Yahoo Finance Hexcel Corporation (NYSE:HXL) Q1 2024 Earnings Call Transcript
Hexcel Corporation (NYSE:HXL) Q1 2024 Earnings Call Transcript April 23, 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: My name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to Hexcel First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. [Operator instructions]. Thank you. I would now like to turn the conference over to Patrick Winterlich, Chief Financial Officer. Patrick, you may begin your conference.
Patrick Winterlich: Thanks, Krista. Good morning, everyone. Welcome to Hexcel Corporation's first quarter 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 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 Ditigation 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 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 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 first quarter 2024 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 2024 first quarter results. Hexcel's upward trajectory continued as we began the year with solid performance, that includes year-over-year sales growth in both commercial aerospace and space and defense as demand continues to increase. Additionally, we were pleased to read reports that in February, the airline industry achieved full recovery in overall global passenger traffic and both domestic and international air travel has now surpassed 2019 levels. This is terrific news and demonstrates the resiliency of the industry and the strong desire for air travel. While commercial aerospace sales grew year-over-year, posting the highest level of sales since Q1 2020, I would like to begin by referencing our commercial aerospace sequential improvement from the fourth quarter of 2023.
With international air traffic now above 2019 levels, wide-body production continues to ramp and we benefited from sequential growth in all of our wide-body programs. This is an encouraging data point illustrating how the wide-body supply chain has been ramping relatively steadily and smoothly. Further, our total narrow-body sales in the first quarter of 2024 also increased sequentially. As you will recall, our narrow-body sales softened in the second half of 2023. There are certainly challenges remaining within the overall narrow-body supply chain and we expect continued choppiness in the first half of 2024. However, the sequential improvement is encouraging. Let me highlight some of the results and Patrick will then provide more details. First quarter sales of more than $472 million were 3% higher than Q1 2023.
Adjusted diluted EPS in the first quarter was $0.44 down year-over-year yet up sequentially. A number of specific items in the first quarter of 2023 drove the particularly strong results last year. Our gross margin and adjusted operating income have been trending upward since the middle of last year and we are very encouraged by this robust performance as our volume leverage continues as expected. Turning to our three markets, in commercial aerospace, first quarter sales of almost $300 million represented an increase of 5% in constant currency on increasing wide-body sales, with significant growth in the Boeing 77 platform. We were especially pleased to see Korean Air and Japan Airlines placing orders for 75 new aircraft, including 64 composite-rich wide-bodies, where Hexcel has significant content.
Other commercial aerospace sales decreased 6% for the first quarter of 2024 compared to the first quarter of '23 on softer overall business jet sales. Although it should be noted, sales to our largest business jet customer Gulfstream did increase year-over-year. Based on the secular growth with composite adoption for large cabin business jets, we expect overall 2024 business jet sales to exceed 2023.We also would like to highlight and congratulate Gulfstream on the recent FAA certification of the G700. It is a high performing next generation large cabin business jet, and we are proud that Hexcel composites are utilized. Now for a few additional aerospace highlights. We had another successful JEC World Composites show in Paris, where we met with dozens of customers and launched a significant new innovation.
HexTow IM9-24K carbon fiber is our newest intermediate modulus fiber, and it provides significant improvements in tensile strength over our baseline IM7 fiber, which already is a major component in commercial aircraft engine fan blades and other aerospace applications. IM9-24K offers our customers a high performance carbon fiber solution for high rate manufacturing, and it is particularly suited for primary and secondary aerospace structures. The combination of the fiber's high performance and composite tensile strength, as well as the increased fiber production throughput and productivity provided by a 24K tool size, provides a strong value proposition, when compared to other commercially available IM fibers. And I especially want to congratulate our team on being recognized last month by Northrop Grumman, during their Supplier Excellence Awards event.
Only about one half of 1% of suppliers receive this recognition each year, so it was quite an honor for us to be among this prestigious group. Northrop Grumman's recognition validates our relentless focus on execution and delivering quality products on time. Now moving to space and defense; sales of $139 million increased 10% in constant currency for the quarter as compared to the first quarter of 2023. The sales increase was led by six wing aircraft programs, including the Lockheed Martin F-35 and Airbus A400M, as well as various classified programs. Hexcel has great global positions in space and defense, and we remain confident in our 2024 outlook. Industrial sales of about $34 million represented a decline of more than 28% in constant currency year-over-year.
