Q4 2023 Hexcel Corporation Earnings Call
Good morning, My name is Andre and I will be your conference operator today.
Andre: At this time I would like to welcome everyone to the Hex Health fourth quarter 2023 earnings Conference call.
Today's conference is being recorded.
Andre: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad. If he would like to withdraw your question Press Star one again.
Andre: At this time I would like turn the conference over to Patrick Wintour Lynch Chief Financial Officer. Please go ahead Sir.
Andre: Thank you Audra.
Andre: Good morning, everyone welcome to Hexcel Corporation's fourth quarter and full year 2023 earnings conference call before beginning let me cover the full amount of fees 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.
Andre: Statements contained in this call may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Andre: Both estimates assumptions and judgments.
Audra: <unk> is caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward looking statements today.
Audra: These factors are detailed in the company's SEC filings last night usually.
Audra: 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.
Hexcel Corporation: With me today on an H <unk> chairman CEO and.
President and kind of got our vice president of Investor Relations.
Hexcel Corporation: The call is to review, our fourth quarter and full year.
The results detailed in our news release issued yesterday.
Nick: Now, let me turn the call over to Nick.
Nick L. Stanage: Thanks, Patrick Good morning, everyone and thank you for joining us today, as we share our fourth quarter and full year 2023 results.
Hexcel Corporation: <unk> completed another solid year with double digit sales growth a significant year over year increase in our adjusted earnings per share and strong cash generation.
Nick L. Stanage: All of those supply chain challenges limited build rates in a number of programs from increasing as fast as we expected when 2023 began most notably narrow body aircraft.
Hexcel Corporation: We continue to focus on ensuring operational readiness for the expected growth ahead.
Hexcel Corporation: This involves training new labor across our manufacturing sites driving operational excellence programs for yield and efficiency gains and bringing assets online for the expected increase in demand.
Hexcel Corporation: All of these efforts will position hexcel to maximize our margin opportunity in the coming years as build rates ramp upwards.
Hexcel Corporation: We continue to emphasize investing in employee training as we increase headcount in advance of program ramps.
Hexcel Corporation: We now have around 5600 employees, who continue to gain experience and are ready and eager for the challenge ahead.
In fact, even though about a third of our direct labor workforce has less than two years of experience with XL. We just completed our safest year on record.
Hexcel Corporation: This is an outstanding achievement and I commend every member of our one hexcel team for their diligence and commitment and taking the necessary steps to ensure that they and their colleagues go home injury free everyday.
Hexcel Corporation: When you couple our legacy and lightweight products and long term customer collaborations with a talented team driven by innovation and excellence in everything we do it is clear that hexcel is well positioned to benefit as the aerospace market strengthens.
Hexcel Corporation: Many reports now show a rebound in passenger air travel to pre pandemic levels was achieved at the end of 2023.
Hexcel Corporation: Thanks, All advanced composite materials are squarely at the center of this recovery and are benefiting the industry and society by enabling enhanced sustainability for decades to come.
Hexcel Corporation: Now, let's turn to some specifics reported in our earnings release last night.
Hexcel Corporation: First I'll cover the fourth quarter results and then full year 2023.
Hexcel Corporation: Fourth quarter sales of roughly $457 million or six 5% higher than Q4 2022.
Adjusted diluted EPS in the fourth quarter was 43 cents up seven 5% compared to last year.
Hexcel Corporation: Turning to our three markets commercial aerospace fourth quarter sales of more than $267 million, representing an increase of more than 5% in constant currency on increasing wide body sales, partially offset by lower narrow body sales year over year.
Other commercial aerospace increased modestly in the fourth quarter of 2023 led by continued growth in business Jets.
Hexcel Corporation: Our customers continue to ramp as fast as the complex supply chains can support.
Hexcel Corporation: There is tremendous backlog demand for narrow body aircraft and the Oems continue to work to maximize their output.
Hexcel Corporation: The wide body supply chain is ramping up robustly and we benefited with strong sales growth in 2023 in both the Airbus <unk> hundred 50, and Boeing 787 programs and we expect this growth to continue in 2024.
Hexcel Corporation: We were pleased to see at the end of 2023, the first Airbus <unk> hundred 21 rollout from the New final Assembly line that Airbus configured in France at the former site of the <unk> hundred 80 Assembly.
Hexcel Corporation: Airbus now has 10 final assembly lines globally for the <unk> hundred 20 family to support the rate ramp.
Hexcel Corporation: Now for some highlights from the quarter.
With the tallest and widest cabin in business aviation with the Salt Falcon <unk> entered service on November 30th following a two year certification achieved in August.
Speaker Change: We have great content on this new <unk> platform.
Speaker Change: We're also looking forward to dispose introduction of the large cabin 10 X, which will be the first business jet with an all composite wing made from <unk> materials or we will see another significant step up in business jet content.
Speaker Change: As you May remember from previous discussions at the end of 2021 XL transferred a significant portion of our fabrication work from our Kent, Washington site to Aerospace Composites, Malaysia, ACM, Our 50 50 joint venture with Boeing.
Hexcel Corporation: As we shifted toward higher complexity advance part manufacturing at Caf.
Hexcel Corporation: Following this transition we determined that our ownership in the ACM JV with no longer strategic for Hep cell and as a result, we sold our 50% interest to Boeing at the end of December.
Hexcel Corporation: The ACM joint venture with Boeing has been a tremendous business collaboration for many years and we think Boeing.
Boeing: For being an excellent JV partner going back to the inception of the ACF plant over 20 years ago.
