Arcturus Therapeutics Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2023

There are 12 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Hexcel Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode and please be advised that this call is being recorded. After the speakers' prepared remarks, there will be a question and answer session. And at this time, I would like to turn the call over to Mr. Patrick Mitulich, Chief Financial Officer.

Speaker 1

Quarter 2023 earnings conference call. Before beginning, let me cover the formalities. I want to remind everyone about 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 Securities 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 differ materially from our forward looking statements today.

Speaker 1

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 and is copyrighted material. It cannot be recorded or rebroadcast without our expressed permission. Your participation on this call constitutes your consent to that request.

Speaker 1

With me today are Nick Stanage, our Chairman, CEO and President and Kirk Goddard, our Vice President of Investor Relations. The purpose of the call is to review our Q2 2023 results detailed in our news release issued yesterday. Now let me turn the call over to Nick.

Speaker 2

Thanks, Patrick. Good morning, everyone, and thank you for joining us today as we share our Q2 2023 results. We started the year with great momentum that is carried forward into the Q2 as we delivered a solid year over year increase in sales of almost 16%, reflecting robust demand for lightweight advanced composites and strong execution. We continue to manage and mitigate supply chain constraints, inflationary pressures and a tight labor market to protect our customers' requirements. As we work through these issues and global supply chains continue to improve, our confidence increases.

Speaker 2

While delays and cancellations at airports this summer have been frustrating for many, it reflects an industry with high demand and growth. On June 30, TSA screened almost 2,900,000 travelers, marking the highest daily number of passengers the agency has screened on record. According to the International Air Transport Association, Domestic travel in key markets globally is now on average 5.3% higher than 2019 levels. International travel is more than 90% recovered and May 2023 was the 1st month that the global passenger load factor had returned to 2019 levels. Thinking back to the depth of the pandemic, there were many who doubted that air passenger traffic would recover to these levels by mid-twenty 23.

Speaker 2

Growing passenger demand, both domestically and internationally, is great news for our customers and for us. Commercial aircraft order backlogs now at a combined level of over 13,500 aircraft for Airbus and Boeing are just above the prior peak level. Demand is strong for next generation fuel efficient aircraft with lower emissions and improved long term maintenance costs. The demand for advanced composites And secular penetration opportunities continue to grow and Hexcel is well positioned to keep winning in this space with our broad portfolio of lightweight solutions. Now let me highlight some of the results of the 2nd quarter and Patrick will then provide more detail on the numbers.

Speaker 2

Commercial Aerospace sales of $264,000,000 increased more than 15% in constant currency compared to the Q2 of 2022. The strongest growth came from the Airbus A350 and Boeing 787 wide body programs. Other commercial aerospace increased more than 13% for the 2nd quarter on continued robust business jet demand. Announced orders and options for narrow bodies, including the Airbus A320neo family, the Airbus A220 and the Boeing 737 MAX remained strong in the 2nd quarter, including growth in new regions and re fleeting in existing markets to improve fuel efficiency and reduce operating costs. We remain agile and aligned with our customers and ready to support their growing demand.

Speaker 2

In response to some of that increased demand, We celebrated the expansion at our site in Casablanca, Morocco in May. The plant, which first for lightweight composite engineered core materials in the region. Also want to mention that earlier this month, we received or we learned that for the 4th consecutive year, our team at Casa Grande, Arizona has been recognized by Boeing with a Supply Chain Performance Achievement Award for superior supplier excellence. Hexcel is the world's largest honeycomb provider for the aerospace industry produced at our Casa Grande, Arizona and Duxford, UK Plants. Turning to Space and Defense.

Speaker 2

Sales of $138,000,000 increased 22% in constant currency with broad based growth across a number of platforms globally, including fighter aircraft such as the S-thirty 5 and Rafael as well as space programs and civilian rotorcraft. This level of quarterly sales for Space and Defense is our highest ever. Our Space and Defense business is supported by our team in Amesbury, Massachusetts, where we produce materials for multiple U. S. Defense programs, including the F-thirty 5.

Speaker 2

You will recall that we acquired this business in January 2019. This has been an excellent strategic acquisition for us. Amesbury is a high quality business that broadens our product line and enables innovation and deeper conversations with existing and potential customers regarding our composite solutions. Since the acquisition, Hexcel has leased the building from the former Art Technologies owner. So when we recently had the opportunity to buy the property, we gladly did so and closed the deal around the end of May.

Speaker 2

Ownership provides Hexcel with control and flexibility of the site, which will simplify our ability to grow and expand operations to meet the many opportunities we foresee in the years ahead. This step to acquire the site is a clear signal that the Amesbury team is now fully integrated into our 1 Hexcel family. Total industrial sales of $53,000,000 decreased about 3% in constant currency due to lower wind energy sales that were only partially offset by growth in automotive, marine and other industrial markets. Year to date, total Hexcel sales of $912,000,000 are up more than 16% year over year in constant currency and EPS is up 82% from $0.55 this time last year to $1 at the end of June 2023, all of which reflects Hexcel's strong performance and growing momentum. Before I hand over to Patrick, I'd like to say we were excited to return to the Paris Air Show last month.

