Q3 2024 Hexcel Corp Earnings Call
Operator: Thank you for standing by and welcome to the Hexcel Third Quarter 2024 Earnings Conference Call. All participants are in a listen-only mode. After the speaker's remarks, we will conduct a question and answer session. If you would like to ask a question at that time, please press star followed by the number one on your telephone keypad. To withdraw any questions, please press star one again. As a reminder, this conference call is being recorded.
Thank you for standing by and welcome to the Hexcel third quarter 'twenty 'twenty four earnings conference call.
All participants are in a listen only mode.
After the Speakers' remarks, we will conduct a question and answer session.
If you'd like to ask a question at that time. Please press star followed by the number one on your telephone keypad.
To withdraw any questions. Please press star one again.
As a reminder, this conference call is being recorded.
Patrick Winterlich: I would now like to turn the call over to Patrick Winterlich, Chief Financial Officer. Thank you. Please go ahead.
Speaker Change: I would now like to turn the call over to Patrick Winter Lynch Chief Financial Officer. Thank you. Please go ahead.
Patrick Winterlich: Thank you, Julian.
Speaker Change: Thank you Julien good morning, everyone welcome to Hexcel Corporation's third quarter 2024 earnings Conference call before beginning let me cover this from Allison.
Patrick Winterlich: Good morning, everyone. Welcome to Hexcel Corporation's third quarter 2024 Earnings Conference call. Before beginning, let me cover the formality. I want to remind everyone about the safe harbor provisions related to any forward-looking statements we may make during the course of this conference. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1990. They involve estimates, assumptions, judgments and uncertainties caused by a variety of Transcripts provided by Transcription Outsourcing, LLC. Such facts are detailed in the company's SEC filings and earnings reports.
Speaker Change: I want to remind everyone about the safe harbor provisions related to any forward looking statement, we may make during the course of this call.
Speaker Change: Certain statements contained in this call may constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Speaker Change: Involve estimates assumptions judgments and uncertainties caused by a variety of factors.
Speaker Change: It could cause future actual results or outcomes differ.
Speaker Change: Materially from our forward looking statements today.
Speaker Change: That's factored the detailed in the company's SEC filings and earnings release.
Patrick Winterlich: 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 in copyrighted material. cannot be recorded or rebroadcast without our express consent. Your participation on this call constitutes your consent to that request.
Speaker Change: A replay of this call will be available on the Investor Relations page of our website.
Speaker Change: Lastly, this call is being recorded by Hexcel Corporation and copyrighted material.
Speaker Change: Cannot be recorded or rebroadcast without our express permission your participation on this call.
Speaker Change: So that's a quick.
Patrick Winterlich: With me today are Tom Gentile, our CEO and President, and Kurt Goddard, our Vice President of Investor Relations. The purpose of the call is to review our third quarter 2024 results detailed in our news release issued yesterday.
Speaker Change: With me today is pumped in television.
Speaker Change: And President and Kevin Goddard, Vice President of Investor Relations.
Speaker Change: The call is to review our third quarter 2024.
Speaker Change: All these tayo and unusually issued yesterday.
Patrick Winterlich: Now let me turn the call over. Thanks, Patrick.
Speaker Change: Now, let me turn the call over to Paul.
Tom Gentile: Good morning, everyone. And thank you for joining us today as we share our 2024 third quarter I have now been with Hexcel nearly six months, and my excitement continues to grow as I learn more about this world-leading technology company, our talented team, and Hexcel's innovative, lightweighting I have visited more than 80% of Hexcel sites in the U.S., Europe, and Africa, and I can say the technology, innovation, operational expertise, and focus on execution is truly outstanding. Just last week, I was at our state-of-the-art technology center in Salt Lake City with the Hexcel leadership team and our global R&T leaders, reviewing the latest technology developments across the company and setting priorities.
Thanks, Patrick Good morning, everyone and thank you for joining us today as we share our 2024 third quarter results.
Paul: Now then with textile nearly six months and my excitement continues to grow as I learn more about this world leading technology company, our talented team and XL innovative light weighting solutions.
Paul: Visited more than 80% of cell sites in the U S. Europe and Africa that can say the technology innovation operational expertise and focus on execution is truly outstanding just last week I was at our state of the Art Technology Center in Salt Lake City with the <unk> leadership team and our global R&D leaders.
Paul: Using the latest technology developments across the company and setting priorities for the future as well.
Tom Gentile: As a relative newcomer to Hexcel, I can tell you the extent of innovation across the company is incredible, and something we intend to continue investing in and promoting strongly going forward.
Speaker Change: Relative newcomer to XL I can tell you the extensive innovation across the company is incredible and something we intend to continue investing in and promoting strongly going forward.
Tom Gentile: Hexcel is on a long-term growth project. and with every new generation of commercial and military aircraft using more advanced composite material for improved fuel efficiency and range, for emissions reduction, and for aerodynamic structural design benefits. The medium to long-term future for Hexcel and our innovative light-weighting solution is remarkable. The cash generation and shareholder return potential is compelling.
So it's not a long term growth trajectory and with every new generation of commercial and military aircraft using more advanced composite materials for improved fuel efficiency and range for emissions reduction and for aerodynamic structural design benefit.
Speaker Change: Medium to long term future for hexcel, and our innovative light weighting solutions is remarkable and the <unk>.
Speaker Change: Cash generation and shareholder return potential is compelling.
Tom Gentile: IATA's latest global air traffic. illustrated that global passenger air travel has exceeded pre-pandemic peaks and that airline load factors reached a record in August. This probably comes as no surprise to you because I'm sure we are all experiencing full flights whenever we travel. Consistent with this picture of robust health for airline passenger demand, the backlog for new Airbus and Boeing aircraft is at an all-time high of just under 15,000 aircraft on order. That's a lot of planes to build with a lot of composite material. However, as we all know all too well, despite the strong demand for new fuel-efficient planes, ongoing and new supply chain challenges, including the strike at Boeing, continue to disrupt planned increases in production.
Speaker Change: <unk> latest global Air traffic Statistics illustrated that global passenger air travel has exceeded pre pandemic peaks and that airline load factors reached a record in August there's probably comes as no surprise to you as I am sure. We are all experiencing full flights whenever we travel.
Speaker Change: Consistent with this picture of robust health for airline passenger demand the backlog for new Airbus and Boeing aircraft is at an all time high of just under 15000 aircraft on order.
Speaker Change: That's a lot of planes to bill there's a lot of composite materials.
Speaker Change: However, as we all know all too well despite the strong demand for new fuel efficient planes ongoing and new supply chain challenges, including the strike at Boeing continued to disrupt planned increases in production.
Tom Gentile: Coming out of 2023, there was a sense in the industry that we were finally achieving some stability after the pandemic. Both Boeing and Airbus publicly pointed to signs of improvement within the supply chain. By late 2024, however, new challenges emerged in the supply chain, including the supply of engines, castings, seats, and landing gear, to name just a few, that have pushed the recovery and production rates further to the right.
Speaker Change: Coming out of 2023, there was a sense in the industry that we were finally, achieving some stability after the pandemic.
Speaker Change: Both Boeing and Airbus publicly pointed to signs of improvement within the supply chain.
Speaker Change: By late 2024, however, new challenges emerge in the supply chain, including the supply of engine casting deep and landing gear to name just a few that have pushed the recovery and production rates further to the right.
Tom Gentile: At Hexcel, our job is to focus on what we can do. driving operational excellence, maintaining quality standards, keeping a robust grip on cost, and delivering to our customers on time. And I am determined to maintain and reinforce the strong focus that has been in place for many years. As we have communicated previously, we are working hard to ensure that we are ready to satisfy the demand in front of us. We are typically sole-sourced, and with that comes the responsibility for on-time delivery. To this end, earlier in the year, we recruited the next wave of direct labor that we needed to meet the forecasted strong demand ahead of us, and we've continued to focus on training and expanding shop floor experience to prepare for the eventual higher production rates, which our customers are publicly forecasting in their schedule.
Speaker Change: At <unk>, our job is to focus on what we can control driving operational excellence, maintaining quality standards, keeping a robust grip on costs and delivering to our customers on time.
Speaker Change: I am determined to maintain and reinforce the strong focus that has been in place for many years in exile.
Speaker Change: As we have communicated previously we are working hard to ensure that we are ready to satisfy the demand in front of us. We're typically sole sourced and with that comes a responsibility for on time delivery.
Speaker Change: To this end earlier in the year, we recruited the next wave of direct labor that we needed to meet the forecasted strong demand ahead of us and we've continued to focus on training and expanding shop floor experience to prepare for the eventual higher production rates, which our customers are publicly forecasting in their schedules.
Tom Gentile: It takes time for our new employees to learn our processes and become efficient and productive on the shop floor, as we have highly technical operations requiring significant training and experience. Therefore, we need to hire two or three quarters ahead of when we expect the demand to develop. As we have said before, this start-stop-start and delayed ramp-up environment means that periodically we will carry too much labor and overhead infrastructure costs, which will be a near-term headwind to margins. We believe we are making the correct decision regarding the timing of adding and training new labor. Although the production rate increases are slower than we would like, there is no question our demand is on an upward trajectory, and we are confident we have taken the right steps to support our customers with experienced and capable labor as they execute on their schedules for production rating.
Speaker Change: It takes time for our new employees to learn our processes and become efficient and productive on the shop floor as we have highly technical operations, requiring significant training and experience.
Speaker Change: Therefore, we need to hire two or three quarters ahead of when we expect the demand to develop as.
Speaker Change: As we have said before the start stop start and delayed ramp up environment means that periodically we will carry too much labor and overhead infrastructure costs, which will be a near term headwind to margins.
Speaker Change: We believe we are making the correct decision regarding the timing of adding and training new labor. Although the production rate increases are slower than we would like there is no question. Our demand is on an upward trajectory and we are confident we are taking the right steps to support our customers with experienced and capable labor as they execute on their scheduled for production rate increase.
Speaker Change: Yeah.
Tom Gentile: We will continue to monitor how those production rates evolve and align our headcount and cost base accordingly.
Speaker Change: We will continue to monitor how those production rates evolve and align our headcount and cost base accordingly.
Tom Gentile: September, we held our annual strategic review with the Hexcel Board. One of the key areas of focus that came out of that strategic review was the importance of our defense and space. As the only vertically integrated U.S.-based American advanced composite company, Hexcel has significant and unique opportunities to develop and sell more critical composite technology into the defense and space market.
Speaker Change: In September we held our annual strategic review with the <unk> one of the key areas of focus that came out of that strategic review was the importance of our defense and space business.
Speaker Change: The only vertically integrated U S base American advanced composite company XL has significant and unique opportunity to develop and sell more critical composite technology into the defense and space markets.
Tom Gentile: During our strategic review, we also made some decisions about our current market. For many years, Hexcel has produced material for select industrial markets including wind energy and certain recreation markets such as winter sports. These businesses historically focus on high volumes of glass fiber prepregs, no longer aligned with our strategic priorities.
Speaker Change: During our strategic review, we also made some decisions about our current market focus.
Speaker Change: For many years <unk> has produced material for select industrial markets, including wind energy and certain recreation markets, such as wood winter sports. These.
Speaker Change: These businesses historically focused on high volumes of glass fiber pre prep no longer aligned with our strategic priorities.
Unknown Executive: We are therefore currently exploring strategic options for our plant and Austria, which produces material for these markets, and which we believe will be better served with different ownership.
Tom Gentile: We are therefore currently exploring strategic options for our plant in Austria, which produces material for these markets, and which we believe will be better served with different owners.
Speaker Change: We are therefore currently exploring strategic options for our plant in Austria, which produces material for these markets in which we believe will be better served with different ownership.
