Aerospace composite provider Hexcel on April 20 scrapped its guidance for 2020 with its financial outlook marred by declining production rates at OEM customers making large commercial aircraft (LCA).
“Whenever we see rates go down, it’s very typical” for suppliers, Hexcel chairman, CEO and president Nick Stanage said. “Given the complexity and the size of the supply chain, we’ll see a meaningful take down in the supply chain as well.”
Stanage told an earnings teleconference April 21 that Boeing still had not communicated LCA production rate changes to the key materials supplier, despite near daily conversations over multiple issues. Last week, Airbus announced monthly production of narrowbodies and widebodies dropped a third. Financial analysts have said they expect Boeing’s production reductions to be as bad or worse, for all the same reasons stemming from the coronavirus pandemic but also the 737 MAX’s production halt in January.
Stanage confirmed suppliers can expect an exponential impact. “Inventory, supply chain, buffer stock, destocking is [all] going to be added to the rate reductions that are being communicated and announced,” he explained. “The bottom line is, nobody really knows where those rates are going to end up.”
“We don’t know where Boeing is going to go, but they’re going to be lower, and that’s what we’re anticipating,” Stanage added.
According to its earnings report, the COVID-19 pandemic forced temporary closures at a “number” of Hexcel plants as well as customer plants. “These impacts led to reduced sales and overhead absorption challenges. Going forward, we anticipate significant declines in demand within the aerospace and industrial markets that will challenge us for the remainder of the year,” Stanage said.
Still, Stanage asserted that his company remains “strong” and is in a position to help its OEM customers. “They haven’t reached out saying, do we need [their] help? We’ve reached out and ask how can we help you.”
Nevertheless, Hexcel is laying off an unidentified number of workers and requiring temporary furloughs of the rest of its salaried employees. Several shareholder and employee benefit payments have been suspended. Stanage’s cash salary and compensation for directors on the company’s board all have been cut in half—one of the deeper such reductions, relatively, across aerospace and defense, according to analysts. On April 6, Hexcel and parts provider Woodward canceled a plan to merge this year, which was announced just in January. Several cost-cutting efforts are underway.
“While the planned cost reduction will help to offset lower volumes, Hexcel has a high fixed-cost base in our view, which is generally an issue across most OE focused suppliers,” Jefferies analysts noted. Looking ahead, the company’s outlook is increasingly challenged.
“The next steps for Hexcel remain to be seen,” Sheila Kahyaoglu and Greg Konrad continued. “The [Boeing] New Midsize Aircraft is non-existent, leaving the next opportunity at the Future Small Aircraft, which at the earliest will be in 2030. As such, we view Hexcel commercial aero business as fairly depressed through 2023 with a recovery mid-decade. The longer-term opportunity is increasing composite content on narrowbody aircraft.”
Hexcel sales in the first quarter of 2020 were $541 million compared to $609.9 million in the first quarter of 2019. Year-over-year net income was down 41% to $42.4 million in the latest quarter. Diluted net income per share dropped similarly to $0.50.
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