Boeing: We know, which Boeing and the ACM team great success for the future.
Boeing: Moving to space and defense.
Hexcel Corporation: Sales in this segment hit an all time high in Q4 exceeding $152 million or an increase of about 20% year over year.
Hexcel Corporation: <unk> has been particularly strong in both space and in classified programs.
Hexcel Corporation: Industrial sales of just under $38 million in Q4 were down 22% year over year in constant currency.
Hexcel Corporation: Year over year high level comparisons, however, masked the growing strength in our automotive and marine markets.
Hexcel Corporation: While our industrial business is now smaller than it has been for some years. It remains an attractive market, where we are pursuing multiple value, adding technology opportunities in a number of different submarkets.
Hexcel Corporation: Now, let's turn to our full year 2023 results.
Hexcel Corporation: Sales were about $1 $79 billion up 13% year over year.
Adjusted diluted EPS for the year with $1 81.
Hexcel Corporation: Up more than 41% over 2022.
Hexcel Corporation: Adjusted operating income increased 33% to $216 $7 million or 12, 1% of sales.
Hexcel Corporation: Commercial aerospace is now 60% of our total sales and in 2023 sales of more than $1 billion represented an increase of 17% with growth led by wide body sales as demand for fuel efficient and lightweight composite aircraft, especially for <unk>.
Hexcel Corporation: International travel continues to be strong.
Hexcel Corporation: Other commercial aerospace increased 14, 1% for the full year of 2023 compared to the same period in 2000 to drill.
Hexcel Corporation: Driven by increasing composite adoption on large cabin business jets.
Hexcel Corporation: 2023 space <unk> defense sales of about $545 million increased almost 17% in constant currency.
Hexcel Corporation: For the full year compared to 2022.
Hexcel Corporation: This segment represented 30% of our total sales.
Growth in 2023 was across numerous programs, including fixed wing and space programs globally and helicopters in Europe and Asia Pacific.
Hexcel Corporation: <unk> composites are the benchmark in this market and our products are on more than 100 programs around the world, which provides us with a diversified foundation for a strong future.
Hexcel Corporation: Finally, industrial sales in 2023 were $176 million, representing a decrease of approximately 13% in constant currency.
Industrial sales are now about 10% of our business and are led by automotive sales primarily in high end sports cars and carbon fiber wheels.
Marine is a market with longer term growth potential, especially saw in light weighting parts, such as masks that reduced reliance on fuel and reduce emissions by large ocean vessels, including cruise and transport ships, incorporating wind assisted ship propulsion.
Hexcel Corporation: We remain very disciplined about the industrial business, we pursue with.
Hexcel Corporation: Our team targets growth areas, where we can differentiate our technology.
Reflecting confidence in our return to growth and our capacity to generate strong cash in the coming years, the Hexcel Board announced yesterday, a 20% increase in our quarterly dividend from 12 and a half.
Hexcel Board: <unk> 15 per share.
Hexcel Board: In February we are going to hold an investor day in New York and via webcast, where we will discuss our roadmap for innovation and market growth in the coming years as well as providing our medium term outlook for the company in relation to sales EPS and cash generation.
Hexcel Board: We're looking forward to seeing many of you there.
Hexcel Board: In the meantime for 2024 as reported in our news release last night, we are guiding to 195 billion to $2.0 billion to $5 billion in sales.
Hexcel Corporation: With adjusted diluted earnings per share of $3 10.
Hexcel Corporation: To $2 30.
Hexcel Corporation: We're also guiding to greater than $200 million of free cash flow.
Hexcel Corporation: Further details around 2024 will be provided in our Investor day next month.
Hexcel Corporation: Now, let me turn it over to Patrick to provide more details on the numbers.
Patrick: 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.
Patrick: 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 for our financial results.
Patrick: This currency exposure over a 10 quarter horizon protect our operating income as a result currency changes of late into our financial results over time.
Patrick: As a reminder, the year over year sales comparisons I will provide or in constant currency, which thereby remove the foreign exchange impact to sales.
Patrick: Turning to our three markets commercial aerospace represented approximately 60% of total fourth quarter 2023 styles.
Hexcel Corporation: Fourth quarter commercial aerospace sales of 267 $5 million increased five 3% compared to the fourth quarter of 2022 led by strong growth in the Airbus <unk> hundred 50, and Boeing 787 programs.
Hexcel Corporation: Total fourth quarter narrow body sales were lower year over year, including declines in Airbus <unk> hundred 20 Neo.
Hexcel Corporation: <unk> hundred 20, and the Boeing 737 Max program.
Hexcel Corporation: The other commercial aerospace category grew two 3% with continued growth in business debt, partially offset by softness.
Hexcel Corporation: And other market market served by this category.
Hexcel Corporation: Based on defense represented approximately 30% of fourth quarter sales and totaled $152 3 million, increasing 19, 7% from the same period in 2022.
Hexcel Corporation: Classified programs grew strongly year over year and space programs with strong including launches rocket motors and satellites.
Hexcel Corporation: European military and civilian helicopter sales also strengthened noticeably.
Hexcel Corporation: Industrial comprised approximately 10% of fourth quarter 2023 sales.
Hexcel Corporation: Industrial sales totaled $37 7 million decreasing 22, 3% compared to the fourth quarter of 2022.
Hexcel Corporation: Sales grew strongly year over year and the performance orientation automated market. Although this growth was more than offset with lower sales across our other industrial market.
Hexcel Corporation: On a consolidated basis gross margin for the fourth quarter was 22, 5% compared to 23, 1% last year.
