Hexcel Corp (HXL) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Hexcel Q1 2020 Earnings Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Patrick Winterlich, Chief Financial Officer. Thank you. Please go ahead.

Good morning, everyone. Welcome to Hexcel Corporation's First Quarter 2020 Earnings Conference Call.

Before beginning, let me cover the formalities. First, I want to remind everyone about the safe harbor provisions related to any forward-looking statements we may make during the course of this call. Certain statements contained in this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They involve estimates, assumptions, judgments and uncertainties caused by a variety of factors that could cause future actual results or outcomes to differ materially from our forward-looking statements today.

Such factors are detailed in the company's SEC filings and last night's news release. A replay of this call will be available on the Investor Relations page of our website. Lastly, this call is being recorded by Hexcel Corporation and is copyrighted material and cannot be recorded or rebroadcast without our express permission. Your participation on this call constitutes your consent to that request.

With me 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 first quarter 2020 results detailed in our news release issued yesterday.

Now let me turn the call over to Nick.

Thanks, Patrick. Good morning, everyone, and thank you for joining us as we share our first quarter results. I sincerely hope that each of you participating in this call are adjusted to these trying times as best as possible and are staying safe. As an organization, we are committed to the health and safety of our employees. We have adopted new work practices in our plants in response to the COVID-19 virus, while those employees that can are working remotely to limit exposure to our dedicated operations team. The effects of the COVID-19 pandemic have been far-reaching and unpredictable. Companies across industries are managing through uncertainties, making difficult business decisions, setting new expectations for performance, and that includes Hexcel. While it was a challenging start to the year with sales impacted by both the continued grounding of the 737 MAX and the economic downturn caused by the COVID-19 pandemic, I can assure you that Hexcel is acting swiftly to respond, and we have taken a number of decisive actions to realign our business with lower current and forecasted demand.

When we last spoke in February, Hexcel was looking forward towards completing a third quarter 2020 merger with Woodward. The COVID-19 pandemic had just started to affect the Asian markets. We could not have imagined the magnitude of the impact on the entire world economy. Hexcel began realizing the effects of COVID-19 on orders and shipments in early in the quarter with our wind operations in China. Then as the virus spread into Europe and the U.S., it caused widespread closures at many of our customer plants as well as some temporary shutdowns at our own facilities, particularly in Spain and France.

Once we recognized the impact of the COVID-19 pandemic on the global economy, we jointly decided to terminate the merger. It was disappointing news after so much anticipation and effort, yet it was the right thing to do for our customers, our shareholders and our employees. We made the decision after careful consideration and in response to the economic uncertainties in both the aerospace and industrial sectors resulting from COVID-19. Woodward's CEO Tom Gendron and I spoke many times over several weeks as the virus spread globally. As events unfolded, it became clear that our 2 companies needed to focus solely on the challenges that each of us are facing. And that is what we are now doing.

Already, it is clear the pandemic will surpass every headwind we have ever faced in terms of its immediate as well as longer-term impact on our business and the customers we serve. In addition to a rapid and dramatic decline in air travel, global restrictions on businesses and shelter-in-place orders have led to significant declines in demand, both within the aerospace and industrial markets.

While we do not yet know how long this pandemic will last or the long-term impact on customer requirements, we are committed to preserving the health and safety of our employees while continuing to meet our customer commitments. I'm confident that after years of strong performance, we are well positioned to successfully navigate the current marketplace and emerge stronger in the future.

Before I go into additional details around the actions we have taken, let me highlight some of the first quarter results, and Patrick will provide more details on the numbers in his section.

Sales in the quarter were $541 million, down 11.3% year-over-year. Adjusted diluted EPS was $0.64 compared to $0.84 in the first quarter of 2019. We delivered first quarter adjusted operating income of $80 million and an adjusted operating income margin of 14.9% compared to 16.9% in Q1 2019. Hexcel's liquidity is strong, and at the end of the quarter, we had $636 million of liquidity comprised of $329 million in cash and revolver borrowing availability of $307 million. Our balance sheet remains strong.

As you read in our news release last night, the uncertainty caused by COVID-19 has led us to withdraw our 2020 and our midterm financial guidance. As you can imagine, it is impossible for us to forecast meaningful financials without knowing how long this crisis will last and how deeply it will affect the global economy without having clear knowledge of how this crisis will affect our customers' operations and overall market demand. In addition, we are temporarily suspending our quarterly dividend and pausing our stock buyback program. We will review both of these decisions quarterly as we evaluate the operating environment and as business conditions warrant.

