Ladies and gentlemen, thank you for standing by and welcome to the Hexcel Q1 2020 Earnings Call. At this time all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session [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.

Good morning, everyone. Welcome to Hexcel Corporation’s first quarter 2020 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 first quarter 2020 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. I sincerely hope that each of you participating in this call are adjusted to these trying times as best as possible and are staying safe. As an organization, we are committed to the health and safety of our employees. We have adopted new work practices in our plants in response to the COVID-19 virus, while those employees that can are working remotely to limit exposure to our dedicated operations team. The effects of the COVID-19 pandemic have been far reaching and unpredictable. Companies across industries are managing through uncertainties, making difficult business decisions, setting new expectations for performance, and that includes Hexcel. While it was a challenging start to the year with sales impacted by both the continued grounding of the 737 MAX and the economic downturn caused by the COVID-19 pandemic, I can assure you that Hexcel is acting swiftly to respond, and we have taken a number of decisive actions to realign our business with lower current and forecasted demand. When we last spoke in February, Hexcel was looking forward toward completing a third quarter 2020 merger with Woodward. The COVID-19 pandemic had just started to affect the Asian markets. We could not have imagined the magnitude of the impact on the entire world economy. Hexcel began realizing the effects of COVID-19 on orders and shipments early in the quarter with our wind operations in China. Then, as the virus spread into Europe and the U.S., it caused widespread closures at many of our customer plants as well as some temporary shutdowns at our own facilities, particularly in Spain and France. Once we recognize the impact of the COVID-19 pandemic on the global economy, we jointly decided to terminate the…

Thank you, Nick. The first quarter of 2020 began with January and February tracking near expectations, excluding the lack of Boeing 737 MAX production and a temporary government induced shutdown in China, due to COVID-19 that impacted our wind energy business. March then witnessed an unprecedented market slowdown. While we don't have all the answers yet, we are taking robust actions to control costs, and we'll continue to do so, as we work to understand near-term and longer-term market demand. I will begin with my usual overview of market, and then address cost reduction actions and explain our strong liquidity position. Before I discuss results, I'd like to remind everyone year-over-year comparisons are in constant currency. 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 strengthens against the euro and the pound, our sales translate lower, but our costs also translate lower resulting in a net tailwinds and margin. Accordingly, we prefer a strong dollar to a weak dollar. In terms of currency hedging, we employ a disciplined hedging strategies to test our operating income, that lays in hedges over a 10 quarter horizon. Quarterly sales totaled $541 million. The sales impact was driven by the 737 MAX production stock and the cessation of the A380 program. The initial first quarter 2020 impact of the COVID-19 pandemic across our market is estimated to be in the range of $20 million. Turning to our three markets, commercial aerospace represented approximately 67%, total first quarter sales. Commercial aerospace sales of $363 million decreased 12.7%, compared to the first quarter…

Thanks, Patrick. This global health crisis has touched all of us and made us view the world differently. However, the Hexcel value proposition is unchanged. The global economy will come back, more people will resume flying and airlines once again order new lower emission composite rich aircraft to meet this growing demand. The trend toward integrating our strong lightweight materials into wind turbines, automobiles, marine and recreation will continue to enhance overall performance and efficiency. I could not be prouder of our one Hexcel team and how they are responding to the crisis at hand. Hexcel remains a global leader in the advanced composites technology. We have worked hard to stay safe as we continue to operate and meet customer demand, and the resilience demonstrated by everyone has been impressive. The challenges we face are enormous, and we remain focused. We're staying close to our customers, and we continue to strive for excellence. Hexcel was founded over 70 years ago, and the company has weathered market disruptions before. We will weather this pandemic. Our Hexcel leadership team is unified, our financial profile is healthy, and we're focused on doing the right thing. Our commitment to operational excellence is sound, and its impact on cost savings and productivity has never been more critical. Again, we're moving swiftly to realign the business. And while we don't have all the answers today, we will continue to take the cost actions needed to maximize earnings and liquidity, while ensuring the business is appropriately positioned for future growth. When the crisis passes, Hexcel will be even better positioned to support our customers and our shareholders. With leading technology, leveraged by our passion for innovation, strong customer relationships that will grow even stronger during these challenging times, our talented team that perseveres in the face of any challenge, I'm confident that our business will thrive in the future. Chris, we'll now turn it over to you and are ready to take questions.

