Hexcel Q3 2024 Earnings Call Transcript

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Provided by Quartr
October 22, 2024

Key Takeaways

  • Third quarter sales of $457 million, up 8% year-over-year, with 17% growth in commercial aerospace driving adjusted EPS of $0.47, a 20% increase from Q3 2023.
  • Ongoing supply chain disruptions, including the Boeing strike and engine, casting and landing gear shortages, have delayed production rate increases and pressured margins due to higher labor and overhead.
  • Hexcel has withdrawn its mid-term guidance citing persistent aerospace supply chain uncertainty and will provide 2025 guidance with Q4 results in January.
  • The company is exploring strategic options for its Austria plant serving wind energy and recreation markets to focus on core aerospace and defense composites.
  • Management repurchased $50 million of stock in Q3 (over $250 million YTD), expects annual capex below $100 million, and targets a dividend payout ratio of ~20% alongside periodic share buybacks.
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Earnings Conference Call
Hexcel Q3 2024
00:00 / 00:00

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Operator

Thank you for standing by, and welcome to the Hexcel Third Quarter 2024 Earnings Conference Call. All participants are in a listen-only mode. After the speaker's remarks, we will conduct a question-and-answer session. If you would like to ask a question at that time, please press star followed by the number one on your telephone keypad. To withdraw any questions, please press star one again. As a reminder, this conference call is being recorded. I would now like to turn the call over to Patrick Winterlich, Chief Financial Officer. Thank you. Please go ahead.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

Thank you, Julian. Good morning, everyone. Welcome to Hexcel Corporation's Third 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 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 to differ materially from our forward-looking statements today. Such factors are detailed in the company's SEC filings and earnings 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.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

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 Tom Gentile, our CEO and President, and Kurt Goddard, our Vice President of Investor Relations. The purpose of the call is to review our third quarter 2024 results, detailed in our news release issued yesterday. Now let me turn the call over to Tom.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Thanks, Patrick. Good morning, everyone, and thank you for joining us today as we share our 2024 third quarter results. I have now been with Hexcel nearly six months, and my excitement continues to grow as I learn more about this world-leading technology company, our talented team, and Hexcel's innovative lightweighting solutions. I have visited more than 80% of Hexcel sites in the U.S., Europe, and Africa, and I can say the technology, innovation, operational expertise, and focus on execution is truly outstanding. Just last week, I was at our state-of-the-art technology center in Salt Lake City with the Hexcel leadership team and our global R&T leaders, reviewing the latest technology developments across the company and setting priorities for the future.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

As a relative newcomer to Hexcel, I can tell you the extent of innovation across the company is incredible and something we intend to continue investing in and promoting strongly going forward. Hexcel is on a long-term growth trajectory, and with every new generation of commercial and military aircraft using more advanced composite material for improved fuel efficiency and range, for emissions reduction, and for aerodynamic structural design benefits. The medium to long-term future for Hexcel and our innovative lightweighting solutions is remarkable, and the cash generation and shareholder return potential is compelling. IATA's latest global air traffic statistics illustrated that global passenger air travel has exceeded pre-pandemic peaks and that airline load factors reached a record in August. This probably comes as no surprise to you, as I'm sure we are all experiencing full flights whenever we travel.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Consistent with this picture of robust health for airline passenger demand, the backlog for new Airbus and Boeing aircraft is at an all-time high of just under 15,000 aircraft on order. That's a lot of planes to build with a lot of composite material. However, as we all know all too well, despite the strong demand for new, fuel-efficient planes, ongoing and new supply chain challenges, including the strike at Boeing, continue to disrupt planned increases in production rates. Coming out of 2023, there was a sense in the industry that we were finally achieving some stability after the pandemic. Both Boeing and Airbus publicly pointed to signs of improvement within the supply chain.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

By late 2024, however, new challenges emerged in the supply chain, including the supply of engines, castings, seats, and landing gear, to name just a few, that have pushed the recovery and production rates further to the right. At Hexcel, our job is to focus on what we can control, driving operational excellence, maintaining quality standards, keeping a robust grip on cost, and delivering to our customers on time. And I am determined to maintain and reinforce the strong focus that has been in place for many years at Hexcel. As we have communicated previously, we are working hard to ensure that we are ready to satisfy the demand in front of us. We are typically sole source, and with that comes a responsibility for on-time delivery.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

To this end, earlier in the year, we recruited the next wave of direct labor that we needed to meet the forecasted strong demand ahead of us, and we've continued to focus on training and expanding shop floor experience to prepare for the eventual higher production rates, which our customers are publicly forecasting in their schedules. It takes time for our new employees to learn our processes and become efficient and productive on the shop floor, as we have highly technical operations requiring significant training and experience. Therefore, we need to hire two or three quarters ahead of when we expect the demand to develop. As we have said before, this start, stop, start, and delayed ramp-up environment means that periodically we will carry too much labor and overhead infrastructure costs, which will be a near-term headwind to margins.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

We believe we are making the correct decision regarding the timing of adding and training new labor. Although the production rate increases are slower than we would like, there is no question our demand is on an upward trajectory, and we are confident we have taken the right steps to support our customers with experienced and capable labor as they execute on their schedules for production rate increases. We will continue to monitor how those production rates evolve and align our headcount and cost base accordingly. In September, we held our annual strategic review with the Hexcel board. One of the key areas of focus that came out of that strategic review was the importance of our defense and space business.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