Tom Gentile: I will now turn to our third quarter results released last Hexcel's third quarter sales of $457 million were up more than 8% year-over-year on solid performance. especially so in commercial aerospace, where sales grew 17% year over year. At $0.47, adjusted EPF was over 20% better than Q3 2023, a strong adjusted EBIT leverage. While third quarter sales grew strongly year over year, they also reflected the normal third quarter seasonality we typically experience from the European summer vacation season. In addition, there are the ongoing supply chain challenges impacting the commercial era. The latter part of the quarter was marginally impacted by the Bowen strike.
Nick L. Stanage: I will now turn to our third quarter results for least last night. Exile's third quarter sales, $457 million, more than 8% year over year on solid performance. Especially so, in commercial aerospace, we are sales through 17% year over year. At 47 cents, adjusted EPS was over 20% better than 23203, the strong adjusted EBIT leverage. While third quarter sales grew strongly over year, they also reflected the normal third quarter seasonality we typically experience from the European summer vacation period. In addition, throughout the ongoing supply chain challenges impacting the commercial aerospace market, and the latter part of the quarter was marginally impacted by the Boeing strike.
Speaker Change: I will now turn to our third quarter results released last night.
Speaker Change: <unk> third quarter sales of $457 million were up more than 8% year over year on solid performance.
Speaker Change: Especially so in commercial aerospace where sales grew 17% year over year at 47.
Speaker Change: Adjusted EPS was over 20% better than Q3 2023, our strong adjusted EBIT leverage.
While third quarter sales grew strongly year over year. They also reflected the normal third quarter seasonality, we typically experienced in the European summer vacation period.
Speaker Change: In addition, there are the ongoing supply chain challenges impacting the commercial aerospace market in the latter part of the quarter was marginally impacted by the Boeing strike.
Nick L. Stanage: Given the previously discussed higher overhead infrastructure and labor levels, be carried right now at Hexcel, combined with the expected lower third quarter sales run rate, we experienced an anticipated reduction in our margins in the third quarter on a sequential basis. Overall, the third quarter 2024 came in generally close to our expectations, so it should be noted that our adjusted EPS benefited from tax planning work coming together in the period. Given all the challenges we see in the marketplace, we expect our 2024 results will be within our current guidance, but at the lower end of the range and benefiting from the lower affected tax rate of 19% versus 22%.
Tom Gentile: Given the previously discussed higher overhead infrastructure and labor levels being carried right now at Hexcel combined with the expected lower third quarter sales run rate, we experienced an anticipated reduction in our margins in the third quarter on a sequential basis. Overall, the third quarter of 2024 came in generally close to our expectations, so it should be noted that our adjusted EPF benefited from tax planning work coming together in the period. Given all the challenges we see in the marketplace, we expect our 2024 results will be within our current guidance, but at the lower end of the range and benefiting from the lower effective tax rate of $19.3 billion.
Speaker Change: Given the previously discussed higher overhead infrastructure and labor levels being carried right now at <unk> combined with the expected lower third quarter sales run rate, we experienced an anticipated reduction in our margins in the third quarter on a sequential basis.
Speaker Change: Overall, the third quarter of 2024 came in generally close to our expectations. So it should be noted that our adjusted EPS benefited from tax planning work coming together in the period.
Speaker Change: Given all the challenges we see in the marketplace. We expect our 2024 results will be within our current guidance, but at the lower end of the range and benefiting from the lower effective tax rate of 19% versus 22%.
Tom Gentile: versus 22. Commercial aerospace sales of $296 million increased 17% in constant currency compared to the third quarter of 2020. Our three key commercial aerospace programs, the A350, the A320neo, and the 787, all generated double-digit sales growth year over year. We should note that the work we do for Airbus programs is nearly three times as large as the work we do for Boeing. And our bowing work is about half focused on the 787, which is built in Charleston, South Carolina, a plant which is not involved in the current bowing strike in the Puget Sound area of Washington State.
Nick Stanage: Commercial aerospace sales, a $2.96 million increase, 17% in cost and currency compared to the third quarter of 2023. Our three key commercial aerospace program, the A350, the A320, Neo, in the 787, all generated double-digit sales growth year over year. We should note that the work we do for Airbus programs is nearly three times as large as work we do for Boeing. And our Boeing work is about half focused on the 787, which is built in Charleston, South Carolina, a plant which is not involved in the current Boeing strike in the Puget Sound area of Washington State.
Speaker Change: Commercial aerospace sales of $296 million increased 17% in constant currency compared to the third quarter of 2023.
Speaker Change: Our three key commercial aerospace programs. The <unk> hundred 50, <unk> hundred 20, Neo and the 787, all generated double digit sales growth year over year. We should note that the work we do for Airbus programs is nearly three times as large as the work we do for Boeing.
Speaker Change: And our buoy work is about half focused on the 787, which is built in Charleston, South Carolina plant, which is not involved in the current Boeing strike in the Puget Sound area of Washington State.
Tom Gentile: Secular growth from business jet composite adoption is driving the growth in other commercial aerospace, which grew 9% in the third quarter. Turning to space and defense, sales of $128 million were essentially flat in constant currency. While select key programs grew, including the Lockheed F-35 and the Sikorsky CH-53K and Blackhawk helicopters, The SpaceX subsegment was broadly soft, including launchers, satellites, and rocket motors. The V-22 is also a headwind as that program winds down. During the quarter, we are excited for two of our plants, Pottsville, Pennsylvania and Salt Lake City, Utah, to be awarded the Sikorsky 2023 Elite Supplier status based on best-in-class on-time delivery and quality.
Nick L. Stanage: Second of the growth from business check composite adoption is driving the growth in other commercial aerospace, which grew 9% in the third quarter. Current space and defense, sales of $128 million were essentially class in constant currency, while select key programs grew, including the Lockheed F-35 and the Secors KCA 53K, and Blackhawk helicopters. The SpaceX subsegment was broadly soft, including launchers, satellites and rocket motors. The V-22 is also a headwind as that program winds now.
Speaker Change: Second the growth from business jet composite adoption is driving the growth in other commercial aerospace, which grew 9% in the third quarter.
Speaker Change: Turning to space and defense sales of $128 million were essentially flat in constant currency, while select key programs grew including the Lockheed F 35, and the Sikorsky CH 53, K and Black Hawk helicopters. The Spacex subsegment was broadly soft including launches satellites and rocket motor.
Speaker Change: The V 22 is also a headwind as that program winds down.
Nick Stanage: During the quarter, we are excited for two of our plants, Paxfield, Pennsylvania, and Salt Lake City, Utah, to be awarded the Secors K2023 elite supplier status based on best and class on time delivery and quality. Dr. Ward's reflect our endless pursuit of operational excellence and fuel our passion for continuous improvement. We are also one of only 15 suppliers nominated by Airbus for prestigious transformation award at their annual supplier conference and to lose two weeks ago.
Speaker Change: During the quarter, we are excited for two of our plants, Pottsville, Pennsylvania, and Salt Lake City, Utah to be awarded the Sikorsky 2023 elite supplier status based on best in class on time delivery and quality.
Tom Gentile: Such rewards reflect our endless pursuit of operational excellence and fuel our passion for continuous improvement. We were also one of only 15 suppliers nominated by Airbots for a prestigious transformation award at their annual supplier conference in Toulouse two weeks ago.
Speaker Change: Such rewards reflect our enlist pursuit of operational excellence and fuel our passion for continuous improvement. We were also one of only 15 suppliers nominated by Airbus for a prestigious transformation award at their annual supplier conference and to lose two weeks ago.
Tom Gentile: I would now like to address the median term guidance that we presented in February of this year. The foundation for that guidance was the best demand and production rate forecast available at that time, which supported a growing sense of confidence in the supply chain and production. We believe that the guidance we provided was a conservative view on the growth outlook. Now, eight months on from providing that guidance, it is clear that the world is not where we had expected it to be. Turbulence in the commercial aerospace OEM supply chain has continued unabated. As I noted earlier, issues over the last four to six months with engines, casting, seats, landing gear, and now the Boeing Strike, are constraining any sustained near-term improvement in the commercial aerospace supply chain, and we have seen further delays to production rate increases, such as those announced by Airbus this past week.
Nick L. Stanage: I would now like to address the meeting term guidance that we presented in February of this year.
Speaker Change: I would now like to address the medium term guidance that we presented in February of this year.
Speaker Change: The foundation for that guidance was the best demand and production rate forecast available at that time, which supported a growing sense of confidence in the supply chain and production rates.
Speaker Change: We believe that the guidance, we provided was a conservative view on the growth outlook now eight months out from providing that guidance. It is clear that the world is not where we had expected it to be.
Speaker Change: Turbulence in the commercial aerospace OEM supply chain has continued unabated as I noted earlier issues over the last four to six months with engine casting seat landing gear and now the Boeing strike are constraining any sustained near term improvement in the commercial aerospace supply chain and we have seen further delays to production rate increases such as those announced by <unk>.
Speaker Change: This past June.
Tom Gentile: Having now had time to assess the situation and more deeply review the current data and outlook for Hexcel, it is clear that the assumptions that were the basis for our midterm guidance are no longer valid.
Speaker Change: Having now had time to assess the situation and more deeply review the current data and outlook for <unk>. It is clear that the assumption that were the basis for our midterm guidance are no longer valid.
Tom Gentile: We are therefore withdrawing our previously issued midterm guidance and we will provide guidance for 2025 with our Q4 earnings in January. With that said, we remain confident in the outlook for commercial aircraft and expect both Airbus and Boeing. We continue to increase their production rates over the coming quarters, and continue to do so for many years to come in order to deliver on their historic value. We also retain our confidence in the space and defense markets, as well as our conviction in the cash generation ability of Hexcel. Reflecting this confidence and strong belief in the value proposition for Hexcel, we repurchased around $50 million of Hexcel stock during the quarter of this quarter in 2024, which brings the total stock repurchases to just over $250 million this quarter.
Speaker Change: We are therefore withdrawing our previously issued mid term guidance and we will provide guidance for 2025 with our Q4 earnings in January.
Speaker Change: With that said, we remain confident in the outlook for commercial aircraft and expect both Airbus and Boeing.
Speaker Change: To increase our production rates over the coming quarters and continue to do so for many years to come in order to deliver on their historic backlog.
Speaker Change: We also retain our confidence in space and defense markets as well as our conviction in the cash generation ability of XL.
Speaker Change: This confidence in strong belief in the value proposition for hexcel, we repurchased around $50 million of hexcel stock during the quarter.
Speaker Change: This quarter in 2024, which brings the total stock repurchases to just over $250 million. This year, a significant return of cash to our shareholders.
Patrick Winterlich: Transcription by Transcription Outsourcing, LLC. Our expectation is for Hexcel to generate strong EBITDA margins and cash flow for years to come. Since we have already invested the capital to support the production rates in effect in 2019. We expect capital expenditures to remain below $100 million per year for the foreseeable future. We will focus on optimizing our capital deployment where our priorities remain unchanged, namely funding organic growth when required, and then considering M&A and inorganic growth in a very disciplined and strategic manner. Also, we will continue to pay a dividend with a notional target-to-payout ratio roughly 20% of net income in the medium to longer term.
Speaker Change: Our expectation is for <unk> to generate strong EBITDA margins and cash flow for years to come.
Speaker Change: Since we have already invested the capital to support the production rates in effect in 2019.
Speaker Change: We expect capital expenditures to remain below $100 million per year for the foreseeable future.
Speaker Change: We will focus on optimizing our capital deployment, where our priorities remain unchanged, namely funding organic growth when required and then considering M&A and inorganic growth and a very disciplined and strategic manner. Also we will continue to pay a dividend with a notional target payout ratio roughly 20% of net income in the medium term.
Speaker Change: Longer term.
Tom Gentile: This will be accompanied by a program of periodic share repurchases while we operate within our targeted net debt-to-EBITDA leverage ratio of 1.5 to 2.5%. We remain confident in a strong future with robust growth and strong shareholder.
Speaker Change: This will be accompanied by a program of periodic share repurchases, while we operate within our targeted net debt to EBITDA leverage ratio of one five to two times.