Now let me turn to our 3 primary markets. Commercial Aerospace sales in Q1 were almost $362 million, which reflected a decrease of 12.7%. In addition to the impact from the 737 MAX grounding, shipments were stalled in both Europe and the Americas by temporary plant closures at Airbus and Boeing as well as shutdowns at some subcontractor sites. In addition, we realized some impact from the end of the Airbus A380 as the first quarter of 2019 was the last quarter in which we had meaningful sales for this program. Overall revenue was supported by higher sales year-over-year from the Boeing 787 and 777X programs. Sales to Other Commercial Aerospace, including regional and business jets, increased just over 3% compared to Q1 2019.

In Space & Defense, sales of almost $112 million was an increase of 3.5% and 4.1% in constant currency year-over-year. Growth was driven primarily by rotorcraft such as the Black Hawk and by other space programs. This quarter marks the first full year after the acquisition of ARC Technologies, which has been experiencing robust growth across a broad range of defense programs.

Industrial sales were $66.5 million, down 23.2% or 21.6% in constant currency. The decline in Q1 was the result of a few factors, including temporary plant closures caused by the COVID-19 pandemic as well as some pandemic-related softness in demand within our other submarkets.

Our solid performance over the past several years positions us to face this crisis with a strong balance sheet and robust liquidity position. As we restructure our business to align with current and forecasted demand, our top priorities are the health and safety of our employees, continuing to serve our customers and build on existing relationships, and ensuring that Hexcel successfully navigates the economic challenges created by the pandemic.

Beginning in Q1 and continuing through May, we're implementing significant reductions in our U.S. workforce as well as short-term cost savings actions, including temporary salary reductions, unpaid furloughs and suspension of our 401(k) match and employee stock purchase plan. We are also working in Europe to make similar cost adjustments, and those changes will be made over the coming months. My salary and the cash compensation for our Board members has been cut in half, and our leadership team has taken a 30% reduction in base salaries. We have implemented a hiring freeze, curtailed capital expenditures and are tightly scrutinizing all discretionary spending. We are ensuring that our operations, including employment levels, capacity and inventory are realigned to meet the new demand levels ahead. We're taking these strong measures to rapidly reshape the business and position Hexcel to deliver double-digit operating margin on an annualized basis throughout this cycle.

Most of our plants are continuing to operate, although at reduced efficiency to meet customer commitments because we have an obligation to the national and economic security of the countries where we do business and to our customers to keep those plants open as long as we can safely do so. We are working closely with our suppliers to ensure we receive only the material needed to fulfill our customer demands. Hexcel is a sole source provider for many programs, including essential defense platforms. We're staying close to our customers as we better understand how the pandemic is affecting their operations and future business.

One thing that will not change is our focus on accelerating innovation and growth. Hexcel always has and always will work on leading-edge technology innovations to enable our customers to find solutions, to improve aerodynamics, energy efficiency and reduce emissions. Hexcel will continue to deliver high-performance, composite-rich and safer materials for the future of aerospace and industrial applications. Our technology leadership in advanced materials, our intimate working relationships with our customers and our exceptional people are the foundations of our investment value proposition. The growing secular penetration trend for advanced composites will continue as the future of aerospace is increasingly dependent on lightweight materials and manufacturing solutions for greater fuel efficiency, lower emissions and more aerodynamic aircraft designs that Hexcel is uniquely positioned to develop and supply.

Now let me turn the call over to Patrick to discuss more of the quarter's financial details. Patrick?

Thank you, Nick. The first quarter of 2020 began with January and February tracking near expectations, excluding the lack of Boeing 737 MAX production and a temporary government-induced shutdown in China due to COVID-19 that impacted our wind energy business. March then witnessed an unprecedented market slowdown. While we don't have all the answers yet, we are taking robust actions to control costs, and we'll continue to do so as we work to understand near-term and longer-term market demand. I will begin with my usual overview of markets and then address cost reduction actions and explain our strong liquidity position.

Before I discuss results, I would like to remind everyone that year-over-year comparisons are in constant currency. Currency movements influence our reported results, and some of this impact may not be intuitive. 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, but our costs also translate lower, resulting in a net tailwind to margin. Accordingly, we prefer a strong dollar to a weak dollar. In terms of currency hedging, we employ a disciplined hedging strategy to protect our operating income that lays in hedges over a 10-quarter horizon.

