Release Date: July 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Hexcel Corp (HXL, Financial) reported second-quarter sales of $500 million, up more than 10% year over year.
- Commercial aerospace sales grew more than 21% year over year, reflecting strong market performance.
- EPS for Q2 2024 was $0.6, a 20% improvement compared to Q2 2023.
- Hexcel Corp (HXL) repurchased around $200 million of its stock in the first half of 2024, demonstrating strong capital allocation.
- The company maintains a positive midterm outlook for commercial aerospace, with expectations of increased production rates from Airbus and Boeing over the coming years.
Negative Points
- Hexcel Corp (HXL) revised its 2024 guidance downward due to softer market conditions, with sales now expected to be $1.9 billion to $1.98 billion.
- Adjusted diluted earnings per share guidance was lowered to $2.02 to $2.18, down from the previous $2.10 to $2.30.
- Free cash flow guidance was adjusted to around $200 million, previously expected to be greater than $200 million.
- Challenges in the aerospace supply chain and slowing production rate increases from key customers like Airbus and Boeing are impacting near-term performance.
- The company anticipates sales and earnings in the second half of 2024 to be similar to the first half, indicating no expected growth in the latter part of the year.
Q & A Highlights
Q: Tom, congratulations. How do we think about profit given 13% in the second half as you just said? And consensus is embedding about 250 basis points expansion in '25 or about 25% EBIT growth. How do we think about that margin expansion if volumes don't materialize, especially given that Hexcel is carrying 20% more head count per plane versus pre-pandemic levels?
A: Well, I think you highlighted the operating leverage that we have as we continue to recover and revenues go up back toward the 2019 level that drives an incredible amount of operating leverage to absorb fixed costs and improve margins. Since we expect that the second half of '24 is going to be similar to the first half, the margins, therefore, will be similar as well. But as the production rates continue to increase and revenues increase next year and beyond, that's when we'll start to see the operating leverage kick in and margins really increase. So we're not changing our outlook for the midterm that we outlined at the February Investor Day, which simply just trimmed the guidance for the second half of this year based on some communications, particularly the one from Airbus on June 24.
Q: It seemed to be that Airbus's contribution commentary is more focused on the 320 and even the 330 or 220 than the 350 at the time. Did the Leonardo pause on the 787 for the composite fuselage have a material contributor to the change in the outlook?
A: It was really all of the above and we took a look at a lot of the demand signals that were see in the market, both from Airbus and Boeing as well as some of the other customers. On the June 24 Airbus announcement, they really weren't specific in the actual release about which programs that impacted. They said it was all programs, and that was reiterated in some of their commentary afterwards. We do understand that the A350 would be impacted, and it's more along the lines of the rate increases that we expected later this year, may be pushed out or delayed. And that's what we took into account as we made some of our decisions about trimming the guidance. We also looked at the deliveries that both Airbus and Boeing reported for Q2. And we took into account some of the other announcements like the one that Leonardo made that you just referenced. So it was all of that. We took into account where we felt it was just more prudent to be more conservative and have a more cautious outlook for the second half of this year.
Q: Are you embedding more conservative assumptions than what you're being told to absorb further deterioration if any?
A: I think we're just being realistic based on what we're seeing in RemX. We're not trying to be conservative or aggressive. It's just being realistic with the outlook. The guidance change that we made was really more trimming it to align to what we're seeing. We've obviously got all the capital in place for higher levels of production. And we have the staffing in place to what we were originally forecasting. So yes, the supply chain does stabilize better in the second half. And things are better than we'll look for upside. But we're being realistic in terms of what the outlook is. And we are prepared in terms of our capital in our staffing for whatever the customer requirements are.
Q: Last quarter, Nick mentioned what rate you guys thought you were on the 787 and likewise on the 737. Would you mind refreshing us on where you are right now? Are still at 5 a month and low 30s?
A: In the MAX, yes, we're still pulling really right now in the low 30s. On the 787, it's been in the [5% or 6%] range. We're obviously continuing to monitor the outlook and the demand signals that we get from our customer. And we're staying closely lined out. We're literally in conversations every day with our customers on all the programs, and we're staying very closely aligned to what their demand and their outlook is. But yes, that continues to be the same case this quarter as it was last quarter for the MAX 737.
Q: On the guidance revision that you provided today, is this more just anticipation of that which will be conveyed to you at some point or is that, as you mentioned, just may be just reflective of Airbus?
A: It's reflective of everything that we're seeing in the market and also the demand signals that we're getting from both of our customers. After the Airbus announcement, they have given us some indication of what the back half of the year will look like. And we are staying very aligned to them in terms of what will happen now. It's important to also reiterate that our delivery system is quite complex. So for example, on the MAX we delivered a 30-plus locations, on the A320 over 80 locations, and on the A350, more than 75 locations. So all of those might have a slightly different demand signal in the second half. We're looking at the totality of it, though, as we make our determination for our guidance book. We feel that, again, based on what we're seeing and hearing that a more cautious outlook for the second half is prudent and realistic.
Q: If we look at the guide you gave, if we look at the midpoint of that 1.94, it assumes $485 million in sales per quarter for the rest of the year, which would be a step down from the second quarter. So is that just looking at mix across the programs and assuming the growth you were starting to get ready for in the second quarter moderates?
A: Well, what I would say is we expect the second half to look very similar to the first half, and that's at about the midpoint if you double it. So as Patrick just said, we're not expecting any decreases necessarily. We're just expecting things to remain flat and for potential increases not to materialize until later.
Q: Could you give us a little more color? I think it was helpful, the walk that you did there in terms of talking about the F-35 and the V-22. But you had seen six consecutive quarters of double-digit growth and that's stepped down to 1%. Is that expected to step back up there?
A: Yeah, the midterm outlook is still the same. We're still very bullish on defense. I think Q2 was just a bit lumpy. If you look at the first half of the year, it's still up by 6%, which is very good, solid growth. And by the way, that's solid growth over 17% last year. So defense is going just fine. There were a couple of programs that had some ups and downs in the quarter. But overall, defense and space are going to be a very strong segment for Hexcel going forward.
Q: As you go through some of these facility tours, where do you
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