As the only vertically integrated U.S.-based American advanced composite company, Hexcel has significant and unique opportunities to develop and sell more critical composite technology into the defense and space market. During our strategic review, we also made some decisions about our current market focus. For many years, Hexcel has produced material for select industrial markets, including wind energy and certain recreation markets, such as winter sports. These businesses historically focus on high volumes of glass fiber prepreg, no longer aligned with our strategic priorities. We are therefore currently exploring strategic options for our plant in Austria, which produces material for these markets, and which we believe will be better served with different ownership. I will now turn to our third quarter results released last night.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Hexcel's third quarter sales of $457 million were up more than 8% year over year on solid performance, especially so in commercial aerospace, where sales grew 17% year over year. At $0.47, adjusted EPS was over 20% better than Q3 2023, a strong adjusted EBIT leverage. While third quarter sales grew strongly year over year, they also reflected the normal third quarter seasonality we typically experience from the European summer vacation period. In addition, there are the ongoing supply chain challenges impacting the commercial aerospace market, and the latter part of the quarter was marginally impacted by the Boeing strike. Given the previously discussed higher overhead infrastructure and labor levels being carried right now at Hexcel, combined with the expected lower third quarter sales run rate, we experienced an anticipated reduction in our margins in the third quarter on a sequential basis.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Overall, the third quarter of 2024 came in generally close to our expectations, though it should be noted that our adjusted EPS benefited from tax planning work coming together in the period. Given all the challenges we see in the marketplace, we expect our 2024 results will be within our current guidance, but at the lower end of the range and benefiting from the lower effective tax rate of 19% versus 22%. Commercial aerospace sales of $296 million increased 17% in constant currency compared to the third quarter of 2023. Our three key commercial aerospace programs, the A350, the A320neo, and the 787, all generated double-digit sales growth year over year. We should note that the work we do for Airbus programs is nearly three times as large as the work we do for Boeing.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Our Boeing work is about half focused on the 787, which is built in Charleston, South Carolina, a plant which is not involved in the current Boeing strike in the Puget Sound area of Washington State. Secondary growth from business jet composite adoption is driving the growth in other commercial aerospace, which grew 9% in the third quarter. Turning to space and defense. Sales of $128 million were essentially flat in constant currency. While select key programs grew, including the Lockheed F-35 and the Sikorsky CH-53K and Black Hawk helicopters, the SpaceX subsegment was broadly soft, including launchers, satellites, and rocket motors. The V-22 is also a headwind as that program winds down.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

During the quarter, we are excited for two of our plants, Pottsville, Pennsylvania, and Salt Lake City, Utah, to be awarded the Sikorsky 2023 Elite Supplier status based on best-in-class on-time delivery and quality. Such rewards reflect our endless pursuit of operational excellence and fuel our passion for continuous improvement. We were also one of only 15 suppliers nominated by Airbus for a prestigious transformation award at their annual supplier conference in Toulouse two weeks ago. I would now like to address the medium-term guidance that we presented in February of this year. The foundation for that guidance was the best demand and production rate forecast available at that time, which supported a growing sense of confidence in the supply chain and production rates. We believe that the guidance we provided was a conservative view on the growth outlook.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Now, eight months on from providing that guidance, it is clear that the world is not where we had expected it to be. Turbulence in the commercial aerospace OEM supply chain has continued unabated. As I noted earlier, issues over the last four to six months with engines, castings, seats, landing gear, and now the Boeing strike, are constraining any sustained near-term improvement in the commercial aerospace supply chain, and we have seen further delays to production rate increases, such as those announced by Airbus this past June. Having now had time to assess the situation and more deeply review the current data and outlook for Hexcel, it is clear that the assumptions that were the basis for our midterm guidance are no longer valid. We are therefore withdrawing our previously issued midterm guidance, and we will provide guidance for 2025 with our Q4 earnings in January.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

With that said, we remain confident in the outlook for commercial aircraft and expect both Airbus and Boeing to continue to increase their production rates over the coming quarters and continue to do so for many years to come in order to deliver on their historic backlog. We also retain our confidence in space and defense markets, as well as our conviction in the cash generation ability of Hexcel. Reflecting this confidence and strong belief in the value proposition for Hexcel, we repurchased around $50 million of Hexcel stock during the third of this quarter in 2024, which brings the total stock repurchases to just over $250 million this year, a significant return of cash to our shareholders. Our expectation is for Hexcel to generate strong EBITDA margins and cash flow for years to come.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Since we have already invested the capital to support the production rates in effect in 2019, we expect capital expenditures to remain below $100 million per year for the foreseeable future. We will focus on optimizing our capital deployment, where our priorities remain unchanged, namely, funding organic growth when required, and then considering M&A and inorganic growth in a very disciplined and strategic manner. Also, we will continue to pay a dividend with a notional target payout ratio, roughly 20% of net income in the medium to longer term. This will be accompanied by a program of periodic share repurchases, while we operate within our targeted net debt to EBITDA leverage ratio of 1.5 to 2 times. We remain confident in a strong future with robust growth and strong shareholder returns.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Now, let me turn it over to Patrick to provide more details on the numbers. Patrick?

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

Thank you, Tom. As a reminder, regarding foreign exchange exposure, and I have explained in detail during previous earnings calls, Hexcel benefits from a strong dollar. We continue to hedge foreign exchange exposure over a 10-quarter time horizon. Year-over-year sales comparisons I will provide are in constant currency, which thereby removes the foreign exchange impact to sales. The commercial aerospace market represented approximately 65% of total third quarter 2024 sales of $456.5 million. The third quarter commercial aerospace sales increased 17% compared to the third quarter of 2023, with double-digit growth in our three key platforms, the Airbus A350, A320, and the Boeing 787. The 737 MAX is a smaller program for us, as it is predominantly a metal plane launched in the 1960s when composites were still in their infancy.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

The majority of our content is with the LEAP engine in nacelle. In the third quarter of 2024, our MAX sales were marginally impacted by the Boeing strike and lower both year over year and sequentially, though the materiality of the impact is less than a decline in our other key programs would have been. The other commercial aerospace category increased 9.1%, led by robust latest generation business jet sales. To share some further perspective on our commercial aerospace business year-to-date, wide-body sales comprised just under 40% of total year-to-date commercial aerospace sales. Narrow-body sales were just over 30%, and other commercial aerospace, including business and regional aircraft, was approximately 20%.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

Space and defense represented approximately 28% of third quarter sales and totaled $128.2 million, decreasing just under 1% from the same period in 2023. As we have previously said, this market can be volatile quarter to quarter. In the third quarter of 2024, CH-53K and Black Hawk programs both experienced growth, including Black Hawk replacement helicopter blades, a good aftermarket business for us. The Bell V-22 program is winding down, so that is a headwind for us in terms of year-over-year sales comparisons, and in the third quarter, the space sub-market was weaker, both domestically and abroad, including satellites, launchers, and rockets. Production volumes are lower in space and can be lumpy, leading to greater quarter to quarter volatility in our sales historically.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