Quarterly sales totaled $541 million. The sales impact was driven by the 737 MAX production stop and the cessation of the A380 program. The initial first quarter 2020 impact of the COVID-19 pandemic across our markets is estimated to be in the range of $20 million.

Turning to our 3 markets. Commercial Aerospace represented approximately 67% total first quarter sales. Commercial Aerospace sales of $363 million decreased 12.7% compared to the first quarter of 2019, led by the temporary production stop for the Boeing 737 MAX and the A380.

Space & Defense represented 21% of sales, and for the first quarter totaled $112 million, an increase of 4.1% compared to the same period in 2019. Growth was led by several rotorcraft and space programs. As a defense contractor and an essential business, as defined by the Department of Defense, we continue to produce for our defense customers.

Industrial comprised 12% to first quarter 2020 sales. Industrial sales totaled $67 million, decreasing 21.6% as temporary wind energy shutdowns in China and Austria impacted sales as well as COVID-19 induced weakness in other industrial markets, particularly automotive. Wind energy remains the largest submarket within Industrial, comprising more than 60% of Industrial sales.

On a consolidated basis, gross margin for the first quarter was 26% compared to 27.4% in the first quarter of 2019. The 737 MAX production stop, combined with temporary facility shutdowns due to COVID-19 situation, resulted in some manufacturing underabsorption during the first quarter of 2020.

Both selling, general and administration and research and technology expenses decreased year-over-year in constant currency as we began implementing aggressive cost control measures during the quarter due to the COVID-19 pandemic. The other expense category is primarily merger-related costs, that will also include some severance actions related to the Boeing 737 MAX taken during the quarter. Adjusted operating income totaled $80.4 million, leading to a 14.9% margin. This was down year-over-year due to the previously discussed 737 MAX production stop and the initial impacts of the COVID-19 pandemic.

Total depreciation expense was $3.2 million lower compared to the prior year period as long-life assets reached the end of their depreciation period and additions from new capital expenditures slowed significantly. An advantage of our business model is that we have long life production equipment that remains operational after being fully depreciated. The year-over-year impact of exchange rates was unfavorable by approximately 20 basis points.

The Composite Materials segment represented 81% of total sales and generated an operating income of 19.7% for the first quarter of 2020 as compared to a 22.2% margin in the prior year period.

The Engineered Products segment, which is comprised of our structures and engineered core businesses, represented 19% of total sales and generated an operating income margin of 6.3% compared to 12.1% in the first quarter of 2019. This lower margin reflects the significant impact of the 737 MAX production stop. Workforce reductions were implemented in early February 2020 due to the 737 MAX production stop, but only a portion of delayed cost savings were recognized during the quarter. As a reminder, Engineered Products requires a much lower level of investment than Composite Materials. And under normal market conditions, Engineered Products generates attractive returns on invested capital.

The effective tax rate for the first quarter of 2020 was 21.9%. The expected effective tax rate for the remainder of the year is 23%. Net cash from operations totaled $8.6 million for the first quarter of 2020. Working capital was a use of $94.3 million (sic) [$94.8 million] in the quarter, a first quarter trend that is consistent with prior years. Capital expenditure on a accrual basis were $22 million in the first quarter of 2020, reflecting rapid actions to curtail spending in response to the pandemic compared to $58 million for the comparable period in 2019. Free cash flow for the first quarter of 2020 was negative $18.6 million compared to negative $15.2 million for the comparable prior year period. For both periods, this use of cash reflects the seasonal growth in working capital that we expect.

We repurchased approximately $25 million of our common stock early in the first quarter prior to suspending our share repurchase program. In this period of unprecedented and rapid change, our focus is on generating and preserving cash. This involves maximizing our liquidity while reducing both fixed and variable costs, deferring all the critical capital expenditures, minimizing discretionary expenditures, taking swift but difficult actions to align headcounts with lower production needs, and temporarily reducing compensation for the Board and salaried employees.

Our balance sheet and liquidity position is strong with cash plus unutilized revolver borrowing availability totaling $636 million. Hexcel has an investment-grade credit rating, which reinforces the belief in our balance sheet strength. We have no near-term debt maturities. Our $1 billion revolver matures in 2024, and our 2 senior debt notes mature in 2025 and 2027, respectively. When markets are predictable, we operate with a minimal cash balance.

