Good morning. My name is Emily, and I will be your conference operator today. At this time I would like to welcome everyone to the Hexcel Q1 2019 Earnings Call. [Operator Instructions] Patrick Winterlich, Chief Financial Officer, you may begin your conference.

Thank you. Good morning everyone. Welcome to Hexcel Corporation's First Quarter 2019 Earnings Conference Call. Before beginning let me cover the formalities. First 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 that 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 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 express permission. Your participation on this call constitutes your consent to that request. With me today is Nick Stanage our Chairman, CEO, and President; and Kurt Goddard our Vice President of Investor Relations. The purpose of the call is to review our first quarter 2019 results detailed in our news release issued yesterday. Now let me turn the call over to Nick.

Thanks Patrick. Good morning everyone, and thank you for joining us as we share our first quarter results with you. It was a terrific start to the year and one of the strongest quarters in our history especially for sales and earnings per share. It builds on our momentum and strengthens our confidence as we reaffirm our full year 2019 guidance that we shared with you in January. First let me highlight some of the results and Patrick will then provide some details on the numbers. Sales in the quarter were $610 million up 12.9% year-over-year and up almost 15% in constant currency. Diluted EPS was $0.84 which was an increase of 23.5% over the first quarter of 2018. We delivered first quarter operating income of $103 million which is about 25% higher than last year and resulted in an operating income margin of 16.9% compared to 15.3% in Q1 2018. Before I spend time on each of our markets, let me talk about a few factors that helped us deliver these results to our shareholders this quarter. First, many of the headwinds that challenged us in 2018 are now behind us and we are experiencing growth in all of our markets. Moreover, we are benefiting from the successful integrations of our acquisitions and from some of our newest assets at Roussillon and Morocco that are now qualified and contributing to our strong performance. Yet none of these factors influenced our results the way our employees do. You've heard me say before how proud I am of our team and they continue to truly impress me when it comes to their commitment to operational excellence. Employee teams leverage each other's strengths to drive excellence throughout the business and generate cost savings through efficiencies and productivity improvements, as well as drive…

Thank you, Nick. First quarter 2019 sales totaled $610 million an increase of 12.9% year-over-year. Our diluted EPS for the first quarter was $0.84 an increase of 23.5% compared to the first quarter of 2018. Free cash flow for the first quarter was a use of $15 million reflecting the working capital impact of sales growth and seasonal effects as we expected. This compares to free cash flow generation of $3 million in the first quarter of 2018. I will now provide a review of our markets and as usual these year-over-year comparisons are in constant currency. As a reminder currency movements influence our reported results and some of this impact may not be intuitive. The majority of our sales is 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 weakens against the euro and the British pound our sales translate higher but our costs also translate higher resulting in a net headwind to margins. Accordingly we prefer a strong dollar to a weak dollar. In terms of currency hedging we employ a disciplined hedging strategy that layers in hedges over a 10-quarter horizon leading to a smoothing impact on currency rate fluctuations. Now turning to our first quarter market performance, Commercial Aerospace represented 68% of total first quarter sales. Commercial Aerospace sales of $416 million increased 9.6% compared to the first quarter of 2018. Space & Defense represented 18% of sales. For the first quarter Space & Defense sales totaled $108 million and increase of 21.8% from the same period in 2018. Activity in the first quarter was broad-based and Hexcel material is on more than 100 different platforms. Note that, the 2019 results included ARC Technologies…

