Hexcel Corporation (HXL) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. My name is Kyle Wenclawiak, I work on the U.S. aerospace, defense and airlines equity research team with Sheila. We're very happy to have Tom Gentile here of Hexcel Corporation, who served in the President and CEO role since May 2024 and as Chairman of the Board since December 2024. Prior to that, of course, spent time at Spirit Aerosystems as CEO. And prior to that, a series of President, CEO, COO roles across the GE Enterprise, including Capital Healthcare and Aviation Services. He also holds a number of Board seats and is very involved in the community, across the U.S. Chamber of Commerce, RPM International, the Board of Governors for the Wings Club and a number of other community actions, including the Smithsonian National Air and Space Museum, the Wichita State University's Business School Board, as well as the Aerospace Industries Association.

So with that, Tom, I think a good starting point is obviously the first half of the year has been quite strong. You have several of the aerospace programs at -- pretty close to peak rates that were achieved back in 2019. Margins have made a ton of headway over the past, call it, 1.5 years. So maybe when you think over the back half of this year and into 2027, where you're spending most of your time, where you're most excited about and what are kind of the upside drivers as you think about kind of forward year?

Well, when you look at the original equipment for commercial aerospace market, it's been a very choppy recovery post pandemic. Production rates overall peaked in 2018 at 1,734 units overall, but for wide-bodies, they peaked in 2019. And since then, there's been a big drop off, and it hasn't recovered. So even in 2025, we were only 85% recovered in terms of total aircraft, and wide-bodies were only 50% recovered. So for example, in 2019, which was the peak for the A350, there was 112 units delivered. Last year, 2025, there was only 57. And so as a material supplier for mostly original equipment, on the commercial side, it's been a choppy recovery. And as a result of the lower production, we had a mothball a lot of lines. So most recently, we had 4 of our 14 carbon fiber lines that were mothballed. As a result, we had a lot of fixed costs that wasn't being absorbed, and that impacted margins. What we've seen in the last year is production rates finally start to recover in a sustainable way that we can say is going to get to the targets that the OEMs have been forecasting. So for example, Airbus has been saying they want to get to 12 aircraft per month on the A350 by 2028. We now see that happening. In fact, what I would say is that at the beginning of the year, we thought production rates were going up. So we said we were going to hire 400 people. We've already hired those 400 people. We were going to bring 1 of the 4 lines back up into production in the back half of this year in November. We did that in March. A line that we were going to bring up next year, we're pulling into November of this year. And aligned that we had started before the pandemic and stop building, and we're going to bring that up in 2028. We're pulling that into 2027. So we're starting to see the production rates. In fact, as those production rates go up and we get more operating leverage, when the OEMs hit all of their targets, that's going to generate $500 million of incremental annual revenue for us. And then on top of that, we'll have $200 million more of defense. So that creates $700 million of growth over the next 3 or 4 years. So it's about a 10% growth rate for that time period. And that growth rate creates operating leverage for us, which drives margins and improved cash flow. So what we said is when we get to those levels of production, we have a path back to 18% margins, which is where we were pre-pandemic. We'll also grow into our capacity. We don't need to make capital investments for new capacity as those rates go up. So our capital expenditure is going to be less than $100 million for the next several years, 5 years or so. And that means that we'll generate $1 billion of cash flow over the next 4 years, '26 through '29. So we're set up for a really good growth period as those production rates recover, particularly on the wide-bodies. Another point I'll make about wide-bodies is before the pandemic, there was a need for a big replenishment cycle. That essentially got put on hold. But if you look at the fleet today of the 5,000 or so wide-bodies, 40% of them are more than 20 years old. And so this replenishment cycle that got delayed is going to be coming with a vengeance. So even when we get up to the high levels of production of 12 aircraft per month in 2028, we're likely to stay there for a very long time. And that's going to be great for Hexcel because our biggest program is the A350. We make the entire material system is $4.5 million to $5 million per shipset, and we're going to get to 12 aircraft per month and stay there for a long time. And on top of that, Airbus has said they want to increase the rate even higher than 12. They want to expand the freighter, which is more material. And they're even considering a stretched version of the A350, the 2000, which would be more material. So we feel like we're in a good position. And with no wide-body on the slate for replacement in the next 2 decades, we feel very good about our position on the A350 and wide-bodies.

Great. That was very comprehensive. I guess, maybe my first question would be the confidence in OEM rates. It sounds like you feel like -- you feel pretty good about 12 per month by 2028, A350. Maybe what has changed or what have your conversations with the airframers looked like 12 months ago versus today? And how has that confidence sort of built?

