Ladies and gentlemen, thank you for standing by and welcome to Hexcel's Fourth Quarter 2019 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Patrick Winterlich, Chief Financial Officer. Thank you. Please go ahead, sir.

Thank you. Good morning, everyone. Welcome to Hexcel Corporation’s fourth 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. 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 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 are 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 fourth quarter and full year 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 today as we share both fourth quarter and full year 2019 results. We completed 2019 with our strongest ever full year results and a solid fourth quarter, taking into account certain end market challenges. 2019 also saw a very positive step up in our return on invested capital to 14.5%. Let me start by highlighting our fourth quarter results. Fourth quarter sales of $564 million increased nominally from the very strong Q4 2018. Adjusted diluted EPS was $0.86, reflecting an increase of 5% year-over-year. We delivered higher adjusted net income despite a decline in quarterly adjusted operating income due to lower volumes for some key aerospace and industrial customers that created overhead absorption challenges. Net income which benefited from a lower tax rate in the quarter was up compared to the prior year period. Fourth quarter aerospace sales were affected primarily by the continued slow down in 737 MAX production. However, business jets were strong in Q4, with a 20% increase in year-over-year sales. In fact, the business jet category was the largest growth contributor in commercial aerospace during Q4. As in our previous quarter, Gulfstream programs primarily drove this growth. Space & Defense sales continued on a growth trajectory during the fourth quarter with an 18% increase as compared to Q4 2018. While our ARC acquisition technologies contributed strongly to Space & Defense sales, growth in this segment is broad based across a number of defense and space programs. Industrial sales declined about 11% when compared to a strong fourth quarter last year. Wind energy sales increased substantially throughout the year despite some inventory adjustments contributing to a deceleration at year end. Now, let's turn to some specifics in our 2019 results. Full year 2019 sales were $2.356…

Thank you, Nick. I will provide a review of our markets and as usual these year-over-year comparisons are in constant currency. Currency movements influence are reported results and some of this impacts may not be intuitive. The majority of our sales are denominated in dollars. However, our cost base is a mix of dollars, euros and British pounds, as we have a significant manufacturing presence in Europe. As a result, when the dollar strengthens against the euro and the pound, our sales translate lower, but our costs also translate lower, resulting in a net tailwinds and margins. Accordingly, we prefer a strong dollar to a weak dollar. In terms of currency hedging, we employ a disciplined hedging strategy to protect our operating income that lays in hedges over a 10 quarter horizon. We do not hedge on sales and foreign exchange fluctuations had an adverse impact on our top line revenue of approximately $20 million compared to our original 2019 got sales guidance. Just over a year ago, as we shared our initial 2019 financial guidance, we were producing the 737 Max at a rate 52 per month, and preparing for 57 per month by summer 2019 along with the rest of the supply chain. We were preparing for the 787 production ramp to 14 per month and continuing to supply for the A380. As we enter 2020 uncertainty continues regarding the timing of the MAX returns to service and future production levels. The 787 production rate is being reduced to 12 per month by the end of 2020 and then to 10 per month early in 2021 and we expect to feel the impact of the 787 reductions in the second half of 2020. The A380 seats in production, we are not planning for any further sales to this…

Thanks Patrick. In summary, 2019 was marked by record sales, earnings per share, and free cash flow. Hexcel is benefiting not only from aircraft program ramp ups, continued adoption of advanced composites and strong demand, but also from our internal efforts to work more efficiently, continuously improve our processes, develop new and innovative products and position ourselves for growth. Now as we turn toward 2020, we have every reason to believe that our relentless focus on operational excellence and our strong discipline will continue to serve us well. We're pleased with our performance despite the effect of the MAX grounding and remain optimistic that the aircraft will return to service soon. In closing, we expect our 2020 results this year will demonstrate growth, exceptional cash generation and a strong return on investment for our shareholders. Our markets are continuing to benefit from long-term growth due to secular penetration, reflecting the growing need for lightweighting to drive fuel efficiency and emissions reduction. Our priority remains squarely on delivering exceptional performance to produce extraordinary results. We're confident in our position as a global leader in advanced composite technology, as well as our strategy to generate sustainable growth while creating ongoing shareholder value. We look forward to closing on our transaction with Woodward later this year, and starting an exciting new chapter in our history. With that, Julian we’ll turn it over to you now and ready to take any questions.

[Operator Instructions] Your first question comes from Mike Sison from Wells Fargo. Your line is open.