Industrial is a much smaller part of our business, comprising only 7% of third quarter 2024 sales and total $32.4 million, decreasing 17.3% compared to the third quarter of 2023. We experienced softness across all the submarkets, including high-end performance automotive. Turning back to total company sales, and as we expected, summer holidays led to a sequential sales decline as demand softened seasonally from our European-based commercial aerospace, business jet, space and defense, and industrial customers. Gross margin of 23.3% in the third quarter of 2024 favorably compared to the prior year period gross margin of 21.8%. The improvement reflects the operating leverage from higher sales.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

As a percentage of sales, selling, general and administrative expenses and R&D expenses were 11.7% in the third quarter of 2024, compared to 11.6% in the comparable prior year period. As I mentioned last quarter, there is a modest cost impact from the CEO transition that will recur in the fourth quarter of 2024 and then conclude at year-end. Adjusted operating income in the third quarter was $52.9 million, or 11.6% of sales, compared to $42.8 million, or 10.2% of sales, in the comparable prior year period. The year-over-year impact of exchange rates in the third quarter to operating income was favorable by approximately ten basis points. Now turning to our two segments.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

The composite material segment represented 81% total third quarter sales and generated an operating margin of 14.4%. The operating margin in the comparable prior year period was 12.3%. The engineered product segment, which is comprised of our structures and engineered core businesses, represented 19% of total sales and generated an 11.2% operating margin as compared to 7.8% in the comparable prior year period. Net cash provided by operating activities was $127.3 million for the first nine months of 2024, which compares to $98.1 million for the same period in 2023.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

Working capital with a cash use of $93.1 million for the first nine months of 2024, and with a cash use of $112.1 million for the comparable prior year period. Capital expenditures on an accrual basis were $59.6 million for the first nine months of 2024, compared to $88.7 million in the comparable prior year period. Recall that in 2023, we purchased the land and building for our Amesbury, Massachusetts operation for approximately $38 million. Free cash flow for the first nine months of 2024 was $58.9 million, which compares to $3.7 million for the first nine months of 2023. Inventory remains higher than I would like, and we have work to do to improve our inventory days as sales expand.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

While I'm on the topic of inventory, our three commercial aerospace platforms, including the A350, A320, and the 787, are all on an upward growth trajectory as our customers work to increase production rates to meet the strong demand for these aircraft. We feel that channel inventories for our material are generally aligned with the growth outlook. Remember, it is production rate increases that are being pushed out. Rates are not being cut. Channel destocking occurs when production rates are cut. The board of directors declared a $0.15 quarterly dividend yesterday. The dividend is payable to stockholders of record as of November first, with a payment date of November eighth. We continued repurchasing Hexcel stock, acquiring $50 million of common stock during the third quarter. Year to date through September thirtieth, repurchases total $252.2 million.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

The remaining authorization under the share repurchase program as of September thirtieth, 2024, was $234.9 million. As we discussed last quarter, fluctuating end market demand limits our ability to optimize our operations and results in a higher cost base near term that is not aligned with current production levels. This dynamic is continuing to play out as new shortages develop within the greater aerospace supply chain, leading to ramp rates being pushed out by some of our customers. For example, one narrow body engine supplier publicly reduced their original 2024 shipment forecast from up 20%-25% to instead be flat to up 5%, which illustrates how supply chain disruptions are impacting aircraft build rates. As we grow into our cost base, we will continue to focus on employee training and driving efficiency improvements throughout our business.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

While we are maintaining our 2024 guidance despite these headwinds, we expect sales and Adjusted EPS to be at the lower end of the previously communicated range. Admittedly, the Adjusted EPS guidance is supported by a more favorable tax rate, as we now expect the 2024 tax rate to be around 19%, rather than the previously communicated forecast of 22%. This lower rate reflects effective overseas and R&D tax plans. As Tom discussed, our midterm guidance issued in February should no longer be relied upon, reflecting recent impacts and the continued uncertainty in the overall aerospace supply chain outlook. One final point is that we continue to expect accrued capital expenditures to be below $100 million annually in both 2025 and 2026, supporting cash generation and strong cash conversion over time. With that, let me turn the call back to Tom.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Thank you, Patrick. As I mentioned at the start of today's call, I've now been with Hexcel just shy of six months. We have bought a home near Hexcel's corporate headquarters, and I'm in the process of relocating to Stamford, Connecticut. I've admired Hexcel from afar for a long time and felt very fortunate to be selected as the next CEO. I feel exactly the same way today. This is truly an amazing and unique company with talented and engaged workforce, strong culture, and truly innovative lightweighting solutions. There are significant financial opportunities ahead for years to come via secular growth and cash generation. Hexcel makes a product that is more relevant than ever. Lightweighting future transportation is a critical need in today's world, and Hexcel's technology is front and center in achieving the goal for a more sustainable aviation future.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

closing, we are faced with some near-term caution as commercial aerospace OEMs moderate their growth rate ramps due to supply chain constraints. However, the medium and long-term outlook is strong for both secular and cyclical growth. Market demand is not the issue. Experience levels throughout the supply chain will continue to grow, and the commercial aerospace OEM build rates will increase to meet the enormous backlog demand for new aircraft. Our focus at Hexcel remains firmly on execution of current programs, innovation to win positions on the next generation of programs, growth, cost control, and cash generation. Operator, we're now ready to take questions.

Operator

Thank you. As a reminder to ask a question, please press star followed by the number one on your telephone keypad. In the interest of time, we ask that you please limit yourselves to one question and one follow-up. Thank you. Our first question comes from Myles Walton from Wolfe Research. Please go ahead. Your line is open

Myles Walton
Myles Walton
Managing Director at Wolfe Research

Thanks. Good morning, Phil. And thanks for taking a more conservative view on the 2026 guidance. I think it's important. In terms of the end market growth that's implied in the 2024 guidance, could you give us what those new numbers are today as you sit there? It doesn't look like you'll be far off on the commercial side, but I guess it's defense and the industrial side I'm more curious about. And then, as we look to 2025, what should we think about in terms of the divestiture headwind from the industrial side? Thanks.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Great. So as we look at the 2024 growth, Miles, in terms of the different programs, you know, we saw, for example, that the A350 was pulling at seven in Q3, and we expect that to continue in Q4. 787 was pulling at about seven, and that should also continue. The A320 was pulling just under 53, and so those should continue. The one, of course, that's the outlier is MAX. That was pulling at 30 for most of Q3, but it was actually pulling at 36 in Q2. So September obviously was a falloff. We'll see what happens with the strike outcome and what happens in the fourth quarter, but we've basically forecasted fourth quarter with no pulls from the MAX, just to be conservative.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

