Hexcel Corporation (NYSE:HXL) Q4 2023 Earnings Call Transcript

Hexcel Corporation (NYSE:HXL) Q4 2023 Earnings Call Transcript January 25, 2024

Hexcel Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hexcel Fourth Quarter 2023 Earnings Conference Call. Today’s conference is being recorded. All lines have been place on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Patrick Winterlich, Chief Financial Officer. Please go ahead, sir.

Patrick Winterlich: Thank you, Audra. Good morning, everyone. Welcome to Hexcel Corporation’s fourth quarter and full year 2023 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. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. Such factors are detailed in the company’s SEC filings and last night’s news release.

A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexcel Corporation 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. With me today are Nick Stanage, our Chairman, CEO and President; and Kurt Goddard, our Vice President of Investor Relations. The purpose of the call is to review our fourth quarter and full year 2023 results detailed in our news release issued yesterday. Now let me turn the call over to Nick.

Nick Stanage: Thanks, Patrick. Good morning, everyone, and thank you for joining us today as we share our fourth quarter and full year 2023 results. Hexcel completed another solid year, with double-digit sales growth, a significant year-over-year increase in our adjusted earnings per share and strong cash generation. Although, supply chain challenges, limited build rates in a number of programs from increasing as fast as we expected when 2023 began, most notably narrowbody aircraft. We continue to focus on ensuring operational readiness for the expected growth ahead. This involves training new labor across our manufacturing sites, driving operational excellence programs for yield and efficiency gains, and bringing assets online for the expected increase in demand.

All these efforts will position Hexcel to maximize our margin opportunity in the coming years as build rates ramp upwards. We continue to emphasize investing in employee training as we increase head count in advance of program ramps. We now have around 5,600 employees who continue to gain experience and are ready and eager for the challenge ahead. In fact, even though about one-third of our direct labor workforce has less than two years of experience with Hexcel, we just completed our safest year on record. This is an outstanding achievement, and I commend every member of our One Hexcel team for their diligence and commitment and taking the necessary steps to ensure that they and their colleagues go home injury-free every day. When you couple our legacy and lightweight products and long-term customer collaborations, with a talented team driven by innovation and excellence in everything we do, it is clear that Hexcel is well positioned to benefit as the aerospace market strengthens.

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Q&A Session

Many reports now show a rebound in passenger air travel to pre-pandemic levels was achieved at the end of 2023. Hexcel advanced composite materials are squarely at the center of this recovery and are benefiting the industry and society by enabling enhanced sustainability for decades to come. Now let’s turn to some specifics reported in our earnings release last night. First, I’ll cover the fourth quarter results and then full year 2023. Fourth quarter sales of roughly $457 million are 6.5% higher than Q4 2022. Adjusted diluted EPS in the fourth quarter was $0.43, up 7.5% compared to last year. Turning to our three markets. Commercial Aerospace fourth quarter sales of more than $267 million represented an increase of more than 5% in constant currency on increasing widebody sales, partially offset by lower narrowbody sales year-over-year.

Other commercial aerospace increased modestly in the fourth quarter of 2023 led by continued growth in business jets. Our customers continue to ramp as fast as the complex supply chains can support. There’s tremendous backlog demand for narrowbody aircraft and the OEMs continue to work to maximize their output. The widebody supply chain is ramping up robustly, and we benefited with strong sales growth in 2023, in both the Airbus A350 and Boeing 787 programs, and we expect this growth to continue in 2024. We were pleased to see at the end of 2023, the first Airbus A321 rollout from the new final assembly line that Airbus configured in France at the former site of the A380 assembly. Airbus now has 10 final assembly lines globally for the A320 family to support their rate ramp.

Now for some highlights from the quarter. With the tallest and widest cabin in business aviation, the Dassault Falcon 6X entered service on November 30, following a two-year certification achieved in August. We have great content on this new 6X platform. We’re also looking forward to Dassault’s introduction of the large cabin 10X, which will be the first business jet with an all-composite wing made from Hexcel materials, where we will see another significant step-up in business jet content. As you may remember from previous discussions, at the end of 2021, Hexcel transferred a significant portion of our fabrication work from our Kent Washington site to Aerospace Composites Malaysia, ACM, our 50-50 joint venture with Boeing, as we shifted toward higher complexity advanced part manufacturing at Kent.

Following this transition, we determined that our ownership in the ACM JV was no longer strategic for Hexcel, and as a result, we sold our 50% interest to Boeing at the end of December. The ACM joint venture with Boeing has been a tremendous business collaboration for many years, and we thank Boeing for being an excellent JV partner, going back to the inception of the ACM plant over 20 years ago. We now wish Boeing and the ACM team great success for the future. Moving to Space & Defense. Sales in this segment hit an all-time high in Q4, exceeding $152 million or an increase of about 20% year-over-year. Growth has been particularly strong in both Space and in classified programs. Industrial sales of just under $38 million in Q4 were down 22% year-over-year in constant currency.

Year-over-year, high-level comparisons, however, masked the growing strength in our automotive and marine markets. While our Industrial business is now smaller than it has been for some years, it remains an attractive market where we are pursuing multiple value-adding technology opportunities in a number of different submarkets. Now let’s turn to our full year 2023 results. Sales were about $1.79 billion, up 13% year-over-year. Adjusted diluted EPS for the year was $1.81, up more than 41% over 2022. Adjusted operating income increased 33% to $216.7 million or 12.1% of sales. Commercial Aerospace is now 60% of our total sales. And in 2023, sales of more than $1 billion represented an increase of 17%, with growth led by widebody sales, as demand for fuel-efficient and lightweight composite aircraft, especially for international travel continues to be strong.

Other Commercial Aerospace increased 14.1% for the full year of 2023 compared to the same period in 2022, driven by increasing composite adoption on large cabin business jets. 2023 Space & Defense sales of about $545 million increased almost 17% in constant currency for the full year compared to 2022. This segment represented 30% of our total sales. Growth in 2023 was across numerous programs, including fixed wing and space programs globally and helicopters in Europe and Asia Pacific. Hexcel composites are the benchmark in this market, and our products are on more than 100 programs around the world, which provides us with a diversified foundation for a strong future. Finally, Industrial sales in 2023 were $176 million, representing a decrease of approximately 13% in constant currency.