Hexcel Corporation: Similar to our commentary last quarter, we have invested ahead of our customers in order to support aircraft production rate ramp.
Hexcel Corporation: This involves spending on infrastructure head count and higher levels of employee training.
Hexcel Corporation: <unk> pull through for narrow body programs lower than we expected is a near term headwind as the full cost of our increased infrastructure base was not absorbed by the actual sales level.
Hexcel Corporation: This should lessen through the first half of 'twenty 'twenty four is the overall narrow body supply chain stabilizes to support the narrow body rate ramp.
Hexcel Corporation: As a percentage of sales selling general and administrative expenses and R&D expenses were 11, 8% in the fourth quarter.
Hexcel Corporation: 12, 3% in the fourth quarter of 2022.
We continue our strong focus on operating cost control as our topline growth to maximize volume leverage.
Hexcel Corporation: Adjusted operating income in the fourth quarter was $49 1 million or 10, 7% of sales compared to $46 3 million or 10, 8% of sales in the comparable prior year period the.
Hexcel Corporation: The year over year impact of exchange rates in the fourth quarter. The adjusted operating income was favorable by approximately 30 basis points.
Hexcel Corporation: Now turning to our two segments. The composite materials segment represented 82% of total sales and generated an operating margin of 14, 4%.
Hexcel Corporation: Operating margin in the comparable prior year areas was 12, 7%.
Hexcel Corporation: The engineered products segment, which is comprised of our structures and engineered core businesses represented 18% of total sales and generated a nine 6% operating margin as compared to 14, 4% in the comparable prior year period.
Hexcel Corporation: Softer margin year over year reflects the impact of higher infrastructure investment.
Hexcel Corporation: Support expected narrow body rate round.
Net cash provided by operating activities was $257 million in.
Hexcel Corporation: In fiscal year, 2023, compared to $173 million for the comparable period in 2022.
Hexcel Corporation: Working capital was a cash use of $27 million in 2023 to support higher sales.
Hexcel Board: For the comparable prior year period, working capital increased $72 million.
Throughout 2023, we focused on improving the efficiency of our inventory holding particularly reducing our buffer or safety stock that we had previously expanded when global logistics with strained.
Hexcel Corporation: Pleased with the accident buyout payments sequentially inventory decreased $16 4 million from the end of the third quarter of 2023, we will continue to tightly manage our working capital.
Hexcel Corporation: Capital expenditures on an accrual basis were $121 6 million in 2023, which included the previously disclosed Amesbury, Massachusetts property taxes for approximately $38 million.
Hexcel Corporation: Excluding this property purchase.
Hexcel Corporation: <unk> III accrued capital expenditures would've been approximately $83 6 million compared.
Hexcel Corporation: Compared to $69 8 million in the prior year period.
Hexcel Corporation: Free cash flow in 2023 was $148 9 million.
Hexcel Corporation: Which includes $7 $5 million dividend received as part of the ACM joint venture sale as well as a $1 9 million.
Hexcel Corporation: <unk> received from the UK pension transaction.
Hexcel Corporation: For comparison free cash flow in 2022 was $96 8 million.
Hexcel Corporation: <unk> generated a strong free cash flow to adjusted net income cash conversion ratio in 2003 interest rate of just over 96%.
Hexcel Corporation: Going forward, we expect the conversion ratio of 100%, Ohio for a period of time, while capex remained at lower levels.
Hexcel Corporation: Our strong free cash flow generation in 2023 resulted in us paying off our revolver balance during the fourth quarter.
Hexcel Corporation: Our net debt position was $472 $5 million.
Hexcel Corporation: December 31, 2023, leading to a leverage ratio of approximately one three times on a net basis on a net debt basis, our ongoing net debt leverage ratio target.
Hexcel Corporation: Maine at one five to 2.0 times EBITDA.
Hexcel Board: I would like to highlight the strategic derisking of the balance sheet by transferring the deferred pension plan in the UK with third party insurer, who assumed all risk and liability.
Hexcel Board: Administers the plan.
With this action <unk> received a $1 9 million.
Hexcel Board: <unk> cash pretax representing the surplus in the plan.
There was also a non cash charge of $75 million.
Hexcel Corporation: Resulting from the required GAAP accounting.
Hexcel Board: The board of directors declared a <unk> 15 quarterly dividend yesterday, which is an increase of 20% from the prior level.
Hexcel Board: The dividend is payable to stockholders of record as of February nine with a payment date of February 16th.
We did not repurchase any stock during the fourth quarter. The remaining authorization under the share repurchase program on December 31, 2023 was $187 million.
Hexcel Board: Expanding on Nick's comments regarding our 2020 for sales and adjusted EPS guidance. We are forecasting 10, 4% sales growth at the midpoint and 21, 5% adjusted EPS growth at the midpoint.
Hexcel Board: In terms of our three markets. We expect 2024 commercial aerospace sales increased mid teens on a percentage basis, we full comp space and defense sales increased mid single digits and we forecast the industrial sales increased low to mid single digits.
Hexcel Board: We are guiding to free cash flow in excess of $200 million.
Nick: We will provide guidance on additional financial metrics at the February Investor day, as well as provide our mid term outlook.
Nick: With that let me turn the call back to Nick.
Nick: Thanks, Patrick.
Nick: As we begin 2024, we do so with the largest backlog in commercial aerospace history of more than 14800 aircraft.
Nick: That currently represents almost a decade of production for the Oems and based on our ship set content over $9 billion of future sales to heck Sal.
