Hexcel Corporation (NYSE:HXL) Q4 2024 Earnings Call Transcript

Hexcel Corporation (NYSE:HXL) Q4 2024 Earnings Call Transcript January 23, 2025

Operator: Hello and welcome to the Hexcel Fourth Quarter and Full Year 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator instructions] I would now like to turn the conference over to Patrick Winterlich, Chief Financial Officer. You may begin.

Patrick Winterlich: Thanks, Sarah. Good morning, everyone. Welcome to Hexcel 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. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Security 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 earnings 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 in its 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 Tom Gentile, 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 2024 results, detailed 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. Hexcel 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. I am confident in this team’s ability to deliver on current commitments and drive advanced composite material innovation for our future with lighter, more sustainable aircraft and capture new growth opportunities. Our 2024 fourth quarter and full year results underscore the robust operational performance Hexcel has demonstrated throughout what was another challenging year for the aerospace industry. 2024 was again a year of disruption for the commercial aviation industry as supply chain and labor challenges persisted for the OEMs and suppliers.

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. 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. The underlying demand for Hexcel advanced composite materials remains very strong. 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 with sales of $1.903 billion, a 6.4% increase over 2023, adjusted EPS of $2.03 and free cash flow of $203 million. Hexcel’s fourth quarter sales were $474 million, a 4% increase year-over-year in constant currency.

Solid performance in commercial aerospace and space and defense drove higher sales volumes, partially offset by weaker industrial sales. Adjusted EPS for the quarter was $0.52, a nearly 21% increase over Q4 2023. Commercial aerospace 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. 787, A350 and A320neo all increased in 2024, whereas the 737 MAX decreased as Boeing worked through a number of issues. The other commercial aerospace category increased 6.7% on strength in regional jets. 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.

The V-22 was the top five program in 2023, but as the program winds down V-22 sales did not even reach the top ten in 2024 for Hexcel, declining as we expected. The industrial market remains a challenge. In the fourth quarter industrial sales decreased 14.8% and weakness in all of the submarkets except for recreation. For the year industrial sales decreased 21.1%. Given the soft industrial performance during 2024 we announced that we will be divesting our Neumarkt, Austria site, which is focused on wind and industrial applications for glass fiber. Going forward, we will still pursue industrial business opportunities, but we’ll focus more on niche value add applications, which use our existing aerospace production plant and equipment. Connected to the Neumarkt divestiture, we have taken one-time non-cash charges in this quarter’s results, which Patrick will describe in more detail shortly.

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. 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. We also announced that we have formally initiated a project to review our Welkenraedt, Belgium plant which supplies engineered core. 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. Looking out over the next decade, we see three broad phases that will define Hexcel’s growth. 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.

Hexcel has the capacity to support the OEM announced peak rates even as some of these peak rates exceed pre-pandemic levels. We expect to generate strong free cash flow during this period as we grow into our existing capacity and capital expenditure remains at a lower level. I am confident in our team’s ability to execute on this ramp up. Since I joined Hexcel, I visited about three quarters of the company’s sites, meeting with hundreds of Hexcel colleagues. The Hexcel workforce is continuing to drive efficiency and quality, positioning our factories for the future and continually prioritizing worker safety. 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.

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 textile’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, and we look forward to engaging defense clients more directly as well as pursuing R&T funding opportunities with U.S. Government research labs to support Hexcel’s value proposition. We have additional organic growth potential across regional and business jets, emerging eVTOL markets and with new aircraft that will soon enter production such as the Boeing 777X and the Falcon 10X from Dassault.

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 threshold. Our core expertise revolves around carbon fiber and resin systems, honeycomb and then the engineering of honeycomb into highly advanced shaped and difficult to engineer specialty aircraft parts. These advanced materials, along with other adjacent material science technologies, are the type of inorganic growth that we will be evaluating. Longer term growth for Hexcel will come from the launch of next generation commercial and defense aircraft, as well as the development of new propulsion systems. 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 OEM, even though entry into service will likely be after 2,030.