And we'll see what happens. If the strike does get resolved before the end of the year, obviously, it won't be zero, but to be conservative, that's what we did. In terms of defense, I would say that the U.S. defense market continues to be very strong. We mentioned the strength in the F-35 and the CH-53K, the Black Hawk. The Osprey, the V-22, has been a little bit soft as it winds down. But overall, the U.S. market grew for us. Where the softness was for us was really in the European market. There were a couple of customers where sales were down for the year. And so we expect that to turn around next year. Now, for 2025, the one thing that you asked about was industrial.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

The Austrian plant that we are looking to sell represents about a third of our revenue in industrial. So, for next year, it could be a $30-$40 million headwind. We've already taken that into account in our planning, but that's generally the outlook that we see for the industrial.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

And Myles, just to kind of pick up on the guidance point, which I think you kind of started with, as you say, we should be close to the mid-teens % on commercial aerospace. I mean, we might not quite make it 4 or 5%, mid-single digit. We should be pushing towards that as long as we have a reasonable fourth quarter in space and defense. Clearly, industrial now is gonna be down strong double digits for 2024. So that's kind of the picture I would paint relative to that original number.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Yeah. And just let me add one thing on the industrial while we're on that topic, is the Austrian plant really has been a focus for wind energy, recreation, and marine, and so those will be markets that we will de-emphasize in the future. But we're not getting out of industrial. We'll still focus opportunistically where we can use our aerospace-grade carbon fibers on markets, including automotive and pressure vessels, things like that. So it's not an exit of all of industrial, it's just those certain markets that no longer really align with our strategic priorities.

Myles Walton
Myles Walton
Managing Director at Wolfe Research

Understood. Thank you.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Thank you.

Operator

Our next question comes from Michael Ciarmoli from Truist Securities. Please go ahead. Your line is open.

Michael Ciarmoli
Michael Ciarmoli
Managing Director and, Equity Research Analyst at Truist Securities

Hey, good morning, guys. Thanks for taking the questions. Yeah, Tom, I'll echo. I thought it was pretty prudent to pull that long-term guidance. Just to stay on the production rates and maybe to zero in on the MAX a little bit more, you know, you kind of mentioned that rates aren't being cut, we're just not seeing the increases, but can you maybe just elaborate on the LEAP? I mean, we did see GE clearly talk up 25% the beginning of the year. They're gonna be down 10% this year, and then presumably, they'll be way below that initial, I don't know, call it 21, 2,200 next year. Is there a destocking situation that we have to worry about on LEAP, or does that...

Michael Ciarmoli
Michael Ciarmoli
Managing Director and, Equity Research Analyst at Truist Securities

You mentioned you kind of zeroed out MAX for the quarter. Does that encompass LEAP? And maybe just if you could give some color there.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

We really align LEAP, partly with the MAX, but also, of course, partly with the A320, 'cause it serves both of those markets. In terms of the production rates for the MAX, we just took the conservative outlook for the quarter. We have plenty of inventory. We'll be able to support Boeing. And I think once the strike is over, Boeing will be able to basically recalibrate what the MAX production rates will be for next year. But regardless, we expect them, even for the MAX, to be higher next year than they were this year. And we'll wait for guidance from Boeing as to exactly what those rates will be, and we will be prepared to support.

Michael Ciarmoli
Michael Ciarmoli
Managing Director and, Equity Research Analyst at Truist Securities

Okay. Is there any difference for the LEAP production right there? I mean, is there a lot of inventory in the channel there, specifically, where we might see a destock?

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

We're not aware of any. You know, if anything, they've been catching up on production, so it doesn't seem like they have excess inventory, and certainly, they have to support the fleet as well. I don't think destocking is gonna be a risk, at least at this point.

Michael Ciarmoli
Michael Ciarmoli
Managing Director and, Equity Research Analyst at Truist Securities

Okay.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

We don't see that for the LEAP or the MAX.

Michael Ciarmoli
Michael Ciarmoli
Managing Director and, Equity Research Analyst at Truist Securities

Okay, perfect. Thanks, guys.

Operator

Our next question comes from Matt Akers from Wells Fargo. Please go ahead. Your line is open.

Mathew Akers
Mathew Akers
Senior Equity Research Analyst at Wells Fargo

Yeah. Hey, guys. Good morning. Thanks for the questions. Are there other parts of the portfolio, you're still reviewing as maybe areas you could shed, or is this Austria facility, you think that's sort of the extent of it?

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

We are looking across the whole portfolio. As you know, we have a fairly homogeneous product mix. We provide lightweight materials in carbon fiber composites, matrices, reinforcements, some honeycomb core, and engineered core. So we don't have a lot of different parts of the portfolio that would be logical to divest. This plant in Austria was a bit of an exception. It was focused more on these industrial markets, and it really didn't leverage Hexcel carbon fibers. It leveraged industrial-grade fibers and glass fibers, and so increasingly, it just wasn't fitting with our strategic alignment, and that's why we made the decision to divest it. But broadly speaking, Hexcel is a fairly homogeneous product mix, and we don't have a lot of pieces that we could hive off.

Mathew Akers
Mathew Akers
Senior Equity Research Analyst at Wells Fargo

Got it. Thank you. And then, I guess as a follow-up, you know, Tom, I guess, what would need to happen for you to think there's enough visibility to kinda give midterm guidance again, you know? Because it feels like we've been in this situation for years now. We think the supply chain is getting better, then, you know, kind of the same issues pop up. Is there some way you think we get past that, or do you think this is just sort of the new normal and visibility is gonna sort of be limited?

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

I wouldn't say it's a new normal, but certainly for the time being, there's a lot of uncertainty. And so we're gonna provide guidance for 2025 in January, and that's about as far out as we can see right now. And by the way, we're gonna wait to see what Boeing and Airbus announce as we get throughout the whole course of this year before we make that guidance. 2026 is just too far out right now. And so midterm guidance, I think for the timing, until the supply chain settles and we get into a period of stability, midterm guidance would be very difficult for us or any company to provide.