The demand and the need for latest generation aircraft is quite apparent.
Hexcel Corporation: The challenge for the industry is how fast the supply chain can ramp to meet that demand.
Hexcel Corporation: Moreover, we recognize that a key element of the future of aerospace is light weighting.
Lightweight materials for better performing fuel efficient more sustainable aircraft are being pulled and driven harder than they ever have in my history with hexcel.
Hexcel Corporation: <unk> has the deepest and broadest portfolio of modern and advanced composites and we are focused on delivering solutions to our customers.
Hexcel Corporation: Our market positions customer relationships and sought after technology lead our industry.
Hexcel Corporation: Our hexcel team is driving forward innovation to deliver lightweight and sustainable advanced composite solutions to make a better world.
Hexcel Corporation: Everything we do at <unk> is driven by our long term relationships with customers, who trust us to collaborate innovate and perform.
Hexcel Corporation: The opportunity ahead is larger and more exciting than ever.
Altra that wraps it up all of the prepared remarks, we're now ready to take questions.
Hexcel Corporation: Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. We ask that you. Please limit yourself to one question and one brief follow up to allow everyone an opportunity to ask a question.
Hexcel Corporation: We will go first to Michael Cera Mueller at Trust Securities.
Hexcel Corporation: Hey, good morning, guys. Thanks for taking the question.
Hexcel Corporation: I guess.
Hexcel Corporation: Patrick or Nick maybe just just thinking about the 24.
Nick: Revenue guidance on commercial Aero.
Nick: Did 17% growth the guidance for mid teens.
Hexcel Corporation: We've got rates ramping obviously, Max news is still fresh, but what would really cause growth deceleration. There maybe could you just give us some of the expected production rates sort of underpinning that outlook by platform. If you can.
Michael: So Michael Thanks, Thanks for the question.
Michael: Yes.
As we have exited the pandemic clearly the supply chain.
Michael: Went through some challenging times with respect to delivery lead times et cetera, and although those are getting better there is still some uncertainty and some impact being driven.
Michael: I think if you look at the platforms.
Michael: In the commercial space you can go down the list <unk> hundred $53 'twenty into 'twenty.
Michael: With plans to be anywhere from 10 to 75 on the <unk> hundred 20, and the 2026 timeframe 14 on the 220.
Michael: Similar story for Boeing getting the 10 per month on the 77% and 25 2006 timeframe.
Speaker Change: For the 737 in the 'twenty five 'twenty six time I think there.
Speaker Change: Clearly.
Hexcel Corporation: The demand for those platforms and those aircrafts and those ramp rates again, a question, we'll be working through some near term issues on the Boeing side working through some continued stress and continued recovery on the supply chain.
Hexcel Corporation: And we feel very good about our plan and the balance we put into it and feel comfortable that we have some conservatism in there and quite frankly, if the supply chain performs we see a potential upside for 2024 and beyond.
Hexcel Corporation: Alright.
Hexcel Corporation: Got it okay helpful. Thanks, guys I'll, just stick to one and jump back in the queue.
Michael J. Sison: Thanks, Michael.
Michael J. Sison: We'll move to our next question from David Strauss with Barclays.
Michael J. Sison: Thanks, Good morning.
Michael J. Sison: Good morning morning.
Michael J. Sison: Nick could you, maybe just expand a little bit on.
Nick: Why narrow body I guess narrow body was flat for you guys last quarter and that are in Q3 and now down in Q4 exactly what what are you seeing there are you seeing destocking or what what does this seems to be unique we're not hearing about this from.
Nick: From any other any other companies at this point.
Nick: So a couple of data points.
Nick: We've talked about this before and that is the complexity of the supply chain.
Just think of the <unk> hundred 20, we have over AED ship to locations. When you look at engine nacelle structures in airframe.
Nick: On the 737, it's less it's closer to 30 plus.
Nick: But it just gives you an idea to the complexity of the supply chain again I would remind.
Nick: All listeners that the <unk> hundred <unk>, we've shared tends to be at the high end of our ship set content of the range. We provided the 2% to 500000, whereas the 737 tends to be at the low end.
Hexcel Corporation: So having said all of that entering 2023.
Hexcel Corporation: And expectation that build rates, perhaps we're going to ramp more quickly than the <unk> and in that some of that supply chain added buffer added safety stock so that they could not.
So that they could deliver and not end up shorting customer.
Hexcel Corporation: For the year the ramp rates, we're not accelerating the way some expected and then there is no doubt in my mind that fourth quarter, and particularly the sundberg some of the supply base put the brakes on managing cash managing their buffer stock and.
Hexcel Corporation: And took some of that inventory out.
Hexcel Corporation: So again.
Hexcel Corporation: It's tough to look at quarter to quarter, you really need to look at multiple quarters and average it out to really know what's going on to get aligned with what the Oes are doing on their final assembly lines.
Hexcel Corporation: Okay. Thank you for that color and.
Hexcel Corporation: Follow up on the on the margin side Patrick.
Patrick: Backing into it looks like you're implying about a.
Patrick: 14% margin all in.
Patrick: In 2004.
Patrick: Yes, I mean, you talked about things getting improving as you absorb labor as you go through the year, but can you kind of compare.
Patrick: That 14 to I think prior you had said closer to 15%, 16% and obviously you know back several years ago. When you were a similar revenue level as you're projecting for 24 I think they were doing closer to 17, 18% margins. Thanks.
Patrick: Yes.
Patrick: Yeah. Thanks, David.
