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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.
[Indecipherable] 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 2020 results detailed in the news release issued yesterday.
After reading our news release last night, I'm sure you'll agree that clearly we've had a seismic shift in the business, our demand, our volume, and our financial metrics.
I also hope that we recognize how Hexcel has moved quickly and robustly in response to the market challenges arising from the pandemic.
The results we are sharing with you today reflect the strong and decisive actions that we took swiftly in response to the substantial impact of the pandemic on all those involved in the aerospace industry in 2020.
The actions which are ongoing include approximately a 35% reduction in global headcount; temporarily idling assets; cutting discretionary expenditures; prioritizing the most critical projects, including capital expenditures; and rightsizing working capital to generate strong cash flow.
So I'm glad that 2020 is behind us.
At the same time, it's amazing what you learn about yourself and your organization during such challenging times.
I learned how extraordinarily strong, resilient, and action-oriented Hexcel employees are.
Throughout the year, and despite the uncertainties and the difficult decisions we took, our team accepted and embraced the challenges we faced, quickly developing options and taking decisive actions.
They knew what needed to be done and they did it.
Although 2020 is over, the pandemic headwinds will continue to test us into 2021.
As I mentioned in our news release last night, this first quarter of 2021, along with Q3 and Q4 of 2020 are anticipated to be our most challenging quarters during this pandemic.
We expect continued inventory destocking into the first part of 2021, which will continue to impact sales volumes and mix.
Growth for both our customers and for Hexcel is contingent on a healthy return to air travel following a successful vaccine rollout.
We are guardedly optimistic for a steady recovery in our business as 2021 progresses.
2021 is going to be yet another unusual year as the world gradually emerges from the pandemic, and remaining disciplined will be vital for our success.
We will not drop the ball or our guard in relation to health and safety of our employees.
We will continue to work with our customers to provide innovative solutions to meet their needs, while at the same time maintaining our focus on delivering operational excellence and cost control, and not allowing waste and inefficiency in any areas of our business.
We will remain disciplined in relation to cash management and maintain an optimal level of working capital throughout our business and control inventory levels to match our customer demand requirements.
2021 will be another challenging year, but I can assure you that Hexcel is ready.
Our teams are focused, and we are optimistic that the actions we have taken and continue to take during the pandemic are laying the foundation for another period of robust growth in the years ahead.
Now let me turn to our results.
First, I'll cover the fourth quarter results and then full year 2020.
Fourth quarter sales of almost $296 million were in line with our forecast.
Adjusted fourth quarter diluted earnings per share was a negative $0.18 compared to a positive $0.86 last year.
Our focus on cash management has been unwavering throughout this pandemic, and in the fourth quarter we generated another $104 million, resulting in $214 million of free cash flow for the year.
Turning to our three markets.
Fourth quarter aerospace sales were down 66% compared to Q4 2019.
All of our major programs were down substantially with the largest sales impact being related to the A350 widebody.
Build rate reductions driven by the pandemic combined with the 737 MAX grounding and significant supply chain inventory destocking led to the reduced sales levels.
Sales to other commercial aerospace, which includes regional and business aircraft, fell almost 60% year over year.
Again, the decline was from lower demand resulting from the pandemic.
On a positive note, space and defense sales increased almost 4% compared to Q4 2019.
Growth in this segment is broad-based across several defense and space programs, particularly US military rotorcraft.
Industrial sales declined approximately 29% when compared to Q4 2019.
As you know, wind energy sales are our largest industrial submarket, and those sales declined 42% in constant currency.
During the year, we saw a decline in demand for wind energy materials in the United States by our largest wind energy customer Vestas.
That led us to close our prepreg production facility in Windsor, Colorado in November.
The decline is attributable in part to the commoditization and outsourcing of blades with a changing technology from prepreg to infusion wind energy remains a good business for Hexcel, and we are adjusting to the changing market dynamics and introducing new innovations to support our customers.
Vestas continues to be a great customer and manufacturing continues at our plants in Neumarkt, Austria; and Tianjin, China.