Had a question just on the back to Hexcel and Woodward combination you've had another month or so to sort of sit on it. Can you maybe talk about your relationship with Airbus and as I recall, Woodward doesn't have a significant position there. So, maybe what the synergy potential is on that bringing them into the equation as a combination unfolds?

Yes Mike, thanks for your question. I would point out that you're right in the fact that Woodward do not have significant direct sales to Airbus, but keep in mind, they're on virtually every aircraft through engines and other tier one providers. So they have very strong positions on the Airbus platform portfolio. Having said that, we're very excited and we've had discussions with Airbus, as Tom has on new opportunities for next generation technologies that help improve dynamics, aerodynamics, as well as efficiency. So it's a little premature to really go in and jointly work it but our teams are certainly getting educated on each of those capabilities and we're in a great position to demonstrate to Airbus as well as many others the value of the complimentary combination of our two companies.

And quick follow-up on the 737 MAX, you talked about 200 shipsets this year. Can you maybe help us see how that flows throughout the year? And then how many shipsets were you on in 2019 just to give me a comparison on a year-over-year basis?

So in 2019, as Patrick commented on we were at 52. And in the process of scaling up when the accidents happened and the reduction started. So we were in the range of 42 to 52, depending on who in the supply chain we were providing throughout most of the year. With respect to what we see this year, Mike as you know Boeing is still basically not producing. So, we're really not going to provide more guidance around how we've split our 200 assumption for the year. I think Boeing is communicated, they expect return to service midyear, and production to start before that. So just build that into your model and divide the 200 over the remaining months.

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

I just wanted to first start off and ask about the - you're clearly guiding your much lower sort of CapEx number then you have you know as recently as last quarter I guess. As we think about this year, and it's 2021, was there anything else besides the MAX or the slowdown in the Decatur expansion, you would point to that's may be pushed some of the CapEx to the right in terms of maybe expected investments on some other new programs or anything else you'd call out?

Well I think you've hit the big pieces Ken. I think even a bigger impact is really the productivity initiatives that the team have generated. And again, you have to remember being sole sourced, we have to go in and make sure we're never short. So by definition, we're always a little bit long on capacity. So we couldn't build in the expectation that we would deliver to the level that the team delivered. So that in turn with the slowdown on the MAX and even now with some additional softness with 787 coming out later in the year, by the [Rate 10] in 2021. That gives us the confidence that we can push that CapEx spending to the right and decrease our overall CapEx spend in 2020 and even 2020 and 2021.

And Nick, just to follow-up, can you just talk about the extent to which you're able to repurpose some of the CapEx around the composite material side, maybe in your capacity there not CapEx but more of your capacity relative to engineer materials and how we should think about the, I guess specifically the MAX impact as it relates to each of the segments?

So you have to look at it based on the technology and the product form. So first I'd say with respect to precursor and carbon fiber, those assets are fully flexible, fungible. They can be repurposed, changed over in hours and redirected to wherever the demand may be pulling material for. If you look at Honeycomb core, which we provide a significant amount for aircraft space and defense, rotor blades engines and the cells, that too can be redeployed very easily and the market is very tight. So we are reallocating engineer core and Honeycomb core based on the needs in that market space. With respect to engineered products, that takes a little longer because we basically go out identify the opportunities. You've got to bring it in to the tooling to the development qualification and identifying those platforms and to convert the resources and the technology over, it just takes a little more time than the other continuous flow materials do.

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

I was hoping you could maybe size that that Kent, Washington revenue that we're talking about that may be getting - put into business elsewhere including your own JV and kind of what's the timing as to how that headwind works into the numbers over the next couple of years?

Yes sure, so the transition as Nick described, is really going to take some time I mean, it will start now and sort of two to three years over sort of a few years as Nick said, to sort of support moving those packages out. And over that period of time, we will be out there winning new packages, we've already identified some new packages, which we're going to be running in 2020 in that facility. So it's a little bit - we are in a net position, if you can imagine some packages are going out, some packages are coming in and so, we're going to be - there will be an offset is the objective. We've given our commercial guys strong challenges to obviously bring things in as soon as possible. And they're out there and they're confident and the President of our Americas' business team is leading that initiative. So don't really want to give a specific revenue number because we'd really be guessing around timing, but it is a decent sized block of revenue. I mean that we’re talking about transitioning over that two to three year period.

Yes, I just want to add that this is not new. This is basically how ACM was formed, really the product work came into Kent, our team did the engineering work, did the tooling, did the processing, and basically had it until it made sense to move to a lower technology, lower cost source. So we've been doing that for years and years with Boeing. It's just further transformation of that supply chain. And really getting Kent ready and opening up capacity to do more complex, more core work for our differentiated capability.