Speaker Change: We remain confident in a strong future with robust growth and strong shareholder returns now let me turn it over to Patrick to provide more details on the numbers Patrick.
Patrick Winterlich: Now, let me turn it over to Patrick to provide more details on the numbers.
Patrick Winterlich: Thank you, Tom. As a reminder, regarding foreign exchange exposure, and I have explained in detail during previous earning calls, Hexcel benefits from a strong dollar. We continue to hedge foreign exchange exposure over a ten-quarter time horizon. Year-over-year sales comparisons I will provide are in contact. thereby removed the foreign exchange The commercial aerospace market represented approximately 65% of total third-quarter transport sales of $456.5 million. third quarter commercial aerospace sales increased 17%. compared to the third quarter of 2023, with double digit growth in our three key platforms, the Airbus A350, A320 and the Boeing 737. The 737 MAX is a smaller program for us as it is predominantly a metal plane launched in the 1960s when composites were still in their infancy.
Patrick: As a reminder, regarding foreign exchange exposure and I have explained in detail during previous earnings calls <unk> benefits from a strong dollar we continue to hedge foreign exchange exposure over a 10 quarter time horizon year over year sales comparisons I will provider in constant currency, which thereby removed.
Patrick: The foreign exchange impact.
Speaker Change: No.
Speaker Change: The commercial aerospace market represented approximately 65% of total third quarter 2012.
Speaker Change: Sales of $456 5 million.
Speaker Change: The third quarter commercial aerospace sales increased 17% compared to the third quarter three with double digit growth in AR.
Speaker Change: Three key platforms, the Airbus <unk> hundred 50, <unk> hundred 20, and the Boeing 787.
Speaker Change: The 737, Max is a smaller program for us as it is.
Speaker Change: Dominantly of metal planed launch in the 19 sixties when compensates for setting their infant.
Patrick Winterlich: The majority of our content is with the LEAP engine in the cell. In the third quarter of 2024, our max sales were marginally impacted by the Boeing. and lower both year over year and So the materiality of the impact is less than the decline in our other key programs. The other commercial aerospace category increased 9.1% led by robust latest generation business jets. We share some further perspective on our commercial aerospace business year-to-date. Wide-body sales comprise just under 40% of total year-to-date commercial aerospace sales. Narrow-body sales with just over 30%. and other commercial aerospace, including business and regional aircraft, was approximately 20,000.
Speaker Change: The majority of our content is with the leap engine and nacelle in the third quarter of 2024 month sales were marginally impacted by the Boeing strike and lower both year over year and sequentially.
Speaker Change: The reality of the impact is less than the decline in our other key programs with Athene.
The other commercial aerospace category increased nine 1% led by robust latest generation business jet sales.
Speaker Change: To share some further perspective on our commercial aerospace business year to date Wi <unk> comprise just under 40% of total year to date commercial aerospace sales.
Narrow body, so we just over 30% and other commercial aerospace including business in regional aircraft was approximately 20%.
Patrick Winterlich: Space in Defence represented approximately 28% of third quarter sales and totalled $128.2 million, decreasing just under 1% from the same period in 2020. As we have previously said, this market can be volatile quarter to quarter. In the third quarter of 2024, CH3K and Blackhawk programs both experienced growth, including Blackhawk Replacement Helicopter Blades, a good aftermarket business. The Bell V-22 program is winding down. So that is a headwind for us in terms of year-over-year sales. And in the third quarter, the space submarket was weaker both domestically and abroad, including satellites, launchers, and rockets. Production volumes are lower in space and can be lumpy, leading to greater quarter-to-quarter volatility in our sales.
Space and defense represented approximately 28% to third quarter sales and totaled $128 2 million.
Speaker Change: Increasing just under 1% from the same period in 2023.
Speaker Change: As we have previously said this market can be volatile quarter to quarter.
Speaker Change: In the third quarter 2024.
Speaker Change: <unk> and Blackhawk program, both experienced growth, including Blackhawk replacement helicopter blade, a good aftermarket business for us.
Speaker Change: The <unk> two program is winding down so that is a headwind for us in terms of year over year sales comparison.
Speaker Change: And in the third quarter. This space sub market was weak both domestically and abroad.
Speaker Change: Leading satellite launches and rocket.
Speaker Change: Production volumes are lowering space and can be lumpy, leading to greater quarter to quarter volatility in our sales of the story.
Patrick Winterlich: Industrial is a much smaller part of our business, comprising only 7% of third quarter 2024 sales. A total of $32.4 million, decreasing $17.3 million. compared to the third quarter of 2020. We experience softness across all the sub-markets, including high-end performance.
Speaker Change: Industrial is a much smaller part of our business comprising 97% of third quarter, 2024 sales and totaled $32 $4 million.
Speaker Change: Decreasing 17, 3% compared to the third quarter of 2023.
Speaker Change: We experienced softness across all the sub market, including high end performance North America.
Patrick Winterlich: Turning back to total company sales, and as we expected, summer holidays led to a sequential sales decline as demand softened seasonally from our European-based commercial aerospace, business jet, space and defence, and industrial aircraft. Growth margin of 23.3% in the third quarter of 2024, favorably compared to the prior year period growth margin of 21%. The improvement reflects the operating leverage from Hyatt. As a percentage of sales, selling, general and administrative expenses and R&D. were 11.7% in the third quarter of 2024. compared to 11.6% in the comparable prior year period. As I mentioned last quarter, there is a modest cost impact from the CEO transition that will recur in the fourth quarter of 2024 and then conclude at year end.
Speaker Change: Turning back to total company sales and as we expected summer holidays led to a sequential sales decline as demand softened seasonally from a European based commercial aerospace business jet faced in defense and industrial customers.
Speaker Change: Gross margin in 2023, 3% in the third quarter 2024 favorably compared to the prior year period gross margin of 21 eight.
Speaker Change: The improvement reflects the operating leverage from higher sales.
Speaker Change: As a percentage of sales selling general and administrative expenses and R&D expenses were 11, 7% in the third quarter of 2024.
Speaker Change: At 11, 6% in the comparable prior year period.
As I mentioned last quarter, there was a modest cost impacts from the CEO transition that will recur in the fourth quarter of 2024, and then conclude at year end.
Patrick Winterlich: Adjusted operating income in the third quarter was $52.9 million, or 11.6% of sales, compared to $42.8 million, or 10.2% of sales, in the comparable prior year period. The year-over-year impact of exchange rates in the third quarter to operating income is favorable by approximately 10 basis points. Now turning to our two sec The composite material segment represented 81% of total third-quarter sales and generated an operating margin of $14.4% The operating margin in the comparable prior period was 12.3%. The engineered product segment, which is comprised of our structures and engineered core businesses, represented 19% of total sales, and generated an 11.2% operating margin as compared to 7.8% Powerful Fire Net cash provided by operating activities was $127.3 million for the first nine months.
Speaker Change: Adjusted operating income in the third quarter was $52 9 million or 11, 6% of sales compared to $42 8 million or 10, 2% sales in the comparable prior year period, the year over year impact of exchange rates in the third quarter. So operating income was phase.
Speaker Change: Verbal by approximately 10 basis points.
Speaker Change: Now turning to our two segments.
Speaker Change: <unk> materials segment represented 81% total third quarter sales and generated an operating margin of 14, 4%.
Speaker Change: The operating margin in the comparable prior year period was 12, 3%.
Speaker Change: Net product segment, which is comprised of our structures and engineered core businesses represented 19% of total sales and generated an 11, 3% operating margin as compared to seven 8% in the comparable prior year period.
Net cash provided by operating activities was $127 3 million for the third.
Speaker Change: <unk> nine months 2024.
Patrick Winterlich: $98.1 million for the same period in time. working capital with a cash use of $93.1 million for the first nine months. and with a cash use of $112.1 million. Actual expenditures, on an accrual basis, were $59.6 million for the first nine months of 2024, compared to $88.7 million in the comparable five-year period. Recall that in 2023 we purchased the land and buildings for our Amesbury, Massachusetts operation for approximately $38 million. Free cash flow for the first nine months of 2024 was $58.9 million. which compared to $3.7 million for the first nine months. Inventory remains higher than I would like and we have work to do to improve our inventory days as sales increase.
Speaker Change: This compares to $98 1 million for.
Speaker Change: For the same period in 2023.
Speaker Change: Great.
Speaker Change: Working capital was a cash use of $93 1 million nine months.
And with the cash use of $112 1 million for the comparable prior year period.
Speaker Change: Capital expenditures on an accrual basis were $59 6 million for the first nine months.
Speaker Change: <unk> compared to $88 7 million in the.
Speaker Change: However, prior period.
Speaker Change: Recall that in 2023, we purchased the land and building for our Amesbury, Massachusetts operation for approximately $38 million.
Speaker Change: Free cash flow for the first nine months of 2024 with $58 9 million.
Speaker Change: Which compares to $3 7 million for the.
Speaker Change: First nine months for interest rates.
Speaker Change: Inventory remained higher than I would like and we have work to do to improve our inventory days I'd sales expense.
Patrick Winterlich: While I'm on the topic of inventory, our three commercial aerospace platforms, including the A350, A320, and the 787, are all on an upward growth trajectory as our customers work to increase production rates to meet the strong demand for these aircraft. We feel that channel inventories for our material are generally aligned with the growth outlook.
Speaker Change: While I'm on the topic of inventory are three commercial aerospace platforms, including the <unk> hundred 50, <unk> hundred 20 and 787.
Speaker Change: All on an upward growth trajectory as our customers work to increase production rates to meet the strong demand for these aircraft.
Speaker Change: We feel that channel inventories for our material are generally aligned with the growth outlook.
Patrick Winterlich: Remember, it is production rate increases that are being pushed out, rates are not being Channel Z stocking occurs when production The Board of Directors declared a $0.15 quarterly dividend yesterday. The dividend is payable to stockholders of record as of November 1st with a payment date of November 1st. We've continued repurchasing Hexcel stock, acquiring $50 million of common stock during the third quarter. Year-to-date through September 30th, we've purchased a total of $252.2 million. The remaining authorisation under the Shared Researches Programme as of September 30th, 2024 is $234.9 million. As we discussed last quarter, fluctuating end market demand limits our ability to optimize operations and results in a higher cost base near term that is not aligned with current production.
Speaker Change: Remember it is production rate increases that are being pushed out.
Speaker Change: Right and not being cost panel destocking occurred when production rates the costs.
Speaker Change: The board of directors declared a <unk> <unk> quarterly dividend yesterday.
Speaker Change: Dividend is payable to stockholders of record as of November 1st with a payment date of November eight.
Speaker Change: We continued repurchasing <unk> acquiring $50 million common.
Speaker Change: Common stock during the third quarter year to date through September 30th.
Speaker Change: <unk> $252 2 million.
Speaker Change: The remaining authorization under the share repurchase program as of September 30th.
Speaker Change: For the $234 9 million.
Speaker Change: As we discussed last quarter fluctuating end market demand limits, our ability to optimize operations and results in a higher cost base near term that is not aligned with current production levels.
Patrick Winterlich: This dynamic is continuing to play out as new shortages develop within the greater aerospace supply chain. leading to ramp rates being pushed out by some of our For example, one narrow-body engine supplier publicly reduced their original 2024 shipment forecast. from up 20 to 25%. instead be flat, so up five. illustrate how supply chain disruptions are impacting aircraft building. We grow into our costumes.
Speaker Change: This dynamic is continuing to play out that new sorts to develop within the greater aerospace supply chain, leading to ramp rate being pushed out by some of our customers.
Speaker Change: For example, one narrow body engine supplier publicly reduce their original 2020 for shipment forecast.
Speaker Change: From up 20% to 25%.
Speaker Change: That would be flat to up 5%.
Speaker Change: We illustrate how supply chain disruptions are impacting aircraft build rates.
Speaker Change: As we grow into our cost base, we will continue to focus on employee training and driving efficiency improvements throughout our business.
