Q3 Earnings: Hexcel’s Composites Rides The OEM Production Rate Ramp Up Wave, But Margins Pressures Persist

By Chris Sloan

Oct. 25, 2023, © Leeham News  – Hexcel Corporation, a tier four carbon fiber supplier best known for its significant contributions to all-composite Boeing 787 and Airbus A350s, reported substantial overall Q3 revenues despite inflationary and production efficiency pressures. While active in other industrial programs like space and defense, industrial applications, and carbon fiber auto wheels; commercial airspace accounts for the bulk of Hexcel’s total sales. Overall, third-quarter revenue increased by 19.2% to $251.9m year-over-year.

“Hexcel continues to benefit from the post-pandemic travel recovery and from the growing pull for newer, more fuel-efficient lightweight aircraft to meet that demand and to replace aging fleets,” commented Hexcel Chief Executive Officer and President Nick Stanage during the Q3 earnings call. The company perceives itself as well positioned to supply the combined Airbus and Boeing backlog currently tallying at a record 13,775 aircraft.

The company maintains that over the next three years, build rates for narrowbody aircraft are expected to increase by nearly 50%, and build rates for widebody aircraft are expected to almost double. Stanage insists the OEMs won’t be waiting on Hexcel, like they are at others at all supply chain tiers. “This is both a challenge and a great opportunity, and Hexcel is determined to be ready to ensure our products are produced efficiently and delivered on time to our customers,” maintains Stanage. The CEO further bullishly adds, “This is truly a great time to be in the business of manufacturing lightweight composite materials.”

Getting With The Programs: Widebodies

Hexcel is a major supplier of the next-generation 787 and A350 widebody programs. The company was awarded the contract by Airbus to supply the primary structure prepreg, with Hexcel carbon fiber, for the A350 XWB program. Melius Research sees the widebody exposure as a tailwind: “The good thing for Hexcel is its significantly higher shipset content on widebody programs (787 and A350) relative to narrowbody programs. For context, Hexcel’s ship set content on the 787 is ~$1.4M compared to $450K on the A320neo. As a result, Hexcel should see outsized top-line growth in 2024 and 2025 as widebody production rates ramp.”

Hexcel’s chief executive says the company is poised to meet the ramp-ups on the 787 and A350 program: “Boeing intends to go to 10 by the 2025-26 timeframe. So there’s going to be a gradual ramp-up there. And the A350, we’re at six. Airbus has been candid that they’re also moving to nine by the end of 2025-26. We have great ship set content, and we’re looking forward to continued widebody order intakes.”

Melcuis contends there is less risk in the widebody ramp-up compared to the more fraught narrowbody ramp, given the fragility of the supply chain.

Narrowbody Sales Softness

Though the CFRP-based widebody programs are higher profile than single-aisle, Hexcel’s bottom line benefits considerably from sales of the current generation of aluminum-based narrowbodies. The firm provides carbon fiber content to the Airbus A320neo and Boeing 737 MAX programs, such as producing an acoustic noise-abating inner barrel for engine nacelles. 

Although overall commercial airframe production rates are on the rise, Hexcel reports flat Q3 sales for its narrowbody programs year-on-year. Melius insists this is a production, not a demand problem: “This suggests that other suppliers and/or the airframers (Boeing and Airbus) may have slowed down their material intake. Today, GE announced that its LEAP deliveries will be up 40%-45% this year, which is down from prior commentary calling for a 50% increase in volumes.”

Wherever Airbus and Boeing’s rates land, Hexcel’s CEO says his company will refrain from contributing to supply-chain woes. “We are ready to support both Airbus and Boeing as they move the 320 and the MAX rates up, and we will not be causing any delays. The challenges the OEMs are dealing with are certainly unrelated to Hexcel.”

Growing Pains

Hexcel’s overall revenue gains were muted by Q3’s operating margin of 21.8%, which declined from 22.4% last year. Matthew Akers, Wells Fargo aviation and defense analyst, asked if new hire labor getting up to speed was the principal culprit responsible for the lower margins amidst a backdrop of higher overall sales.

“It’s much more to do with the gradual infrastructure and cost base that we’ve been building and putting in place, quite honestly, over the last several quarters, to be ready for the really strong growth that we see,” retorted Hexcel’s Patrick Joseph Winterlich Executive Vice President & Chief Financial Officer. He conceded, however, that “Perhaps they’re not all efficient, they’re not sort of at the utilization level individually that we would like.” 

Winterlich clarified that the diminished margins are transitory and temporary: “It’s going to take time to really get a top line that really pulls all that product, production, and all those sales through to drive the margin.”

The Price Is Right?

With recent publicly disclosed price increases paid by plane makers to troubled suppliers like Spirit AeroSystems fresh on the mind, Scott Deuschle, aviation and defense analyst at Deutsche Bank, asked, “Is there any opportunity to open the door with OEMs to discuss the prospect of getting some better price given the inflation that’s out there?” Given Hexcel’s profitable status, he caveated that the question could be a non-starter.

Stanage took an increase off the table, at least publicly. “No. I think our team does a great job of getting price and value pricing our products for what it does for our customers. Remember, in many commercial aerospace programs, we have long-term agreements where we have indices and formulas that help protect both of us in inflationary, increased cost scenarios or raw material inputs, and it protects our customers where it’s declining.”

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