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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 First Quarter 2020 results detailed in our news release issued yesterday.
These numbers reflect the beginning of what we expect will be a gradual and steady recovery over the coming quarters as the world emerges from the economic effects of the pandemic and regains its confidence in air travel once again.
The results we reported in our news release, last night, represent a solid start to the year and were largely consistent with our expectations.
And we were more than pleased with how well we performed in controlling costs and delivering stronger margins.
Our Hexcel team has transformed this downturn in demand into an upturn in productivity, cash management, inventory control, and efficiency.
While we have a few more months of restructuring ahead of us, especially in Europe, which is on track, we are already realizing meaningful results from our rapid and robust response to the pandemic and its unprecedented effects on our business.
As we have previously communicated, we expect to reduce overhead costs by the middle of this year on an annual basis by approximately $150 million.
And I'm pleased to report a significant portion of those savings are reflected in our first-quarter results.
We expected that second half of 2020 and our first for this year would represent the troughs or the low point of the demand cycle resulting from COVID-19.
Now, with Q1 behind us and a clearer view ahead, we're even more convinced that our expectations were correct, which we continue to validate via regular customer interactions, including customer site visits where this can now be accomplished safely.
Keep in mind, however, the pandemic has triggered many challenges that the world has not yet fully overcome, and therefore, any substantial increases in build rates, air passenger demand, and even consumer spending remain uncertain.
For example, we anticipate that 2021 will continue to be impacted by pandemic headwinds, including inventory destocking, which we expect will wind down as we move through the second quarter and to be largely behind us as we move into the second half of the year.
Some tightness in our supply chain is always a risk, and even more so with the ever-present threat of pandemic-related slowdowns, shutdowns, and shortages.
The rollout of vaccines is encouraging in some countries, yet, unfortunately, slow in others.
Domestic travel in the US is showing signs of improvement and may boom by year-end.
While other countries are entering their second, third, or fourth lockdowns with minimal domestic flights.
International travel is still showing little sign of recovery.
So, for the aerospace industry, 2021 remains a transition period between the dramatic decline triggered by the pandemic and a return to strong growth in 2022.
We remain cautiously optimistic by both our demonstrated performance and the momentum we see building in the global economy as the air travel begins a gradual return to pre-pandemic levels.
Now, let me highlight some of the results.
First-quarter sales of $310 million were in line with our expectations.
Adjusted first-quarter earnings per share was a negative $0.10 compared to a positive $0.64 last year.
Throughout the pandemic, we have maintained a strong focus on cash, and in the first quarter, our free cash flow was a use of $6 million compared to a use of $19 million in Q1, 2020.
Despite significantly lower sales, we continue to tightly manage cash by controlling spending, which includes capital expenditures.
Liquidity at the end of the quarter was strong and included $82 million of cash and $536 million of revolver borrowing availability.
Overall, our balance sheet remains robust.
Turning to our three markets.
Aerospace sales of $147 million were down more than 59% compared to the first quarter of last year, which included sales before the effects of the pandemic began to dramatically impact Commercial Aerospace.
Sales were down significantly across all major platforms, which reflects pandemic induced build rate reductions by the aircraft OEMs and continued supply chain destocking.
While one quarter does not make a trend, we did see sequential sales growth in the first quarter for narrow bodies.
Admittedly, Boeing 737 MAX sales continue to be at a low level as the supply chain works through channel inventory.
This may take some time and will be uneven as inventory levels vary across the supply chain.
Sales to other Commercial Aerospace, which include regional and business aircraft, were down 48% compared to 2020.
Business Jets is the largest portion of this sector and while most business jet programs were down significantly year-over-year, there were a few select programs that increased modestly.
While not getting into program specifics, we are confident business jet demand will return over time, likely led by the small and mid-sized classes.
Space and Defense sales were basically flat year-over-year at $112 million.
We have content on over 100 space and defense programs and they fluctuate by quarter.
Our space business has been growing nicely over time, yet, paused in the first quarter with softer sales which was not usual.
We are -- not unusual.
We are beginning to benefit from the ramp in the CH-53K and we are pleased to see the growing international demand for this composite rich, heavy-lift helicopter.
We are encouraged with the initial outlook through proposed US defense spending, particularly as composite lightweighting [phonetic] supports the US military focus on longer-range aircraft and rotorcraft.
We expect to benefit from growth in Space and Defense throughout the year.
Total Industrial sales of $51 million in the first quarter were down more than 23% and 27% in constant currency.
Lower wind energy sales drove the decrease, yet were partially offset by stronger automotive sales, which may be an indication that consumer confidence is improving.
Wind energy sales, which is the largest submarket in Industrial, were down more than 40% compared to last year.