Our current innovation efforts are focused on developing materials for these future platforms. 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. These production techniques will include improvements in layup rates, period time and nondestructive inspection. We’re also driving what we call our Future Factory initiatives, 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; 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.

Looking forward, we issued 2025 guidance in our earnings release issued last night. We are forecasting 2025 sales between $1.95 billion $2.05 billion. Adjusted earnings per share between $2.05 and $2.25. And free cash flow greater than $220 million. When we provide guidance, our objective is to provide realistic estimates that align with our understanding of the market. Remember that we provide chipset 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. Because of the continued start, stop, start production environment, uncertainty remains in relation to the outlook for our 2025 performance. Sales growth may be impacted by potential delays to the recovery in production rates.

As we enter 2025, 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. 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 cost headwinds will dampen margins to some extent until we achieve further sales recovery to drive the considerable operating leverage opportunity that is in front of us. Since I started in this role in May, I continue to be impressed by the team here at Hexcel. As compelling as our technology is, it is our people who truly make a difference for Hexcel and for our customers. Although the industry faces another challenging year in 2025, Hexcel is positioned for growth and cash generation as we leverage our exceptional team, our intellectual property and our operational capabilities.

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, Hexcel benefits from a strong dollar. We continue to hedge foreign exchange exposure over a ten-quarter time horizon. The year-over-year sales comparisons I will provide are in constant currency, which thereby removes the foreign exchange impact of sales. The commercial aerospace market represented approximately 59% of total fourth quarter sales of $473.8 million. Fourth quarter commercial aerospace sales of $278.3 million increased 4.6% compared to the fourth quarter of 2023. Various industry issues, including OEM supply chain challenges and labor strikes at customers muted Hexcel sales growth. The Boeing 787 and Airbus A320neo grew modestly year-over-year, while Boeing 737 MAX sales were down with fourth quarter sales being primarily for the LEAP 1-B and nacelle.

Sales for other commercial aerospace in the fourth quarter increased 9.5% year-over-year led by regional jets. To share some further perspective on our commercial aerospace business for the full year, wide-body sales comprised just under 40% of 2024 commercial aerospace sales. Narrow-body sales were just over 30% and the legacy commercial aircraft were 10%. And finally, other commercial aerospace, including business and regional aircraft, grew 20%. Business jet comprised largest submarket within this category. While business jet sales are higher than pre-pandemic levels, 2024 business jet sales were flat compared to 2023. Space & Defense represented approximately 34% of fourth quarter sales and totaled $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. For fiscal year 2024, approximately 35% Space & Defense sales were outside of the U.S. 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. Industrial comprised only 7% of fourth quarter 2024 sales and totaled $32.2 million, decreasing 14.8% compared to the fourth quarter of 2023. We experienced softness across all the submarkets, except for recreation. For the full year, Industrial sales were down 21.1%, declining more than forecasted. Higher financing costs and growing competition from Chinese automakers negatively impacted the performance automotive category of industrial to a much greater degree than we had suspected, particularly the Western European auto companies.

Wind continued its multiyear decline, decreasing 37% year-over-year, whereas we were forecasting flattish of an already low base, other submarkets also decreased. Gross margin of 25% in the fourth quarter of 2024 favorably compared to the prior year period gross margin of 22.5% as higher sales drove operating leverage combined with strong operational execution. As a percentage of sales, selling, general and administrative expenses and R&T expenses were 13% in the fourth quarter 2024, compared to 11.8% in the comparable prior year period. Higher R&T expenses to support innovation for future programs, partially account for the increase. Other operating expenses in the fourth quarter of 2024, consisted of noncash impairment and restructuring charges, primarily related to the pending divestment of the Neumarkt, Austria, glass fiber, prepreg industrial operations as previously disclosed.

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. The year-over-year impact of exchange rates in the fourth quarter to operating income was favorable by approximately 60 basis points. Now turning to our two segments. The Composite Materials segment represented 79% of total fourth quarter sales and adjusting for nonrecurring charges generated an adjusted operating margin of 15.3%. This compares to an adjusted operating margin of 14.7% in the prior year period. The Engineered Products 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%.