David Strauss: So to call I mean, we're one of the first differences.
David Strauss: Which we put in our statement.
David Strauss: If you look at year over year margins and you look at the total company and EPS.
David Strauss: Obviously, I just want to point out the <unk> and around <unk>.
David Strauss: ICM, which won't be there now going forward.
David Strauss: And I think if you kind of look at the volume difference between.
David Strauss: Our guidance and sort of the street guidance again, there's kind of a volume step down and I think if you put all that together the EPS is start to get much closer.
David Strauss: But in terms of the operating margin.
David Strauss: About yes, I think you're backing into a number.
David Strauss: Somewhere in that.
David Strauss: And a half 14% range I think thats about right.
David Strauss: I think there are a number of headwinds I think as Nick was just talking about we started 2023 extremely strong way and I think everyone was excited about the narrow body ramp and things moving forward and a lot of inventory got pulled into the pipeline and as Nick said I think in the second half of the year. There was a bit of an adjustment and then pulled back.
Nick: But as we went into the year, we cannot we don't have that ability to turn and change we've been bringing in labor. We're training labor, we're investing in infrastructure, we've got all lines up and running we're maintaining them and so we're positioned for higher growth and we're ready for that ramp rate certainty through 2024, and so that.
Nick: Currently and we call that out in 2023.
Nick: And perhaps for another quarter or two.
Nick: <unk> is a headwind it is a headwind to our margin and it's pushing this down the way we want it to be where we expect it to be and so that mid teens and we kind of call. It 14 to 16, clearly we're knocking at the bottom end of that range, rather than the middle or going beyond as we would have ideally desired I think a little bit of inflation.
Nick: Over the last couple of years.
Nick: Okay.
Nick: That's definitely kind of an increased headwind compared to pumps margin labor was slightly inflated.
Nick: Some raw materials around the edges.
David Strauss: Causes some headwinds as well as some of the energy costs, which are not increasing today, but they certainly haven't returned to sort of pre pandemic lower cost levels.
David Strauss: I mean, if you're really then looking back to 2016 17 margin. We've got another 50 or $60 million of depreciation today again ready to support that higher ramp, but that will give you at least 200 basis points of difference.
And our margin performance. So when you add all that together, we believe our underlying performance is moving in the right direction. We're certainly strongly positioned and very deliberately positioned for the growth ahead and as we move through 'twenty four and into the back half of 'twenty four we will be driving those margins and the leverage is strong as we can.
Thank you very much.
David Strauss: We'll go next to <unk> bin at Stifel.
David Strauss: Hi, good morning, and thank you for the question.
David Strauss: Hi, good morning.
David Strauss: Patrick just following up on that as we think further out.
Patrick: Would you say there is anything structurally different about the business today as you think about <unk> ability to get back to that margin profile. Once sales are back to those same level does it.
Patrick: Yes, you noted the deflation is a headwind potentially some material costs are there other things like mix competition or a different view on production potential that impact where you think you are heading.
Patrick: No we are absolutely driving back to where we were historically now is taking longer now thats frustrating answer is clearly frustrating you, but we are very deliberately there to support our customers. We put the infrastructure in we have this headwind, which was never going to just be one quarter. It was always going to be a period of time.
Patrick: But yes, we are confident that when the top line continues to grow and the ramp rates continue to come through there is no fundamental mix change. There is no kind of competition shifts we are just as well positioned as we were historically to bring through our products to drive leverage, but we have to get that top line coverage, we've got to cover that.
David Strauss: And I, just mentioned, which is obviously higher.
And we hope to get that sort of just leverage over our overheads that basic sort of economies of scale leverage and that will come it will come as we drive through as I say the back half of 'twenty floor and then we go into 'twenty five we will be driving back to those historic levels of margin.
David Strauss: Got it okay on the just as a follow up on the other two segments space and defense and industrial.
David Strauss: Based on defense coming off of a really strong year in sort of talking about maybe a little bit of lower growth. There and then industrial coming off a weaker year in a little bit of a rebound can you just talk through the dynamics of your expectations and what <unk> guided there.
David Strauss: Yeah.
So in space and defense I mean, 2023 quite honestly was an extraordinary year at 17% I'm sure that certainly a record in my time.
David Strauss: We'd have to book a long battle back a long time in <unk> history to find another year of such growth that it was just very solid growth across a number of platforms. We called out helicopters, we called out the classified a lot of one time buys there, which really do help and then just general strength in the fixed wing find suggest.
David Strauss: So very very solid now as we go look forward, we continue to be confident it's a great market for us and we're driving growth opportunities CH 53 K.
David Strauss: The down the road the V. Two AC, but many sort of smaller platforms as well, where we can penetrate.
David Strauss: So we're calling mid single digits, we think Matt sensible, obviously, there is budget challenges and other sort of geopolitical aspects to it.
David Strauss: Which make military and space and defense from time to time lumpy as you know, but anyway, another solid year of mid single digit growth.
David Strauss: Industrial industrial clearly 2023 was a tough year.
Speaker Change: Probably the first time wind has been mentioned today. They are just mentioned it.
Speaker Change: Wind is now a much smaller sort of factor in our industrial segment, but it has come down dramatically and perhaps a little bit faster than we even expected over the last couple of years.
Speaker Change: That really is now going to stabilize we believe.
David Strauss: Automotive is now our largest industrial sub market, we're seeing nice growth in high end causes surtitles carbon fiber whales as I think Nick mentioned.
Nick: So we are positive and we see continued investments and then around things like marine and other peer industrial plays.