Speaker 2

As always, it is thrilling to see all the aircraft on display, knowing that Hexcel has extensive and growing product content on practically every aircraft flying and in development today. We had many face to face customer meetings to talk about how our lightweight solutions will propel their next generation products, which always is the best part of the event. And it was made even more notable this year as we hosted about 180 customers for a special event to celebrate Hexcel's 75th anniversary. At the show, we launched 2 new aerospace products that each deliver faster cure cycles, enabling higher production throughput rates. We also exhibited parts made with our advanced composite materials by Airbus for the Wing of Tomorrow project.

Speaker 2

We congratulate Airbus on the recently announced opening of a new Wing Technology Development Center in Filton, UK and look forward to our continued collaboration on making longer, thinner and lighter aircraft wings, which represent one of the biggest opportunities to improve fuel efficiency, reduce CO2 and ultimately work toward the Air Transport Industry's carbon emissions reduction goal. Finally, Our Hexcel leadership team had the opportunity to ring the opening bell at the New York Stock Exchange in June in recognition of Hexcel's 75th anniversary. The last time Hexcel had the privilege of ringing the bell was in 2,005 when we celebrated 25 years on the stock exchange. This was truly an experience for all of us and a great way to represent and recognize our 1 Hexcel team for their hard work and effort that has led us to this anniversary year and this significant moment in our history. Now I'll turn it over to Patrick to provide more details on the numbers.

Speaker 1

Thank you, Nick. As a reminder, the majority of our sales denominated in dollars. However, our cost base is a mix of dollars, euros and British pounds as we have a significant manufacturing presence in Europe. As a result, when the dollar strengthens against the euro and the pound, our sales translate lower, while our costs also translates lower, leading to a net benefit to our margins. Conversely, a weak dollar is a headwind to our financial results.

Speaker 1

We hedge this currency exposure over a 10 quarter horizon to protect our operating income. As a result, currency changes are layered into financial results over time. As a reminder, the year over year sales comparisons I will provide are in constant currency, which thereby removes the foreign exchange impact of sales. Turning to our 3 markets. Commercial Aerospace represented approximately 58 of total Q2 2023 sales.

Speaker 1

2nd quarter commercial aerospace sales of $264,300,000 increased 15.4% compared to the Q2 of 2022 led by growth in the Airbus A350 and Boeing 787 programs. The other commercial aerospace category grew 13.3% led by strength in business jets on greater adoption of lightweight concerts in the latest generation of large cabin business jets. Space and Defense represented 30% of 2nd quarter sales and totaled $137,500,000 increasing 22.1% from the same period in 2022. Fighter aircraft were particularly strong, including the F-thirty 5 and Rafale and Blackhawk and Civilian Rotorcraft also grew strongly along with a solid performance for space. Industrial comprised 12% of Q2 2023 sales.

Speaker 1

Industrial sales totaled $52,500,000 decreasing 3.3% compared to the Q2 of 2022 as growth in other in automotive and other industrial markets did not offset the lower wind energy sales. On a consolidated basis, gross margin for the 2nd quarter was 24.4% compared to 22.8% last year. The gross margin this quarter was consistent with our expectations following an unusually strong Q1 2023 gross margin due to a number of factors we called out on our last earnings call, including favorable sales mix with strong demand for Hexcel fiber rich products and significant overhead absorption from increasing inventory. As a percentage of sales, selling, general and administrative expenses and R and were 10.8% in the 2nd quarter compared to 11.4% in the Q2 of 2022, reflecting robust cost control as sales grow. Adjusted operating income in the second quarter was $81,800,000 or 13.6 percent of sales compared to $44,700,000 or 11.4 percent of sales in the comparable prior year period.

Speaker 1

The year over year impact of exchange rates in the Q2 to adjusted operating income was favorable by approximately 30 basis points. Now turning to our 2 segments. The Composite Materials segment represented 83% of total sales and generated an operating margin of 16.2%. The operating margin in the comparable prior year period was 14%. The Engineered Products segment, which comprised of our Structured and Engineered core businesses, represented 17% of total sales and generated an 8.9% operating margin as compared to 12% in the comparable prior year period.

Speaker 1

The operating margin was softer than normal in this quarter on sales mix and higher development and tooling costs related to the CA-fifty three ks and various space programs. The effective tax rate for the Q2 of 2023 was 22.1%. Net cash provided by operating activities is $30,100,000 year to date compared to $18,300,000 in the first half of twenty 22. Working capital was the use of cash of $113,900,000 year to date to support higher sales. For the comparable prior year period, working capital increased $95,100,000 Capital expenditures on an accrual basis were $70,500,000 in the first half of twenty twenty three, which includes $37,800,000 for the Amesbury, Massachusetts property purposes discussed by Nick.

