Q1 2025 Hexcel Corp Earnings Call
Krista: Ladies and gentlemen, thank you for standing by. My name is Krista and I will be your conference operator today.
Krista: At this time, I would like to welcome everyone to Hexcel First Quarter 2025 earnings conference call All lines have been placed on mute to prevent any background noise
Krista: After the speaker's remarks, there will be a question and answer session.
Krista: If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad
Krista: And if you'd like to withdraw your question, press star one again.
Speaker Change: Thank you, and I would now like to turn the conference over to Patrick Winterlich, Chief Executive Officer, you may begin
Speaker Change: Hi, Chris. Thank you. Hello, everyone. Welcome to Hexcel Corporation's First Quarter 2025 earnings conference call. Before beginning, let me cover the formalities.
Speaker Change: I want to remind everyone about the safe harbor provisions related to any forward-looking statements we may make during the course of this course.
Speaker Change: Certain statements contained in this call may constitute forward a statement within the meaning of the private security of the Education Reform Act.
of 1995.
Speaker Change: They involve estimates, assumptions, judgments, and uncertainties caused by a variety of factors that, of course, future actual results or outcomes differ materially from our forward-looking statements today.
Speaker Change: Such factors are detailed in the company's FEC filing and earnings release.
Speaker Change: A replay of this call will be available on the Investor Relations page of our website. Mark Lee, this call is being recorded by Hexcel Corporation and is copyrighted material.
Speaker Change: It cannot be recorded or re-broadcast without our express permission. Your participation on this call constitutes your consent for that request.
Speaker Change: With me today, I'm Tom Gentile, I'm Chairman, CEO and President, and Curve Goddard, our Vice President and Investor Relations [inaudible]
Speaker Change: The purpose of the call is to review our first call to 2025 results, details, and unusually issued yesterday
Now, let me turn the coil over to Thomas [inaudible]
Tom Gentile: Thanks, Patrick. Hello, everyone, and thank you for joining us today as we discuss our 2025 first quarter results.
Speaker Change: Hexcel's value proposition is strong. We have a broad and unrivaled product range of lightweight, innovative aerospace composites protected by robust intellectual property as well as considerable know-how game from decades of experience. [inaudible]
Speaker Change: That position texts out extremely well with the expanding demand for advanced lightweight composites and aerospace and defense as the industry continues its recovery from the COVID-19 pandemic and returns to higher production rates across all commercial and military programs.
Speaker Change: We are well positioned with sole source life of program contracts across a large number of commercial aircraft programs.
Speaker Change: Hexcel will benefit as Airbus and Boeing increased production in the coming years to address their significant backlogs.
Speaker Change: Taking the ship set values by program that we disclose, and the peak build rate announced by Airbus and Boeing for key platforms. There is roughly half a billion dollars of incremental annual sales.
Speaker Change: from existing contracts ahead of Hexcel, when compared to our 2024 sales.
Speaker Change: For example, the A350 is Hexcel's largest program with a ship set value between $4.5 and $5 million.
Speaker Change: Airbus delivered 57 H-350 aircraft in 2024 and recently reiterated that they still expect to achieve 12 aircraft per month for the H-350 by 2028.
which will result in approximately 132 delivery. [inaudible]
Speaker Change: This is business we already have contracted as production rate ramp in the future for the A350 and other Airbus and Boeing commercial program.
Speaker Change: In terms of defense, we see significant opportunities as well as the U.S. and European governments look to increase spending. We are U.S. domicile and vertically integrated to support U.S. defense production with existing positions on most current military programs that use lightweight composite materials. [inaudible]
Speaker Change: We also have deep relationships with European defense contractors and a strong vertically integrated manufacturing presence in Europe to support our overseas defense customers.
Speaker Change: Our ability to generate cash, combined with our conservative financial policy, underscores Hexcel solid balance sheet.
Speaker Change: As sales grow over time and our capital expenditures remain subdued, as we have already invested in the plant equipment necessary to support higher production rates, the multi-year cash generation profile of Hexcel is compelling [inaudible]
Speaker Change: Based on the value we perceive in Hexcel Common Stock, and our confidence in the future cash generation potential of business, we utilize $50 million to repurchase shares of Common Stock in the first quarter [inaudible]
We have additional authorization to purchase a further $185 million.
Speaker Change: We also addressed a pending debt maturity by refinancing a $300 million fixed rate note that was maturing later this year's at Attractive Interstrate Spreads.
Speaker Change: As a reminder, we are changing how we report sales by market and we'll now report two markets, commercial aerospace and defense space and other, which is the market that now includes our industrial business.
Speaker Change: This industrial business will consist primarily of performance-oriented automotive sales once we conclude the legislature of our Wind and Recreation Focus facility in Austria, which we expect to be later in Q2.
Speaker Change: Looking at our financial results for the first quarter of 2025, we generate sales of $457 million and adjusted deluded EPS of 37 cents.
Speaker Change: 2025 is turning out to be another year in which production rate increases for commercial aircraft will not meet initial expectation due to ongoing supply chain disruption.
Speaker Change: Commercial Aerospace Sales in the first quarter of 2025 were $280.1 million down to 6.3% on a casting currency basis from the same period in 2024.
Speaker Change: Lower sales year-over-year were primarily due to the Boeing 787 and the 737 maps. However, this was partially offset by a 7.1% increase in other commercial aerospace from international domain.
