Q4 2024 Hexcel Corp Earnings Call
Hello and welcome to the HECSL fourth quarter and full year 2024 earnings call. All lines have been placed on mute to prevent any background noise.
Speaker Change: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. I would now like to turn the conference over to Patrick Winterlich, Chief Financial Officer. You may begin.
Thanks, Sarah.
Patrick Winterlich: Good morning everyone. Welcome to Hexel Corporation's fourth quarter and full year 2024 earnings conference call. Before beginning let me cover the formalities. I want to remind everyone about the safe harbor provisions related to any forward-looking statements we may make during the course of this call.
Patrick Winterlich: Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995.
Patrick Winterlich: They involve estimates, assumptions, judgments, and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today.
Patrick Winterlich: Such factors are 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.
Patrick Winterlich: Lastly, this call is being recorded by Hexel Corporation and is copyrighted material. It cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request.
Speaker Change: With me today are Tom Gentile, our Chairman, CEO and President, and Kurt Goddard, our Vice President of Investor Relations.
Speaker Change: The purpose of the call is to review our fourth quarter and full year 2024 results, details in our news release issued yesterday.
Now let me turn the call over to Tom.
Tom Gentile: Thanks, Patrick. Good morning, everyone, and thank you for joining us today as we share our 2024 fourth quarter and full year results.
Tom Gentile: Xcel is a company well positioned for growth with a very talented team, a world leading portfolio of products, and a strong operational and safety focus.
Tom Gentile: I am confident in this team's ability to deliver on current commitments and drive advanced composite material innovation for a future with lighter, more sustainable aircraft and capture new growth opportunities.
Tom Gentile: Our 2024 fourth quarter and full year results underscore the robust operational performance Hexel has demonstrated throughout what was another challenging year for the aerospace industry.
Tom Gentile: 2024 was again a year of disruption for the commercial aviation industry as supply chain and labor challenges persisted for the OEMs and suppliers.
Tom Gentile: While OEM production rates are increasing, recent history has clearly shown that ramping up aircraft build rates continues to be a challenging process. Indeed, production levels in 2024 were only 68% of 2018 levels.
Tom Gentile: On the other hand, demand for air travel now exceeds pre-pandemic levels, and aircraft backlogs at both Boeing and Airbus are at near-record levels. So the underlying demand for HECSIL advanced composite materials remains very strong.
Tom Gentile: Despite all the disruptions in 2024, we had a solid close to the year and generally met or marginally exceeded all of our final guidance targets.
Tom Gentile: with sales of $1.903 billion, a 6.4% increase over 2023, adjusted EPS of $2.03, and free cash flow of $203 million.
Tom Gentile: Exel's fourth quarter sales were $474 million, a 4% increase year-over-year in cost and currency.
Tom Gentile: Solid performance in commercial aerospace and space and defense drove higher sales volumes, partially offset by weaker industrial sales.
Tom Gentile: Adjusted EPS for the quarter was $0.52, a nearly 21% increase over Q4 2023.
Tom Gentile: Commercial airspace sales in the fourth quarter of 2024 increased 4.6% year over year on a constant currency basis and full-year sales increased 11.9%.
2024 sales growth was consistent with our guidance.
Tom Gentile: 787, A350, and A320neo all increased in 2024, whereas the 737 MAX decreased as Boeing worked through a number of issues.
Tom Gentile: The other commercial aerospace category increased 6.7% on strength in regional jets.
Tom Gentile: Fourth quarter space and defense sales increased 7.6% and the full year increased 4.6%, consistent with our 2024 guidance. For the year, F-35, CH-53K, and classified programs drove the growth.
Tom Gentile: The V22 was the top 5 program in 2023, but as the program winds down, V22 cells did not even reach the top 10 in 2024 for Hexel, declining as we expected.
Tom Gentile: The industrial market remains a challenge. In the fourth quarter, industrial sales decreased 14.8% a weakness in all the sub-markets except for recreation. For the year, industrial sales decreased 21.1%.
Tom Gentile: Given the soft industrial performance during 2024, we announced that we will be divesting our Neumark Austria site, which is focused on wind and industrial applications for glass fiber.
Tom Gentile: Going forward, we will still pursue industrial business opportunities, but will focus more on niche value-add applications, which use our existing aerospace production plant and equipment.
Tom Gentile: Connected to the Neumark divestiture, we have taken one-time non-cash charges in this quarter's results, which Patrick will describe in more detail shortly.
Tom Gentile: As we continue to review our operations and optimize our footprint, we also recently signed a deal to divest our Hartford, Connecticut 3D printing business.
Tom Gentile: Industry adoption of 3D printing has been slower than we anticipated and there are better operators for this business. We expect the deal will close in Q1 2025.
Tom Gentile: We also announced that we have formally initiated a project to review our Welkin-Ratt Belgian plant, which supplies engineered coir. This review is expected to be concluded sometime in the first half of 2025.
Patrick will provide more details on all of our finances.
in a few minutes.
Speaker Change: Looking out over the next decade, we see three broad phases that will define Hexel's growth.
Speaker Change: The near-term focus is to drive growth by executing and delivering on existing programs and our current contracts and supporting our customers as they increase production rates.
Speaker Change: Excel has the capacity to support the OEM announced peak rates even as some of these peak rates exceed pre-pandemic levels.