Thanks Patrick. By staying aligned with customer demand while keeping costs under control and operational excellence at the forefront we delivered a strong first quarter and we are on track to deliver our full year guidance. We continue to benefit from aircraft program ramp ups continued secular adoption of advanced composites and strong demand as well as from our internal efforts to work more efficiently continuously improve our processes develop new and innovative products and position ourselves for growth. Our markets are strong with continued long-term growth expected. Our focus throughout 2019 will be to take every advantage of opportunities to grow and drive innovation and operational excellence to achieve strong and sustainable financial results while continuing to create ongoing shareholder value. We will respond to any headwinds including the Boeing 737MAX with decisive actions to mitigate any negative impacts. Finally we look forward to having several of you join us next month for our Investor Day. For those of you who are not joining us in person we hope that you'll join us via a webcast to hear several of our leaders share perspectives on our innovation and growth in their respective areas. After a morning of presentations and our tour we will wrap up the day by outlining our growth expectations and providing our midterm guidance. Thank you again for your time today. Emily, we are ready to take questions now. So, we'll turn it over to you.

[Operator Instructions] Your first question comes from the line of Gautam Khanna with Cowen and Company. Your line is open.

I was wondering if you could provide some perspective on the 737MAX supply chain that you supply into - that Hexcel supplies into just how diverse it is how many different suppliers and what sort of closed delivery - delivered close to ultimate aircraft delivery versus much longer lead time? Any way to split it so we can maybe get a sense for any sort of risk down the road if there is any destock where it could surface.

Yes. Certainly our supply chain on the 737MAX is nothing like it is for the A350. But having said that, it's still multiple shipped to not only to multiple Boeing sites but Tier 1s and even further down the supply chain. What you have to keep in mind is we're shipping materials to support engines, and obviously we know that's the lead and we've seen publicly what their intent is at least for the time being on their production schedule. We ship to plants at Boeing and others for nacelles which basically follow the engine builds with respect to scheduling and the timing for assembly under the air frame. And then we ship to the airframe to Boeing sites directly, various matrix products and components subassemblies sub-components for the MAX program. So as we came into the year, we were at about 52 per month and as everyone knows the intent was to ramp during the year up to 57. The second accident happened and there was a grounding and the supply chain continued to operate. As I mentioned, we have not seen any changes to our demand signals. We certainly expect some specifically around the airframe. Those will adjust quicker from our perspective than engines and nacelles and various areas that may have been a little bit behind. So I think much of those the supply base will use this time as a bit of a recovery, a bit of an opportunity to build some buffer stock in anticipation that the regulators will approve the fix the changes the training that are being proposed and reviewed. And ultimately the grounding will lift and production and deliveries will start back up to some ramp rate yet to be determined. So as about the best, obviously moving investigation and everyone's monitoring it. Certainly we are and we're just going to stay current on it and make sure we're supplying to not only Boeing but the Tier 1s based on their needs and what they plan to do relative to the MAX supply chain.

As a follow-up I was just wondering you did mention there was stock that's unique to the engine and nacelle versus the airframe is there any ballpark split you can give us in terms of how much goes to engine related stuff versus airframe on the 737MAX relative to the content you guys described in the past? Two-third, one-third or...?

The engines and nacelles, I don't think we split it out exactly. But we certainly have fibers and pre-pregs going into engines and nacelles and we've got significant amount of core and Acousti-Cap going into nacelles for the noise abatement. And then we also have our structures business providing secondary structures, interior components, some of that business ships directly to Boeing and to Boeing Winnipeg. So it is mixed, it's diversified. And again, those assets are very deployable and easy and can be changed over quickly if in fact we do see a signal that gives us the capacity to divert for other programs.

Our next question comes from the line of Mike Sison with KeyBanc. Your line is open

Nick in terms of win, can you maybe talk to us a little bit about the backlog that Vestas has. And given how fast the market is growing, can you may be give us a thought of where you're having capacity to support the growth there and how much it would cost to add more if you need to?

Yes. So first thing and we've said it before, but wind turbines are getting more efficient. They're getting more efficient because the technology has improved, blades are getting longer, they're able to put the wind turbine farms in lower wind speed areas. And the bottom line of all this is energy cost generated from wind turbines has come down significantly, which is driving part of that demand. If you look at over the course of 2018, Vestas turbine backlog both in dollars and gigawatts increased every single quarter, the end of the year at just short of €12 billion of backlog or 15.6 gigawatts, Mike. So obviously there's continued interest in the wind farms. Obviously Vestas is well positioned, not just in the U.S. but outside of the U.S. where they generate almost 70% of their wind turbine sales and we are well-positioned with Vestas to continue taking advantage of that growth and penetration.