Speaker Change: To share some additional color, Mursel Aerospace Sales were abnormally on a sequential basis.
Speaker Change: Airbus A350, A320, and A220 all increased sequentially as did other commercial aerospace. Volume 737 max sales were unchanged sequentially.
Speaker Change: consistent with our expectations whereas the Boeing 787 sales were significantly lower.
Speaker Change: In defense space and other, sales were 176.4 million, up 2.7% in counts and currency from the same period in 2024
Speaker Change: In defense and space, we realized sales growth of 3.3% in constant currency compared to Q1 of 2024.
Speaker Change: The Black Hawk, classified programs, a number of space programs, and an international fighter program.
Speaker Change: This continues growth underscores the capabilities and values Hexcel brings to the defense market, particularly our vertically integrated capabilities for both US and European defense programs [inaudible]
Speaker Change: Within Industrial, we had growth year-over-year and automotive, offset by further deterioration in wind and recreation remains top.
Speaker Change: With lower than expected sales volume in our commercial business, we now see 2025 as the year where we need to remain focused on the fundamentals of our business and controlling costs as we navigate reductions in your term demand for commercial aerospace programs.
including the H350. [inaudible]
Speaker Change: Our gross margin of 22.4% for the first quarter, down from 25% in the same period last year, was negatively impacted by lower operating leverage from the lower sales fines [inaudible]
Speaker Change: Additionally, we experienced a power outage in January at our Decada, Alabama facility which disrupted our manufacturer, Pant, the precursor element for our carbon fiber production line.
Speaker Change: This resulted in additional expense to restart production of the facility, which is now complete and the plant is once again operating efficiently [inaudible]
Speaker Change: With respect to hiring, we are carefully managing any additional increase in headcount to ensure we do not get ahead of the revised production levels of our customers while maintaining our ability to support future rate ramps.
Speaker Change: Our current head count is about 300 heads or 5% lower than where our annual plan forecasted from the end of March.
Speaker Change: For 2025 overall, we expect to run significantly both below our previous plan for your end headcount.
Speaker Change: The Hexcel team is actively managing cost reduction and cash by driving material use efficiencies, minimizing discretionary spend, revisiting planned capital expenditures, and optimizing our sales inventory and operations planning to right size working capital.
Speaker Change: Before I move into guidance, I want to address the issue of tariff [inaudible]
Speaker Change: The situation remains fluid as US policy continues to evolve. We have a cross-functional team analyzing the potential impact and our strategy to manage tariffs.
Speaker Change: As a reminder of what I shared earlier this year, residents in a Krillin Nitral are two of our top purchases.
Speaker Change: and we source these regionally to support local production, both in the US and in Europe .
Speaker Change: To illustrate further, over 85% of our 2024 spin was in the US in five European countries where we have the vast majority of our assets, employees and productions.
Speaker Change: I share these figures to provide some perspective on the potential direct tariff impacts on Hexcel [inaudible]
Speaker Change: Further, our total combined purchases from Canada, Mexico, and China were only just above 1% of our total 2024 spend, so we source very little from those three countries that have been specifically targeted for tariffs.
Speaker Change: There was no impact from tariffs in the first quarter results as the new U.S. tariffs were not announced until April and due to the fluid situation and uncertainty with tariffs, our guidance does not include any tariff impact or potential impact from tariffs enacted after March 31, 2025.
Speaker Change: We do not know what the indirect impact that tariffs could have on other parts of the aerospace supply chain in OEM production rate collapse.
Speaker Change: Additionally, we continue to streamline our footprint, to minimize our costs, and position the business for future, stronger margin.
Speaker Change: In Q1, we completed the divestiture of our 3D printing facility in Hartburg, Connecticut, and we continue to work on the divestiture of our Neumark Austria site, which primarily supplies the wind and recreation market.
Speaker Change: In addition, we are continuing the evaluation of our Balachem facility which makes engineered core.
Speaker Change: We announced our 2025 guidance this past January . Subsequently, Airbus significantly revised their land forecast with substantially lowered 8350 production in 2025.
Speaker Change: We built our plan in 25 with an assumption of 84 H350 material ship set.
Speaker Change: We now expect this to be around 68 material ship sets in 2025.
Speaker Change: This lower A350 production is a primary driver for revising our 2025 guidance downward as we have significant ships that value on the A350 of between 4.5 and $5 million per ship set. [inaudible]
Speaker Change: Patrick will go into more detail on the revised guidance in his remarks [inaudible]
Speaker Change: Despite these near-term headwinds that we have in 2025, Hexcel is well-positioned to generate significant future cash flows as a commercial OEM's ramp-up production when we are aligned and focused to grow in other markets, such as defense and space, where we continue to see opportunities to expand.
Speaker Change: Before turning it over to Patrick, I would like to thank again our customer Emberier for the recognition of the hard work the Hexcel team does every day in producing high quality parts that are delivered on time. We are honored and humbled to receive the best supplier of the year award for Emberier for their materials category.
Speaker Change: I was at the Embryer Headquarters last week in Sao Paulo to accept this prestigious honor. I'd also like to thank and congratulate our customer Gulf Stream retaining certification of their G800 large cabin business jet. [inaudible]
Speaker Change: is quite an amazing aircraft and utilizes our lightweight composite material extensively. Now let me turn it over to Patrick to provide some more details on the numbers. Patrick?