Now let's turn to some specifics in our full-year 2020 results.
2020 sales were $1.5 billion, down 36% year over year.
Adjusted diluted earnings per share for the year was $0.25.
Our full-year results were bolstered by the pre-pandemic Q1 2020 results, which were the strongest of the year.
Free cash flow came in strong at $214 million compared to $287 million in 2019.
Our liquidity position remains robust, and we have managed working capital tightly during this pandemic.
2020 commercial aerospace sales were about $822 million compared to $1.6 billion in 2019, a decline of almost 50% [Indecipherable] an unprecedented decline in demand driven by lower build rates across all programs, including the 737 MAX, was compounded by inventory destocking across the supply chain.
Sales to other aerospace declined by one-third.
Space and defense sales for 2020 grew nominally to $448 million compared to $445 million in 2019.
Select programs have been impacted by pandemic-induced disruptions, although we feel these are temporary impacts that we -- that will be recovered over time.
Moreover, space and defense is traditionally a strong and attractive market for Hexcel, now enhanced by our ARC Technologies acquisition where we continue to be pleased with the excellent performance and sales growth.
Finally, turning to industrial, sales were $232 million in 2020, which was 26.5% lower year over year.
We have good wind energy demand continuing from the European and Asian markets as we enter 2021, and we are encouraged by growing demand for composites in automotive, marine, and sports applications where we have opportunities for growth.
Our technical innovations in strength and light-weighting have led to increased composites penetration in these markets.
They were challenged in 2020 in ways we never could have imagined.
Despite all the uncertainty, distractions, and sacrifices, they performed well for our customers and shareholders, and I couldn't be prouder.
Our employees accepted the challenge of wearing face masks all day, constantly distancing themselves from one another, dealing with additional concerns about their own health and family's well-being in the midst of a pandemic, and they did this while continuing to deliver the high standards we set.
In this context, we achieved our best-ever safety rate performance in 2020.
That's just phenomenal and illustrates our deeply rooted safety culture.
I also want to take a moment to reassure you that not even a pandemic, such as we are experiencing, has altered our commitment to continued innovation and customer intimacy.
All of our R&D sites are considered essential businesses, and these teams kept up their work in our labs throughout 2020.
They've continued to advance new technologies that will lead to new and optimized product offerings and improved manufacturing performance.
Our advanced composites technology leads our industry, and we're proud that we have been able to continue to work for our customers during the pandemic.
Finally, I want to mention that in Q4 we were pleased to expand our contract with Safran to include our HexTow IM7 Carbon Fiber for the GE9X engine that powers the 777X as well as positioning Hexcel for next-generation engines being developed by Safran.
This expansion also includes our advanced composites for Safran Cabin, Seats, and Aerosystems.
Our relationship with Safran spans more than 35 years, and we are proud to partner with this key customer providing our high-performance materials that support the strength, efficiency, and reliability in their products.
To briefly summarize the quarterly results, our 2020 sales were negatively impacted by lower build rates and continued destocking as we expected and communicated last quarter.
Our aggressive cost-reduction actions are starting to have an impact, which we've demonstrated by sequential margin improvement compared to the third quarter of 2020.
Further, we continue to generate free cash flow and deleverage with particularly strong and disciplined management of working capital.
We have increased our liquidity by $239 million at December 31st, 2020, compared to the end of the first quarter of 2020.
As a reminder, the year-over-year comparisons are 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 to our margins.
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 $295.8 million.
The sales decrease year over year reflects production rate decreases by our commercial aerospace customers in response to the pandemic combined with continued commercial aerospace supply chain destocking.
Turning to our three markets, commercial aerospace represented approximately 43% of total fourth quarter sales.
Commercial aerospace sales of $126.7 million decreased 67% compared to the fourth quarter of 2019 as destocking continued to impact our sales.
We expect continued destocking in the first quarter of 2021 at a similar level to what we witnessed in the third and fourth quarters of 2020.
Destocking is then forecast to wind down during the second quarter of 2021.