Patrick Winterlich: We will continue to focus on employee training and driving efficiency improvement throughout our While we are maintaining our 2024 guidance despite these headwinds, we expect sailed and adjusted EPS to be at the lower end of the previously communicated Admittedly, the adjusted EPS guidance is supported by a more favorable tax As we now expect the 2024 tax rate to be around 19%. rather than the previously communicated four. 22. This lower rate reflects effective overseas and R&D.
Speaker Change: While we are maintaining our 2020 full guidance. Despite these headwinds we have.
Speaker Change: Sales and adjusted EPS to be at the lower end of the previously communicated range.
Speaker Change: Admittedly the adjusted EPS guidance is supported by a more favorable tax rate as we now expect the 2024 tax rate to be around 19% rather than the previously communicated forecast of 22%.
Speaker Change: This lower rate reflects effective overseas and RMC.
Speaker Change: And.
Tom Gentile: Tom discussed how mid-term guidance issued in February should no longer be relied on.
Speaker Change: But Tom discussed our midterm guidance issued in February should no longer be relied upon reflecting recent impact and the continued uncertainty in the overall aerospace clients and outlook.
Unknown Executive: Unknown Executive, Scott Deuschle, Noah Poponak, Hexcel Corp. One final point is that we continue to expect accrued capital expenditures to be below $100 million annually in both 2025 and 2026. Supporting cash generation and strong cash conversion over time.
Speaker Change: One final point is that we continue to expect accrued capital expenditures to be below $100 million annually by 2025 and 2026.
Speaker Change: Quoting cash generation and strong cash conversion over time.
Patrick Winterlich: With that, let me turn the call Thank you, Patrick.
Speaker Change: With that let me turn the call back to Tom.
Tom Gentile: As I mentioned at the start of today's call, I've now been with Hexcel just shy of We have bought a home near Hexcel's corporate headquarters, and I'm in the process of relocating the stamp. I've admired Hexcel from afar for a long time and felt very fortunate to be selected as the next CEO. I feel exactly the same way today. This is truly an amazing and unique company with a talented and engaged workforce, strong culture, and truly innovative, lightweighting services. There are significant financial opportunities ahead for years to come via secular growth and cash generation. Hexcel makes a product that is more relevant than ever.
Tom: Thank you Patrick as I mentioned at the start of today's call I would now then with textile just shy of six months we.
Tom: We have bought a home near Hexose corporate headquarters and I'm in the process of relocating to Stanford, Connecticut, I've admired from afar for a long time and felt very fortunate to be selected as the next CEO I feel exactly the same way today. This is truly an amazing and unique company with talented and engaged workforce strong culture truly innovative light weighting solutions.
Tom: There are significant financial opportunities ahead for years to come we have secular growth and cash generation.
Tom: Excellent makes a product that is more relevant than ever light weighting future transportation is a critical need in today's world textiles technology is front and center and achieving the Gulf for a more sustainable aviation future.
Tom Gentile: Lightweighting future transportation is a critical need in today's world. Hexcel's technology is front and center in achieving the goal for a more sustainable aviation. Closed, we are faced with some near-term caution as commercial aerospace OEMs moderate their growth rate ramps due to supply chain constraints. However, the medium and long-term outlook is strong for both secular and cyclical growth. Market demand is not the issue. Experience levels throughout the supply chain will continue to grow and the commercial aerospace OEM build rates will increase to meet the enormous backlogged demand for new aircraft. Our focus at Hexcel remains firmly on execution of current programs, innovation to win positions on the next generation of programs, growth, cost control, and cash generation.
Tom: Clothes, we are faced with some near term caution as commercial aerospace Oems moderate their growth rate ramps due to supply chain constraints.
Tom: However, the medium and long term outlook is strong for both secular secular and cyclical growth market demand is not the issue experienced levels throughout the supply chain will continue to grow in the commercial aerospace OEM build rates will increase meet the enormous backlog demand for new aircraft are focused at hexcel remains firmly.
Tom: And execution of current program innovation to win positions on the next generation of programs growth cost control and cash generation.
Operator: Operator, we're now ready to take. Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad.
Speaker Change: Operator, we're now ready to take questions.
Speaker Change: Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad and the interests of time, we ask that you. Please limit yourself to one question and one follow up thank you.
Operator: In the interest of time, we ask that you please limit yourselves to one question and one follow up. Thank you.
Myles Walton: Our first question comes from Miles Walton from Wolf Research. Please go ahead. Your line is open. Thanks. Good morning, Phil. And thanks for taking a more conservative view on the 26 guidance. I think it's important.
Speaker Change: Our first question comes from Myles Walton from Wolfe Research. Please go ahead. Your line is open.
Myles Walton: Thanks, Good morning Jill.
Myles Walton: And thanks for taking a more conservative view on the 26 guidance I think it's important.
Myles Walton: In terms of the end market growth that's implied in the 24 guidance, could you give us what those new numbers are today as you sit there? It doesn't look like you'll be far off on the commercial side, but I guess it's defense and the industrial side I'm more curious about.
Myles Walton: In terms of the end market growth that's implied in the 'twenty four guidance could you.
Myles Walton: Give us what those new numbers are today as you sit there it doesn't look like you'll be far off on the commercial side, but I guess defense and the industrial side of Mark curious about.
Tom Gentile: And then as we look to 25, what should we think about in terms of the divestiture headwind from the industrial side? Thanks. So as we look at the 24 growth miles, in terms of the different programs, We saw, for example, that the A350 was pulling at 7 in Q3, and we expect that to continue in Q4. 787 was pulling at about 7. and that should also continue. The A320 was pulling just under 53. And so that, those should continue.
Myles Walton: And then as we looked at 25, what should we think about in terms of the divestiture headwind from the industrial side. Thanks.
Myles Walton: Alright.
Speaker Change: As we look at the 24 growth Myles in terms of the different programs.
Speaker Change: We saw for example that.
Speaker Change: The <unk> hundred 50 was pulling at 7% in Q3, and we expect that to continue in Q4.
Speaker Change: <unk> hundred 87 was pulling at about 7% on.
Speaker Change: And that should also continue the <unk> hundred 20 was pulling just under 53.
And so that those those those should continue but one of course thats. The outlier is Max that was pulling at 30 for most of Q3.
Tom Gentile: The one, of course, that's the outlier is MAPS. That was polling at 30 for most of Q3, but it was actually polling at 36 in Q2. So September obviously was a fall off. We'll see what happens with the strike outcome and what happens in the fourth quarter. But we basically forecasted fourth quarter with no polls from the MAPS. to be conservative and we'll see what happens. If the strike does get resolved before the end of the year, obviously it won't be zero, but to be conservative, that. In terms of defense, I would say that the U.S.
Speaker Change: Three.
Speaker Change: But it was actually pulling at 36 in Q2. So September obviously was a falloff.
Speaker Change: We'll see what happens with the strike outcome and what happens in the fourth quarter, but we have basically forecasted fourth quarter with no pulls from the Max just to be conservative and we will see what happens if the strike does get resolved before the end of the year, obviously, it won't be zero, but to be conservative that is what we did.
Speaker Change: In terms of defense I would say that the U S defense market continues to be very strong we mentioned needs strengthen the F 35, and CH 53, K the black Hawk.
Tom Gentile: defense market continues to be very strong. We mentioned the strength in the F-35 and the CH-53K, the Blackhawk. The Osprey, the V-22, has been a little bit soft as it winds down. But overall, the U.S. market grew for us.
<unk>. The V 22 has been a little bit soft as it winds down but overall the U S market grew for us where the softness was for US was really in the European market. There were a couple of customers, where where sales were down for the year and so we expect that to turn around next year.
Tom Gentile: Where the softness was for us was really in the European market. There were a couple of customers where sales were down for the year. And so we expect that to turn around next year.
Tom Gentile: Now, for 2025, the one thing that you asked about was industrial. And the Austrian plant that we are looking to sell represents about a third of our revenue in industrials. So for next year, it could be a 30 or $40 million headwind. We've already taken that into account in our planning, but that's generally the outlook that we see. And Miles, just to kind of pick up on the guidance point, which I think you kind of started with, as you say, we should be close to the mid-teens percentage on commercial aerospace. I mean, we might not quite make, if you call 5%, mid-single-digit.
Speaker Change: Now for 2025 to.
Speaker Change: The one thing that you asked about was industrial.
Speaker Change: And the Austrian plant that we are looking to sell represents about a third of our revenue.
Speaker Change: In industrial so.
Speaker Change: Got it for next year, it could be 30 or $40 million headwind, we've already taken that into account in our planning, but that's that's generally the outlook that we see for the industrial.
Speaker Change: Okay.
Speaker Change: And Myles just to kind of pick up on the guidance point, which I think you kind of started with as you say, we should be close to the mid teens percentage on commercial aerospace I mean, we might not client make equal 5% mid single digit we should be pushing towards that as long as we have a reasonable fourth quarter in space and defense.
Tom Gentile: We should be pushing towards that as long as we have a reasonable fourth quarter in space and defense. Clearly, industrial now is going to be down strong, double-digit. So that kind of depicts. I would paint relative to that.
Speaker Change: Clearly industrial now he is going to be down strong double digits. So.
Speaker Change: So thats kind of the picture.
Speaker Change: I would paint relative to that original deal and just let me add one thing on the industrial while we're on that topic is the Austrian plant really has been a focus for wind energy recreation in marine and so those will be markets that we will be emphasized in the future, but we're not getting out of industrial we will still focus.
Tom Gentile: and just let me add one thing on the industrial while we're is the the Austrian plant really has been a focus for wind energy, recreation and So those will be markets that we will de-emphasize in the future, but we're not getting out of industrial. We'll still focus opportunistically where we can use our aerospace-grade carbon fibers on markets including automotive and pressure vessels. So it's not an exit of all of industrial, it's just those certain markets that no longer really align. Understood. Thank you.
Speaker Change: <unk>, where we can use our aerospace grade carbon fibers on markets, including automotive and pressure vessels things like that so it's not an exit of all up industrial its just those certain markets that no longer really align with our strategic priorities.
Speaker Change: Understood. Thank you.
Speaker Change: Thank you.
Michael Ciarmoli: Our next question comes from Michael Ciarmoli from Truist Securities. Please go ahead. Your line is open. Hey, good morning, guys. Thanks for taking the questions.
Speaker Change: Our next question comes from Michael <unk> from <unk> Securities. Please go ahead. Your line is open.
Speaker Change: Hey, good morning, guys. Thanks for taking the questions and yes, Tom I'll Echo I thought it was pretty prudent to pull that long term guidance.
Michael Ciarmoli: And yeah, Tom, I'll echo, I thought it was pretty prudent to pull that long term guidance. Just to stay on the production rates, and maybe to zero in on the max a little bit more, you know, you kind of mentioned that rates aren't being cut, we're just not seeing increases. But can you maybe just elaborate on the leap? I mean, we did see GE clearly talk up 25% at the beginning of the year, they're going to be down 10% this year. And then presumably, they'll be way below that initial, I don't know, call it 21-2200 next year.
Speaker Change: Just to stay on the.
Speaker Change: Production rates and maybe zero in on the Max a little bit more you kind of mentioned that rates aren't because we're just not seeing the increases.
Speaker Change: Maybe just elaborate on the leap I mean, we did see GE clearly talk up 25% at the beginning of the year, they're going to be down 10%. This year and then presumably.
Speaker Change: There'll be way below that initial I don't know call. It 'twenty. One 'twenty 200 next year is there a destocking situation that we have to worry about on the board.
Tom Gentile: Is there a de-stocking situation that we have to worry about on leap? Or does that you mentioned you kind of zeroed out max for the quarter? Does that encompass leap? And maybe just if you can give some color there? Unknown Speaker Well, we really align partly with the MAC, but also, of course, partly with the A320 because it serves both of those markets. In terms of the production rates for the MAX, we just took the conservative outlook for the quarter. We have plenty of inventory, we'll be able to support Boeing, and I think once the strike is over, Boeing will be able to basically recalibrate what the MAX production rates will be for next year.
