response to all these challenges is our ongoing commitment to Operation Life's Lens, which continues to drive efficiencies and increase productivity throughout our operation.

Our response to all these challenges as our ongoing commitment to operational excellence, which continues to drive efficiencies and increased productivity throughout our operations.

Speaker 3: Positioning in advance for the bill rate growth ahead is critical both for hexal and our customers to avoid disruptions and to replenish the supply chain.

Positioning in advance for the Bill rate growth ahead is critical both for hexcel, and our customers to avoid disruptions and to replenish the supply chain.

Speaker 3: The commercial aerospace industry is on a fast-paced journey to ramp the build rates of modern light weight aircraft.

The commercial aerospace industry is on a fast paced journey to ramp the bill rates of modern lightweight aircraft.

Speaker 3: Over the next three years, build rates for narrow body aircraft are expected to increase by nearly 50% and build rates for wide body aircraft are expected to almost double.

Over the next three years build rates for narrow body aircraft are expected to increase by nearly 50% and build rates for wide body aircraft are expected to almost double.

Speaker 3: This is both a challenge and a great opportunity. And Hexal is determined to be ready to ensure our products are produced efficiently and delivered on time to our customers.

This is both a challenge and a great opportunity and hexcel is determined to be ready to ensure our products are produced efficiently and deliver it on time to our customers.

Speaker 3: The forecasted cash generation over this period will provide significant capital deployment opportunities in the coming years while we continue to maintain strong discipline around our balance sheet structure.

The forecasted cash generation over this period will provide significant capital deployment opportunities in the coming years, while we continue to maintain strong discipline around our balance sheet structure.

Speaker 3: This is truly a great time to be in the business of manufacturing lightweight composite materials.

This is truly a great time to be in the business of manufacturing lightweight composite materials.

Now let me highlight some of the third quarter results and Patrick will then provide more detail on the numbers.

Speaker 3: Now that we highlight some of the third quarter results, and Patrick will then provide more detail in the numbers.

Speaker 3: Mirfelloral Space Fails of almost $252 million increased more than 19% in constant currency compared to the third quarter of 2022.

Commercial aerospace sales of almost $252 million increased more than 19% in constant currency compared to the third quarter of 2022.

Speaker 3: The strongest growth came from the Airbus A350 and Boeing 77 wide body program.

Our strongest growth came from the Airbus <unk> hundred 50, and Boeing 77 wide body programs.

Speaker 3: Narrow body sails were relatively flat year over year, reflecting some temporary disruptions in the overall aerospace supply.

Narrow bodies sales were relatively flat year over year, reflecting some temporary disruptions in the overall aerospace supply chain.

While each quarter, we highlight the strongest programs from Airbus and Boeing remember, we have great positions in the business jet segment.

Speaker 3: While each former we highlight the strongest programs from Airbus and Boeing, remember we have great positions in the business jet segment.

Speaker 3: Other commercial aerospace increase more than 20% in the third quarter and continued strong business get demand. Let me.

Other commercial aerospace increased more than 20% in the third quarter and continued strong business jet demand.

Let me highlight a couple of additional points.

Speaker 3: First, the combined Airbus Boeing backlog currently stands at a record 13,775 aircraft.

First the combined Airbus Boeing backlog currently stands at a record 13775 aircraft.

Speaker 3: Airlines are securing their place in line that is 8 to 10 years long as they plan to replenish their terms.

Airlines are securing their place in line that is eight to 10 years long as they plan to replenish those fleets with new efficient lightweight aircraft.

Speaker 3: Virtually every OEM out there is ramping as fast as the supply chain will allow.

Virtually every OEM out there is ramping as fast as the supply chain will allow.

Commercial aerospace is booming and demand remains strong perhaps stronger than ever.

Speaker 3: Immersed aerospace is booming and demand remains strong. Perhaps stronger than ever.

Speaker 3: lightweight materials for fuel-efficient aircraft are being pulled harder than I've seen in my 14 years with Hexel, and the reason is clear. Making flying platforms light and strong is the number one in labor for both performance and sustainability. And Hexel is

Lightweight materials for fuel efficient aircraft are being pulled harder than I've seen in my 14 years with <unk> and the reason is clear, making flying platform's life and strong is the number one enabler for both performance and sustainability and Hexcel is.

Speaker 3: at the leading edge of developing and producing these technologies.

At the leading edge of developing and producing these technologies.

Secondly, we recognize that while the next narrow body programs.

Speaker 3: Secondly, we recognize that while the next Nerobody program might not have a scheduled launch date, material selections for those aircraft are several years in advance of launch, and that time is now.

I have scheduled launch date material selections for those aircrafts are several years in advance of launch and that time is now.

Speaker 3: We have tremendous efforts to underway as we pursue those opportunities with our customers.

We have tremendous efforts underway as we pursue those opportunities with our customers.

Turning to space and defense sales of almost $129 million increased 17% in constant currency with broad based growth across a number of military platforms globally, including classified programs.

Speaker 3: Turning the space and defense, sales of almost $129 million, increased 17% in constant currency with broad-based growth across a number of military platforms globally, including classified programs.

Speaker 3: Defense spending is on an upward trajectory in many countries as governments raise budgets in response to the growing instability and increase number of conflicts occurring around the world today.

Defense spending is on an upward trajectory in many countries as governments raise budgets in response to the growing instability and increased number of conflicts occurring around the world today.

Speaker 3: In August , it was announced that the US Navy awarded Sikorsky a $2.7 billion contract to build and deliver 35 additional CH-53 TAE helicopters. And that's big news both for our customer and for us.

In August it was announced that the U S. Navy awarded Sikorsky, a $2 7 billion dollar contract to build and deliver first five additional CH 50, <unk> helicopters and that's big news, both for our customer and for us.

Speaker 3: As you know, the CH53K is becoming one of our top defense program.

As you know the CH 53, K is becoming one of our top defense programs.

Also in August we celebrated the landing of the Sham Julianne tree on the Moon. It was the first lower lunar probe under the program launched by the Indian Space Research organization, and our Hexcel lightweight advanced composites were onboard.

Speaker 3: Also in August , we celebrated the landing of the Shandruyen tree on the moon. It was the first lunar probe under the Program launch by the Indian Space Research Organization and our Hexel lightweight advanced composites were on board.

Now turning to industrial sales of about $39 million decreased 21% in constant currency attributed primarily to lower wind energy sales.

Speaker 3: Now turning to industrial. Sales of about $39 million decreased, 21% in constant currency, attributed primarily to lower wind energy sales.

Speaker 3: Globally, the wind energy remains, wind energy industry remains channeled.

Globally, the wind energy remains wind energy industry remains challenge our legacy wind business is now focused in Austria, which continues to deliver to our largest win customer vestas.

Speaker 3: Our legacy win business is now focused in Austria, which continues to deliver to our largest win customer vest.

Speaker 3: Other parts of our industrial business continue to grow, most notably automotive, which has increased year over year, and now is the largest sub-substatement for us in industrial.

Other parts of our industrial business continue to grow most notably automotive, which has increased year over year and now is the largest subsegment for us in industrial.

Speaker 3: our presence in high-end sports cars and SUVs as well as carbon fiber wheels is growing, pulling through high-value added composites material.

Our presence in high end sports cars, and Suvs as well as carbon fiber wheels is growing pulling through high value added composites materials.

Speaker 3: other areas such as marine, electric vehicles, and hydrogen pressure vessels, where there is a need for value-adding advanced composite solutions are also being explored.

Other areas, such as marine electric vehicles, and hydrogen pressured vessels, where there is a need for value, adding advanced composite solutions are also being explored.

Speaker 3: Year to date total hexfell sales of more than $1.3 billion are up more than 15% year-over-year in constant currency. And EPS is up more than 50% to $1.38 at the end of September 2023, from $8.8 this time last year.

Year to date total hexcel sales of more than one $3 billion are up more than 15% year over year in constant currency and EPS is up more than 50% to $1.38 at the end of September 2023 from 88 since this time last year.

Speaker 3: All of which reflects positive momentum and underpins our confidence in continued strong demand and growth.

All of which reflects positive momentum and underpins our confidence in continued strong demand and growth.

Speaker 3: As evidence of that confidence, we completed a stop by back of $30 million during the third quarter.

As evidence of that confidence, we completed a stock buyback of $30 million during the third quarter.

Speaker 3: Lastly, our sales, EPS, and free cash flow guidance remains unchanged for 2023.

Lastly, our sales EPS and free cash flow guidance remains unchanged for 2023.

Speaker 3: Now I'll turn it over to Patrick to provide more details on the number.

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

Speaker 2: Thank you Nick. As a reminder, the majority of our sales are denominated in dollars. However, our cost base is a mix of dollars, euro and British pounds, as we have a significant presence in Europe , including both manufacturing and R&T.

Thank you Nick as a reminder, the majority of our sales are denominated in dollars. However, our cost base is a mix of dollars euros and British pounds as we have a significant presence in Europe , including both manufacturing and R&D.

Speaker 2: 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 result.

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.

Speaker 2: We had this currency exposure over a 10-quarter horizon to protect our operating income. As a result, currency changes are layered into financial results over time. As a reminder, the year over year fails, comparisons I will provide are in constant currency, which thereby removes the foreign exchange impact to fail.

We had this currency exposure over a 10 quarter horizon to protect our operating income as a result currency changes are layered into financial results over time.

As a reminder, the year over year sales comparisons I will provide or in constant currency with thereby removes the foreign exchange impact to sales.

Speaker 2: Our Q3 sales were impacted by the expected seasonality we previously highlighted, as well as some general challenges in the commercial era space market supply.

Our Q3 sales were impacted by the expected seasonality, we previously highlighted as well as some general challenges in the commercial aerospace market supply chain.

Speaker 2: However, as Nick described, the outlook for commercial aerospace remains extremely robust, providing us a confidence to position our infrastructure and workforce for the anticipated strong growth there.

However, as Nick described the outlook for commercial aerospace remains extremely robust providing us the confidence to position our infrastructure and workforce for the anticipated strong growth ahead.

Turning to our three markets commercial aerospace represented approximately 60% of total third quarter sales third quarter commercial aerospace sales of $251 9 million.

Speaker 2: Turning to our three markets, commercial aerospace represented approximately 60% of total third quarter sales. Third quarter commercial aerospace sales at $251.9 million increased 19.2% compared to the third quarter of 2022, led by growth in the Airbus A350 and Boeing 787 program.

Increased 19, 2% compared to the third quarter of 2022 led by growth in the Airbus <unk> hundred 50, and Boeing 787 programs.

Speaker 2: Total narrow body sales, including the Airbus A320 Neo, Airbus A220 and Boeing MAX, were unchanged year over year.

Total narrow body styles, including the Airbus <unk> hundred 20, Neo Airbus <unk> hundred 20, and Boeing Max were unchanged year over year.

Speaker 2: The other commercial aerospace category grew 20% with business jets displaying the most significant growth.

Commercial aerospace category grew 20% with business that is displaying the most significant growth.

Speaker 2: Space and Defence represents approximately 31% of third-quarter sales and totals $128.8 million, increasing 17.1% from the same period in 2022.

Space and defense represented approximately 31% of third quarter sales and totaled $128 8 million increase.

Increasing 17, 1% from the same period in 2022.

Speaker 2: Sail Strength came from a variety of different programs, including a number of international fixed wing aircraft programs, and dramatically from growth in pacified programs.

Sales strength came from a variety of different programs and creating a number of international fixed wing aircraft programs and.

Domestically from growth in classified programs.

Speaker 2: Industrial comprised approximately 9% of third quarter 2023 sales. Industrial sales totaled $38.8 million, decreasing 21.3% comparing for the third quarter of 2022.

Industrial comprised approximately 9% of third quarter 2023 sales industrial sales totaled $38 8 million decreasing 21, 3% comparing to the third quarter of 2022.

Speaker 2: The high-end automotive market, which is where we focus, grew strongly year over year, while wind continued to weaken.

High end automotive market, which is where we focus grew strongly year over year, while wins continued to weaken.

Speaker 2: The global wind industry is currently facing a number of challenges and we are experiencing lower demand as a result.

The global wind industry is currently facing a number of challenges and we are experiencing lower demand as a result.

Speaker 2: As a reminder, all of our wind energy production and expertise is now concentrated in Austria following our restructuring in North America and China.

As a reminder, all of our wind energy production and expertise is now concentrated in Australia. Following a restructuring in North America and China.

Speaker 2: On a consolidated basis, gross margin for the third quarter was 21.8% compared to 22.4% last year.

On a consolidated basis gross margin for the third quarter was 21, 8% compared to 22, 4% last year.

Speaker 2: With the anticipated strong growth ahead, the company has infrastructure and headcount in place to meet the forecasted high levels to demand and ensure our customers are fully supported as Aircraft Buildrates continue to ramp.

With the anticipated strong growth ahead, the company has infrastructure and head count in place to meet the forecast at high levels of demand and ensure our customers are fully supported as aircraft pills build rates continue to ramp.

Speaker 2: This growth related overhead however is a headwind in the short term impacting margins, particularly in periods with lower run rate sales, such as we saw in the third quarter.

This growth related overhead however is a headwind in the short term impacting margins.

<unk> in periods with lower run rate sales such as we saw in the third quarter.

Speaker 2: As a percentage of sales selling general and administrative expenses and R&T expenses, we are 11.6% in the third quarter compared to 11.1% in the third quarter of 2022.

As a percentage of sales selling general and administrative expenses and R&D expenses were 11, 6% in the third quarter compared to 11, 1% in the third quarter of 2022.