Thank you. [Operator Instructions] The first question is from Myles Walton with UBS. Your line is open.

Thanks. Good morning. The first question is around the cost reduction actions you're taking which are pretty swift. I think in the 10-Q, it talks about a 30% reduction in labor costs. And maybe could you just give us some flavor as to what percent of COGS is labor and also, in the whole scheme of your cost reduction efforts kind of your anticipated impact of that on a run rate basis?

Yes, Myles. So, I'll take a shot at the first part and ask Patrick to comment. Once we understood how large the pandemic was going to impact our business, we immediately took what we classify as short-term actions to get as much cost out very quickly, so that we could preserve as many of the critical skills and long-term resources for the market going forward. The other reason for doing that is we simply did not understand what our markets were ultimately going to migrate to with respect to a new run rate. So taking the cost out from a direct/indirect headcount and controlling all discretionary costs was a priority throughout the globe. Obviously, quicker and easier to do in the U.S., a little more work involved in Europe, but we're in process with doing that as we speak.

Patrick, were you able to put a box around the size quantum of the cost reduction effort and also the percent of COGS of labor?

Yes. So, I mean, we're not in a position to be precise today Myles, because we don't know the exact step down in our demand. I mean, we put the 30% out of labor costs as sort of a ballpark target. We may end up being slightly stronger or slightly lower than that. But our initial estimates suggest that that's where we need to go to. Our biggest cost, I think, as we've said before is raw materials. Labor is the second largest cost input we have across the company. I'm not going to define that specifically, but it is a significant cost and take -- I mean, raw materials will come out naturally as you can imagine. What we have to address as management is our labor costs. After that, it's sort of utilities and depreciation. And obviously, the challenge we have is overcoming the depreciation fixed cost and the absorption challenge that it brings. But as Nick highlighted, across the board, we’re taking many, many actions.

And just one follow-up which is Airbus has come out with the production rates. And maybe to just focus on the 350 if you can, do you anticipate your realized sales to be below their announced production rates in the near-term because of destocking or do you think the rates you'll pretty much see represented in your sales over the next few quarters? Thanks.

Yes, Myles. So, whenever we see rates go down, it's very typical given the complexity and the size of the supply chain. We'll see a meaningful takedown in the supply chain as well. So, we're building that into our forecast as well, not only on the A350 but some of the other changes that are being evaluated.

The next question is from Robert Stallard with Vertical Research. Your line is open.

Thanks so much, good morning.

Good morning.

Just a follow-up on Myles’ question on the destocking. I know this is probably a question you've had in the past, and it's rather hard to answer. But just what is your assessment of what the level of excess buffer inventory that could be in the chain that can now come out?

So again, our ship-to locations are multiple on various programs, and those supply chains can be very along. So to give you a precise number, we're really not in a position to do that. I would remind you that we stay very close to our customers and much of our material with the fiber and the prepreg go into freezers, so we had very good line of sight in those materials and how much is in stock internally as well as at our customers. But it will be a meaningful supply chain adjustment concurrent with the rate takedown.

Okay. And then secondly, just following up on the CapEx move you saw in the quarter, which is very rapid. Should we expect this sort of rate to continue in the second quarter and going forward through the year or is this a 1Q expense pretty much what we should expect going forward?

No, we're not going to get into specifics. But it's just as a reminder, our maintenance level is in the $60 million, $70 million range. Given the actions we've taken, I would expect to be in that range if not less.

Okay. That's great. Thank you.

Thank you, Rob.

The next question is from Mike Sison with Wells Fargo. Your line is open.