Speaker Change: You mentioned, you kind of zeroed out Max for the quarter or does that encompass leap and maybe just if you could give some color to that.
Speaker Change: Well, we really align wheat.
Speaker Change: Partly with the Mac, but also of course, partly with the <unk> hundred 20, because it serves both of those markets.
Speaker Change: In terms of the production rates for the Max We just took the conservative outlook for the quarter, we have plenty of inventory, we'll be able to support volume and I think once the strike is over Boeing will be able to basically recalibrate with the Max production rates will be for next year, regardless, we expect them even for the Max to be higher next year then.
Tom Gentile: But regardless, we expect them, even for the MAX, to be higher next year than they were this year. and we'll wait for guidance from Boeing as to exactly what those rates will be and we will be prepared. Okay.
Speaker Change: This year and we'll wait for guidance from Boeing as to exactly what those rates will be and we will be prepared to support.
Tom Gentile: Is there any difference for the Leap production right there? I mean, is there a lot of inventory in the channel there specifically where we might see a destock? We're not aware of any, you know, if anything, they've been catching up on production. So it doesn't seem like they have excess inventory and certainly they have to support the fleet as well. So I don't I don't think deep stock is going to be a risk. At least at this point, we don't see that for the week or the month. Okay, perfect.
Speaker Change: Okay.
Any difference for the leap production rate. There I mean is there are a lot of inventory in the channel there specifically to where we might see a destock.
Speaker Change: We're not aware of any.
Speaker Change: If anything they've been catching up on production. So it doesn't seem like they have excess inventory and certainly they have to support the fleet as well. So I don't I don't think destock is going to be a risk at least at this point, we don't see that for the lethal than that.
Michael Ciarmoli: Thanks, guys.
Speaker Change: Okay perfect. Thanks, guys.
Matt Akers: Our next question comes from Matt Akers from Wells Fargo. Please go ahead. Your line is open. Yeah, hey guys, good morning. Thanks for the question. Are there other parts of the portfolio you're still reviewing as maybe areas you could shed or is it off your facility? You think that's sort of the extent of it?
Speaker Change: Our next question comes from Matt Akers from Wells Fargo. Please go ahead. Your line is open.
Matt Akers: Yeah, Hey, guys. Good morning, Thanks for the question.
Matt Akers: Are there other parts of the portfolio.
Matt Akers: Reviewing as maybe areas you could shed or disastrous facility.
Speaker Change: That's sort of the extent of it.
Tom Gentile: We are looking across the whole portfolio. As you know, we have a fairly homogenous product mix. We provide lightweight materials in carbon fiber composites, matrices, reinforcements, some honeycomb core and engineered core. So we don't have a lot of different parts of the portfolio that would be logical to divest.
Speaker Change: We are looking across the whole portfolio as you know we have a fairly homogenous product mix, we provide lightweight materials in.
Speaker Change: Carbon fiber composites matrices reinforcements and honeycomb core and engineered core. So we don't have a lot of different parts of the portfolio that would be logical to to divest. This this plant in Austria was a bit of an exception. It was focused more on these industrial markets and it it really didn't leverage.
Tom Gentile: This plant in Austria was a bit of an exception. It was focused more on these industrial markets. It really didn't leverage Hexcel carbon fiber. It leveraged industrial grade fibers and glass fibers. And so increasingly, it just wasn't fitting with our strategic alignment. And that's why we made this decision. But broadly speaking, Hexcel is a fairly homogenous product mix, and we don't have a lot of. Got it.
Speaker Change: <unk> carbon fibers.
Speaker Change: Leverage to industrial grade fibers, and glass fibers, and so increasingly it just wasn't fitting with our strategic alignment and that's why we made the decision to divest it but broadly speaking <unk> is a fairly homogenous product mix and we don't have a lot of pieces that we can hi, Bob.
Matt Akers: Thank you.
Speaker Change: Got it. Thank you and then I guess as a follow up.
Tom Gentile: And I guess as a follow up, you know, Tom, I guess what would need to happen for you to think there's enough visibility to kind of give midterm guidance again, you know, because it feels like we've been in this situation for years now, we think the supply chain is getting better than, you know, kind of the same issues pop up. Is there some some way you think we get past that? Or do you think this is just sort of a new normal and visibility is going to sort of be limited? I wouldn't say it's a new normal, but certainly for the time being, there's a lot of uncertainty.
Speaker Change: Tom I guess, what would need to happen for you to think theres enough visibility to kind of give midterm guidance again, because it feels like we've been in this situation for years now we think the supply chain is getting better than kind of the same issues pop up in some.
Speaker Change: And why do you think we get past that or do you think this is a sort of a new normal and visibility is going to sort of be limited.
Speaker Change: I wouldn't say, it's the new normal, but certainly for the time being there is a lot of uncertainty and so we're going to provide guidance for 2025 in January and that's about as far out as we can see right now and by the way, we're going to wait to see what Boeing and Airbus announced as we get throughout the whole course of this year. When we before we make that guidance 2026 is just too far out right now and so.
Tom Gentile: And so we're going to provide guidance for 2025 in January, and that's about as far out as we can see right now. And by the way, we're going to wait to see what Boeing and Airbus announce as we get throughout the whole course of this year before we make that guidance. 2026 is just too far out right now.
Tom Gentile: And so midterm guidance, I think for the timing until the supply chain settles and we get into a period of stability, midterm guidance would be very difficult for us or any company. Yeah, okay.
Speaker Change: <unk> guidance I think for the timing until the supply chain settles, we get into a period of stability midterm guidance would be very difficult for us or any company that provides.
Yes, okay. Thank you.
Ken Herbert: Thank you. Our next question comes from Ken Herbert from RBC. Please go ahead. Your line is open. Yes, good morning, Tom and Patrick. Tom, I wanted to follow up on your initial comments around sort of where you are in terms of the workforce. Are you at staffing levels to support the next move up to eight a month on the A350? And when do you expect to see that? The answer is yes, and we are staffed to the schedules that Airbus put in place for A315 and A320, and also what Boeing has put in place. Since those got pushed out, though, we are a bit overstaffed right now to the current production rates, but those production rates are going to hit as we get into next year, first quarter and second quarter.
Speaker Change: Our next question comes from Ken Herbert from RBC. Please go ahead. Your line is open.
Speaker Change: Yes, hi, good morning.
Speaker Change: Tom and Patrick.
Ken Herbert: Tom I wanted to follow up on your initial comments around sort of where you are in terms of the workforce.
Ken Herbert: Are you at staffing levels to support the next move up to eight months on the <unk> hundred 50, and when do you expect to see that.
Tom: The answer is yes, and we our staff to the schedules that Airbus put in place for <unk> hundred 50, <unk> hundred 20, and also what what Boeing has put in place.
Tom: Since those got pushed out so we are a bit overstaffed right now to the current production rates, but those those production rates are going to hit as we get into next year first quarter and second quarter. So it would make note no sense to reduce our workforce only to have to re hire right. So we're just going to stay where we are and we paused new hiring but we're maintaining our current.
Tom Gentile: So it would make no sense to reduce our workforce only to have to rehire it, so we're just going to stay where we are. And we've paused new hiring, but we're maintaining our current position, and we are staffed to meet the production rates that are going to be in effect. And the good news is, because we're already staffed, those employees are getting training and on-the-job experience, which is going to help them in terms of quality and on-time delivery. And so I think it's going to be a win-win for everybody as a result. It's putting a little bit of pressure on our margins right now, but ultimately, it's going to pay dividends in terms of quality and on-time delivery.
Tom: Position and we are staffed to meet the production rates that are going to be in effect for next year and the good news is because we're already staff those employees are getting training and on the job experience, which is going to help them in terms of quality and on time delivery and so I think it is going to be a win win for everybody. As a result, it's putting a little bit of pressure on our margins right now but.
Tom: Ultimately it is going to pay dividends in terms of quality and on time delivery in the future.
Patrick Winterlich: Perfect. And maybe Patrick, is it possible to quantify what that margin headwind has been just just from a staffing standpoint alone this year?
Speaker Change: Perfect and maybe Patrick is it possible to quantify what that margin headwind has been just just from a staffing standpoint alone this year.
Patrick Winterlich: I don't think we're going to get into specifics on margin points. But I mean, you can see that are adjusted EBIT level is not where we would want it to be. It is a pressure we're carrying. I mean, as Tom said, we probably we're carrying labor that we don't need today, but it's going to come and support us. And we need it in the first half of next year as we see some growth going into 2025, which we fully expect to see, even though the ramp. Delayed. It is a headwind.
Speaker Change: Well I don't think were going to get into specifics on margin points, but I mean, you can see.
Speaker Change: Adjusted EBIT level is not where we would want it to be it is a pressure we're counting as Tom said, we were counting labor that we don't need today, but it is going to come in and support this and we need it in the first half of next year as we see some growth going into 2025, we fully expect to say, even though that.
Speaker Change: Ramp rates.
Speaker Change: Delays.
Patrick Winterlich: I don't think we want to try and get into specific margins.
Speaker Change: It is a headwind I don't think we want to try and get into specific margin points from that.
Patrick Winterlich: Perfect. Thanks, Patrick. Thanks, Tom.
Speaker Change: Perfect. Thanks, Patrick Thanks, Tom.
Ken Herbert: Thanks, Ken.
Scott Mikus: Our next question comes from Scott Mikus from Melius Research. Please go ahead. Your line is open. Morning. Tom, I wanted to ask, so for sales, the last 12 months are about 80% of 2019 levels. You mentioned that you're a little bit overstaffed right now.
Speaker Change: Our next question comes from Scott <unk> from Melius Research. Please go ahead. Your line is open.
Speaker Change: Good morning.
Speaker Change: Good morning, Scott.
Tom I wanted to ask so.
Sales in the last 12 months or about 80% of 2019 levels and you mentioned that youre, a little bit overstaffed right now I'm just wondering with all the production rate pushed out so what you've seen from Boeing and Airbus why not just hold extra buffer inventory. So you can ship at higher rates rather than growing your head count.
Scott Mikus: I'm just wondering, with all the production rate pushouts that we've seen from Boeing and Airbus, why not just hold extra buffer inventory so you can ship at higher rates rather than growing your headcount in advance of production rates that we've seen shift multiple times? Well, first of all, Airbus has given a pretty clear signal. And as we said, Airbus Biggest customer for the A350 and the A320, and we want to be in a position to make sure we can deliver on their schedules for next year. The production rates have been pushing out, and we do have excess inventory so we can be conservative, but the issue is, on production, headcount is so important.
Speaker Change: Production rates that we've seen shifts multiple times.
Speaker Change: Alright, well first of all.
Speaker Change: Airbus has.
Speaker Change: Given a pretty clear signal and as we said Airbus is our biggest customer for the <unk> hundred 50, <unk> hundred 20, and we we want to be in a position to make sure. We can deliver on their scheduled for next year the production rates have been pushing out.
Speaker Change: We do have excess inventories. So we can be conservative, but the issue is on production head count is still important it takes a long time to hire the people and to train them and to get them on the job experience.
Tom Gentile: It takes a long time to hire the people, then to train them, and to get them on the job again. And so even though we're a little bit overstaffed right now, that was the point I was making to Ken, it's going to help us next year as the rates do go up and we're going to have those people already in place, already trained, already with on-the-job experience.
Speaker Change: And so even though we're a little bit overstaffed right now that was the point I was making the can is going to help us next year as the rates do go up because we're going to have those people already in place already trained already with on the job experience and that's something you can't you can't take shortcuts to achieve so while the inventory would help address the delivery of the physical product.