Speaker 2: The increase in reflect reflects the necessary infrastructure for new commercial growth as well as supporting the R&T organization with new product development.

The increase in flat reflects the necessary infrastructure for new commercial growth as well as supporting the R&D organization with new product development.

Speaker 2: Adjusted operating income in the third quarter was $42.8 million or 10.2% of sales. Compared to $41.2 million or 11.3% of sales in the comparable prior year period.

Adjusted operating income in the third quarter was $42 8 million or 10, 2% compared to $41 2 million or 11, 3% of sales in the comparable prior year period.

Due to our hedging program foreign exchange rates had no impact on third quarter adjusted operating income when comparing to the prior year.

Speaker 2: Due to our hedging program, foreign exchange rates had no impact on third quarter to a rejected operating income when comparing to the prior.

Now turning to our two segments. The composite materials segment represented 81% of total sales and generated an operating margin of 12, 3% the operating margin in the comparable prior year periods was 13, 4%.

Speaker 2: Now turning to our two segments, the composite material segment represented 81% of total sales and generated an operating margin of 12.3%. The operating margin in the comparable prior year period was 13.4%.

Speaker 2: The engineering product segment, which is comprised of our structures and engineering core businesses, represented 19% total sales and generated a 7.8% operating income margin as compared to 8.3% in the comparable prior year period.

The engineered products segment, which is comprised of our structures and engineered core businesses represented 19% of total sales and generated a seven 8% operating income margin.

As compared to eight 3% in the comparable prior year period.

Net cash provided by operating activities was $98 $1 million yesterday.

Speaker 2: Net cash provided by operating activities was $98.1 million year to date compared to $56.4 million for the comparable period in 2022.

<unk> to $56 4 million for the comparable period in 2022.

Speaker 2: working capsule with a cash fuse of $112.1 million here today to support higher sales.

Working capital was a cash years of $112 $1 million yesterday to support higher sales.

Speaker 2: For the comparable prior year of period, working capital increased $115 million.

For the comparable prior year period, working capital increased $115 million.

Our strong focus on disciplined working capital management continues as illustrated by the inventory reduction in the third quarter. Despite the lower revenue excellent performance on collections also supported third quarter working capital reduction.

Speaker 2: Our strong focus on disciplined working capital management continues and illustrated by the industry reduction in the third quarter despite the lower revenue. Excellent performance on collections, also supportive, third quarter working capital and still ?? solitary

Speaker 2: As just mentioned, our focus on inventory is becoming evidence with raw materials decreasing approximately $20 million on a sequential basis as we purposefully reduce our buffer or tracey style.

As just mentioned our focus on inventory is becoming evident with raw materials decreasing approximately $20 million on a sequential basis as we purposefully reduced our buffer or safety stock.

Speaker 2: As previously discussed, our supply chain and input lead times have improved significantly from the first half of 2022. We continue to target further.

As previously discussed our supply chain and input lead times have improved significantly from the first half of 2022.

We continue to target further inventory reductions.

Capital expenditures on an accrual basis were $88 $7 million year to date in 2023, which included the previously disclosed proxy purchase for a facility in Massachusetts.

Speaker 2: Capital expenditures on an accrual basis were $88.7 million a year to date in 2023, which included the previously disclosed property purchase for our facility in Massachusetts.

Speaker 2: without the property purchase in 2023, or the cash of expenditure would be $50.7 million, which compares to $49.1 million in the prior year period.

Without the property purchase in 2023 capital expenditure would be $50 7 million, which compares to $49 1 million in the prior year period.

Speaker 2: Free cashflow for the first nine months of 2023.

Free cash flow for the first nine months of 2023.

Speaker 2: with $3.7 million, which includes the Massachusetts property acquisition, but does not include the proceeds from the Colorado facility sold in the third quarter.

With $3 7 million, which includes the Massachusetts property acquisition, but does not include the proceeds from the Colorado facility sold in the third quarter.

Speaker 2: for the comparable prior year periods, free cash flow was negative $1.9 million.

For the comparable prior year period free cash flow was negative $1 9 million.

The board of directors declared a 12 and a half cent quarterly dividend yesterday payable to stockholders of record as of November 3rd with a payment of November 13.

Speaker 2: The board of directors declared it 12.5% and unfortunately dividend yesterday, payable to stockholders of records as of November 3rd, with a payment of November 13th.

Speaker 2: We repurchase approximately $30 million of common stock in the third quarter.

We repurchased approximately $30 million of common stock in the third quarter.

Speaker 2: The remaining authorization under the share approaches program on September 30th, 2023, was $187 million.

The remaining authorization under the share repurchase program on September 30 of 2023 with a $197 million.

Speaker 2: The company's net debt to EBITDA leverage was approximately 1.8 times at the end of the third quarter.

We are maintaining our 2023 guidance, except for adjusting the estimated annual tax rate due to some favorable lower changes domestically and internationally.

Speaker 2: We are maintaining our 2023 guidance, except for adjusting the estimated annual tax rate due to some favorable law changes domestically and internationally.

Speaker 2: Our 2023 estimated annual effective tax rate is now 21% compared to 23% previous.

Our 2023 estimated annual effective tax rate is now 21% compared to 23% previously.

Speaker 2: as a reminder. Our sale guidance is $1.765 billion to $1.835 billion.

As a reminder, our sales guidance is $1 76 5 billion.

Unknown Executive: Please stand by, we're about to begin. Good morning ladies and gentlemen, welcome to the Hexcel Third Quarter 2023 earnings conference call. At this time, all participants are in a listen only mode, and please be aware that this call is being recorded.

To 183 5 billion.

Speaker 2: Our adjusted EPS guidance is $1.80 to $1.94.

Our adjusted EPS guidance is $1 80.

To $1 94 and.

Speaker 2: and free cash flow is guided to be greater than $110 million. With that, let me turn the call back.

And free cash flow is guided to be greater than $110 million.

Unknown Executive: After the speakers prepare remarks, there will be a question and an intercession if you would like to ask a question during this time, simply press the star one under telephone keypad, and if you would like to withdraw your question, simply press star one again. And we do ask you, please lend yourself to one question and one follow-up question.

With that let me turn the call back to Nick.

Thanks, Patrick.

Speaker 3: Most of you know that we have a significant presence in Morocco.

Most of you know that we have a significant presence in Morocco.

Speaker 3: We're deeply saddened by the loss of life following the earthquake last month that tragically devastated parts of the country.

We are deeply saddened by the loss of life. Following the earthquake last month that tragically devastated parts of the country.

Patrick Winterlich: Now this time, I would like to turn things over to Mr. Patrick Winterlich, Chief Financial Officer. Please go ahead, sir. Thank you both.

Speaker 3: Fortunately, all our employees in that region are safe and our engineered core operations in Casablanca remains fully operational.

Fortunately all our employees in that region are safe and our engineered core operations and Casa Blanca remained fully operational.

Patrick Winterlich: Good morning, everyone. Welcome to Hexcel Corporation's third quarter 2023 earnings conference call. Before beginning, let me cover the formalities. I want to remind everyone about the state half of provisions related to any forward-looking statements we may make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the private security litigation reform act of 1995. They involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that 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-nights news release.

Speaker 3: As a final note, I want to share that our leadership team and members of our Board of Directors spent time earlier this month with our R&T team reviewing new products and processes and development.

As a final note I want to share that our leadership team and members of our board of Directors spent time earlier this month with our R&D team reviewing new products and processes and developments.

Speaker 3: And we couldn't be more excited about the future of Hexels' technology offering and the tremendous potential impact those advanced lightweight composites will have in enabling the reduction of CO2 emissions in the environment through greater fuel efficiency and modern aircraft and other forms of transportation.

And we couldnt be more excited about the future of <unk> technology, offering and the tremendous potential impact those advanced lightweight composites will have an enabling the reduction of cotwo emissions in the environment through greater fuel efficiency and modern aircraft and other forms of transportation.

Speaker 3: As you may remember from our comments in the past, we meet with our R&T leadership team every year, and this year it was a pleasure to meet for the first time at our new Center of Research and Technology Excellence in Salt Lake City.

As you May remember from our comments in the past, we meet with our R&D leadership team every year and this year. It was a pleasure to meet for the first time at our New Center of research and technology Excellence in Salt Lake City.

Unknown Executive: 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 its copyrighted material. It cannot be recorded or re-broadcast without our express permission. Your participation on this call constitutes your consent to that request.

Speaker 3: While these meetings dig deep into data and the details of fiber and tonsil strength, modulus, and the chemistry of precursors and resins, one simple fact always emerges from these technical discussions. And that is, our customer aligned approach to product development is a key differentiator for itself.

While these meetings dig deep into data and the details of filings tensile strength modulus and the chemistry of precursors in resins. One simple fact always emerges from these technical discussions and that is our customer aligned approach to product development is a key differentiator.

Patrick Winterlich: With me today, I'm Nick Stanich, our Chairman, CEO and President and Goddard, our Vice President of Investor Relations. The purpose of the call is to review our third quarter 2023 results detailed in our news release issues yesterday.

For upsell.

Speaker 3: We innovate based on the collaborations and continuous dialogue we have with our customers.

We innovate based on the collaboration and continuous dialogue, we have with our customers.

When we develop new products, we know the application and customer expectations, which make us highly efficient.

Speaker 3: When we develop new products, we know the application and customer expectations, which make us highly efficient.

Nick Stanage: Now, let me turn the call over to Nick. Thanks, Patrick.

Speaker 3: Our engineers and researchers have daily conversations with customers as we work closely with them to develop the next generation of lightweight solutions.

Our engineers and researchers have daily conversations with customers as we work closely with them to develop the next generation of lightweight solutions.

Nick Stanage: Good morning, everyone, and thank you for joining us today as we share our third quarter 2023 results. Continued strong demand in our commercial aerospace and space and defense markets resulted in another consecutive quarter of double-digit sales growth for Hexcel. Hexcel continues to benefit from the post-candemic travel recovery and from the growing poll for newer, more fuel-efficient, lightweight aircraft to meet that demand and to replace aging fleas. Over the past several months, numerous airlines around the world have placed a significant number of orders for both narrow body and wide body aircraft resulting in total backlogs that are at record levels.

Speaker 3: These customer engagements are now deeper than ever and we are fully aligned with their road maps as we design new lighter and stronger materials, especially for improved fuel efficiency and life-cycle costs.

These customer engagements are now deeper than ever and we are fully aligned with their roadmaps as we design, new lighter and stronger materials, especially for improved fuel efficiency and lifecycle costs.

Speaker 3: We are firmly convinced that the key to improved sustainability is lightweight. Composites are a prime enabler and Hexwell is a world's leader in providing lightweight, sustainable materials for the aerospace, space and defense, and select industrial markets.

We are firmly convinced that the key to improve sustainability is light weighting that composites are a prime enabler and hexcel is the world's leader in providing lightweight sustainable materials for the aerospace space and defense and select industrial markets.

Paul we're now ready to take questions.

Yes.

Speaker 1: Thank you, Mr. Stannings. Ladies and gentlemen, at this time, if you do have any questions against Star One, please. And we do ask the EPs limit yourself to one question and one follow-up question.

Thank you Mr standards, ladies and gentlemen at this time, if you do have any questions again star one fleet and we do ask you. Please limit yourself to one question and one follow up question I'll go first this morning, too Matt Akers at Wells Fargo.

Nick Stanage: Hexcel is on a long-term growth trajectory, and we are working hard to ensure that we are ready to satisfy that demand. This involves bringing back operational capacity, which has been either turned off or running at reduced rates since the pandemic. We've been recruiting the talent we need to meet the strong demand ahead of us and we continue to focus on training and expanding shop for experience to prepare for the higher production rates.

Speaker 1: We'll go first this morning to Matt Acres as well as Parker.

Alright, thanks for the question.

Speaker 4: Maybe to put a finer point on the margin discussion. I guess so, you know, margins down year of a year, even though sales were a lot higher, is most of that because of this kind of cost issue of you basically hired people that had the demand coming through or is there any sort of makes issue or anything else that sort of impacted margins for the quarter?

But maybe just to put a finer point on the margin discussion I guess, though margins down year over year, even though sales were a lot higher as.

Is most of that because of this kind of cost issue of you basically hired people ahead of the demand coming through or is there any sort of mix issue or anything else that sort of it.

Nick Stanage: We're excited about the growth opportunities ahead and we expect that growth to drive significant cash generations over the next several years. As a reminder, we continue to expect capital expenditures to remain below $100 million for the next few years as we grow into and reutilize existing plant and equipment. Third quarter sales who strongly year over year and they also reflect the normal third quarter seasonality we typically experience from the European summer vacation period.

Packet margins for the quarter.

Yes, I think.

Speaker 2: Good morning. It's much more to do with the gradual infrastructure and cost-based that we've been building and putting in place. Quite honestly, over the last several quarters, really, it's been ready for the really strong growth that we see, and we've just called out over the next sort of couple of years.

Good morning is much more to do with the.

The gradual.

Infrastructure and cost base that we've been building and putting in place quite honestly over the last several quarters really to be ready for the <unk>.

Really strong growth that we see and we've just called out over the next sort of couple of years.

Speaker 2: We're running more lines, as Nick called out in his part of the comments, but perhaps they're not all efficient, that they're not sort of at the utilization level individually that we would like. And we have more people, and we continue to train and upgrade that experience as we go. And so we're carrying that higher level of overhead, if you like, infrastructure in the company for the future growth.