Hey guys, glad to hear you guys are safe. Nick, when you think about the long-term, I think you noted a little bit in terms of long-term value proposition for carbon fiber with fuel prices pretty low. Any thoughts on how that sort of flows through to carbon fibers as being the go-to material on new airplanes going forward?

Well, Mike, if you've ever flown on a 787 or an A350, if you've looked at the advantages a carbon composite intensive airplane provides, there's no question in our mind that that is the future of aircraft. Now given what's going on with revenue passenger travel and parked planes, my belief is new planes will be required, most planes will be composite intensive. So, I think the value proposition is there certainly from a strength, a weight , a maintenance overall productivity improvement that composites and the performance composites have demonstrated, it is the material of the future and we're confident.

Great. And as quick follow-up. When you think about -- I know probably difficult to sort of give us a feel for, but if you think about the first quarter sales down 30%, can you give us a thought of how March looked? And then, how do you think your order patterns will change, April, May, June given the production rate changes, as well as plant shutdowns at Boeing and Airbus have had to do over the last couple of weeks?

Yes. So, as you're reading from both Airbus and Boeing, their plants are in different states of operation and efficiency and some even closed down. The big impact in commercial air, commercial aero, we really experienced in March, and we expect that to continue certainly into the second quarter, third quarter. Inventory, supply chain, buffer stock, destocking is going to be added to the rate reductions that are being communicated and announced. And the bottom line is nobody really knows where those rates are going to end up. As you know Airbus gave some preliminary rates that'll run into summer, that took their 320, 350 and 330 down by about a third. And we don't know where Boeing is going to go, but they're going to be lower. And that's what we're anticipating, that's what we're positioning our operations to manage to.

Great. Thank you.

Thanks, Mike.

The next question is from Robert Spingarn with Credit Suisse. Your line is open.

Hi, good morning. Just sticking with the rates. Is there a way to quantify what breakeven looks like on a cash flow basis with regard to the rates? You have talked about trying to maintain double-digit, I guess book margins, but on a cash flow breakeven basis, can you make money, six per month on a widebody, and I don't know, 30 to 40 per month on a narrowbody? How do we think about that? And then the second question, Patrick, on the cost going back to where Myles was headed is, maybe can we, maybe I can ask a question about detrimental margins. How should we think about detrimentals through a period like this? Thanks.

Yes, Rob. So just to start off, I'll remind everyone that bulk of our assets are fungible. And we're certainly looking to repurpose where we can. And you can see from the actions we're taking, we're stripping costs out to rightsize the business so that we can ensure sustainability and free cash flow, and operating margins in the double-digit range, and we're confident we can do that. Patrick and I are working multiple scenarios and demonstrating that to the board on upside and downside, and we've very good controls and models to reflect the various levels of demand that our potential. So, we feel good about the actions that we have in place given today's view. And the additional actions that we will take if required. Patrick?

Yes. No, absolutely. I mean, we're coming into this in a strong liquidity and tax generating position. Clearly, the reduced revenues impact that, but as Nick said, we're going to take action. In terms of the detrimental margins, that's really the task at hand to try and minimize that impact. In the short-term Q1 is very difficult to react fast enough with the overhead costs, the indirect costs and the operational expenses. And so more of the variable margin impact is going to flow to the bottom line. I mean, the first instance that’s what you lose. You lose the variable margin. So our job right now and we've already started it as Nick alluded to and in the earnings release and as I talked to taking out indirect costs, discretionary costs, operating expenses. We're obviously going to try and minimize that detrimental margin, but it's always a challenge. I mentioned depreciation before, that’s one of the biggest sort of fixed costs that we've got to overcome. And that's what Nick and I and the team at Hexcel are working to do. So, we have a clear objective to minimize it. But clearly, especially in the short-term that's a tough challenge.

Well, and the reason I asked is because when you were adding capacity, clearly volumes were so important to extracting the value in those new plans. And of course, now we're going the other way. And so that's why I was hoping we could maybe put a finer point on that. And then the point to the question for Nick was on a -- because of your comment on depreciation. On a cash flow basis, can you generate cash at rates down 30% and even maybe down 50%?