Speaker Change: We expect to generate strong key free cash flow during this period as we grow into our existing capacity and capital expenditure remains at a lower level.
Speaker Change: I am confident in our team's ability to execute on this ramp up. Since I joined Hexel, I have visited about three-quarters of the company's sites, meeting with hundreds of Hexel colleagues.
Speaker Change: The Hexel workforce is continuing to drive efficiency and quality, positioning our factories for the future, and continually prioritizing workers' safety.
Speaker Change: With the capital in place and a strong team recruited and trained, we are ready to meet whatever production schedules our OEM customers adopt across all the programs we support.
Speaker Change: In the medium term, we see opportunities to drive both organic and inorganic growth. For example, our space and defense business is well-positioned to grow, given Hexel's unique position as the only vertically integrated U.S. domestic corporation providing advanced lightweight composite materials.
Composite technology is critical in current and future military programs.
Speaker Change: And we look forward to engaging defense crimes more directly, as well as pursuing R&T funding opportunities with U.S. government research labs to support HEXEL's value proposition.
Speaker Change: We have additional organic growth potential across regional and business jets, the emerging eVTOL market, and with new aircraft that will soon enter production, such as the Boeing 777X and the Falcon 10X from Dassault.
Speaker Change: As we consider future capital allocation from our growing cash generation, we will be stepping up our disciplined evaluation of potential M&A opportunities that leverage our advanced material science expertise and meet our return thresholds.
Speaker Change: Our core expertise revolves around carbon fiber and resin systems, honeycomb, and then the engineering of honeycomb into highly advanced shapes and difficult-to-engineer specialty aircraft parts.
Speaker Change: These advanced materials, along with other adjacent materials science technologies, are the type of inorganic growth that we will be evaluating.
Speaker Change: Longer term growth for HEXEL will come from the launch of next generation commercial and defense aircraft, as well as the development of new propulsion systems.
Speaker Change: The decisions on identifying what material systems these platforms will utilize are taking place right now and will continue over the next several years with the airframe and engine OEMs, even though entry into service will likely be after 2030.
Speaker Change: Our current innovation efforts are focused on developing materials for these future platforms.
Speaker Change: Just as important, our innovation is focused on how we can continue to refine the production process for carbon fiber composites to support the high rate production requirements of next generation aircraft, including the next single aisle.
Speaker Change: These production techniques will include improvements in lamp rates, cure time, and non-destructive inspection.
We're also driving what we call our Future Factory Initiative.
Speaker Change: which will be a constant throughout these three phases of growth. Near term, the focus of Future Factory is on continuing to drive efficiencies with our Operational Excellence Initiative.
Speaker Change: Longer term, it will involve more creative approaches to revolutionize production and lower manufacturing costs by rethinking production processes and machinery, leveraging AI, and selectively adding further automation to repetitive tasks.
Speaker Change: Looking forward, we issued 2025 guidance in our earnings release issued last night.
Speaker Change: We are forecasting 2025 sales between $1.95 billion and $2.05 billion.
Adjusted earnings per share between $2.05 and $2.25.
and free cash flows greater than $220 million.
Speaker Change: When we provide guidance, our objective is to provide realistic estimates that align with our understanding of the market. Remember that we provide shift set information for all of our top programs, which enables anyone interested to undertake their own sensitivity analysis of our guidance based on their own assumption of OEM build rate.
Speaker Change: Because of the continued start-stop-start production environment, uncertainty remains in relation to the outlook for our 2025 performance.
Speaker Change: Sales growth may be impacted by potential delays to the recovery in production rates.
As we enter 2025,
Speaker Change: Our operations headcount is marginally elevated since production was softer in Q4 than expected. However, we expect to grow into that headcount during the first half of the year in 2025.
Speaker Change: Our R&T spend will also be elevated in 2025 as we work on developing and qualifying new materials for next-generation aircraft and propulsion programs.
These cock headwinds will dampen margins to some extent.
Speaker Change: and until we achieve further sales recovery to drive a considerable operating leverage opportunity that is in front of us.
Speaker Change: Since I started in this role in May, I continue to be impressed by the team here at Hexel.
Speaker Change: As compelling as our technology is, it is our people who truly make the difference for Heccel and for our customers.
Speaker Change: Although the industry faces another challenging year in 2025, Paxil is positioned for growth and task generation as we leverage our exceptional team, our intellectual property, and our operational capabilities.
Speaker Change: Now let me turn it over to Patrick to provide more details on the numbers. Patrick?
Patrick Winterlich: Thank you, Tom. As a reminder, regarding foreign exchange exposure, Hexel benefits from a strong dollar. We continue to hedge foreign exchange exposure over a 10 quarters time horizon.
Speaker Change: The year-over-year sales comparisons I will provide are in constant currency, which thereby removes the foreign exchange impact of sales.
Speaker Change: The commercial aerospace market represented approximately 59% of total fourth quarter sales of $473.8 million.
Speaker Change: Fourth quarter commercial aerospace sales of $278.3 million increased 4.6% compared to the fourth quarter of 2023.
Speaker Change: Various industry issues including OEM supply chain challenges and labor strikes at customers, and usage of Hexel sales growth.
Speaker Change: The Boeing 787 and Airbus A320neo grew modestly year over year, while Boeing 737 MAX sales were down, with four-quarter sales being primarily for the Leap 1B and Nacelle.