Due to the current market dislocation, we proactively drew $250 million from the revolver late in the quarter as a purely prudent measure. When markets begin to recover, we will evaluate the appropriate time to apply the excess cash back to the revolver, and therefore, reduce our gross debt position. Our leverage is measured on a gross debt basis and was 2.5x at the end of the first quarter 2020 compared to 1.8x at 2019 fiscal year-end as a result of the previously referenced $250 million revolver draw. We are operating comfortably within covenant conditions.

Approximately 2/3 of our cost of goods sold are comprised of variable costs. We are quickly reducing raw material purchases to meet lower demand levels. We are carefully scrutinizing safety stock stop levels, both to minimize any excess stock while simultaneously ensuring we need customer commitments if our supply chain has a temporary shortage. As Nick said, we have started to institute headcount reductions, both direct and indirect. We are going through the process right now of rationalizing production and expect to temporarily idle a limited number of assets. We are cutting appropriately while recognizing that markets will recover and secular composite growth will resume. We are sole source on many programs, and we'll continue to remain positioned to meet the demand of our customers. We are also driving efforts to identify opportunities to repurpose our plants wherever possible given the fungible nature of our assets, especially within our composite segment. All the actions above will ensure Hexcel continues to maximize margin performance and the return to shareholders.

With that, let me return the call back to Nick.

Thanks, Patrick. This global health crisis has touched all of us and made us view the world differently. However, the Hexcel value proposition is unchanged. The global economy will come back, more people will resume flying and airlines once again order new lower-emission, composite-rich aircraft to meet this growing demand. The trend towards integrating our strong, lightweight materials into wind turbines, automobiles, marine and recreation will continue to enhance overall performance and efficiency.

I could not be prouder of our one Hexcel team and how they are responding to the crisis at hand. Hexcel remains a global leader in the advanced composites technology. We have worked hard to stay safe as we continue to operate and meet customer demand, and the resilience demonstrated by everyone has been impressive. The challenges we face are enormous, and we remain focused, we are staying close to our customers and we continue to strive for excellence.

Hexcel was founded over 70 years ago, and the company has weathered market disruptions before. We will weather this pandemic. Our Hexcel leadership team is unified, our financial profile is healthy, and we are focused on doing the right thing. Our commitment to operational excellence is sound and its impact on cost savings and productivity has never been more critical. Again, we are moving swiftly to realign the business. And while we don't have all the answers today, we will continue to take the cost actions needed to maximize earnings and liquidity while ensuring the business is appropriately positioned for future growth. When the crisis passes, Hexcel will be even better positioned to support our customers and our shareholders. With leading technology leveraged by our passion for innovation, strong customer relationships that will grow even stronger during these challenging times and a talented team that perseveres in the face of any challenge, I am confident that our business will thrive in the future.

Chris, we'll now turn it over to you and are ready to take questions.

(Operator Instructions) The first question is from Myles Walton with UBS.

The first question is around the cost reduction actions you're taking which are pretty swift. I think in the 10-Q, it talks about a 30% reduction in labor costs. And maybe could you just give us some flavor as to -- the percent of COGS is labor? And also in the whole scheme of your cost reduction efforts, kind of your anticipated impact of that on a run rate basis.

Yes, Myles. So I'll take a shot at the first part and ask Patrick to comment. Once we understood how large the pandemic was going to impact our business, we immediately took what we classify as short-term actions to get as much cost out very quickly so that we could preserve as many of the critical skills and long-term resources for the market going forward. The other reason for doing that is we simply did not understand what our markets were ultimately going to migrate to with respect to a new run rate. So taking the cost out from a direct, indirect headcount and controlling all discretionary costs was a priority throughout the globe. Obviously, quicker and easier to do in the U.S. A little more work involved in Europe, but we're in process with doing that as we speak.

Patrick, were you able to put a box around the size and to move the cost reduction effort and also the percent of COGS of labor?