Patrick Winterlich: Thank you, Tom. As a reminder, regarding foreign exchange exposure, Hexcel benefits from a strong dollar. We continue to hedge foreign exchange exposure over a ten quarter time horizon.
Patrick Winterlich: The year-of-year comparison I will provide are in constant currency with thereby removed the foreign exchange impact that failed.
Patrick Winterlich: The commercial air space market represented approximately 61% of total first quarter 2025 sales for $456.5 million.
Patrick Winterlich: First quarter commercial aerospace sales of $200.1 million decreased 6.3% to the first quarter of 2024.
Patrick Winterlich: The overall aerospace supply chain continues to recover in fixed and start, leading to delayed rate ramps across our commercial aerospace customers.
Patrick Winterlich: Boeing 787 sales declined meaningfully year-over-year, Matt sales remained low as Excess Inventory is consumed consistent with our expectation as we lag-bowing ramp-raise.
Patrick Winterlich: Airbus A350 sales declined modestly year over year or less than the equivalents of one half of one ship staff.
Patrick Winterlich: Sales for other commercial aerospace in the first quarter increased 7.1 percent year over year, led by strength from a few of our international customers.
Patrick Winterlich: The newly designated market of defense based another represented approximately 39% of the first quarter sales and total of $176.4 million, increasing 2.7% from the same period in 2024.
Patrick Winterlich: Within this market, defense and space grew 3.3% with growth both domestically and internationally.
Patrick Winterlich: Barotapra, the CH-53K and Black Hawk programs through year over year, partially offset by declining
Patrick Winterlich: A Pew Space Program strove additional growth as is an international fighter program.
Patrick Winterlich: Industrial, increased in automotive, tempers by lower wind and recreation sales.
Patrick Winterlich: Much of our industrial business is with European customers, as illustrated by sales being down year over year from a weakening dollar, whereas on a constant currency basis, sales were phenomenally up.
Patrick Winterlich: Growth margin of 22.4% in the first quarter of 2025 deteriorates the year-over-year from the negative impact of lower operating leverage, a vendor quality issue in our engineer product segments, as well as a generally unfavorable sales mix. [inaudible]
Patrick Winterlich: In addition, a rare powerhouse is that Isaac Cater Alabama facility costed us between $2 and $3 million.
Patrick Winterlich: Tom said in his remarks that the case of plant operations were restored quickly.
Patrick Winterlich: As a percentage of sales, selling general and administrative expenses and R&T expenses were 12.5% in the first quarter of 2025.
Patrick Winterlich: Compared to 13.6% in the comparable prior year periods with the year-over-year reduction primarily reflecting lower employee costs, including lower stock-based compensation charges.
Patrick Winterlich: Adjusted operating income in the first quarter was $45.3 million or 9.9% of sales compared to $54.1 million or $11.5% of sales in a comparable prior year period.
Patrick Winterlich: The year-over-year impact of exchange rates in the first quarter to operating income was favourable by approximately 60 basis.
Patrick Winterlich: Now turning to our two segments, the constant material segment represented 80% of total first quarter sales, and adjusting for non-recurring charges generated an adjusted operating margin
Patrick Winterlich: This compares to an adjusted operating margin of 16 cents in the prior year period.
Patrick Winterlich: The Engineers' Product Pregment, which is comprised of our structures and engineers' core businesses.
Patrick Winterlich: represented 20% of total sales and generated an adjusted operating margin of 6.8%.
Patrick Winterlich: Discompared to an adjusted operating margin of 14.3% in the prior period. As previously mentioned, a vendor quality issue and poor sales mix impracted the engineer court segment,
Patrick Winterlich: Net cash used by operating activities in the first quarter of 2025 with $28.5 million.
Patrick Winterlich: Compared to a use of $7 million in the first quarter of 2024 [inaudible]
Patrick Winterlich: Working Castle with the cashews of $97.7 million in the first quarter of 2025, compared to a cashews of $84.5 million in the first quarter of 2024.
Patrick Winterlich: Capitol expenditure is on an accrual basis with $17.1 million in the first quarter of 2025, compared to $18.6 million in the comparable prior year periods.
Patrick Winterlich: Three cash flow in the first quarter of 2025 was negative $54.6 million, which compares to a negative $35.7 million in the first quarter of 2024. We typically see cash use in the first quarter of the year, and this year was no difference.
Patrick Winterlich: Adjusted EBITDA, totaled $84.8 million in the first quarter of 2025, compared to $98.2 million in 24.
Patrick Winterlich: During the first quarter, we refinanced a $300 million fixed rate note that was maturing later this year.
Patrick Winterlich: The transaction was significantly over-subscribed, and we had said it achieved good interest rate spread. Demonstrating Hexcel's strong credit profile [inaudible]
Patrick Winterlich: We are pleased to have removed this refinancing as a potential race. Our net debt maturity is not until 2027.
Patrick Winterlich: We use $50.4 million to recurse his stock during the first quarter, the remaining authorisation under the share recurse's programme as of March 31, 2025, with $184.5 million.
Patrick Winterlich: The Board of Directors declared a 17 cent quarterly dividend yesterday. The dividend is payable to stockholders of record as of May 2nd with a payment date of May 9th [inaudible]
Patrick Winterlich: Expanding on comments regarding the year and our guidance revision, 2025 is going to be another transition year for the commercial aerospace industry and for our commercial aerospace business.