Confidence is building. And there have been challenges and obstacles on the narrow-body aircraft, expansions. Particularly, the GTF has been slow and not being delivered for new production. But even the LEAP has had some infant mortality issues and created a time on wing. Those are getting sorted out. On the wide-bodies, it's been more interiors, particularly seats. The seats, particularly the first-class seats, are highly customized because of the more premium travel that the airlines are seeing. And those all require certification. And with more stringent requirements and staff shortages at FAA and [ IASA ] that has impacted seat deliveries and some interiors. The difference, though, is before, there were some structural elements for the A350, for example, that were in short supply like the center fuselage. You can't build an aircraft without a center fuselage. You can build it if a seed hasn't been delivered or if it's not certified, you can just park it and then put the seat in when it's ready and then deliver it. So that's been 1 of the factors. Now what I would say is our confidence level has gone up on production for a number of reasons. One is we get the skyline for all the OEMs, which is their master schedule that looks 2 or 3 years in advance. In addition, on the Airbus side, in particular, we do a bottoms-up survey of the top 20 or so locations that take material for the A350 or the A320 and we confirm what the demand is. But then we also have our firm purchase orders. And we get, in our case, 5 months firm purchase orders. So we already have purchase orders that are firm for the rest of the year. And that justifies our estimate, which was 80 units for this year, even maybe a little bit of upside to that. So our confidence level on the near-term production rates is quite high for those reasons.

That's great. And maybe on the kind of restart of some of the carbon fiber lines that you talked about that were mothballed over the pandemic and now are sort of bringing online, maybe what's either the capital cost or the OpEx that has to be put in place for those to restart? And maybe what is sort of the lead time between making that decision and when sort of first shipments come off those lines?

Right. Well, first of all, CapEx is 0 because we already made all that CapEx back in 2018, 2019. So that's really low. The OpEx, there is a little bit of cost. It's not material, but there's some costs. You have to hire people. And so those are some of the reasons why when we said in the last earnings call, for example, that the back half of the year was going to be strong. We raised our guidance. But people pointed out that if they did the math, it looks like the margins in the second half of the year were going to be slightly lower than the first half. Well, the first half was great. Right? We got lots of operating leverage. We got some pricing. The margins were good. What we said in the second half is we had the normal seasonal slowdown in August and December. We're bringing on these new lines, which takes a little bit of money. And then we're hiring more people. And so the combination of those 3 things does put a little pressure on the second half. But we feel that's a good investment because that's giving us more volume, more production, more operating leverage, which is going to drive higher margins and cash flow in '27 and '28.

Certainly. And maybe on the hiring point, because the 400 have already happened to date, whether that's something that will continue over the next couple of quarters and years in terms of kind of getting those lines up to speed? And maybe from a labor availability point, what kind of run-ins have you had with finding kind of the labor, retaining it, training people to become more proficient on these lines?

Right. Well, we said at the begin of the year we're going to hire 400. We've already hired those 400. We are going to hire some more people in the back half of the year. Interesting, Sheila and you guys that Jefferies wrote an article about all the new hiring. And you had us at 77%, which is probably accurate. We are hiring right now because the rates are going up. The hiring is a bit easier than it was in, say, '23, '24. People are available. We pay good wages. We have great benefits. It's -- Tom Kennedy from Raytheon used to call it, noble jobs in aerospace. And I've always loved that term. I think it's absolutely true. So we are able to attract people, but it's about having enough lead time because it takes time to train people to get them on-the-job experience. And then you have to make sure you're giving them proper development incentives, so you retain them and keep attrition low. It's never easy, but we're having success with it in all of our plants around the world.

That's great. That's great. And then on that A350 discussion about potential stretch version, potential above 12 a month, what sort of implications would that have in terms of -- obviously, CapEx is sort of maintenance based right now, but should that demand materialize, what does that look like? And what kind of stage are those conversations right now for you guys?

We're capacitized for 13 aircraft per month. That's from pre-pandemic. And we got up to 12 pre-pandemic -- or 10 actually, it was back then. So we have room. Now since then, we've made a lot of improvements in productivity with Kaizen events and continuous improvement in digitization. So we can handle the freighter, which has more material or the -1000 mix, which has more material. If rates went up if we did the 2000, that would require investment in capacity in the future, but that would be not until the early to mid-2030s. And 1 of the things I've said before is that it's about a 3-year lead time to plan the plant, build it and then qualify it for aerospace production. And so we would be in conversations with Airbus well in advance of any requirement for the new capacity in order to make sure it's in place.

Great. And then maybe at a program level because A350 is so important to you. How do you think about the gross margin kind of contribution of that program relative to the -- returning back to the high-teens operating margin over time?