This compares to an adjusted operating margin of 9.6% in the prior year period. Net cash provided by operating activities in 2024 was $289.9 million, compared to $257.1 million in 2023. Working capital was a cash use of $0.8 million in 2024 compared to a use of $27.4 million in 2023. Capital expenditures on an accrual basis were $81.1 million in 2024 compared to $121.6 million in the comparable prior year period. Recall that in 2023, we purchased the land and building for our Amesbury, Massachusetts operation for approximately $38 million. Free cash flow in 2024 was $202.9 million, which compares to $148.9 million in 2023. Increased volume, robust working capital management, and tightly managed capital expenditures supported the higher level of cash generation.

Adjusted EBITDA totaled $382.3 million in 2024, compared to $362.4 million in 2023. We operate long lived assets, which explains why our depreciation expense has been well above our capital expenditures for a number of years. We did not repurchase any stock during the fourth quarter. In total, for fiscal year 2024, we used $252.2 million to repurchase stock. The remaining authorization under the share repurchase program as of December 31, 2024 was $234.9 million. 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 7 with a payment date of February 14. Expanding on Tom’s comments regarding our 2025 sales and adjusted EPS guidance, we are forecasting 5% sales growth at the midpoint and 6% adjusted EPS growth at the midpoint.

Hexcel has the operational capacity to support much higher demand from our customers, 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. Note also that our guidance excludes approximately $40 million of annual sales from the Neumarkt, Austria facility which we are planning to divest. In terms of our markets, we expect 2025 commercial aerospace sales to increase high-single digits as a result of the planned sale of industrial focused Austria facility, we will change our reporting by market. Beginning with the first quarter of 2025, we will report results for Commercial Aerospace and a second market titled Defense Space and other.

This market will include the remaining industrial business, which will consist primarily of performance orientated automotive sales. In 2025, we are expecting this Defense Space and other markets to be flattish as low-single digit Defense and Space growth is expected to be offset by continued softness in industrials. Tom pointed out some pressure on our margins including growing into our existing headcount and higher R&D costs as we continue to develop and innovate materials for the next generation of aircraft and propulsion platforms. Additionally, we are focused on productivity and driving operational efficiency to offset recent inflationary pressures including labor inflation. Top line growth and higher capacity utilization will ultimately be critical to driving improved overhead leverage and stronger margin performance.

As Tom referenced last quarter, we are upgrading our ERP system as this new ERP system will be cloud-based, – excuse me, accounting rules require it to be expensed rather than capitalized, placing some further short-term pressure on margins. Rounding out the guidance discussion, we expect a tax rate of 21%, Interest expense – excuse me, 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. We forecast capital expenditures to remain subdued as we grow back into existing capacity. So for 2025 and likely for the next two or three years, accrued capital expenditures are forecast to be below $100 million. This level of capital expenditure should support a cash, 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 Hexcel enters 2025, I am confident in our long-term growth and the value we will provide to our customers and shareholders. Hexcel’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.

Q&A Session

Operator: Thank you. [Operator Instructions] Thank you. Your first question comes from the line of Ken Herbert with RBC Capital Markets. Your line is open.

Ken Herbert: Yes. Hi, good morning, Tom and Patrick and Kurt.

Tom Gentile: Good morning.

Patrick Winterlich: Hey, Ken.

Ken Herbert: Hey, maybe Tom or Patrick, as you think about the commercial aerospace guide for this year, up high-single digit to 10%, can you talk about maybe some of the moving pieces there and maybe explicitly where you are today on some of the higher volume or higher revenue programs like the A350 and to what extent we should expect sort of acceleration on that program in 2025 or what’s embedded in the guide.

Tom Gentile: 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, 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 a 23 in that range. For the 2025 outlook, we built in low-30s as an average APM, aircraft per month for the full year. And the reason for that is, Boeing has said publicly they want to get back up to 38. 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 destocking with all the inventory that’s in the system. 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. But that’s what we built. We took a fairly conservative number in terms of building our plan for 2025 on the 37. On the 87, we were pulling at about seven aircraft per month for the whole year, including Q4. And so we expect 2025 to be at about that same level, delivering somewhere in the mid-80s in terms of total number of units. And again, if it goes higher, we can support higher rates, but that’s where we are for 2025 is kind of in the six to seven range and mid-80s with the ability to flex.