And then just one quick one on MAX given that you supply six to nine months ahead, if the supply chain does adjust, when should you feel it I guess? If they actually -- the whole supply chain does go down to 42?

Well, first thing, I'd say Mike is on the 737MAX the lead times are not that lengthy. They're shorter and especially in our tent and our structures business they are much shorter. So I would think within four to eight weeks, if there is a further delay or a demand signal on taking rates down for whatever area whether it's engines, nacelles or structures, we would see that relatively quickly and would adjust relatively quickly.

Your next question comes from the line of John McNulty with BMO Capital Markets. Your line is open.

With regard to with the MAX headwind that you've got, I guess, obviously there were some offsets or some surprises relative to what you're expecting in 1Q to kind of help things go along. Can you kind of give us some color as to where those surprises were? And how you're thinking about those respective businesses as they progress throughout the year?

Well, thanks for the question John. I'd say there wasn't one in particular program that jumped out. It was pretty broad-based. Obviously, wind and our Industrial segment were strong but we had forecasted that. Space & Defense maybe a little stronger than we had originally anticipated, ARC Technologies continues to perform very well and quite honestly was stronger in Q1 than we had expected. And then just continued strength on commercial aero, continued opportunities and sampling around incremental opportunities relative to our fiber sales and from thermal plastic opportunity. So again it was pretty broad-based, and you're exactly right, in our forecast and in our commitment and confidence in maintaining our guidance we certainly have modeled an impact -- a negative impact on the 737MAX. And based on what we see that will be more than offset by the robust growth we're seeing in other aspects of the business.

Just to clarify John we did not see a negative impact on the 737 in the first quarter.

And then I guess as a follow-up we had fielded a bunch of questions on some of the acrylonitrile allergies, obviously you weathered them pretty well through the quarter. So I guess, can you remind us or at least give us some color as to whether you're seeing any supply issues there and also how your hedged with that because I know you have a relatively new hedge program in place as well?

We haven't seen any supply issues -- so our supplier has not been affected. We buy our acrylonitrile on a price formula related directly related to polypropylene and I think as we have mentioned as sort of a surrogate, we are hedging propylene over an eight quarter period now which is going to smooth out the pricing in front of us. So we don't expect variances to guidance because of variance. So really quite a good story on AN for us at the moment no surprise and no surprising surprises.

Your next question comes from Ken Herbert with Canaccord. Your line is open.

You had really nice incremental margins in the first quarter by my estimate about 29%. And I know Nick you eluded to the fact that a lot of the headwinds you faced last year whether it be on AN pricing or wind resins and of course the new facility ramp, you're no longer seeing this year. Is there anything in your assumptions that would imply incremental margins to step down from here? Anything else we should be thinking about in the second third or even fourth quarter that we should keep in mind that could potentially impact this aside from obviously MAX uncertainty and broader cycle issues?

So again there's one element that I want to make sure I emphasize and the headwinds you mentioned were all known and we've talked about them and most of them are behind us relative to raw material inputs and our startups and our sites. But our plants and our teams focus on productivity and leveraging sales volume through our facilities now has been fantastic. And to answer your question I would expect to see that momentum to continue. With the strong topline growth the position we're in with respect to our plants are up and running. We're not dealing with any startups today. We've got good coverage and protection on AN, now with our hedging program that we implemented last year. I feel really good about where we stand today. Obviously I can't predict the unknowns. Obviously there will be some negative headwind based on the 737 MAX program and how that plays out. But overall we're feeling very good.