Yes. So I mean, we're not in a position to be precise today, Myles, because we don't know the exact step down in our demand. I mean we put the 30% out of labor cost as sort of a ballpark target. We may end up being slightly stronger or slightly lower than that. But our initial estimates suggests that, that's where we need to go to. Our biggest cost, I think, as we've said before, is raw materials. Labor is the second largest cost input we have across the company. I'm not going to define that specifically, but it is a significant cost and take -- I mean, raw materials will come out naturally, as you can imagine. What we have to address as management is our labor costs. After that, it's sort of utilities and depreciation. And obviously, the challenge we have is overcoming the depreciation fixed cost and the absorption challenges that brings. But as Nick highlighted, across the board we're facing many, many actions.

And just one follow-up, which is Airbus has come out with the production rates. And maybe to just focus on the 350 if you can, do you anticipate your realized sales to be below their announced production rates in the near term because of destocking? Or do you think the rates, you'll pretty much see represented in your sales over the next few quarters?

Yes, Myles. So whenever we see rates go down, it's very typical given the complexity and the size of the supply chain. We'll see a meaningful take down in the supply chain as well. So we're building that into our forecast as well, not only on the A350 but some of the other changes that are being evaluated.

The next question is from Robert Stallard with Vertical Research.

Just a follow-up on Myles' question on the destocking. I know this is probably a question you've had in the past. I mean it's rather hard to answer, but just what is your assessment of what the level of excess buffer inventory there could be in the chain that can now come out?

So again, our ship-to locations are multiple on various programs, and those supply chains can be very long. So to give you a precise number, we're really not in a position to do that. I would remind you that we stay very close to our customers, and much of our material with the fiber and the prepreg go into freezers. So we have very good line of sight in those materials and how much is in stock internally as well as at our customers. But it will be a meaningful supply chain adjustment concurrent with the rate take down.

Okay. And then secondly, just following up on the CapEx move you saw in the quarter, which is very rapid. Should we expect this sort of rate to continue in the second quarter and going forward through the year? Or is this a 1Q expense pretty much what we should expect going forward?

No, we're not going to get into specifics. But just as a reminder, our maintenance level is in the $60 million, $70 million range. Given the actions we've taken, I would expect to be in that range, if not less.

The next question is from Mike Sison with Wells Fargo.

Glad to hear you guys are safe. Nick, when you think about the long-term -- I think you noted a little bit in terms of the long-term value proposition for carbon fiber with fuel prices pretty low, any thoughts on how that sort of flows through to carbon fiber as being the go-to material on new airplanes going forward?

Well, Mike, if you've ever flown on a 787 or an A350, if you've looked at the advantages a carbon composite-intensive airplane provides, there's no question in our mind that, that is the future of aircraft. Now given what's going on with revenue passenger travel and parked planes, my belief is new planes will be required, and those planes will be composite-intensive. So I think the value proposition is there. Certainly, from a strength, a weight, a maintenance, overall productivity improvement that composites and the performance composites have demonstrated, it is the material of the future, and we're confident.

Great. And as a quick follow-up, when you think about -- probably difficult to sort of give us a feel for. But if you think about the first quarter, sales down 13%. Can you give us a thought of how March looked? And then how do you think your order patterns will change April, May, June? Does it -- given the production rate changes as well as the plant shutdowns that Boeing and Airbus have had to do over the last couple of weeks.

Yes. So as you're reading from both Airbus and Boeing, their plants are in different states of operation and efficiency, and some even closed down. The big impact in commercial air -- commercial aero, we really experienced in March, and we expect that to continue certainly into the second quarter and third quarter. Inventory, supply chain buffer stock, destocking is going to be added to the rate reductions that are being communicated and announced. And the bottom line is, nobody really knows where those rates are going to end up. As you know, Airbus gave some preliminary rates that will run into summer. That took their 320, 350 and 330 down by about 1/3. We don't know where Boeing is going to go, but they're going to be lower. And that's what we're anticipating. That's what we're positioning our operations to manage to.

The next question is from Robert Spingarn with Crédit Suisse.

Just, Nick, sticking with the rates. Is there a way to quantify what breakeven looks like on a cash flow basis with regard to the rates? You have talked about trying to maintain double-digit, I guess, book margins. But on a cash flow breakeven basis, can you make money? It's 6 per month on a wide body and I don't know, 30 to 40 per month on a narrow body. How do we think about that?

And then the second question, Patrick, on the costs, going back to where Myles was headed is maybe can we -- maybe I can ask a question about decremental margins. How should we think about decrementals through a period like this?

