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Text: Before beginning, let me cover the formalities.
Such factors are detailed in the Company's SEC filings and last night's news release.
It cannot be recorded or rebroadcast without our express permission.
The purpose of the call is to review our second quarter 2021 results detailed in our news release issued yesterday.
The global COVID pandemic is far from over.
But with the growing availability of vaccinations, there is cautious yet positive momentum as domestic travel appears to be on the rebound and aircraft backlogs have started to grow again.
While there remains uncertainty ahead, our focus has shifted toward a return to growth.
All of us recognize that the past year and a half has been unprecedented.
The global pandemic required Hexcel to take aggressive and swift restructuring actions, which we did.
We also took advantage of the lower production levels to drive cost and efficiency improvements.
These efforts have positioned us to exit the pandemic more focused and more efficient for a strong rebound.
The way our team responded to the challenges has been phenomenal and as reflected in the results we reported in our news release last night.
Our robust start to the year continued into the second quarter with results in line with or slightly ahead of our expectations.
We achieved strong margin performance despite lower year-over-year sales as a result of a favorable margin mix from higher carbon fiber sales.
Combined with the efficiency improvements and reductions in our overhead costs, we were able to deliver $0.08 of adjusted earnings per share for the quarter.
If you remember back to the second quarter of 2020, we also reported $0.08 of adjusted EPS.
However, on sales, that were almost 17% higher in constant currency.
This demonstrates the cost controls actions that we took quickly in 2020 and that continue today are making a significant difference in the sustained value we offer to our shareholders.
As we anticipated last quarter, we believe inventory destocking is largely behind us as we move into the second half of the year.
Specifically, destocking for the A320 and 737 MAX are basically complete.
The widebody still have some inventory to burn through and we expect that will take a few more months to align with announced build rates.
We are encouraged that airlines such as United are placing orders with the commercial aerospace OEMs as revenue passenger kilometers continue to grow around the world.
Deliveries climbed in June for both Airbus and Boeing, which we believe is further evidence that we, along with our customers, are beginning to emerge from the effects of this pandemic-driven downturn.
However, while we anticipate gradual increases in build rates in the coming months, we recognize that it will take some time for rates to return to 2019 levels.
Even with vaccines restoring confidence in travel, there are uncertainties with additional variants of the COVID-19 virus spreading.
US air travel is steadily increasing, but still about 25% lower than before the pandemic.
European travel is improving.
However, the recovery is slower with flights remaining about 50% lower than pre-pandemic levels.
So while we see some encouraging signs and are planning for increased demand and a gradual recovery, we recognize that the effects of the pandemic on commercial aerospace and our business are likely to remain for some time.
Even so, we are very excited about the future and pride ourselves on our relentless drive for continuous improvement.
With that in mind, we have taken full advantage of this time to deepen our customer relationships, which had never been stronger, to further improve our processes and to build our broad portfolio and our commitment to continued innovation.
We announced in May that we are building a flagship center of excellence for research and technology in the US to support next generation developments in advanced composite technologies.
When it opens in 2022 at our Salt Lake City Campus, it will be our largest center for innovation and product development in North America and a showcase for our advanced composites technologies.
Eventually, about 150 scientists and other employees will work at the new center, including many of the experienced and talented R&T employees currently working in Dublin, California.
We will eventually sell the property in California, with the proceeds expected to fund a significant portion of our construction costs for the new center.
With about 100,000 square feet of laboratory and office space and the latest state-of-the-art testing equipment, it will allow us to expand our research to further develop new products and processes and provide an even greater opportunity for us to collaborate with our customers on the latest and advanced composites technologies to deliver innovative solutions and support future growth.
Design efforts are well underway and we expect to break ground in the fourth quarter of this year.
We're excited to make this investment in innovation today to ensure our continued leadership tomorrow.
I look forward to inviting many of you to visit once the site opens toward the end of next year.
I recently completed touring all of our US locations to conduct site readiness reviews.
What I found during these site visits thrilled me.
Our workforce is engaged, focused and highly motivated for a return to growth.
The caliber of site leadership and the shop forward teams across our plants is truly outstanding.
I was shown numerous examples of increased productivity, significant process enhancements and a long list of continuous improvement projects our team has implemented across our manufacturing footprint during the pandemic to reduce costs, further enhance worker safety and job quality, and to position Hexcel to expand margins as growth returns.
The ability of the supply chain to ramp up remains a watch item for us and we are working very closely with our suppliers to successfully overcome any challenges that arise.
The same focus applies to our labor requirements, which I'm happy to say are growing once again.
At this point, we have been able to attract the labor we need.
Yet, we anticipate further challenges, which we'll address through robust recruitment, planning and continuing to stay in lockstep with our customers.
Now, let me highlight some of the results from the quarter.
Aerospace sales of $154 million were down almost 25% compared to the second quarter of last year.