And maybe at the risk of sort of putting words in your mouth but it sounds like the strength you're seeing in the first quarter and through the year I think Nick you just said more than offsets your current assumptions around MAX. Is it fair to say that the lack of adjustment to the guidance for the full year just reflects the fact that obviously we're just one quarter in? But also there still could be some risk around the MAX? Or how are you thinking about the full year guidance now with what you see in this quarter on the MAX?

Well, again we feel really good about our guidance. It is just one quarter and certainly with the MAX hanging out there I just wasn't ready we weren't ready to make a change at this point. Hopefully next quarter we'll have a different story for you and it will be along the same lines you saw this quarter.

[Operator Instructions] Your next question comes from Hunter Keay with Wolfe Research. Your line is open.

Can you guys please help me understand how to think about partnering for success with the backdrop of this MAX issue? And this is a complicated question but basically PFS was marketed as sort of a big guaranteed volumes in exchange for little price and here we are now with rate potentially not filling up as fast as everyone thought would be the case. But you've signed these long-term agreements with Boeing under this PFS umbrella. How should we think about how you guys have altered your supply chain in the context of PFS relative to this sort of MAX clause situation you might argue that's occurred since then? Thanks.

Well, a couple of points there. First it's very rare that we have a guaranteed volume. Again remember most of our materials are full sourced. So when we win the program we get the program sales depending on what the end customer demand is. So really there's no volume guarantees in here. PFS you could call it PFS you could call it GE's name you could call it UTC's name you could call it Airbus. Productivity and cost improvement we've been doing that forever and I would expect we have to continue to do that forever. So our focus is to take cost out of our supply chain to take cost out of our factories and share that so that we can A) help our customers meet their objectives and B) make them competitive so that they sell more airplanes or wind turbines to their ultimate end customer. So with respect to our contracts with any of our customers and Boeing included. We're going to continue to drive productivity and we're going to continue to provide part of that productivity as price improvement for them to incentivize further secular penetration and growth. And I don't see that changing. I don't see the MAX and what Boeing is going through changing that direction. And certainly it's not changing how we are operating our business or our focus on operational excellence.

And then can you talk about the A220 for a second? Obviously just kind of dovetail to the prior comment you made about constantly driving our cost, but can you first of all high-level remind me of your shipset content overall exposure to 220 and just talk about if you getting any pressure from Airbus to drive out that incremental cost of late? Thanks a lot I appreciate it.

Hunter just to be clear you said the 220 or 320?

I'm talking about the 220 you have exposure of that program with some capacity right?

Yes 220, but we have not provided our shipset content on the program. Obviously we're working with Airbus. We were working with Bombardier before the deal with Airbus. We're looking at multiple opportunities to increase our content. It's not insignificant today but combined with the low volume monthly we just haven't declared that yet and we're optimistic that we are going to expand our position. So as you could imagine Airbus is working on cost out and they are looking at some broader scale opportunities on materials they have in their supply chain to help them achieve their overall objectives. And as the plant and plane continues to grow and production starts to ramp up in the U.S. we think we'll have a nice incremental opportunity to share on the 220.

Your next question comes from the line of Greg Konrad with Jefferies. Your line is open.

Just two quick ones, one this morning Boeing announced that they were at the 14-month rate on 787 just as we think about the quarters going forward is it safe to assume you felt that impact in Q1 from the 12-month rate?

I can tell you we saw some impact in Q1 but believe we’re going to see much bigger impact as the year progresses. So we certainly expect quarter two and the second half to ramp up more significantly for us on the 14 rate.

And then I mean you've called out the F-35 but also that's Space & Defense's over 100 programs and I think your secondary on the F-35. Is there any way to maybe frame the size of that program and kind of where you are in the ramp given that the supply chain seems to be at many different rates?