We are running more lines as Nick called out in his part of the the comments.

Nick Stanage: In addition, there are some ongoing supply chain challenges in the commercial aerospace market as the OEMs navigate their way through the strong ramp up and build rates. Given our higher number of production assets and service today, along with the preparation to support strong growth ahead, the expected lower third quarter sales resulted in a reduction in our margins. The supply chains for our raw materials are greatly improved compared to last year. Those shipping lead times are still not quite back to the level seen pre-pandemic.

But perhaps they're not all efficient, they're not sort of at the utilization level individually that we would like.

And we have more people and we continue to train and upgrade that experience as we go and so we're carrying that higher level of overhead if you like infrastructure in the company for the future growth.

Speaker 2: and it's going to take time to really get a top line that really pulls all that product production and all those sales through to really drive the margins. And certainly when you have a quarter as we have forecasted as our third quarters are reduced by the European seasonality impact, then you see the margin headwind that we saw. It was much more that in the third quarter than anything to do with...

And it's going to take time to really get a top line that really pulls all of that product production and all of those sales through to really drive the margin and certainly when you have a quarter as we had forecasted as our third quarters are reduced by the European seasonality impact than you see.

Nick Stanage: Freshers also continue around certain inflationary impacts, most notably energy cost in Europe. Our response to all these challenges is our ongoing commitment to operational excellence which continues to drive efficiencies and increase productivity throughout our operations. Positioning in advance for the build rate growth ahead is critical both for HECSEL and our customers to avoid disruptions and to replenish the supply chain. The commercial aerospace industry is on a fast-paced journey to ramp the build rates of modern lightweight aircraft.

The margin headwinds that we saw it was much more of that in the third quarter than anything to do with to do with mix.

Speaker 4: Okay, understood. And then I guess some of the industry supply chain HGD mentioned the flat narrow bodies over the years. Is any of that, I guess, driven by Hexel supply chain things over is a more demand from your customers in the end you have any view of how long that linger that back could go on in 2024.

Okay understood.

And then I guess some of the I guess the industry supply chain issues, you mentioned in the flat narrow bodies year over year is any of that.

I guess driven by XL supply chain being slow or is it more.

Demand from your customers and do you have any view.

Sort of how long that lingers.

Nick Stanage: Over the next three years, build rates for neural body aircraft are expected to increase by nearly 50 percent and build rates for wide-body aircraft are expected to almost double. This is both a challenge and a great opportunity and HECSEL is determined to be ready to ensure our products are produced efficiently and delivered on time to our customers. The forecasted cash generation over this period will provide significant capital deployment opportunities in the coming years while we continue to maintain strong discipline around our balance sheet structure.

Sure.

Yes, Matt so yes.

Speaker 3: Yeah, Matt. So, yeah, basically the challenges that the OEs are dealing with are certainly not related to HEPSAW. We're in a great position with capacity and resources available to meet their growing demand and their projected growing demand. There are a few issues out there that really are limiting.

<unk>. The challenge is that the Oes are dealing with are certainly not related to <unk>, we're in a great position.

With capacity.

Resources available to meet their growing demand in our projected loan demand. There are a few issues out there that really are limiting the ramp rate on the growth, where we always want to take the narrow bodies and wide bodies and it just slowed it down a little bit cause some inspections and rewards.

Speaker 3: the ramp rate on the growth. Where the always want to take the narrow bodies and wide bodies and it just slowed it down a little bit.

Speaker 3: cause some inspections and reworks within that supply chain.

Within that supply chain.

Speaker 3: And my perspective is that these will be resolved and given the demand and the pull for those new lightweight nervous body and white body aircraft.

And my perspective is that these will be resolved and given the demand and the pull for those new lightweight narrow body and wide body aircrafts.

Nick Stanage: This is truly a great time to be in the business of manufacturing lightweight composite materials.

Speaker 3: The rates are going to continue to go up and that's what we're positioning for is strong 24 and 25 build rates and growth for Huxup. Great, thank you.

The rates were going to continue to go up and that's what we're positioning for a strong 24% 25 build rates and growth for EXL.

Nick Stanage: Now that we highlight some of the third quarter results, and Patrick will then provide more detail on the numbers. Commercial aerospace sales of almost $252 million increased more than 19 percent in constant currency compared to the third quarter of 2022. The strongest growth came from the Airbus A350 and Boeing 77 wide-body programs. James. Narrow body fails were relatively flat year-over-year, reflecting some temporary disruptions in the overall aerospace supply chain. While each forer we highlight the strongest programs from Airbus and Boeing, remember we have great positions in the business jet segment. Other commercial aerospace increased more than 20% in the third forer and continued strong business jet demand.

Great. Thank you.

Thank you.

We'll go next now to Gavin Parsons at UBS.

One moment gentlemen, it looks like we actually lost Mr. Parsons will go next now to Ken Herbert at RBC.

Speaker 1: one moment, Jim, it looks like we actually lost Mr. Parsons. We'll go next now to Ken Herbert at RBC.

Yes, hi, good morning, Nick and Patrick.

Good morning Ann.

Speaker 5: Hey, maybe just to put a finer point on the margin question, if you had sort of seen the increase in narrow body volume that maybe been contemplated earlier in the year, would we have seen the same kind of margin impact year over year or how much of a factor was basically flat volume on the narrow body?

Hey, maybe just to.

Put a finer point on the margin question, if you had sort of seen the.

The increase in narrow body volume that maybe been contemplated earlier in the year.

Would we have seen the same kind of margin impact year over year or how much of a factor was basically flat volume on the narrow body side.

Nick Stanage: Let me highlight a couple of additional points. First, the combined Airbus Boeing backlog currently stands at a record 13,775 aircraft. Airlines are securing their place in line that is 8 to 10 years long as they plan to replenish their fleece with new, efficient lightweight aircraft. Virtually every OEM out there is ramping as fast as the supply chain will allow. Commercial aerospace is booming and demand remains strong, perhaps stronger than ever. Lightweight materials for fuel-efficient aircraft are being pulled harder than I've seen in my 14 years with Hexcel and the reason is clear.

Okay.

Speaker 3: So let me start, clearly, increased demand on the narrow body would have helped.

Paul Let me.

Let me start clearly increased demand on the narrow body.

Hall.

Speaker 3: But it would not have changed our position and the fact that

But it would not have changed our position and the fact that.

Speaker 3: In the environment we're in after taking our assets down to the low point we did at the pandemic to preserve cash and the position for a strong viable future. We knowingly took off 35% of our resources in our heads.

In the environment, we're in after taking our assets down to the low point, we did at the pandemic to preserve cash in that position for a strong viable future.

We.

Knowingly took about 35% of our resources in our house.

Speaker 3: In today's hiring environment with the unemployment where it is, with the poll for talent globally, we had to get ahead of the hiring and we do that intentionally so that we can train them. And as the growth comes, we can get the efficiency back to and above 2019 levels.

In today's hiring environment with the unemployment where it is with the pull for talent globally. We had to get ahead of the hiring and we do that intentionally so that we can train them and as the growth comes we can get the.

Nick Stanage: Making flying platforms light and strong is the number one enabler for both performance and sustainability. Hexcel is at the leading edge of developing and producing these technologies. Secondly, we recognize that while the next Narrow body program might not have a scheduled launch date, material selections for those aircraft are several years in advance of launch and that time is now. We have tremendous effort to underway as we pursue those opportunities with our customers.

<unk> C back to and above 2019 levels and I have to tell you. The third quarter, we're seeing our efficiencies come up and as that demand and that growth continues to pull through.

Speaker 3: And I have to tell you, the third quarter, we're seeing our efficiencies come on up. And as that demand and that growth continues to pull through for Q4 and into 24 and 25, we're expecting to convert very strongly on that volume. So to answer your question, Ken, it would have had an effect, but it wouldn't have negated the seasonality and the lower demand.

<unk> Q4 and into 'twenty, four and 'twenty five we're expecting to convert very strongly on that volume. So to answer your question can it would've had in fact, but it wouldn't have.

Nick Stanage: Turning to space and defense, sales of almost $129 million increased 17% in constant currency with broad base growth across a number of military platforms globally, including classified programs. Defense spending is on an upward trajectory in many countries as governments raise budgets in response to the growing instability and increase number of conflicts occurring around the world today. In August, it was announced that the US Navy awarded Sikorsky a $2.7 billion contract to build and deliver 35 additional CH-53T helicopters and that Steve News both for our customer and for us.

The gated the seasonality and the lower demand.

Okay, and I guess I mean.

Speaker 5: And I guess, I mean, you'd seem to be on a fairly nice trajectory when we look at the gross margins. We can appreciate the seasonality, but was there anything else that maybe deteriorated in the quarter as you think about, you know, maybe costs in Europe or logistics or other aspects of the supply chain that maybe pushed you to see sort of greater inefficiency or maybe taking more sort of cautious view on sort of your own pull forward of cost to support future rate ramps?

You seem to be on a fairly nice trajectory when we look at the gross margins. We can appreciate the seasonality, but was there anything else that maybe deteriorated in the quarter. As you think about maybe caution in Europe or logistics or other aspects of the supply chain that maybe push you do see sort of greater inefficiency or may be taken.

More sort of cautious view on sort of your own pull forward of cost to support future rate ramp.

Speaker 2: I mean, absolutely nothing to make us more cautious on the future opportunity and the future ramp. Now obviously we're cognizant of what's happening with the narrow bodies and the challenges that Nick talked to in that space. I think they're well known and obviously we are.

I mean, absolutely nothing to make us more cautious on the future opportunity in the future ramp now obviously we're.

Cognizant of what's happening with the narrow bodies and the challenges that need tool too in that space.

Nick Stanage: As you know, the CH-53T is becoming one of our top defense programs. Also in August, we celebrated the landing of the San Julien 3 on the moon. It was the first lunar probe under the program launched by the Indian Space Research Organization and our Hexcel lightweight advanced composites were on board.

I think that well known and obviously, we are ready to support both Airbus and Boeing as they move to $3 20 in the Max rates up and we are certainly ready to do that and we will not be.

Speaker 2: ready to support both Airbus and Boeing as they move for 320 and the MX rates up and we are certainly ready to do that and we will not be causing any delay. In terms of the cost it's really...

Causing any delays in terms of the cost is really about the overhead base and the overhead leverage ability given the volume of sales that there isn't anything specific I would call out on the cost front.

Speaker 2: The overhead base and the overhead leverage ability given the volume of sales. That there isn't anything specific, I would call out on the cost front. It's as I was saying to maths. It's really about...

Nick Stanage: Now turning to industrial, sales of about $39 million decreased 21% in constant currency attributed primarily to lower wind energy sales. Globally, the wind energy remains wind energy industry remains channeled. Our legacy win business is now focused in Austria, which continues to deliver to our largest win customer justice. Other parts of our industrial business continue to grow, most notably automotive, which has increased year-over-year, and now is the largest sub-statement for us in industrial.

As I was saying to math, it's really about that gradual buildup in our infrastructure and our workforce ready for the plenty of growth ahead, and we are not going to be late for that and so aligning those two things is never perfect.

Speaker 2: Gradual build-up in our infrastructure and our workforce.

Speaker 2: ready for the clear growth ahead and we are not going to be late for that.

Speaker 2: And so aligning those two things, it never perfect. And so our cost base is perhaps just a little bit ahead of the sales growth, but we're going to be ready. And when that comes, we'll generate the margins, and we will generate the catch.

And so our cost basis, perhaps just a little bit ahead of the sales growth, but we're going to be ready and when that comes we will generate the margins and we will generate the cash.

Nick Stanage: Our presence in high-end sports cars and SUVs, as well as carbon fiber wheels is growing, pulling through high-value-added composite materials. Other areas, such as marine, electric vehicles, and hydrogen-pressure vessels, where there is a need for value-adding advanced composite solutions are also being explored.

Alright, well, thank you very much.

Speaker 1: Thank you. We'll be right back to Miles Walton, at the Wolf Research.

Thank you the next now to Myles Walton at Wolfe Research.

Speaker 5: Thanks, Boarding. Patrick or Nick, I'm not sure, but maybe just to clarify, was the margin performance in the quarter about as you expected? And then we're just looking forward, Nick, you're talking about the growth that you're sort of building towards. Is it still fair to think about a double digit growth into next year? And then the margin profile of getting to mid teens at two billion in sales is that still on the table.

Thanks, Good morning.

Nick I'm not sure, but maybe just to clarify was the margin performance in the quarter.

About as you expected and then maybe just looking forward. Nick you are talking about the growth that you're you're sort of building towards is it still fair to think about a double digit growth into next year and then the margin profile of getting to mid teens at 2 billion in sales is that still on the table.

Nick Stanage: Year-to-date total Hexcel sales of more than $1.3 billion are up more than 15% year-over-year in constant currency, and EPS is up more than 50% to $1.38 at the end of September 2023 from $0.88 this time last year. All of which reflects positive momentum and underpins our confidence in continued strong demand and growth. As evidence of that confidence, we completed a stop-by-back of $30 million during the third quarter.

Speaker 2: Yeah, so the margin in Q3 was close to what we expected, yes, because we probably saw the seasonal sales or we recognised it perhaps more than it was externally recognised. So the margins were not a long way off what we expected, passed a little bit softer but not a lot.

Yes so.

The margin in Q3 was close to what we expected, yes, because we probably saw the seasonal styles.

We recognize that perhaps more so than it was externally recognized.

So the margins were not alone way off what we expected pass a little bit soft.