And reflects a previously reported softening in customer demand, as well as the closure of our wind blade prepreg production facility in North America, last November.
Wind energy remains a good business for Hexcel and Vestas continues to be a great customer.
Material manufacturing continues at our plants in Neumarkt, Austria; and Tianjin, China, as well as our continuing commitment to innovation in the wind energy market.
During the quarter, we announced our new HexPly XF Surface Treatment Technology that significantly reduces show manufacturing time during the wind blade production process.
It's a product that has had a successful track record in prepreg blades and now is adapted for infusion processes.
We also received type approval certification for our HexPly M9 [Phonetic] prepreg materials, which adds to our growing portfolio of prepreg processing options for marine applications.
To finish, I'd like to provide a slightly longer-term perspective.
As sales recover in 2022 and beyond, we expect to deliver strong incremental margins as utilization of existing capacity increases.
While we do not guide to incremental margins, what may be helpful is to review past sales levels and operating margin performance before the A350 reached peak rates.
Specifically, in the 2014 to 2015 timeframe Hexcel sales were in the range of $1.8 billion to $1.9 billion, with operating margins in the range of 17%.
And what is noteworthy is that the A350 production rate was ramping to five per month during these years.
We believe that we can return to these margin levels when we attain similar sales levels.
While our depreciation expense is now higher than during that prior time period, our focus is to more than offset this by efficiency improvements and our overhead cost reductions.
Our cost base will expand with growth, but what is incumbent on our management team is to be extremely disciplined in managing cost growth and ensuring the depreciation headwinds is more than off overcome.
To state this succinctly, we expect to achieve strong, mid-teens plus operating margins, with sales of approximately $1.8 billion to $1.9 billion, and we are targeting to exceed prior peak margins when we return to previous peak sales levels.
As a reminder, the year-over-year comparison will be in constant currency.
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 while our costs also translate lower leading to a net benefit through our margin.
Accordingly, a weak dollar, as we are currently facing, 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 $310.3 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 Commercial Aerospace supply chain destocking.
Turning to our three markets.
Commercial Aerospace represented approximately 48% of the total first-quarter sales.
Commercial Aerospace sales of a $147.6 million, decreased 59.7% compared to the third quarter of 2020 as destocking continues to impact our sales.
We continue to expect destocking to wind down during the second quarter of 2021, consistent with what we have communicated during our fourth quarter 2020 earnings call.
We don't expect to generally be aligned with OEM production levels entering the second half of 2021, with destocking largely behind us and recognizing the beneficial impact of the cost takeout actions that we have implemented.
Space and Defense represented 36% of first-quarter sales and totaled $111.7 million, basically unchanged from the same period in 2020.
We remain bullish for the outlook for our Space and Defense business globally.
Industrial comprised 16% for first quarter 2021 sales.
Industrial sales totaled $51 million, decreasing 27.1% compared to the third quarter of 2020 on weaker wins and recreation market, partially offset by stronger automotive.
Wind energy represented approximately 50% for first quarter Industrial sales.
On a consolidated basis, gross margin for the first quarter was 17.1% compared to 26% in the first quarter of 2020.
The sequential gross margin improvement from the fourth quarter of 2020 had three drivers, including greater impact from our cost reduction actions, improved sales mix, and a few more carbon fiber lines coming back online as our production levels and inventory becomes appropriately realigned with demand.
We continue to temporarily idle select carbon fiber assets.
And as we bring further lines back into production over time to support this expected gradual and steady sales growth in future periods, this should help generate strong incremental margins.
First-quarter selling, general, and administrative expenses decreased 17% or $8 million in constant currency, year-over-year, as a result of headcount reductions and continued tight controls on discretionary spending.
Research and Technology expenses decreased 19.7% in constant currency.
The other expense category consisted primarily of severance costs in Europe.
We continue to target approximately $150 million of annualized overhead cost savings, including indirect labor.
As Nick said, a significant portion of these savings have been achieved and were reflected in our Q1 2021 results.
We expect that most of the remainder of this cost and take-outs will be achieved by the end of the second quarter of 2021.
Adjusted operating income in the first quarter was $1.9 million, which is the first positive operating income since the destocking began in earnest during the third quarter of 2020.
The year-over-year impact of exchange rates was negative by approximately 10 basis points.
Now turning to our two segments.
The Constant Materials segment represented 76% of total sales and generated a 3% operating margin or an adjusted operating margin of 8% compared to 19.9% adjusted operating margin in the prior-year period.
The Engineered Products segment, which is comprised of our structures and engineered core businesses represented 24% of total sales and generated a 6.4% operating margin or a 5.4% adjusted operating margin compared to 6.6% adjusted operating margin in the first quarter of 2020.