Our industrial business now represents about 7% of total sales. Sales were soft in the first quarter as global consumers pulled back on spending, and a few of our customers worked through some production issues on their end. Industrial remains an attractive market, where we are pursuing multiple value-adding technology opportunities, and [indiscernible] activity remains strong in a number of submarkets, including automotive, EVs, and energy. Our cash performance remains strong, and we continue to return cash to our stockholders. During the first quarter, we repurchased $101 million of stock and we paid a $0.15 per share quarterly dividend. During our Investor Day, we highlighted the road map for multiyear growth. This included cyclical growth from production rate ramps by our customers that is supported by extensive aircraft backlogs and secular growth by our composite lightweight value proposition.
This growing top-line will drive margin expansion from higher capacity utilization, supported by our continued focus on execution and enhancing productivity. This all leads to strong forecasted cash generation with more than $1.5 billion of adjusted EBITDA forecasted for the three-year time frame 2024 to 2026. We remain committed to delivering our full year 2024 and our mid-term guidance as our Hexcel team drives growth, margin expansion and cash generation. As an organization, we will continue to prioritize innovation and advancing our technologies. We will continue to focus on growth markets, where there is tremendous pull for the specialized lightweight materials that only Hexcel can provide. Stronger, lighter, more durable, innovative, collaborative, customer focus, no words better describe who we are at Hexcel or who we will be going forward.
Now let me turn it over to Patrick to provide more details on the numbers.
Patrick Winterlich: Thank you, Nick. As a reminder, regarding foreign exchange exposure and as I explained in detail during our fourth quarter 2023 earnings call, Hexcel benefits from a strong dollar, we continue to hedge foreign exchange exposure over a 10-quarter time horizon The year-over-year sales comparisons I will provide are in constant currency, which thereby remove the foreign exchange impact to sales. While I'm going to provide my typical year-over-year comparison of financial results, I want to begin by highlighting the sequential improvement over the last three quarters in total sales and margins. Beginning with sales, both total wide-body sales and total narrow-body sales increased sequentially, as the overall aerospace supply chain expands output to meet the tremendous demand for new fuel-efficient commercial aircraft and importantly, margins expanded sequentially on higher operating leverage.
We continue to expect further progress as we move through 2024 as we utilize more of our existing assets, volume leverage continues to improve, and as the wide-body ramp continues and the narrow-body aerospace supply chain stabilizes and strengthens. Turning to our three markets; Commercial Aerospace represented approximately 63% of total first quarter 2024 sales. First quarter Commercial Aerospace sales of $299.3 million increased 5.2% compared to the first quarter of 2023, led by growth in wide-bodies, particularly the Boeing 787 program. The other Commercial Aerospace category decreased 6.3% on lower overall business jet sales year-over-year. We continue to expect full year 2024 business jet sales to be higher than 2023. Space & Defense represented approximately 30% of first quarter sales and totaled $139.1 million, increasing 10% from the same period in 2023.
The Lockheed F-35, the Airbus A400M and other fixed wing platforms grew strongly, along with classified programs. Industrial comprised approximately 7% of first quarter 2024 sales and totaled $33.9 million, increasing 28.5% compared to the first quarter of 2023. Sales softened across most of our industrial submarkets. Gross margin improved again and was 25% for the first quarter of 2024. The first quarter of 2023 was exceptionally strong with gross margin of 27.9%. As I explained last year, Q1 '23 benefited from particularly favorable absorption and a favorable sales mix. Also, the cost base in the first quarter last year was lower as beginning in the second quarter of 2023, we undertook the deliver overhead infrastructure, including labor hiring and training to prepare for strong customer production ramps and ensure Hexcel would always be ready to meet our customer demand.
Sequentially, from the fourth quarter of 2023, gross margin improved 250 basis points on higher operating leverage. As a percentage of sales, selling, general and administrative expenses and R&D expenses were 13.6% in the first quarter compared to 14.1% in the first quarter of 2023. This year-over-year improvement in operating expenses as a percentage of sales illustrates our tight control as we target operating expenses to grow at a fraction of our sales growth. Adjusted operating income in the first quarter was $54.1 million or 11.5% of sales compared to $63 million or 13.8% of sales in the comparable prior year period. The year-over-year impact of exchange rates in the first quarter to adjusted operating income was favorable by approximately 30 basis points.
Sequentially, the adjusted operating income margin improved by 80 basis points on higher operating leverage, partially offset by the stock-based compensation charge taken in the first quarter as is typical each year. Now turning to our two segments; the Composite Materials segment represented 80% of total sales and generated an operating margin of 15.8%. The operating margin in the comparable prior year period was 18.4%. The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 20% of total sales and generated a 13.9% operating margin as compared to 14.9% in the comparable prior year period. Net cash used in operating activities was $7 million in the first quarter of 2024, which compared to a net cash use of $23.4 million in the first quarter of 2023.