And on the 777, we’re expecting three to four aircraft per month for 2025. Shifting to Airbus. On the 320, we were pulling 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, which was an increase. And for 2025, we’re really expecting probably low-60s in terms of aircraft per month. So kind of low 700 units in terms of total delivery. On the 350, where obviously, we have a very big ship set value kind of $4.5 million to $5 million per ship set, we were pulling at $6.5 million to $7 million for Q1 to Q3, Q4 was a little bit less. 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.

And then on the 220, where we also have content in the 200,000 to 500,000 range, we were pulling at kind of nine 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 units per month. 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 the capital in place, we have people in place that are trained. And so as I mentioned in my remarks, Patrick reiterated, we are fully prepared to deliver whatever our customers require from us across all of our programs in 2025.

Ken Herbert: Perfect. Thanks, Tom. I appreciate all the color. I’ll pass it back there.

Tom Gentile: All right. Thanks, Ken.

Operator: The next question comes from Matt Akers with Wells Fargo. Your line is open.

Matt Akers: 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.

Patrick Winterlich: So, Matt, I would take it as the – 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 kind of moving from six to seven in 2024, kind of pushing towards seven and hopefully above it. And we’ll just see that trend as we move through 2025. The 350 is – sorry, the 320, as Tom said, sort of in the 50s in 2024 and hopefully pushing through 60s to the mid-60s in 2025 and growing as the year goes. The hardest call is the MAX 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 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 for strength as we go into 2026 when hopefully more of the supply chain and the OEM rates continue to go up.

Matt Akers: Okay, thanks. And then, I guess, within the industrial sales, I think you said, is down in 2025. What’s the biggest driver there?

Patrick Winterlich: Well, obviously pulling out Austria, is – 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 sub-segment within industrial year-over-year.

Matt Akers: Got it. Thank you.

Operator: The next question is from Sheila Kahyaoglu with Jefferies. Your line is open.

Sheila Kahyaoglu: Thank you so much and good morning. Maybe I just wanted to ask about profitability, if we could talk about it for a minute. Two part question first. The guidance implies 20% incrementals to high 12% adjusted EBITDA margins. Tom, I don’t know if you’re comfortable talking about this. But how do we think about the return to high teens margins over the medium-term? And just given some of the rates changes in 2025 and 2026 you just mentioned, how do we think about what you’re capacitized in terms of hiring.

Tom Gentile: Well, if you go back to 2018, 2019, that’s where Hexcel was, was in the high teens in terms of margin. 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, 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. So we’re still in the middle of the recovery. And as we start to get more production and more revenue, that will drive a lot of operating leverage and will help us get our margins back up to those high teens. Now, at the same time, over the last three or four years, we’ve seen a massive amount of inflation in labor, in utilities and material, 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. Now we’ve got a lot of work to do to drive our productivity programs. That future factor that I talked about to drive productivity and efficiency will help us offset the inflationary pressures to get back to the high teens in terms of margin. So we still got a couple 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.

Sheila Kahyaoglu: Great. Thank you.

Tom Gentile: Thank you.

Operator: The next question comes from Pete Skibitski with Alembic Global Advisors. Your line is open.

Pete Skibitski: Yes. 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? And then maybe you could talk about – I’m sorry, maybe you could talk about the impact of the Hartford sale as well, because it sounds like that is a done deal.

Patrick Winterlich: Yes. 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. 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. 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, but 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.

Pete Skibitski: 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 is there any way to quantify, I don’t know how big it is, but you’re talking about margin headwind from this ERP implementation. I was wondering if you could quantify that.

Tom Gentile: Yes. So we are always looking for opportunities for price when our contracts come due. 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, maybe 20% a year. 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. Now your second question was regarding what?

Pete Skibitski: The ERP implementation, if you can quantify that.