Speaker Change: Sales for other commercial aerospace in the fourth quarter increased 9.5% year-over-year, led by regional jets.
Speaker Change: And finally, other commercial aerospace, including business and regional aircraft, with 20%.
Speaker Change: Business jets comprise the largest sub-market within this category. While business jet sales are higher than pre-pandemic levels, 2024 business jet sales were flat compared to 2023.
Speaker Change: Space in Defence represented approximately 34% of fourth quarter sales and totalled $163.3 million, increasing 7.6% from the same period in 2023. In the fourth quarter of 2024, growth was led by the F-35 and CH-53K.
Speaker Change: For fiscal year 2024, approximately 35% of space and defense sales were outside of the U.S.
Speaker Change: This included customers in a number of Western European countries, as well as sales to customers in other Western-aligned markets.
including Brazil, India, South Korea and Turkey.
Speaker Change: Industrial comprised only 7% of Q4 2024 sales and totaled $32.2 million.
Speaker Change: decreasing 14.8 percent compared to the fourth quarter of 2023. We experience softness across all the submarkets except for recreation.
Speaker Change: For the full year, industrial sales were down 21.1%, declining more than forecasted.
Speaker Change: Higher financing costs and growing competition from Chinese automakers negatively impacted the performance automotive category of industrials to a much greater degree than we had expected, particularly for Western European auto companies.
Speaker Change: Wind continued its multi-year decline, decreasing 37% year-over-year, whereas we were forecasting flattish off an already low base.
Other sub-markets also decreased.
Speaker Change: Gross margin of 25% in the fourth quarter of 2024, favorably compared to the prior year period gross margin of 22.5%.
Speaker Change: The tire sales drove operating leverage combined with strong operational execution.
Speaker Change: As a percentage of sales, selling, general and administrative expenses and R&D expenses were 13% in the fourth quarter of 2024 compared to 11.8% in the comparable prior year period.
Speaker Change: Higher R&T expenses to support innovation for future programs partially account for the increase.
Speaker Change: Other operating expenses in the fourth quarter of 2024 consisted of non-cash impairment and restructuring charges primarily related to the pending divestment of the Neumark Austria glass fiber prepreg industrial operations as previously disclosed.
Speaker Change: Adjusted operating income in the fourth quarter was $57.1 million, or 12.1% of sales, compared to $49.1 million, or 10.7% of sales, in the comparable prior year period.
Speaker Change: The year-over-year impact of exchange rates in the fourth quarter to operating income was favourable by approximately 60 basis points.
Speaker Change: Now turning to our two segments. The composite material segment represented 79% of total four-quarter sales and adjusting for non-recurring charges generated an adjusted operating margin of 15.3%.
Speaker Change: This compares to an adjusted operating margin of 14.7% in the prior year period.
Speaker Change: The engineered product segment, which is comprised of our structures and engineered core businesses, represented 21% of total sales and generated an adjusted operating margin of 10.7%.
Speaker Change: This compares to an adjusted operating margin of 9.6% in the prior year period.
Speaker Change: Net cash provided by operating activities in 2024 was $289.9 million compared to $257.1 million in 2023.
Speaker Change: Working capital with a cash use of 0.8 million dollars in 2024 compared to a use of 27.4 million dollars in 2023.
Speaker Change: Capital expenditures on an accrual basis were $81.1 million in 2024, compared to $121.6 million in the comparable prior year period.
Speaker Change: Recall that in 2023 we purchased the land and building for our Amesbury Massachusetts operation for approximately 38 million dollars.
Speaker Change: Free cash flow in 2024 was $202.9 million, which compares to $148.9 million in 2023.
Speaker Change: Increased volume, robust working capital management, and tightly managed capital expenditures supported the higher level of cash generation.
Speaker Change: Adjusted EBITDA totaled $382.3 million in 2024 compared to $362.4 million in 2023.
Speaker Change: We operate long-lived assets, which explains why our depreciation expense has been well above our capital expenditures for a number of years.
Speaker Change: We did not repurchase any stocks during the fourth quarter. In total for fiscal year 2024, we used $252.2 million to repurchase stocks.
Speaker Change: The remaining authorization under the share repurchase program as of December 31st, 2024 was $234.9 million.
Speaker Change: The Board of Directors declared a $0.17 quarterly dividend yesterday, which is an increase of $0.02 or 13% from the prior level. The dividend is payable to stockholders of record as of February 7th, with a payment date of February 14th.
Speaker Change: Expanding on Tom's comments regarding our 2025 sales and adjusted ETF guidance.
Speaker Change: We are forecasting 5% sales growth at the midpoint and 6% adjusted EPS growth at the midpoint.
Speaker Change: Excel has the operational capacity to support much higher demand from our customers.
Speaker Change: So, considering the various current industry supply chain issues and rate ramp challenges faced by our customers, we are forecasting somewhat muted sales growth in 2025.
Speaker Change: Note also that our guidance excludes approximately 40 million dollars of annual sales from the Neumarkt Austria facility which we are planning to divest.
Speaker Change: In terms of our markets, we expect 2025 commercial aerospace sales to increase high single digits.
Speaker Change: As a result of the planned sale of industrial-focused Austrian facilities, we will change our reporting by market.
Speaker Change: Beginning with the first quarter of 2025, we will report results for commercial aerospace and a second market titled defense, space and others.