Nick Stanage: Lastly, our sales, EPS, and free cash flow guidance remains unchanged for 2023.

But not a lot.

Speaker 2: Looking forward over the next couple of years, we see strong doubles as it grows for a couple of years now in front of us.

Looking forward over the next couple of years, we see strong double digit growth for a couple of years now in front of us.

Patrick Winterlich: 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 are denominated in dollars. However, our cost base is a mix of dollars, euro, and British pounds as we have a significant presence in Europe, including both manufacturing and R&T. As a result, when the dollar strengthens against the euro and the pound, our sales translate lower, while our costs also translate lower, leading to a net benefit to our margins.

Speaker 2: with 2025 getting sort of back to where 2019 was. That that should be the expectation out.

With 2025 getting sort of back to where 2019 was.

That should be the expectation out there.

Speaker 2: In terms of the mid-team margins, we're strongly going to be pushing for that and we will get there once we line up our cost base with the right level of sales. We've got to do the training, we've got to have the infrastructure, but our ability to get to mid-teams once the revenue comes and once... I mean, we should be able to push past it, ultimately, as what I'm trying to say miles, back to where we were.

<unk>.

Mid teens margins were strongly going to be pushing for that and we will get there once we line up our cost base with the.

The right level of sales.

We've got to do the training, we've got to have the infrastructure, but on our ability to get to mid teens. Once the revenue comes and once when we should be able to push past that.

Patrick Winterlich: Conversely, a weak dollar is a headwind to our financial results. We had this currency exposure over a 10-quarter horizon to protect our operating income. As a result, currency changes are layered into financial results over time. As a reminder, the euro sales comparisons I will provide are in constant currency, which thereby removes the foreign exchange impact to sales. Our Q3 sales were impacted by the expected seasonality we previously highlighted, as well as some general challenges in the commercial era space market supply chain.

Ultimately, what I'm trying to say model back to where we were we that's not going to happen tomorrow.

Speaker 2: That's not going to happen tomorrow, but that's definitely the target on the table and we're not taking that away.

Definitely the target on the table and we're not taking that away.

Speaker 6: And just to clarifying on the industrial side, I've always thought of that as that business is being lower margin.

Got it and just clarifying on the industrial side I've always thought of that as that business as being lower margins.

Speaker 6: But it might be getting to a point where the sales are so low that it's actually a net drag on profit. Can you just give us a color of the profitability of the industrial business at this point in composites?

Then the core but it might be getting to a point, where the sales are so low that it's actually a net drag on profit can.

Can you just give us a color of the profitability of the industrial business at this point and composite materials.

Patrick Winterlich: However, as Nick described, the outlook for commercial era space remains extremely robust, providing us the confidence to position our infrastructure and workforce for the anticipated strong growth ahead. Turning to our Q3 markets, commercial era space represented approximately 60% of total third quarter sales. Third quarter commercial era space sales at $251.9 million increased 19.2% compared to the third quarter of 2022, led by growth in the Airbus A350 and Boeing 787 programs. Total narrow body sales, including the Airbus A320 Neo, Airbus A220 and Boeing MAX, were unchanged year-over-year.

Speaker 3: So I'll take a shot at first splitting it and let's talk about wind for a minute. And again, remember the wind technology...

So I'll take a shot at.

Splitting it and let's talk about wind for a minute and again remember the wind technology.

Speaker 3: transitioned to a Lower technology and one that we chose not to pursue and that resulted in us restructuring in North America As well as China so we're serving the wind market out of our facility in Austria and and supportingbestos and and a couple of other small ones Remember wind is less than two percent

<unk> transitioned to a lower technology and one that we chose not to pursue.

And that resulted in less restructuring in North America as.

As well as training so were serving the wind market out of our facility in Austria and support investors in a couple of other small ones remember wind is less than 2%.

Speaker 3: expected of Hexel's total revenue this year and it is at a lower margin, a lower cost of syrup and decent return on invested capital but a lower margin profile.

Expected of <unk> total revenue this year and it is at a lower margin lower cost to serve a decent return on invested capital, but a lower margin profile.

Patrick Winterlich: The other commercial aerospace category grew 20% with business guests displaying the most significant growth. Space and defense represented approximately 31% of third quarter sales and totaled 128.8 million dollars, increasing 17.1% from the same period in 2022. Sales strength came from a variety of different programs, including a number of international fixed wing aircraft programs and domestically from growth in classified programs. Industrial comprised approximately 9% of third quarter 2023 sales. Industrial sales totaled 38.8 million dollars, decreasing 21.3% comparing for the third quarter of 2022.

Speaker 3: On the balance of the industrial, the automotive, the select areas that we find niches to introduce our technology and differentiated solutions.

On the balance of the industrial the automotive the select areas that we find niches to introduce our technology and differentiated solutions. The margin really is not dilutive to <unk>.

Speaker 7: The margin really is not dilutive to Huxel. And perhaps in some of those high-end automotive and niche applications, when we do fall off on sales a little bit because of inflationary, recessionary pressures on REC or winter sports or some of those other markets, it could have a slight dilutive effect on the margins. Thank you.

And and in perhaps in some of those high end automotive and niche applications. When we do fall off on sales a little bit because of inflationary recessionary pressures on rack or winter sports, where some of those other markets. It could have a slight dilutive.

The effect on the margins.

Okay. Thank you.

Thanks files.

We'll go next to Gavin Parsons at UBS.

Patrick Winterlich: The high end automotive market, which is where we focus, grew strongly year over year, while wind continued to weaken. The global wind industry is currently facing a number of challenges and we are experiencing lower demand as a result. As a reminder, all of our wind energy production and expertise is now concentrated in Austria following our restructuring in North America and China. On a consolidated base, this gross margin for the third quarter was 21.8% compared to 22.4% last year.

Hey, Good morning can you guys hear me.

Speaker 8: Good morning! Okay see this?

Good morning.

Speaker 4: Thank you, sorry about the tech issues. Apologies about if I missed this, but can you talk a little bit about how much the capacity step up is, what growth rates, you know, you're kind of hired ahead for there and how much of the double digit top line revenue growth is now already in the cuff base.

Thank you sorry about the tech issues.

Apologize if I missed this but can you talk a little bit about how much the capacity step up as well.

What growth rates, you're kind of hired ahead for there and how much of the double digit topline revenue growth is now already in the cost base.

Hi.

Well.

Sure.

Speaker 3: We're continuing to bring up assets, you know, just to roughly calibrate. You think of 2019 of us as us running close to capacity. We'd never be at 100% but think of mid 90s. And if you think about our racial of sales today to where we were then, think of our assets being utilized at about 75%.

We're continuing to bring up assets.

Roughly calibrated you think of 2019 above as us running close to capacity, we'd never be at 100%, but think of mid nineties.

Patrick Winterlich: With the anticipated strong growth ahead, the company has infrastructure and headcount in place to meet the forecasted high levels to demand and ensure our customers are fully supported as aircraft bills continue to ramp. This growth related overhead, however, is a headwind in the short term impacting margins, particularly in periods with lower run rate sales, such as we saw in the third quarter. As the percentage of sales selling general and administrative expenses and R&T expenses were 11.6% in the third quarter compared to 11.1% in the third quarter of 2022.

And if you think about our ratio of sales today to where we were then think of our assets being utilized at about 75% that will give you a good proxy for where we are with respect to utilization.

Speaker 3: Then we'll give you a good proxy for where we are with respect to utilization.

Speaker 3: Some plants that means we have some lines still down. Some plants that may mean we have a line up but aren't running it at 100% of capacity. Meaning we may have more positions that we could turn on which make it much less efficient but the right thing to do so that we don't over build inventory and to optimize our cash position going forward. So from an asset.

Some plants that means we have some lines still down.

Some plants that May mean, we have a line up but arent running it at 100% of capacity, meaning we may have more positions that we could turn on which makes it much less efficient, but the right thing to do so that we double overbuild inventory.

Patrick Winterlich: The increase in reflect reflects the necessary infrastructure for new commercial growth as well as supporting the R&T organization with new product development. Adjusted operating income in the third quarter was 42.8 million dollars or 10.2% sales compared to 41.2 million dollars or 11.3% sales in the comparable prior year period. Due to our hedging program for an exchange rate had no impact on third quarter adjusted operating income when comparing to the prior year.

And to optimize our cash position going forward.

From an asset base in the fiber specifically, we have brought in a lot of assets a lot of resources over the last three to six months and that fibers is one of the big.

Speaker 3: In the fibers specifically, we have brought in a lot of assets, a lot of resources over the last three to six months.

Speaker 3: And that fibers is one of the big drivers within Hexfell from a cash from a profitability generation. And there, I'm not gonna say we don't have to add a few people, but basically most of our lines are running now where we see them for the next six, 12, maybe even a little bit longer.

Drivers within heck cell format.

Cash from.

<unk> profitability generation and there im not going to say, we don't have to add a few people, but basically most of our lines are running now where we see them for the next 612, maybe even a little bit longer.

Patrick Winterlich: Now turning to our two segments, the composite material segment represented 81% of total sales and generated an operating margin of 12.3%. The operating margin in the comparable prior year period was 13.4%. The engineered product segment, which is comprised of our structures and engineered core businesses, represented 19% total sales and generated a 7.8% operating income margin as compared to 8.3% in the comparable prior year period. Net Cash, provided by operating activities, was 98.1 million dollars a year to date, compared to 56.4 million dollars for the comparable period in 2022.

Speaker 3: So we feel like we're in a great position there. Other plants depends on the technology, whether it's free-trag or blending or core engineer products. There may be select ads here and there, but overall we're going to enter 2024 in a very strong position to deliver on that demand.

We feel that we're in a great position there other plants depends on the technology, whether it's <unk> or blending or core engineered products. There may be select ads here and there, but overall, we're entering we're going to enter 2024, and a very strong position to deliver on.

That demand.

Great I appreciate that detail and then on buybacks is your anticipation there that.

Speaker 4: Great, appreciate that detail. And then on bybacks, is your anticipation there that as your cashless drink then you'll do something regular or was that an opportunistic?

As your cash flow strengthens you'll do something regular or was that an opportunistic purchase in the quarter.

Well, we constantly look at our capital structure and we're back into the range, where we like to operate our net debt leverage ratio in the one eight region. So we review that with the board on a regular basis with respect to what opportunities.

Speaker 3: Well, we constantly look at our capital structure and we're back into the range where we like to operate our net debt leverage ratio in the 1.8 region. So we review that with a board on a regular basis which we expect to what opportunities are there for collaborations.

Patrick Winterlich: Working capsule was a cash use of 112.1 million dollars a year to date to support higher sales. For the comparable prior year period, working capsule increased 115 million dollars. Our strong focus on disciplined working capsule management continues and illustrated by the inventory reduction in the third quarter, despite the lower revenue. Excellent performance on collections also supported third quarter working capsule reduction. As just mentioned, our focus on inventory is becoming evidence, with raw materials decreasing approximately 20 million dollars on a sequential basis, as we purposefully reduce our buffer or flaky stock.

Either for collaboration.

Speaker 3: What areas do we have with respect to internal investment? And then what's our opportunities with respect to dividend strategy and share buyback?

What areas do we have with respect to internal investment and then what's our opportunities with respect to dividend strategy and share buyback. So it really was an opportunity for us too.

Speaker 3: It really was an opportunity for us to underlude what we issued in 2023, clearly given our leverage position and our increased cash flow forecast, we're gonna be looking at that much more actively going forward.

What we issued in 2023.

Clearly given our leverage position and our increased cash flow.

Our forecast, we're going to be looking at that much more actively going forward.

Thank you.

Youre welcome.

Patrick Winterlich: As previously discussed, our supply chain and input lead times have improved significantly from the first half of 2022. We continue to target further inventory reductions. Capital expenditures on an accrual basis were 88.7 million dollars a year to date in 2023, which included the previously disclosed property purchase for our facility in Massachusetts. Without the property purchase in 2023, the capital expenditure would be 50.7 million dollars, which compares to 49.1 million dollars in the prior year period.

Speaker 1: Good action now to Pete Skavisky at Elevator Global.

Go next now two peaks Kubicki, Alabama global.

Speaker 9: Yeah, good morning guys. Morning. Yeah, I just wonder if you could kind of give us a sense of your outlet for space and defense as we head into next year because the last couple of quarters you've been running really strongly there and the trend seemed pretty positive. You got the CH53K coming through the pipeline pretty good there. Can you go? I mean, you may be a double digit sister in space and defense. I'm wondering if you can do it again next year. Thanks.

Yes, good morning, guys.

Good morning, Scott.

I was just wondering if you could kind of give us a sense of your outlook for space and defense as we head into next year, because the last couple of quarters, you've been running really strongly there and the trends seem.

Pretty positive you got CH 53, K coming through the pipeline pretty good there can you grow.

May be up double digits. This year in space and defense I'm wondering if you could do it again next year.

Yes.

Speaker 2: Yeah, I mean, we've stepped up. I mean, I think last quarter was the record quarter, all time record quarter for space and defense with the seasonality. We came off that a little bit in the third quarter, but we've seen sustained strength in that market. And we've really had a couple of years with...

We've stepped up I mean, I think last quarter was a record quarter, all time record quarter for space and defense with the seasonality, we came off that a little bit in the third quarter, but we've seen sustained strength in that market and we've really had a couple of years.

Patrick Winterlich: Free cash flow for the first nine months of 2023 was $3.7 million, which includes the Massachusetts property acquisition, but does not include the proceeds from the Colorado facility sold in the third quarter. For the comparable prior year period, free cash flow was negative $1.9 million.