Mathew Akers
Mathew Akers
Senior Equity Research Analyst at Wells Fargo

Yeah. Okay. Thank you.

Operator

Our next question comes from Ken Herbert from RBC. Please go ahead. Your line is open.

Ken Herbert
Ken Herbert
Managing Director and, Senior Aerospace and Defense Analyst at RBC Capital Markets

Yes, hi, good morning, Tom and Patrick. Tom, I wanted to follow up on your initial comments around sort of where you are in terms of the workforce. Are you at staffing levels to support the next move up to eight a month on the A350, and when do you expect to see that?

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

The answer is yes, Ken. We are staffed to the schedules that Airbus put in place for A350 and A320, and also what Boeing has put in place. Since those got pushed out, so we are a bit overstaffed right now to the current production rates, but those production rates are gonna hit as we get into next year, first quarter and second quarter. So it would make no sense to reduce our workforce only to have to rehire it. So we're just gonna stay where we are, and we've paused new hiring, but we're maintaining our current position, and we are staffed to meet the production rates that are gonna be in effect for next year.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

The good news is, because we're already staffed, those employees are getting training and on-the-job experience, which is gonna help them in terms of quality and on-time delivery. So I think it's gonna be a win-win for everybody as a result. It's putting a little bit of pressure on our margins right now, but ultimately, it's gonna pay dividends in terms of quality and on-time delivery in the future.

Ken Herbert
Ken Herbert
Managing Director and, Senior Aerospace and Defense Analyst at RBC Capital Markets

Perfect. And maybe Patrick, is it possible to quantify what that margin headwind has been, just from a staffing standpoint alone this year?

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

I don't think we're gonna get into specifics on margin points, but I mean, you can see that our Adjusted EBIT level is not where we would want it to be. It is a pressure we're carrying. I mean, as Tom said, we're probably carrying labor that we don't need today, but it's gonna come and support us, and we need it in the first half of next year as we see some growth going into 2025, which we fully expect to see, even though the ramp rates are delayed. It is a headwind. I don't think we want to try and get into specific margin points from that.

Ken Herbert
Ken Herbert
Managing Director and, Senior Aerospace and Defense Analyst at RBC Capital Markets

Perfect. Thanks, Patrick. Thanks, Tom.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Thanks, Ken.

Operator

Our next question comes from Scott Mikus from Melius Research. Please go ahead. Your line is open.

Scott Mikus
Director at Melius Research LLC

Morning.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Morning, Scott.

Scott Mikus
Director at Melius Research LLC

Tom, I wanted to ask, so your sales the last 12 months are about 80% of 2019 levels, and you mentioned that you're a little bit overstaffed right now. I'm just wondering, with all the production rate pushouts that we've seen from Boeing and Airbus, why not just hold extra buffer inventory so you can ship at higher rates rather than growing your headcount in advance of production rates that we've seen shift multiple times? Right. Well, first of all, Airbus has given a pretty clear signal, and as we've said, Airbus is our biggest customer for the A350 and the A320. And we wanna be in a position to make sure we can deliver on their schedules for next year.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

The production rates have been pushing out, and we do have excess inventory, so we can be conservative, but the issue is, on production, headcount is so important. It takes a long time to hire the people, then to train them, and to get them on-the-job experience, and so even though we're a little bit overstaffed right now, that was the point I was making to Ken, it's gonna help us next year as the rates do go up, because we're gonna have those people already in place, already trained, already with on-the-job experience, and that's something you can't take shortcuts to achieve, so while the inventory would help address the delivery of the physical product, to make that product, you need an experienced and trained workforce, and that's what we've developed.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

I think it's gonna be a real strategic asset for us as we get into next year. As I said, every single program we see, including the 737 MAX, is gonna have higher production next year than it did this year. And so all those people that we have on board are gonna enable us to deliver for our customers.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

And the other thing to remember, Scott, is as Tom said, we do have some extra fiber inventory, notably fiber. But when it comes to our prepregs, when you involve the resins, the resins have to be when we impregnate the products have to go into cold storage, into freezers.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

And so there is a finite amount, a natural finite amount of capacity for that. So apart from not wanting to build huge amounts of excess inventory, there's also a natural barrier to holding too much anyway in the supply chain because of the storage issues.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

And instead, I'd also add, you mentioned it, but we're still only at about 80% of the production levels that we were at 2019, and we have all the capital in place to support higher levels of production. And so right now, we're absorbing a lot of that fixed cost. As the production rates increase and revenues go up, we'll get a lot of operating leverage.

Scott Mikus
Director at Melius Research LLC

Okay. Then, Patrick, in the past, incrementals normalized have typically been in the 30%-35% range. I know there's a lot of puts and takes, but if you don't have to do much hiring next year, you exit the facility in Austria as well. Should we be thinking about incrementals in 2025 being above the 30%-35% range that you would normally see in an upcycle?

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

Yeah. I mean, we don't guide, as you know, anymore, to incremental margins. We're always going to drive them as strongly as we can. We're gonna have to assess where the growth is coming from next year. Undoubtedly, the key commercial aerospace programs are gonna grow. We're gonna have to understand what else is growing. We obviously have some cost increases, and we've got that. We're carrying that sort of labor into the first half of next year, which we absolutely need that labor, but that cost is not gonna go away overnight. So we will drive incremental margins as strongly as we can, as we always do. That's the only message we can send. But we've got a good cost base, we've got a good headcount base going into next year. I think that's the key point.

Scott Mikus
Director at Melius Research LLC

Okay, thanks for taking the questions.

Operator

Our next question comes from David Strauss from Barclays. Please go ahead. Your line is open.

David Strauss
David Strauss
Analyst at Barclays

Thanks. Good morning.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Good morning.

David Strauss
David Strauss
Analyst at Barclays

Could, so for the 2026 guidance or, you know, the medium-term targets that you're pulling, what had you assumed for rates on maybe 777, A350, and A320 that you're no longer assuming?