Speaker Change: This market will include the remaining industrial business, which will consist primarily of performance-orientated automotive sales.
Speaker Change: In 2025, we are expecting this defence space and other markets to be flattish, as low single-digit defence and space growth is expected to be offset by continued softness in industrials.
Speaker Change: Tom pointed out some pressure on our margins, including growing into our existing headcounts and higher R&D costs as we continue to develop and innovate materials for the next generation of aircraft and propulsion platforms.
Speaker Change: Additionally, we are focused on productivity and driving operational efficiency to offset recent inflationary pressures, including labor inflation.
Speaker Change: Top-line growth and higher capacity utilization will ultimately be critical to driving improved overhead leverage and stronger margin performance.
Speaker Change: As Tom referenced last quarter, we are upgrading our ERP system.
and this new ERP system will be cloud-based.
Speaker Change: Accounting rules require it to be expensed rather than capitalized, placing some further short-term pressure on margins.
Speaker Change: Rounding out the guidance discussion, we expect a tax rate of 21%.
Speaker Change: Interest expense will likely increase as during the year we expect to refinance our 4.7% note, which is due in August 2025 and rates are expected to be higher for the new bond.
Speaker Change: We forecast capital expenditures to remain subdued as we grow back into existing capacity.
Speaker Change: So for 2025, and likely for the next two or three years, accrued capital expenditures are forecast to be below $100 million.
Speaker Change: This level of capital expenditure should support a strong cash conversion ratio of 100% or higher for a period of time.
With that, let me turn the call back to Tom.
Tom Gentile: Thanks Patrick. As Hexel enters 2025, I am confident in our long-term growth and the value we will provide to our customers and shareholders.
Tom Gentile: Xcel's lightweight material technology is vital for the design and production of modern aircraft that are lighter and structurally stronger, have greater range, consume less fuel, and emit less carbon dioxide. I am proud to be part of this exceptional team.
With that, we're ready to take some questions.
Tom Gentile: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. We ask that you please limit yourself to one question and one follow-up. Thank you.
Operator: Your first question comes from the line of Ken Herbert with RBC Capital Markets. Your line is open.
Good morning, Tom and Patrick and Kurt.
Morning, again.
Operator: Hey, maybe Tom or Patrick, as you think about the Commercial Aerospace Guide for this year, apply single digit to 10%,
Operator: Can you talk about maybe some of the moving pieces there and maybe explicitly where you are today on some of the higher...
Operator: higher volume or higher revenue programs like the A350 and to what extent we should expect for the acceleration on that program in 25 or what's embedded in the guide.
Speaker Change: Right. Well, Ken, let me take that and just walk through some of the different programs and give you a sense of what we used as the underlying assumptions for production rates for our 2025 guide.
So, starting with Boeing on the 737.
Speaker Change: We were pulling at mid 30s in terms of aircraft per month for really Q1 last year and in Q2 it dropped into the kind of 30 range and then in Q4 we were still pulling at 23.
in that range.
Speaker Change: For the 25 Outlooks, we've built in low 30s as an average ATM aircraft per month for the full year.
And the reason for that is...
Speaker Change: Bolling has said publicly they want to get back up to 38.
Speaker Change: They've got some aircraft that they're going to deliver that are out of inventory. So the production rates may be lower. We are taking into account there could be some some destocking with all the inventory that's in the system.
Speaker Change: But we feel like a low 30s number as an average is a good number for us. If it's higher, we certainly have the capacity in place, we've got the people in place, and we can meet the demand.
Speaker Change: but that's that's what we built we took a fairly conservative number in terms of building our plan for 2025 on a 3-7
Speaker Change: On the H-7, we were pulling in about seven aircraft per month for the whole year, including Q-4.
Speaker Change: And so we expect 2025 to be at about that same level in delivering, you know, somewhere in the mid-80s in terms of total number of units.
Speaker Change: And again, if it goes higher, we can support higher rates, but that's where we are for 2025 is kind of in the 6 to 7 range in mid-80s with the ability to flex. And on a 777, we're expecting 3 to 4 aircraft per month for 2025.
Speaker Change: Shifting to Airbus on the 320, we were polling at mid-50s for most of last year and right about 50 in Q4, so it did drop a little bit in Q4.
Airbus delivered, as you know, 602 units last year.
Speaker Change: which was an increase and for 2025 we're really expecting probably low 60s in terms of aircraft per month.
Speaker Change: So kind of low 700 units in terms of total delivery.
Speaker Change: On the 350, obviously we have a very big ship set value, kind of $4.5 to $5 million per ship set. We were pulling at $6.5 to $7 million for Q1 to Q3. Q4 was a little bit less.
Speaker Change: But if we look at the outlook for 2025, again we're thinking six to seven and mid-80s in terms of total units, that range.
Speaker Change: And then on the 220, where we also have content in the 200 to 500,000 range, we were pulling at kind of 9 for most of the year. It dropped a little bit in Q4. And the outlook for 2025 is we expect to be pulling at about 10 to 11.
Speaker Change: So that's how we built our plan was with those underlying assumptions. A bit conservative, but we have the ability to flex if the rates are higher because we have a capital in place, we have people in place that are trained.
Patrick Winterlich: And so, as I mentioned in my remarks and Patrick reiterated, we are fully prepared to deliver whatever our customers require from us across all of our programs in 2025.