Speaker 2: very high, very strong growth. Now, it depends what time frame you're looking at. I mean, if you kind of look over the next two to three years, we're going to see a lot of growth over that period. The F-35 for us, Bill has room to grow. The C-H53K is going to grow substantially. There are European programs which are strong. And we're across such a broad range with the military budgets moving the direction they are. Now.

Very high and very strong growth now.

Payments what timeframe you are looking at I mean, if you kind of look over the next two to three years, we're going to see a lot of growth over that period. The F 35 for US still has room to grow the CH 53, K is going to grow substantially there are European programs, which is strong.

Patrick Winterlich: The Board of the Raptors declared its 12.5% quarterly dividend yesterday, payable to stockholders of records as of November 3rd, with a payment of November 13th. We repurchase approximately $13 million of common stock in the third quarter. The remaining authorization under the share of purchase program on September 30th, 2023 was $187 million. The company's net debt to EBITDA leverage was approximately 1.8 times at the end of the third quarter. We are maintaining our 2023 guidance, except for adjusting the estimated annual tax rate due to favourable law changes domestically and internationally.

And.

We're across such a broad range with the military budgets moving the direction. They are now I am not going to tell you, it's going to be double digit every year, but over the two to three year space and defense is going to continue to be a very strong sector, perhaps out and I'm confident in further growth.

Speaker 2: I'm not going to say it's going to be double digits every year, but over the two, three years.

Speaker 2: Spacing defence is going to continue to be a very strong sector, perhaps, though, and I'm confident in further growth.

Speaker 9: any risks to defense program revenue the next couple of years that you've seen in the past. Is it just budgets passing on time or any other risk that we should think about?

Any risks to defense program revenue.

Patrick Winterlich: Our 2023 estimated annual effective tax rate is now 21% compared to 23% previously. As a reminder, our sale of guidance is $1.765 billion to $1.835 billion. Our adjusted EPS guidance is $1.80 to $1.94. Free cash flow is guided to be greater than $110 million.

The next couple of years that you've seen in the past is it just budgets passing on time or any other risks that we should think about.

I mean, I don't want to be complacent, there's always budgetary risks, but right now I think this is one of the strongest soda periods healthiest periods, a few lines to space and defense and looking forward. We have seen for a long time, so as confident as we can be without absolute guarantee we see growth in.

Speaker 2: I mean, I don't want to keep being complacent. There's always budgetary risks. But right now, I think this is one of the strong, sort of, periods, healthiest periods, if you like, for space and defense and looking forward to what we've seen for a long time. So as confident as we can be, without absolute guarantees, we see growth in the next couple of years in space and defense.

In the next couple of years in space and defense.

Okay. Thank you.

Speaker 1: Thank you. We're going to now to Christine Lillag at Morgan Stanley .

Thank you. We'll go next now to Christine will lag at Morgan Stanley .

Nick Stanage: with that, let me turn the call back to Nick. Thanks, Patrick. Most of you know that we have a significant presence in Morocco.

Speaker 10: Great, make in fact, you know, it's clear from your commentary that you've invested on headcount and infrastructure ahead of the OEM. But can you provide an update on which specific production rate you can support today for the 737, this is 2787 and 8357.

Great.

It's clear from your commentary that you.

You've exhausted on head count and infrastructure ahead of the Oems.

But can you provide an update on what specific production rate.

Nick Stanage: We're deeply saddened by the loss of life following the earthquake last month that tragically devastated parts of the country. Fortunately, all our employees in that region are saved and our engineered core operations and Casablanca remains fully operational.

What's the date for the 77.

77% increase.

Okay.

Speaker 3: Well, you know, first I'll tell you where align with our customers and we're flexible and going to continue to stay aligned. If you look at the, let's start with Boeing on the Mac.

Well.

First I'll tell you we are aligned with our customers and we're flexible and going to continue to stay in line. If you look at the let's start with Boeing on the Max.

Nick Stanage: As a final note, I want to share that our leadership team and members of our Board of Directors spent time earlier this month with our R&T team reviewing new products and processes and development. And we couldn't be more excited about the future of Hexcel's technology offering and the tremendous potential impact those advanced lightweight composites will have in enabling the reduction of CO2 emissions in the environment through greater fuel efficiency and modern aircraft and other forms of transportation.

Speaker 3: You know, we're in the low 30s and clearly Boeing is working hard to transition up to 30A. And we have that capacity and we have, we'll share more on what specifically we're putting in our 2024 plan, but we'll be prepared to do that as well as hitting 50 in the 2025, 2026 time.

We're in the low thirties, and clearly Boeing is working hard to transition up to 38, and we have that capacity and we have.

We'll we'll share more on what specifically were putting in our 2024 plan, but we'll be prepared to do that as well as hitting 50 and the 2025 2026 timeframe 787, we're at four to five and clearly Boeing intends to go to 10 by 'twenty five 'twenty six.

Speaker 3: 787, we're at 4 to 5 and clearly Boeing intends to go to 10 by 25, 26 timeframe. So there's going to be a gradual ramp up there. I'll let you pick the number for 24 and get into the 10 and 26.

Nick Stanage: As you may remember from our comments in the past, we meet with our R&T leadership team every year and this year it was a pleasure to meet for the first time at our new Center of Research and Technology Excellence in Salt Lake City. While these meetings dig deep into data and the details of fiber, pencil, strength, modulus and the chemistry of precursors and resins, one simple fact always emerges from these technical discussions and that is our customer aligned approach to product development is a key differentiator for Hexcel.

Timeframes.

So there's going to be a gradual ramp up there I'll, let you pick.

Pick the number for 'twenty, four and get into the 10 in 2006.

Speaker 3: but you could estimate a pretty linear stable transition, which is what the OE's have done for the last several years when they're wrapping up rates. So, you know, the OE's have done a pretty linear stable transition, which is what the OE's have done for the last several years when they're wrapping up rates.

But you could estimate a pretty linear stable transition, which is what we always have done for the last several years when theyre ramping up rates.

If you look at Airbus.

Speaker 3: We're in the mid 50s and again, I'm looking in total for the year. I'm not looking at Q3. We were much lower than mid 50s and Q3.

We're in the mid fifties and again Im looking in total for the year and that looking at Q3, we were much lower than mid <unk> in Q3.

Nick Stanage: We innovate based on the collaborations and continuous dialogue we have with our customers. When we develop new products, we know the application and customer expectations which make us highly efficient. Our engineers and researchers have daily conversations with customers as we work closely with them to develop the next generation of lightweight solutions. These customer engagements are now deeper than ever and we are fully aligned with their road maps as we design new lighter and stronger materials, especially for improved fuel efficiency and life-cycle costs.

Speaker 3: with a ramp rate up to 75.

With a ramp rate up to 75 in 2026, so Airbus really is not giving specific milestones on the incremental positions in 'twenty four 'twenty five so again, if you just draw a straight line along that curve will be aligned with that and perhaps will share more.

Speaker 3: in 2026. So, Airbus really is not giving specific milestones on the incremental positions in 24 or 25. So, again, if you just draw a straight line along that curve, we'll be aligned with that and perhaps we'll share more when we provide 2024 guidance. I mean, 8350.

When we provide 2020 for guidance.

And the <unk> hundred 50 were at six.

Speaker 3: Airbus has been candid that they're moving to nine by the end of 25. And again, it's a great program for us. We have great ship set content and we're looking forward to continued wide body order intakes, which have ramped up a lot of momentum on the wide bodies based on the need for improved efficiency and longer routes because of some of the pattern changes.

Airbus has been.

<unk> that theyre moving to nine by the end of 'twenty five and again, it's a great program for US we have great chipset content and we're looking forward to continued wide body order intakes, which have ramped up a lot of momentum on the wide bodies.

Nick Stanage: We are firmly convinced that the key to improve sustainability is lightweighting. That composites are a prime enabler and Hexcel was the world's leader in providing lightweight sustainable materials for the aerospace, space and defense and select industrial markets.

Based on the need for improved efficiency and longer routes because of some of the pattern changes.

Speaker 3: So that kind of gives you a little color on where we are versus what we're positioning for in the 24, 25, 26 times.

Unknown Executive: Paul, we are now ready to take questions. Thank you, Mr. Stannings. Ladies and gentlemen, at this time if you do have any questions against our ones, please, and we do ask the EPs limit yourself to one question and one follow-up question.

So that kind of gives you a little color on where we are versus what we're positioning for in the 'twenty four 'twenty five 'twenty six timeframe.

Thank you for the color and maybe a follow up question on wind Pat you mentioned that when transition to a lower technology that textile decided not to pursue the how much revenue is left in wind in Australia, and how much more of a step down do you expect.

Speaker 11: Thank you for the color. And maybe a follow up question on wind. Pat, you mentioned that wind transition to a lower technology that HECL decided not to pursue. So how much revenue is left in wind and Austria? And how much more of a step down do you expect?

Matthew Akers: We will go first this morning to Matt Acres as Wells Fargo. Thanks for the question. Maybe to put a finer point on the margin discussion. I guess so. You know, margins down year of a year, even though sales were a lot higher, is most of that because of this kind of cost issue of you basically hired people ahead of the demand coming through or is there any sort of makes issue or anything else that sort of impacted Mark?

Speaker 3: Well, let me take that again. Our largest wind customer is Vestus. That has been Vestus. Vestus has been the market leader and we've done business with them for probably 20 plus years with plants positioning to support them very well. They were vertically integrated. They produced their own blades. They had differentiated technology and that model worked for many years.

Well, let me, let me take that again, our largest win customer.

It's best if there has been some investors.

<unk> has been the market leader and we have done business with them for 'twenty, probably 20, plus years with plants positioning to support them very well they were vertically integrated they produce their own blades. They had differentiated technology and that model worked for many years.

Matthew Akers: Yeah, I think good morning. It's much more to do with the gradual infrastructure and cost space that we've been building and putting in place. Quite honestly over the last several quarters, really to be ready for the really strong growth that we see and we've just called out over the next sort of couple of years. We're running more lines, as Nick called out in his part of the comments, but perhaps they're not all efficient, that they're not sort of at the utilization level individually that we would like.

Matthew Akers: And we have more people and we continue to train and upgrade that experience as we go. And so we're carrying that higher level of overhead, if you like, infrastructure in the company for the future growth. And it's going to take time to really get a top line that really pulls all that product production and all those sales through to really drive the margins. And certainly when you have a quarter as we have forecasted as our third quarters are reduced by the European seasonality impact, then you see the margin headwind that we saw. It was much more that in the third quarter than anything to do with to do with mix.

Speaker 3: Vestus decided that they needed to refocus the business and they decided blades were not core. So they went more to an outsourcing model which pushed the technology more to a commodity type infused.

<unk>.

Decided that they needed to refocus the business and they decide and blades were not core so they want more to an outsourcing model, which pushed the technology more towards commodity tie in fused glass pre Craig infused material not a pre correct Budd.

Speaker 3: glass pre-preg, it's used material, not a pre-preg, but a infused material and that really didn't fit our strategy going forward.

Infused material and that really didn't fit our strategy going forward. So the new blades that were being the new wind turbines that are being developed by <unk> and many others utilize outsourced blades made utilizing compiled.

Speaker 3: So the new blades that are being, the new wind turbines that are being developed by Vestus and many others, utilize outsourced blades, made utilizing...

Commodity type technologies, the way, we define that space.

Speaker 3: Commodity type technologies the way we define that space. If you look at our current business, we...

If you look at our current business, we've got a nice book of business. The legacy business, which is served out of Austria.

Speaker 3: Book of Business, the Legacy Business, which is served out of Austria, sort of being Vestus Europe .

Serving vestas Europe .

Speaker 3: And again, there's some challenges in that market related to inflationary pressures, regulatory pressures that have often demand, but we still have our positions and we think there's a long tail on that demand profile that'll go on for several years, although at a much reduced run rate level from where Hexwell was two, three, four years ago.

And again, there is some challenges in that market related to inflationary pressures regulatory pressures that have softened demand, but we still have our positions and we think there's a long tail on that demand profile that will go on for several years, although at a much.

Matthew Akers: Okay, understood. And then I guess some of the industry supply chain that you mentioned, the flat narrow bodies over years, is any of that? I guess driven by hexel supply chain things or is it more demand from your customers? And do you have any view of sort of how long that lingers if I could go on for 24? Yeah, math. So basically, the challenge is that the always are dealing with are certainly not related to hexel.

Reduced run rate level for more textile was 234 years ago.

I really appreciate the color. Thank you.

Youre very welcome.

Speaker 1: We're going to have to John McMulti at BMO Capital Mark.

We'll go next now to John Mcnulty at BMO capital markets.

Speaker 12: Yeah, thanks for taking my question. So I guess the first one is just on the implied fourth quarter range, which is actually, it's pretty broad. I mean, in Italy, it's toward the end of the year. But I guess can you help us to understand what puts you at the low end of that range, which is implied about 42 cents or so, and what would put you at the higher end of the range at 56 cents? Can you help us to think through the puts and takes there?

Yes, thanks for taking my questions. So I guess the first one is just on the implied fourth quarter range, which is actually it's pretty broad I mean, Italy, it's toward the end of the year, but I guess can you help us to understand what puts you at the low end of that range, which is implied about 42 cents or so and what would put you at the higher end of the range at 56.