We then expect to generally be at a steady-state entering the second half of 2021, with destocking largely behind us and realizing a substantial portion of the cost takeout benefits we have implemented and continued to work on.
Space and defense represented 40% of the fourth quarter sales and totaled $119.7 million, an increase of 2.5%, compared to the same period in 2019.
U.S. military rotorcraft was strong in the fourth quarter.
We remain bullish for the outlook for our space and defense business globally.
Industrial comprised 17% of fourth quarter 2020 sales.
Industrial sales totaled $49.4 million, decreasing 31% compared to the fourth quarter of 2019 on weaker wind and recreation markets, partially offset by strengthening automotive.
We closed our Windsor, Colorado wind energy facility during the fourth quarter as previously disclosed.
Recreation markets remained soft due to the pandemic, particularly for winter sports.
In contrast, the fourth quarter of 2020 generated the strongest automotive sales since mid-2019.
On a consolidated basis, gross margin for the fourth quarter was 10.3% compared to 26% in the fourth quarter of 2019.
As we discussed at our last earnings call, we continued to temporarily idle select carbon fiber capacity during the fourth quarter, and this is continuing in 2021 as we maintain alignment with customer demand.
The sales mix, particularly lower sales of carbon fiber products, continued to be an earnings headwind.
Our view of forward demand continues to be consistent with what we communicated at our last earnings call in October, with Q3 and Q4 2020 along with Q1 2021 being the low point of the pandemic downturn.
We are staying close to our customers and maintaining our focus on operational excellence with process improvements and cost realignment actions across the business.
Fourth quarter selling, general, and administrative expenses decreased 29.2% in constant currency or $9.9 million year over year as a result of headcount reductions and continued tight controls on discretionary spending.
Research and technology expenses decreased 21.4% in constant currency.
We are an innovative material science company and continued research and technology funding is critical to our future growth.
So we have been very selective with our cost reduction actions in this area of the business.
The other expense category reflected severance costs, primarily in Europe.
We continue to target eliminating $150 million of annualized overhead costs, including indirect labor.
We expect that a significant portion of these cost-out actions will be completed as we enter the second half of 2021.
Adjusted operating loss in the fourth quarter totaled $6.1 million, reflecting the lower sales volume and overhead headwinds combined with the negative sales mix.
The year-over-year impact of exchange rates was negative by approximately 40 basis points.
Now turning to our two segments.
The composite material segment represented 76% of total sales and generated a negative 6.2% operating margin compared to 18.8% margin in the prior year period.
The engineered products segment, which is comprised of all structures and engineered core businesses, represented 24% of total sales and generated an 8.6% operating margin, compared to 16.9% in the fourth quarter of 2019.
The tax benefit for the fourth quarter and year-to-date periods of 2020 was $12 million and $61 million, respectively.
The tax benefit was primarily due to losses incurred in various jurisdictions due to the impacts of COVID-19.
The 2020 tax benefit was also impacted by discrete tax items of $55 million, primarily composed of a valuation allowance released in the third quarter of 2020.
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 provided by operating activities was $107.1 million for the fourth quarter and $264.3 million for 2020.
Working capital was a source of cash of $87.7 million in the last quarter of the year.
Capital expenditures on an accrual basis was $3.2 million in the fourth quarter of 2020, compared to $30 million for the prior year period in 2019.
Accrual basis capital expenditures were $42.5 million for the full 2020 year.
We continue to tightly manage capital expenditures and look for innovative ways to optimize the flexibility of our existing capacity to support new business opportunities in the future.
Free cash flow for the fourth quarter of 2020 was $104.3 million and $213.7 million for the year.
We remain focused on generating and preserving cash as we deleverage.
We increased our liquidity by $108 million as of 31st -- December 31st, 2020, compared to September 30th, 2020, further strengthening our balance sheet.
Our total liquidity at the end of the fourth quarter of 2020 was $875 million consisting of $103 million of cash and an undrawn revolver balance of $772 million.
We have no near-term debt maturities.
Our revolver matures in 2024 and our two Senior Notes mature in 2025 and 2027, respectively.