Nick: We'll be very focused very targeted on value add plays. So we don't see this exit going down further we don't see dramatic growth, we see some small growth ahead.
Nick: Hopefully no more declines.
Nick: Thank you.
Nick: We'll go next to Ken Herbert at RBC capital markets.
Nick: Hi, good morning.
Nick: Nick and Patrick.
Ken Herbert: Good morning, good morning, Ken.
Ken Herbert: Hey, maybe either one of you I wanted to start off first you didn't buy any any of your stock in the fourth quarter and I wanted to see if that reflected just maybe uncertainty around just sort of the outlook or anything else, but I guess more importantly can you can you refresh us on how you would how you would view capital allocation.
Ken Herbert: <unk> here in 'twenty, four and the potential for some more return to shareholders. As you look at relatively low leverage the significant step up in cash generation.
And other maybe priorities as you think about investments working capital et cetera, but how should we think about the opportunity for more capital to shareholders in 'twenty four.
John: Yes, John Thanks for the question.
John: Our approach had a couple of ways first saw.
John: Our outlook had absolutely nothing to deal with the fact that we chose not to buy back shares in the fourth quarter.
John: Quite the opposite we're very bullish on our expected cash.
John: Generation looking forward.
John: We discussed that regularly with the board and how we're going to prioritize.
David Strauss: Yes, I wanted to take the opportunity on your question to really highlight our focus on <unk>.
David Strauss: Utilization of our cash is prioritized on organic growth.
David Strauss: And thats investing in fiber and resin technology, it's investing in new weaving technologies that basically advanced composites make them, even more attractive than they are today make them even more manageable for differ.
Ken Herbert: Brent and expanded part production going forward, which ultimately will drive lower cost solutions lower.
Ken Herbert: Lower waste solutions and more efficient solutions for our customers. So when you think about the products that are being envisioned and worked on you can go through the new platforms wings Empanadas Central wing box, whether it's for the next new narrow body.
Ken Herbert: The next new business jet or the next new commercial application, where there is a conversion from metal to two composites to get laid a weight advantage.
Ken Herbert: Lots of opportunities around new engine technology with the Rolls Royce Ultra and the rise platform. The newness cells remember we have great content on engine then themselves which are included in our total of ship set value.
Ken Herbert: When you look at on the military side the floor. The <unk> the combat drones. The next generation Air dominance all the technology initiatives. We're working on are going to help us win even more content on these applications.
Ken Herbert: Then when I look internally I look at things like infrastructure efficiency productivity modifying our assets so that we get even higher utilization out of our legacy assets.
Ken Herbert: One make us more cost effective and secondly to be able to defer our capex our capex investment.
Ken Herbert: Further to the right so future factory process improvement productivity improvement are front and center.
Ken Herbert: Clearly organic growth is our priority now as always we look at our balance sheet, we look at our debt leverage ratio and we look at how we manage that efficiently and effectively and clearly share buyback and dividend increases are front and center as we.
Ken Herbert: Evaluate M&A options and action ability and whether or not we can find something that enhances our portfolio and allows us to grow our core competency.
So that's kind of a summary, and the priorities that we're working on remember we we build our new R&D Center of excellence in Salt Lake City, we've been adding.
Hexcel Board: Talented scientists and technicians and we're doing that because as I said in my remarks, I've never seen the Paul I have never seen any requests from customers.
Hexcel Board: Other than I do today and Thats for applications that are mid term and applications. Some are longer term, but overall, that's what we're investing in.
Hexcel Board: Thanks, Nick appreciate all the color.
Nick: Youre welcome.
Peace Kubicki: We will go next to peace Kubicki at Alembic Global advisors.
Peace Kubicki: Hey, good morning, guys.
Peace Kubicki: Patrick a couple of points of clarity just on the fourth quarter of gross margin.
Patrick: Obviously, you've talked about the labor.
And similar volumes for the first half of 'twenty, three but was there any mix issue in the fourth quarter the impact to gross margin or was that all the impact of labor.
Patrick: To that point should we think about a similar gross margin in the first half of 'twenty four.
Patrick: Yes.
Patrick: Certainly, it's not really a mix issue.
Patrick: More fundamentally I would say a broad over hedged infrastructure cost issue I wouldn't just say labor labor is definitely part of that but it is also maintaining the plant running the plant operating general kind of input costs and support infrastructure cost that that's really the headwind right now and why we meet that bar.
Patrick: <unk> leverage.
Patrick: What I mean in terms of margin, yes, we're going to see a gradual margin growth.
Patrick: And improved leverage over that infrastructure overhead base as 2024 continues and then in 'twenty five and beyond.
Patrick: So yeah.
Patrick: Yeah, it's not going to be a sudden snap change we're going to gradually increase with maybe though of lump payroll there, but we should see a gradual increase as volumes growth.
Patrick: Okay, and then just it was a great free cash flow you're obviously.
Patrick: Pretty strong 24 cash outlook as well.
Patrick: And just as you think about your mid term topline growth over the next two to three years.
Patrick: With what you've done with the inventory do you really do not expect to have to grow inventory over the next couple of years, even with the growth that youre expecting.
Patrick: So.
Patrick: Obviously, we'll talk about our medium term growth and a lot more detail.
Patrick: In February, but essentially I'm not going to say there is going to be no dollar inventory growth.
Patrick: I actually think we've got to we actually sort of focus on a relative days metric. How many days of inventory were holding and we have the opportunity to reduce that and add several more days down and so as our top line grows we nearly to minimize the growth in inventory as I say I'm not saying it will be zero.