So obviously, depreciation is a noncash cost and obviously most of what we're stripping out is cash related. So, we can keep generating cash and we will take cash out of working capital, with step downs in revenue. Now obviously, we can all speculate on those step downs in revenue and it gets tougher, you've got upsides and downsides. But clearly, we will be moving the cash costs as fast as we can. And as I say, we're entering this in a strong position in terms of a cash generating business. So, we're pretty confident in the outlook. We're very positive around our liquidity position through this cycle.

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

Hi, good morning.

Good morning.

Nick and Patrick, I just want to follow-up once more on your comments here regarding the indirect costs. You've obviously moved pretty quickly to adjust your cost structure. Do you expect that the indirect or cost structure is aligned with sort of demand? Is this something you're able to get to in the second quarter or third quarter? Does it take longer? How do we think about the timing now that you've moved pretty quickly on addressing the cost structure?

Yes. So again, as Patrick mentioned, we've targeted based on what we see today 30% cost take out and that's including labor. We can realize that fairly quickly in the U.S. Many of those have already been communicated and implemented, some of which will continue over the next few weeks. In Europe, it's a little more time consuming and challenging working with the state regulators as well as the works council. So that will tend to take a little longer. Nevertheless, we've got some short-term actions in Europe that are underway with respect to [Indiscernible] and furloughs and short-term costs takeouts, that will help us get to that 30% type of range fairly quickly.

Okay, that's helpful. And you've talked about the opportunity to repurpose some of your assets. Is this something we should think about as potentially material? This year, is this longer-term? Or can you write any more specifics around, outside of maybe aerospace and defense? Is that really an option that your cost base? Or what's -- I mean, how viable is that in the near-term? Or is this -- and does this represent maybe strategically something longer-term that could be part of the mix? Thank you.

Yes, Ken. So, clearly, there's some shorter-term opportunities, but they're relatively small. And it takes time for us to develop the relationships, both in space and defense, which we're looking at. As you know, our materials are high performing, they're the high end of the performance spectrum on carbon fibers. So that's where we're trying to find opportunities to utilize those materials. Even in industrial, there are opportunities, but again, some of the capacity we're looking to take out, that will take time for us to repurpose.

Thank you.

Thank you Ken.

The next question is from David Strauss with Barclays. Your line is open.

Thanks, Good morning.

Good morning, David.

I wanted to ask on working capital and how you see that playing out? Patrick, I think there was a comment in the press release around how you expect working capital to be a source of cash over the next couple of quarters. Just how do we think about, how working capital is going to move over the course of the next couple of quarters as rates come down?

Yes. So, I would sort of look at it over the balance of the year. So over the next three quarters, I'd definitely expect working capital to be a source of cash. We will look to drive down inventory, raw materials will come down in line and underlying demand from our customers. Finished goods, we will manage very tightly. And we've talked about idling capacity, we're not just going to keep producing, so those things go together. Receivables thus far have been strong, our collections remain strong. We have a very good record on that front. But undoubtedly, with lower demand, lower revenue, our receivables will come down. Our payables, likewise, we will manage, work with closely with our supply base. But all told, we will end up operating with a lower level of working capital. And therefore, at some point during this year and it won’t be perfectly smooth but over the balance of this year, we will release cash out of our working capital base.

So would your expectation be that throughout this that you would be able to remain free cash flow positive, I guess on a rolling 12 months basis?

I think as we look at the world today, my answer is yes. But you need to tell me what the demand is ultimately going to be. So we’re not forecasting, we’re not guiding. It depends on the overall ultimate impact. That is realistic outlook.

Okay. And then last question on pricing. Do any of your programs, Nick, on the aerospace side, you have volume based pricing where you potentially get a higher price at lower volume?

So, our contracts vary, depending on the application and the customer and the segments. But we do have contracts that are volume based. And that when volume goes up, we pass on part of that volume leverage savings to our customers. Similarly, if volumes drop below then pricing is adjusted accordingly. So, it's not across the board, but we do have certain contracts that do include volume contingent center.