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

We didn't really lay out the specific rates, and the OEMs have provided publicly what their targets are. But what I would say is, as we look over the past year and a half, the OEMs have each released at least three new schedules, and in each schedule, they've pushed out production rates on certain programs, particularly the MAX and even the A320 on the Airbus side. And so it's really on the basis of that, and then all the uncertainty that we have here in the fourth quarter with supply chain and the Boeing strike. We just didn't feel that those rates that we were looking at in February of 2024 were really valid. And so therefore, the whole guidance was really no longer valid, and that's why we decided to pull it.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

You know, the outlook is very good if you look at the production rate increases going forward. We just don't know exactly when they're gonna hit. So we'll wait until January, and then we'll provide guidance for 2025, and we think that will be a good indicator for the investment community to see the market. But right now, it's just too hard to see, and certainly twenty-six is just too far out, given the current uncertainty in the supply chain.

David Strauss
David Strauss
Analyst at Barclays

Okay. Patrick, couple smaller questions. Are you assuming working capital kind of fully reverses in the fourth quarter, and you know, you'll generate a fair amount of cash? Are you gonna continue to kind of focus on buyback? Are you gonna look to delever a bit? And the other thing on corporate, can you just, you know, is that CEO costs due to why it's running higher than kind of typical this year? And does that, you know, step down as a % of sales next year? Thanks.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

Okay. So in relation to working capital, we'll obviously drive that in the fourth quarter, as we always do. I think I called out inventory as an area we're gonna focus on not only in the fourth quarter, but as we go into 2025 as well, to try and improve our sort of days of inventory, which is really the key ratio, inventory relative to the level of sales. In terms of buybacks, well, we're not gonna... We'll periodically look at that. I mean, in terms of our overall approach, we're gonna maintain our sort of net debt to EBITDA leverage within the 1.5-2 range. We're at 1.9. We're absolutely comfortable at 1.9, but we're gonna stay in that range under two.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

In terms of corporate expenses, I guess there's a couple of factors. Yes, there's the CEO transition costs, which are there in 2024, which will go away. We shouldn't see any of that in 2025, and there's a little bit of intercompany profit elimination, which is sort of a swing factor between Q3 2023 and Q3 2024, which is also part of that year-over-year difference. Basically, the segments made internal profit, and we have to eliminate it at the corporate level, and that just created a bit of a swing year over year.

David Strauss
David Strauss
Analyst at Barclays

Thank you.

Operator

Our next question comes from Gavin Parsons from UBS. Please go ahead. Your line is open.

Gavin Parsons
Gavin Parsons
Equity Research at UBS

Hey, morning, guys. It's Gavin.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Morning.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

Morning.

Gavin Parsons
Gavin Parsons
Equity Research at UBS

Any change to the lead time from OEM build rate increases? Because given it, it seems like they'd want you to ramp up well ahead of time, and then when they cut you, it's pretty close to the actual date.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Right. Well, we tend to be a little bit ahead of the OEM, about six months, and so we are planning our production and our staffing based on that, six months out. And so when the rates do change, yes, it's difficult for us to respond, especially when we know the rates are gonna continue to go up. It's just been pushed out. So it's just the nature of the industry. We are six months ahead of a lot of the structures manufacturers and the OEMs, just because we're providing materials. And so for us, it can be a little bit challenging when the rates change as we get closer to the actual production date.

Gavin Parsons
Gavin Parsons
Equity Research at UBS

Okay. So no desire or ability to shorten that ramp-up lead time?

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Not really. We do need to be out in front of the OEMs because we're providing that material. And so this is a, you know, it's a very dynamic time in the industry, and rates have been changing more frequently than they normally do. But, you know, we're gonna have to always be six months out in front of the OEMs.

Gavin Parsons
Gavin Parsons
Equity Research at UBS

Got it. Okay. Thank you.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Welcome.

Kurt Goddard
Kurt Goddard
VP of Investor Relations at Hexcel Corporation

Our next question comes from Gautam Khanna from TD Cowen. Please go ahead. Your line is open.

Gautam Khanna
Gautam Khanna
Aerospace and Defense Equity Analyst at TD Cowen

Hey, good morning, guys.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

Morning, Gautam.

Gautam Khanna
Gautam Khanna
Aerospace and Defense Equity Analyst at TD Cowen

Forgive me if I missed this, but it sounded as though you have you slowed a little bit down on the 737 MAX relative to Q2, but the 787 is, you know, continue to ramp sequentially. And I'm just curious, is that pretty broad-based across all your intermediary customers between Hexcel and Boeing? Or are you seeing kind of, you know, very different purchasing patterns, across the customer base?

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Well, for Boeing, you know, obviously, the 737 with the strike, there were a lot of stop shipment orders to our plants. And so that impacted September. And so we did see a sequential slowdown from Q2 and also from the first two months of the third quarter. On 787, as I mentioned, it's built in Charleston, South Carolina. It's not impacted by the strike. That kept producing, and they kept pulling, and Boeing was very public about that. And so I would say the rates for us to pull was about seven in Q2, was about seven in Q3, so it stayed about the same. And I think that was consistent with Airbus in Q3, and we expected this, we did see a sequential slowdown in the A320 and the A350.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

The A350 was smaller. It was only a couple of percentage points. On the A320, it was probably about five aircraft per month between Q2 and Q3, but that was fully expected because in Europe, August is a much slower month, and so it's seasonally slower, so not unexpected.

Gautam Khanna
Gautam Khanna
Aerospace and Defense Equity Analyst at TD Cowen

Okay. And I mean, does this, because the 787 is being assembled, final assemblies at a rate well below seven, as you know, does this just kind of portend a shallower ramp in the first half of 2025? Or, I'm just curious, like, how do you think about 2025 directionally?

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Well, we'll, you know, wait to see what Boeing's final production schedules are, and then we will align to meet those. You know, they tend to... Again, they're pulling from us, looking at what their rates are gonna be six months out. And so that's why you could see a difference between what the current delivery rates are and the rates that we're seeing in terms of the pull. But for 2025, we expect the production rates on 787 will go up, just like on the other programs. We wanna be prepared to meet that demand, and we are.

Gautam Khanna
Gautam Khanna
Aerospace and Defense Equity Analyst at TD Cowen

All right. Thank you.

Operator

Our next question comes from Peter Skibitski from Alembic Global. Please go ahead. Your line is open.