Patrick Winterlich: So in recognition of this, we are pivoting and managing the business for the realities of today. We are focusing on strong control of operating costs.
and Pikeley Managing Hector. [inaudible]
Patrick Winterlich: For the 2025 sales guidance, we reduced the midpoint by $85 million. Most of this sales reduction is attributable to Airbus Cutting, the 2025 demand for A350 materials.
Patrick Winterlich: For 2025 we expect 8350 sales to be lower than 2024, which is decreased to be particularly noticeable in the second and third quarters 2025 [inaudible]
Patrick Winterlich: There was also a reduction in the A320 build rate for 2025 compared to our original assumptions.
Patrick Winterlich: There are a few other areas of softness, including the Boeing 787 and automotive [inaudible]
Patrick Winterlich: Much of our automotive business is with European based high performance automotive manufacturers that import their automobiles into the US, where any additional tariffs are likely to have a significant impact.
Patrick Winterlich: Bymarket 2025 commercial estate sales, and now expected to be unchanged or flat compared to 2024, as are 2025 sales to defend space and others.
Patrick Winterlich: Lower sales negatively impact cost absorption, resulting in margin deterioration and the downward revision to adjusted E.P.F. guidance.
Patrick Winterlich: The midpoint spot UPS guidance is now 20 cents lower.
Patrick Winterlich: Three cash flow guidance is now expected to be around $119 million.
Patrick Winterlich: Note also that our guidance excludes any further sales from Neumar,
Patrick Winterlich: from the Neumont Austria Facility, which we are continuing to work towards diverse things.
Patrick Winterlich: Sales for Austria were originally assumed to be approximately $40 million for the year.
Patrick Winterlich: And just a repeat, our guidance did not include the impact of any new tariffs announced after March 31st, 2025 due to the fluid and uncertain nature of tariffs globally.
With that, let me turn the call back to Tom. [inaudible]
Tom Gentile: Thanks Patrick. In my annual letter to shareholders, I outlined three key strategies for Hexcel this year.
Tom Gentile: Deliver, Innovate, and Grow that are central to what's navigating the current challenges and positioning Hexcel for the future.
Tom Gentile: We are focused on operational excellence, ensuring we meet production schedules, maintaining high quality, and upholding our commitment to the safety of our employees as we deliver on our commitments to our customers
Tom Gentile: While we do this, we have been streamlining our footprint to position Hexcel for higher margins and to the future.
Tom Gentile: We are innovating through our investments in research and technology to develop new materials and processes that will drive the next generation of aerospace and defense products.
Tom Gentile: We will grow as build rates increase in existing programs to address historically high levels of backlogs and as we pursue opportunities in the median term in markets including defense and space regional business jets and a beach all aircraft. [inaudible]
Tom Gentile: Long return growth will come from the next generation narrow body aircraft and propulsion that will incorporate increasingly more lightweight composite material.
Tom Gentile: as the only US-owned maker of lightweight carbon fiber composite used extensively in all of the top commercial and military programs.
Tom Gentile: Hexcel is well positioned to benefit from the continued recovery from the COVID-19 pandemic and the increase in production rates across all programs. As we move forward, I'm confident in our team's ability to navigate the challenges and seize the opportunities ahead to deliver strong and meaningful cash flows over the coming years and to generate strong shareholder returns.
Tom Gentile: We appreciate your continued engagement with us today. Operator, we're now ready to take questions.
Tom Gentile: Thank you. We will now begin the question and answer session.
Speaker Change: If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue [inaudible]
Tom Gentile: And if you'd like to withdraw your question, again, press star 1.
Speaker Change: We do ask that you limit yourself to one question in one follow up. [inaudible]
Speaker Change: Thank you. Your first question comes from Sheila Kahyaoglu, with Jeffries, please go ahead.
Good morning, Tom Patrick. Thank you so much.
Speaker Change: Popular topic today, so on tariffs, Tom, you talked about it a little bit, and Patrick, you noted 4 million per quarter [inaudible]
Speaker Change: You know, how do we think about your overall tariff impact and what your base assumption would be if you were to include it into guidance on that 4 million and how you think about profitability in Q1 9.9% margins they expand 200 or 250 basis points, depending on whether you include tariff. [inaudible]
Speaker Change: on Flatish Sales in the next three quarters. So what drives that margin improvement?
Speaker Change: Well, let me just start with the tariffs as we said as we've gone through and analyzed our total spend and just matched it to the tariffs currently in effect for each country.
Speaker Change: We came out with with that impact of three or four million dollars per quarter [inaudible]
as I mentioned in my prepared remarks.
Speaker Change: Most of what we buy in the U.S. is U.S. source and most of what we buy in Europe for production is source in Europe . So there's not a lot of cross-border flow and as I also mentioned, the amount that we buy from China, Canada and Mexico is only a little bit over 1%. [inaudible]
Speaker Change: So the direct impact is fairly minimal. It's, as I said, three or four million dollars. And while that's a big number, that's the number that we can offset over the course of the year with our productivity. The productivity can improve.
But we didn't include it in our guidance because...