David Strauss: But it shouldnt have to grow to much more certainty significantly at a much lower growth rate than the top line grows which will then give is that improvement in relative days of holdings.
David Strauss: Okay. That's great. Thank you.
David Strauss: Next we'll go to Robert Spingarn at Melius research.
Robert Spingarn: Hey, good morning, Nick Patrick Kirk.
Robert Spingarn: Hi, Robert.
Nick: Nick you talked about.
What I'm going to call Destocking in the narrow body business first half of 'twenty four.
Nick: We're going with this it sounds like it gets better in the second half but.
Nick: Can we think about the destocking relative between.
Nick: Airbus and Boeing is it greater for Boeing given what's going on there and how.
How much risk would you say we have when we think about the news that came out yesterday and Michael referred to this in the beginning it is very fresh news I'm trying to get an idea of when you will be at rate parity on these narrow body programs.
Yes, Robert So again.
Nick: Pointing out one platform versus the other is really driving the.
Nick: The stocking in the first half of the year and some of the Destocking in the second half.
Nick: Yes.
Nick: It's really not as relevant as the ship set content.
Nick: And at what rates they are thoughts relative to that consumption and where they are so there was not one that jumped out now clearly with the news that's been coming out.
Nick: And as some of the issues get resolved.
I'm very excited to see that shipments to China.
Nick: Here to have resumed and the grounding of the dash nine it sounds like it's been lifted so I think Boeing and their supply chain are working through putting in some enhancements to ensure that they deliver what the FAA is looking for.
Nick: And again, if you look at what we rolled up in our plan, we still feel even given the news yesterday, which probably will continue to evolve we still feel good with our guidance. We think we were conservative enough in the right areas that debt.
Nick: That we're holding to that.
Nick: Okay. Okay.
Nick: Okay, and then I just have a fault block kind of as a follow up but.
Speaker Change: The 787 hundred 37, Max seven and 10 have this anti icing issue waiver situation.
Speaker Change: <unk>.
Speaker Change: With the nacelle on the composite materials wanted to ask if you guys are involved there and if there is a redesign is that a headwind or tailwind.
Speaker Change: Well you can assume anything with our customers, where we can help provide a solution we're going to be involved.
Speaker Change: <unk>.
Speaker Change: It's really too early to say, what a redesigned might entail what it might be involved with but.
Ken Herbert: Historically anytime there is an enhancement or a new engine or lasalle or component there tend to be more composites involved and we tend to get a greater portion of that so again it will take some time to work through the details there and it would be premature.
Ken Herbert: For me to comment on.
Ken Herbert: What direction that will go specifically are.
Ken Herbert: Are you on the existing nacelle.
Ken Herbert: Yes.
Ken Herbert: Okay. Thank you.
Ken Herbert: Youre welcome.
Ken Herbert: We will take our next question from Gavin Parsons at UBS.
Ken Herbert: Thanks, guys good morning.
Ken Herbert: Good morning.
Gavin Parsons: If I'm interpreting it right. It seems like maybe there are three buckets of costs that are really impacting margins. Brett you mentioned inflation lower volume on narrow body than you expected and cost ahead of growth and I kind of wanted to focus on that last one the press release talks about training, new labor driving operational excellence and bringing assets online.
Is there a way to think about how much of that is abnormal or elevated costs versus normal course of business before the volume has come through.
Gavin Parsons: Yeah.
Brett: I'm not sure I describe any of it as abnormal I mean, we've as we've called out many times.
Brett: We focused very strongly on supporting our customers, we are not going to be the bottleneck.
Brett: And we're going to be ahead of the ramp right now that as I am.
Brett: Sure you all understand it is difficult to judge, especially in the narrow body market right now, which is quite a ramp that complicated supply chains as Nick described we have dozens of two.
Brett: Two points with both of those planes.
Brett: And so it is complicated and we have to be ahead of that and so it's really about bringing in costs, bringing in labor training that labor make.
Brett: Making sure the plants and equipment is maintained and ready and so we've got machines running but they're not fully utilized then not truly efficient at the moment.
Brett: But you have to support them and you have to have general infrastructure across the business to be ready and we following the first half of 'twenty. Three we were obviously anticipating a stronger second half of 'twenty three than we saw I mean, we raised guidance, perhaps mistakenly now.
Brett: In July but we did.
Brett: And then that second half didn't materialize as we thought in mind, but we are prepared we are positioned now as we go into 'twenty four ready to support our customers.
Brett: And so I wouldn't call it abnormal it's part of being prepared for growth ahead.
Brett: Okay. That's helpful. And then any sense you can give us about <unk>.
Brett: Energy and raw material costs today, you can relative to where they were pre COVID-19.
David Strauss: Oh pre COVID-19.
Ken Herbert: I mean energy costs I would say is still high.
Ken Herbert: They've come down a bit they are not growing now or at least they might be in very very small green in certain pockets, but largely they have come down I am not sure. There is low as well I'm pretty sure they're not as low as they were pre pandemic, but they're not growing it's not a big year on year headwind at all for us in terms of other raw.
Ken Herbert: Heroes, we're seeing a little bit of inflationary pressure, but it is nothing like the pressure we saw over the last couple of years, where we saw significant headwinds. So we've still got some elevated costs, but they're not growing.
Ken Herbert: <unk> raw materials have definitely softened a bit and so that's very helpful. Others are a bit more sticky, but they're not growing is the way I would describe the situation.
Ken Herbert: Okay. Thank you.