Matthew Akers: We're in a great position with capacity and resources available to meet their growing demand and their projected growing demand. There are a few issues out there that really are limiting the ramp rate on the growth where the always want to take the narrow bodies and wide bodies and it just slowed it down a little bit, cause some inspections and rewards within that supply chain. And my perspective is that these will be resolved and given the demand and the poll for those new lightweight, narrow body and wide body aircraft, the rates are going to continue to go up. And that's what we're positioning for is strong 24 and 25 build rates and growth for hexel.

Unknown Executive: Great. Thank you.

Can you help us to think through the puts and takes there.

Speaker 2: Yeah, I mean, I mean the biggest part of the take is clearly the top blind John . I mean,

Yes, I mean, I mean, the biggest Burton take is clearly the top line John I mean.

Sure.

Speaker 2: We've obviously got the mid points at 1.8 and 1.87 as you can see. And I guess that's where we're really focusing and that's what we're targeting to deliver for the year. But we're also recognizing.

We've obviously got the midpoint of $1 eight.

Seven as you can see and I guess, that's where we're really focusing and that's what we're targeting to deliver for the year, but we're also recognizing.

Speaker 2: There is uncertainty in the aerospace supply chain right now. And that could pop to the positive this quarter, if things suddenly align and we get a pull through material to support the ramp rates that we know the OEMs are trying to do. But likewise, as we've seen several times over the last couple of years, their abundance and hiccups in this aerospace supply chain has the world sort of...

There is uncertainty in the aerospace supply chain right now and that that could pop to the positive this quarter as things suddenly aligned and we get a pull through material to support the ramp rates that we know the Oems are trying to do but likewise as we have seen several times over the last couple of years.

Gavin Parsons: We'll go next now to Gavin Parsons at UBS.

There are bumps in head counts in this aerospace supply chain as the world starts to normalize and get back to where we were pre pandemic and sort of inefficient flowing.

Speaker 2: starts to normalize and get back to where we were pre-pandemic in sort of inefficient flowing.

Ken Herbert: One moment, gentlemen, looks like we actually lost Mr Parsons. We'll go next now to Ken Herbert at RBC.

Industry so.

Speaker 2: We're focusing really on the midpoint as our target to deliver, but we've left the range-wise because we do, unfortunately, we recognise that there are still risks and challenges out there. Now, that could fall in our favour, but we certainly wanted to recognise that there could be headwinds.

We're focusing really on the midpoint.

Ken Herbert: Yeah, good morning, Nick Patrick. Good morning.

Our target to deliver.

We've left the range wide because we do unfolds.

Ken Herbert: Hey, maybe just to put a finer point on the margin question, if you had sort of seen the increase in narrow body volume that maybe been contemplated earlier in the year, would we have seen the same kind of margin impact year over year or how much of the factor was basically flat volume on the narrow body? So let me, let me start clearly increased demand on the narrow body would have helped, but it would not have changed our position and the fact that in the environment we're in after taking our assets down to the low point we did at the pandemic to preserve cash and the position for a strong viable future.

Unfortunately, we recognize there is still risks and challenges out there now that could fall in our favor, but we certainly wanted to recognize that there could be headwinds.

Speaker 12: Okay, and just to be clear, would you say the midpoint of the range reflects kind of status quo on the supply chain or modest improvement or I guess how should we think about that?

Okay, and just just to be clear would you say the midpoint of the range reflects kind of status quo on the supply chain or a modest improvement or I guess, how should we think about that.

Speaker 2: Well, it's certainly, it's not a seasonal, it's not another Q3 season, it's a return to sort of a more normal run rate of sales, not seasonally impacted. And then, yes, hopefully it's the current, if not less, slightly less of supply chain issues, but more or less where we are today, without the seasonality, is how I would describe it.

Well it certainly is.

It's not a seasonal on another Q3 seasonally is a return to sort of a more normal run rate of sales not seasonally impacted and then yes hopefully.

The current if not less.

Slightly less of supply chain issues, but more or less where we are today without the seasonality is how I would describe it.

Ken Herbert: We knowingly took out 35% of our resources in our heads and today's hiring environment with the unemployment where it is with the poll for talent globally we had to get ahead of the hiring and we do that intentionally so that we can train them and as the growth comes we can get the efficiency back to and above 2019. And I have to tell you the third quarter we're seeing our efficiencies coming up and as that demand and that growth continues to pull through for Q4 and into 24 and 25 we're expecting to convert very strongly on that volume so to answer your question can it would have an effect but it wouldn't have negated the seasonality and the lower demand.

Speaker 12: got it and then maybe just as as a follow up question you know you spoke to pulling back on inventory and a bigger focus there and i think you'd mentioned a twenty million dollar sequential improvement i guess how much farther do you think you can pull back on those rains while still being ready for what potentially is a bigger ramp up from from some of your customers as you look to uh... look to twenty twenty four

Got it and then maybe just as a follow up question you spoke to pulling back on inventory and a bigger focus there and I think you had mentioned a 20 million dollar sequential improvement I guess, how much farther do you think you can pull back on those range, while still being ready for what potentially is a bigger ramp up.

From some of your customers as you look to look to 2024.

Yes, so the $20 million.

Speaker 2: Yeah, so the 20 million sequential pullback was specifically on raw materials. Overall inventory was down about $4 million, so we saw a little bit of growth in other areas, but there was a reduction and obviously the starting point is raw material.

Sequential pullback was specifically on raw materials overall inventory was down about $4 million, we saw a little bit of growth in other areas, but there was a reduction.

And obviously, the starting point is raw materials.

Speaker 2: We will continue to be aggressive and disciplined around inventory. I think we've spoken to it a few times. The real metric we're looking at is the relative days of inventory that we hold. And so the first objective is to allow our sales to grow.

We will continue to be aggressive and disciplined around inventory.

I think we've spoken to a few times the real metric. We're looking at is the relative days of inventory that we hold and so the first objective is to allow our sales to grow.

Ken Herbert: Okay and I guess I mean it seemed to be on a fairly nice trajectory when we look at the gross margins we can appreciate the seasonality but was there anything else that maybe deteriorated in the quarter as you think about you know maybe costs in Europe or logistics or other aspects of the supply chain that maybe pushed you to see sort of greater inefficiency or maybe take a more sort of cautious view on sort of your own. Can you pull forward of cost to support future rate ramp?

Speaker 12: certainly in next year and beyond that and hold this level of sort of dollar inventory. Now we will look to squeeze it in the board quarter. I think there's some opportunity to do that, but most importantly, it's really holding this level of inventory as our sales grow and essentially improving the day's holding fairly significantly over the coming sort of periods. Guy, thanks very much for the call.

Certainly into next year and beyond that and hold this level sort of dollar inventory now we will look to squeeze it in the fourth quarter. I think there is some opportunity to do that but most importantly, its really holding this level of inventory as our sales grow and essentially improving the days holding.

Fairly significantly over the coming sort of periods.

Got it thanks very much for the color.

Ken Herbert: I mean absolutely nothing to make us more cautious on the future opportunity and the future ramp now obviously we're cognizant of what's happening with the narrow bodies and the challenges that Nick talked to in that space. I think they're well known and obviously we are ready to support both air bus and Boeing as they move for 320 and the max rates up and we are certainly ready to do that and we will not be causing any delay in terms of the cost it's really about the overhead base and the overhead leverage ability given the volume of sales that there isn't anything specific I would call out on the cost front.

We'll go next map to Scott Deuschle at Deutsche Bank.

Hey, good morning.

Good morning.

Speaker 13: Nick, is there any opportunity to open the door with OEMs to discuss the prospect of getting some better price given the inflation that's out there? You kind of like some of the other OEM suppliers that have been able to achieve.

Nick is there any opportunity to open the door with Oems to discuss the prospect of getting some better price given the inflation that's out there kind of like some of the other OE suppliers have been able to achieve.

Speaker 13: Or is that conversational, probably a nonstarter given that you're still generating some nice profitability here? Thank you.

Or is that conversation ultimately a nonstarter or given that you are still <unk>.

<unk> some nice profitability here. Thank you.

Speaker 3: No, I think our team did a great job on getting price and value pricing our products for what it does for our customers.

No so.

Our team does a great job getting pricing and value pricing our products for what it does for our customers remember.

Speaker 3: Remember in a lot of the commercial aerospace programs we have long-term agreements.

And a lot of the commercial aerospace programs, we have long term agreements, where we have indices and formula that helps protect both us and inflationary.

Ken Herbert: It's as I was saying to Matt it's really about that gradual build up in our infrastructure in our workforce ready for the clear growth ahead and we are not going to be late for that. And so aligning those two things it's never perfect and so our cost base is perhaps just a little bit ahead of the sales growth but we're going to be ready and when that comes we'll generate the margins and we will generate the cash.

Speaker 3: where we have indices and formulas that help protect both us in inflationary, increased cost scenarios or raw material inputs. And it protects our customers where it's declining. So there tend to be a lag.

Increased cost scenarios, where raw material inputs.

It protects our customers, whereas declining so there tend to be a lag.

Speaker 3: But overall, we constantly look to help our customers with their productivity initiatives. We do that through driving productivity through our systems and identifying new opportunities to leverage our growth.

But overall, we constantly look to help our customers with their productivity initiatives, we do that through driving productivity through our systems.

Ken Herbert: All right well thank you very much. Thank you.

And identifying new opportunities to leverage our growth. So I'd say, we certainly have other areas that aren't on long term contract and our.

Speaker 3: So I'd say, you know, we certainly have other areas that aren't on long-term contract and our team work those very hard, especially in the industrial segment.

Myles Walton: We'll go next now to Miles Walden, Patel Wolf Research. Thanks, good morning. Patrick or Nick I'm not sure, but maybe just to clarify, was the margin performance in the quarter about as you expected? And then we're just looking forward, Nick, you're talking about the growth that you're building towards. Is it still fair to think about a double digit growth into next year? And then the margin profile of getting to mid teens at two billion in sales is that still on the table?

Our team worked closed very hard, especially in the industrial segment.

Speaker 3: and some other smaller nicheries where we are able to get price based on the environment we're in today.

And some other smaller niche areas, where we are able to get price based on the environment. We're in today.

Okay, great. Thank you.

Thank you Scott.

Speaker 1: Thank you. We go next now to Godham Conner at TD Cowan.

Thank you. We'll go next now to Gautam Khanna at TD Cowen.

Myles Walton: Yeah. So does the margin in Q3 was close to what we expected? Yes, because we probably saw the seasonal sales or we recognised it perhaps more than it was externally recognised. So the margins were not a long way off what we expected, pants a little bit softer but not a lot. Looking forward over the next couple of years, we see strong double digit growth for a couple of years now in front of us with 2025 getting sort of back to where 2019 was that that should be the expectation out there.

Hey, good morning, guys.

Hey, good morning.

I was wondering if you could just talk a little bit about the components of the implied Q4 free cash flow and.

Speaker 12: Talk a little bit about the components of the implied Q4 pre-cashlow. And is there any efforts underway?

Is there any efforts underway to maybe make it a little more linear because last couple of years.

Been pretty backend loaded.

I would say.

Speaker 2: I would say, historically, for better or worse, got them our cash flow tends to be backhand loaded. It's sort of the flavor of our business.

Historically for better or worse, Gotham, our cash flow tends to be backend loaded.

It's sort of the flavor of our business.

Speaker 2: In terms of Q4 this year, it's obviously going to be driven by an income number which we're going to push to drive to the guided.

In terms of Q4. This year is obviously going to be driven by an income number which we're going to push to drive to the guided.

Myles Walton: In terms of the mid teens margins, we're strongly going to be pushing for that and we will get there once we line up our cost base with the right level of sales. We've got to do the training, we've got to have the infrastructure, but our ability to get to mid teens once the revenue comes. And once we should be able to push past it ultimately is what I'm trying to say miles, banks are where we were.

Speaker 2: EPS, we're going to manage working capital tightly as I was just saying I think there's some opportunity.

<unk>, we're going to manage working capital tightly as I was just saying I think there's some opportunity.

Speaker 2: around inventory, we will drive, receive a full collection, very strongly as we always do in the fourth quarter and we will manage payables. So it's really just about sensible cash discipline. We're managing capital.

Around inventory, we will drive receivables collections very strongly as we always do in the fourth quarter and we will manage payables. So it's really just about sensible cash discipline.

We're managing capital.

Speaker 2: As we've called out several times, we don't have sort of huge capacity requirements. We continue to bring up lines and to reutilize existing assets on the whole. And we'll see that again in the fourth quarter and into next year.

Myles Walton: That's not going to happen tomorrow, but that's definitely the target on the table and we're not taking that away. And just to clarifying on the industrial side, I've always thought of that as that business is being lower margins than the core. But it might be getting to a point where the sales are so low that it's actually a net drag on profit. Can you just give us a colour of the profitability of the industrial business at this point in composite materials?

As we called out several times, we don't have sort of huge capacity requirements. We continue to bring up lines and to re utilize existing assets on the hull.

And we will see that again in the fourth quarter and into next year.

Speaker 2: So we believe, I mean we did, virtually $100 million to fall last year. We believe we can, we will deliver that again this year.

So we believe I mean, we did virtually a $100 million.

Q4 last year.

We believe we can.

We will deliver that again this year.

Myles Walton: So I'll take a shot at first splitting it and let's talk about wind for a minute. And again, remember the wind technology transitioned to a lower technology and one that we chose not to pursue. And that resulted in us restructuring in North America as well as China. So we're serving the wind market out of our facility in Austria and supporting investors and a couple of other small ones. Remember wind is less than 2% expected of Hexel's total revenue this year.