Speaker Change: There's a lot of uncertainty as to what the final tariffs will be by country and also probably more importantly is what's the indirect impact of tariffs going to be on the rest of the aerospace supply chain and on production rates at the OEM. That's something that we just can't determine at this point. And so we didn't want to try to guess. And so we've left that out of our guidance. [inaudible]
Speaker Change: The margin that you mentioned for first quarter was depressed primarily because the revenue was lower than we expected and we didn't get the kind of operating leverage that we expected. As you know, we've peaked in production back in 2019.
Speaker Change: We have all the capital and equipment in place to support much higher levels of production, and we're only about 80% recovered back to those levels. So we're not getting the operating leverage, we didn't get it in Q1, and that's why we saw the depressed operating one.
about it. Thank you very much.
Speaker Change: Your next question comes from the line of Michael Ciarmoli with Truist. Please go ahead.
Michael Ciaramoli: Hey, good afternoon, guys. Thanks for taking the question. Just to follow up on what Sheila was asking on the tariff, lots of uncertainty. Do you have any levers to pull in terms of pricing as a potential offset versus or in addition to productivity?
Michael Ciaramoli: Well, what I would say, Mike, is that we have in our contracts in our inco-term.
Michael Ciaramoli: Most of them, for example out of Europe , are ex-works, and so the buyer is responsible for the tariffs, and so they would get passed on to the buyer in that case.
Michael Ciaramoli: In addition, we have a lot of contracts which are essentially passports [inaudible]
Michael Ciaramoli: and so for some of our bigger items, like Krillin Nitrile or some of our paper for our core contracts are set up so that we can pass through costs including tariffs. So that creates a little bit of a natural hedge for us.
Michael Ciaramoli: and that most of our aerospace contracts are fixed for the period of time that they're in effect, and so that doesn't offer the contract opportunity for raising Christ, but as I said, most of our ankle terms out of Europe .
Michael Ciaramoli: Our X-Works, and so the tariff is responsibility of the buyer, and we can for some of our bitter commodities pass through the price, including tariffs to the customer.
Speaker Change: Okay, perfect. And then maybe on the flip side, is there an opportunity to potentially gain some domestic share if these tariffs are making composites from other global suppliers more expensive? I mean, is that kind of in the realm of your thought process right now?
Speaker Change: It's a possibility, but of course it depends on what the impact of the air is on those foreign sources. And at this point I would say it's still uncertain.
Speaker Change: Okay, got it. I'll jump back in the cube. Thanks, guys. Thanks.
Miles Walton: Your next question comes from the line of Myles Walton with Wolf Research. Please go ahead
Hey, good morning. You have Lurifetto on from Myles
Hi, Mark. Hi.
Miles Walton: You called out the low production rates in the A350 as a driver, main driver of the revised guidance, I'm just curious is this the rates flattening are you actually seeing any destocking there?
Well, what we're saying is... [inaudible]
Miles Walton: In terms of what we're going to deliver is a reduction of about 16 units. So in January when we had our call for the fourth quarter, I mentioned that we built our plan around an assumption that we would deliver 84 shifts sets of material to Airbus in 2025.
Miles Walton: What we're seeing right now is a demand for about 68 units.
Miles Walton: And so if you just take a look at the midpoint of our ship set amount, which is $4.5 to $5 million, 16 times the $4.75 million is $76 million.
Miles Walton: So our revenue guidance dropped from midpoints by $85 million, 76 million of that, is due just simply to the reduction that we've seen in the 8353 production rate.
Miles Walton: As Patrick said, we've also seen a reduction in the A320 of about 30 units [inaudible]
Miles Walton: And again, if you look at the midpoint of what we said our ships at value is the $350,000, 30 units is about $10 million. So just the 835 and the 8320 reductions in what we're seeing as demand accounts for the $85 million drop in our revenue guide.
Speaker Change: I appreciate that color, Tom. And then maybe just follow up on the Corporate Expense. Usually it's a lot higher than one queue. I know you mentioned lower.com and know if anything slipped out of the quarter or should we expect some sort of flattening any reason. Corporate Expense will be up year here in the back half now.
Speaker Change: No, I mean, essentially we had one or two credits come through and there is a Stockholm difference between Nick and Tom.
Speaker Change: because of Tom's tenure with the company and so that will make a difference where Tom's costs are now going to be spread out.
Speaker Change: So it was two or three things, but the largest thing was really around the difference between Common Nick.
Siva: I'm in the other thing, kind of also picking up on something, she was dead [inaudible]
Siva: Q1 is normally our softest margin quarter because we're taking those dot-com charges, which we did again this year. They were just a little bit lower and that's what you're seeing in the lower corporate charges in 2025.
Thank you, Patrick [inaudible]
Speaker Change: Your next question comes from the line of John McNulty with BMO Capital Markets. Please go ahead.
John Mcnulty: Yeah, thanks for taking my question. Tom Historically, Hexcel has always been
John Mcnulty: Very conservative when it comes to kind of staffing and whether it pairs back, you know, for temporary changes in orders or production levels from the customers, it seems like you guys are taking a much more aggressive approach.
John Mcnulty: Is this a change in terms of how you think Hexcel should be managed as you go forward and where you're a little bit more nimble? And if not, how do you get comfortable that you can ramp up quickly enough when things start to get better? [inaudible]
John Mcnulty: I think we are taking a stronger line on in terms of aligning our headcount with what we see current production at and how we see it evolving. So that is true. We're being a little bit more, I'd say, practical and realistic in terms of where we are. Now that said
John Mcnulty: We remain very well positioned to support our customers in terms of whatever production rates they determine that they can achieve.