Okay. Thanks very much.

Thanks, David.

The next question is from Gautam Khanna with Cowen and Company. Your line is open.

Hey guys, this is Dan on for Gautam. Thanks for the question.

Good morning.

So, I know we discussed this a couple of times in the beginning of the call, but have you actually started to see any destocking by Boeing sub-contractors? And are you able to parse that out by program or how widespread that might be if so?

So, to differentiate again, you have to imagine the multiple ship to locations we have. And each of those sub-contractors or the primes are at different levels of production and pulling at different rates, depending on what their inventory levels are, their buffer stock, their backlogs. So to give you any real clarification around how much has been rates coming down versus how much has been supply chain adjustments, we really can't provide much more color on that. I could tell you that clearly there's some supply chain adjustments taking place today. And again, when your rates are coming down and supply chains are coming down, it's just multiplies the downward effect, and that's really what we're embracing for in Q2 and Q3.

Got it, understood. Thanks for that. And then just one other question was, can space and defense actually continue to grow regardless of the current macro situation? Or is there significant disruption there as well?

Well, we certainly believe space and defense can and will continue to grow. The budgets are strong. Now, I won't say there won't be COVID-19 supply chain impacts or potential closures based on site closures, but in total, we view that market as fairly robust. And it's certainly a target for us to continue to drive not only growth in the programs we have, but incremental growth in some repurposing opportunities that we see.

Thanks very much.

Thank you, Dan.

The next question is from Paretosh Misra with Berenberg. Your line is open.

Thank you. Good morning. Can you completely idle a plant and move production to another facility? And does it require to get recertified with that customer? How does the process work?

So, it depends on the product form. So I would just remind those on the call today, that our Roussillon plant, which makes precursor and carbon fiber, it is shutdown. It's shutdown, a function of the COVID-19 and is scheduled to be down until mid-May. Those materials are qualified another plants indicator in Salt Lake City that we can continue to run and continue to support. So most of our products can be moved around between plants. It's one of the benefits of our operating model, the fact that our assets are fungible. We can move them around, we can change them over very quickly so that we can optimize our supply chain and flex as, and when we need to. So, we do have quite a bit of flexibility there.

Interesting. And then maybe if you could just quickly remind me how many fiber and prepreg facilities you currently have or are currently operating?

For fiber, we have two sites that make precursor that's in Roussillon, France, and in Decatur, Alabama. We have three sites that make carbon fiber that's Salt Lake City, Illescas and Roussillon. And then prepreg, there is numerous plants in multiple countries in Europe, as well as in the U.S. in Salt Lake City and other.

Thank you, and good luck with everything. Thanks, guys.

Thank you.

The next question is from Ron Epstein with Bank of America. Your line is open.

Yes, good morning, guys.

Good morning.

Would you think about -- I guess, maybe your supply chain and more importantly, the broader aerospace supply chain? How do you think about that impacting build rates so on and so forth? Meaning, you guys are actually seem like -- and you have a good liquidity situation, but many of your peers don't. I mean, how do you think that plays out? I mean, do you think that the broader supply chain is going to need government help? Or how they're going to get through this? Because ultimately, you can't deliver your stuff if they can't deliver their stuff?

Yes. So, that's a pretty big question, Ron. I don't know if I'm qualified to answer that. I can tell you we're focused on what we're doing. I can also tell you with respect to our supply chain for incoming materials, one of the first things we did is to make sure our team got with our key suppliers to make sure we were aligned. Because we started pushing back on orders, we did not want to take in excess inventory since our customers were slowing down their build rate. So, with respect to their performance, you're right. It's probably all over the map. We're in a great position. We've got great liquidity. There are some in the supply chain that don't. I know the CARES program will potentially help some of them, help many of them. But really, I don't have a crystal ball to tell you who's going to get in trouble and what possible relief they might have down the road.

Okay, fair enough. And then maybe as a follow on. I mean, have the OEMs either of them reached out to you guys or to your knowledge, other suppliers offering to help?

