By Chris Sloan

Jan. 25, 2024, © Leeham News  – Advanced composite materials maker Hexcel received a drubbing from analysts for reduced narrowbody sales in the most recent quarter. “This is the second quarter in a row that Hexcel has missed consensus expectations, and we used the sell-off last quarter to upgrade the stock, thinking it was a seasonal aberration,” said a sharply worded note from Vertical Research Partners Robert Stallard. The vexed analyst added,” Clearly, we were wrong, as Hexcel has missed again on every operating metric in 4Q. Given its established reputation as a quality aerospace company enjoying the OEM ramp, this performance is a jarring contradiction versus expectations.” 

By The Numbers

Overall, Hexcel’s Q4 2023 sales reached $457.5 million, up from $429.4 million in the fourth quarter of 2022. Hexcel’s largest corporate segment, commercial aerospace, increased 4.4%year-on-year to $267.5 million due to increasing demand and production rates for composite Airbus A350 and Boeing 787 airframes. This partially offset reduced Hexcel’s narrowbody sales for advanced materials for control surface, engines, and fuselage components for mainline workhorses A320s and 737s.

Vertical’s Stallard called this an 11% miss short of forecast. A Goldman Sachs First take piled on with, “4Q23 results are below consensus on revenue, margins, and EPS but ahead on free cash flow. Segment EBIT is 14% below consensus on revenue, which is 3% below.”

Hexcel achieved a full-year sales increase of 13.4% to $1,789 billion, up from $1,577 billion in 2022. Again, commercial aerospace, which constitutes 60% of corporate sales, lifted by 17.2% to $1,068 billion . The materials maker is guiding for mid-teens growth for FY 2024.

Narrower Narrowbody Sales

Hexcel claimed slower-than-expected narrowbody production rate ramp-ups were the primary culprits, pressuring sales and margins. “The pull through for narrow body programs were lower than we expected is a near-term headwind as the full cost of our increased infrastructure base was not absorbed by the actual sales level,” said Patrick Joseph Winterlich, Chief Financial Officer. But he does see clearing skies. “This should lessen through the first half of 2024 as the overall narrow body supply chain stabilizes to support the narrow body rate ramp.”

Chief Executive Nick Stanage took pains to remind analysts of the complexity of the supply chain on the narrowbody programs. “The A320 tends to be at the high end of our shipset content of the range we provided, the 200,000 to 500,000, whereas the 737 tends to be at the low end.” Stanage positioned Hexcel as being ahead in terms of adding production buffer so as not to “short customers”.

Hexcel is not alone in this quagmire. “There’s no doubt in my mind that in the fourth quarter and particularly December, some of the supply base put the brakes on managing cash, managing their buffer stock, and putting some of that inventory out,” stated Stanage.

MAX Pain and Widebody Pressure

Analysts were keen to understand how the latest 737 MAX news, particularly the FAA’s mandate from the day before to halt Boeing’s planned production rate increases, would affect Hexcel’s sales and production forecasts. “Even given the news yesterday, which probably will continue to evolve, we still feel good with our guidance. We think we’re conservative enough in the right areas that we’re holding to that,” Stanage affirmed.

Ironically, another 737 problem involving overheating on the anti-icing system on the composite engine nacelles, which Hexcel provides materials for, could provide an upside. “Historically, any time there is an enhancement or a new engine or nacelle or component, there tend to be more composites involved, and we tend to get a greater portion of that,” said Stanage, who added, “It would be premature to comment any further.”

In contrast to the MAX maladies, the A320neo program inspired more optimism from the chief executive. “We were pleased to see at the end of 2023 the first Airbus A321 rollout from the new final assembly line that Airbus configured in France at the former site of the A380 assembly. Airbus now has ten final assembly lines globally for the A320 family to support the rate ramp.”

Smoother widebody build rate ramps on the 787 and A350 lines moving to 14/mo and 10/mo, respectively, over the next two years provided a sunnier supply chain prognosis. “They’ve ramped really without issues, granted lower volume, but much larger scale. We have great confidence. We’re not seeing or hearing anything that indicates that there’s going to be bottlenecks for challenges,” Stanage remarked.

Marginal Margins

The company’s soft margins compared to years past were also in analysts’ crossfires. The composites maker reiterated that it is getting ahead of expected growth in training new hire labor – a third of the 5,600 employees have been on the job less than two years – and bringing new equipment up to speed. The CFO conceded, “We’ve got machines running, but they’re not fully utilized, they’re not truly efficient at the moment.” He pointed to raw materials and electricity as additional sticky inflationary headwinds.

Boeing JV Ends

The Hexcel / Boeing Joint-Venture Aerospace Composites (AMC) ended with Hexcel selling its 50% share to its partner. This followed the transfer of a significant portion of the fabrication work from the Kent, Washington plant to free up bandwidth for higher complexity advanced part manufacturing at the U.S. factory. “The ACM joint venture with Boeing has been a tremendous business collaboration for many years, and we thank Boeing for being an excellent JV partner going back to the inception of the ACF plant over 20 years ago,” Stanage said.