John Mcnulty: We have higher levels of inventory. You can see that on our balance sheet. That gives us a bit of cushion. We also have all the capital in place so that's not an issue. And we're not going to reduce head count per se, but we're just not going to increase it. [inaudible]
John Mcnulty: We've made a few reductions in Europe of contract labor. We made in one of our plans in the US, we made a small furlough but for the most part we're just not increasing and we're allowing a tradition to take place. So we're about running 300 heads below where the plan was and we'll stay that way until we see evidence that production rates will increase.
John Mcnulty: Again, with that high level of inventory, we have more than enough cushion to be able to respond to our customers. One thing I want to make very clear, we're not trying to second guess our customers on their rates and their schedule.
John Mcnulty: We are absolutely prepared to meet all of our customers and the production rates that they put out there. We're just managing our own cost base so that we are not getting ahead of them.
Speaker Change: Got it. Fair enough. No, it makes sense. And then maybe just as a follow up on the CapEx reduction, I mean, it looks like you're taking CapEx down by, you know, 10% or maybe even more than that. I guess can you, can you give us a little bit of color as to where that trimming is taking place? Yeah.
Speaker Change: It's in a whole variety of areas across dozens of projects and the fact is is if you look at Hexcel between 2008 and the A350 program up to 2018, we made massive investments to tool up for the A350 industrialization. Those investments are all behind us and we're still not using all that capacity. [inaudible]
Speaker Change: So we don't have that sort of capital expenditure and we had a hundred million dollars in the plan given that this year is soft. We've obviously sharpened the pencil and we prioritize the projects we push some things out and we were able to take ten million dollars out of the capex budget for the year but it was just through. Thank you very much.
Speaker Change: blocking and tackling on a wide variety of projects, nothing major significant, but we also don't have any big capital expenditures in front of us for capacity because all of those were made in the past.
Got it. Thanks very much for the caller.
Thank you.
Speaker Change: Your next question comes from the line of Matt Akers with Wells Fargo. Please go ahead Go ahead.
Speaker Change: Yeah, hi, this is actually Catherine Kileron for Matt this morning. So I guess back to the guys who talked about the reduction in ship shipsets on the air bus side, but could you speak to what you're seeing on the following side and what you're seeing in terms of production rights there?
Great, well, on the bowling side... [inaudible]
Speaker Change: For 737, we said that we were planning and building our plan around in assumption that they would be in the low 30s.
Speaker Change: and that's about where we still are. We haven't seen a change in that. Boeing is doing very well on their production. They're getting up and rate. They still have that cap of 38 aircraft per month. That'll be something really to watch during the course of the year is...
Speaker Change: Are they able to get approval from the FBA to go above that? But even if they get above it in the back half of the year we still think the overall average for the course of the year will be in the low third and so that hasn't changed. [inaudible]
Speaker Change: On the 7-8-7, we built our plan around an assumption of about 84 units of delivery, so roughly 7 a month.
Speaker Change: What Boeing has said is that they are delaying the increase in their rate by three to six months, so that could impact five to ten units over the course of the year, and our ships that value is $1 to $2 million, so a million and a half that could be another $7 and a half to $15 million.
Speaker Change: But those are the assumptions that we have used in terms of constructing our plants.
Speaker Change: Okay, understood. And then I guess on the F-47 and GAD and the F-A-XX, you guys have any opportunity to supply those programs in the future?
Speaker Change: Yes, we do have opportunity, it's still obviously very early, they've just been awarded, and so there have been no decisions made, but as you know, we are a supplier for the F-35 material.
and we provide the carbon fiber for that.
and and so as as
Speaker Change: Boeing and whoever wins the Navy and Gap Program decide on their material system, we will certainly have discussions with them to advocate that our material system for lightweight composite material would be very suitable for those applications. And as I mentioned before, and I think this is important in...
Speaker Change: in this context is, we're the only US-owned maker of aerospace grade carbon fiber composite.
Speaker Change: And so with everything going on in the geopolitical environment today, having a source that is owned and controlled in the US certainly has its advantages.
Thanks.
Ken Herbert: Your next question comes from the line of 10 Herbert with our BC Capital Markets. Please go ahead.
Yeah, hi, good morning, Tom and Patrick and Kurt.
Thank you.
Ken Herbert: Maybe you want to just to drill again deeper on on the eighth [inaudible]
Ken Herbert: Gay 350, if you are looking at, obviously a step down in about 16 units this year,
What's your confidence level in terms of inventory?
Ken Herbert: at Airbus Road, a customer site that that couldn't face incremental headwind if the ramp at Airbus goes a little slower than expected. I guess how much inventory do you see in the channel at your customer on this program and how much of that does the revised guide implies is worked off this year. [inaudible]
Ken Herbert: Well, I think, and what we're seeing is that there is some inventory there, and there's some de-stocking going on, which is why we built our plan where it is. So, our plan and where we built it takes into account some level of de-stocking that will occur.
Ken Herbert: So we're happening, and the thing is, is Airbus just reiterated in their in their recent annual meeting report that they are still planning to get up to 12 aircraft per month in 2028.