Speaker 1

This compares to $28,300,000 in the prior year period. I would also like to mention that early in July, we sold our former wind energy facility in Colorado for $11,000,000 This was an asset that was held for sale and will be accounted for in the Q3 of 2023. Free cash flow for the 1st 6 months of 20 20 3 was negative $44,700,000 which includes the Massachusetts property acquisition. For the comparable prior year period, free cash flow was negative $19,600,000 For an alternate metric of cash generation, adjusted EBITDA in the Q2 of 2023 was 95 $6,000,000 or 21 percent of sales compared to $78,800,000 or 20 percent of sales in the Q2 of 2022. As disclosed on our last earnings call, we renewed and extended the maturity to date of our bank syndicated $750,000,000 revolver.

Speaker 1

The leverage liquidity covenant calculation is now on a net debt basis. As a result, we may trend a little lower in our desired leverage range of 1.5 to 2 times as we have previously defined that range on a gross debt basis. The Board of Directors declared a $0.125 quarterly dividend today payable to stockholders of record as of August 4 with a payment date of August 11. We did not repurchase any common stock during the Q2 of 2023. The remaining authorization under the share purchase program at June 30, 2023, was $217,000,000 As you read in our release last night, we are updating our 2023 guidance.

Speaker 1

We have raised and narrowed our sales guidance range to $1,765,000,000 to $1,835,000,000 And similarly, we have raised and narrowed our EPS guidance range to $1.80 to 1 $0.94 Our guidance for free cash flow is updated to reflect the purchase of the Amesbury Massachusetts property. Free cash flow guidance is now to generate more than $110,000,000 with accrued capital expenditures in 2023 revised to approximately $130,000,000 And as a reminder, on sales forecasting seasonality, we typically experienced softer sales in the Q3 of the year due to summer vacations, particularly in Europe. With that, let me turn the call back to Nick.

Speaker 2

Thanks, Patrick. We are confident that the outlook for Hexcel continues to get stronger with expectations for significant cash generation in the coming years. As we plan for that cash generation, our capital deployment priorities remain unchanged. 1st, we will invest in organic growth opportunities to support secular penetration and expanded composite adoption. Both for the next few years, we Our capital expenditure requirements to be subdued as we grow back into and optimize our existing capacity and footprint.

Speaker 2

The next priority is to explore in a disciplined manner high quality M and A opportunities involving innovative and Value Adding Material Science Technology. We'll continue to pay a dividend and depending on these activities, we'll repurchase our stock while staying aligned with our target leverage range. Before we take questions, I want to note that last Our global team were in Stanford for our annual strategic review, which is a 3 days of sharing and collaborating on the new and expanded business opportunities that lie ahead for our markets, our customers and Hexcel over the next 5 to 10 years. While we packed a lot into that meeting, at least two things were crystal clear. 1st, Our advanced composite materials are a key enabler in helping our customers meet their efficiency and sustainability targets and that value proposition continues to expand as the focus on global emissions reduction increases.

Speaker 2

We look forward to continuing our relentless pursuit of new technologies and lightweight material solutions that enable our customers to achieve their goals to optimize fuel consumption, lower emissions, reduce noise and help sustain the planet for generations to come. 2nd, we are absolutely ready to meet the growing demand forecasted over the coming quarters years. All that we did during the pandemic to become lean and efficient and all that we have done since to prepare ourselves for robust growth is paying off. We are aligned with our customers. We are adept at pivoting and flexing with changing requirements.

Speaker 2

And we have demonstrated time and again that we know how to work through uncertainties or challenges that arise. Our One Hexcel team will stay focused on efficiency and productivity, cash management and overall performance, especially in quality and on time delivery. I remain extremely confident in Hexcel's future and our ability to continue delivering value to our stockholders. Thank you. Paul, we're now ready to take questions.

Operator

We'll go first this morning to Ken Herbert at RBC Capital Markets.

Speaker 3

Yes. Hi. Good morning, Nick and Patrick.

Speaker 2

Good morning, John. Good morning.

Speaker 3

Hey, I just first I wanted to just clarify on the free cash flow outlook. I think obviously the Facility acquisition justified the majority of the change in the cash flow outlook. But can you comment on any other moving pieces that we may or otherwise would have expected to see in the cash flow guide?

Speaker 1

Yes. So I mean, and it really was driven fundamentally by that One time, if you like, slightly exceptional capital expenditure to buy the property. That essentially moved us down really from $140,000,000 to $100,000,000 But we felt a little bit more confident with the earnings that we see coming through and the outlook and getting control of inventory now for the rest of the year that we pushed it to 110. There's not a lot more to it than that. So really recognizing the Amesbury property purchase and some underlying strength.

Speaker 4

Great. Thanks, Patrick. And as I

Speaker 3

look at the Full year commercial aerospace growth, you obviously saw some slightly slower growth in the Q2. I think the guidance would imply sort of High teens for the full year, is the growth rate for Aerospace in the Q2 a fair starting point as we think about the second half of the year? Or does it maybe soften a little bit from where

Speaker 1

today? Well, I mean, we've called down the seasonality with Q3 and particularly the European Vacations. And so that will slow things down a little. I think the question really is how strong is the 4th quarter going to be. Everyone's obviously read about the Raytheon Pratt and Whitney engine issue this morning.