Speaker Change: Perfect. Thanks, Tom. I appreciate all the cover. I'll pass it back there. All right. Thanks again.
Speaker Change: The next question comes from Matt Akers with Wells Fargo. Your line is open.
Speaker Change: Hey, good morning guys. Thanks for the question. Can you give us any help with kind of modeling the quarters for 2025, just how we should think about maybe a slower start to the year, ramp up in the second half, if there's any way to kind of think about that split?
The man, I would take it as the...
Speaker Change: As normal, we're on an upward ramp, frustratingly slow as we all know, but we're moving upwards, we're climbing. And so as Tom said, on the wide bodies, we're kind of moving from six to seven in 2024, kind of pushing towards seven and hopefully above it. And we'll see that trend as we move through 2025.
Speaker Change: The 320, as Tom said, sort of in the 50s and 2024 and hopefully pushing through 60 to the mid-60s in 2025 and growing as the year goes.
Speaker Change: The hardest call is the Macs coming out of the strike. Boeing are in the 20s probably right now and it's really going to be down to how well they can grow that. As Tom said, we're fully ready to support.
Speaker Change: and hopefully they push through the 30s and into the high 30s in the back end of the year. So our expectation, yes, is for some growth as the year progresses and then obviously that would position ourselves.
Speaker Change: for strength as we go into 2026 when hopefully more of the supply chain and the OEM rates continue to go up.
Speaker Change: Thanks. And then I guess within the industrial sales, I think you said it's down in 2025, what's the biggest driver there?
Speaker Change: Well, obviously pulling out Austria, which is not included in our guidance, is worth roughly $40 million. And then we're also seeing a bit of a decline, it's not massive, but a bit of a decline in automotive, which is the largest subsegment within industrial year over year.
Got it. Thank you.
Speaker Change: The next question is from Sheila Kayelu with Jeffreys. Your line is open.
Sheila Kayelu: Thank you so much and good morning. Maybe I just wanted to ask about profitability if we could talk about it for a minute.
Speaker Change: Two-part question. First, the guidance implies 20% incrementals to high 12% adjusted EBITDA margins.
Speaker Change: Tom, I don't know if you're comfortable talking about this, but how do we think about the return to high teen margins over the medium term? And just given some of the rate changes in 25 and 26 you just mentioned, how do we think about what you're capacitized in terms of hiring?
All right.
Tom Gentile: Well, if you go back to 2018-2019, that's where Hexel was, was in the high teens in terms of...
Speaker Change: of margins. And it was because we were utilizing a lot of the capacity, we were getting great operating leverage. After the pandemic, when we saw the decline in production,
Speaker Change: we've lost a little bit of that operating leverage and we're still recovering it. So last year the production was only about 68% of what it was in 2018.
Speaker Change: So we're still in the middle of the recovery and as we start to get more
in Utilities and Materials.
Speaker Change: And we have to offset that. So, I mean, we always have to run fast to stand still in this industry. But I think these inflationary pressures over the last few years have been particularly daunting.
Speaker Change: Now, we've got a lot of work to do to drive our productivity programs, that future factory that I talked about to drive productivity and efficiency will help us offset the inflationary pressures to get back to the high team in terms of margin.
Speaker Change: So we've still got a couple of years, though, before we're going to fully get back to those production rates, but in that time, we'll be driving productivity initiatives so that we can offset the inflationary pressures and get back to higher margins.
Great, thank you.
Speaker Change: The next question comes from Pete Skibitzky with Alembic Global Advisors. Your line is open.
Pete Skibitzky: Good morning, guys. Just wanted to clarify a little bit more the revenue guide. So Austria is out of guidance, but you haven't sold it yet. So will you actually report that revenue in the first quarter, even though it's not in guidance?
Pete Skibitzky: I'm sorry, maybe you can talk about the impact of the Hartford sale as well, because it sounds like that is a done deal.
Pete Skibitzky: Yeah, so we will report any sales that we achieve out of Austria because you're quite right, the sale is not closed yet. We will call out what those sales are so those would be I guess small increments to the guidance that we have provided.
Pete Skibitzky: That's the best way to manage that I think through the year. We expect it to go at some point, clearly the timing is uncertain.
Pete Skibitzky: In relation to Hartford, really de minimis level of sales, it was really a development program. We had a very small, low single-digit millions of sales.
Pete Skibitzky: negligible in the total company so more of a research development sort of program that where as we said there are better operators of that business and we've agreed a good deal on that.
Speaker Change: Okay, that's helpful. Thank you. If I could just have one follow-up. Are you guys expecting net pricing improvements in 2025? And then, you know, is there any way to quantify, you know, I don't know how big it is, but you're talking about margin headwind from this ERP implementation. I was wondering if you can quantify that.
Yeah, so we are always looking for opportunities for price.
when our contracts come due.
Speaker Change: And we have several long-term contracts, which is great, but we also have a fair number of contracts that are coming due on a regular basis, you know, maybe 20% a year.
Speaker Change: And so we did get some good price increases last year to reflect a lot of the inflationary pressures and we expect that that will continue into 2025 as well.
Your second question was regarding what?
The ERP implementation, if you can quantify that.
which will drive a lot of productivity.
the plan so it'll pay back it's just
It's a bit of a headwind this year.
Got it. Thanks, guys.
Speaker Change: The next question comes from the line of Michael Ciaramoli with Truist Securities. Your line is open.