Great. Thank you and just I was curious also.

Speaker 12: You know, this quarter had a little bit of dampening in the march and from the hiring ahead and the like. Maybe if you could just describe.

This year this quarter has a little bit of damage.

Anthony and the margins on the hiring ahead and alike.

Maybe if you could just describe some of the one time things this year that.

Speaker 12: or anything else that you do is non-recurring that kind of make the

Tooling for example, and I think that was called out in prior quarters.

Anything else that.

You would view as nonrecurring kind of make that.

The comparisons a little easier for next year. Besides what we've discussed Q3.

Thank you Lynn.

Yes.

Speaker 3: There really were not material one-timers. The hiring and the efficiency improvements that were driving in the plants and bringing people in. Again, I think we've shared that some of the positions in our fiber business take nine months to a year to get to a minimum efficiency level for an operator to be able to work alone on the line.

We're really we're not material one time moves.

The higher marine and the efficiency improvements that we're driving in the plants and bringing people in and again I think we've shared that some of the positions in our fiber business take nine months towards year to get to a minimum efficiency level for an operator to.

Myles Walton: And it is at a lower margin, a lower processor, a decent return on invested capital, but a lower margin profile. On the balance of the industrial, the automotive, the select areas that we find niches to introduce our technology and differentiated solutions. The margin really is not dilutive to Hexel. And perhaps in some of those high-end automotive and niche applications, when we do fall off on sales a little bit because of inflationary recessionary pressures on REC or winter sports or some of those other markets, it could have a slight dilutive effect on the margins. Okay, thank you. Thanks, Myles.

Able to work alone on the line.

Speaker 3: I would say, you know, there's some added effort going on with the CH 53K RAM and the first articles and that program is really just starting to ramp up. So we're clearly not as efficient in the engineer structures area there as we will be as those first articles are complete, the qualifications complete and we streamline the deliveries to our customers.

I would say there is some added effort going on with the CH 53, K ramp and the first articles and that program is really just starting to ramp up so we're clearly not as efficient in the engineered structures area. There as we will be as as those.

First articles or complete the qualifications complete and we streamline the deliveries to our customer.

Speaker 3: You know, other than that, we continue to work hard on recruiting and finding top talent. And the team has been very successful, but it's hard work. And it takes a little bit longer. And the attrition is a little bit higher than it had been pre-pandemic. And you have to build all that in. And again, when you're soul-sourced,

Other than that.

Gavin Parsons: We'll go back now to Gavin Parsons at UBS. Hey, good morning. Can you guys hear me? Good morning. Thank you. Sorry about the tech issues.

We continue to work hard Allen.

Recruiting and finding top talent and the team has been very successful, but it's hard work.

Gavin Parsons: Apologies if I missed this, but can you talk a little bit about how much the capacity step up is, what growth rates, you know, you're kind of hired ahead for there and how much of the double digit top line revenue growth is now already in the cuff base. Well, first, we're continuing to bring up assets, you know, just to roughly calibrate. You think of 2019 of us as us running close to capacity.

And it takes a little bit longer.

And the attrition is a little bit higher than it had been pre pandemic and you have to build all that in and again one year sole source.

Speaker 3: for key programs, you can't be sure. And that's really what drove us to make sure we're not short and we have that capacity in place. So we've talked about that. Other than that, there really are no other one-timers that we're going at in attacking other than operational excellence and efficiency.

Our key programs you can't be sure and Thats really what drove us to make sure. We're not sure and we have that capacity in place. So we've talked about that other than that there really are no. Other one time or is that were going at and attacking other than operational X.

Gavin Parsons: We'd never be at 100% but think of mid 90s. And if you think about our ratio of sales today to where we were then, think of our assets being utilized at about 75%. That will give you a good proxy for where we are with respect utilization. Some plants, that means we have some lines still down. Some plants that may mean we have a line up, but aren't running it at 100% of capacity.

Lawrence and efficiency.

Great. Thank you guys.

Thank you.

Speaker 1: We'll put that smile to Sheila Kayaglu at Jeffery.

We'll go next now to Sheila <unk> at Jefferies.

Thanks, So much good morning, Nick and Patrick.

Speaker 14: Thanks so much, good morning, Nick and Patrick. So maybe first question on Defense and Space, really good performance there on the top line. Can you maybe talk about the profitability within Defense and Space Business as you ramp on some of these programs and their Delta and Space there?

Maybe first question on defence and space really good performance there on the top line can you maybe talk about the profitability within defense and space business as you ramp on some of these programs in there without that stays there.

Gavin Parsons: Meaning we may have more positions that we could turn on, which make it much less efficient, but the right thing to do so that we don't over build inventory and and to optimize our cash position going forward. So from an asset base in the fiber specifically, we have brought in a lot of assets, a lot of resources over the last three to six months. And that fibers is one of the big drivers within hep cell from a cash from a profitability generation.

Speaker 2: I'm in faith in the pen.

Hi, Sheila.

I'm in space and defense.

Speaker 2: It's very similar to commercial arrow in terms of its profile of profitability.

Very similar to commercial Aero in terms of his.

Profile of profitability.

Speaker 2: It contains a fair amount of hexel carbon fiber and as we've called out

It contains a fair amount of the <unk> carbon fiber and as we've called out before putting through <unk> carbon fiber in our mix of sales is good. So we generate good earnings good margin, we have quite a lot of engineered core and honeycomb and some of our military applications.

Speaker 2: before pulling through hexal carbon fiber and inner mix of stales is good. So we generate good earnings, good margins. We have quite a lot of...

Speaker 2: Internet core and honeycomb in some of our military applications.

Speaker 2: all the way through to the art technology work that...

All the way through to the <unk> technology.

Speaker 2: as a business we acquired in early 2019. So overall the profitability profile with those strong sales is good.

This is a business we acquired in early 2019, so overall the profitability profile with those strong sales is good.

Gavin Parsons: And there, I'm not going to say we don't have to add a few people, but basically most of our lines are running now where we see them for the next six, 12, maybe even a little bit longer. So we feel that we're in a great position there. Other plants depends on the technology, whether it's free track or blending or core engineer products, there may be select ads here and there. But overall, we're entering, we're going to enter 2024 in a very strong position to deliver on that demand. Great, appreciate that detail.

Speaker 14: Great. And then maybe Nick one for you. And you're prepared remarks, you mentioned investing in new programs, you're in advance of them coming to market. Can you talk about how that could manifest itself in your PNL?

Great and then maybe Nick one for you and in your prepared remarks, you mentioned investing in new around the Earth in advance of them coming in the market can you talk about how that could manifest itself in <unk>.

Now.

Speaker 3: Yeah, so boy, there's so many areas and having just gone through our interior view. I can tell you from a performance standpoint, we have several initiatives related to our fibers and the efficiency of our lines and the mechanical performance and the throughput, which as you know, we have many lines and we replicate that, so it translates into a big opportunity and a big boost for Excel. So, so.

Yes, Paul.

There are so many areas and having just gone through our R&D review I can tell you from a performance standpoint, we have several initiatives related to our fibers and the efficiency of our lines on the mechanical performance and the throughput, which as you know we have many lines and we replicate that so it translates.

Gavin Parsons: And then on buybacks, is your anticipation there that as your cashless strengthens, you'll do something regular or was that an opportunistic purchase in the quarter? Well, we we constantly look at our capital structure and, you know, we're back into the range where we like to operate our net debt leverage ratio in the 1.8 region. So we review that with the board on a regular basis, which respect to what opportunities are there for collaborations?

<unk>, a big opportunity and a big boost for hexcel.

So.

Speaker 3: Our improvements, our initiatives, are certainly performance-based.

Our improvements are initiatives are certainly performance based but there also processing based how do we help our customers processed materials. So that they can lay down materials faster they can cure them faster.

Speaker 3: But they're also processing based. How do we help our customers process materials?

Speaker 3: so that they can lay down materials faster, they can cure them faster, and ultimately drive to a lower life cycle cost in a better efficiency for them. So there's not an area within our portfolio, whether you're talking about fibers.

And ultimately drive to a lower lifecycle cost and a better efficiency for them. So.

Gavin Parsons: What areas do we have with respect to internal investment and then what's our opportunities with respect to dividend strategy and and share buyback. So it really was an opportunity for us to underlude what we issued in 2023, clearly given our leverage position and our increased cash flow forecast. We're going to be looking at that much more actively going forward. Thank you. You walk.

Not a area within our portfolio, whether youre talking about fibers or resin systems, or <unk> or infusion products or.

Speaker 3: or resin systems or pre-pragues or infusion products or other new technologies that were not really ready to disclose yet are being worked aggressively with our customers. And again, there's a lot of pull for the improved performance, the improved throughput and the improved cost effectiveness.

Other new technologies that we're not really ready to disclose yet.

Are being worked aggressively with our customers and again, there's a lot of pull.

For the improved performance the improved throughput and improved cost effectiveness.

Pete Skibitski: Good next now to Pete Skibitski at Elemental Global. Yeah, good morning guys. I just wonder if you can kind of give us a sense of your outlet for space and defense as we head into next year because the last couple of quarters you've been running really strongly there and the trend seemed pretty, pretty positive. You got CH53K coming through the pipeline pretty good there. Can you go, I mean, you may be a double digit sister in space in the fence.

Thank you.

Thank you.

And it looks like we do have time for one more question. This morning will take that now from Michael <unk> at Truest.

Speaker 1: And it looks like we do have time for one more question this morning. We'll take that now from Michael C. Ramoli at...

Sure.

Speaker 15: Hey, good morning guys, thanks for taking the question. Hey, I don't know, Nicor Patrick, but as we think about sort of the margins and the capacity additions, you're not gonna give guidance here for 24, but.

Hey, good morning, guys. Thanks for taking the question, Hey, I don't know, Nick or Patrick, but as we think about sort of the margin and the capacity additions.

Youre not going to give guidance here for 2004, but.

Speaker 15: It is this excess overhead in terms of adding capacity and labor. Is that going to be a drag into 24 as well? I mean, presumably.

Is this excess overhead in terms of adding capacity and labor is that going to be a drag into 'twenty four as well I mean, presumably.

Pete Skibitski: I'm wondering if you can do it again next year. Thanks. Yeah, I mean, we're we've stepped up. I mean, I think last quarter was a record quarter all time record quarter for space and defense with the seasonality. We came off that a little bit in the third quarter, but we've seen sustained strength in that market and we've really had a couple of years with very high, very strong growth. Now, it depends what time frame you're looking at.

Speaker 15: you know, if you, you know, rates are increasing and you got to have more additions next year. I mean, do we have to look more out to 25 or 26? By the time you get to that, that kind of stated margin, I mean, it looks like, I guess, street got you at 15 and a half percent margins next year.

If you know rates are increasing and you've got to have more addition next year.

Do we have to look more out to 25 or 26 by the time you get to that kind of stated margin I mean, it looks like Greg Yes, St. Scott you're at 15, 5% margins next year.

Speaker 15: and just thinking about supply chain challenges and what we just saw here, you know, just should we expect a little bit of a headwind?

Pete Skibitski: I mean, if you kind of look over the next two to three years, we're going to see a lot of growth over that period. The F 35 for us, Phil has room to grow the CH53K. It's going to grow substantially. There are European programs which are strong and we're we're across such a broad range with the military budgets moving the direction they are. Now, I'm not going to say it's going to be double digit every year.

Just just thinking about supply chain challenges and what we just saw it here.

Should we expect a little bit of a headwind next year as well.

I think I mean, as I said I think to miles earlier, I mean, we're still confident to target.

Speaker 2: I mean, as I said, I think to Miles earlier, I mean, we're still confident to target.

Speaker 2: The mid-teens margins as we build our revenue, now lining up as you're alluding to our cost base.

The mid teens margins.

As we build on our revenue now and lining up as Youre alluding to our cost base with the top line and getting those two things in sync and you kind of tailor into that some of the inflationary pressures that we certainly saw this year around energy.

Speaker 2: with the top line and getting those two things into sync and you kind of

Pete Skibitski: But over the two three years, space and defense is going to continue to be a very strong sector. Perhaps I'll and I'm confident in further growth. Any risks to defense program revenue, the next couple of years that you've seen in the past. It isn't just budgets passing on time or any other risk that we should think about. I mean, I don't want to keep being complacent. There's always budgetary risks, but right now, I think this is one of the strongest sort of periods, healthiest periods, if you like, for space and defense and looking forward to what we've seen for a long time. So, as confident as we can be, without absolute guarantees, what we see growth in the next couple of years in space and defense. Okay. Thank you.

Certainly been a headwind and perhaps a little bit of labor.

Above the norm, but I wouldn't overplay the labor part, but we remained remain confident in the general outlook that we are going to get to those mid teens margins. We are going to generate a lot of cash over the next two to three years that is Nick called out in his part of the script is going to sort of allow a lot of capital deploy.

Speaker 2: over the next two, three years, that is Nick called out in his part of the script.

Speaker 2: It's gonna sort of allow a lot of capital deployment opportunities which we would look to do as wisely and smartly as we can.

Women opportunities.

We would look to do as wisely and smartly as we can so.

Speaker 16: We will manage quarter by quarter. You're absolutely right. We're not going to guide here to 24. But we remain optimistic, very optimistic on the general outlook. Got it. Thanks.

We will manage quarter by quarter, you're absolutely right, we're not going to guide hedge 2024, but we remain optimistic very optimistic on the general outlook.

Got it thanks Scott.