Patrick Winterlich: That's something you can't, you can't take short. So while the inventory would help address the delivery of the physical product, to make that product, you need an experienced and trained workforce, and that's what we've developed. I think it's going to be a real strategic asset for us as we get into next year. As I said, every single program we see, including the 737 MAX, is going to have higher production next year than it did this year. So all those people that we have on board are going to enable us to deliver for our customers. And the other thing to remember, Scott, is, as Tom says, we do have some extra fiber, inventory notably fiber.
Speaker Change: To make that product you need an experienced and trained workforce and that's what we've developed I think it's going to be a real strategic asset for us as we get into next year as I said every single program, we see including the 737 Max is going to have higher production next year than it did this year and so all of those people that we have on board are going to enable us to deliver for our customers.
Speaker Change: And the other thing to remember Scott.
Speaker Change: Tom says, we do have some extra fiber.
Speaker Change: Inventory notes would be fiber, but when it comes to our pre regs when you invoke the residents the residents have to be when we when we impregnate the product has to go into cold storage into freezes and so there is a finite amount of natural finite amount of capacity for that so often not wanting to build huge amounts of excess inventory. There is also a <unk>.
Patrick Winterlich: But when it comes to our prepregs, when you involve the resins, the resins have to be, when we impregnate the product, have to go into cold storage, into freezers. And so there is a finite amount, a natural finite amount of capacity.
Patrick Winterlich: So, apart from not wanting to build huge amounts of excess inventory, there's also a natural barrier to holding too much anyway in the supply chain because of the storage. As I said, I'd also add, you mentioned it, but we're still only at about 80% of the production levels that we were at 2019. We have all the capital in place to support higher levels of production. And so, right now, we're absorbing a lot of that fixed cost. As the production rates increase and revenues go up, we'll get a lot of opportunity. Okay, and then Patrick, in the past, incrementals normalized have typically been in the 30 to 35% range.
Speaker Change: Natural barrier to the holding two months anyway, and the supply chain because of the storage issues.
Instead I'd also add you mentioned it but we're still only at about 80% of the.
Speaker Change: Production levels that we were at 2019, and we have all the capital in place to support higher levels of production and so right. Now we are absorbing a lot of that fixed cost as the production rates increase and revenues go up we will get a lot of operating leverage.
Speaker Change: Okay, and then Patrick in the past Incrementals normalize it typically been in the 30% to 35% range I know theres a lot of puts and takes but if you don't have to do much hiring next year your exit the facility in Austria as well should we be thinking about incrementals in 2025 being above the third.
Patrick Winterlich: I know there's a lot of puts and takes, but if you don't have to do much hiring next year, you exit the facility in Austria as well. Should we be thinking about incrementals in 2025 being above the 30 to 35% range that you would normally see in an upcycle?
Speaker Change: <unk> to 35% range that you would normally see in an up cycle.
Patrick Winterlich: Yeah, I mean, we don't guide, as you know anymore, to incremental margins. We're always going to drive them as strongly as we can. We're going to have to assess where the growth is coming from next year. Undoubtedly, the key commercial aerospace programs are going to grow. We're going to have to understand what else is growing. We obviously have some cost increases, and we've got that. We're carrying that sort of labor into the first half of next year, which we absolutely need that labor, but that cost is not going to go overnight. So we will drive incremental margins as strongly as we can, as we always do.
Speaker Change: Yes, I mean, we don't guide as you know anymore to incremental margins were always going to drive them as strongly as we can we're going to have to assess where the growth is coming from next year on that to me. The key commercial aerospace programs Youre going to grow we're going to have to understand what else is growing we obviously you have some cost increases.
Speaker Change: And we've got that we're carrying that sort of labor into the first half of next year, we absolutely need that labor.
Speaker Change: That cost is not going to go away a benign so we will drive incremental margins as strongly as we can as we always do.
Patrick Winterlich: That's the only message we can send, but we've got a good cost base, we've got a good headcount base going into next year.
Speaker Change: Thats the only message we concern we have.
Speaker Change: Got a good cost base, we've got a good head count base going into next year I think that the key point.
David Sprouse: Okay, thanks for taking the question. Our next question comes from David Sprouse from Barclays. Please go ahead. Your line is open. Thanks. Good morning.
Speaker Change: Okay. Thanks for taking the questions.
Speaker Change: Our next question comes from David Strauss from Barclays. Please go ahead. Your line is open.
David Strauss: Thanks, Good morning.
Speaker Change: Any data.
David Sprouse: Could, so for the, the 2026 guidance or the, you know, the medium term targets that you're pulling, what had you assumed for rates on maybe on 787, A350 and A320 that you're no longer assuming? Well, we didn't really lay out the specific rates and the OEMs have provided publicly what their what their targets are. But what I would say is, is we look over the past year and a The OEMs have each released at least three new schedules, and in each schedule they've pushed out production rates on certain programs, particularly the MAX and even the A320 on the Airbus.
Speaker Change: Good.
Speaker Change: So for the <unk>.
Speaker Change: The 2006 guidance or the medium term targets.
Speaker Change: <unk> what have you assumed for rates on maybe on $773 50, and <unk> hundred 20 that you are no longer assuming.
Speaker Change: Great.
Speaker Change: We didn't really lay out the specific rates and the Oems have provided publicly what their what their targets are but what I would say as we look over the past year and a half.
Speaker Change: The Oems have each released at least three new schedules in each schedule they pushed out production rates on certain programs, particularly the Max and even the <unk> hundred 20 on the Airbus side and so it's really on the basis of that and then all of the uncertainty that we have here in the fourth quarter with supply chain and the Boeing strike as we just didn't feel that those.
Tom Gentile: And so it's really on the basis of that. And then all the uncertainty that we have here in the fourth quarter with supply chain and the Boeing strike is we just didn't feel that those rates that we were looking at in February of 2024 were really valid. And so therefore, the whole guidance. and that's why we. You know, the outlook is very good if you look at the production rate increases going forward. We just don't know exactly when they're going to be.
Speaker Change: Rates that we were looking at in February of 2024, we're really valid and so therefore, the whole guidance was really no longer valid and that's why we decided to pull it.
Speaker Change: The outlook is very good if you look at the production rate increases going forward. We just don't know exactly when theyre going to hit so we'll wait until January and then we'll provide guidance for 2025, and we think that will be a good indicator for for the investment community to see the market, but right now it's just too hard to see and certainly 26 is just too far.
Tom Gentile: So we'll wait until January and then we'll provide guidance for 2025, and we think that will be a good indicator for the investment community to see the market. But right now, it's just too hard to see, and certainly 2026 is just too far out, given the current...
Speaker Change: Given the current uncertainty in the supply chain.
Patrick Winterlich: Okay. Patrick, a couple smaller questions. Are you assuming working capital kind of fully reversed in the fourth quarter and you'll generate a fair amount of cash? Are you going to continue to kind of focus on buyback? Are you going to look to de-lever a bit?
Speaker Change: Okay.
Speaker Change: Patrick couple a couple of smaller questions.
Patrick: Are you assuming working capital kind of fully reverses in the fourth quarter and Youll generate a fair amount of cash are you are you going to Canadian kind of focus on buyback a year and I'll look to delever a bit.
Patrick Winterlich: And the other thing on corporate, is that CEO cost is to why it's running higher than kind of typical this year? And does that, you know, step down as a percent of sales next year? Thanks. Okay, so in relation to working capital, we'll obviously drive that in the fourth quarter as we always do. I think I called out inventory as an area we're going to focus on not only in the fourth quarter, but as we go into 2025 as well to try and improve our sort of days of inventory, which is really the key ratio, inventory relative to the level of sales.
And the other thing on corporate can you just.
Patrick: Is that is that CEO cost as to why it's running higher than kind of typical of this year and does that step down as a percent of sales next year. Thanks.
Speaker Change: Okay. So in relation to working capital will obviously drive that in the fourth quarter as we always do I think I called out.
Speaker Change: Inventory is an area, we're going to focus on not only in the fourth quarter, but as we go into 2025 as well to try and improve our sort of days of inventory, which is really the key ratio inventory relative to the level of level of sales.
Patrick Winterlich: In terms of Buybacks, well, we're not going to, we will periodically look at that. I mean, in terms of our overall approach, we're going to maintain our sort of net debt to EBITDA leverage within the 1.5 to 2 range. We're at 1.9. We're absolutely comfortable at 1.9. But we're going to stay in that range under 2.
Speaker Change: In terms of.
Speaker Change: Buybacks, well, we're not going to we will periodically look at that.
Speaker Change: In terms of our overall.
Speaker Change: <unk>, we're going to maintain sort of.
Speaker Change: Net debt to EBITDA leverage within the one five to two range. We're at one nine we're absolutely comfortable at one nine but we're going to stay in that range.
Speaker Change: <unk>.
Patrick Winterlich: In terms of corporate expenses, I guess there's a couple of factors. Yes, there's the CEO transition costs, which are there in 2024, which will go away. We shouldn't see any of that in 2025. And there's a little bit of intercompany profit elimination, which is sort of a swing factor between Q3'23 and Q3'24, which is also part of that year-over-year difference. Basically, the segments make internal profit, and we have to eliminate it at the corporate level. And that just created a bit of a swing year-over-year.
Speaker Change: In terms of corporate expenses I guess, there's a couple of faxes.
Speaker Change: Yes.
Speaker Change: Transition costs, which are there in 2020 full which will go away that we shouldn't see any of that in 2025.
Speaker Change: And there's a little bit of.
Speaker Change: The company profit elimination, which is sort of a swing factor between Q3 23 in Q3 24, which is also part of that year over year difference basically the segments make internal profit and we have to eliminated at the corporate level and that just created a bit of a swing year over year.
Speaker Change: Thanks.
Speaker Change: Okay.
Adam Parsons: Our next question comes from Adam Parsons from UBS. Please go ahead. Your line is open. Hey, morning guys. It's Gavin. Morning.
Speaker Change: Our next question comes from Adam <unk> from UBS. Please go ahead. Your line is open.
Speaker Change: Hey, good morning, guys, it's Kevin.
Speaker Change: Good morning.
Adam Parsons: Any change to the lead time from OEM build rate increases? Because given it, it seems like they'd want you to ramp up well ahead of time. And then when they cut you, it's pretty close to the actual date. Right, well, we tend to be a little bit ahead of the OEM. So we are planning our production. and our staff. Based on that six months out. And so when the when the rates do change, yes.
Speaker Change: Any change to the lead time from OEM build rate increases just given it seems like they would want you to to ramp up well ahead of time and then when they cut you it's pretty close to the actual date.
Speaker Change: Great well, we tend to be a little bit ahead of the Oems about six months and so we are planning our production and our staffing.
Speaker Change: Based on that six months out and so when the when the rates do change, yes, it's difficult for us to respond, especially when we know the rates are going to continue to go up it's just been pushed out.
Tom Gentile: Unknown Executive, Scott Deuschle, Noah Poponak, Hexcel Corp So it's just the nature of the industry. We are six months ahead of. A lot of the structures, manufacturers, and the OEMs, just because we're providing materials. And so, for us, it can be a little bit challenging when the rates change. as we get closer to the end. So no, no desire or ability to shorten that ramp up lead time. Not really. We do need to be out in front of the OEMs because we're providing that material. And so this is a, you know, it's a very dynamic time in the industry and rates have been changing more frequently than they normally do.
Speaker Change: It's just the nature of the industry. We are six months ahead of.
Speaker Change: Lot of the structures manufacturers and the Oems just because we are providing materials and so for us it can be a little bit challenging when the rates change.
As we get closer to the actual production.
Speaker Change: Okay. So no no desire or ability to shorten that that ramp up lead times.
Speaker Change: Not really we do need to be out in front of the Oems because we are providing that material and so this is it's a very dynamic time in the industry and rates have been changing more frequently than they normally do but.
Tom Gentile: But, you know, we're going to have to always be six months out.
Speaker Change: We're going to have to always be six months out in front of the OEM.
Tom Gentile: Got it.