Speaker 1

There are always challenges out there. But fundamentally, we're Confident the underlying demand is fantastic. Our content on all these platforms is strong. And we're obviously willing Airbus and Boeing to move forward as strong as possible. So we're still pretty positive, but we recognize it's not Always going to be a smooth path, but it should be a solid second half of the year, especially the Q4.

Speaker 3

Okay. Thanks, Patrick.

Operator

Thank you. We go next now to Gautam Khanna at Cowen.

Speaker 5

I wanted to just ask, in the quarter itself, did you guys see a rate increase on threeseven packs, A320neo, I know you cited a couple of programs of 350 and 787 year over year, but I didn't know sequentially if you saw much change across any of the programs.

Speaker 2

Yes. So if you look at the first half, we're clearly aligned with Boeing in the low 30s On the rate, there's a little bit of movement between 1st and second quarter, maybe some supply chain restocking happened in Q1. So we saw a minimal decrease sequentially, Gautam.

Speaker 5

Okay. And just stepping back, do you feel like Most of the supply chain, most of your customers are aligned on rate across the board. I mean, with underlying assembly rates at Boeing and Airbus or is there anyone that's out of whack noticeably?

Speaker 2

Well, we pay a lot of attention to the supply chain and Especially looking for outliers that may be pulling excess material or not pulling enough. And Right now, we see our supply chain, throughout the OEs and the Tier 1s, 2s and beyond to be pretty much aligned on the product lines that we're providing.

Speaker 5

Thanks a lot guys.

Speaker 2

Thank you.

Operator

We'll go next now to David Strauss at Barclays.

Speaker 6

Thank you. Good morning.

Speaker 7

Good morning.

Speaker 6

Just want to first question on margins in the quarter. So could you just maybe touch on the mix, So all the different things that might have impacted the margin in Composite Materials in Q2 versus Q1, I mean the revenue was fairly similar. The margin obviously was down a decent amount. So if you could address that first.

Speaker 1

Yes. I mean, I think as we tried to call out in Q1 and I think I've just touched on in the previous comments, Q1 really was as things aligned, it was somewhat exceptional. We had a very strong Product mix, if you like, Hexcel carbon fiber rich product mix. And that always drives our strongest profile of margins. And so we had a good weighting of that in Q1.

Speaker 1

We also had quite a lot of inventory build in Q1. And that combined with good cost control led to very good overhead absorption. And so With that strong mix of Hexcel Fiber Products, good sales, leveraging over a controlled overhead base and combined with some inventory build, that is really those are really the key factors that drove that strong or very strong Q1. I would say Q2 is back more in the normal solid range we would expect to be forming with this level of revenue is the way I would frame it.

Speaker 6

Okay. And I guess the question John, where we go from here? I think previously, Patrick, you talked about mid teens margins, Total margins for the company on $1,800,000,000 to $1,900,000,000 in revenue, you're going to be kind of at the bottom end of that range this Yeah, it doesn't look like based on your EPS guidance that you're implying that you're going to get all the way to mid teens margin. So how do we think about the margin progression from here as volumes continue to go higher? Thanks.

Speaker 1

Yes. I think we talked to this probably in the Q4 and then after the Q4 earnings. Essentially, the inflationary pressures last year probably pushed us back a bit on that mid teens €1,800,000,000 to €1,900,000,000 sort of model. And I think we acknowledge we would be at the low end of that range and it would now be a struggle to get to something like 15% with 1.8 I think a lot of the inflationary pressures are transitory. So energy costs are going to So, Page, certainly, as we look forward into 2024, some of the commodity chemicals and raw materials that we buy are going to ease off.

Speaker 1

And so the general shape of what we put out there is fundamentally correct, but we have been delayed in getting there. So as we now approach 2024 and we our sales are going to step up again significantly, We will definitely be looking at that mid teens and maybe slightly higher range for our operating income. And then as we go above 2,000,000,000 and continue to drive up to back to where we were in 2019, we should be pushing ourselves back to the 17%, 18% op income that we historically saw and ultimately we'll be looking to push past that.

Speaker 6

Thanks very much.

Operator

We'll go next now to Robert Spingarn at Melius Research.

Speaker 5

Hey, good morning.

Speaker 2

Good morning, Rob.

Speaker 1

Nick, I think you just

Speaker 5

said Maybe Patrick said it, but you're pretty aligned with Boeing on the MAX in the low 30s during the second quarter. When would you expect to start building to that $38 per month? And then I have another quick one on future programs.

Speaker 2

Yes. I basically confirm that we are very aligned with Following not only on the MAX, but on the 787 running at about 4 and low 30s on the MAX. We have the capacity. We are ready to ramp up and we're not going to get ahead of Boeing. But as soon as they start pulling material at a higher rate, getting up to their 38 target or 41 or even 50 in 25, 26, we're going to be aligned with them.

