So to answer your question, Ken, it would have an effect, but it wouldn’t have negated the seasonality and the lower demand.
Ken Herbert: Okay. And I guess, I mean, you seem to be on a fairly nice trajectory when we look at the gross margins. We can appreciate the seasonality. But was there anything else that maybe deteriorated in the quarter as you think about maybe costs in Europe or logistics or other aspects of the supply chain that maybe push you to see sort of greater inefficiency or maybe take a more sort of cautious view on sort of your own pull forward of cost to support future rate ramp?
Patrick Winterlich: I mean, absolutely nothing to make us more cautious on the future opportunity and the future ramp. Now obviously, we’re cognizant of what’s happening with the narrowbodies and the challenges that Nick talked to in that space. I think they’re well known. And obviously, we are ready to support both Airbus and Boeing as they move the 320 and the MAX rates up, and we are certainly ready to do that, and we will not be causing any delays. In terms of the cost, it’s really about the overhead base and the overhead leverage ability. Given the volume of sales, there isn’t anything specific I would call out on the cost front. It’s as I was saying to Matt, it’s really about that gradual buildup in our infrastructure, in our workforce ready for the clear growth ahead.
And we are not going to be late for that. And so aligning those two things is never perfect. And so our cost base is perhaps just a little bit ahead of the sales growth, but we’re going to be ready. And when that comes, we will generate the margins, and we will generate the cash.
Ken Herbert: Great. Alright. Well, thank you very much.
Operator: We’ll go next now to Myles Walton at of Wolfe Research.
Myles Walton : Good morning. Patrick or Nick, I’m not sure, but maybe just to clarify, was the margin performance in the quarter about as you expected? And then maybe just looking forward, Nick, you’re talking about the growth that you’re sort of building towards, is it still fair to think about a double-digit growth into next year? And then the margin profile of getting to mid-teens at $2 billion in sales, is that still on the table?
Patrick Winterlich: Yes. So the margin in Q3 was close to what we expected, yes, because we probably saw the seasonal sales, or we recognized it perhaps more than it was externally recognized. So the margins were not a long way off what we expected, perhaps a little bit softer, but not a lot. Looking forward, over the next couple of years, we see strong double-digit growth for a couple of years now in front of us, with 2025 getting sort of back to where 2019 was. That should be the expectation out there. In terms of the mid-teens margins, we’re strongly going to be pushing for that, and we will get there once we line up our cost base with the right level of sales. We’ve got to do the training. We’ve got to have the infrastructure, but our ability to get to mid-teens once the revenue comes, and once — I mean we should be able to push past it ultimately is what I’m trying to say, Myles, back to where we were.
We — that’s not going to happen tomorrow, but that’s definitely the target on the table, and we’re not taking that away.
Myles Walton: Got it. And just clarifying on the industrial side, I’ve always thought that as that business as being lower margins than the core. But it might be getting to a point where the margins — the sales are so low that it’s actually a net drag on profit. Can you just give us a color of the profitability of the Industrial business at this point in composite materials?
Nick Stanage: So I’ll take a shot at, first, splitting it and let’s talk about wind for a minute. And again, remember, the wind technology transitioned to a lower technology and one that we chose not to pursue. And that resulted in us restructuring in North America as well as China. So we’re serving the wind market out of our facility in Austria and supporting Vestas and a couple of other small ones. Remember, wind is less than 2% expected of Hexcel’s total revenue this year. And it is at a lower margin, a lower cost to serve, a decent return on invested capital, but a lower margin profile. On the balance of the industrial, the automotive, the select areas that we find niches to introduce our technology and differentiated solutions, the margin really is not dilutive to Hexcel.
And perhaps in some of those high-end automotive and niche applications, when we do fall off on sales a little bit because of inflationary recessionary pressures on rec or winter sports or some of those other markets, it could have a slight dilutive effect on the margins.
Myles Walton: Okay. Thank you.
Operator: We’ll go next now to Gavin Parsons at UBS.
Gavin Parsons: Hey, good morning. Can you guys hear me?
Patrick Winterlich: Good morning.
Nick Stanage: We can.
Gavin Parsons: Thank you. Sorry for the tech issues. Apologies if I missed this, but can you talk a little bit about how much the capacity step-up is what growth rates you kind of hired ahead for there? And how much of the double-digit top line revenue growth is now already in the cost base?
Nick Stanage: Well, first, we’re continuing to bring up assets, just to roughly calibrate, you think of 2019 of us as us running close to capacity, we’d never be at 100%, but think of mid-90%s. And if you think about our ratio of sales today to where we were then, think of our assets being utilized at about 75%. That will give you a good proxy for where we are with respect to utilization. Some plants, that means we have some lines still down. Some plants that may mean we have a line up, but aren’t running it at 100% of capacity, meaning we may have more positions that we could turn on, which make it much less efficient, but the right thing to do so that we don’t overbuild inventory and to optimize our cash position going forward.
So from an asset base, in the fiber specifically, we have brought in a lot of assets, a lot of resources over the last 3 to 6 months. And that fibers is one of the big drivers within Hexcel from a cash, from a profitability generation. And there, I’m not going to say we don’t have to add a few people, but basically, most of our lines are running now where we see them for the next 6, 12, maybe even a little bit longer. So we feel like we’re in a great position there. Other plants depends on the technology, whether it’s prepreg or blending or core engineered products, there may be select adds here and there. But overall, we’re entering — we’re going to enter 2024 in a very strong position to deliver on that demand.
Gavin Parsons: Great. I appreciate that detail. And then on buybacks, is your anticipation there that as your cash flow strengthens, you’ll do something regular? Or was that an opportunistic purchase in the quarter?
Nick Stanage: Well, we constantly look at our capital structure. And we’re back into the range where we like to operate our net debt leverage ratio in the 1.8 region. So we review that with the Board on a regular basis with respect to what opportunities are there for collaborations, what areas do we have with respect to internal investment? And then what’s our opportunities with respect to dividend strategy and share buyback? So it really was an opportunity for us to undilute what we issued in 2023. Clearly, given our leverage position and our increased cash flow forecast, we’re going to be looking at that much more actively going forward.
Gavin Parsons: Thank you.
Nick Stanage: You’re welcome.
Operator: We’ll go next now to Peter Skibitski at Alembic Global.
Pete Skibitski: Yes, good morning, guys. I just wonder if you could kind of give us a sense of your outlook for Space and Defense as we head into next year because the last couple of quarters, you’ve been running really strongly there, and the trends seem pretty positive. You got CH-53K coming through the pipeline pretty good there. Can you grow — I mean you may be up double digits this year in Space & Defense, I’m wondering if you can do it again next year. Thanks.
Patrick Winterlich: Yes. I mean, we’ve stepped up. I mean I think last quarter was a record quarter, all-time record quarter for Space & Defense with the seasonality. We came off that a little bit in the third quarter, but we’ve seen sustained strength in that market. And we’ve really had a couple of years with very high, very strong growth. Now it depends what time frame you’re looking at. I mean if you kind of look over the next 2 to 3 years, we’re going to see a lot of growth over that period. The F-35 for us still has room to grow. The CH-53K is going to grow substantially. There are European programs, which is strong, and we’re across such a broad range with the military budgets moving the direction they are. Now I’m not going to say it’s going to be double digits every year, but over the two, three years, Space & Defense is going to continue to be a very strong sector for Hexcel, and I’m [technical difficulty] in further growth.