Right. Well, it's a big program that we capacitized over a number of years. So what I would say is that as the rates go up, the margins get better and better. We get more operating leverage, and we see it go up. So now the program is profitable, and it's going to continue to get more profitable overall as the rates go up. We're still heavily levered toward production rates. And now that we're finally starting to see them get back to reasonable levels, we're seeing the operating leverage and the margins are going up. So 1 of the things I will say on margins is before the pandemic in 2019, that was the peak of our production. Our revenues were $2.35 billion. We got up to 18% margins. After the pandemic, when we had to mothball all those plants, we had all those fixed assets that weren't absorbing any of our overhead. And so the margins deteriorated. When we get up to the peak rates of production, we have a path back to the 18%. At a higher level of revenue, but we have a path back to the 18%. And so that's 1 of the -- I think, the manifestations of increased production rates as we get operating leverage, and that drives margins. And we do have a path back to our high levels of margins from the pre-pandemic when we get to those production levels.

And maybe on kind of a shorter-term conversation that investors are a little more focused on around raw material inflation, fuel. I know you guys have discussed probably ad nauseam, some of the kind of hedging that you do and some of the COGS protections that you have in place. So maybe if you can address like what you're seeing on the materials and labor cost, fuel?

Well, first of all, I would say is 1 of the things that we did back when we first set up the A350 program and a lot of the programs with Airbus and Boeing is we set up a lot of back-to-back contracts with our suppliers. So our contract with Airbus goes to 2030, which is great. It's a long-term contract. We didn't anticipate the pandemic and all the inflation. But similarly, we have back-to-back contracts with most of our suppliers for resin and chemicals that also go through 2030. So it's a back-to-back natural hedge. And that's 1 way that we've been able to mitigate inflation as we go forward. Now with regard to the oil prices going up because of the war that's going on, we saw oil prices spike to over $100 a barrel. Now carbon fiber, the major material that we use is our feedstock is something called the [ cryonitrile ]. And the way it works is you start with petroleum, then you go to propane, then the propylene and then acrylonitrile. We hedge propylene. And we hedge it -- for 8 quarters out, we hedge about 80% of our needs. So even though oil prices might be spiking right now, we're not seeing that because we have these long-term hedges in place. We've been very disciplined about it. It's 80%. If the prices go up higher than we expect, we have standard deviations that we measure. And if it passes through standard deviations, we might hedge more or less, depending on the direction. So we feel confident in our hedging program. Now if oil prices stay elevated for more than 2 years, we'll see the impact of that on the back end. But it will be properly measured and spread out over these 8 quarters that we have the hedging program in place for them.

Great. And then maybe the other kind of big piece in terms of that margin conversation is the pricing dynamic, particularly relevant on the Airbus contracts. But I think what you guys have done in recent history is talk more and more about kind of the rolling nature of your business. So maybe if you can just discuss how pricing works at the Hexcel level?

Right. So our contracts tend to be between 5 and 7 years. Which means that every year, 15% to 20% of our contracts come due. When the contracts come due, we obviously try to reset them to reflect the current market conditions. And we want to make sure that we're getting a fair return on the investments we've made and the value we bring. And we have been able to get price. It's very hard to change the material system once you have it in place because you have to certify the material system and qualify it, then you have to certify the aircraft with that material, then you have to get the equipment and certify that and then train the people. So it's not impossible. It's just very difficult and time-consuming. So it very rarely happens. So when the prices come due, we want to make sure that we're partnering with our customers and reflecting in the price that we get the investments that we've made and the value that we bring, and we have been getting that. So that's it. Now the Airbus contracts are unique. We have 2 Airbus contracts, and that represents about 40% of our revenue. They expire in 2030, at the end of 2030. Now the big ones were signed back in 2008. Now we were a small company. We won the position on the A350 for the entire material system. We had to capitalize $1 billion of investment over the next several years. And so having that long-term contract really helped. We renewed it in 2016 and extended it to 2030. But again, we have back-to-back contracts with all the suppliers so that we're naturally hedged. Now we didn't anticipate the pandemic and the hyperinflation. So that's put us behind a little bit. And what I've said is, even when we get back to the revenue levels that we were at in 2018, in 2019, say, $2.35 billion, we'll only have margins at that point of 16%. So there's about 200 basis of headwind that we've incurred because of inflation that we haven't been able to offset yet with pricing and productivity. Now by the time we get up to the full production targets that the OEMs have, the $700 million I mentioned, that's $2.6 billion. So '28, '29, we'll be back to the 18%. Now when we get to 2030 and when we're negotiating with Airbus, again, we want to focus on getting a fair return on the investments that we've made. We want the pricing to reflect the value. At the same time, we want to be a strong partner for them. We want to make sure the A350 is a good program going forward. It's our biggest program. We want to make sure it's competitive. And of course, we want to win more work on the next-generation Airbus. So there's lots of different trade-offs. But at the end of the day, we have a path back to the 18%. We'll continue to drive productivity and pricing as the opportunity arises. And because we have such a long growth trajectory in front of us, we feel very good about our position.