Next we'll go to now a <unk> at Goldman Sachs.
Ken Herbert: Hey, good morning, everyone.
Nomura: Morning Nomura.
Nomura: Okay.
Gavin Parsons: Our Boeing or any of the tier one suppliers on the Max that you sell into communicating any change to the master schedule through the year to you at this point.
Gavin Parsons: So we work primarily with the Oes.
Gavin Parsons: <unk>.
Gavin Parsons: And although we get Paul and see signals from the supply chain, they really don't provide guidance.
Gavin Parsons: I can just say Boeing is staying very we stay very aligned with them and they communicated to us on a regular basis.
Gavin Parsons: Okay Fair.
Fair enough: Fair enough.
Fair enough: On the wide body side.
Fair enough: And equally complex supply chain, but also fewer units and.
Fair enough: Yes.
Fair enough: Those facilities sort of look very ready to go to higher rates and the the order pace there has been.
Fair enough: Surprisingly strong I guess.
Fair enough: What are the prospects for the for getting to the planned rates faster or going higher then you recently were thinking on the wide body side.
Fair enough: Yes.
Fair enough: Again, if you look at the wide bodies and how they've ramped.
Fair enough: 2021, how smoothly the brand with really out issues.
Fair enough: Branded lower volume, but scale much larger.
Fair enough: We have great confidence, we're not seeing or hearing anything that.
Fair enough: Indicates that theres going to be bottlenecks or challenges.
Fair enough: Obviously time will tell and.
Fair enough: We will stay aligned with our customers, but we're very optimistic and very bullish on number one all of the orders that are coming in on wide bodies as well as the expected ramp rates over the next two to three years.
Fair enough: Okay, and then just lastly in your.
Fair enough: Defense business.
Fair enough: Growth rate is just kind of step function higher.
Fair enough: You talk about that being diversified.
Fair enough: But I guess I'll, just I'll, just ask Jim to try to better understand it is there any one.
Fair enough: <unk> program driver is that the Florida ramp.
Jim: And what's behind that.
Jim: Kind of tripling of the growth rate.
Yes, hi.
Jim: I'll grab that one is definitely not the flower at this stage I think thats still a few years out before that will really have any impact I mean, the biggest kind of moving program for US is the CH 53, K over the last two to three years and probably in funds or is still weak.
Jim: Such strong content, such advanced shapes that two five to $3 5 million.
Ken Herbert: On that.
Ken Herbert: And we're still adding elements and growing into that platform.
That's probably the biggest single one to call out I think Europe.
Ken Herbert: Has stepped up a bit in the last certainly we saw then in 'twenty three.
Ken Herbert: So that's very positive for us so I mean, we're across so many programs to enhance the specifics so I'll call out the CH 53, K I'd call out Europe stepping up.
Gavin Parsons: But the general positivity and I would also echo what I said, a little bit earlier 23 was exceptional.
Gavin Parsons: 17% growth for space and defense.
We are guiding to mid single digits, we'll obviously do as well as we can but.
Gavin Parsons: <unk> three was it somewhat sort of.
Gavin Parsons: That year I would say.
Gavin Parsons: Okay. Thank you. Thank you.
Noah: Thanks Noah.
Speaker Change: And we will take our final question today from miles Walton at Wolfe Research.
Speaker Change: Thanks, Good morning.
Speaker Change: I was wondering.
Speaker Change: If he could.
Speaker Change: Say, whether or not the level of composite.
Speaker Change: Materials commercial aerospace sales was about what you expected or.
Or is it a situation where the <unk>.
Robert Spingarn: <unk> is just not coming through.
Robert Spingarn: In real time.
Ken Herbert: Or are you just seeing it and you have the ability to see that it slow you hope it gets better, but but just trying to reconcile those two.
Ken Herbert: Okay.
Ken Herbert: There is nothing that really surprised us other than what we've mentioned in that surround the narrow bodies and the ramp being more challenged than than what we expected when we entered the year.
Ken Herbert: And again not knowing all the issues that are driving that I can I can tell you, it's not a <unk> capability or capacity.
Ken Herbert: We have not been a bottleneck for our customers, but clearly there is.
Ken Herbert: Supply chain and internal challenges that just prevented those rates from from getting where we expected other than that miles.
Ken Herbert: We've got very good visibility on it.
Ken Herbert: Believe the supply chain is improving I believe the narrow body rates are going to increase there may be some bumps in the road, but we cannot be caught short we will not be caught short and thats whats driving the pre investment the pre training to make sure we.
Ken Herbert: We deliver to our highest potential here in the coming quarters and years.
Ken Herbert: Is it fair to think that you've done the hiring that you needed for 24 and 23 already given what you experienced.
Ken Herbert: In certain areas, we have there certainly will be additional hiring but.
Ken Herbert: The scrutiny and the focus the team have on getting the line efficiencies again remember, we've got multiple lines and we've been bringing them up and that takes more head count and with the amount of direct labor that have minimal experience. It just takes a little bit more to get that in.
Gavin Parsons: <unk> C, where we're accustomed to back pre pandemic levels clearly, we're confident that is going to come and we will get there and we're working to make that happen as fast as possible, but it's not a step change youll grow into it and I like the trajectory I like where we are on the efficiency.
David Strauss: Fee gains im seeing in the plants and I know the team will do the right thing on managing the costs going forward.
David Strauss: Okay. Thank you.
Myles Walton: Thanks miles.
Myles Walton: And this concludes today's conference call. Thank you for your participation you may now disconnect.
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