Speaker 2

So to put a prediction on that, I'll let Boeing talk to that tomorrow.

Speaker 5

Okay. And then a couple of things on Airbus. There's been some talk that the 321XLR may be hitting some weight challenges that might affect range. To what extent are you talking to them about maybe increasing your Lightweight material content to mitigate that. And then you also talked about having brought in your teams On future programs, that must be fresh in your mind.

Speaker 5

You mentioned the Wing of Tomorrow facility in the U. K. And I wondered if you could speak a little bit to the Hexcel opportunity on wing of tomorrow.

Speaker 2

Yes, Rob. So to start with on the XLR, We're seeing what everybody else is seeing and reading on some weight challenges related to the central fuel tank in the back of the aircraft and some Additional lining that's going to take place, I can tell you we're intimately involved with Airbus on their development efforts. I can't call out this specifically, because it's related to fuel liner And I don't want to get into the details, but anything that they can do to decrease that weight impact, They certainly know our portfolio, they know our capability and they know the areas that we can continue to help them to drive weight out. So That's ongoing. Again, I'll let Airbus talk to that point tomorrow during their earnings call.

Speaker 2

On the wing of tomorrow, it's exciting, obviously. It's there really There's no final wing of tomorrow as of yet. There's a lot of demonstrations. There's a lot of different material product forms. And what I'm so excited about with Hexcel is our portfolio allows us to position multiple material types to help optimize that wing.

Speaker 2

And it depends on the type of ultimate technology that's selected. So We believe we're in a great position. We believe Airbus have a fantastic path forward to continue to decrease weight, increase strength and optimize the future wing for the next new narrow body or any other derivative They move forward

Speaker 5

with. And Nick, do you think that they've got the technology where it needs to be? And I'm speaking specifically to composite wing, where it could keep up with the types of rates that are necessary in narrow body?

Speaker 2

I think they have the technology and they could launch a win today, absolutely. I think they are still evaluating that technology and the rate throughput, not only in The material lay down rate, but the material cure rate and the downstream processing, all of that is being evaluated with the various material forms. And I can just say I'm excited that we're side by side with them helping them to optimize that design.

Speaker 5

Great. Thanks, Nick.

Speaker 2

You're welcome, Rob.

Operator

Thank you. We go next now to Matt Bakers at Wells Fargo.

Speaker 7

Hey, good morning guys. Thanks for the question. Good morning, Dan.

Speaker 2

I guess

Speaker 7

maybe to put a finer point, could you talk about the decision to buy the Amesbury facility, what drove that? Was it just that the prior owner was looking to sell and you want to be the owner today? It seems like it wasn't in the original plan for the year?

Speaker 2

So you're right, it was not in our original plan for the year and that's One of the major reasons or the major reason why we updated our guidance on cash and CapEx. When we acquired Amesbury, our technologies, we were excited to find that technology that So cohesively fit into our existing portfolio and technologies and how to add value to composites. As you know, it's primarily a U. S. Military product site, But the opportunities around what they do and how we can enhance our overall composite offering is tremendous.

Speaker 2

And our excitement just continues to grow with that site. When Dan Healy, the prior owner approached us and we found out that he was going to market that property. He wanted to change direction. We took the opportunity to pursue it so that we could control the expansions there, we could control the facility modifications and consolidations and really continue to drive the growth and the efficiency that we see in the coming periods.

Speaker 7

Got it. Thanks. That makes sense. And then, if I can ask on industrial, I know the wind compares Get a lot easier in the back half, but could you just talk about sort of how you think about that business growing sequentially after it's kind of step up sequentially we saw in Q2?

Speaker 2

Well, I think we've said before, wind has pretty much stabilized for us in the second half of twenty twenty two. Obviously, that's driven by Europe, by the legacy products that we're supporting there. And we do see it stabilizing and continuing to be a solid business for the foreseeable future. Clearly, automotive, marine, other industrial continues to grow nicely. And we see that offsetting or basically driving some of the significant growth we see in the go forward periods on the industrial side.

Speaker 2

Recreation has been a little softer on some winter sports and some of the rec goods. But again, That tends to be a little bit impacted by GDP and inflationary pressures. And again, the product offerings we have There in the technology we're introducing there, we continue to see that as being an opportunity going forward.

Speaker 7

Great. Thank you.

Speaker 2

Thank you.

Operator

We'll go next now to Sheila Kahyaoglu at Jefferies.

Speaker 8

Thank you. Just wanted to ask on Space and Defense, good growth in the quarter. What sort of drove that? And as you think about 2024, are there any platforms that decline outside the V22 in defense?

Speaker 2

So really what drove it, the F-thirty 5 was very strong for us in Q2. The Rafael was very strong. We saw civil helicopter step up nicely. Blackhawk was up strong. And we saw space applications, which is U.