Narrow-body demand is recovering quickly, with second quarter sales reaching their highest level since the first quarter of 2020.
Sales to Other Commercial Aerospace such as regional and business aircraft were down 27% compared to 2020.
Business jets is the largest portion of this sector and sales continue to recover, but remain lower year-over-year.
Space and defense sales were about $107 million, which represents relatively flat year-over-year performance, affected primarily by pandemic-related production delays.
As you know, we have significant content on both the Lockheed Martin F-35 and Sikorsky CH-53 K, with these platforms receiving new orders within the past month.
Both will continue to be strong programs for us, as well as the 100-plus other defense and space programs in this sector.
Industrial sales were about $60 million during the quarter, which was a 15% decline in constant currency.
Wind energy sales, which is the largest submarket in Industrial, declined 44%, which reflects ongoing softer demand, along with the previously reported closure of our wind blade prepreg production facility in North America last November.
In addition, solid sales in other industrial markets, including automotive and recreation, helped offset reduced wind energy sales during the quarter.
Throughout the pandemic, we have maintained a strong focus on cash and in the first half, our free cash flow was almost $30 million compared to just over $33 million for the first six months of 2020.
Sustainability is at the heart of Hexcel.
Innovating and producing modern lightweight advanced composite materials enabling the evolution of more aerodynamic, fuel-efficient aircraft producing significantly lower emissions than older generation aircraft.
More broadly, responsibility has been one of our four primary values for many years and it calls on us to strive to be good citizens in the communities in which we live and work.
We continue to build on our sustainability goals highlighted in our sustainability report first published several years ago and we are now excited to participate in the Carbon Disclosure Project or CDP.
Initially, the CDP report will be submitted selectively to some of our customers this year and we expect to share next year's submittal publicly.
We recognize that many of our investors evaluate our progress in relation to sustainability and especially, our ongoing work to reduce greenhouse gas emissions.
And you can be assured of our continued strong focus and actions on this topic.
As a reminder, the year-over-year comparisons are in constant currency.
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, while our costs also translate lower, leading to a net benefit to our margins.
Conversely, a weak dollar is a headwind to our financial results.
We hedge this currency exposure over a 10-quarter horizon to protect our operating income.
Quarterly sales totaled $320.3 million.
The sales decrease year-over-year reflects production rate decreases by our commercial aerospace customers in response to the pandemic, combined with the continued supply chain destocking.
You will recall that in the second quarter of 2020, OEM production rates were only beginning to be reduced midway through the quarter and the supply chain destocking had not yet begun to any great degree.
I say this is a reminder to consider when evaluating the year-over-year sales comparisons.
Turning to our three markets.
Commercial aerospace represented approximately 48% of total second-quarter sales.
Second quarter commercial Aerospace sales of $153,7 million decreased 24.8% compared to the second quarter of 2020 with destocking continued.
We believe the substantial destocking is now behind us as we enter the third quarter of 2021 and that our narrow-body production is generally aligned with OEM production rates.
However, our widebody sales are still facing some lingering supply chain adjustments that are expected to conclude by the end of the summer.
Space and defense represented 33% of the second quarter sales and totaled $106.9 million, decreasing 2.7% from the same period in 2020.
While the demand outlook remains favorable for composite secular growth to enhance performance and extend capabilities, quarter-to-quarter sales can fluctuate as we experienced in the second quarter.
Lockheed Martin has publicly commented the F-35 deliveries in 2021 will be lower than initial expectations on pandemic-induced disruptions, which impacts the supply chain and our deliveries.
Sales were also softer due to some short-term pandemic-related interruptions impacting other programs, including a number of space-orientated platforms with customers located outside of the United States.
Industrial comprised 19% of second quarter 2021 sales.
Industrial sales totaled $59.7 million, decreasing 15.1% compared to the second quarter of 2020.
Wind demand remained subdued, while other industrial markets, including automotive and recreation, witnessed growth in the second quarter of 2021.
Wind energy represented approximately 45% of second quarter industrial sales.
On a consolidated basis, gross margin for the second quarter was 19.3% compared to 14.5% in the second quarter of 2020.
The strengthening gross margin benefited in the quarter from a higher mix of carbon fiber sales and production.
Our margin recovery will not be completely smooth quarterly progression though, as it will be impacted at times by step-ups in the utilization of major assets such as precursor and carbon fiber lines.
Second quarter selling, general and administrative expenses increased 24.3% or $7 million in constant currency year-over-year.
Research and technology expenses decreased 3.2% in constant currency.
The other expense category consisted primarily of restructuring costs in Europe.
In terms of the year-over-year comparison of SG&A expenses, the second quarter of 2020 was artificially low as pandemic-induced restructuring actions related to non-recurring reductions in stock compensation accruals as well as a temporary implementation of salary reductions.