Great. No, that's super helpful context. And I was going to go there next about NGSA and what kind of next gen content looks like because there's obviously been a theme that composites penetration continues to evolve with each next generation. So maybe the timing of those Airbus contracts probably sync up pretty decently with when some of those supplier discussions are happening. So maybe if you can just talk about what the preliminary talks look like for you guys on next gen today and how that competitive landscape is shaping up?

Yes. So first of all, in terms of aerospace-grade carbon fiber, there's only 3 companies that make aerospace-grade carbon fiber. Hexcel, [ Tore ] and [ Tage ], the 2 Japanese companies. Only [ Tore ] and Hexcel are vertically integrated in [ do ] resin. So for carbon fiber composite, you need the carbon fiber and the resin and you [ impregnate ] them. Now Hexcel is the only U.S. company that does aerospace grade carbon fiber. There's another company that does the resin which is [ Science Co ], but they tend to use our fiber or [ tagon ] fiber. Now in the way the split is, [ Toray ] does the 787 material system for Boeing. Hexcel does the A350 program for Airbus. And that's the way it has laid out. The 787 and the A350 are about 50% carbon fiber composite by weight. If you look at the narrow bodies, the MAX and the A320, they are 15% carbon fiber by weight. And most of that is in the engine, say, the fan blades, the fan case or the nacelles. Now the next-generation narrow-body, they're going to definitely have more carbon fiber composite. For 1 thing, the wing will be composite. Everybody is in complete agreement on that. In order to get the right architecture and reduce drag and increase lift, you need a carbon fiber wing. And that by getting more range, you reduce fuel consumption. Now going from a metallic wing to a fiber wing will take the content from 15% to 30%. Now the question becomes the fuselage. Do you go to a carbon fiber fuselage? And there's still a little bit of debate on that. Personally, I think they will because I think the lighter weight and the fact that you have less maintenance is also a factor. Now it's not as big a factor as on a wide-body aircraft where your cycles are 8 to 10 hours. On a narrow-body aircraft, the cycles are 1 to 3 hours, so weight isn't as big of a deal. But I just think airlines have gotten used to the lightweight carbon fiber composite fuselage, especially now with fuel prices high. They like the extended range and they reduce fuel. And then the maintenance is something they're also getting used to. So along those lines, there has been a lot of work with both of the OEMs on the next-generation aircraft, not in terms only of the carbon fiber development and the resin development, but also the production system. So in carbon fiber, we think of 3 different dimensions of strength. We think of tensile strength, which is how hard it is to pull apart. We think of [ modulus ], which is how stiff it is, and we think of compression. We've been advancing all 3 of those. We're also looking at the resin system, which today takes as much as 12 hours to cure, how can we do that in 3 hours. How can we increase the layup speed? How can we reduce the amount of capital required? And so there's lots of decisions not only on the exact formulation of the fiber, which mix of those dimensions that I mentioned they want for each part of the aircraft, but also do they want to prepay or do they want a resin infusion system with -- that's out of autoclave, doesn't require the heated pressurized even, but can use a heated oven tool. And so these are all the different factors. One thing I would say is, today, the material system for the [ 87 ] and the A350 tends to be homogeneous. It's pretty much the same material system for all the different parts of the aircraft. Some variations, but essentially the same. On the next generation, you're going to see a lot more variation. It will be optimized for each part of the aircraft. Not only the material system, but also the production process. And so because of all of that and the sophistication, I do think you're going to see a carbon fiber wing and a carbon fuselage, in my view. And what that means is that the carbon fiber will be from 15% to 30% with the wing and to 50% with the fuselage. So today, on the narrowbodies, which are 15% carbon fiber, it's $300,000, $200,000 to $500,000 per shipset. In the future, it will be about $1.5 million to $2 million per shipset of carbon fiber. And when you think about the production rates of 75 for Airbus, 52 for Boeing and then throw in some A220s, it's close to 150 aircraft per month at $1.5 million to $2 million per shipset, that's a lot of carbon fiber. And there's only 3 companies that make it. So we're going to get our share of it. And that's why we also feel good about that. We're doing a lot of hard work in R&D right now with both of the OEMs. But that's what the range of opportunity is very significant.