Christine Lillag: We're going to go next now to Christine Lillag at Morgan Stanley. Great. Nick and Pat, you know, it's clear from your commentary that you've you've invested on headcounted infrastructure ahead of the OEM.

Thanks, Michael.

Speaker 1: Thank you and ladies and gentlemen, that will conclude the Hexsel 3rd quarter, 2023 earnings conference call. We'd like to thank you all so much for joining us today and wish you all a great remainder of your day. Goodbye.

Thank you and ladies and gentlemen that will conclude the hetzel third quarter 2023 earnings conference call I would like to thank you all so much for joining us today and wish you all a great remainder of your day Goodbye.

Christine Lillag: But can you provide an update on which specific production rates you can support today for the 737. Is it 2787 and 2350? Well, you know, first I'll tell you, we're aligned with our customers and we're flexible and going to continue to stay aligned. If you look at the, let's start with Boeing on the Mac, you know, we're in the low 30s and clearly Boeing is working hard to transition up to 38.

Okay.

[music].

Christine Lillag: And we have that capacity and we have, we'll share more on what specifically we're putting in our 2024 plan. But we'll be prepared to do that as well as hitting 50 in the 2025, 2026 time. Frank, 787, we're at 4 to 5, and clearly Boeing intends to go to 10 by 25, 26 time frames. So there's going to be a gradual ramp up there. I'll let you pick the number for 24 and get into the 10 and 26.

Christine Lillag: But you could estimate a pretty linear stable transition, which is what the always have done for the last several years when they're ramping up rates. If you look at Airbus, we're in the mid 50s. And again, I'm looking in total for the year. I'm not looking at Q3. We were much lower than mid 50s and Q3 with a ramp rate up to 75 in 2026. So Airbus really is not giving specific milestones on the incremental positions in 2026.

Christine Lillag: So, again, if you just draw a straight line along that curve, we'll be aligned with that and perhaps we'll share more when we provide 2024 guidance. And the 8350, we're at 6. Airbus has been candid that they're moving to 9 by the end of 25. And again, it's a great program for us. We have great chipset content and we're looking forward to continued wide body order intakes, which have ramped up a lot of momentum on the wide bodies based on the need for improved efficiency and longer routes because of some of the pattern changes. So that kind of gives you a little color on where we are versus what we're positioning for in the 24 25 26 timeframe.

Patrick Winterlich: Thank you for the color. And maybe a follow-up question on wind. Pat, you mentioned that wind transition to a lower technology that Excel decided not to pursue. So how much revenue is less than wind and Austria and how much more of a step down do you expect? Well, let me, let me take that again. Our largest wind customer is Vestus. That has been Vestus. Investus has been the market leader and we've done business with them for 20, probably 20 plus years with plants position to support them very well.

Patrick Winterlich: They were vertically integrated. They produced their own blades. They had differentiated technology and that model worked for many years. Vestus decided that they needed to refocus the business and they decided blades were not core. So they went more to an outsourcing model which pushed the technology more to a commodity type infused glass prepreg infused material, not a prepreg, but an infused material and that really didn't fit our strategy going forward. So the new blades that are being the new wind turbines that are being developed by Vestus and many others utilized outsourced blades, made utilizing commodity type technologies the way we define that space.

Patrick Winterlich: If you look at our current business, we've got a nice book of business, the legacy business which is served out of Austria, serving Vestus Europe. And again, there's some challenges in that market related to inflationary pressures, regulatory pressures that have often demand, but we still have our positions and we think there's a long tail on that demand profile. That'll go on for several years, although at a much reduced, run rate level from where Hexcel was two, three, four years ago.

Patrick Winterlich: I really appreciate the color.

Unknown Executive: Thank you.

John Mcnulty: You're very welcome. We're going back now to John McNulty at BMO Capital Markets. Yeah, thanks for taking my question. So I guess the first one is just on the implied fourth quarter range, which is actually, it's pretty broad. I mean, in Italy, it's toward the end of the year, but I guess can you help us to understand what puts you at the low end of that range, which is implied about 42 cents or so, and what would put you at the higher end of the range at 56 cents?

John Mcnulty: Can you help us to think through the puts and takes there? Yeah, I mean, I mean, the biggest burden take is clearly the top blind John. I mean, we've obviously got the mid points at 1.8 and 187, as you can see, and I guess that's where we're really focusing and that's what we're targeting to deliver for the year, but we're also recognizing that there is uncertainty in the aerospace supply chain right now, and that that could pop to the positive this quarter if things suddenly align and we get a pull through material to support the ramp rates that we know the OEMs are trying to do.

John Mcnulty: But likewise, as we've seen several times over the last couple of years, there are bumps and hiccups in this aerospace supply chain. It has the world sort of starts to normalize and get back to where we were pre-pandemic in sort of an efficient flowing industry. So we're focusing really on the mid points as our target to deliver, but we've left the range wise because we do, unfortunately, we recognize that there are still risks and challenges out there.

John Mcnulty: Now, that could fall in our favor, but we certainly wanted to recognize that there could be headlines. Okay, and just to be clear, would you say the midpoint of the range reflects kind of status quo on the supply chain or modest improvement, or I guess how should we think about that? Well, it certainly is not a seasonal, it's not another Q3 season, it's a return to sort of a more normal run rate of sales, not seasonally impacted.

John Mcnulty: And then yes, hopefully it's the current, if not less, slightly less of supply chain issues, but more or less where we are today without the seasonality is how I would describe it. Got it. And then maybe just as a follow-up question, you know, you spoke to pulling back on inventory and a bigger focus there, and I think you'd mentioned a $20 million sequential improvement. I guess how much farther do you think you can pull back on those rains while still being ready for what potentially is a bigger ramp up from some of your customers as you look to 2024?

John Mcnulty: Yes, so the 20 million sequential pullback was specifically on raw materials, overall inventory was down about $4 million, so we saw a little bit of growth in other areas but there was a reduction and obviously the starting point is raw materials. We will continue to be aggressive and disciplined around inventory. I think we've spoken to it a few times, the real metric we're looking at is the relative days of inventory that we hold, and so the first objective is to allow our sales to grow certainly into next year and beyond that and hold this level of sort of dollar in inventory.

John Mcnulty: Now we will look to squeeze it in the board quarter, I think there's some opportunity to do that but most importantly it's really holding this level of inventory as our sales grow and essentially improving the day's holding fairly significantly over the coming sort of periods.

Scott Deuschle: Guy, thanks very much for the collar.

Scott Deuschle: We'll be next map to Scott Doyschle at what you've been. Hey, good morning. Good morning.

Scott Deuschle: Nick, is there any opportunity to open the door with OEMs to discuss the prospect of getting some better price given the inflation that's out there? You kind of like some of the other OEM suppliers that have been able to achieve or is that conversational to be a nonstarter given that you're still generating some nice profitability here? Thank you. No, so I think our team does a great job on getting price and value pricing our products for what it does for our customers.

Scott Deuschle: Remember in a lot of the commercial aerospace programs, we have long-term agreements where we have indices and formula that help protect both us in inflationary, increased cost scenarios or raw material inputs and it protects our customers where it's declining. So there tend to be a lag. But overall, we constantly look to help our customers with their productivity initiatives. We do that through driving productivity through our systems and identifying new opportunities to leverage our growth.

Scott Deuschle: So I'd say, we certainly have other areas that aren't on long-term contract and our team work those very hard, especially in the industrial segment. And some other small or niche areas where we are able to get price based on the environment we're in today. Okay, great. Thank you. Thank you, Scott. Thank you.

Gautam Khanna: We go next now to Gotham Kanna at TD Coward. Hey, good morning, guys. Hey, Gotham.

Gautam Khanna: I was wondering if you could just talk a little bit about the components of the implied Q4 pre-cash-low and is there any efforts underway to maybe make it a little more linear? Because last couple of years it would have been pretty.., and back unloaded. I would say, historically, for better or worse, Gautam, our cash flow tends to be back-end loaded. It's sort of the flavor of our business. In terms of Q4 this year, it's obviously going to be driven by an income number which we're going to push to drive to the guided EPS.

Gautam Khanna: We're going to manage working capital tightly as I was just saying. I think there's some opportunity around inventory. We will drive receivables collections very strongly as we always do in the fourth quarter and we will manage payables. So it's really just about sensible cash discipline. We're managing capital. As we've called out several times, we don't have sort of huge capacity requirements. We continue to bring up lines and to reutilize existing assets on the whole and we'll see that again in the fourth quarter and into next year. So we believe, I mean, we did virtually $100 million to for last year. We believe we can, we will deliver that again this year.

Gautam Khanna: Thank you. I was curious also if this quarter had a little bit of dampening the margin from the hiring ahead and the like. Maybe if you could just describe some of the one time things this year that, like tooling, for example, I think that was called out in private borders. Is there anything else that you'd do as non-recurring that kind of make the comparisons a little easier for next year, besides what we discussed in Q3?

Gautam Khanna: You know, there's really, yeah, there really will not material one-timers. The hiring and the efficiency improvements that we're driving in the plants and bringing people in. Again, I think we've shared that some of the positions in our fiber business take nine months to a year to get to a minimum efficiency level for an operator to be able to work alone on the line. I would say, you know, there's some added effort going on with the CH53K ramp and the first articles and that program is really just starting to ramp up.

Gautam Khanna: So we're clearly not as efficient in the engineer structures area there as we will be as those first articles are complete, qualifications complete, and we streamline the deliveries to our customers. You know, other than that, we continue to work hard on recruiting and finding top talent. And the team has been very successful, but it's hard work. And it takes a little bit longer and the attrition is a little bit higher than it had been pre-pandemic and you have to build all that in. And again, when you're sole source for key programs, you can't be sure. And that's really what drove us to make sure we're not short and we have that capacity in place. So we've talked about that.

Gautam Khanna: Other than that, there really are no other one timers that we're going at in attacking other than operational excellence and efficiency.

Gautam Khanna: Great, thank you guys. Thank you.

Sheila Kahyaoglu: We'll go back now to Sheila Kahyaoglu at Jeffries. Thanks so much, good morning, Nick and Patrick. So maybe first question on Defense and Space, really good performance there on the top line. Can you maybe talk about the profitability within Defense and Space Business as you ramp on some of these programs and their Delta and Space there? Yeah, hi Sheila. I mean, Space and Defense is very similar to commercial arrow in terms of its profile of profitability.

Sheila Kahyaoglu: It contains a fair amount of Hexcel carbon fiber and as we've called out before pulling through Hexcel carbon fiber and in a mix of sales is good. So we generate good earnings, good margins. We have quite a lot of engineering core and honeycomb in some of our military applications all the way through to the art technology work that the business we acquired in early 2019.

Nick Stanage: So overall the profitability profile with those strong sales is good, Sheila. Great. And then maybe Nick one for you and your prepared remarks you mentioned investing in new programs, years in advance of them coming to market. Can you talk about how that could manifest itself in your PNL? Yeah, so boy, there's so many areas and having just gone through our R&T review. I can tell you, from a performance standpoint, we have several initiatives related to our fibers and the efficiency of our lines and the mechanical performance and the throughput which as you know, we have many lines and we replicate that so it translates into a big opportunity and a big boost for Hexcel.

Nick Stanage: So our improvements, our initiatives are certainly performance based but they're also processing based. How do we help our customers process materials so that they can lay down materials faster, they can cure them faster and ultimately drive to a lower life cycle cost and a better efficiency for them. So there's not a area within our portfolio whether you're talking about fibers or resin systems or prepregs or infusion products or other new technologies that were not really ready to disclose yet are being worked aggressively with our customers and again, there's a lot of pull for the improved performance, the improved throughput and the improved cost effectiveness.

Nick Stanage: Thank you.

Unknown Executive: And it looks like we do have time for one more question this morning. We'll take that now from Michael C. Emoli at Truis. Hey, good morning guys. Thanks for taking the question. Hey, I don't know Nick or Patrick, but as we think about sort of the margins and the capacity additions, you know, you're not going to give guidance here for 24 but is this excess overhead in terms of capacity and labor?

Unknown Executive: Is that going to be a drag into 24 as well? I mean, presumably, you know, if you, if you, you know, rates are increasing and you got to have more additions next year, I mean, do we have to look more out to 25 or 26? By the time you get to that kind of stated margin, I mean, it looks like I guess streak got you at 15 and a half percent margins next year and just just thinking about supply chain challenges and what we just saw here.

Unknown Executive: I'm You know, just should we expect a little bit of a headwind in the next year as well? I think, I mean, as I said, I think to Myles earlier, I mean, we're still confident to target the missing margins as we build our revenue. Now lining up as you're alluding to our cost space with the top line and getting those two things into sync and you kind of tailor into that some of the inflationary pressures that we certainly saw this year around energy.

Unknown Executive: Which has certainly been a headwind and perhaps a little bit of labor above the norm, but I wouldn't have played the labor part. But we remain confident in the general outlook that we are going to get to those missing margins. We are going to generate a lot of cash over the next two, three years, as Nick called out in his part of the script. It's going to sort of allow a lot of capital deployment opportunities.

Unknown Executive: What we would look to do is wisely and smartly as we can. So we will manage quarter by quarter. You're absolutely right. We're not going to guide head swings 24, but we remain optimistic, very optimistic on the general outlook. Got it. Thanks, Scott. Thanks, Michael. Thank you.

Unknown Executive: And ladies and gentlemen, that will conclude the Excel third quarter 2023 earnings conference call. We'd like to thank you all so much for joining us today and wish you all a great remainder of your day. Goodbye. You