Yes, Rob. So just to start off, I'll remind everyone that our -- bulk of our assets are fungible, and we're certainly looking to repurpose where we can. And you can see from the actions we're taking, we're stripping costs out to rightsize the business so that we can ensure sustainability and free cash flow and operating margins in the double-digit range. And we're confident we can do that. Patrick and I are working multiple scenarios and demonstrating that to the Board on upside, on downside. And we have very good controls and models to reflect the various levels of demand that are potential. So we feel good about the actions that we have in place, given today's view and the additional actions that we will take if required. Patrick?

Yes. No, absolutely. I mean we're coming into this in a strong liquidity and cash-generating position. Clearly, the reduced revenues impacted us, but as Nick said, we're going to take actions. In terms of the decremental margins, that's really the task at hand, to try and minimize that impact. In the short term, Q1 is very difficult to react fast enough with the overhead costs, the indirect costs and the operational expenses. And so more of the variable margin impact is going to flow to the bottom line. I mean in the first instance, that's what you lose. You lose the variable margin.

So our job right now and we've already started it, as Nick alluded to in the earnings release and as I talked to, taking out indirect costs, discretionary costs, operating expenses. We're obviously going to try and minimize that decremental margin, but it's always a challenge. I mentioned depreciation before. That's one of the biggest sort of fixed costs that we've got to overcome. And that's what Nick and I and the team at Hexcel are working to do. So we have a clear objective to minimize it. But clearly, especially in the short term, that's a tough challenge.

Well, and the reason I asked is because when you were adding capacity, clearly, volumes were so important to extracting the value in those new plants. And of course, now we're going the other way. And so that's why I was hoping we could maybe put a finer point on that. And then the point to the question for Nick was on a -- because of your comment on depreciation, on a cash flow basis, can you generate cash at rates down 30% and even maybe down 50%?

So obviously, depreciation is a noncash cost. And obviously, most of what we're stripping out is cash related. That's -- so we can keep generating cash, and we will take cash out of working capital with step downs in revenue. Now obviously, we can all speculate on those step downs in revenue and it gets tougher. You've got upside and downside. But clearly, we will be moving the cash costs as fast as we can. And as I say, we're entering this in a strong position in terms of a cash-generating business. So we're pretty confident in the outlook. We're very positive around our liquidity position through this cycle.

The next question is from Ken Herbert with Canaccord.

Nick and Patrick, I do just want to follow-up once more on your comments here regarding the indirect cost. You've obviously moved pretty quickly to adjust your cost structure. Do you expect that the indirect or cost structure is aligned with sort of demand? Is this something you're able to get to in the second quarter or third quarter? Does it take longer? How do we think about the timing now that you've moved pretty quickly on addressing the cost structure?

Yes. So again, as Patrick mentioned, we've targeted, based on what we see today, a 30% cost take up, and that's including labor. We can realize that fairly quickly in the U.S. Many of those have already been communicated and implemented, some of which will continue over the next few weeks. In Europe, it's a little more time-consuming and challenging working with the state regulators as well as the Works Council. So that will tend to take a little longer.

Nevertheless, we've got some short-term actions in Europe that are underway with respect to chomage and furloughs and short-term cost takeouts that will help us get to that 30% type of range fairly quickly.

Okay. That's helpful. And you've talked about the opportunity to repurpose some of your assets. Is this something we should think about as potentially material this year? Is this longer term? Or could you provide any more specifics around outside of maybe aerospace and defense? Is that really an option at your cost base? Or what's -- I mean, how viable is that in the near term? Or is this -- and does this represent maybe strategically something longer term that could be part of the mix?

Yes, Ken. So clearly, there's some shorter-term opportunities, but they're relatively small. And it takes time for us to develop the relationships, both in Space & Defense, which we're looking at. As you know, our materials are high performing. They're at the high end of the performance spectrum on carbon fiber. So that's where we're trying to find opportunities to utilize those materials. Even in Industrial, there are opportunities. But again, some of the capacity we're looking to take out, that will take time for us to repurpose.

The next question is from David Strauss with Barclays.

I wanted to ask on working capital and how you see that playing out, Patrick. I think there was a comment in the press release around how you expect working capital to be a source of cash over the next couple of quarters. Just how do we think about how working capital is going to move over the course of the next couple of quarters as rates come down?