Michael, perhaps your line is on mute.
Okay, we'll move on.
Speaker Change: Perfect. The next question comes from John McNulty with BMO Capital Markets. Your line is open.
Yeah, good morning. Thanks for taking my question.
Speaker Change: So when you look at the inflation that you saw in SG&A in 2024, which I guess is high single-digit call at 8%,
How much of that was
Speaker Change: putting people in the seats versus wage inflation, and I guess, how are you thinking about how that line grows in 2025? It sounds like you've got all the feet you need in the seats, but not necessarily. It's harder to figure out how to think about the wage inflation side of things going forward.
Speaker Change: Yeah, hi John. I mean, SG&A is a combination of things and it isn't just people. So the ERP system and implementation, some of those charges as we talked about, run through there. I think we called out previously, obviously with the Nick-Tom succession, we had some specific one-time costs this year. Those ran through SG&A.
Speaker Change: as well as, yes, I mean, we're gradually adding some heads and then you've got the merit that the labor cost increases coming through the inflation, if you like. So it's a combination of things that are really driving that year-on-year. Put that infrastructure in place.
to support the growth that we expect ahead.
So...
Speaker Change: We're managing it tightly, we're controlling it on an ongoing basis. We have, from time to time, certain one-time costs, like the CEO, which clearly was unique to 2024. The ERP was in 2024, and that will recur to some extent in 2025, as well as the underlying
Speaker Change: General inflation, if you like, merit cost increases that we normally see.
Speaker Change: And then it sounds like you've got a bit of a ramp in R&T coming up. I guess, can you help us to think about how big that could be? I guess it was, you're up about 5 million bucks a year every year in 24, but it sounds like it may be a little bit more meaningful going forward. Can you help us to think about that and what that's going towards? Maybe one way to look at it is,
Speaker Change: It's about 3% of revenue right now, which is a little bit up from where it's been historically. But that's a number that we think is a good number that will allow us to make sure we're driving innovation on not only our fibers and our resin systems and our...
Speaker Change: production technique, but to really make sure that we're developing the material systems for the next generation. So maybe the easiest way to think about it is we're going to be in the 3% range for R&T in order to fund the level of development that's required for the next generation.
Got it. Thanks very much for the call.
Thank you.
Miles Walton: The next question comes from Miles Walton with Wolf Research. Your line is open.
Miles Walton: Thanks, good morning. First, maybe a follow-up question to Pete's question on the implied growth within commercial aerospace.
Miles Walton: for 25. In that 10%, is the volume growth maybe something closer to 5-7% and the rest is gross pricing?
Miles Walton: The majority is volume miles, which is then topped up by some pricing.
Miles Walton: Okay. All right. Tom, on the capital deployment strategy you have, and as it evolves, there is no stock repurchase in the quarter. I'm curious if that signals to us.
Miles Walton: how you're thinking about the availability of this inorganic growth you put into the press release for the first time.
Miles Walton: And if I could just clarify, as it relates to what's in scope and not in scope on your M&A strategy, is it fair to think that structures and composite manufacture of structures is not within your scope?
Miles Walton: That's correct, we're really not looking at structures. We're really focused on advanced material science.
Miles Walton: In terms of capital deployment, let me just go backwards in terms of your questions.
Miles Walton: You asked about Q4. Really I mean Q4 wasn't signaling anything other than we had done 250 million or so of share repurchases during 2024.
Miles Walton: and so that was obviously higher than our cash flow for the year so
We didn't do any further in.
Miles Walton: But we do have $235 million still left on our authorization, and we do intend to do some this year as we go through the year. We put M&A in as a topic just because, as we think of capital allocation,
Miles Walton: At the same time, we do want to start to look at things that would leverage our material science expertise inorganically.
Miles Walton: things that are aligned strategically to the direction that we want to go and that also meet our return thresholds and if something comes up we will look at it very very closely.
Miles Walton: Absent that, absent an inorganic opportunity, we will continue with our share repurchases and you saw that we did increase our dividend again this year from $15,000.
Miles Walton: So that's how we think of the capital allocation strategy overall. But again, to reiterate, we're not interested in structures. We're more interested in advanced material science for things that we consider for inorganic growth.
Okay, thank you.
Thanks.
Miles Walton: The next question is from Gavin Parsons with UBS. Your line is open.
Thanks, morning guys.
Good morning, again.
Miles Walton: Really appreciate all the build rate color. That's really helpful. You mentioned having some buffer for max destock in there. Is there any consideration for that in some of the other programs or maybe is that already in those build rates?
Miles Walton: Well, max is the one where we think it's the most relevant just because the build rates have been all over, bowling is going up, there's still a lot of inventory in the system, so that was the one we really probably were more conscious about. The others, you know, our rates have been more or less ticking along with the rates of the OEMs.
Miles Walton: So it wasn't much of a factor, but MAPS is still a bit of a special situation.
Speaker Change: That's helpful. And it sounds like maybe due to some of those metrics you talked about, margins are a little more second half weighted, but when do you expect to get back to maybe a more normal incremental margin drop through on revenue growth?
Speaker Change: Right, well I mean I would say that the the situation really requires the operating leverage that will come through from revenue. So when production rates get back to where they were in the 2018 level and our revenues are up at that level, that's when we can start to see some more normalized margins.