Gautam Khanna: Okay. Thank you. Our next question comes from Gautam Khanna from TD Cowan. Please go ahead, your line is open. Hey, good morning, guys. Forgive me if I missed this, but it sounded as though you have, you've slowed a little bit down on the 737 max relative to Q2, but the 87 is a you know, continue to ramp sequentially. And I'm just curious, is that pretty broad based across all your Intermediary customers between Hexcel and Boeing or are you seeing kind of You know, very different purchasing patterns. across the customer base.
Speaker Change: Got it okay. Thank you.
Speaker Change: Welcome.
Speaker Change: Our next question comes from Gautam Khanna from TD Cowen. Please go ahead. Your line is open.
Speaker Change: Yes.
Gautam Khanna: Hey, good morning, guys.
Speaker Change: Got them.
Speaker Change: Forgive me if I missed this but it sounded as though you have.
Gautam Khanna: You've slowed a little bit down on the 737 Max relative to Q2.
Speaker Change: But the 87.
Speaker Change: Continue to ramp sequentially and I'm just curious is that.
Speaker Change: Pretty broad based across all your.
Speaker Change: The intermediary customers between Texel, and Boeing or are you seeing kind of.
Speaker Change: Very different purchasing patterns.
Speaker Change: Across the customer base.
Tom Gentile: Well, for Boeing, you know, obviously, the 737 With the strike, there were a lot of stop shipment orders to our plant. And so that impacted September, and so we did see a sequential slowdown from Q2 and also from the first two months of the third quarter. On 787, as I mentioned, it's built in Charleston, South Carolina, it's not impacted by the strike. That kept producing, and they kept pulling, and Boeing was very public about that. And so, I would say the rates, for us, the pull was about seven in Q2, it was about seven in Q3.
Speaker Change: Well for Boeing obviously the 737.
Speaker Change: With the strike there were a lot of stop shipment orders to our plants.
Speaker Change: And so that impacted September and so we did see a sequential slowdown from Q2 and also from the first two months of the third quarter on.
On 787 as I mentioned, it's built in Charleston, South Carolina, it's not impacted by the strike that kept producing and they kept pulling and Boeing with very public about that and so I.
Speaker Change: I would say the rates for us the poll was about 7% in Q2 was about seven in Q3. So it stayed about the same and I think that was consistent.
Tom Gentile: So, it stayed about the same. And I think that was a good thing.
Tom Gentile: With Airbus in Q3, and we expected this, we did see a sequential slowdown in the A320 and the A350. The A350 was smaller, it was only... On the A320, it was probably about five aircraft per month between Q2 and Q3, but that was fully expected because in Europe, August is a much slower month, and so it's seasonally slower.
Speaker Change: With Airbus in Q3 than we expected we did see a sequential slowdown.
Speaker Change: In the <unk> hundred 20, and the <unk> hundred 50, the <unk> hundred 50 was smaller was only a couple of percentage points.
Speaker Change: On the <unk> hundred 20, it was probably about five aircraft per month between Q2, and Q3, but that was fully expected because in Europe August is a much slower month and so it's seasonally slower so not unexpected.
Tom Gentile: Okay, and I mean, does this because the 787 is being assembled final assemblies at a rate well below seven, as you know, Does this just kind of pretend a shallower ramp in the first half of 25? or I'm just curious, like, how do you think about 25? directionally. Well, we'll, you know, wait to see what Boeing's final production schedules are and then we will align to meet. They tend to, again, they're pulling from us, looking at what their rates are going to be. So that's why you could see a difference between what the current delivery rates are and the rates that we're seeing in terms of the pulse.
Speaker Change: Okay, and I mean does this because of the 787 is being assembled final assembly is at a rate well below seven as you know.
Speaker Change: Does this just kind of pretend a shallower ramp in the first half of 'twenty five.
Speaker Change: Or I'm just curious how do you think about 25.
Speaker Change: Directionally.
Speaker Change: Well, we'll wait to see what Boeing's final production schedules are and then we will align to meet those.
Speaker Change: They tend to again, they're pulling from us looking at what their rates are going to be six months out.
Speaker Change: And so that's why you could see a difference between what the current delivery rates are and the rates that we're seeing in terms of the call.
Tom Gentile: But for 2025, we expect the production rates on 787 will go up. We want to be prepared to meet that demand and we want to be prepared to meet that demand.
Speaker Change: But for 2025, we expect the production rates on 787 will go up just like on the other programs, we want to be prepared to meet that demand and we are.
Pete Skibitski: All right, thank you. Our next question comes from Pete Skibitski from Alembic Global. Please go ahead. Your line is open. Hey, good morning, guys.
Alright, thank you.
Speaker Change: Our next question comes from Pete <unk> Kubicki from Alembic Global. Please go ahead. Your line is open hey.
Speaker Change: Good morning, guys.
Patrick Winterlich: Just wanted to belabor a topic from earlier, as we think about the, you know, the right way to think about margin rate entering 2025. Patrick, without, you know, giving us guidance. If we think about the majority of your key commercial programs being up or at least flattish entering 2025, but maybe the max still at 30, at least initially, you know, should we start out with, you know, the year with some margin headwind? Excuse me, in 2025, and maybe, you know, maybe tailwind as we get to the back half of the year, assuming, you know, the max does start to ramp?
Speaker Change: Just wanted to belabor a topic from earlier as we think about.
Speaker Change: The right way to think about margin rate entering 2025, Patrick without giving us guidance.
Speaker Change: If we think about the majority of your key commercial programs being up or at least flattish entering 2025, but maybe the Max still at 30 and east at least initially.
Speaker Change: Shall we start out.
Speaker Change: The year with some margin headwind.
Speaker Change: Excuse me in 2025 and maybe.
Speaker Change: Maybe tailwind as we get to the back half of the year, assuming the Max does start to ramp.
Tom Gentile: Or would you, you know, I'm trying to consider labor in that whole calculus as well. So, I was wondering, you know. I think, in a broad sense, that that is probably a correct way to look at it, in that we'll get more and more volume leverage as the year goes on and production rate increases. And as I think we've communicated before, volume leverage is really the key driver for Hexcel. We need to get back to the 2019 levels of revenue. We need to utilize our capacity to get the true efficiency across our farm. And that volume leverage, yes.
Or would you.
Speaker Change: Trying to consider labor in that whole calculus as well so I was wondering.
Speaker Change: I think our broad sense that that is probably a correct way to look at it and that we will get more and more volume leverage as the year goes on and production rate increases and I think we've communicated before volume leverage is really the key driver for <unk>. So we need to get back to the 2019 levels. The revenue we need to utilize op.
Speaker Change: Passive fee to get the true efficiency across our platform.
Speaker Change: And that volume leverage yes. So every six months as hopefully we start to see build rates increase that will help our month, yes.
Tom Gentile: Okay, and just on V-22, the right way to think about it is maybe a couple more quarters of headwind on V-22. It sounds like it was fairly substantial from a sizing for you, and so I guess as that annualizes in 2025, you should maybe, maybe the underlying mean growth at space and defense should improve. Well, we're on over 100 different programs. There's many, many different moving parts in space and defense. I mean, the V-22 is essentially sunsetting next year. We think there's probably a couple of aircraft to build. So it impacted this quarter year over year, but I wouldn't overplay it in the broader picture.
Speaker Change: Okay.
Speaker Change: V 22.
Speaker Change: The right way to think about it maybe a couple more quarters of headwind on V 22. It sounds like it was it was fairly substantial from a sizing for you.
Speaker Change: And so I guess it is annualized in 2025, you should maybe maybe the underlying growth.
Speaker Change: Growth in space and defense should improve.
Speaker Change: Well, we ran over 100 different programs, there's many many different moving pumps in space and defense I mean, the V. 22 is it tends to be sunsetting next year, we think that there'll be a couple of aircraft to build so.
Speaker Change: It impacted this quarter year over year, but I wouldn't overplay it in the broader picture.
Tom Gentile: And we've got to assess the moving parts before we can really talk to space and defense.
Speaker Change: And we've got to assess the moving parts before we can really cool space and defense in 2020.
Sheila Kahyaoglu: Okay, thank you. Our next question comes from Sheila Kahyaoglu from Jeffreys. Please go ahead. Your line is open. Good morning, Tom, Patrick. Thank you so much. Maybe just on the 737, because it's such a hot topic.
Speaker Change: Okay. Thank you.
Speaker Change: Our next question comes from Sheila <unk> from Jefferies. Please go ahead. Your line is open.
Sheila: Good morning, Tom Patrick Thank you so much.
Sheila: Just on the 787, because it's such a hot topic can we go over.
Tom Gentile: Could we go over the rates, Tom, you mentioned, you said you were at 36 in Q2, 30 in Q3. Is it zero for Q4? And how do we think about potential optionality into 2025, what you're assuming in terms of rates? Right? Well, as I mentioned, the 30 in Q3 was really a function of September falling off in the back half of the month. And so regarding next year, I think it really depends on when the strike ends and then Boeing resetting the schedule, and we'll wait. They had plans in place for higher levels of production next year.
Speaker Change: The rates Tom You mentioned you said you were at 36 to 30 in Q3 is at zero for Q4, and how do we think about potential optionality into 2025, what you're assuming in terms of rates.
Speaker Change: Well as I mentioned the 30 in Q3 was really a function of September falling off in the back half of the month.
Speaker Change: And so regarding next year.
Speaker Change: I think it really depends on when the strike ends and then Boeing resetting the schedule and we'll wait to see what that is.
Speaker Change: They had plans in place for higher levels of production next year.
Tom Gentile: Obviously, with the strike, it gets pushed out a little bit.
Speaker Change: Obviously with the strike it gets pushed out a little bit and so book points presenting tomorrow of course, the voters tomorrow, we will know a lot more after that in terms of 2025.
Tom Gentile: And so, Boeing is presenting tomorrow, of course. The vote is tomorrow. We'll know a lot more after that in terms of...
Tom Gentile: That's helpful. And I know Ken asked some questions about headcount, too.
Speaker Change: That's helpful and I know Ken asked some questions about head count can you give us an idea of like how fungible head count is across programs, whether you move.
Tom Gentile: Can you give us an idea of how fungible headcount is across programs, whether you move folks to A350 from A370? Well, actually, for us, it's very fungible, because we make a base material of carbon fiber composites, resin, and prepreg, and so the materials, while they are different materials, the labor is fairly fungible across the board. So we can leverage, if we need more Airbus material, the labor is very fungible to do that. Transcripts provided by Transcription Outsourcing, LLC.
Kevin Goddard: Thanks, Kevin.
Speaker Change: Well actually for us, it's very fungible, because we make the base material carbon fiber composites resin and <unk> and so the materials.
Speaker Change: They are different materials labor is fairly fungible across the programs and so we can leverage if if if we need more.
Speaker Change: Airbus material.
Speaker Change: The labor is very fungible to do that and our plants. Its just the nature of what we do we're producing carbon fiber pre Craig and weaving in resins and so yes, the labor's extremely fungible across program.
Noah Poponak: Thank you. Our next question comes from Noah Poponak from Goldman Sachs. Please go ahead. Your line is open. Hey, good morning, everyone.
Speaker Change: Thank you.
Speaker Change: Welcome.
Speaker Change: Our next question comes from Noah <unk> from Goldman Sachs. Please go ahead. Your line is open.
Speaker Change: Hey, good morning, everyone everyone.
Speaker Change: No.
Noah Poponak: I guess I'm still confused on, and I know it's sort of like a lot of moving pieces and hard to answer, but just in terms of what's happening with Boeing flowing down into the supply chain during the strike, I guess there was press that said they were kind of stopping the supply chain, then heard a lot of suppliers say that the communication was keep things going pretty close to pre-strike under the hope that there could be a quick resolution. And then I guess on this earnings call, I've heard you say that they slowed you slightly, but then I've heard you say that they've issued stop orders.
Speaker Change: I guess I'm still confused on and I know, it's sort of like a lot of moving pieces and hard to answer but.