Our leverage as of December 31st, 2020, is measured on a net debt basis and was 3.6 times compared to 3.25 times at September 30, 2020, which at that time was measured on a gross debt basis.
The increase in the leverage ratio was due to the lower 12-month trailing EBITDA as net debt actually decreased $108 million at December 31, 2020, compared to September 30, 2020.
We remain within covenant conditions.
Our revolver facility has leverage covenants based on a debt to trailing 12-month EBITDA.
During the third quarter of 2020, we worked with our bank group to temporarily amend the covenant from a gross debt measurement to a net debt measurement and to increase the maximum allowable leverage for a period of four quarters.
While we comfortably remained in compliance with the amended Covenant's December 31st, 2020, we recognized that the trailing 12-month EBITDA is decreasing more than we had forecast early in the third quarter of 2020.
This reflects our projections based on our latest customer demand requirements along with our belief that the aerospace supply chain destocking will now run through the second quarter of 2021 compared to our previous thinking that it would be largely completed by the end of 2020.
We are currently in discussions with our bank group regarding our revolver facility, and we are extremely confident that a mutually agreeable solution will be reached soon to ensure continued covenant compliance.
Our share repurchase program remains suspended and is also restricted by the previously referenced revolver amendment.
Our board will continue to regularly evaluate capital allocation priorities.
To summarize full-year 2020 results.
Total sales decreased 36%, adjusted operating income was $72 million, and adjusted diluted earnings per share was $0.25.
We delivered $214 million of free cash flow during the year, which we used to deleverage.
As our earning release states, we are not providing financial guidance at this time, but I would like to share the following.
Our current market outlook, considering the strong pre-pandemic first quarter of 2020, is that we expect 2021 annual sales to be lower than 2020.
We expect the aerospace chain destocking to largely come to an end during the second quarter of 2021.
Consistent with prior years, selling, general, and administrative expenses are forecast to be higher in the first quarter of 2021 compared to following quarters due to the timing of recording stock-based compensation expenses.
Some additional restructuring costs are anticipated primarily in the first half of 2021 based on labor actions already initiated.
Capital expenditures in 2021 will continue to be managed very tightly and are expected to be at a similar level to 2020.
We expect to generate free cash flow in 2021 and to further reduce debt levels.
The tax assumption is more complicated than normal, but we expect the rate to be approximately 24% to 25% in 2021.
This change from prior rates is due to a mix of the jurisdictions where we expect to generate income.
Over time, we expect the tax rate to return to pre-pandemic levels.
While it seems as though everything is changed, in reality, nothing has changed about who we are as a company.
We still have the broadest technology portfolio in our industry, with leading positions on the world's largest aerospace programs with our advanced composites materials.
We continue to generate cash and further strengthen our balance sheet.
We are taking this opportunity to strengthen our foundation, especially in the areas of cost control, realigning the business for lower demand for a period of time, and cash management, to name a few.
The great job our team has done puts us in a position to return to growth with strong leverage once this pandemic is behind us.
Clearly, there is still uncertainty.
While air travel has increased from the 2020 lows, it remains weak.
So the next couple of quarters will be challenging.
However, we can see a path forward toward a return to stability, and we view 2021 as a transition period that sits between the trough of the second half of 2020 and a return to growth in 2022.
This year, one of our primary objectives is to continue to stay close to, aligned with, and responsive to our customers' needs.
Global demand for advanced composites technology for lighter weight will grow, and our technology and products remain unrivaled in our industry.
The potential for a significant upturn in 2022 and beyond continues to look promising.
The actions we have taken and will continue to take will ensure that Hexcel emerges from this pandemic stronger than ever, strategically positioned for growth to support the future of aerodynamics and sustainability in the markets we serve.
We continue to be disciplined and ready for the year ahead.

user
compname reports q4 adjusted loss per share $0.18.
q4 adjusted loss per share $0.18.
q4 sales $295.8 million versus refinitiv ibes estimate of $298.7 million.
continues to withhold financial guidance due to market uncertainties.

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