And I appreciate the transparency but in the 2020, topline outlook is it a - did a headwind to that outlook, you kind of didn't mention it has a headwind.

No the headwind because as I said, even if some of the early packages start to move, we want at least as much to put into the plant in 2020.

Yes. And then just one follow-up if I could, Patrick on the cash flow. Can you size the working capital headwind in 2020? Is it kind of a reversal of the really good performance on receivables in the fourth quarter, is it inventory bill? And then why 2021…

Yes I mean - so good question Myles. So the headwind is inventory to be honest and managing inventory in 2020 we will do our very best to hold on to that receivables performance as you saw at the end of last year. And we continue to drive our payables. But the headwind the hardest part for us to manage this year with the uncertainties in the market and trying to match up is going to be around inventory. And so although we wouldn't say we had a bad performance at the end of Q4 '19, it wasn't as strong as you can see at the end of Q4, and then faced with the challenges this year, that's going to be the biggest headwinds, its inventory and it's managing inventory through the middle and back end of the year as the MAX, especially the MAX sort of returns to service, but then we've got to manage the timing around the 787 as well.

Your next question comes from Sheila Kahyaoglu from Jefferies. Your line is open.

Your guidance explicitly talk about margins, but how do we think about the profitability profile of the business and flattish margin given MAX volumes are having - you have the 787 headwind in the second half, and potentially 777X. Can you just say that a way to make sure that it's captured in the guidance or are there risks or how do we think about that? Thank you.

Hi, Sheila, that's absolutely captured in the guidance. And I would say, our commercial aerospace margins are fairly similar. We don't have huge differences across the range and so the 777X, the 787, the MAX, as you call down there, are not massively different to the rest of our commercial aerospace program. So in terms of the mix, there isn't a swing that you're going to see. I mean, obviously, what we saw in Q4 was an overhead challenge with some growth coming into business in Space & Defense in some other areas and industrial will be in a better position to cover that overhead. So that should be less of a headwind going into the year. And then really it's about - as we always say, driving productivity and efficiency, which we challenge ourselves and continuous improvement every year to overcome the inflationary pressures that are naturally there to maintain and drive strong margins and in our low-to-mid EPS guidance that's exactly what we're assuming to deliver and hold on to those margins.

And then maybe just a follow up on business jets, they were quite strong in Q4, you guys called it out. How do we think about that into 2020 with some of that Gulfstream business anniversary, if you could talk about the business jets outlook? Thank you.

Yes, I mean obviously, we're going into a strong Q1, Q2 with Gulfstream, we see that trend continuing. I think your point on the anniversary is always a good one. It can't continue to ramp and ramp, but what I would say certainly in the next couple of quarters, we continue to see as positive

Your next question comes from Gautam Khanna from Cowen. Your line is open.

I was wondering if you could give us maybe some granularity on the 737 MAX of the $400,000 per shipset, that you estimate. How much is related to the engine channel and how much is related to the airframe so we can sort of calibrate out conservative of the guidance which does appear, at least on the MAX to be conservative.

So we need to be careful not to call out specific customers. But what I would say Gautam is that about a third of our MAX $400,000 shipset value is shipped to Tier 1 suppliers including CFM and others around the leap engine and Spirit. So about a third.

About a third. Okay, and then just to understand the A380 and 787 comments a little further. So do you have a sense for how many shipset equivalence you had on the A380 in 2019? And just to be clear on the 2020 guidance does that - when do you start to feel the effects of the 10 a month on the 787?

So on the A380 Gautam, I would estimate we had about six shipsets, maybe slightly over six shipsets in 2019. If you remember, we have $3 million of shipsets on the 380, we kind of did just over that. And then the 787, I think as we described or Nick described, is going to be the back half Q3, we're going to probably start to feel the move to 12 and Q4, we're going to start to feel the move to 10.

Your next question comes from David Strauss from Barclays. Your line is open.

Just following up on that. How is the commercial aero guide not worse than down low to mid-single digits when you've got MAX down 50% plus and obviously 87 coming down in 0.380? I mean, is there - what is in there that - what's going up in that business, I guess to offset some of those headwinds?

Well, the A320 neo continues to be strong, and we expect to see some growth coming from a small base, but the 777X is going to present some growth opportunity this year. We actually see a little bit of growth in the A320 and then as we talked about a moment ago, the business jets and regional jets is looking pretty good. And we have the - okay, you're talking about commercial aero, so those are the key ones in commercial aero.