Well, we're talking with Boeing and Airbus and our other customers on virtually a daily basis to make sure we're aligned with their needs. They know we're very strong. They know our global position. And quite honestly, we're working to help them on not only technical solutions, but other cost reduction initiatives and continuing to provide ideas and opportunities. So they haven't reached out saying do we need help? We've reached out and asked how can we help you?

Okay, great. Thank you very much.

Thanks, Ron.

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

Thank you. Good morning, everybody. A little bit of a derivative follow-up to Ron's sort of theme there. How do you think about the potential of the OEs building redundancy into the supply chains in a post-coronavirus world? In the event that that some of these suppliers both large and small fail and don't recover. Is there a risk or even a potential opportunity in the event that there's redundancy built in? Thanks.

Yes. Thank you, Hunter. So again, we do believe there will be some companies that will be stressed through the process. We're continuing to keep our competitive lands and our pipeline active, so that we can understand what technologies what areas might be we be interested, if certain assets were to become available which they may during this crisis. So, with respect to our customers and their procurement strategies, our focus has been to provide the best technical solution at the best value proposition and to continue to show how we can deliver that, not only on the existing platforms, but for the new platforms that will be developed ultimately and that’s what our focus is. And we think we are in a great position to do that.

Okay, Nick thanks. And then can you just give us the most recent thoughts updates on what you’re hearing at the biz jet market right now? Thanks very much.

Yes, and we called it out in the first quarter. Our Gulf stream was extremely strong. I think it’s a little slower to respond in the regional. I am reading the same materials, you are reading. There is no doubt, there is going to be a fall of on demand. What it looks like and how it translates to the larger scale versus the mid and small size business jet remains to be seen. So we’re keeping a close eye on that, talking with our customers regularly, but it's just a bit early for us to predict.

Thank you.

Thank you.

Our final question is from Noah Poponak with Goldman Sachs. Your line is open.

Hey guys.

Hey, good morning.

With regard to Boeing and Airbus production in the immediate term, you alluded to Airbus having provided some numbers into the summer. Has Boeing not done that specifically? And then do you have any insight into just how much disruption the OEMs are facing at the airlines? It's hard to tell if it's some kind of quasi, normal type of environment, you'd seen a downturn where there's some deferral, some cancellations versus if it's full on, literally almost every airline asking to defer or cancel within the next six months.

Yes. So to answer your first part of your question, no, Boeing has not provided any guidance on build rates. As you know, the MAX has not been recertified and is not being produced today and there's no date on when it will it be produced, or at what rate they would initiate production. So really no guidance there. With respect to the turmoil, we can only imagine with travel down, pick a number anywhere from 90% to 97% depending on the route. The cash position, I'm sure there's many discussions going on, but I'm really not going to speculate on the amount of turbulence. I feel for Boeing and Airbus, and we're doing everything in our power to help them navigate through. And I'm sure they're doing everything in their power to help the airlines get back into an operating mode.

Okay. And Nick, just following-up on the MAX there. Boeing, at least, somewhat recently, Boeing has stood by somewhere in the zone of mid-year re-entry in service, and has also talked about starting the production to some back up prior to that. Spirit is talking about restarting production within a few weeks. And obviously, you're feeding into those companies. So I guess it's a little surprising to hear your comments that suggest less clarity on that. Am I reading that correctly? Or how do I square all of that?

Well, there's some -- we've provided timeframes on how quickly we could turn production on depending on what build rate. There's inventory in the pipeline. So, don't read my message to mean anything other than we don't have any longer-term Boeing build rates. Obviously, the supply chain are in different places, you mentioned Spirit, which we provide materials to as well. So, we're just not going to get ahead of Boeing and we'll let them declare what their schedules and timeframes are and recertification and production for the MAX.

Okay. Thank you.

Thank you, Noah. Okay. Chris, that’s it. Thank you, everyone.

Yes. This now concludes the Hexcel first quarter 2020 earnings call. Thank you all for participating, and you can go ahead and drop your lines. Have a good day.