Speaker 2

S. Driven, although we've got good positions in India, which stepped up nicely. So All in all, it was very broad based, but those were the primary drivers. In 2024, There's really nothing new. I'd say the CH-fifty 3 ks, there's a lot of optimism around that.

Speaker 2

Continued growth in the F-thirty 5 as Lockheed ultimately will hit their targeted delivery and build rates. And perhaps some softness in the B-twenty 2, but People have been talking about that going down for a long time and it just continues to hold strong. So I'll wait until we roll up our 2024 plan

Speaker 5

before I

Speaker 2

really guide more on what's going to be the puts and the takes in the Space and Defense side. Sure.

Speaker 8

Thank you, Nick. And then Patrick, if I could ask one for you. No, I understand you didn't want to deal with a new landlord. So you purchased That facility from ARC. How do we think about your other capital allocation?

Speaker 8

And when you start buying back shares, what's your sort of Metric and analysis you do behind resuming your share repurchases.

Speaker 1

Yes. So we continue I mean Nick laid out our capital deployment Priorities which haven't changed the organic growth, disciplined M and A, we'll pay dividend. And so share buyback kind of becomes the default sort of last stop, which we will do. We're not going to sit on Mountain's piles of cash. So as we go through the rest of this year and we will start to generate some cash now in the second half, which is the typical profile for Hexcel and certainly going into 2024 and beyond.

Speaker 1

We will expect to engage in share buyback. I'm not going to call out specifically what's and when at this point, but it's very much on our agenda in the coming periods.

Speaker 8

Okay. Thank you so much.

Operator

Thank you. We'll go next now to Pete Sibitski at Alabama Global.

Speaker 9

Patrick, maybe just extending your comments in the Q3 revenue wise. Margin wise, should we expect 3rd quarter margins to be down sequentially? Or do you have a sense already about the carbon fiber mix in 3Q versus 2Q that could maybe offset it.

Speaker 1

Yes. I mean, what I would say in terms of fiber mix is that Q1 was Unusually strong. Perhaps going forward for the rest of the year, we'll see a more normal profile as we saw in the second quarter. I mean in terms of margin and we don't I'm not going to get into sort of quarter by quarter predictions or come up with any specifics, but a lower revenue that we are Expecting because of the seasonality will give us less or lower sort of overhead volume leverage, if you like, which makes That bottom line a bit tougher, but it's a top line issue. It's not a margin quality issue going forward.

Speaker 1

And then as the revenue steps back up In the Q4, we should be driving back to strong margins again.

Speaker 4

Okay. Thank you.

Operator

We'll go next now to Richard Safran at Seaport Research Partners.

Speaker 5

Nick, Patrick, Kurt, good morning. How are you?

Speaker 2

Good morning, Richard.

Speaker 5

Nick, since you brought it up, I'd like to ask you about The materials that you were highlighting at Paris had highlighted or enabled the higher build rates. So I just want to know if you could Platforms they might be being targeted for commercial, defense, both. And generally when you have new aerospace materials, They have a long term payoff. And I'm wondering if that's the case here or might there be more of a near term payoff for these materials you've been talking about?

Speaker 2

Yes. So again, there's multiple versions, and we're talking about the lay down Whether it's a pre prag, whether it's an infused product form, whether it's Secured in autoclaves, under pressure or out of autoclave, we're working all those technologies And they're on the table, some more mature than others. With respect to The way in Airbus and again, you look at the material costs as being one element, But the lay down and the processing and the curing and the after machining is also something that we work with our customers diligently on. I would say the new materials for the most part run on our existing assets. So with respect to our flexibility in our plans, it makes for a very easy transition.

Speaker 2

It's just a question of qualification for the application.

Speaker 5

Okay. Thanks. And then, Patrick, just a quick You've been talking about back half and margins. And if you've answered this and I missed it, I apologize. But I want to know about working capital in the back half of the year, specifically I guess inventory.

Speaker 5

Given the expected 3Q seasonal slowing, is it Correct to assume that most of your working capital benefit shows up in the Q4. Is that the way it should trend this year?

Speaker 1

We should definitely see a working capital benefit in the second half of the year, I would expect, driven by inventory. I think we kind of turned a corner in the second quarter. Inventory was essentially flat. It was a few $1,000,000 up. But Essentially, we stopped the growth that we've seen in the sort of the second half of twenty twenty two and the Q1 of 'twenty three.

Speaker 1

So I would expect that trend to continue and our inventory in fact to reduce. And so that should drive some working capital reduction And therefore cash positive cash flow. Receivables will reflect the level of sales. And so with seasonality and lower Q3 sales receivables will probably step down, but then they're likely to come back again in the Q4. But overall, driven by inventory, I would back to positive cash flow impact from working capital in the second half of the year.

Speaker 5

Well, thank you very much.

Operator

Going next now to Christine Liwag at Morgan Stanley.

Speaker 8

Great. Hey guys. Patrick, on the Airbus A220-five hundred or should I say the potential Airbus A220-five hundred, Can you provide any color in terms of the maximum shipset content you could potentially win? Is there an opportunity For Hexcel I'm Fiber for the aircraft. And should you get the upper end of your expected ship set content, How do we think about CapEx requirements to meet that program?