Speaker Change: Just in terms of.
Speaker Change: What's happening with Boeing.
Speaker Change: Flowing down into the supply chain during the strike I guess there was press that said they were kind of stopping the supply chain then.
Speaker Change: A lot of suppliers say that the communication was keep things going pretty close to pre strike under the hope that there could be a quick resolution.
Speaker Change: And then I guess on this earnings call I've heard you say that they slowed you slightly but then I heard you say that they've issued stock.
Tom Gentile: So I'm just trying to understand if Boeing's action to the supply chain or message to the supply chain during the strike has been closer to full stop or closer to keep going so that we can pick it back up where we left off whenever there's a resolution. That characterization is the right one, is they issued a stop ship, but they encouraged suppliers to keep building so that when the strike ended, they could continue to ship again. And so for us, in fact, you saw our inventory go up. That was part of it. We stopped shipping to Boeing, but we continued to build into some inventory, and that's why we have a little bit higher inventory.
Speaker Change: Stop order, so I'm just trying to understand.
Boeing's action to the supply chain, our message to the supply chain during the strike has been closer to.
Speaker Change: Full stop or closer to keep going so that we can pick it back up where we left off whenever there is a resolution here.
That characterization is the right one is they issued a stop ship, but they encourage buyers to keep building so that when the strike ended they could continue to ship it yet and that was the case and so for US in fact, you saw our inventory go up that was part of it.
Speaker Change: We stopped shipping to Boeing but we continue to build into some inventory and that's why we have a little bit higher inventory. It's one of the reasons why we have it and that was true.
Tom Gentile: That's one of the reasons why we're doing this. and that enables us to meet the demand once the strike ends and once the strike is over.
Speaker Change: To meet the demand once the strike ends and once they start producing.
Tom Gentile: I see. So it's sort of both it's stop ship, but they, them then counting on everyone to build on their own, I guess. And the other point, Noah, is that...
Speaker Change: I see so it's sort of both stop ship, but they them then counting on everyone to build on their own.
Speaker Change: Yes.
Speaker Change: And the other point now or is that.
Tom Gentile: The 737 MAX, as we've said many times, is not the biggest program for us. And so those two statements, we did have some stock orders during September, but the overall in the third quarter was marginal. So those are consistent statements. And in line with what Tom said about building inventory. So the bubble chart that's in the investor deck now, it clearly illustrates the relative magnitude of the program, the 350, the 320, and the 787, all bigger than the MAX with its sort of build rate at the lower end of that two to 500, or the ship set at the lower end of that two to 500,000 range.
Speaker Change: The 737, Max as we said many times.
Speaker Change: The biggest program for us and so those two statements. We did have some stockholders during September but the overall in the third quarter was marginal. So those are right in line with what Tom said about building inventory.
Speaker Change: The bubble chart, that's in the Investor deck, now I kind of it clearly illustrates the relative magnitude of the program. The 350 to $3 20, and the 787, all bigger than the months, where they sort of build rate is at the lower end of that three to 500 of the ship set at the low end of that three to 500000 million. So.
Tom Gentile: So I think everything that Thomas said is completely No, that makes a ton of sense. And I and my question really was a an effort to understand the broader ecosystem a little better. But I appreciate that.
Speaker Change: That is completely consistent.
Speaker Change: No that makes a ton of sense. My question were really was an effort.
Speaker Change: I understand the broader ecosystem a little better.
Speaker Change #100: But I appreciate that and then just one on one other item.
Tom Gentile: And then just one other one other item, the industrial assets that you've discussed Disposing of or selling. Is that far down a process and close to complete or that's a process you're just now starting? I'd say we're probably midway through the process. It's something we initiated a couple months ago, but we felt it was the right time to be public about it because we wanted to be open and transparent with our customers as well as with our employees. So the process is under way. And Patrick, is there an approximate revenue in EBITDA you have for that?
Speaker Change #101: The industrial assets.
Speaker Change #100: You've discussed.
Speaker Change #100: Disposing of are selling.
Speaker Change #100: Does that is that far down a process and close to complete or that's a process. You are just now starting.
I'd say, we're probably midway through the process, it's something we initiated a couple months ago, but we felt it was the right time to be public about it.
Speaker Change #100: We wanted to be open and transparent with our customers as well as with our employees and so the processes underway.
Speaker Change #100: And do you Patrick is there.
Speaker Change #100: Approximate revenue.
Speaker Change #100: EBITDA you have for that.
Patrick Winterlich: It's about a third of our industrial business. And quite honestly, the margin impact is going to be low, that's what I would say.
Speaker Change #102: It's about a third of our industrial business.
Speaker Change #100: Sure.
Speaker Change #100: And quite honestly the margin impact.
Speaker Change #100: It's going to be low that's what I would say.
Scott Deuschle: Okay, thank you. Our next question comes from Scott Deuschle from Deutsche Bank. Please go ahead. Your line is open. Hey, good morning, Patrick. Sorry if I missed it.
Speaker Change #103: Okay. Thank you.
Speaker Change #104: Our next question comes from Scott <unk> from Deutsche Bank. Please go ahead. Your line is open hey.
Scott: Good morning, Patrick sorry, if I missed it but was there any restocking benefit this quarter from going to seven per month on the age of 50, and 77% or would that potentially be a tailwind later on.
Patrick Winterlich: But was there any restocking benefit this quarter from going to 7 per month on the 8350 and 787, or would that potentially be a tailwind later on? Yeah, I mean, I mean, we weren't, I mean, the 350 was Sorry, did you say 787 or 350? Both. Okay. I mean, they were reasonably flat, I think, as Tom said. Both of them slipped down slightly in the third quarter from the second quarter. So we didn't really see, we saw more of a consistent pattern of delivery into those programs. The 350, a marginal slowdown because of the European vacations, but only marginal.
Speaker Change #104: Yes.
Speaker Change #104: The $3 54.
Speaker Change #104: Did you say 787 to 350.
Speaker Change #104: Okay.
Speaker Change #106: Were reasonably flat I think as Tom said, both of them slipped down slightly in the third quarter from the second quarter.
Speaker Change #106: So we didn't really see we saw more of a consistent pattern of delivery into those programs.
Speaker Change #106: The $3 50, a marginal slowdown because of the European vacations, but only marginal the 320 impact I think as Tom said was more significant.
Patrick Winterlich: The 320 impact, I think, as Tom said, was more significant. So I wouldn't really call out a stocking impact either way on those two 787 or 350. Okay, thanks.
Speaker Change #106: So I wouldn't really call out as stocking.
Speaker Change #106: Impact either way on those two 787 O 360 program.
Scott Deuschle: And then, Tom, it seems like China has become pretty dominant in supplying carbon fiber in a lot of industries outside of aerospace. And, you know, it looks like Airbus has brought in Chinese structure suppliers in a fairly meaningful way at this point, I think with AVIC in particular.
Speaker Change #107: Okay. Thanks, and then Tom It seems like China has become pretty dominant in supplying carbon fiber and a lot of industries outside of aerospace.
Speaker Change #108: It looks like Airbus has brought and Chinese structure suppliers in a fairly meaningful way at this point I think with HVAC in particular I guess my question is do you see any risk over the longer term that you start to see the Chinese become a more meaningful competitor in the carbon fiber world on the aerospace side, particularly on Nextgen aircraft. Thanks.
Tom Gentile: I guess my question is, do you see any risk over the longer term that you start to see the Chinese become a more meaningful competitor in the carbon fiber world on the aerospace side, particularly on next gen aircraft? Well, certainly on industrial-grade fibers, China has increased capacity, and that has had an impact on price for industrial-grade fibers, but aerospace-grade fibers are very And there are no Chinese makers today of industrial grade carbon. And it'd be a pretty big leap for that to happen. So while they can compete, certainly on industrial markets, they aren't competing on aerospace markets today and probably will not do so for the foreseeable future.
Speaker Change #107: Alright.
Speaker Change #109: He is certainly an industrial grade fibers, China has increased capacity and that has had an impact on price for industrial grade fibers, but aerospace grade fibers are very different and there are no Chinese makers today.
Speaker Change #109: Industrial grade carbon fiber and it would be a pretty big leap for that to happen. So while they can compete certainly on industrial markets. They are competing on aerospace markets today, and probably will not do so for the foreseeable future.
Speaker Change #110: Thank you welcome.
Speaker Change #109: Welcome.
Phil Gibbs: Our last question will come from Phil Gibbs from KeyBank Capital Markets. Please go ahead, your line is open. Hey, thanks. Good morning. Hey, Tom, you may have mentioned it. You certainly mentioned it on the call this morning that the wide bodies, the key ones are pulling at about seven per month.
Speaker Change #111: Our last question will come from Phil Gibbs from Keybanc capital markets. Please go ahead. Your line is open.
Phil Gibbs: Hey, Thanks, good morning good.
Speaker Change #111: Morning.
Phil Gibbs: Hey, Tom you May have mentioned that you certainly mentioned on the call. This morning that the wide bodies. The key ones are pulling in about seven.
Speaker Change #111: Per months when did that.
Tom Gentile: When did that Step up in your mind from that sort of four to five rate that we were at near the bottom. Well, you go back to kind of early 23. and then it started stepping up progressively through 23. Inc. got into the seven ranges we got.
Speaker Change #111: The step up in your mind from that sort of 4% to 5% rate that we were at near the bottom.
Speaker Change #113: Well you go back to kind of early 'twenty three and the 787 was in the kind of three or four range and then it started stepping up progressively through 'twenty three and got into the seven range as we got into 'twenty for us.
Tom Gentile: So that was the time frame.
Speaker Change #111: No.
Speaker Change #111: That was the timeframe and then the.
Tom Gentile: And on the A350, you got to really go back to 2022. It was in the four and five range, stepped up to the six range in 23, and it's kind of moved into the seven range. Okay. That's helpful.
Speaker Change #111: <unk> hundred 50, you got to really go back to 2022. It was in the four and five range stepped up to the six range in 'twenty, three and has kind of moved into the 7% range in 'twenty four.
Speaker Change #111: Okay.
Speaker Change #114: That's helpful and then on defense.
Tom Gentile: And then on defense... Historically The fourth quarter for defense-related revenues is typically a lot better than the third quarter. I would say, one, is that what you're expecting? And then I know you have a decent outlook for new program growth over the next couple of years, some of that being international. Is that all still holding in your mind as you look ahead? Yes, I mean, defense overall is strong. Unknown Executive, Scott Deuschle, Noah Poponak, Hexcel Corp And then as we go forward into next year. Yes, the big programs around like F-35s, J-53Ks, Blackhawks, some of our European programs, we expect to see continued...
Speaker Change #111: Historically.
Speaker Change #115: The fourth quarter for defense related revenues as typically a lot better than the third quarter I would say one is that what you're expecting and then I know you have a.
Speaker Change #111: A decent outlook for new program growth over the next couple of years.
Speaker Change #111: Some of that being international is that is that all still still holding in your mind as you look ahead.
Yes, I mean defense overall is strong unfortunately, because of some of the geopolitical pressures that are out there Q4 has been stronger and we're going to push hard to make that true again this year.
Speaker Change #111: And then as we go forward into next year.
Speaker Change #111: The big programs around like F 35, CH 53, K Blackhawk some of our European program, we expect to see continued strength in notes.
Speaker Change #111: And.
Tom Gentile: So overall, yes, we're very bullish on Thank you.
Speaker Change #111: So overall, yes, we're very bullish on space and defense.
Speaker Change #116: Thank you.
Operator: Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may now disconnect.
Speaker Change #117: Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation you may now disconnect.
Speaker Change #117: [music].
Speaker Change #117: Okay.
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Speaker Change #117: Okay.
Speaker Change #117: Sure.
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Speaker Change #117: [music].
Speaker Change #117: Yeah.
Speaker Change #117: Yes.
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Speaker Change #117: Yes.
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Speaker Change #117: Sure.