Tom Gentile: It’s in the kind of $5 million to $7 million range, it’s normal cost for implementing an ERP. It’s just – it’s hitting this year, as Patrick said, as an expense and that’s creating some headwinds. But on the flip side, it should drive a lot of productivity because at the same time we’re implementing the ERP, we’re also implementing an MES system, a manufacturing efficiency system, which will drive a lot of productivity in the plant. So it’ll pay back. It’s just – it’s a bit of a headwind this year.

Pete Skibitski: Got it. Thanks, guys.

Operator: The next question comes from the line of Michael Ciarmoli with Truist Securities. Your line is open. Michael, perhaps your line is on mute. Okay, we’ll move on.

Tom Gentile: Maybe we’ll come back to Michael later.

Operator: Perfect. The next question comes from John McNulty with BMO Capital Markets. Your line is open.

John McNulty: Yes. Good morning. Thanks for taking my question. So when you look at the inflation that you saw in SG&A in 2024, which I guess is high single digits, call it 8%. How much of that was 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.

Patrick Winterlich: Yes. 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 NICSOM [ph] succession, we had some specific onetime costs this year those ran through SG&A. 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, we’re managing it tightly. We’re controlling it on an ongoing basis.

We have some 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 general inflation, if you like, merit cost increases that we normally see.

John McNulty: Got it. Okay. 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 year-over-year in 2024, 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?

Tom Gentile: Yes. Maybe one way to look at it is, 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 production techniques, 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.

John McNulty: Got it. Thanks very much for the color.

Tom Gentile: Thank you.

Operator: The next question comes from Myles Walton with Wolfe Research. Your line is open.

Myles Walton: Thanks. Good morning. First, maybe a follow-up question to Pete’s question on the implied growth within Commercial Aerospace for 2025. In that 10%, is it is the volume growth maybe something closer to 5% to 7% and the rest is gross pricing?

Patrick Winterlich: The majority is volume miles, which is then topped up by some pricing, yes.

Myles Walton: Okay. All right. Tom, on the capital deployment strategy you have and as it evolves, there’s no stock repurchase in the quarter. Curious if that signals to us how you’re thinking about the availability of this inorganic growth you put into the press release for the first time. 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 manufacturer of structures is not within your scope?

Tom Gentile: That’s correct. We’re really not looking at structures. We’re really focused on Advanced Materials Science. In terms of capital deployment, let me just go backwards in terms of your question. 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. And so that was obviously higher than our cash flow for the year. So, we didn’t do any further in Q4, 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, we’re going to, of course, fund all of our productivity initiatives and our R&D and our innovation initiatives.

And at the same time, the organic growth initiatives like we talked about with Space and Defense or on Commercial and Regional Jets and eVTOL. At the same time, we do want to start to look at things that would leverage our material science expertise inorganically, 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. 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 $0.15 to $0.17 [ph]. 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.

Myles Walton: Okay. Thank you.

Tom Gentile: Thanks.

Operator: The next question is from Gavin Parsons with UBS. Your line is open.

Gavin Parsons: Thanks. Good morning, guys.

Tom Gentile: Good morning, Gavin.

Gavin Parsons: 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?

Tom Gentile: Well, MAX is the one where we think it’s the most relevant just because the build rates have been all over, Boeing 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, our rates have been more or less ticking along with the rates of the OEMs. So it wasn’t much of a factor. But MAX is still a bit of a special situation.

Gavin Parsons: Got it. Okay. That’s helpful. And it sounds like maybe the 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?

Tom Gentile: Right. Well, I mean, I would say that 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. And as I said, that’s probably 2026, perhaps even in 2027, it gives us time to work on our productivity initiatives, our future factory initiatives to drive productivity to offset some of the inflation levels.

Operator: The next question comes from the line of Michael Ciarmoli with Truist Securities. Your line is open.

Michael Ciarmoli: Hey, good morning, guys. Can you hear me now? Apologies for before.

Tom Gentile: Yes, we can.

Patrick Winterlich: Hey, Michael. Very nice.

Michael Ciarmoli: Good. Hey Patrick. Just on exchange rates. I mean 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?