Ken Herbert: And so of course that means the ramp is going to be steeper now in these few years to that point but they're confident that they're going to do it and we are certain prepared to do it. So that creates enormous opportunity for us. And I would just say that on the basis of that so we're going from last year they delivered 57 aircraft.
Ken Herbert: They're going to get up to 12 aircraft per month in 2028 which is about 132 units [inaudible]
Ken Herbert: and that creates a lot of potential for Hexcel. And when you look at that in terms of our cash flow generation capability, you know, we see in expect that we could deliver a billion dollars in cash flow over the four year period between 2025 and 2028, principally on the back of that A350 ramp.
Ken Herbert: So that's why we're really so optimistic about Hexcel's position is we're on that program.
Ken Herbert: It's going to ramp up. It has been slower, frustratingly slow to ramp up, but they haven't changed their outlook for 2028. And so that gets us, as I said, a billion dollars to cash flow over the next four years. And we see that in very compelling.
Speaker Change: Yeah, thanks for that, Tom. As you look obviously at that 2028 ramp, Airbus obviously hasn't been at those levels before the A350. Is there incremental capacity you have to put into support 12 a month, assuming Airbus is eventually able to get there? [inaudible]
Speaker Change: We're absolutely capacitated, but in fact, a little bit more.
Speaker Change: That's where we capacitized in 2019. But if you look at it, if you go back to 2019, in fact, the A350 deliveries were about 111.
Speaker Change: which translates into ten a month. So, the system has generated very high levels of production. Everybody does have the capacity and it's really just a question of getting the supply chain stabilized and achieving it. But on, for Hexcel, we are absolutely capacitized to achieve those levels and even a little bit higher. [inaudible]
Speaker Change: and remember, Ken, that we're completing a fiber line that we announce pre-handemic, and that will be online in the next two to three years, which will also give us additional...
Tom Gentile: Capacity for other sort of military growth opportunities, business share, growth opportunities. So, as Tom says,
Speaker Change: We will be comfortable on the capacity of footprint for some years to come.
Great. Thank you.
Speaker Change: Your next question comes from the line of Gautam Khanna with TD Cowan. Please go ahead.
Yeah, thanks. Good morning, guys.
Speaker Change: I was wondering on the A350 given you ship, you know, well and dance the final assembly, what do you expect him? [inaudible]
By the end of this year, you'll be...
Speaker Change: shipping that for 2026. Like, what do you think they're going to get to in terms of us?
Speaker Change: What they're going to buy at what rate per month later in the year? I know you've said the impacts biggest in Q2 and Q3 on the negative side [inaudible]
but presumably it picks back up in Q4 and anticipation.
Speaker Change: of higher rates. I think some numbers are going to be higher for next year, but I certainly don't want to try to provide any guidance for 2026.
Speaker Change: at this point. We'll just stay right now, it'll be higher, and we will be prepared to support
Okay.
Speaker Change: and I know you have a number of different shift twos from the A350, 40 suppliers or so. Are they all coming down in or are you still seeing?
Speaker Change: Now it's a whole revival. You know, you can imagine 40 different supply plants are at different levels of production, but there are some plants that are actually behind.
Speaker Change: and we see quite a bit of a higher rate at those, and others maybe where they built the head a little bit, and so we're seeing a lower rate. So it really is quite variable across the, it's about 35 locations that we delivered to for the A350, but it's highly variable, but the average is what we are building our plan around, which is six-
Gautam, thank you very much.
Speaker Change: Your next question comes from the line of Scott Mikus with Melius Research. Please go ahead.
Speaker Change: Hey Tom, Patrick, quick question. You've been a very good partner to Boeing and Airbus over the years. You've also had absorbed a big inflation headwind over the past several years.
Speaker Change: In addition to just the chaotic arrow ramp, have you approached Boeing and Airbus about repricing some of these LTAs, particularly on the A350?
Speaker Change: Well, we are under contract, as you know, on all of our programs with our long-term agreements and on the bowling side they tend to be a little shorter and so when we see those
Speaker Change: and so we've been able to reach mutually satisfactory outcomes on that...
Speaker Change: On the age of 350, which is our biggest program, that goes up to 2030 with Airbus, and the pricing is lacking with some variable due to volume. But what we do there is we put in place joint productivity program. [inaudible]
Speaker Change: where they have to invest engineering resources, we put our own engineering resources in, and then we split the savings.
Speaker Change: And that's how we are able to drive productivity and improvement in those long-term contracts with Airbus.
Speaker Change: And as you said, it's very important to maintain strong relationships with our biggest customers. We want to support them. They're in a tough competitive situation.
Speaker Change: At the same time, we are in discussions with them about long-term programs, and we want to make sure that we secure positions on the long-range programs as well. So, combination of all those things, we do get price from contracts expire. For the longer-term contracts like Day 350, we work on joint productivity improvement programs where we can both benefit through our investments.
Speaker Change: Okay, and then Europe is trying to essentially rebuild its own indigenous defense industrial base. If you can't sell that Austrian facility at a reasonable price.
Speaker Change: Did you repurpose it to support growth on some of these European defense programs like the Rafale?
Speaker Change: And that really, the facility in Austria is really...