Speaker 1

Okay. So that was a lot of questions So essentially the $220,000 today is we call out in sort of $200,000 to $500,000 range in terms of ship That is probably at the lower end of that range. I mean if we were to win a significant position, the wing on the 220-one 100 and we'll be aiming for other opportunities as well as they reengineer that platform. But clearly, we see a significant step up in the ship set. I mean, multiple times what we have today.

Speaker 1

I'm not going to try and give a number. It's far too variable, but clearly, it's a great opportunity. Would it attract I'm Fiber? But very likely to attract I'm Fiber of some sort if there's a wing involved and unique and structural integrity that the Ion Fibers bring. So again, a Hexcel fiber rich opportunity would be great.

Speaker 1

In terms of capital expenditure, I wouldn't put you too much. We We are bringing on, as you know, we're completing a new fiber line and we have a panel line in the works into Catur, Alabama, which we put on hold as we went into the pandemic. And I would imagine that capacity certainly in the next few years would cover us. Now if the platform grew significantly combined with other opportunities, we will gladly invest in capital for strong long term returns and good margins.

Speaker 8

Great. Thank you for the color.

Operator

We'll next now to Myles Walton at Wolfe Research.

Speaker 4

Thanks. Maybe to follow-up on that Patrick or How much of the sales today within composite materials is Supplied or furnished with your own fiber from a vertical and a grade perspective.

Speaker 1

Well, I'll turn that around a little bit. I don't know that we're explicit on that, but we use 70% to 80% of our own fiber. So the fiber we produce, we consume the vast majority internally. Now we're not at The full capacity we were in 2019, yes, but it is stepping up and we are using 70% to 80 Percent of what we produce, the remainder goes to 3rd parties, military outlets and a smaller amount goes to industrial. But we use the vast majority of our own fiber.

Speaker 4

And you procure from external sources less fiber I presume than what you're producing internally?

Speaker 1

That is true. For some of the older legacy programs is really where we're buying in third party fibers And that will continue because those programs are long term qualified and very unlikely to be requalified. And so yes, we do buy in 3rd fiber, but it is a smaller quantity than we use of our own fiber.

Speaker 4

Okay. Fair enough. And then looking to cash flow, is there a path To 100 percent net income to free cash flow conversion in 2024? Or is the growth I think the

Speaker 1

simple answer is yes. We're definitely driving towards that. Whether we'll get there in 2024, I don't know. But we're definitely moving in that direction in the next year or 2 miles. Yes.

Speaker 4

Okay. Perfect. Those are my only 2. Thank you.

Operator

We'll go next now to Ron Epstein at Bank of America.

Speaker 10

Hey, good morning. Good morning, Ron. Maybe just a quick financial question and then maybe a more technical question. The finance one first. I mean, what

Speaker 5

are you

Speaker 10

guys seeing out there in the M and A environment? Is there any interesting add on things that you Want to do technologies or whatever? I mean, if you could just share a couple of words on that and then I just have a quick technology question.

Speaker 2

Yes, Ron. So, as part of our strat review, obviously M and A and more importantly, Technologies around material science is a big portion of our review process. And I would say there are technologies out there that are attractive that would enhance our portfolio, allow us to offer broader solution set to our customers, whether that's a value add to the materials or sensing capability To do on condition maintenance or diagnostics, to get into the specifics on companies obviously is tough to do. And As always, it always comes down to what's actionable. So we have a pipeline, it's very active.

Speaker 2

We review it on a regular basis. We have our priorities that our pipeline is based on and we continue to work those and stay mindful, But always disciplined on what we would consider going forward.

Speaker 10

Got it. Got it. And then on the technology side, when we think about future wings, I mean, that's come up a couple of times here in the context of an A220-five 100 or a future wing. Would you expect it to be kind of how they're doing it today with the tape layup? Or would you expect it, how I guess how the 220 does it within an injection molded technology or Something completely different.

Speaker 10

I mean, how are you thinking about that when we think about the future application Of advanced composites on something like a wing. I mean, just give us a broad context for that.

Speaker 2

Yes. So that's a great question. And It's one of the focuses on Hexcel's strategy and that is we're not making the assumption that a wing will be designed with one material type. The technology has advanced so rapidly. Our Customers' knowledge and ability to design and work with multiple material forms, all composite lightweight just allows them a great opportunity to optimize the wing.

Speaker 2

So when you're talking about a wing skin versus a wing strut versus a spar versus brackets. Really what I And what Hexcel's position for is it's not going to be one material type. It could be a combination of Thermal set, thermal plastic, prepreg, infused and liquid compound molding. And again, That's the beauty of our diverse portfolio.

Speaker 10

Got it. Thank you.

Speaker 2

You're welcome.

Operator

And go next now to Michael Ciarmoli at Truist Securities.