Patrick Winterlich: Yeah. I mean it’s an interesting question, Mike. I think it’s a little bit premature for us to do anything in terms of changing our policy right now. We will obviously be vigilant, we always are. I mean, we have a 10-quarter 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 if we extend out further would be a lot. But I understand your point. A strong dollar is good for Hexcel that the way our cost base in Europe rolls up. So, good question. We will stay vigilant. No plans imminently to change anything else.

Michael Ciarmoli: Got it. Got it. And just if I may. Tom, I think you said you might engage defense primes more directly. What would be different in the strategy there going forward versus what you’ve historically done? Thanks.

Tom Gentile: Right. Well, I think historically, we sometimes operated through intermediaries or partners as opposed to dealing directly with the defense primes. Obviously, as we go forward, we want to be tighter with the defense primes and understanding what their requirements are and how our material systems could impact them. So that’s something that we are seeking to do is we’ve always had good relationships with the defense primes. What we’d like to do is strengthen those and move further upstream and get more involved in their innovation and development, particularly as it relates to material systems. So that we can see, if you will, Hexcel material throughout the program. So that’s what we meant by it.

Michael Ciarmoli: Got it. Helpful. Thanks, guys. Appreciate it.

Operator: The next question is from Scott Deuschle with Deutsche Bank. Your line is open.

Scott Deuschle: 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?

Tom Gentile: The answer – yes, we’re shipping again from all of our plants that’s by Boeing.

Scott Deuschle: Okay.

Tom Gentile: As I said, even in Q4, on the 737, we’re still pulling in the low 20s. So it was mainly engine-focused.

Patrick Winterlich: Engine-focused, you’re right.

Scott Deuschle: Okay. For products that go on airframes, is that broadly restarted, though?

Tom Gentile: Yes. That we are low level, yes.

Scott Deuschle: Okay. Thank you. And then, Tom, it looks like your A350 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.

Tom Gentile: Well, 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 year. As I said, between six and seven, pushing up to seven as the year goes on. And that’s generally in line with what Airbus has been indicating. They will, of course, clarify when they presented 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. And we’ve tried to be conservative and realistic, but we will obviously adjust to what Airbus indicates when they…

Patrick Winterlich: And Scott…

Scott Deuschle: Okay.

Patrick Winterlich: You always have to remember, we’re about four to six months ahead of Airbus’ 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.

Scott Deuschle: Understood. Thank you.

Operator: The next question comes from David Strauss with Barclays. Your line is open.

David Strauss: Thanks. A follow-up question on currency. You called out that it was a 40 bp tailwind to margins in 2024. What kind of tailwind is it – further tailwind is it in 2025 and 2026 based on where your hedge rates are?

Patrick Winterlich: 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 rate because we’re not 100% hedged. So I’d also bring in the actual FX rates, combined then with where we’re hedged and then that will be the comparison to 2024. So we’re in a good position. I will say that much. We’ve obviously locked in some of those stronger rates. But until we have the actual rate each quarter, we can’t predict ahead. All I will say is we’re well positioned.

David Strauss: Can you maybe give us what was your average rate in 2024 on the euro?

Patrick Winterlich: 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.

David Strauss: Okay. And Patrick, I think in terms of your cash progression through the year, typically Q1 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 Q4. The way we closed out the year, I mean compliments to the team, great income and really good working 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 a positive situation.

David Strauss: Thanks very much.

Operator: The next question comes from Richard Safran of Seaport Research Partners. Your line is open.

Richard Safran: Tom, Patrick, Kurt, good morning. I dropped off for a bit, so if you answered this, I’ll move on. On – you’re coming off some fairly high level of growth in 2024 for business and regional jets. I thought you might talk a little bit more about business and regional jets growth trends in 2025? And I’m assuming that you’re going to see more of a contribution from Dassault in 2025; is that correct?

Tom Gentile: Yes. We are – we have great packages on the Dassault Falcon 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.

Richard Safran: Okay. And then – just second question. So you guys have been pretty clear in the release and in your commentary about the ongoing challenges in the OEM supply chain. So 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 of the supply chain issues behind us?