Peter Skibitski
Peter Skibitski
Director of Aerospace and Defense Equity Research at Alembic Global

Hey, good morning, guys. Just wanted to belabor a topic from earlier as we think about, you know, the right way to think about margin rate entering 2025. Patrick, without, you know, giving us guidance, if we think about the majority of your key commercial programs being up or at least flattish, entering 2025, but maybe the MAX still at 30, at least initially, you know, should we start out with, you know, the year with some margin headwind, excuse me, in 2025 and maybe, you know, maybe tailwind as we get to the back half of the year, assuming, you know, the MAX does start to ramp? Or would you... You know, I'm trying to consider labor in that whole calculus as well. So I was wondering what, you know-

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

I think-

Peter Skibitski
Peter Skibitski
Director of Aerospace and Defense Equity Research at Alembic Global

Go ahead

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

... in a broad sense, that is probably a correct way to look at it, in that we'll get more and more volume leverage as the year goes on and production rate increases. And as I think we've communicated before, volume leverage is really the key driver for Hexcel. We need to get back to the 2019 levels of revenue. We need to utilize our capacity to get the true efficiency across our plants and that volume leverage. Yes, so every six months, as hopefully we start to see our build rates increase, that will help our margins. Yes.

Peter Skibitski
Peter Skibitski
Director of Aerospace and Defense Equity Research at Alembic Global

Okay. And just on V-22, the way you think about it is maybe a couple more quarters of headwind on V-22. It sounds like it was fairly substantial from a sizing for you, and so I guess as that annualizes in 2025, you should maybe the underlying main growth at Space and Defense should improve?

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

There's, we're on over a hundred different programs. There's many different moving parts in Space and Defense. I mean, the V-22 is essentially sunsetting next year. We think there's probably a couple of aircraft to build, so it impacted this quarter, year-over-year, but I wouldn't overplay it in the broader picture. And we've got to assess the moving parts before we can really talk to Space and Defense in 2025.

Peter Skibitski
Peter Skibitski
Director of Aerospace and Defense Equity Research at Alembic Global

Okay. Thank you.

Operator

Our next question comes from Sheila Kahyaoglu from Jefferies. Please go ahead, your line is open.

Sheila Kahyaoglu
Sheila Kahyaoglu
Managing Director at Jefferies

Good morning, Tom, Patrick. Thank you so much. Maybe just on the 737, because it's such a hot topic, could we go over the rates? Tom, you mentioned you said you were at thirty-six in Q2, thirty in Q3. Is it zero for Q4, and how do we think about potential optionality into 2025, what you're assuming in terms of rates?

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Right. Well, as I mentioned, the 30 in Q3 was really a function of September falling off in the back half of the month. And so regarding next year, I think it really depends on when the strike ends and then Boeing resetting the schedule, and we'll wait to see what that is. You know, they had plans in place for higher levels of production next year. You know, obviously, with the strike, it gets pushed out a little bit. And so Boeing's presenting tomorrow, of course, the vote is tomorrow. We'll know a lot more after that in terms of 2025.

Sheila Kahyaoglu
Sheila Kahyaoglu
Managing Director at Jefferies

That, that's helpful. And I know, Ken asked some questions about headcount, too. Can you give us an idea of, like, how fungible headcount is across programs, whether you move folks to A350 from 737?

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Actually, for us, it's very fungible because we make a base material, carbon fiber composites, resin, and prepreg. And so the materials, while they are different materials, labor is fairly fungible across the programs. And so we can leverage if we need more Airbus material, the labor is very fungible to do that in our plants. It's just the nature of what we do. We're producing carbon fiber, prepreg, and weaving, and resins, and so, yes, the labor is extremely fungible across programs.

Sheila Kahyaoglu
Sheila Kahyaoglu
Managing Director at Jefferies

Thank you.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Welcome.

Operator

Our next question comes from Noah Poponak from Goldman Sachs. Please go ahead, your line is open.

Noah Poponak
Noah Poponak
Managing Director and, Equity Research at Goldman Sachs

Hey, good morning, everyone.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Good morning, Noah.

Noah Poponak
Noah Poponak
Managing Director and, Equity Research at Goldman Sachs

I guess I'm still confused on and I know it's sort of like a lot of moving pieces and hard to answer, but just in terms of how what's happening with Boeing flowing down into the supply chain during the strike. I guess there was press that said they were kind of stopping the supply chain. Then heard a lot of suppliers say that the communication was keep things going pretty close to pre-strike under the hope that there could be a quick resolution. And then I guess on this earnings call, I've heard you say that they slowed you slightly, but then I've heard you say that they've issued stop orders.

Noah Poponak
Noah Poponak
Managing Director and, Equity Research at Goldman Sachs

I'm just trying to understand if Boeing's action to the supply chain or message to the supply chain during the strike has been closer to full stop or closer to keep going so that we can pick it back up where we left off whenever there's a resolution.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Yeah, that characterization is the right one. They issued a stop ship, but they encouraged suppliers to keep building so that when the strike ended, they could continue to ship again, and that was the case. And so for us, in fact, you saw our inventory go up. That was part of it. We stopped shipping to Boeing, but we continued to build into some inventory, and that's why we have a little bit higher inventory. It's one of the reasons why we have it.

Noah Poponak
Noah Poponak
Managing Director and, Equity Research at Goldman Sachs

I see.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

That enables us to meet the demand once the strike ends and once they start producing it.

Noah Poponak
Noah Poponak
Managing Director and, Equity Research at Goldman Sachs

I see. So it's sort of both. It's stop ship, but they, them then counting on everyone to build on their own, I guess.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

And the other point, Noah, is that the 737 MAX, as we've said many times, is not the biggest program for us. And so those two statements, we did have some stop orders during September, but the overall impact in the third quarter was marginal. So those are consistent.

Noah Poponak
Noah Poponak
Managing Director and, Equity Research at Goldman Sachs

Right

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

Statements and in line with what Tom said about building inventory. So the bubble chart that's in the investor deck now, I kind of it clearly illustrates the relative magnitude of the programs, the 350, the 320, and the 787, all bigger than the MAX, with its sort of build rate at the lower end of that 200-500, or the shipset at the lower end of that 200-500 thousand range. So

Noah Poponak
Noah Poponak
Managing Director and, Equity Research at Goldman Sachs

Yeah

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

I think everything Tom has said is completely consistent.