And then just to clarify, so your - for your EPS guidance, you assumed a flat share count because you can't do share repo while the deals progressing?

Correct. Yes.

Our next question comes from John McNulty from BMO Capital Markets. Your line is open.

This is Colton Bina on for John. I was just wondering, could you talk a little bit about the inventory alignment you saw in wind and kind of what kind of growth for wind is embedded in your 2020 guidance?

Yes, sure. So Vestas our key wind energy customer has a range of turbines and really it was kind of a mix inventory play towards the end of the year. They were obviously sort of aligning themselves up, they just took less material for some of the key turbines for us. And so that led to a softer fourth quarter that they have various sizes of turbines newer and older, and if you like it was kind of a mix effect on our sales as they sort of lined up their inventory towards the end of the year. As we look forward to this year, Vestas have - it continues to be a record backlog. We have about two years of visibility, it remains to be very strong. Some of the key turbines are in demand and we continue to see some growth. I mean, obviously, we're not going to see the same sort of 60%, 30% growth again, but we continue to see some level of growth in that space, where we expect to stay at the elevated revenue level.

Your next question comes from Hunter Keay from Wolfe Research. Your line is open.

This is Andrew Quach on for Hunter. Could you talk about how you see the hybrid electric segment of the commercial engine market evolving over the next five to 10 years, and if it's an area you'll prioritize. Thanks.

Quach, again anything that is driving technology for lighter more efficient aircraft or vehicles, we're working on it, I can assure you both from a material strength, from a processing capability, and from a customer care rate and how they actually form part. So I really - it's a little premature to give you any numbers but I can tell you it's a technology that we're pursuing and plan to participate in going forward.

Our next question comes from Chris Kapsch from Loop Capital Markets. Your line is open

Yes, so my question is a follow-up on just the impact that seems - that isn't necessarily factored into the guidance from the absorption variants. You saw it in the fourth quarter. And then just a few - depending on you look at it seems like that gross margin entering 2020 will be something closer to the fourth quarter then rebounding, but it seems like you need a rebound in the gross margin and the absorption variances in order to see some operating leverage to have the EPS exceed the sales growth of flat to low single digits. I hear you that you don't want to necessarily parse out when you'll feel the impact from the MAX, but I'm guessing it is at least on a comparison basis, there's going to be more pronounced impact in the first half, so seems like it's difficult to envision those gross margins rebounding sequentially in the first half. So I was just wondering if you can, maybe more granularly reconcile that delta on the margin level maybe there's some offsets in SG&A and R&D. So, thank you.

Yes I understand the point. I mean what I would say is, we had some particular adjustments in the fourth quarter in addition to the MAX, which is ongoing, but we had the wind energy softness, we even had one or two things. So the A380 completely came to an end, the air cabin-flex and coming to the end with Airbus we saw some adjustments. And the A350 is now sort of at rates and I think Airbus we’re sort of lining that up towards the end of the year. So I think on a number of fronts, we saw some absorption challenges. I think as we go into 2020, we've got growth in the areas I talked about, the NEO outlook is excellent. The 777 is going to start to grow for us, the 220, the business jets, on the military side the JSF is strong and growing the CH-53K. So that's going to help us with the absorption and that gives us confidence that we're going to be able to overcome it. And so, we'll be able to produce stronger results than we saw in the fourth quarter. So the MAX continues and we're not hiding from it. Otherwise, we don't have much more positive guidance, but we think the low to mid EPS builds on a stronger gross margin and better absorption is what we're looking at right now.

Yes I guess I just add to that, that we have very aggressive actions around cost controls, discretionary spending, temp labor, contract labor overtime, and even actions around aligning our workforce with actual demand. So it's two fronted costs and capitalizing on the topline growth.

Okay, do you see gross margin just improving sequentially in the first quarter. The other thing that you have a headwind down presumably as mix as you know - with the commercial aero down the industrial sales up, pretty certain industrial margins I believe are lower than commercial aero. So if you could just, maybe just provide color on the sequential trend there? Thank you.

Yes I mean, we're obviously looking for stronger gross margin in our outlook throughout the year. And in terms of mix I mean yes, industrial is up but you've got to remember it's only sort of 12%, 13% of total sales. Space & Defense which has good margins very similar to commercial aerospace is high single-digit growth. So, I don't think the mix headwind within our market segments is significant and we should see growth as Nick said on the cost front, we're driving that and then in the areas where we have growth to help us with the absorption.

We have no further questions. This concludes today's conference call. Thank you for your participation. You may now disconnect.