The tax benefit for the first quarter of 2021 was $7.5 million, which included a discrete tax benefit of $3.2 million from the revaluation of deferred tax liabilities related to a favorable US state tax law change.
The pandemic and consequent mix of results across the countries in which we operate is expected to continue to have an impact on the Company's overall effective tax rate throughout 2021.
Net cash used by operating activities was $1.2 million for the first quarter.
Working capital was a use of cash of $26.2 million in the quarter, primarily related to increased receivables as first-quarter sales were weighted toward the end of the quarter.
Capital expenditures on an accrual basis were $4 million in the first quarter of 2021 compared to $21.9 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 first quarter of 2021 was negative $6.1 million compared to negative $18.6 million in the prior-year period, which reflects tight spending control on significantly lower sales.
In late January 2021, we announced the second amendment to our revolver, which we've structured to accommodate the temporary economic impact of the pandemic.
The amendment temporarily replaces the leverage covenant with a minimum liquidity covenant.
The minimum required liquidity is $250 million, which includes unrestricted cash, plus unutilized revolver-based [Phonetic] availability.
This minimum liquidity requirement is through and including March 31, 2022.
The facility terms then revert to the prior leverage covenant, effective April 1, with the first measurement of leverage to occur as of June 30, 2022.
Additionally, the amount of the revolver is reduced to $750 million from $1 billion, previously.
This amendment preserves our access to liquidity during this period of market transition and reinforces our strong relationship with our bank's indication.
We remain within all covenant conditions.
Our total liquidity at the end of the first quarter of 2021 was $618 million, consisting of $82 million of cash and an undrawn revolver balance of $536 million [Phonetic].
Our revolver matures in 2024 and our two senior notes mature in 2025 and [Technical Issues] purchase program remains suspended and is also restricted by the previously referenced revolver amendment.
Our Board continues to regularly evaluate capital allocation priorities.
As our earning release states, we are not providing financial guidance at this time, but I would like to reinforce and expand upon the information shared during our fourth quarter 2020 earnings call.
We continue to expect 2021 annual sales to be lower than 2020, in fact, largely in line with the current market consensus.
We expect the aerospace supply chain destocking to largely come to an end during the second quarter 2021.
While some destocking may continue into the second half in select instances, it should be offset by strengthening narrow-body sales.
Some additional restructuring costs are anticipated in the remaining quarters of 2021 but below the first-quarter level.
We 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 very tightly and is expected to be at a similar level to 2020.
We expect to generate free cash flow in 2021 and further reduce debt levels.
The tax assumption is more contrary to normal, but we expect the underlying effective rate to be approximately 25% in 2021.
This change from prior rates was due to a change in the mix of jurisdictions where we generate income.
Over time, we expect the tax rates to return to pre-pandemic levels assuming no changes to existing tax rates in the major jurisdictions where we operate.
Our first-quarter results give us confidence in our outlook for a steady recovery throughout 2021.
We believe that the aerospace industry will realize some upticks in demand beginning in the second half.
And as it does, Hexcel is well-positioned to benefit from our leadership and much sought-after advanced lightweight composites from our strong customer relationships that have grown stronger throughout the pandemic, and from our continuous focus on continuous improvement through operational excellence.
This also is not the time to be shy about investment in R&T and we are continuing to realize a strong pull from our customers to further drive advancements in existing and new innovations that position us to win next-generation platforms.
Despite all the turmoil and challenges that arose in 2020, the great strengths and values of Hexcel remain as robust as ever.
We still have leading positions on the world's largest aerospace programs with our advanced composite materials and the broadest technology portfolio in our industry.
The great job our team has done puts us in a position to return to substantial growth once this pandemic is behind us.
Few companies are as efficient or as good at execution, or as committed to excellence as Hexcel.
Our people are the most resilient and talented group that I've ever known and I'm always proud to share with you their accomplishments every quarter.
For several years, Hexcel has been building capacity to meet extraordinary ramp-ups in demand.
So the chance to pause with our customers, over the past few months, has afforded us a unique opportunity to ensure that we are aligned with them and in the strongest position possible to meet the growing demand at hand.
Hexcel has never been more focused on its customers, innovation, and operational excellence.
We expect to emerge from these challenges as a leaner and stronger company and even better positioned for strong growth and return to shareholders.

user
compname reports q1 sales $310 mln.
q1 sales $310 million versus $541 million.
qtrly adjusted diluted net loss per common share $0.10.
continues to withhold financial guidance due to market uncertainties arising from global pandemic.
quarterly dividend remains temporarily suspended.
share repurchase program remains temporarily suspended.

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