Tom Gentile: 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 put pressure on the supply chain in terms of cash conversion. Obviously, inflation was a bigger problem in the 2022, 2023 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. So the answer is I do expect that 2025 is going to be better than 2024, not completely fully stable, the recovery is not going to completely happen in 2025, and so in 2026, you’ll get even more stability. So yes, it’s improving. Inflation has tapered a bit, but we still are at a higher level of cost.

The labor shortages have mitigated. People are in place and they’re getting trained and some of the attrition is going down. So we’re certainly seeing that. So I expect we’ll definitely be in a better place by the end of 2025. And sorry, if I said something…

Richard Safran: Thanks very much.

Tom Gentile: Yeah. I just like to jump in on the call there to answer David’s question, it was 1.08 – $1.08 to the euro was our average rate. So David’s still on the line, there you go.

Operator: The next question comes from Scott Mikus of Melius Research. Your line is open.

Scott Mikus: 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 and air body aircraft that could enter service in the 2030s?

Tom Gentile: Right. Well, we have a very good relationship with Embraer. I don’t want to get into confidential discussions that we would have with them on new programs. But we’ve always had a good relationship with Embraer, and we’re going to continue that. Certainly, I have read about the thoughts that they could introduce a new narrow body. There’s certainly plenty of demand for that sort of thing. And so we’ll continue the discussions with Embraer. But I don’t have anything more to say about the specific discussions that we have with them right now.

Scott Mikus: Okay. And then given potential concerns about tariffs, 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?

Tom Gentile: No. I mean, so, on this point, we’ve obviously been watching this very closely. Hexcel buys about 95% of its material, direct material and sourcing activity from the U.S., Europe and Japan, and by the way, only 1.2% or so from Canada, Mexico and China. So, we have very limited exposure to the countries that have been targeted 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.

Scott Mikus: 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?

Patrick Winterlich: We haven’t put anything specific out of the ordinary into the plan. We’re – we obviously are well first on what to do and we’re going to prepare well for that negotiation as we do periodically as those come round. We don’t have anything specific and we believe we’re going to find – a mutual agreement and successful outcome.

Scott Mikus: Okay. Thanks for taking the questions.

Tom Gentile: Thank you.

Operator: The next question comes from Jack Ayers of TD Cowen. Your line is open.

Jack Ayers: Hey guys, good morning.

Tom Gentile: Good morning.

Jack Ayers: Yes, really appreciate all the color here from both of you guys. Just more high level and I know you’re not giving long term guidance. Tom, I think you guys kind of backed away from that last quarter, but just at like a very high level. Hexcel did 350 [ph] in earnings in 2019, guiding to, almost $4 in earnings for 2020 before COVID with, with much higher build rates to, you know, all our points here. I just wanted to like back up and see like is there anything changing like structurally, like maybe wind is, structurally down. But like any moving pieces to that 350 in earnings, as we get out there and production rates go higher, just so we can kind of get a thing like a sense for normalized earnings power. Thanks so much.

Tom Gentile: 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 fixed costs in terms of production. 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 and that will 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. As that recovers back up to 100%, that’s when we will get back to our full margin and earnings.

Patrick Winterlich: Just to clarify, I think the 68% is the industry production level that Tom’s alluding to. Hexcel is closer to about 80% as compared to 2019 levels. And just on the structural chain, I mean, fundamentally, we’re still a carbon fiber, resin, honeycomb, engineered core business, 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.

Jack Ayers: Okay, thanks. Appreciate it, guys.

Operator: 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.

Tom Gentile: Good morning, Ron.

Ron Epstein: 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?

Tom Gentile: Well, the 787 is a good program for us. Our shipset value is between $1 million and $2 million on it. The expansion, as I understand it, will allow them to go from kind of a historic rate of seven aircraft per month to high as 12. And that obviously would be great for the industry. It would be great for Hexcel because it’s a good shipset value. So, I think that was very encouraging to see that they’re making that investment and that they are going to be increasing the capacity, because the 787 is a very popular aircraft, and it’s a very good program for Hexcel and for many others in the industry.

Ron Epstein: Great. Thank you.

Tom Gentile: Thanks, Ron.

Operator: Thank you. This concludes today’s conference call. We thank you for joining. You may now disconnect your lines.