Speaker Change: Aligned better to industrial production. It's a pre-creg. So really was very good for the wind market and the recreation market when those were bigger. It's not really tailored to aerospace grade carbon fiber and the production of carbon fiber. So,
Speaker Change: No, it wouldn't help on the capacity. We have sufficient capacity in Europe .
Speaker Change: to support defense growth. And we would invest in more if the market would justify it. But that's an exciting opportunity for us and because we are indigenous in Europe with production facilities and labor in Europe , we think we're well positioned to support any increase that the European defense firms decide to take.
All right, thank you [inaudible]
Speaker Change: Your next question comes from the line of Gavin Parsons with UBS. Please go ahead.
Take guys, good afternoon.
Speaker Change: On the cost out, the head count attrition sounds like that's more just kind of aligning with the new revenue guide for the year, maybe not driving incremental efficiency on a per head basis. Just want to ask about initiatives to actually improve per head efficiency and other opportunity to take cost out of non-labor areas.
Speaker Change: We are investing quite a bit in what we call our future factory initiative and continuous improvement, so we've got dozens of lean projects across the plants.
Speaker Change: to drive efficiency and take cost out to improve unicost.
Speaker Change: So that's really the mechanism's basic blocking and tackling at the plant at very defined levels.
Speaker Change: to take cost out to improve the short-term productivity. Longer term, we're looking at digitization and automation and new ways of structuring our production flow that will take even additional cost out. [inaudible]
Speaker Change: and reduced the capital that's required for production. But in the short term, it's just dozens of continuous improvement projects with lean and six-sigma manufacturing that will take cost out and create efficiency.
Speaker Change: There's just no shortcut to it. You just have to grind away at it. [inaudible]
Speaker Change: Got it. And just a clarification of the tariff impact, the three to four million per quarter would be inclusive of reciprocals.
Tom Gentile: No, no, that would be the, as Tom called out, that would really just be the direct impact that we can sort of sensibly estimate today. I mean, when you get into indirect impacts and reciprocal tariffs
Tom Gentile: Then you're in another realm of assumption, so the three to four million is our kind of ring fencing giving a magnitude around sort of the direct impact that we can see today.
Tom Gentile: I think that highlights how fluid this situation is. We don't know what the tariffs are going to be by individual country. We don't know if there will be reciprocal. So, what we've done is analyzed what we know.
Tom Gentile: We verify country what the direct impact is and that's the three to four million. Other things are speculative and will remain to be seen as the situation continues to evolve.
Tom Gentile: I'm even the three-four million handsome speculation in it because we don't know where the talents are going to tackle.
Chris, it's a tentable ballpark. [inaudible]
Thank you
David Strauss: Your next question comes from the line of David Strauss with Barclays. Please go ahead.
Thanks. Yep.
David Strauss: We've obviously seen a pretty big weakening in the US dollar, and I know that's a negative, I know you're hedged out, but Patrick made me give some color around how that could potentially impact as you look to hedge going forward.
David Strauss: Well, our hedging profile will continue as we've done for many years, and that's protecting us to a significant degree today, and I think in this quarter you saw what effects were actually a headwind for us given our tailwind, I should say, given our hedges that were in place.
David Strauss: Now obviously if the dollar stays weak for any sort of extended period of time, ultimately new headdoons will reflect that weak dollar position.
David Strauss: and in 12 months' time, our average FX rate will be weaker and so yes. So we will manage it appropriately as we've done for many years, but certainly through 2025, given our previous hedging profile, we're in a good position.
David Strauss: Okay, and it looks like your updated guidance reflects, you know, 11 and a half to 12% I think margins for the full year is that is that right?
Thank you.
David Strauss: Okay, and how should we expect that to kind of ramp from here? Do we have the typical seasonal Q3 slowdown for lower margins? [inaudible]
David Strauss: Well, as we said, Q1 is often the weakest quarter of the year because of the dot-com charges that was mitigated this quarter by some slightly lower corporate expenses going through the end of the year.
So the volume leverage, and therefore...
David Strauss: Yes, I would expect the margin ultimately to get stronger as the year goes on. We know we have the European vacations which can impact you three anyway, so yes, we would expect a strong sort of improvement in margins as we come to the end of the year and we see higher volumes going into 26.
All right, thanks very much.
Scott Duchelle: Our final question comes from Scott Duschle with Deutsche Bank. Please go ahead.
Scott Duchelle: Patrick, sorry if I missed this, but did you lower your guidance assumptions on 787 at all to reflect the softer start there in the first quarter?
Scott Duchelle: We do have slightly, I mean we called out the 350 and the 320, those are really the driver of the 85 million, and then what I would say is we have some puts and takes, and so within the puts and takes the 787 is down, whereas some of our defense business is up to offset it, so it's down a bit but not massively, and it's more than offset, so really...
Scott Duchelle: The Tom Calls out, the 315, the 320, explain the revenue guidance you've done. Right, and the adjustment on 787 is really just due to the delay of three or six months that's following signals on the production run.
Scott Duchelle: Okay, is there a current level of purchase order activity supporting that ramp back up on 787?
Scott Duchelle: Well, we saw a softer Q1. Now we'll obviously see what we do for the remainder of the year, but we're expecting them to kind of somewhere in the 70s for the full year. Reflecting that push out at Tom's post.
Okay, thank you.
Speaker Change: And ladies and gentlemen, that does conclude today's conference call. Thank you for your participation and you may now disconnect and connect.