Speaker Change: And as I said, you know, that's probably 26, perhaps even into 27. It gives us time to work on our productivity initiatives, our future factory initiative to drive productivity, to offset some of the inflation that we see.
Speaker Change: The next question comes from the line of Michael Charmoli with TruSecurities. Your line is open.
Speaker Change: Hey, good morning guys. Can you hear me now? Apologies for before.
Speaker Change: Patrick, just on exchange rates, it seems like the Trump administration powers that be might want a weaker dollar. Just given where we are now, does it make sense to change the hedging philosophy, to extend that to a more longer term, to kind of lock in these?
current rates where we're basically at parity with the euro.
Speaker Change: Yeah, I mean it's an interesting question Mike. I think it's a little bit premature for us to do
Speaker Change: in terms of changing our policy right now. We will obviously be vigilant. We always are.
Speaker Change: horizon hedging policy, which is quite a long horizon already, and that's quite a substantial amount of hedging in terms of the total dollars involved. So to extend out further would be
Speaker Change: a lot. But I understand your point. A strong dollar is good for Hexel, that's the way our cost base in Europe rolls up. So, good question. We will stay vigilant, no plans imminently to change anything.
Speaker Change: Got it, got it. And just if I may, Tom, I think you said you might engage defense primes more directly. You know, what would be different in the strategy there going forward versus what you've historically done?
Thanks.
Speaker Change: Right, well I think historically we sometimes operated through intermediaries or partners as opposed to dealing directly with the defense practice.
and John Cardozo.
particularly as it relates to material systems.
Speaker Change: so that we can feed, if you will, Hexel material throughout the program. So that's what we meant by it.
Got it. Helpful. Thanks, guys. Appreciate it.
Speaker Change: The next question is from Scott Duschel with Deutsche Bank. Your line is open. Hey, good morning. Tom, just to clarify, has Boeing restarted issuing purchase orders for products where they had previously halted purchase orders during the strike?
Speaker Change: The answer, yes, we're shipping again from all of our plants that supply Bowen.
Speaker Change: As I said, even in Q4 on the 7th Recon, we're still...
Speaker Change: It's pulling in the low 20s, so it was mainly engine focus, engine focus, right, but okay. For products that go on airframes, is that broadly restarted though?
Yeah, at a low level, yeah.
Speaker Change: Okay, thank you. And then, Tom, it looks like your A through 50 build rate assumptions are a bit higher than what Airbus itself is signaling to the street and what consensus is expecting there. Just curious if you could talk a bit about why you're comfortable tending to ship to and guide to this healthier rate.
Thank you.
Speaker Change: Well, you know, of course we will be guided by what Airbus finally puts out. It's just these are the assumptions that we put in for the for the year. As I said, you know, between six and seven, pushing up to seven as the year goes on. And...
Speaker Change: That's generally in line with what Airbus has been indicating. They will, of course, clarify when they present in February. But the one thing they've reiterated is they're still on track for 12 aircraft per month by 2028. So it's just a question of what's the ramp curve.
when they
Speaker Change: and Scott, you always have to remember we're about four to six months ahead of Airbus's assembly so we're always going to be a little bit higher in terms of the amount of material we ship relative to the planes that they sell.
Understood. Thank you.
Speaker Change: The next question comes from David Strauss with Barclays. Your line is open.
Speaker Change: A follow-up question on currency. You called out that it was a 40 BIP tailwind to margins in 2024. What kind of further tailwind is it in 2025 and 2026 based on where your hedge rates are?
Speaker Change: Well, I can't answer that until I know what the actual rates are. So, I mean, we're well positioned and hedged coming into the year, but obviously the hedge and the benefit we have will depend on the actual rates because we're not 100% hedged.
Speaker Change: We can't predict ahead. All I will say is we're well positioned.
Speaker Change: Can you maybe give us what was your average rate in 2024 on the Euro?
Oh, um!
Speaker Change: No, we'll come back to you. I don't want to make up a number. I don't want to make up a number, David.
Speaker Change: Okay and Patrick I think in terms of your cash progression through the year typically Q1 is a is a usage of cash should we expect the same thing this year?
Patrick Winterlich: Yes, I mean the profile of cash usage will be more, excuse me, more or less the same. We had a fantastic fourth quarter the way we closed out the year. I mean, compliments to the team.
Speaker Change: great income and really good work in capital management that tends to reverse in the first quarter and then after the first quarter We're then trying to drive ourselves back to to a positive situation
Thanks very much.
Speaker Change: The next question comes from Richard Safran of Seaport Research Partners. Your line is open.
Richard Safran: Good morning. I dropped off for a bit, so if you answered this, I'll move on. You're coming off some fairly high level of growth in 24 for business and regional JETS. I thought you might talk a little bit more about business and regional JETS and growth trends in 25. And I'm assuming that you're going to see more of a contribution from DeSoto in 25. Is that correct?
Richard Safran: Yes, we have great packages on the DeSoto 10X in particular and so as that program gets into low rate production and then full rate production it will be a good generator of revenue for us.
Just a second question.
Richard Safran: So, you know, you guys have been pretty clear in the release and in your commentary about the
ongoing challenges in the OEM supply chain.
So...
Richard Safran: As an industry observer and speaking generally, I want to know if you could comment on how you think about progress being made to eliminate supply chain issues, and if you have an expectation that we're going to exit 2025 with most, if not all the supply chain issues behind us.
