12 October 2001
12 October 2001
Hexcel Corporation provided some comments on its business outlook in light of the tragic events that occurred on September 11, 2001 and the potential impact of those events on the markets it serves. The outlook is presented in relation to each of the company's major market segments.
Unlike many aerospace suppliers, Hexcel's sales to this segment are almost entirely driven by new aircraft build rates with no material aftermarket content. As a result, Hexcel's sales in the third quarter were not affected. While it will take some time before the changes in demand for new commercial aircraft become visible, Boeing and Airbus have published their initial revised guidance on aircraft deliveries. In 2001 Boeing has reduced its projected deliveries from 538 to around 500 aircraft. Airbus is anticipated to deliver their previous forecast of about 330 aircraft. For 2002, Boeing has indicated they will deliver around 400 aircraft compared to their previous projection of 510 to 520 aircraft. Airbus has indicated that they anticipate deliveries at the same rate as 2001 rather than ramping up production as they had previously indicated. This guidance suggests that combined Boeing and Airbus commercial aircraft deliveries in 2002 will be about 16% lower than what had been projected for 2001 before the events of September 11. There is less information on anticipated deliveries of regional aircraft, but a similar decrease is expected. The impact of these changes on Hexcel will be influenced by two additional factors. First, the mix of aircraft produced. The dollar value of Hexcel's materials varies by aircraft type - twin aisle aircraft use more Hexcel materials and products than narrow body aircraft and newer designed aircraft use more than older generations. Secondly, the inventory supply chain effects of reduced aircraft production. Hexcel normally supplies its products on average six months before an aircraft is delivered and is already producing to its customer's previously anticipated 2002 delivery rates. The speed by which the aircraft manufacturers reduce their production to the new demand levels, and thereby their inventories, will impact their requirements for Hexcel's products. To date, customers have yet to identify details regarding the aircraft mix or the timing of production and inventory changes, however, the Company anticipates revenue reductions will begin in the fourth quarter of this year.
Hexcel's commercial aerospace revenues for the twelve months ended June 30, 2001 were approximately $530 million. Based on the limited information available today, Hexcel's working assumption is that its commercial aerospace revenues will decline on the order of 20% in 2002.
Space & Defense
Production of a new generation of military aircraft in the United States and Europe has been ramping up over the last two years. These aircraft utilize significantly greater amounts of Hexcel products than previous generations of military aircraft. During the summer, production rates and funding for such new programs as the V-22 and F-22 were confirmed. The company had sales of about $130 million for the twelve months ended June 30, 2001 in this segment and anticipates that its Space & Defense revenues will grow between 10% and 20% in 2002.
As previously reported, since March, the company has experienced an unprecedented reduction in demand for its electronic woven fabrics used in the manufacture of printed circuit boards. After allowing for the seasonal effects of the European summer vacation period, as expected, third quarter electronics revenues have remained at the same depressed levels seen in May and June. To date there is no evidence of an upturn in demand in the fourth quarter.
As indicated in the company's second quarter earnings release, the company has continued to pursue cost reductions to offset some of the impact of these electronic market conditions. In addition to continuing to furlough employees, in July Hexcel initiated a headcount reduction of approximately 275 employees in its reinforcement products business and elsewhere in the company. The annualized savings from these actions will be about $6 million. The company will record a business consolidation expense of about $4 million in the third quarter in respect to these actions.
The impact of recent events on Hexcel's Industrial segments ($237 million of sales for the twelve months ended June 30, 2001) is likely to be mixed. The company anticipates that demand for renewable energy such as wind energy will continue to grow and has seen strong growth in demand for soft body armor. The company has continued to enjoy growth in its sales from automotive applications. This growth has been driven by new programs that use Hexcel honeycomb core to provide impact protection and lightweight structural products, rather than volume growth in the automotive market. Sales to recreational markets will probably track the trends in consumer spending and travel. Based on currently available information the company estimates that its industrial revenues will grow between 0% and 10% in 2002.
Third Quarter Estimated Performance
The company's performance in the third quarter has tracked with its expectations given the continuing depressed levels of electronic revenues and the seasonal impact of the European summer vacation period. While the company will not report actual results until later in the October, revenues for the quarter are estimated in the order of $240 million and EBITDA before business consolidation expense will be in the range of $25 - $28 million.
Mr. David Berges, Hexcel's Chairman and Chief Executive Officer commented ""Like many companies, we are working to understand the impact of events on our business and define appropriate strategies and actions to respond to a changed business environment. Prior to the events of September 11th, Hexcel had been focused on delivering growth from all business segments and responding to challenging market conditions in electronics. Our focus today is clearly on identifying where best we can reduce cost and generate cash."" In response to the anticipated reduction in commercial aerospace sales, management is developing plans to aggressively reduce both direct and overhead costs company-wide. Hexcel expects to announce and commence the implementation of these plans in the fourth quarter, once the timing, mix, and value of reduced demand is known.
Hexcel Corporation is a leading advanced structural materials company. It designs, manufactures and markets lightweight, high performance reinforcement products, composite materials and engineered products for use in commercial aerospace, space and defense, electronics, general industrial, and recreation applications.
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