Noah Poponak
Noah Poponak
Managing Director and, Equity Research at Goldman Sachs

No, that makes a ton of sense. And my question really was an effort to understand the broader ecosystem a little better, but I appreciate that. And then, just one other item, the industrial assets that you've discussed disposing of or selling, is that far down a process and close to complete, or that's a process you're just now starting?

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

I'd say we're probably midway through the process. It's something we initiated a couple of months ago, but we felt it was the right time to be public about it because we wanted to be open and transparent with our customers as well as with our employees, and so the process is underway.

Noah Poponak
Noah Poponak
Managing Director and, Equity Research at Goldman Sachs

Do you, Patrick? Is there an approximate revenue and EBITDA you have for that?

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

It's about a third of our industrial business, and quite honestly, the margin impact is gonna be low. That's what I would say.

Noah Poponak
Noah Poponak
Managing Director and, Equity Research at Goldman Sachs

Okay. Thank you.

Operator

Our next question comes from Scott Deuschle from Deutsche Bank. Please go ahead, your line is open.

Scott Mikus
Director at Melius Research LLC

Hey, good morning, Patrick. Sorry if I missed it, but was there any restocking benefit this quarter from going to seven per month on the A350 and 787, or would that potentially be a tailwind later on?

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

Yeah, I mean, we weren't. I mean, the 350 was... Sorry, did you say 787 or 350?

Scott Deuschle
Scott Deuschle
Equity Research Analyst Covering The Aerospace and, Defense Sector at Deutsche Bank

Both.

Patrick Winterlich
Patrick Winterlich
CFO at Hexcel Corporation

Okay. I mean, they were reasonably flat. I think as Tom said, both of them slipped down slightly in the third quarter from the second quarter. So we didn't really see. We saw more of a consistent pattern of delivery into those programs. The 350, a marginal slowdown because of the European vacations, but only marginal. The 320 impact, I think, as Tom said, was more significant. So I wouldn't really call out a destocking impact either way on those two, 787 or 350 programs.

Scott Deuschle
Scott Deuschle
Equity Research Analyst Covering The Aerospace and, Defense Sector at Deutsche Bank

Okay, thanks. And then, Tom, it seems like China has become pretty dominant in supplying carbon fiber in a lot of industries outside of aerospace. And, you know, it looks like Airbus has brought in Chinese structure suppliers in a fairly meaningful way at this point, I think with AVIC in particular. I guess my question is, do you see any risk over the longer term that you start to see the Chinese become a more meaningful competitor in the carbon fiber world on the aerospace side, particularly on next-gen aircraft? Thanks.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Great. Well, certainly on industrial-grade fibers, China has increased capacity, and that has had an impact on price for industrial-grade fibers. But aerospace-grade fibers are very different, and there are no Chinese makers today of industrial-grade carbon fiber, and it'd be a pretty big leap for that to happen. So while they can compete, certainly on industrial markets, they aren't competing on aerospace markets today and probably will not do so for the foreseeable future.

Scott Deuschle
Scott Deuschle
Equity Research Analyst Covering The Aerospace and, Defense Sector at Deutsche Bank

Thank you.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Welcome.

Operator

Our last question will come from Phil Gibbs, from KeyBanc Capital Markets. Please go ahead. Your line is open.

Philip Gibbs
Philip Gibbs
Managing Director, Metals Equity Research Analyst at KeyBanc Capital Markets

Hey, thanks. Good morning.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Morning.

Philip Gibbs
Philip Gibbs
Managing Director, Metals Equity Research Analyst at KeyBanc Capital Markets

Hey, Tom, you may have mentioned it, you certainly mentioned it on the call this morning that the widebodies, the key ones, are pulling at about seven per month. When did that step up in your mind from that sort of four to five rate that we were at near the bottom?

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

You go back to kind of early 2023, and the 787 was in the kind of 3-4 range, and then it started stepping up progressively through 2023, and it got into the 7 range as we got into 2024. So, you know, that was the time frame. On the A350, you got to really go back to 2022. It was in the 4-5 range, stepped up to the 6 range in 2023, and it's kind of moved into the 7 range in 2024. That-

Philip Gibbs
Philip Gibbs
Managing Director, Metals Equity Research Analyst at KeyBanc Capital Markets

Okay.

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

That squares with it.

Philip Gibbs
Philip Gibbs
Managing Director, Metals Equity Research Analyst at KeyBanc Capital Markets

That's helpful. And then on defense, historically, the fourth quarter for defense-related revenues is typically a lot better than the third quarter. I would say, one, is that what you're expecting? And then I know you have a decent outlook for new program growth over the next couple of years, some of that being international. Is that all still holding in your mind as you look ahead?

Tom Gentile
Tom Gentile
President and, CEO at Hexcel Corporation

Yes. I mean, defense overall is strong, unfortunately, because of some of the geopolitical pressures that are out there. Q4 has been stronger, and we're gonna push hard to make that true again this year. And then as we go forward into next year, yes, on the big programs we're on, like F-35, CH-53K, Black Hawk, some of our European programs, we expect to see continued strength in those. And so overall, yes, we're very bullish on space and defense.

Philip Gibbs
Philip Gibbs
Managing Director, Metals Equity Research Analyst at KeyBanc Capital Markets

Thank you.

Operator

Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may now disconnect.

Executives
Analysts
    • David Strauss
      Analyst at Barclays
    • Philip Gibbs
      Managing Director, Metals Equity Research Analyst at KeyBanc Capital Markets
    • Scott Deuschle
      Equity Research Analyst Covering The Aerospace and, Defense Sector at Deutsche Bank
    • Sheila Kahyaoglu
      Managing Director at Jefferies
    • Scott Mikus
      Director at Melius Research LLC
    • Gavin Parsons
      Equity Research at UBS
    • Noah Poponak
      Managing Director and, Equity Research at Goldman Sachs
    • Gautam Khanna
      Aerospace and Defense Equity Analyst at TD Cowen
    • Myles Walton
      Managing Director at Wolfe Research
    • Michael Ciarmoli
      Managing Director and, Equity Research Analyst at Truist Securities
    • Ken Herbert
      Managing Director and, Senior Aerospace and Defense Analyst at RBC Capital Markets
    • Peter Skibitski
      Director of Aerospace and Defense Equity Research at Alembic Global
    • Mathew Akers
      Senior Equity Research Analyst at Wells Fargo
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