Speaker 9

Hey, good morning guys. Thanks for taking the questions. Good morning, Michael. Just on back to how are you? Just back to CapEx on the facility purchase.

Speaker 9

I mean, you kind of said the past 100% conversion is still there. Does anything change in terms of your CapEx profile to support the new facility? Or how should we think about your CapEx spend there?

Speaker 1

Our CapEx outlook remains unchanged really. As I think I described it, I would see this property acquisition as a little bit of an exception So our underlying trend and our underlying trend is to sort of be under €100,000,000 for the next few years. We guided to around 90 this year. I would see a similar shape in the next few years. This building, so to speak, was an outlier.

Speaker 1

The opportunity arose and as Nick described strategically and for the growth opportunities we want to be in control of that site to expand it and grow it. And now we can do that. But the underlying trend in our CapEx remains unchanged. They're sort of under $100,000,000 for the next few years.

Speaker 4

Okay, perfect.

Speaker 9

And then just back to the margin question. I mean, there's been some a bunch of talk here on the wing of the future, but It sounds like there might be some more shovel ready projects in Space and Defense. And I think you called out development and tooling kind of as a headwind in this quarter in Engineered Products. How should we think about if there are if there is a bigger pipeline 1st Space and Defense, should we think about maybe some margin pressure going forward in that engineered products? Or do you think can get that segment back to prior peak.

Speaker 1

Yes. I mean, we did have a softer quarter, but on top of a very strong first And a very positive sort of engineered product mix in Q1. Engineered product is lumpy and anyone who's followed Hexcel But for some time, we'll kind of have seen that. We do get tooling lumps when we buy it. The cost We incur and bring this down and then we sell tooling and we get a good mix in the quarter and we can have a very strong engineered product.

Speaker 1

It is much more lumpy There's in composite materials just because of the nature of the business. I mean, this quarter was particularly about the 3 ks, but there was also some developments in tooling around some space programs. And I think we believe very strongly in our opportunities For military programs going forward across our engineered core engineered products businesses, we're fantastically positioned to win more business and we'll be driving to do that.

Speaker 4

Perfect. Thanks guys.

Speaker 1

Thank you.

Operator

Thank you. And ladies and gentlemen, we do have time for one further question this morning. We'll take that now from Noah Poponak at Goldman Sachs.

Speaker 11

Hey, good morning guys.

Speaker 5

Good morning Noah. Good morning Noah.

Speaker 11

Patrick, I wanted to ask about the revenue profile in the back half. I think you alluded to aerospace being down sequentially with a normal seasonality, but it looks historically like that's usually only down low single digits. And I think you're maybe ramping on a number of airplanes. So can you give us a little more context around how much that's down? And then on the defense side, should we be thinking of defense revenues as growing now sequentially from that New level you've put in with this 2Q in absolute dollars or would that does that pull back before then growing again?

Speaker 1

Yes. So there's a lot in there. I mean, you're right. We've got underlying program growth, which We are going to see somewhat certainly towards the end of the year. How much of that really materialized in the Q3, we will see We will align ourselves with Airbus and Boeing and what they're doing.

Speaker 1

I think that the seasonal effects will Be the larger effect net net, if you like. And so we will see a bit of a dip. I wouldn't overstate it, but we will see a bit of a step down in Q3. And that in Europe could affect some of the Space and Defense programs as well, quite honestly. It might not just be Commercial Aerospace, it could affect Space and Defense.

Speaker 1

In terms of Space and Defense, Q2 was our record highest ever sort of sales quarter, dollars $175,000,000 I mean quarter to quarter, it's not a straight line. It can be a bit bumpy from time to time. But we're very encouraged and very positive about space and defense as one of our markets, one of our sectors. And we do continue to See opportunities going forward. It won't be a perfect straight line as I see, but there are growth opportunities ahead and we would expect another good year in 2024.

Speaker 11

That's helpful. Appreciate that. And if I could just ask one more on margins. Should we think of next year as kind of settling back into that 25% incremental that has long been Sort of normalized for the business? Or are you early enough in getting back To normal capacity utilization and maybe a slower growth in cost inputs that it should be Higher than that again next year.

Speaker 1

Well, as you know Noah, we're not going to call out a Specific sort of incremental leverage number or target, we're always going to look to maximize what we can do. Obviously, the last Year 18 months has been somewhat exceptional coming out of the pandemic and we've driven very high incremental margins. Quarter to quarter, you can get different shapes, different growth profiles and even mixes and costs as we know. But we will always be pushing ourselves, whether it's 20s or 30s or occasionally, unfortunately, it's going to be lower than that. But we will always be driving to do the best incremental margins that we can perform to.

Speaker 11

Okay. Thanks so much.

Speaker 1

Okay.

Operator

Thank you. And ladies and gentlemen, that will bring us to the conclusion of the Hexcel 2nd quarter earnings conference call. I'd like to thank you all so much for joining us and wish you all a great day. Goodbye.

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Earnings Conference Call
Arcturus Therapeutics Q2 2023
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