Richard Safran: It's been evolutionary, and certainly it's taken longer than everybody expected for the recovery. Part of it is that production rates have remained low, and that's put pressure on the supply chain in terms of cash conversion.
Richard Safran: Obviously, inflation was a bigger problem in the 22-23 time period. Labor shortages have kind of persisted, but I think those are getting under control. People have now hired the people, they've trained them.
Richard Safran: So the answer is, I do expect that 25 is gonna be better than 24, not completely fully stable, the recovery is not gonna completely happen in 25. And so in 26, you'll get even more stability. So yes, it's improving.
Cut
The labor shortages have mitigated.
People are in place, and they're getting trained.
Richard Safran: Some of the attrition is going down, so we're certainly seeing that.
Richard Safran: So I expect we'll definitely be in a better place by the end of 2025.
Thanks very much.
Richard Safran: Yeah, if I can just jump in on the call there to answer David's question, it was 1.08, a dollar and eight to the euro was our average rate. So if David's still on the line, there you go.
Speaker Change: The next question comes from Scott Mikes of Melius Research. Your line is open.
Speaker Change: Tom, I think most would agree that without changes in scope clauses, regional jets are probably going to be less relevant going forward. So Embraer may need to launch a clean sheet aircraft to challenge Boeing and Airbus. So I'm just wondering if you had any preliminary discussions with Embraer about a potential clean sheet narrowbody aircraft that could enter service in the 2030s?
the thought that they could introduce a new neural body.
There's certainly plenty of demand for that sort of thing.
Okay, and then given potential concerns about tariffs...
Speaker Change: Could that impact your ability or cost to acquire some of the precursor chemicals that you need? And are you actively accelerating purchase orders to suppliers to preempt any tariffs?
Speaker Change: No, I mean, so on this point, we've obviously been watching this very closely. Excel buys about 95% of its material, direct material, and...
sourcing activity from the U.S., Europe, and Japan.
Speaker Change: for higher tariffs. And with regard to acrylonitrile, which is the basis for our pan, all of the acrylonitrile we use in the U.S. comes from U.S. sources. All the acrylonitrile we use in Europe comes from European sources. So there is no cross-border trade in that major raw material for us.
Speaker Change: Okay, and then one quick question for Patrick. I think you have a union negotiation coming up in September. Just wondering, is that factored into the guidance and part of the conservatism on the incremental margin?
Speaker Change: We believe we're going to find a mutual agreement, a mutual agreement and successful outcome.
Okay, thanks for taking the questions.
Speaker Change: The next question comes from Jack Ayers of TD Cowan. Your line is open.
Hey, guys. Good morning.
What? Um.
Speaker Change: Yeah, really appreciate all the color here from from both of you guys just just
more high-level, and I know you're not giving...
Speaker Change: long-term guidance. Tom, I think you guys kind of backed away from that last quarter, but just at like a very high level, you know, Hexcel did $3.50 in earnings in 2019, guiding to, you know, almost $4 in earnings for 2020 before COVID.
Speaker Change: with much higher build rates to all our points here. I just wanted to like back up and see like.
Speaker Change: Is there anything changing, like, structurally, like, maybe wind is, you know, structurally down, but, like, any moving pieces to that $3.50 in earnings, you know, as we get out there and production rates go higher, just so we can kind of get a sense for normalized earnings power. Thanks so much.
Speaker Change: Well, I think the key is operating leverage, and it has to do with build rates that drive revenue, and it allows us to essentially absorb more of the cost in terms of production.
Speaker Change: So, again, as we get back to those 2018-2019 levels of production, that will create the operating leverage that will drive the margin and the earnings.
Speaker Change: And that'll be the biggest driver. I mean, we'll continue to drive all of our efficiency initiatives, our future factory initiatives, but the biggest thing is going to be the recovery in the production rate. In 2024, production was only 68% of what it was in 2018.
Speaker Change: As that recovers back up to 100%, that's when we will get back to our full margin and earning potential.
Speaker Change: Just to clarify, I think the 68% is the industry production level that Tom's alluding to. Hexel is closer to about 80% as compared to
Speaker Change: 2019 levels, and just on the structural change, I mean fundamentally we're still a carbon fiber, resin, honeycomb, engineered core business.
Speaker Change: And so fundamentally it hasn't shifted, and taking out the glass prepreg wind business, if anything, will be a very marginal small benefit to us.
Okay, thanks. Appreciate it, guys.
Speaker Change: We have time for one last question. It will come from Ron Epstein of Bank of America. Your line is open.
Ron Epstein: Hey, good morning, guys. Just a quick one. With the expansion of the 787 facility down in South Carolina, what kind of opportunity does that bring along for you guys?
Speaker Change: Well, the 787 is a good program for us. Our ship set value is between $1 and $2 million on it.
Speaker Change: The expansion, as I understand it, will allow them to go from kind of a historic rate of seven aircraft per month to size 12.
Speaker Change: And that obviously would be great for the industry, it'd be great for Hexel, because it's a good shift that value. So I think that was very encouraging to see that they're making that investment and that they are gonna be increasing the capacity.
Speaker Change: Because the 787 is a very popular aircraft and it's a very good program for Hexel and for many others in the industry.
Great, thank you.
Thanks guys.
Speaker Change: Thank you. This concludes today's conference call. We thank you for joining. You may now disconnect your lines.
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