Working capital with a cash use of $84.5 million in the first quarter of 2024, for the comparable prior year period, working capital increased $104 million. We remain focused on tightly managing our working capital. Capital expenditures on an accrual basis were $18.6 million during the first quarter of 2024 compared to $16.8 million in the comparable prior year period. Free cash flow during the first quarter was negative $35.7 million, which compares to negative $41.5 million in the first quarter of 2023. It is normal for the business to use cash in the first quarter of the year. The Board of Directors declared a $0.15 quarterly dividend yesterday. The dividend is payable to stockholders of record as of May 3, with a payment date of May 10.
We repurchased $100.7 million of common stock during the first quarter. The remaining authorization under the share repurchase program on March 31, 2024, with $386.4 million. The share repurchase authorization was increased by $300 million in February, recognizing the strong future cash generation profile of the company. With that and for the final time, on behalf of myself and all my Hexcel colleagues, I want to take the opportunity to express our enormous gratitude and thanks to Nick for leading Hexcel so successfully as CEO for well over a decade. I also want to thank Nick for all his guidance and friendship and for the great honor of sharing the Hexcel earnings calls for the last seven years, it has been a privilege. And so having just gone off script and hopefully not throwing him too much, let me turn the call back to Nick.
Nick Stanage: Thanks, Patrick. As I near the end of my final call as CEO and President of Hexcel and transition to Executive Chairman, I'd like to take a few minutes to reflect. My decision to retire is something I have personally been contemplating for some time. As I thought about my upcoming 65 birthday, I began more specific discussions with our Board on my potential retirement. Our Board is continually engaged in management succession preparation, and I wanted to ensure that we had a robust, comprehensive strategy and a thorough and exhaustive search process to identify the best person to lead Hexcel forward. I told the Board that I would be flexible. I would stay longer, if the search dictated it or I could step aside sooner if the time was right.
I tell you today without hesitation that I believe Tom Gentile is the ideal choice to be the next CEO and President of Hexcel. The more I have talked and worked with Tom, the more excited I've become by the future of Hexcel. Already, we have shared with him a mountain of data and details about our people, our products, our processes and most importantly, our one Hexcel culture. I look forward to helping Tom focus on our priorities and supporting him in every way that I can in the months ahead. I would also like to share some perspective from the Board on our transition. Following an extremely thorough search and recruitment process, including extensive reference checks throughout the industry, the Hexcel Board firmly believe Tom is the right choice for Hexcel for many reasons.
Tom has fantastic aerospace industry knowledge and understanding with strong customer relationships. Very importantly, Tom has been one of the largest buyers of composite materials for many years. He understands how they are used, what developments are needed for the future and what is required from composites for the next generation of commercial aircraft and space and defense applications. Tom has extensive experience, a factory for transformation through implementing manufacturing execution systems and lean production processes to drive operational excellence, quality and productivity. Tom brings all this knowledge. And in addition, the most critically, the Board believes Tom is an excellent cultural fit for Hexcel. This last point cannot be overstated.
Hexcel could be described as a high-performing material science machine, driving innovation and delivering operational excellence for our customers. Our quality, on-time delivery and value proposition are our top priority. Tom is taking over a fantastic business with a fantastic team, not disrupting this strong momentum is crucial and Tom is bringing a unique skill set and operating philosophy that is ideally suited for executing in the near-term while positioning and growing Hexcel over the longer term. Initially, Tom will focus on execution, to deliver Hexcel's 2024 and medium-term guidance. He and the Hexcel leadership team will continue to drive flawless execution that starts with safety for our team, continuous improvement of productivity and efficiencies and maintaining our constant and laser focus on quality and on-time delivery to our customers.
And Tom will continue to position Hexcel within the industry and with our customers for next-generation platforms as we pursue and benefit from strong secular growth of lightweight composites. Tom is completely aligned on the strategy that we outlined at our Investor Day in February. While I look forward to spending more time with my family, I cannot tell you how much I will miss my Hexcel family. I have grown to love this company and all that we have built together. Tom is inheriting an awesome team and a growing business with the brightest future ever. I am so proud to have had the honor of working with the most talented team I have ever known. I also want to sincerely thank all of you, our stockholders and the analysts that cover Hexcel, you all been fantastic.
You have challenged me over the years, and I'm grateful for that because you've made me a better leader and you've made Hexcel a better company. Thank you for following Hexcel. Thank you for your questions, your coverage and your kind words. I trust you all will support Tom as you have supported me over the past 14 years as Hexcel continues to generate strong shareholder value. Krista, we're ready to take questions now. Thank you.
Operator: [Operator Instructions] Your first question comes from John McNulty from BMO Capital Markets. Please go ahead.
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