Yes. So I would sort of look at it over the balance of the year. So over the next 3 quarters, I would definitely expect working capital to be a source of cash. We will look to drive down inventory. Raw materials will come down in line and align with demands from our customers. Finished goods, we will manage very tightly, and we've talked about idling capacity. We're not just going to keep producing, so those things go together. Receivables thus far have been strong. Our collections remain strong. We have a very good record on that front. But undoubtedly, with lower demand, lower revenue, our receivables will come down. Our payables, likewise, we will manage -- work with closely with our supply base. But all told, we will end up operating with a lower level of working capital. And therefore, at some point during this year -- and it won't be perfectly smooth, but over the balance of this year, we will release cash out of our working capital base.

So would your expectation be that throughout this, that you would be able to remain free cash flow positive, I guess, on a rolling 12-month basis?

I mean, I think as we look at the world today, my answer is yes. But you need to tell me what the demand is ultimately going to be. So we're not forecasting, we're not guiding. It depends on the overall ultimate impact. We have -- that is a realistic outlook.

Okay. And then last question on pricing. Do any of your programs -- Nick, on the aerospace side, do you have volume-based pricing where you potentially get a higher price at lower volume?

So our contracts vary depending on the application and the customer and the segment. But we do have contracts that are volume-based. And that when volume goes up, we pass on part of that volume leverage savings to our customers. Similarly, if volumes drop below, then pricing is adjusted accordingly. So it's not across the board, but we do have certain contracts that do include volume contingents there.

The next question is from Gautam Khanna with Cowen & Company.

This is Dan on for Gautam. So I know we discussed this a couple of times in the beginning of the call, but have you actually started to see any destocking via Boeing subcontractors? And are you able to parse that out by program or how widespread that might be, if so?

So to differentiate, again, you have to imagine the multiple ship-to locations we have. And each of those subcontractors or the primes are at different levels of production and pulling at different rates depending on what their inventory levels are, their buffer stock, their backlog. So to give you any real clarification around how much has been rates coming down versus how much has been supply chain adjustments, we really can't provide much more color on that. I could tell you that, clearly, there's some supply chain adjustments taking place today. And again, it's -- when your rates are coming down and supply chains are coming down, it's just multiplies the downward effect, and that's really what we're bracing for in Q2 and Q3.

Got it. Understood. And then just another question was, can Space & Defense actually continue to grow regardless of the current macro situation? Or is there significant disruption there as well?

Well, we certainly believe Space & Defense can and will continue to grow. The budgets are strong. Now I won't say there won't be COVID-19 supply chain impacts or potential closures based on site closures, but in total, we view that market as fairly robust. And it's certainly a target for us to continue to drive not only growth in the programs we have but incremental growth in some repurposing opportunities that we see.

The next question is from Paretosh Misra with Berenberg.

Can you completely idle a plant and move production to another facility? And does it require to get recertified with that customer? Like how does that process work?

So it depends on the product form. So I would just remind those on the call today that our Roussillon plant, which makes precursor and carbon fiber, it is shut down. Its shut down a function of the COVID-19 and is scheduled to be down until mid-May. That material -- those materials are qualified in other plants, in Decatur, in Salt Lake City that we can continue to run and continue to support. So most of our products can be moved around between plants. It's one of the benefits of our operating model, the fact that our assets are fungible. We can move them around. We can change them over very quickly so that we can optimize our supply chain and flex as and when we need to. So we do have quite a bit of flexibility there.

Interesting. And then maybe if you could just quickly remind me, how many fiber and prepreg facilities you currently have or currently operating?

Well, fiber, we have 2 sites that make precursor. That's in Roussillon, France and in Decatur, Alabama. We have 3 sites that make carbon fiber. That's Salt Lake City, Illescas and Roussillon. And then prepreg, there's numerous plants in multiple countries in Europe as well as in the U.S. and Salt Lake City and other.

Next question is from Ron Epstein with Bank of America.

When you think about, I guess, maybe your supply chain, and more importantly the broader aerospace supply chain, how do you think about that impacting build rates, so on and so forth? Meaning, have you guys are -- actually seem like you have a good liquidity situation, but many of your peers don't. I mean how do you think that plays out? I mean do you think the broader supply chain is going to need government help? Or how they're going to get through this because ultimately you can't deliver your stuff if they can't deliver their stuff?