So I mean the F-35 is a big program for us and it's one of our top three. V-22 remains a very strong program and we’re seeing good signals but that's going to continue. And the A400M which is another one of our big ones it's held steady okay. If you look at it sequentially or year-over-year to really get into the more detail on the F-35 I'd really defer to Lockheed and the information they provided in their call yesterday from Maryland or the day before. Obviously a lot of interest in international demand I know there's concern on the program with Turkey and there is concern on some of the potential declines in the U.S. Military. But overall we see great strength there. We're continuing to see demand signals from our supply chain that support JSF going up. So I think there's a lot of excitement that the JSF is going to continue to grow through the year and it's certainly on or ahead of our forecast.

Your next question comes from the line of Krishna Sinha with Vertical Research. Your line is open.

So you mentioned earlier in your remarks that you have the ability to re-purpose some capacity if indeed there is some MAX rate adjustments. But if that repurposing should occur would that happen at the same sort of margin rate that you're getting on the MAX currently? Or will there be some puts and takes that you'll experience as you re-purpose those lines just in regards to margins?

Well, specifically we're very - our opportunities with our carbon fiber are continuing to go up. Demand is quite honestly one of the reasons why our sales growth this year is so strong. So repurposing fiber assets for another opportunity we have would be similar to MAX margins. It basically wouldn't be noticeable. If you look at honeycomb core, again it's another area where our engineered core business is just growing significantly, even faster than we are able to put in some assets. So we would diver that honeycomb core very quickly again at comparable margins. And we've said it before, if you look in our aerospace business, the margins are comparable. Where you have differences are if you transition and look into our wind business. And I can tell you none of these assets would be redeployed to support wind or the wind turbine business. So overall from a fibers, from a engineered core, from a matrix very quick and easy to sell that where demand is strong. A little bit harder on the structures business, harder to backfill that and it would take a little longer but it's just a portion of the MAX overall shipset value we sell.

And then you mentioned some of the other aero structure suppliers having come to some sort of agreement on the MAX with Boeing. Is there anything different about what you guys do that would preclude you from having a agreement similar to say Spirit AeroSystems who is just going to continue delivering at 52 a month and seems like all the working capital impact or anything would flow up to Boeing as opposed to staying with Spirit. I mean is there a reason why or why you couldn't have a similar agreement to that?

Well, I think it's a little bit different. I mean if you think about our ship to locations, if you think of our diversity and the materials and the types of products we are shipping to the multiple locations, we don't have an agreement similar to what you're referencing that we've read online with Boeing. Our signal is staying close to Boeing and staying close to their Tier 1s and basically when they drop orders fulfilling those orders. So if you think about it, we're providing the raw materials for the Tier 1s or for Boeing to build their components and to ultimately support the final aircraft assembly.

Your next question comes from the line of Ron Epstein with Bank of America Merrill Lynch. Your line is open.

It's Kristine Liwag. It seems like the 737MAX delays could delay Boeing's decision on the 7M7 middle of the market aircraft. So if that gets pushed to the right there's also a chance that a possible A322neo doesn't happen either in the near term. With these things get to the right which means that possibly investments from you and CapEx from you would also get pushed to the right, how should we think about uses of cash for you in the near and medium term? What will you do with cash that you're generating?

So a couple of comments, so relative to how the OEs will respond with respect to their next new platforms, that remains to be seen. And I certainly don't have a crystal ball where I can declare when that's going to happen. What I can tell you is, our efforts to develop and qualify and present new materials and material solutions both to Boeing and Airbus has not slowed down one bit. And it will not. Because regardless of whether the plane is launched a year from now or two years from now, we need to be there and as you know these are long cycle programs, long development cycle programs. Having said that, our cash priorities have not changed and that is incremental organic growth that we can find internally and again it remains very strong as we've talked about fiber pull, fiber demand as we look at our thermoplastics development, that's going on and having the opportunity for even further secular penetration. We'll invest in those technologies and those assets to support programs when we win them. Second, we will continue to be opportunistic and look at M&A targets that fit within our portfolio, that expand our technology, that allow us to position and even better and broader range of solutions to our customers in our existing markets. And then last we'll return to shareholders through dividends and share buybacks. So nothing new there, we'll just monitor it real-time and again as you know we had no capacity plans in or forecasted for the M&A. We would do that as we win content and as the program evolves.