As a point of reference, second quarter 2021 SG&A expenses are lower by approximately 21% or $8.4 million compared to the pre-pandemic second quarter of 2019.
Our targeted $150 million of annualized overhead cost savings is being fundamentally achieved at the end of the second quarter.
As we now pivot to increasing sales and production levels, our focus will be to drive efficiencies and minimize the amount of cost as we can, while at the same time preparing for significant growth.
Adjusted operating income in the second quarter was $19.3 million, reflecting strong variable margin performance and robust overhead cost control.
The year-over-year impact of exchange rates was favorable by approximately 70 basis points.
Now, turning to our two segments.
The Composite Materials segment represented 75% of total sales and generated a 9.6% operating margin compared to 6.3% in the prior year period.
Adjusting for non-recurring costs, the adjusted composite materials operating margin in the current period was 10.7% compared to 8.9% in Q2 2020.
The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 25% of total sales and generated a 7.4% operating income margin or 7.6% adjusted operating margin compared to 2.6% adjusted operating margin in the second quarter of 2020.
The adjusted effective tax rate for the second quarter of 2021 was 18.8%.
The pandemic and consequent mix of results across the countries in which we operate is expected to continue to impact the Company's overall effective tax rate throughout 2021.
Net cash generated by operating activities was $38.9 million year-to-date.
Working capital was a use of $19.6 million year-to-date, primarily related -- primarily due to increased receivables.
Capital expenditures on an accrual basis was $3.8 million in the second quarter of 2021 compared to $11.5 million for the prior year period in 2020.
Capital expenditures continue to be tightly managed with a focus on improving existing asset efficiency and new technology flexibility.
Free cash flow for the second quarter of 2021 was $35.8 million compared to $51.8 billion in the prior year period.
Continued tight cost control and lower capital expenditures are supporting free cash flow generation.
Liquidity, at the end of the second quarter of 2021, consisted of $115 million of cash and an undrawn revolver balance of $543 million.
Our liquidity remains well above the bank covenant minimum of $250 million and we have no near-term debt maturities.
Our revolver matures in 2024 and our two senior notes mature in 2025 and 2027 respectively.
Our share repurchase program is restricted through March 31st 2022 by the revolver amendment executed in January 2021.
Dividends also remain suspended at the current time.
Our Board continues to regularly evaluate capital allocation priorities.
As our earning release states, we are not providing financial guidance at this time.
However, I would like to reinforce and expand upon the financial outlook shared during the First Quarter 2021 Earnings Call.
We continue to expect 2021 annual sales to be lower than 2020 and below the current market consensus due to recent commercial aerospace production rate adjustments.
The remainder of our previously stated expectations remain largely unchanged, including some additional restructuring costs are anticipated in the remaining quarters of 2021 and are expected to be below first and second quarter levels.
We continue to expect the fiscal year 2021 adjusted operating margin percentage to be in the low single digits.
Capital expenditure in 2021 will continue to be managed closely and are expected for the full year to be at a similar level to 2020.
We expect to generate positive free cash flow in 2021 and further reduce debt levels.
We expect the effective tax rate to be approximately 25% in 2021.
Lastly, repeating some broad context from the first quarter's earning call in April, we continue to target strong mid-teens-plus operating margins once we achieve sales in the range of $1.8 million to $1.9 million [Phonetic] and we are targeting to exceed prior peak margins when we return to previous peak sales levels.
We believe the worst is behind us and we are cautiously optimistic of a continued and steady recovery during the remainder of 2021 that will propel us into 2022 when we expect a significant return to growth, which will extend into 2023 and beyond.
Without a doubt, some of this growth will come from pent-up demand for air travel.
Yet, much of it also comes from airlines ready to replace older, less efficient aircraft with more aerodynamic and fuel-efficient solutions as the world demands long-term reductions in greenhouse gas emissions.
No company has a broader or more vertically integrated portfolio of strong, durable and lightweight advanced composite solutions that lead to fewer emissions than Hexcel.
The market is demanding lighter, yet high-performing materials and we anticipate strong pull for our entire portfolio from carbon fiber to prepreg to engineering core for many years to come.
Additionally, no team is better prepared to meet a quick ramp up than our Hexcel team.
Over the past several months, while demand retracted, we planned for the inevitable rebound.
We have become more efficient, more cost effective and more competitive than ever.
Throughout the downturn, we have improved our processes to ensure that we continue making gains, especially in employee safety, quality and on-time delivery.
Certainly, there are risks ahead and especially so within the supply chain and the availability of raw materials and labor.
It comes down to staying focused and aligned with our customers and we intend to do just that.
I'm excited about the path ahead.

user
sees q2 adjusted earnings per share $0.08.
continues to withhold financial guidance.
compname reports q2 adjusted earnings per share $0.08.

assistant