Yes. So that's a pretty big question, Ron. I don't know if I'm qualified to answer that. I can tell you we're focused on what we're doing. I can also tell you, with respect to our supply chain for incoming materials, one of the first things we did is to make sure our team got with our key suppliers to make sure we were aligned because we started pushing back on orders. We did not want to take in excess inventory since our customers were slowing down their build rate.

So with respect to their performance, you're right. It's probably all over the map. We're in a great position. We've got great liquidity. There are some in the supply chain that don't. I know the CARES program will potentially help some of them, help many of them. But really, I don't have a crystal ball to tell you who's going to get in trouble and what possible relief they might have down the road.

Okay. Fair enough. And then maybe as a follow-on, I mean, have the OEMs, either of them, reached out to you guys or, to your knowledge, other suppliers offering to help?

Well, we're talking with Boeing and Airbus and our other customers on virtually a daily basis to make sure we're aligned with their needs. They know we're very strong. They know our global position. And quite honestly, we're working to help them, not only technical solutions but other cost reduction initiatives and continuing to provide ideas and opportunities. So they haven't reached out saying, do we need help? We've reached out and asked how can we help you?

The next question is from Hunter Keay with Wolfe Research.

A little bit of a derivative follow-up to Ron's sort of theme there. How do you think about the potential of the OE's building redundancy into the supply chains in a post-coronavirus world? In any event that some of these suppliers, both large and small, fail and don't recover, is there a risk or even a potential opportunity in the event that there's redundancy built in?

Yes. Thank you, Hunter. So again, we do believe there will be some companies that will be stressed through the process. We are continuing to keep our competitive lens and our pipeline active so that we can understand what technologies, what areas might we be interested if certain assets were to become available, which they may during this crisis. So with respect to our customers and their procurement strategies, our focus has been provide the best technical solution at the best value proposition and to continue to show how we can deliver that, not only on the existing platforms but for the new platforms that will be developed ultimately. And that's what our focus is. And we think we're in a great position to do that.

Okay. And then can you just give us the most recent thoughts, updates on what you're hearing out of the biz jet market right now?

Yes. And we called it out in the first quarter. Our Gulfstream was extremely strong. I think it's a little slower to respond in the regional. I'm reading the same materials you're reading. There's no doubt there's going to be a falloff on demand. What it looks like and how it translates to the larger scale versus the mid- and small-sized business jet remains to be seen. So we're keeping a close eye on that, talking with our customers regularly but it's just a bit early for us to predict.

Our final question is from Noah Poponak with Goldman Sachs.

With regard to Boeing and Airbus production in the immediate term, you alluded to Airbus having provided some numbers into the summer. Has Boeing not done that specifically? And then do you have any insight into just how much disruption the OEMs are facing with the airlines? It's hard to tell if it's some kind of quasi-normal type of environment you'd see in a downturn where there's some deferral, some cancellations versus if it's full-on literally almost every airline asking to defer or cancel within the next 6 months.

Yes. So to answer your first part of your question, now Boeing has not provided any guidance on build rates. As you know, the MAX has not been recertified and is not being produced today, and there's no data on when it will be produced or at what rate they would initiate production. So really no guidance there. With respect to the turmoil, you can only imagine with travel down, pick a number, anywhere from 90% to 97%, depending on the route. The cash position, I'm sure there's many discussions going on, but I'm really not going to speculate on the amount of turbulence. I feel for Boeing and Airbus, and we're doing everything in our power to help them navigate through. And I'm sure they're doing everything in their power to help the airlines get back into an operating mode.

Okay. And Nick, on -- just following up on the MAX there. Boeing, at least somewhat recently, Boeing has stood by the -- somewhere in the zone of midyear reentry in service and has also talked about starting the production system back up prior to that. And Spirit's talking about restarting production within a few weeks. And obviously, you're feeding into those companies. So I guess it's a little surprising to hear your comments that suggest less clarity on that. Am I reading that correctly? Or how do I square all of that?

Well, there's some -- we provided time frames on how quickly we could turn production on depending on what build rate. There's inventory in the pipeline, so don't read my message to mean anything other than we don't have any longer-term Boeing build rates. Obviously, the supply chain are in different places. You mentioned Spirit, which we provide materials to as well. So we're just not going to get ahead of Boeing, and we'll let them declare what their schedules and time frames are and recertification and production for the MAX.

Thank you, everyone.

This now concludes the Hexcel First Quarter 2020 Earnings Call. Thank you all for participating, and you can go ahead and drop your lines. Have a good day.