Your next question comes from the line of Myles Walton with UBS. Your line is open.

This is Lou Raffetto on for Myles. So margins, I know you covered them briefly earlier. Just composite materials really strong engineered a little less so and I know that that business still has good return metrics but I'm just curious were there any one-time costs related to ARC in there? Because I thought ARC would be I guess accretive based on the EBITDA margins you guys have disclosed for them.

Yes. What I would say Myles is - I would say it was a pretty good quarter actually and you have to separate quarter one from the other three quarters of the year because we have a heavier burden in terms of our OpEx expenses rolling through Q1. So if you look at it sequentially I can completely get that it looks like it's down but if you look at it year-over-year we actually had quite a nice step up in Engineered Products. And for Q1 coming in sort of above 12% well that's a pretty good result for that segment. So I can't point to any one-time costs. What I would say is that as the year goes on, ARC will be a strong performer within that segment and without the additional burden of the heavier Q1 OpEx, it should get stronger. And the range I've called out before sort of the whole 12% to 14%, I think is still valid and ARC if anything will nudge us towards up in that range.

And then just one clarification on the one-time action on depreciation, did that mostly fall into Composite Materials? Or is it spread?

It relates to Composite Materials, yes. It was just a good program that sort of reached its end as they do periodically and we accelerated some of the depreciation associated.

Your final question comes from the line of Chris Kapsch with Loop Capital. Your line is open.

I wanted to clarify the - in your formal comments you - in the reaffirmation of guidance you said you're evaluating a number of scenarios and then in the Q&A I think you said you did factor in a little downside on the 737 programs. So I'm just wondering the - so based on the current guidance are you - even though you haven't had demand signals that reduced your shipments tied to 737, are you assuming in your guidance that there is some of that offset by other programs?

Absolutely.

And just from an order magnitude - this was asked but I don't know if you quantified it on an order magnitude, the content is skewed more towards engines in nacelles versus airframe and that sounds like the part of the supply chain that may keep going just to sort of catch up given there have been bottlenecks there. It sounds like just order of magnitude in terms of content per plane. Is that engine and nacelles maybe 70% of your content? Or can you quantify that at all?

Yes. I mean as Nick laid out Chris we shipped - we have engines nacelles they are clearly significant but we also have airframe structures secondary and tertiary things. We don't sort of specify specifically across the $400,000 shipset. But yes, I mean we called out before when we went from the Legacy 737 to the MAX that was an increase of $100,000 and most of that $100,000 per shipset increase was engine and nacelle driven as you would expect because it was a reengineering program. So engines and nacelles are clearly a significant portion of that overall shipset.

And if I can just add one on the development efforts and peak in thermoplastic versus thermoset epoxy. This sounds like an intriguing secular story and I'm just curious about how nascent or how far along is the commercialization of these sorts of programs. My understanding is this helps to avoid autoclave and therefore presumably a lot more efficient for the manufacturer but is it targeted primarily a commercial airliner market? Or is as an opportunity that's much broader including automotive?

Well, thermoplastics have been around for many, many years and very big and prevalent in automotive. Our efforts today are focused primarily on aerospace. And obviously they're starting with smaller simpler parts where you can avoid to laying into your point you can basically improve throughput, lower cost and offer opportunities to displace additional metals. So that's really our focus. I'm very excited. I visited our site where we have our line running materials. It's looking very good. And like I said our relationship with Arkema it couldn't be going any better. We've got multiple development focuses on thermoplastic front and different material forms. And we look forward to sharing more with you as we continue to penetrate and win more programs.

This concludes today's conference call. You may now disconnect.